Popular, Inc. (Banco Popular de Puerto Rico)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

Commission File Number: 000-13818

POPULAR, INC.

(Exact name of registrant as specified in its charter)


Puerto Rico		66-0667416

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

Popular Center Building 209 Muñoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico		00918

(Address of principal executive offices)		(Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value 279,629,000 shares outstanding as of August 3, 2007.

POPULAR, INC.

INDEX


	Page
Part I — Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Condition as of June 30, 2007, December 31, 2006 and June 30, 2006		4

Unaudited Consolidated Statements of Income for the quarters and six months ended June 30, 2007 and 2006		5

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2007 and 2006		6

Unaudited Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2007 and 2006		7

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006		8

Notes to Unaudited Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		60

Item 3. Quantitative and Qualitative Disclosures about Market Risk		93

Item 4. Controls and Procedures		96

Part II — Other Information

Item 1. Legal Proceedings		97

Item 1A. Risk Factors		97

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		99

Item 4. Submission of Matters to a Vote of Security Holders		100

Item 6. Exhibits		100

Signatures		101
EX-12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
EX-32.2 SECTION 906, CERTIFICATION OF THE CFO

2

Forward-Looking Information

The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the Corporation’s financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, market risk and the impact of interest rate changes, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to: the rate of growth in the economy, as well as general business and economic conditions; changes in interest rates, as well as the magnitude of such changes; the fiscal and monetary policies of the federal government and its agencies; the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets; the performance of the stock and bond markets; competition in the financial services industry; possible legislative, tax or regulatory changes; and difficulties in combining the operations of acquired entities.

Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries.

All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, and we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

3

ITEM 1. FINANCIAL STATEMENTS

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(UNAUDITED)


	June 30,			December 31,			June 30,
(In thousands, except share information)	2007			2006			2006

ASSETS
Cash and due from banks	$	762,085		$	950,158		$	848,892

Money market investments:
Federal funds sold		345,400			84,350			245,500
Securities purchased under agreements to resell		212,138			202,181			366,143
Time deposits with other banks		17,449			15,177			8,879

		574,987			301,708			620,522

Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		3,421,716			3,743,924			6,112,628
Other investment securities available-for-sale		5,552,752			6,106,938			4,776,670
Investment securities held-to-maturity, at amortized cost (market value at June 30, 2007 - $429,536; December 31, 2006 - $92,764; June 30, 2006 – $420,172)		429,479			91,340			420,398
Other investment securities, at lower of cost or realizable value (realizable value at June 30, 2007 - $160,372; December 31, 2006 - $412,593; June 30, 2006 – $422,163)		160,150			297,394			312,042
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		355,484			193,619			212,637
Other trading securities		321,374			188,706			163,633
Loans held-for-sale, at lower of cost or market value		605,990			719,922			606,620

Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge		195,661			306,320			67,381
Other loans held-in-portfolio		32,274,058			32,019,044			31,847,625
Less – Unearned income		323,864			308,347			304,994
Allowance for loan losses		564,847			522,232			483,815

		31,581,008			31,494,785			31,126,197

Premises and equipment, net		587,505			595,140			592,704
Other real estate		112,858			84,816			83,658
Accrued income receivable		249,746			248,240			245,998
Other assets		1,499,461			1,611,890			1,515,682
Goodwill		668,469			667,853			656,189
Other intangible assets		102,299			107,554			105,044

	$	46,985,363		$	47,403,987		$	48,399,514

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	4,280,195		$	4,222,133		$	4,370,437
Interest bearing		21,105,800			20,216,198			19,079,083

		25,385,995			24,438,331			23,449,520
Federal funds purchased and assets sold under agreements to repurchase		5,655,936			5,762,445			7,926,731
Other short-term borrowings		3,384,105			4,034,125			2,656,936
Notes payable		8,068,638			8,737,246			10,198,675
Other liabilities		793,500			811,424			704,547

		43,288,174			43,783,571			44,936,409

Commitments and contingencies (See Note 12)

Minority interest in consolidated subsidiaries		109			110			112

Stockholders’ equity:
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 shares issued and outstanding in all periods presented		186,875			186,875			186,875
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 292,722,761 shares issued (December 31, 2006 – 292,190,924; June 30, 2006 – 291,718,358) and 279,326,816 outstanding (December 31, 2006 – 278,741,547; June 30, 2006 – 278,293,561)		1,756,337			1,753,146			1,750,310
Surplus		533,152			526,856			490,631
Retained earnings		1,701,100			1,594,144			1,576,499
Accumulated other comprehensive loss, net of tax of ($96,065) (December 31, 2006 – ($84,143); June 30, 2006 – ($110,267))		(274,817	)		(233,728	)		(334,789	)
Treasury stock – at cost, 13,395,945 shares (December 31, 2006 – 13,449,377; June 30, 2006 – 13,424,797)		(205,567	)		(206,987	)		(206,533	)

		3,697,080			3,620,306			3,462,993

	$	46,985,363		$	47,403,987		$	48,399,514

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

POPULAR, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Quarter ended					Six months ended
	June 30,					June 30,
(In thousands, except per share information)	2007		2006			2007			2006

INTEREST INCOME:
Loans	$	656,485	$	613,792		$	1,300,599		$	1,205,627
Money market investments		5,752		7,906			10,361			15,888
Investment securities		113,063		133,274			228,554			266,807
Trading account securities		9,611		7,065			18,992			15,925

		784,911		762,037			1,558,506			1,504,247

INTEREST EXPENSE:
Deposits		182,730		135,961			355,832			260,372
Short-term borrowings		119,466		127,074			244,275			251,877
Long-term debt		111,298		133,223			232,000			266,455

		413,494		396,258			832,107			778,704

Net interest income		371,417		365,779			726,399			725,543
Provision for loan losses		115,167		67,096			211,513			116,043

Net interest income after provision for loan losses		256,250		298,683			514,886			609,500
Service charges on deposit accounts		48,392		47,324			96,863			94,793
Other service fees (See Note 13)		89,590		80,017			177,439			160,363
Net gain (loss) on sale and valuation adjustments of investment securities		1,175		(14,424	)		82,946			(2,084	)
Trading account profit (loss)		10,377		1,830			(3,787	)		13,305
Gain on sale of loans and valuation adjustments on loans held-for-sale		28,294		29,054			31,728			76,315
Other operating income		25,547		40,185			70,362			70,127

		459,625		482,669			970,437			1,022,319

OPERATING EXPENSES:
Personnel costs:
Salaries		126,950		126,700			263,429			262,232
Pension, profit sharing and other benefits		37,338		39,783			79,234			82,303

		164,288		166,483			342,663			344,535
Net occupancy expenses		26,501		28,629			58,515			57,267
Equipment expenses		32,245		33,973			64,641			67,170
Other taxes		11,835		10,929			23,682			21,170
Professional fees		38,642		38,488			74,629			75,566
Communications		16,973		17,293			34,035			34,593
Business promotion		30,369		31,991			58,741			64,814
Printing and supplies		4,549		4,291			8,825			8,923
Other operating expenses		32,838		28,072			64,854			56,903
Impact of change in fiscal period of certain subsidiaries		—		—			—			9,741
Amortization of intangibles		2,813		2,831			5,796			5,552

		361,053		362,980			736,381			746,234

Income before income tax		98,572		119,689			234,056			276,085
Income tax		23,622		22,308			40,459			60,201

NET INCOME	$	74,950	$	97,381		$	193,597		$	215,884

NET INCOME APPLICABLE TO COMMON STOCK	$	71,972	$	94,403		$	187,641		$	209,928

BASIC EARNINGS PER COMMON SHARE (EPS)	$	0.26	$	0.34		$	0.67		$	0.75

DILUTED EPS	$	0.26	$	0.34		$	0.67		$	0.75

DIVIDENDS DECLARED PER COMMON SHARE	$	0.16	$	0.16		$	0.32		$	0.32

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Six months ended
	June 30,
(In thousands)	2007			2006

Preferred stock:
Balance at beginning and end of year	$	186,875		$	186,875

Common stock:
Balance at beginning of year		1,753,146			1,736,443
Common stock issued under the Dividend Reinvestment Plan		3,131			2,475
Issuance of common stock		—			11,312
Stock options exercised		60			80

Balance at end of period		1,756,337			1,750,310

Surplus:
Balance at beginning of year		526,856			452,398
Common stock issued under the Dividend Reinvestment Plan		5,290			5,733
Issuance of common stock		—			28,281
Issuance cost of common stock		—			1,502
Stock options expense on unexercised options, net of forfeitures		857			1,525
Stock options exercised		149			192
Transfer from retained earnings		—			1,000

Balance at end of period		533,152			490,631

Retained earnings:
Balance at beginning of year		1,594,144			1,456,612
Net income		193,597			215,884
Cumulative effect of accounting change (adoption of SFAS No. 156 and EITF 06-5)		8,667			—
Cash dividends declared on common stock		(89,352	)		(89,041	)
Cash dividends declared on preferred stock		(5,956	)		(5,956	)
Transfer to surplus		—			(1,000	)

Balance at end of period		1,701,100			1,576,499

Accumulated other comprehensive loss:
Balance at beginning of year		(233,728	)		(176,000	)
Other comprehensive loss, net of tax		(41,089	)		(158,789	)

Balance at end of period		(274,817	)		(334,789	)

Treasury stock – at cost:
Balance at beginning of year		(206,987	)		(207,081	)
Purchase of common stock		(352	)		—
Reissuance of common stock		1,772			548

Balance at end of period		(205,567	)		(206,533	)

Total stockholders’ equity	$	3,697,080		$	3,462,993

Disclosure of changes in number of shares:


	June 30, 2007			December 31, 2006			June 30, 2006

Preferred Stock:
Balance at beginning and end of period		7,475,000			7,475,000			7,475,000
Common Stock – Issued:
Balance at beginning of year		292,190,924			289,407,190			289,407,190
Issued under the Dividend Reinvestment Plan		521,773			858,905			412,445
Issuance of common stock		—			1,885,380			1,885,380
Stock options exercised		10,064			39,449			13,343

Balance at end of period		292,722,761			292,190,924			291,718,358

Treasury stock		(13,395,945	)		(13,449,377	)		(13,424,797	)

Common Stock – outstanding		279,326,816			278,741,547			278,293,561

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Quarter ended						Six months ended
	June 30,						June 30,
(In thousands)	2007			2006			2007			2006

Net income	$	74,950		$	97,381		$	193,597		$	215,884

Other comprehensive loss, before tax:
Foreign currency translation adjustment		1,200			369			2,980			(317	)
Adjustment of pension and postretirement benefit plans		—			—			(519	)		—
Unrealized holding losses on securities available-for-sale arising during the period		(95,452	)		(123,859	)		(55,969	)		(215,824	)
Reclassification adjustment for (gains) losses included in net income		(1	)		14,424			(83	)		2,084
Net gain on cash flow hedges		1,840			2,710			948			3,910
Reclassification adjustment for gains included in net income		(286	)		(778	)		(125	)		(617	)
Cumulative effect of accounting change		(243	)		—			(243	)		—

		(92,942	)		(107,134	)		(53,011	)		(210,764	)
Income tax benefit		22,060			27,610			11,922			51,975

Total other comprehensive loss, net of tax		(70,882	)		(79,524	)		(41,089	)		(158,789	)

Comprehensive income	$	4,068		$	17,857		$	152,508		$	57,095

Disclosure of accumulated other comprehensive loss:


	June 30,			December 31,			June 30,
(In thousands)	2007			2006			2006

Foreign currency translation adjustment	$	(33,721	)	$	(36,701	)	$	(36,632	)

Minimum pension liability adjustment		—			(3,893	)		(2,354	)
Tax effect		—			1,518			918
Adoption of SFAS No. 158		—			3,893			—
Tax effect		—			(1,518	)		—

Net of tax amount		—			—			(1,436	)

Underfunding of pension and postretirement benefit plans		(69,779	)		(69,260	)		—
Tax effect		27,214			27,034			—

Net of tax amount		(42,565	)		(42,226	)		—

Unrealized losses on securities available-for-sale		(268,295	)		(212,243	)		(409,430	)
Tax effect		69,182			57,146			110,440

Net of tax amount		(199,113	)		(155,097	)		(298,990	)

Unrealized gains on cash flows hedges		913			90			3,117
Tax effect		(331	)		(37	)		(1,091	)

Net of tax amount		582			53			2,026

Cumulative effect of accounting change, net of tax		—			243			243

Accumulated other comprehensive loss, net of tax	$	(274,817	)	$	(233,728	)	$	(334,789	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

7

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six months ended June 30,
(In thousands)	2007			2006

Cash flows from operating activities:
Net income	$	193,597		$	215,884
Less: Impact of change in fiscal period of certain subsidiaries, net of tax		—			(6,129	)

Net income before change in fiscal period		193,597			222,013

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		39,973			42,506
Provision for loan losses		211,513			116,043
Amortization of intangibles		5,796			5,552
Amortization and fair value adjustment of servicing assets		22,606			28,290
Net (gain) loss on sale and valuation adjustment of investment securities		(82,946	)		2,084
Net gain on disposition of premises and equipment		(4,851	)		(2,269	)
Net gain on sale of loans and valuation adjustments on loans held-for-sale		(31,728	)		(76,315	)
Net amortization of premiums and accretion of discounts on investments		11,235			14,358
Net amortization of premiums and deferred loan origination fees and costs		47,938			66,709
Earnings from investments under the equity method		(16,590	)		(6,163	)
Stock options expense		907			1,585
Deferred income taxes		(48,112	)		(28,381	)
Net disbursements on loans held-for-sale		(3,087,103	)		(3,559,262	)
Acquisitions of loans held-for-sale		(403,712	)		(846,117	)
Proceeds from sale of loans held-for-sale		2,833,030			3,834,624
Net decrease in trading securities		645,680			1,000,341
Net increase in accrued income receivable		(1,506	)		(1,966	)
Net increase in other assets		(16,261	)		(79,280	)
Net (decrease) increase in interest payable		(14,013	)		9,886
Net increase in postretirement benefit obligation		1,824			2,755
Net decrease in other liabilities		(52,071	)		(63,653	)

Total adjustments		61,609			461,327

Net cash provided by operating activities		255,206			683,340

Cash flows from investing activities:
Net (increase) decrease in money market investments		(206,843	)		129,048
Purchases of investment securities:
Available-for-sale		(65,385	)		(211,139	)
Held-to-maturity		(12,293,611	)		(16,847,432	)
Other		(16,935	)		(32,202	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		810,710			761,858
Held-to-maturity		11,957,964			16,580,599
Other		5,445			39,263
Proceeds from sale of investment securities available-for-sale		28,981			44,474
Proceeds from sale of other investment securities		246,352			—
Net disbursements on loans		(362,569	)		(472,274	)
Proceeds from sale of loans		3,549			212,791
Acquisition of loan portfolios		(784	)		(175,856	)
Assets acquired, net of cash		(1,633	)		(418	)
Mortgage servicing rights purchased		(23,988	)		(9,599	)
Acquisition of premises and equipment		(49,652	)		(63,469	)
Proceeds from sale of premises and equipment		21,951			26,762
Proceeds from sale of foreclosed assets		80,278			66,685

Net cash provided by investing activities		133,830			49,091

Cash flows from financing activities:
Net increase in deposits		936,810			811,499
Net decrease in federal funds purchased and assets sold under agreements to repurchase		(106,509	)		(888,881	)
Net decrease in other short-term borrowings		(650,020	)		(150,183	)
Payments of notes payable		(773,731	)		(1,210,735	)
Proceeds from issuance of notes payable		103,249			682,406
Dividends paid		(95,223	)		(93,249	)
Proceeds from issuance of common stock		8,667			47,293
Treasury stock acquired		(352	)		—

Net cash used in financing activities		(577,109	)		(801,850	)

Cash effect of change in fiscal period of certain subsidiaries		—			11,914

Net decrease in cash and due from banks		(188,073	)		(57,505	)
Cash and due from banks at beginning of period		950,158			906,397

Cash and due from banks at end of period	$	762,085		$	848,892

The accompanying notes are an integral part of these unaudited consolidated financial statements.

8

Notes to Unaudited Consolidated Financial Statements

Note 1 – Nature of Operations and Basis of Presentation

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution based in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation has established a community banking franchise providing a broad range of financial services and products to the communities it serves. Banco Popular North America (“BPNA”) operates branches in California, Texas, Illinois, New York, New Jersey and Florida, while E-LOAN provides online consumer direct lending to obtain mortgage, auto and home equity loans, and provides an online platform to raise deposits for BPNA. Popular Financial Holdings (“PFH”) offers mortgage and personal loans and provides mortgage loan servicing. The Corporation also owns a financial transaction processing operation, EVERTEC, which strives to use its expertise in technology and electronic banking as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. Note 21 to the consolidated financial statements presents further information about the Corporation’s business segments.

The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Corporation also consolidates the variable interest entities for which it is the primary beneficiary and, therefore, will absorb the majority of the entity’s expected losses, receive a majority of the entity’s expected returns, or both. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the 2007 presentation.

The statement of condition data as of December 31, 2006 were derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of June 30, 2007, December 31, 2006 and June 30, 2006 pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2006, included in the Corporation’s 2006 Annual Report. The Corporation’s Form 10-K filed on March 1, 2007 incorporates by reference the 2006 Annual Report.

Note 2 – Recent Accounting Developments

SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 permits companies to elect, on a transaction-by-transaction basis, to apply a fair value measurement to hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation under SFAS No. 133. This statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS No. 155 in 2007 did not have a material impact on the Corporation’s consolidated financial statements during the six months ended June 30, 2007.

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SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140”

SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes by class of servicing asset or liability. The Corporation adopted SFAS No. 156 in January 2007. The Corporation elected the fair value measurement for mortgage servicing rights (“MSRs”). Servicing rights associated with Small Business Administration (“SBA”) commercial loans will continue to be accounted at the lower of cost or market method. The initial impact of adoption of the fair value measurement for MSRs was included as a cumulative effect of a change in accounting principle directly in stockholders’ equity and resulted in a net increase in stockholders’ equity of approximately $9.6 million, net of deferred taxes. Refer to Note 7 to the consolidated financial statements for required SFAS No. 156 disclosures.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (FIN 48)

In 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition related to income taxes. The accounting provisions of FIN 48 were effective for the Corporation beginning in the first quarter of 2007. Based on management’s assessment, there was no impact on retained earnings as of January 1, 2007 due to the initial application of the provisions of FIN 48. Also, as a result of the implementation, the Corporation did not recognize any change in the liability for unrecognized tax benefits. Refer to Note 14 to the consolidated financial statements for further information on the impact of FIN 48.

EITF Issue No. 06-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-03)

EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The Corporation’s accounting policy is to account on a net basis for the taxes collected from customers and remitted to governmental authorities on a net basis. The corresponding amounts recognized in the consolidated financial statements are not significant.

EITF Issue No. 06-5 “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (EITF 06-5)

EITF 06-5 focuses on how an entity should determine the “amount that could be realized under the insurance contract” at the balance sheet date in applying FTB 85-4, and whether the determination should be on an individual or group policy basis. At the September 2006 meeting, the Task Force affirmed as a final consensus that the cash surrender value and any additional amounts provided by the contractual terms of the insurance policy that are realizable at the balance sheet date should be considered in determining the amount that could be realized under FTB 85-4, and any amounts that are not immediately payable in cash to the policyholder should be discounted to their present value. Additionally, the Task Force affirmed as a final consensus the tentative conclusion that in determining “the amount that could be realized,” companies should assume that policies will be surrendered on an individual-by-individual basis, rather than surrendering the entire group policy. Also, the Task Force reached a consensus that contractual limitations on the ability to surrender a policy do not affect the amount to be reflected under FTB 85-4, but, if significant, the nature of those restrictions should be disclosed. The Corporation adopted the EITF 06-5 guidance in the first quarter of 2007 and as a result recorded a $0.9 million cumulative effect adjustment to beginning retained earnings (reduction of capital) for the existing bank-owned life insurance arrangement.

SFAS No. 157 “Fair Value Measurements”

SFAS No. 157, issued in September 2006, defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and

10

reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are: (1) quoted market prices for identical assets or liabilities in active markets; (2) observable market-based inputs or unobservable inputs that are corroborated by market data; and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation will adopt the provisions of SFAS No. 157 commencing with the first quarter of 2008. The Corporation is evaluating the impact that this accounting pronouncement may have in its consolidated financial statements and disclosures.

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

In February 2007, the FASB issued SFAS No. 159, which provides companies with an option to report selected financial assets and liabilities at fair value. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, “Fair Value Measurements,” and No. 107, “Disclosures about Fair Value of Financial Instrument.” SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Corporation will adopt the provisions of SFAS No. 159 commencing in January 2008. Management is evaluating the impact that this accounting standard may have on its consolidated financial statements.

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

In April 2007, the FASB issued Staff Position FSP FIN 39-1 which defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP permits the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. This interpretation is effective for fiscal years beginning after November 15, 2007, with early application permitted. The adoption of FSP FIN 39-1 is not expected to have a material impact on the Corporation’s consolidated financial statements.

FSP FIN No. 46(R) – 7 “Application of FASB Interpretation No. 46(R) to Investment Companies”

In May 2007, the FASB issued Staff Position FSP FIN No. 46 (R), which amends the scope of the exception to FIN 46 (R) to indicate that investments accounted for at fair value in accordance with the specialized accounting guidance in the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies, are not subject to consolidation under FIN No. 46 (R). This interpretation is effective for fiscal years beginning on or after December 15, 2007. Management is evaluating the impact, if any, that the adoption of this interpretation may have on its consolidated financial statements.

SOP 07-01“Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies”

The Statement of Position SOP 07-01 issued in June 2007 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies (“AICPA Guide”). Additionally, it provides guidance as to whether a parent company or an equity method investor can apply the specialized industry accounting principles of the AICPA Guide. SOP 07-01 is effective for fiscal years beginning on or after December 15, 2007, with early application encouraged. Management is evaluating the impact, if any, that the adoption of SOP 07-1 may have on its consolidated financial statements.

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Note 3 – Restrictions on Cash and Due from Banks and Highly Liquid Securities

The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or with a correspondent bank. Those required average reserve balances were approximately $603 million at June 30, 2007 (December 31, 2006 — $621 million; June 30, 2006 — $583 million). Cash and due from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances.

In compliance with rules and regulations of the Securities and Exchange Commission, at June 30, 2007, December 31, 2006, and June 30, 2006, the Corporation had securities with a market value of $445 thousand segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.

As required by the Puerto Rico International Banking Center Law, at June 30, 2007, December 31, 2006, and June 30, 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally split for the two IBEs, which were considered restricted assets.

As part of a line of credit facility with a financial institution, at June 30, 2007, December 31, 2006, and June 30, 2006, the Corporation maintained restricted cash of $1.9 million as collateral. The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.

Note 4 – Pledged Assets

Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, borrowings and other available credit facilities. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:


	June 30,		December 31,		June 30,
(In thousands)	2007		2006		2006

Investment securities available-for-sale	$	3,264,299	$	2,645,272	$	2,799,279
Investment securities held-to-maturity		501		658		808
Loans held-for-sale		—		332,058		56,898
Loans held-in-portfolio		9,062,900		10,260,198		11,440,294

	$	12,327,700	$	13,238,186	$	14,297,279

Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.

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Note 5 – Investment Securities Available-For-Sale

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of June 30, 2007, December 31, 2006 and June 30, 2006 were as follows:


	AS OF JUNE 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	500,193		—	$	37,616	$	462,577
Obligations of U.S. Government sponsored entities		6,016,206		—		174,448		5,841,758
Obligations of Puerto Rico, States and political subdivisions		117,372	$	170		3,754		113,788
Collateralized mortgage obligations		1,544,362		6,122		18,435		1,532,049
Mortgage-backed securities		991,440		1,529		32,771		960,198
Equity securities		55,250		1,173		11,074		45,349
Others		17,940		809		—		18,749

	$	9,242,763	$	9,803	$	278,098	$	8,974,468


	AS OF DECEMBER 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	504,653		—	$	29,818	$	474,835
Obligations of U.S. Government sponsored entities		6,603,252	$	57		147,524		6,455,785
Obligations of Puerto Rico, States and political subdivisions		118,214		265		3,537		114,942
Collateralized mortgage obligations		1,657,613		4,904		17,191		1,645,326
Mortgage-backed securities		1,061,850		1,458		26,492		1,036,816
Equity securities		70,954		6,692		3,901		73,745
Others		46,326		3,087		—		49,413

	$	10,062,862	$	16,463	$	228,463	$	9,850,862


	AS OF JUNE 30, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	524,093		—	$	46,330	$	477,763
Obligations of U.S. Government sponsored entities		7,440,298		—		288,943		7,151,355
Obligations of Puerto Rico, States and political subdivisions		120,410	$	70		5,801		114,679
Collateralized mortgage obligations		1,790,277		6,762		28,898		1,768,141
Mortgage-backed securities		1,285,786		2,464		50,331		1,237,919
Equity securities		68,294		2,748		925		70,117
Others		69,327		698		701		69,324

	$	11,298,485	$	12,742	$	421,929	$	10,889,298

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The table below shows the Corporation’s gross unrealized losses and market value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2007, December 31, 2006 and June 30, 2006.


	AS OF JUNE 30, 2007
	Less than 12 Months

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	475,542	$	13,283	$	462,259
Obligations of Puerto Rico, States and political subdivisions		21,652		473		21,179
Collateralized mortgage obligations		189,570		2,077		187,493
Mortgage-backed securities		39,132		873		38,259
Equity securities		53,683		11,047		42,636

	$	779,579	$	27,753	$	751,826


	12 months or more

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	500,193	$	37,616	$	462,577
Obligations of U.S. Government sponsored entities		5,540,664		161,165		5,379,499
Obligations of Puerto Rico, States and political subdivisions		69,136		3,281		65,855
Collateralized mortgage obligations		647,337		16,358		630,979
Mortgage-backed securities		869,343		31,898		837,445
Equity securities		310		27		283

	$	7,626,983	$	250,345	$	7,376,638


	Total

	Amortized		Gross Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	500,193	$	37,616	$	462,577
Obligations of U.S. Government sponsored entities		6,016,206		174,448		5,841,758
Obligations of Puerto Rico, States and political subdivisions		90,788		3,754		87,034
Collateralized mortgage obligations		836,907		18,435		818,472
Mortgage-backed securities		908,475		32,771		875,704
Equity securities		53,993		11,074		42,919

	$	8,406,562	$	278,098	$	8,128,464

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	AS OF DECEMBER 31, 2006
	Less than 12 Months

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	19,421	$	134	$	19,287
Obligations of U.S. Government sponsored entities		425,076		4,345		420,731
Obligations of Puerto Rico, States and political subdivisions		21,426		259		21,167
Collateralized mortgage obligations		501,705		4,299		497,406
Mortgage-backed securities		28,958		484		28,474
Equity securities		11,180		3,699		7,481

	$	1,007,766	$	13,220	$	994,546


	12 months or more

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	485,232	$	29,684	$	455,548
Obligations of U.S. Government sponsored entities		6,097,274		143,179		5,954,095
Obligations of Puerto Rico, States and political subdivisions		55,238		3,278		51,960
Collateralized mortgage obligations		564,217		12,892		551,325
Mortgage-backed securities		954,293		26,008		928,285
Equity securities		300		202		98

	$	8,156,554	$	215,243	$	7,941,311


	Total

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	504,653	$	29,818	$	474,835
Obligations of U.S. Government sponsored entities		6,522,350		147,524		6,374,826
Obligations of Puerto Rico, States and political subdivisions		76,664		3,537		73,127
Collateralized mortgage obligations		1,065,922		17,191		1,048,731
Mortgage-backed securities		983,251		26,492		956,759
Equity securities		11,480		3,901		7,579

	$	9,164,320	$	228,463	$	8,935,857

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	AS OF JUNE 30, 2006
	Less than 12 Months

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	19,418	$	342	$	19,076
Obligations of U.S. Government sponsored entities		3,519,349		157,756		3,361,593
Obligations of Puerto Rico, States and political subdivisions		44,386		1,024		43,362
Collateralized mortgage obligations		732,872		16,340		716,532
Mortgage-backed securities		205,765		29,321		176,444
Equity securities		35,716		925		34,791
Others		14,261		701		13,560

	$	4,571,767	$	206,409	$	4,365,358


	12 months or more

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	504,675	$	45,988	$	458,687
Obligations of U.S. Government sponsored entities		3,920,949		131,187		3,789,762
Obligations of Puerto Rico, States and political subdivisions		55,232		4,777		50,455
Collateralized mortgage obligations		313,094		12,558		300,536
Mortgage-backed securities		957,443		21,010		936,433

	$	5,751,393	$	215,520	$	5,535,873


	Total

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	524,093	$	46,330	$	477,763
Obligations of U.S. Government sponsored entities		7,440,298		288,943		7,151,355
Obligations of Puerto Rico, States and political subdivisions		99,618		5,801		93,817
Collateralized mortgage obligations		1,045,966		28,898		1,017,068
Mortgage-backed securities		1,163,208		50,331		1,112,877
Equity securities		35,716		925		34,791
Others		14,261		701		13,560

	$	10,323,160	$	421,929	$	9,901,231

At June 30, 2007, “Obligations of Puerto Rico, States and political subdivisions” include approximately $59 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”) the rating on which was downgraded in May 2006 by Moody’s Investors Service (“Moody’s”) to Ba1, one notch below investment grade. Standard & Poor’s (“S&P”), another nationally-recognized credit rating agency, rated the Appropriation Bonds BBB-, which is still considered investment grade. As of June 30, 2007, these Appropriation Bonds represented approximately $2.9 million in unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island as part of its evaluation of its available-for-sale portfolio for any declines in value that management may consider being other-than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

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The unrealized loss positions of available-for-sale securities at June 30, 2007, except for the obligations of the Puerto Rico government described above, are primarily associated with U.S. government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly-liquid securities, which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in these available-for-sale securities at June 30, 2007 are temporary and are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

During the six months ended June 30, 2007, the Corporation recognized through earnings approximately $30.7 million in losses in residual interests classified as available-for-sale and $7.6 million in losses in equity securities that management considered to be other-than-temporarily impaired. The equity securities that generated this other-than-temporary impairment in the first quarter of 2007 were sold in the second quarter of 2007.

The following table states the name of issuers and the aggregate amortized cost and market value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.


	June 30, 2007				December 31, 2006				June 30, 2006

(In thousands)	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value

FNMA	$	1,261,541	$	1,238,499	$	1,539,651	$	1,517,525	$	1,797,323	$	1,758,590
FHLB		6,069,496		5,897,748		6,230,841		6,086,885		7,354,827		7,073,831
Freddie Mac		1,011,125		996,046		1,149,185		1,134,853		1,243,039		1,212,853

Note 6 – Investment Securities Held-to-Maturity

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of June 30, 2007, December 31, 2006 and June 30, 2006 were as follows:


	AS OF JUNE 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of U.S. Government sponsored entities	$	340,323	$	13	$	36	$	340,300
Obligations of Puerto Rico, States and political subdivisions		72,406		441		374		72,473
Collateralized mortgage obligations		354		—		19		335
Others		16,396		39		7		16,428

	$	429,479	$	493	$	436	$	429,536

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	AS OF DECEMBER 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of U.S. Government sponsored entities	$	3,017		—		—	$	3,017
Obligations of Puerto Rico, States and political subdivisions		72,152	$	1,559	$	161		73,550
Collateralized mortgage obligations		381		—		21		360
Others		15,790		60		13		15,837

	$	91,340	$	1,619	$	195	$	92,764


	AS OF JUNE 30, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of U.S. Government sponsored entities	$	314,408		—	$	64	$	314,344
Obligations of Puerto Rico, States and political subdivisions		73,043	$	367		527		72,883
Collateralized mortgage obligations		433		—		24		409
Others		32,514		50		28		32,536

	$	420,398	$	417	$	643	$	420,172

The following table shows the Corporation’s gross unrealized losses and fair value of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2007, December 31, 2006 and June 30, 2006:


	AS OF JUNE 30, 2007
	Less than 12 months

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	240,336	$	36	$	240,300
Obligations of Puerto Rico, States and political subdivisions		20,995		223		20,772
Others		250		2		248

	$	261,581	$	261	$	261,320


	12 months or more

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	24,545	$	151	$	24,394
Collateralized mortgage obligations		354		19		335
Others		1,250		5		1,245

	$	26,149	$	175	$	25,974

18


	Total

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	240,336	$	36	$	240,300
Obligations of Puerto Rico, States and political subdivisions		45,540		374		45,166
Collateralized mortgage obligations		354		19		335
Others		1,500		7		1,493

	$	287,730	$	436	$	287,294


	AS OF DECEMBER 31, 2006
	12 months or more and Total

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	26,623	$	161	$	26,462
Collateralized mortgage obligations		381		21		360
Others		1,250		13		1,237

	$	28,254	$	195	$	28,059


	AS OF JUNE 30, 2006
	Less than 12 months

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	307,460	$	61	$	307,399
Obligations of Puerto Rico, States and political subdivisions		25,830		328		25,502
Others		7,636		28		7,608

	$	340,926	$	417	$	340,509


	12 months or more

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	6,948	$	3	$	6,945
Obligations of Puerto Rico, States and political subdivisions		25,993		199		25,794
Collateralized mortgage obligations		433		24		409
Others		250		—		250

	$	33,624	$	226	$	33,398


	Total

			Gross
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	314,408	$	64	$	314,344
Obligations of Puerto Rico, States and political subdivisions		51,823		527		51,296
Collateralized mortgage obligations		433		24		409
Others		7,886		28		7,858

	$	374,550	$	643	$	373,907

19

Management believes that the unrealized losses in the held-to-maturity portfolio at June 30, 2007 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Management has the intent and ability to hold these investments until maturity.

Note 7 – Mortgage Servicing Rights

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers (sales and securitizations). Commencing in 2007 and in accordance with SFAS No. 156, the Corporation no longer records servicing rights in connection with on-balance sheet mortgage loan securitizations.

Effective January 1, 2007, under SFAS No. 156, the Corporation identified servicing rights related to residential mortgage loans as a class of servicing rights and elected to apply fair value accounting to these mortgage servicing rights (“MSRs”). These MSRs are segregated between loans serviced by PFH and by the Corporation’s banking subsidiaries. Fair value determination is performed on a subsidiary basis, with assumptions varying in accordance with the types of assets or markets served (i.e. PFH — primarily subprime mortgage loans vs. banking subsidiaries – primarily conforming loans). Servicing rights associated with Small Business Administration (“SBA”) commercial loans, the other class of servicing assets held by the Corporation, will continue to be accounted at the lower of cost or market method.

Classes of servicing rights were determined based on the different markets or types of assets served. Management also considered trends in the markets and elections by other major participants in the industries served in determining the accounting methodology to be followed for the different types of servicing rights.

Under the fair value accounting method of SFAS No. 156, purchased MSRs and MSRs resulting from asset transfers are capitalized and carried at fair value. Prior to the adoption of SFAS No. 156, the Corporation capitalized purchased residential MSRs at cost, and MSRs from asset transfers based on the relative fair value of the servicing right and the residential mortgage loan at the time of sale. Prior to SFAS No. 156, both purchased MSRs and MSRs from asset transfers were accounted at quarter-end at the lower of cost or market value.

Effective January 1, 2007, upon the remeasurement of the MSRs at fair value in accordance with SFAS No. 156, the Corporation recorded a cumulative effect adjustment to increase the 2007 beginning balance of retained earnings in stockholders’ equity. The table below reconciles the balance of MSRs as of December 31, 2006 and January 1, 2007.


	Banking subsidiaries		PFH

(In thousands)	Residential MSRs		Residential MSRs		Total

Balance at December 31, 2006	$	77,801	$	82,338	$	160,139
Remeasurement upon adoption of SFAS No. 156 (a)		13,630		1,700		15,330

Balance at January 1, 2007	$	91,431	$	84,038	$	175,469


(a)		The remeasurement effect, net of deferred taxes, amounted to $9.6 million on a consolidated basis.

At the end of each quarter, the Corporation uses a discounted cash flow model to estimate the fair value of MSRs, which is benchmarked against third party opinions of value. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. The Corporation uses assumptions in the model that it believes are comparable to those used by brokers or other service providers. Refer to Note 8 – Retained Interests on Mortgage Loan Sales / Securitizations for information on assumptions used in the valuation model of MSRs as of June 30, 2007.

20

The change in MSRs measured using the fair value method for the six months ended June 30, 2007 was:


	Banking
	subsidiaries			PFH

(In thousands)	Residential MSRs			Residential MSRs			Total

Fair value at January 1, 2007	$	91,431		$	84,038		$	175,469
Purchases		2,030			21,958			23,988
Servicing from securitizations or asset transfers		11,968			8,040			20,008
Changes due to payments on loans (1)		(4,561	)		(16,837	)		(21,398	)
Changes in fair value due to changes in valuation model inputs or assumptions		3,887			(4,015	)		(128	)
Other changes		—			(66	)		(66	)

Fair value at June 30, 2007	$	104,755		$	93,118		$	197,873


(1)		Represents changes due to collection / realization of expected cash flows over time.

The changes in amortized MSRs for the six months ended June 30, 2006 were:


(In thousands)	Residential MSRs

Balance at January 1, 2006	$	137,701
Rights originated		40,014
Rights purchased		9,599
Amortization		(31,721	)

Balance at June 30, 2006		155,593
Less: Valuation allowance		351

Balance at June 30, 2006, net of valuation allowance	$	155,242

Fair value at June 30, 2006	$	171,068

Residential mortgage loans serviced for others were $15.4 billion at June 30, 2007 (December 31, 2006 — $13.3 billion; June 30, 2006 — $11.0 billion).

Net mortgage servicing fees, a component of other service fees in the consolidated statement of income, include the changes from period to period in fair value of the MSRs, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, representing changes due to collection / realization of expected cash flows. Prior to the adoption of SFAS No. 156, the Corporation carried residential MSRs at the lower of cost or market, with amortization of MSRs and changes in the MSRs valuation allowance recognized in net mortgage servicing fees.

Note 8 – Retained Interests on Sales of Mortgage Loans

Popular Financial Holdings

The Corporation, through its consumer lending subsidiary PFH, has retained mortgage servicing rights and residual interests (also referred to as interest-only securities or “IOs”) in connection with securitizations of subprime mortgage loans.

Residual interests retained as part of off-balance sheet securitizations of subprime mortgage loans prior to 2006 are classified as investment securities available-for-sale and are presented at fair value in the unaudited consolidated statements of condition. PFH’s residual interests classified as available-for-sale as of June 30, 2007 amounted to $19 million. In the quarter and six-month periods ended June 30, 2007, the Corporation recognized other-than-temporary impairment losses of $1.3 million and $30.7 million, respectively, on these residual interests.

Commencing in January 2006, the residual interests derived from newly-issued PFH’s off-balance sheet securitizations are accounted for as trading securities. As such, any valuation adjustment related to these particular residual interests is being recorded as part of trading account profit (loss) in the consolidated statements of income. Residual interests accounted for as trading securities from PFH’s securitizations approximated $17 million at June 30, 2007. For the second quarter and six-month periods ended June 30, 2007, the Corporation recognized trading losses of $0.8 million and $24.3 million, respectively, on these residual interests.

21

During 2007, the Corporation conducted one off-balance sheet asset securitization that involved the transfer of mortgage loans to a qualifying special purpose entity (QSPE), which in turn transferred these assets and their tittles to a different trust, thus isolating those loans from the Corporation’s assets. Approximately, $461 million in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH as part of this transaction, with a gain on sale of approximately $13.5 million. As part of this transaction, the Corporation recognized MSRs of $8 million and IOs of $4.7 million.

Key economic assumptions used in measuring the retained interests at the date of this off-balance sheet securitization were:


				MSRs
				Fixed-
				rate				ARM
	Residual Interests			loans				Loans

Average prepayment speed	28% (Fixed-rate loans		)			28	%			35	%
	35% (ARM loans		)			—				—
Weighted average life of collateral (in years)	4.2 years				4.8 years				2.2 years
Cumulative credit losses	4.75% (Fixed-rate loans		)			—				—
	8.40% (ARM loans		)			—				—
Discount rate (annual rate)		25	%			17	%			17	%

Key economic assumptions used to estimate the fair value of residual interests and MSRs derived from PFH’s securitizations and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:


	June 30, 2007									December 31, 2006
				MSRs									MSRs
(In thousands)	Residual Interests			Fixed-rate loans			ARM loans			Residual Interests			Fixed-rate loans			ARM loans

Carrying amount of retained interests	$	36,013		$	34,081		$	25,544		$	85,965		$	38,017		$	29,838
Fair value of retained interests	$	36,013		$	34,081		$	25,544		$	85,965		$	37,815		$	32,212
Weighted average life of collateral (in years)	2.8 years			3.2 years			2.0 years			3.2 years			3.1 years			2.1 years
Weighted average prepayment speed (annual rate)	28% (Fixed-rate loans)									28% (Fixed-rate loans)
	35% (ARM loans)				28	%		35	%	35% (ARM loans)				28	%		35	%
Impact on fair value of 10% increase in prepayment rate	$	(1,405	)	$	263		$	(120	)	$	(5,543	)	$	210		$	(149	)
Impact on fair value of 20% increase in prepayment rate	$	(2,235	)	$	404		$	(165	)	$	(9,284	)	$	234		$	(200	)
Weighted average discount rate (annual rate)		25	%		17	%		17	%		17	%		16	%		16	%
Impact on fair value of 10% adverse change	$	(2,139	)	$	(827	)	$	(120	)	$	(4,172	)	$	(901	)	$	(542	)
Impact on fair value of 20% adverse change	$	(4,106	)	$	(1,617	)	$	(936	)	$	(8,081	)	$	(1,761	)	$	(1,060	)
Cumulative credit losses	3.17% to 6.50%				—			—		1.28% to 3.19%				—			—
Impact on fair value of 10% adverse change	$	(7,415	)		—			—		$	(4,792	)		—			—
Impact on fair value of 20% adverse change	$	(15,351	)		—			—		$	(9,558	)		—			—

PFH, as servicer, collects prepayment penalties on a substantial portion of the underlying serviced loans; as such, an adverse change in the prepayment assumptions with respect to the MSRs could be partially offset by the benefit derived from the prepayment penalties estimated to be collected.

22

The amounts included in the tables above exclude any purchased MSRs since these assets were not derived from securitizations or loan sales executed by the Corporation.

Banking subsidiaries

The Corporation’s banking subsidiaries also retain servicing responsibilities in connection with the sale of mortgage loans to third parties. Also, servicing responsibilities are retained under pooling / selling arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by the Corporation’s banking subsidiaries, in which the Corporation retains a servicing right, have fixed rates. Under the servicing agreements, the banking subsidiaries do not earn significant prepayment penalties on the underlying loans serviced.

Key economic assumptions used in measuring the MSRs at the date of the securitizations and whole loan sales by the banking subsidiaries performed during the quarter ended June 30, 2007 were:


	MSRs

Prepayment speed		13.1	%
Weighted average life (in years)	7.7 years
Discount rate (annual rate)		10.0	%

Key economic assumptions used to estimate the fair value of MSRs derived from transactions performed by the banking subsidiaries and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:


	June 30, 2007			December 31, 2006
(In thousands)	MSRs			MSRs

Fair value of retained interests	$	83,171		$	73,332
Weighted average life (in years)	11.3 years			9.2 years
Weighted average prepayment speed (annual rate)		8.8	%		14.0	%
Impact on fair value of 10% adverse change	$	(2,903	)	$	(1,868	)
Impact on fair value of 20% adverse change	$	(5,017	)	$	(4,151	)
Weighted average discount rate (annual rate)		10.9	%		10.3	%
Impact on fair value of 10% adverse change	$	(3,714	)	$	(2,142	)
Impact on fair value of 20% adverse change	$	(6,542	)	$	(4,200	)

The amounts of MSRs presented in the table above exclude purchased MSRs.

The expected credit losses for the residential mortgage loans serviced by the Corporation’s banking subsidiaries, including securitizations serviced on a recourse basis, are minimal.

The sensitivity analyses presented above for IOs and MSRs are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

23

Note 9 – Derivative Instruments and Hedging Activities

Refer to Note 28 to the consolidated financial statements included in the 2006 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities in the second quarter of 2007:

Cash Flow Hedges

Derivative financial instruments designated as cash flow hedges outstanding as of June 30, 2007 and December 31, 2006 were as follows:


As of June 30, 2007
					Derivative
(In thousands)	Notional amount		Derivative assets		liabilities		Equity OCI		Ineffectiveness

Asset Hedges
Forward commitments	$	180,000	$	477	$	194	$	173		—


Liability Hedges
Interest rate swaps	$	390,000	$	853		—	$	554		—


As of December 31, 2006
					Derivative
(In thousands)	Notional amount		Derivative assets		liabilities		Equity OCI		Ineffectiveness

Asset Hedges
Forward commitments	$	190,000	$	175	$	2	$	106		—


Liability Hedges
Interest rate swaps	$	390,000	$	887	$	523	$	237		—

The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forward contracts are contracts for the delayed delivery of securities which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are used to hedge a forecasted transaction and thus qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair value of the derivatives are recorded in other comprehensive income. The amount included in accumulated other comprehensive income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding at June 30, 2007 have a maximum remaining maturity of 80 days.

The Corporation also has designated as cash flow hedges, interest rate swap contracts that convert floating rate debt into fixed rate debt by minimizing the exposure to changes in cash flows due to higher interest rates. These interest rate swap contracts have a maximum remaining maturity of 1.8 years.

24

Non-Hedging Activities

Financial instruments designated as non-hedging derivatives outstanding at June 30, 2007 and December 31, 2006 were as follows:


June 30, 2007
			Fair Values
(In thousands)	Notional amount		Derivative assets		Derivative liabilities

Forward contracts	$	634,365	$	3,732	$	683
Futures contracts		4,000		—		29
Call options and put options		98,000		94		164
Interest rate swaps associated with:
- short-term borrowings		400,000		1,989		—
- bond certificates offered in an on-balance sheet securitization		441,555		855		—
- financing of auto loans held-in-portfolio		385,872		1,564		—
- swaps with corporate clients		509,607		—		8,252
- swaps offsetting position of corporate client swaps		509,607		8,252		—
- investment securities		79,385		160		483
Credit default swap		33,463		—		—
Interest rate caps		818,365		2,996		—
Interest rate caps for benefit of corporate clients		50,000		—		77
Indexed options on deposits		212,192		50,309		—
Index options on S&P Notes		31,152		7,523		—
Bifurcated embedded options		237,861		—		56,412
Mortgage rate lock commitments		254,092		6		2,147

Total	$	4,699,516	$	77,480	$	68,247


As of December 31, 2006
			Fair Values
(In thousands)	Notional amount		Derivative assets		Derivative liabilities

Forward contracts	$	400,572	$	1,277	$	125
Call options and put options		37,500		83		46
Interest rate swaps associated with:
- short-term borrowings		400,000		2,153		—
- bond certificates offered in an on-balance sheet securitization		516,495		90		1,168
- financing of auto loan portfolio held-in-portfolio		470,146		728		—
- auto loans approvals locked interest rates		17,442		22		—
- swaps with corporate clients		410,533		—		2,146
- swaps offsetting position of corporate client swaps		410,533		2,146		—
- investment securities		89,385		—		1,645
- mortgage loan portfolio prior to securitization		75,000		302		—
Credit default swap		33,463		—		—
Foreign currency and exchange rate commitments w/ clients		103		—		2
Foreign currency and exchange rate commitments w/ counterparty		103		2		—
Interest rate caps		889,417		4,099		—
Interest rate caps for benefit of corporate clients		50,000		—		90
Indexed options on deposits		204,946		38,323		—
Indexed options on S&P Notes		31,152		5,648		—
Bifurcated embedded options		229,455		—		43,844
Mortgage rate lock commitments		215,676		13		635

Total	$	4,481,921	$	54,886	$	49,701

Interest Rates Swaps

The Corporation has an interest rate swap outstanding to economically hedge the payments of certificates issued as part of a securitization. This swap is marked-to-market quarterly and recognized as part of interest expense. The

25

Corporation recognized gains of $1.7 million for the second quarter and $1.9 million for the six months ended June 30, 2007 due to changes in its fair value. There was no impact in interest expense associated with these swaps during the quarter and six-month periods ended June 30, 2006.

The Corporation has interest rate swaps to economically hedge the cost of short-term debt. For the second quarter of 2007, the Corporation recognized a gain of $634 thousand, and for the six months ended June 30, 2007, recognized losses of $164 thousand due to changes in their fair value, which were included as part of short-term interest expense. During the quarter and six-month periods ended June 30, 2006, the Corporation recognized gains of $4.0 million and $5.4 million, respectively, associated with changes in the fair value of these interest rate swaps.

Additionally, the Corporation entered into amortizing swap contracts to economically convert to a fixed rate the cost of funds associated with auto loans held-in-portfolio. Gains of $1.8 million and $836 thousand for the quarter and six months ended June 30, 2007, respectively, were recognized as part of long-term interest expense. During the quarter and six-month periods ended June 30, 2006, the Corporation recognized gains of $1.4 million and $2.9 million, respectively, associated with changes in the fair value of these swaps.

The Corporation had interest rate swaps to economically hedge the changes in fair value of loans acquired and originated prior to securitization. These swaps were unwound during the second quarter of 2007 as a result of the completion of an off-balance sheet securitization. Changes in the fair value of these swaps were reported as part of interest income. Gains of $1.5 million and $107 thousand were recorded in the quarter and six-month periods ended June 30, 2007, respectively, as part of long-term interest expense.

Interest Rate Caps

The Corporation has interest rate caps in conjunction with a series of mortgage loans securitizations that are used to limit the interest rate payable to the security holders. These interest rate caps are designated as non-hedging derivative instruments and are marked-to-market currently in the consolidated statements of income.

During the quarter ended June 30, 2007, the Corporation entered into a $100 million interest rate cap to mitigate its exposure to rising interest rates on short-term borrowings.

Losses of $125 thousand and $1.3 million for the quarter and six months ended June 30, 2007, respectively, were recognized as part of long-term interest expense related to these interest rate cap contracts. For the quarter and six months ended June 30, 2006, these losses amounted to $0.7 million and $3.1 million.

Forward Contracts

The Corporation has loan sales commitments to economically hedge the changes in fair value of mortgage loans held-for-sale associated with interest rate lock commitments through both mandatory and best efforts forward sales agreements. These contracts are entered into in order to optimize the gain on sales of loans. These contracts are recognized at fair market value with changes directly reported in income as part of gain on sale of loans. For the quarter and six months ended June 30, 2007, gains of $2.3 million and $1.6 million, respectively, were recognized due to changes in fair value of these forward sales commitments. During the second quarter and six months ended June 30, 2006, the Corporation recognized losses of $0.5 million and gains of $1.8 million, respectively, related to these forward contracts.

26

Note 10 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2007 and 2006, allocated by reportable segment, were as follows (refer to Note 21 for the definition of the Corporation’s reportable segments):


2007
	Balance at		Goodwill					Balance at
(In thousands)	January 1, 2007		acquired		Other			June 30, 2007

Banco Popular de Puerto Rico:
P.R. Commercial Banking	$	14,674		—		—		$	14,674
P.R. Consumer and Retail Banking		34,999		—		—			34,999
P.R. Other Financial Services		4,391	$	24		—			4,415
Popular North America:
Banco Popular North America		568,647		—		—			568,647
Popular Financial Holdings		—		—		—			—
EVERTEC		45,142		775	$	(183	)		45,734

Total Popular, Inc.	$	667,853	$	799	$	(183	)	$	668,469


2006
			Purchase
	Balance at		accounting					Balance at
(In thousands)	January 1, 2006		adjustments		Other			June 30, 2006

Banco Popular de Puerto Rico:
P.R. Commercial Banking	$	14,674		—		—		$	14,674
P.R. Consumer and Retail Banking		34,999		—		—			34,999
P.R. Other Financial Services		4,110		—		—			4,110
Popular North America:
Banco Popular North America		542,834	$	2,412	$	(210	)		545,036
Popular Financial Holdings		14,236		3		—			14,239
EVERTEC		43,131		—		—			43,131

Total Popular, Inc.	$	653,984	$	2,415	$	(210	)	$	656,189

Purchase accounting adjustments consist of adjustments to the value of the assets acquired and liabilities assumed resulting from the completion of appraisals or other valuations, adjustments to initial estimates recorded for transaction costs, if any, and contingent consideration paid during a contractual contingency period. The purchase accounting adjustments during the first six months of 2006 at the PNA reportable segment were mostly related to the E-LOAN acquisition.

At June 30, 2007 and December 31, 2006, other than goodwill, the Corporation had $65 million of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark (June 30, 2006 — $59 million).

The following table reflects the components of other intangible assets subject to amortization:


	June 30, 2007				December 31, 2006				June 30, 2006
	Gross		Accumulated		Gross		Accumulated		Gross		Accumulated
(In thousands)	Amount		Amortization		Amount		Amortization		Amount		Amortization

Core deposits	$	71,629	$	46,982	$	76,708	$	48,367	$	76,956	$	44,741

Other customer relationships		11,543		3,113		11,156		2,171		8,593		1,273

Other intangibles		9,146		4,534		9,099		3,426		9,320		2,729


Total	$	92,318	$	54,629	$	96,963	$	53,964	$	94,869	$	48,743

During the quarter and six months ended June 30, 2007, the Corporation recognized $2.8 million and $5.8 million,

27

respectively, in amortization expense related to other intangible assets with definite lives (June 30, 2006 — $2.8 million and $5.6 million, respectively).

The following table presents the estimated aggregate annual amortization expense of the intangible assets with definite lives for each of the following fiscal years:


	(In thousands)
2007	$	10,067
2008		8,368
2009		6,546
2010		5,588
2011		3,925

No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.

Note 11 – Borrowings

The composition of federal funds purchased and assets sold under agreements to repurchase was as follows:


	June 30,		December 31,		June 30,
(In thousands)	2007		2006		2006

Federal funds purchased	$	1,430,952	$	1,276,818	$	1,164,177
Assets sold under agreements to repurchase		4,224,984		4,485,627		6,762,554

	$	5,655,936	$	5,762,445	$	7,926,731

Other short-term borrowings consisted of:


	June 30,		December 31,		June 30,
(In thousands)	2007		2006		2006

Advances with FHLB paying interest at:
-fixed rates ranging from 5.24% to 5.44% (June 30, 2006 – 5.24% to 5.39%)	$	305,000	$	230,000	$	400,000
-a floating rate of 0.06% over the fed funds rate (Fed funds rate at June 30, 2006 was 5.00%)		—		—		105,000

Advances under credit facilities with other institutions at:
-fixed rates ranging from 5.35% to 5.50% (June 30, 2006 – 5.33% to 5.35%)		262,675		386,000		60,000
-floating rates ranging from 0.45% to 2.00% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2006 was 5.33%)		—		481,062		87,872
-a floating rate of 0.20% over the 3-month LIBOR rate (3-month LIBOR rate at June 30, 2006 – 5.48%)		—		10,000		10,000

Commercial paper at rates ranging from 4.75% to 5.37% (June 30, 2006 – 4.75% to 5.37%)		264,239		193,383		62,224

Term funds purchased at:
-fixed rates ranging from 5.28% to 5.38% (June 30, 2006 – 5.02% to 5.36%)		2,065,000		2,140,900		1,275,000
-a floating rate of 0.08% (June 30, 2006 – 0.06% to 0.08%) over the fed funds rate (Fed funds rate at June 30, 2007 was 5.38%; June 30, 2006 – 5.00%)		400,000		500,000		647,200

Others		87,191		92,780		9,640

	$	3,384,105	$	4,034,125	$	2,656,936

Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2006, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Notes payable consisted of:


	June 30,		December 31,		June 30,
(In thousands)	2007		2006		2006

Advances with FHLB:
-maturing from 2007 through 2016 paying interest at fixed rates ranging from 3.07% to 6.98% (June 30, 2006 – 2.51% to 6.98%)	$	204,195	$	289,881	$	527,625
-maturing in 2008 paying interest monthly at a floating rate of 0.0075% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2007 was 5.32%; June 30, 2006 – 5.33%)		250,000		250,000		250,000
-maturing in 2007 paying interest quarterly at the 3-month LIBOR rate less 0.04%		—		6,000		—
-maturing in 2007 paying interest monthly at the 1-month LIBOR rate plus 0.02% (1-month LIBOR rate at June 30, 2006 – 5.33%)		—		5,000		11,000

Advances under revolving lines of credit maturing in 2008 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2007 was 5.32%; June 30, 2006 – 5.33%)		362,787		426,687		347,178

Advances under revolving lines of credit with maturities until 2009 paying interest quarterly at a floating rate of 0.20% to 0.35% (June 30, 2006 – 0.35% to 0.45%) over the 3-month LIBOR rate (3-month LIBOR rate at June 30, 2007 was 5.36%)		124,997		69,994		—

Term notes with maturities ranging from 2007 through 2011 paying interest semiannually at fixed rates ranging from 3.35% to 5.65% (June 30, 2006 – 3.25% to 6.39%)		2,014,659		2,014,928		2,712,601

Term notes with maturities ranging from 2007 until 2009 paying interest quarterly at floating rates ranging from 0.35% to 0.40% over the 3-month LIBOR rate (3-month LIBOR rate at June 30, 2007 was 5.36 %; June 30, 2006 – 5.48%)		349,504		349,295		469,074

Term notes with maturities until 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00%		3,100		3,100		3,100

Term notes with maturities until 2013 paying interest monthly at a floating rate of 3.00% over the 10-year US treasury notes rate (average 10-year US treasury notes rate at June 30, 2007 was 5.10%; June 30, 2006 – 5.11%)		8,168		10,428		11,589

Secured borrowings with maturities until 2015 paying interest monthly at fixed rates ranging from 3.86% to 7.12% (June 30, 2006 – 3.05% to 7.12%)		2,489,329		2,695,916		3,093,397

Secured borrowings with maturities until 2012 paying interest monthly at rates ranging from 0.05% to 3.50% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2007 was 5.32%; June 30, 2006 – 5.33%)		1,352,710		1,708,650		1,888,914

Notes linked to the S&P 500 Index maturing in 2008		38,118		36,112		34,014

Junior subordinated deferrable interest debentures with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.13% to 8.33% (Refer to Note 17)		849,672		849,672		849,672

Other		21,399		21,583		511

	$	8,068,638	$	8,737,246	$	10,198,675

Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2006, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Note 12 – Commitments and Contingencies

Commercial letters of credit and stand-by letters of credit amounted to $15 million and $181 million, respectively, at June 30, 2007 (December 31, 2006 — $21 million and $181 million; June 30, 2006 — $18 million and $161 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit.

At June 30, 2007, the Corporation recorded a liability of $753 thousand (December 31, 2006 — $658 thousand; June 30, 2006 — $696 thousand), which represents the fair value of the obligations undertaken in issuing the guarantees under stand-by letters of credit. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The liability was included as part of “other liabilities” in the consolidated statements of condition. The stand-by letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in stand-by letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These stand-by letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s stand-by letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries, which aggregated to $3.4 billion at June 30, 2007 (December 31, 2006 — $3.3 billion and June 30, 2006 — $4.2 billion). In addition, at June 30, 2007, PIHC fully and unconditionally guaranteed $824 million of capital securities (December 31, 2006 and June 30, 2006 — $824 million) issued by four wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R.

The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.

Note 13 – Other Service Fees

The caption of other service fees in the consolidated statements of income consists of the following major categories:


	Quarter ended June 30,					Six months ended June 30,
(In thousands)	2007		2006			2007		2006

Credit card fees and discounts	$	24,999	$	22,371		$	48,523	$	44,944
Debit card fees		16,855		15,085			32,956		30,004
Insurance fees		14,720		14,411			27,669		26,552
Processing fees		11,677		10,939			23,789		21,218
Sale and administration of investment products		7,311		6,649			14,571		14,106
Mortgage servicing fees, net of amortization and fair value adjustments		4,641		(919	)		10,869		(667	)
Other		9,387		11,481			19,062		24,206

Total	$	89,590	$	80,017		$	177,439	$	160,363

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Note 14 – Income Taxes

As indicated in Note 2, the Corporation adopted FIN 48 effective January 1, 2007. The initial adoption of FIN 48 had no impact on the Corporation’s financial statements since management determined that there was no need to recognize changes in the liability for unrecognized tax benefits.

The reconciliation of unrecognized tax benefits, including accrued interest, was as follows:


	Six months
	ended June
(In millions)	30, 2007

Balance as of January 1, 2007	$	20.4
Additions for tax positions of current period		4.0

Balance as of June 30, 2007	$	24.4

As of June 30, 2007, the related accrued interest approximated $2.8 million. Management has determined that as of June 30, 2007 there is no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, while the penalties, if any, in other operating expenses in the consolidated statements of income.

After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized, would affect the Corporation’s effective tax rate, was approximately $23.2 million for the six months ended June 30, 2007.

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.

The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of June 30, 2007, the following years remain subject to examination: U.S. Federal jurisdiction – 2005 and 2006 and Puerto Rico – 2003 through 2006. The U.S. Internal Revenue Service (“IRS”) commenced its examination of the Corporation’s U.S. operations tax return for 2005 that is anticipated to be finished by the end of 2007. As of June 30, 2007, the IRS has not proposed any adjustment as a result of the audit. Although the outcome of tax audits is uncertain, the Corporation believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from open years. The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

Note 15 – Stock-Based Compensation

The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. All outstanding award grants under the Stock Option Plan continue to remain outstanding at June 30, 2007 under the original terms of the Stock Option Plan.

Stock Option Plan

Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury

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stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.

The following table presents information on stock options outstanding as of June 30, 2007:


(Not in thousands)
			Weighted Average		Weighted Average		Options		Weighted Average
Exercise Price	Options		Exercise Price of		Remaining Life of		Exercisable		Exercise Price of
Range per Share	Outstanding		Options Outstanding		Options Outstanding (in years)		(fully vested)		Options Exercisable

$14.39 - $18.50		1,513,582	$	15.81		5.24		1,371,858	$	15.72
$19.25 - $27.20		1,586,035	$	25.27		7.00		1,008,732	$	25.02

$14.39 - $27.20		3,099,617	$	20.65		6.14		2,380,590	$	19.66

The aggregate intrinsic value of options outstanding and options exercisable as of June 30, 2007 was $12.6 million and $1.0 million, respectively.

The following table summarizes the stock option activity and related information:


	Options			Weighted-Average
(Not in thousands)	Outstanding			Exercise Price

Outstanding at January 1, 2006		3,223,703		$	20.63
Granted		—			—
Exercised		(39,449	)		15.78
Forfeited		(37,818	)		23.75
Expired		(1,637	)		24.05

Outstanding at December 31, 2006		3,144,799		$	20.65
Granted		—			—
Exercised		(10,064	)		15.83
Forfeited		(19,063	)		25.50
Expired		(16,055	)		19.14

Outstanding at June 30, 2007		3,099,617		$	20.65

The stock options exercisable at June 30, 2007 totaled 2,380,590 (June 30, 2006 – 1,973,986). There were no stock options exercised during the quarter ended June 30, 2007. For the six months ended June 30, 2007, the cash received from stock options exercised amounted to $159 thousand. The total intrinsic value of options exercised during the quarter ended June 30, 2006 was $26 thousand. The total intrinsic value of options exercised during the six-month period ended June 30, 2007 was $28 thousand (June 30, 2006 — $68 thousand).

There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2006 or 2007.

The Corporation recognized $0.4 million in stock option expense, with a tax benefit of $0.2 million, for the quarter ended June 30, 2007 (June 30, 2006 — $0.8 million, with a tax benefit of $0.3 million). For the six months ended June 30, 2007, the Corporation recognized $0.9 million in stock option expense, with a tax benefit of $0.4 million (June 30, 2006 — $1.6 million, with a tax benefit of $0.6 million). The total unrecognized compensation cost at June 30, 2007 related to non-vested stock option awards was $2.5 million and is expected to be recognized over a weighted-average period of 1.4 years.

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Incentive Plan

The Incentive Plan permits the granting of incentive awards in the form of an Annual Incentive Award, a Long-term Performance Unit Award, an Option, a Stock Appreciation Right, Restricted Stock, Restricted Unit or Performance Share. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and / or any of its subsidiaries are eligible to participate in the Incentive Plan. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock. The Corporation’s policy with respect to the shares of restricted stock has been to purchase such shares in the open market to cover each grant.

Under the Incentive Plan, the Corporation has issued only restricted shares, which become vested based on the employees’ continued service with Popular. The compensation cost associated with the shares of restricted stock is estimated based on a two-prong vesting schedule, unless otherwise stated in an agreement. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service.

Beginning in 2007, the Corporation authorized the issuance of performance shares in addition to restricted shares under a long-term incentive plan. The performance shares award consists of the opportunity to receive shares of Popular, Inc.’s common stock provided the Corporation achieves certain performance goals during a 3-year performance cycle. The compensation cost associated with the performance shares will be recorded ratably over a three-year performance period. The performance shares will be granted at the end of the three-year period and will be vested at grant date. As of June 30, 2007, no shares have been granted under this plan.

The following table summarizes the restricted stock activity under the Incentive Plan and related information to members of management:


	Restricted			Weighted-Average
(Not in thousands)	Stock			Grant Date Fair Value

Non-vested at January 1, 2006		172,622		$	27.65
Granted		444,036			20.54
Vested		—			—
Forfeited		(5,188	)		19.95

Non-vested at December 31, 2006		611,470		$	22.55
Granted		—			—
Vested		(69,471	)		20.56
Forfeited		(3,781	)		19.95

Non-vested at June 30, 2007		538,218		$	22.83

During the quarters ended June 30, 2007 and 2006, no shares of restricted stock were awarded to management under the Incentive Plan. During the six-month period ended June 30, 2007, no shares of restricted stock were awarded to management under the Incentive Plan (June 30, 2006 – 444,036).

During the quarter ended June 30, 2007, the Corporation recognized $0.5 million (June 30, 2006 - $0.8 million) of restricted stock expense related to management incentive awards, with an income tax benefit of $0.2 million (June 30, 2006 — $0.3 million). For the six-month period ended June 30, 2007, the Corporation recognized $1.8 million (June 30, 2006 — $2.1 million) of restricted stock expense related to management incentive awards, with an income tax benefit of $0.7 million (June 30, 2006- $0.8 million). The total unrecognized compensation cost related to non-vested restricted stock awards to members of management at June 30, 2007 was $5.0 million and is expected to be recognized over a weighted-average period of 2.9 years.

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The following table summarizes the restricted stock under Incentive Award and related information to members of the Board of Directors:


	Restricted			Weighted-Average
(Not in thousands)	Stock			Grant Date Fair Value

Non-vested at January 1, 2006		46,948		$	23.61
Granted		32,267			19.82
Vested		(2,601	)		23.54
Forfeited		—			—

Non-vested at December 31, 2006		76,614		$	22.02
Granted		29,363			17.35
Vested		(22,486	)		22.03
Forfeited		—			—

Non-vested at June 30, 2007		83,491		$	20.37

During the quarter ended June 30, 2007, the Corporation granted 26,751 (June 30, 2006 – 28,583) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $0.1 million, with a tax benefit of $0.06 million (June 30, 2006 — $0.1 million, with a tax benefit of $0.05 million), of restricted stock expense related to these restricted stock grants. For the six-month period ended June 30, 2007, the Corporation granted 29,363 (June 30, 2006 – 29,859) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $0.3 million, with a tax benefit of $0.1 million (June 30, 2006 — $0.3 million, with a tax benefit of $0.1 million), of restricted stock expense related to these restricted stock grants.

Note 16 – Pension and Other Benefits

The Corporation has noncontributory defined benefit pension plans and supplementary pension plans for regular employees of certain of its subsidiaries.

The components of net periodic pension cost for the quarters and six months ended June 30, 2007 and 2006 were as follows:


	Pension Plans												Benefit Restoration Plans
	Quarters ended						Six months ended						Quarters ended						Six months ended
	June 30,						June 30,						June 30,						June 30,
(In thousands)	2007			2006			2007			2006			2007			2006			2007			2006

Service cost	$	2,639		$	3,135		$	5,745		$	6,270		$	220		$	262		$	457		$	524
Interest cost		7,959			7,641			15,932			15,282			419			400			839			800
Expected return on plan assets		(10,533	)		(9,931	)		(21,057	)		(19,909	)		(368	)		(264	)		(736	)		(528	)
Amortization of prior service cost		52			44			104			88			(13	)		(13	)		(26	)		(26	)
Amortization of net loss		—			488			—			976			247			276			495			552

Net periodic cost		117			1,377			724			2,707			505			661			1,029			1,322
Curtailment gain		—			—			(246	)		—			—			—			(258	)		—

Total cost	$	117		$	1,377		$	478		$	2,707		$	505		$	661		$	771		$	1,322

During the first quarter of 2007, the Corporation adopted an amendment to freeze the benefits for all employees under the U.S. Retirement and Restoration plans. These plans were remeasured at January 31, 2007 to account for the freeze. The discount rate of the U.S. Retirement plan was changed to 4.5% to reflect the expected plan termination. The remeasurement and curtailment effects were considered for these plans and are included as part of the June 30, 2007 disclosures.

For the six months ended June 30, 2007, contributions made to the pension and restoration plans approximated $1.6 million. The total contributions expected to be paid during 2007 for the pension and restoration plans approximate $2.2 million.

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The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and six months ended June 30, 2007 and 2006 were as follows:


	Quarters ended						Six months ended
	June 30,						June 30,
(In thousands)	2007			2006			2007			2006

Service cost	$	578		$	687		$	1,156		$	1,399
Interest cost		1,889			1,927			3,778			3,854
Amortization of prior service cost		(261	)		(262	)		(523	)		(524	)
Amortization of net loss		—			240			—			480

Total net periodic cost	$	2,206		$	2,592		$	4,411		$	5,209

For the six months ended June 30, 2007, contributions made to the postretirement benefit plan approximated $3.3 million. The total contributions expected to be paid during 2007 for the postretirement benefit plan approximate $6.4 million.

Note 17 – Trust Preferred Securities

At June 30, 2007 and 2006, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under the provisions of FIN No. 46(R).

The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.

Financial data pertaining to the trusts follows:


(In thousands, including reference notes)
							Popular North
	BanPonce			Popular Capital			America Capital			Popular Capital
Issuer	Trust I			Trust I			Trust I			Trust II

Issuance date	February 1997			October 2003			September 2004			November 2004
Capital securities	$	144,000		$	300,000		$	250,000		$	130,000
Distribution rate		8.327	%		6.700	%		6.564	%		6.125	%
Common securities	$	4,640		$	9,279		$	7,732		$	4,021
Junior subordinated debentures aggregate liquidation amount	$	148,640		$	309,279		$	257,732		$	134,021
Stated maturity date	February 2027			November 2033			September 2034			December 2034
Reference notes		(a),(c),(e),(f),(g)			(b),(d),(f)			(a),(c),(f)			(b),(d),(f)


(a)		Statutory business trust that is wholly-owned by Popular North America (PNA) and indirectly wholly-owned by the Corporation.

(b)		Statutory business trust that is wholly-owned by the Corporation.

(c)		The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.

(d)		These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.

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(e)		The original issuance was for $150,000. In 2003, the Corporation reacquired $6,000 of the 8.327% capital securities.

(f)		The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below, the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. A capital treatment event would include a change in the regulatory capital treatment of the capital securities as a result of the recent accounting changes affecting the criteria for consolidation of variable interest entities such as the trust under FIN 46(R).

(g)		Same as (f) above, except that the investment company event does not apply for early redemption.

The capital securities of Popular Capital Trust I and Popular Capital Trust II are traded on the NASDAQ under the symbols “BPOPN” and “BPOPM”, respectively.

Under the Federal Reserve Board’s risk-based capital guidelines, the capital securities are included as part of the Corporation’s Tier I capital.

Note 18 - Stockholders’ Equity

During the fourth quarter of 2005, existing shareholders of record of the Corporation’s common stock at November 7, 2005 fully subscribed to an offering of 10,500,000 newly issued shares of Popular, Inc.’s common stock at a price of $21.00 per share under a subscription rights offering. This offering resulted in approximately $216 million in additional capital, of which approximately $175 million impacted stockholders’ equity at December 31, 2005 and the remainder impacted the Corporation’s financial condition in the first quarter of 2006. As of December 31, 2005, this subscription rights offering resulted in 8,614,620 newly issued shares of common stock; the remaining 1,885,380 were issued during the first quarter of 2006.

The Corporation has a dividend reinvestment and stock purchase plan under which stockholders may reinvest their quarterly dividends in shares of common stock at a 5% discount from the average market price at the time of issuance, as well as purchase shares of common stock directly from the Corporation by making optional cash payments at prevailing market prices.

The Corporation’s authorized preferred stock may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation’s only outstanding class of preferred stock is its 6.375% noncumulative monthly income preferred stock, 2003 Series A. These shares of preferred stock are perpetual, nonconvertible and are redeemable solely at the option of the Corporation beginning on March 31, 2008. The redemption price per share is $25.50 from March 31, 2008 through March 30, 2009, $25.25 from March 31, 2009 through March 30, 2010 and $25.00 from March 31, 2010 and thereafter.

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $346 million at June 30, 2007 (December 31, 2006 — $346 million; June 30, 2006 — $317 million). During the six months ended June 30, 2006, BPPR transferred $1 million to the statutory reserve account. There were no transfers between the statutory reserve account and the retained earnings account during the six months ended June 30, 2007.

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Note 19 – Earnings per Common Share

The computation of earnings per common share (“EPS”) follows:


	Quarter ended				Six months ended
	June 30,				June 30,
(In thousands, except share information)	2007		2006		2007		2006

Net income	$	74,950	$	97,381	$	193,597	$	215,884
Less: Preferred stock dividends		2,978		2,978		5,956		5,956


Net income applicable to common stock	$	71,972	$	94,403	$	187,641	$	209,928


Average common shares outstanding		279,355,701		278,354,043		279,218,147		278,220,693
Average potential common shares		88,158		282,176		117,671		305,794

Average common shares outstanding – assuming dilution		279,443,859		278,636,219		279,335,818		278,526,487


Basic and diluted EPS	$	0.26	$	0.34	$	0.67	$	0.75

Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter and six-month period ended June 30, 2007, there were 1,752,235 and 1,756,748 weighted average antidilutive stock options outstanding, respectively (June 30, 2006 – 1,900,071 and 1,899,458). All shares of restricted stock are treated as outstanding for purposes of this computation.

Note 20 – Supplemental Disclosure on the Consolidated Statements of Cash Flows

As mentioned in Note 1 of the Corporation’s 2006 Annual Report, as of the end of the first quarter of 2006, all subsidiaries of the Corporation had changed the reporting period to a December 31^st calendar period. The impact of this change corresponds to the financial results for the month of December 2005 for those subsidiaries which implemented the change in the first reporting period of 2006.

The following table reflects the effect in the Consolidated Statements of Cash Flows of the change in reporting period mentioned above.


	Six months ended
(In thousands)	June 30, 2006

Net cash used in operating activities	$	(80,906	)
Net cash used in investing activities		(104,732	)
Net cash provided by financing activities		197,552

Net increase in cash and due from banks	$	11,914

Loans receivable transferred to other real estate and other property for the six months ended June 30, 2007 amounted to $90 million and $18 million, respectively (June 30, 2006 — $64 million and $15 million, respectively).

During the six months ended June 30, 2006, $464 million in non-conforming loans classified as held-in-portfolio were pooled into trading securities and subsequently sold. The cash inflow from this sale was reflected as operating activities in the consolidated statement of cash flows. In addition, the consolidated statements of cash flows exclude the effect of $708 million and $354 million in non-cash reclassifications of loans held-for-sale securitized into trading securities for the six months ended June 30, 2007 and 2006, respectively.

37

The Corporation recognized mortgage servicing rights of $20 million during the six months ended June 30, 2007 as a result of the securitization and sale of mortgage loans with servicing retained (June 30, 2006 — $40 million).

Note 21 – Segment Reporting

Commencing in the first quarter of 2007, the Corporation’s corporate structure consists of three reportable segments – Banco Popular de Puerto Rico, Popular North America and EVERTEC. Also, a corporate group has been defined to support the reportable segments.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.

As indicated in the 2006 Annual Report, in January 2007, the Corporation announced a restructuring and integration plan (the “Restructuring Plan”) for PFH’s businesses. The Restructuring Plan, which is being implemented throughout 2007, has the following four basic components:

	o		exiting the wholesale subprime mortgage origination business during the first quarter of 2007, which entailed shutting down the wholesale broker, retail and call center business divisions;

	o		consolidating support activities at PFH (Finance, Credit Risk, Compliance, Human Resources, Facilities) within BPNA to reduce expenses;

	o		integrating PFH’s existing commercial lending businesses (mortgage warehouse, mixed use, and construction lending) into BPNA’s business lending groups; and

	o		focusing on the core Equity One network of 132 consumer finance branches in 15 states.

As part of the Restructuring Plan, the Corporation also executed an internal corporate reorganization of its U.S. subsidiaries. In January 2007, E-LOAN, as well as all of its direct and indirect subsidiaries, with the exception of E-LOAN Insurance Services, Inc. and E-LOAN International, Inc., became operating subsidiaries of BPNA. Prior to the consummation of this U.S. reorganization, E-LOAN was a direct wholly-owned subsidiary of PFH. E-LOAN continues to offer its broad range of products and conducts its direct activities through its online platform. Management will be leveraging the E-LOAN brand, technology and internet financial services platform over the next several years to complement BPNA’s community banking growth strategy.

This reorganization and the Restructuring Plan led management to redefine its business reportable segments. Commencing in 2007, the U.S. operations are defined as one reportable segment defined as “Popular North America”. This segment includes the operations of BPNA and PFH, including all of its wholly-owned subsidiaries.

The reportable segment disclosures for periods prior to 2007 were restated to reflect the new segmentation.

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes approximately 86% of the Corporation’s net income for the six months ended June 30, 2007 and 55% of its total assets as of June 30, 2007, additional disclosures are provided for the business areas included in this reportable segment, as described below:

	•		Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds as well as a proportionate share of the investment function of BPPR.

	•		Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income

38

			related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.

	•		Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I. and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

Popular North America:

Popular North America, which includes the Corporation’s U.S. operations, consists of:

	•		BPNA, including its subsidiaries E-LOAN, Popular Leasing, U.S.A. (name being changed to Popular Equipment Finance, Inc.) and Popular Insurance Agency, U.S.A. BPNA operates through a branch network of over 135 branches in 6 states, while E-LOAN provides online consumer direct lending and supports BPNA’s deposit gathering through its online platform. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Equipment Finance, Inc. provides mainly small to mid-ticket commercial and medical equipment financing. The U.S. operations also include the mortgage business unit of Banco Popular, National Association.

	•		PFH, which activities are described above.

All of Popular’s U.S. operations now report to the same president. The PNA segment is disaggregated for additional disclosures between BPNA and PFH. The results of E-LOAN are included as part of BPNA for the quarters ended June 30, 2007 and 2006. PNA Holding Company only is included as part of the Corporate group.

EVERTEC:

This reportable segment includes the financial transaction processing and technology functions of the Corporation, including EVERTEC with offices in Puerto Rico, Florida, the Dominican Republic and Venezuela; EVERTEC USA, Inc. incorporated in the United States; and ATH Costa Rica, S.A., EVERTEC Centroamérica S.A. and T.I.I. Smart Solutions Inc. located in Costa Rica. In addition, this reportable segment includes the equity investments in CONTADO and Servicios Financieros, S.A. de C.V. (“Serfinsa”), which operate in the Dominican Republic and El Salvador, respectively. This segment provides processing and technology services to other units of the Corporation as well as to third parties, principally other financial institutions in Puerto Rico, the Caribbean and Central America.

Corporate:

The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America and Popular International Bank, excluding the equity investments in CONTADO and Serfinsa, which due to the nature of their operations, are included as part of the processing segment. The holding companies obtain funding in the capital markets to finance the Corporation’s growth, including acquisitions. The Corporate group also includes the expenses of the four administrative corporate areas that are identified as critical for the organization: Finance, Risk Management, Legal and People, Communications and Planning. These corporate administrative areas have the responsibility of establishing policy, setting up controls and coordinating the activities of their corresponding groups in each of the business circles.

The Corporation may periodically reclassify business segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment. The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between operating segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

39

2007

For the quarter ended June 30, 2007


											Total
	Banco Popular de		Popular North					Intersegment			Reportable
(In thousands)	Puerto Rico		America		EVERTEC			Eliminations			Segments

Net interest income (expense)	$	237,154	$	139,576	$	(240	)		—		$	376,490
Provision for loan losses		63,482		51,685		—			—			115,167
Non-interest income		125,090		57,141		59,853		$	(34,801	)		207,283
Amortization of intangibles		656		1,938		219			—			2,813
Depreciation expense		10,441		4,706		4,258			(18	)		19,387
Other operating expenses		179,164		136,812		44,727			(34,832	)		325,871
Income tax		27,887		708		3,814			19			32,428

Net income	$	80,614	$	868	$	6,595		$	30		$	88,107

Segment Assets	$	25,863,421	$	20,598,645	$	233,167		$	(75,991	)	$	46,619,242

For the quarter ended June 30, 2007


	Total Reportable								Total
(In thousands)	Segments		Corporate			Eliminations			Popular, Inc.

Net interest income (expense)	$	376,490	$	(5,373	)	$	300		$	371,417
Provision for loan losses		115,167		—			—			115,167
Non-interest income (loss)		207,283		(1,614	)		(2,294	)		203,375
Amortization of intangibles		2,813		—			—			2,813
Depreciation expense		19,387		594			—			19,981
Other operating expenses		325,871		14,218			(1,830	)		338,259
Income tax		32,428		(8,750	)		(56	)		23,622

Net income (loss)	$	88,107	$	(13,049	)	$	(108	)	$	74,950

Segment Assets	$	46,619,242	$	6,471,299		$	(6,105,178	)	$	46,985,363

For the six months ended June 30, 2007


												Total
	Banco Popular de		Popular North						Intersegment			Reportable
(In thousands)	Puerto Rico		America			EVERTEC			Eliminations			Segments

Net interest income (expense)	$	469,378	$	271,671		$	(473	)		—		$	740,576
Provision for loan losses		110,480		101,026			—			—			211,506
Non-interest income		241,842		38,835			119,475		$	(69,134	)		331,018
Amortization of intangibles		1,318		4,011			467			—			5,796
Depreciation expense		21,165		9,342			8,320			(36	)		38,791
Other operating expenses		352,992		293,467			88,625			(69,196	)		665,888
Income tax		58,382		(34,316	)		7,749			38			31,853

Net income (loss)	$	166,883	$	(63,024	)	$	13,841		$	60		$	117,760

40

For the six months ended June 30, 2007


	Total Reportable								Total Popular,
(In thousands)	Segments		Corporate			Eliminations			Inc.

Net interest income (expense)	$	740,576	$	(14,776	)	$	599		$	726,399
Provision for loan losses		211,506		7			—			211,513
Non-interest income		331,018		128,049			(3,516	)		455,551
Amortization of intangibles		5,796		—			—			5,796
Depreciation expense		38,791		1,182			—			39,973
Other operating expenses		665,888		28,161			(3,437	)		690,612
Income tax		31,853		8,386			220			40,459

Net income	$	117,760	$	75,537		$	300		$	193,597

2006

For the quarter ended June 30, 2006


											Total
	Banco Popular de		Popular North					Intersegment			Reportable
(In thousands)	Puerto Rico		America		EVERTEC			Eliminations			Segments

Net interest income (expense)	$	228,498	$	148,483	$	(640	)		—		$	376,341
Provision for loan losses		33,676		33,420		—			—			67,096
Non-interest income		101,639		46,591		57,154		$	(36,537	)		168,847
Amortization of intangibles		633		2,081		117			—			2,831
Depreciation expense		11,014		5,367		4,132			(16	)		20,497
Other operating expenses		169,451		147,674		43,265			(36,555	)		323,835
Income tax		25,071		2,766		3,555			13			31,405

Net income	$	90,292	$	3,766	$	5,445		$	21		$	99,524

Segment Assets	$	26,383,022	$	21,335,337	$	217,579		$	(117,420	)	$	47,818,518

For the quarter ended June 30, 2006


	Total Reportable								Total
(In thousands)	Segments		Corporate			Eliminations			Popular, Inc.

Net interest income (expense)	$	376,341	$	(10,792	)	$	230		$	365,779
Provision for loan losses		67,096		—			—			67,096
Non-interest income		168,847		15,842			(703	)		183,986
Amortization of intangibles		2,831		—			—			2,831
Depreciation expense		20,497		574			—			21,071
Other operating expenses		323,835		15,523			(280	)		339,078
Income tax		31,405		(9,009	)		(88	)		22,308

Net income (loss)	$	99,524	$	(2,038	)	$	(105	)	$	97,381

Segment Assets	$	47,818,518	$	6,576,522		$	(5,995,526	)	$	48,399,514

41

For the six months ended June 30, 2006


												Total
	Banco Popular de			Popular North					Intersegment			Reportable
(In thousands)	Puerto Rico			America		EVERTEC			Eliminations			Segments

Net interest income (expense)	$	454,801		$	291,662	$	(1,067	)		—		$	745,396
Provision for loan losses		57,465			58,578		—			—			116,043
Non-interest income		216,724			120,708		112,042		$	(70,467	)		379,007
Amortization of intangibles		1,266			4,064		222			—			5,552
Depreciation expense		22,044			11,125		8,238			(39	)		41,368
Other operating expenses		338,676			302,221		85,722			(70,495	)		656,124
Impact of change in fiscal period		(2,072	)		6,181		—			—			4,109
Income tax		63,724			11,734		6,273			26			81,757

Net income	$	190,422		$	18,467	$	10,520		$	41		$	219,450

For the six months ended June 30, 2006


	Total Reportable								Total
(In thousands)	Segments		Corporate			Eliminations			Popular, Inc.

Net interest income (expense)	$	745,396	$	(20,383	)	$	530		$	725,543
Provision for loan losses		116,043		—			—			116,043
Non-interest income		379,007		34,831			(1,019	)		412,819
Amortization of intangibles		5,552		—			—			5,552
Depreciation expense		41,368		1,138			—			42,506
Other operating expenses		656,124		32,748			(437	)		688,435
Impact of change in fiscal period		4,109		3,495			2,137			9,741
Income tax		81,757		(20,601	)		(955	)		60,201

Net income (loss)	$	219,450	$	(2,332	)	$	(1,234	)	$	215,884

During the six months ended June 30, 2007, the holding companies realized net gains on sale and valuation adjustments of investment securities (before tax) of approximately $108.1 million, compared with $14.2 million for the six months ended June 30, 2006. These net gains are included in “non-interest income” within the “Corporate” group.

Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:

2007

For the quarter ended June 30, 2007


										Total Banco
	Commercial		Consumer and		Other Financial					Popular de
(In thousands)	Banking		Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	93,754	$	140,326	$	2,933	$	141		$	237,154
Provision for loan losses		22,889		40,593		—		—			63,482
Non-interest income		22,000		80,681		22,956		(547	)		125,090
Amortization of intangibles		220		325		111		—			656
Depreciation expense		3,574		6,569		298		—			10,441
Other operating expenses		44,048		118,478		16,717		(79	)		179,164
Income tax		12,507		12,703		2,803		(126	)		27,887

Net income	$	32,516	$	42,339	$	5,960	$	(201	)	$	80,614

Segment Assets	$	11,422,905	$	18,081,721	$	724,346	$	(4,365,551	)	$	25,863,421

42

For the six months ended June 30, 2007


										Total Banco
	Commercial		Consumer and		Other Financial					Popular de
(In thousands)	Banking		Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	184,182	$	279,736	$	5,180	$	280		$	469,378
Provision for loan losses		35,822		74,658		—		—			110,480
Non-interest income		45,107		154,575		42,807		(647	)		241,842
Amortization of intangibles		440		658		220		—			1,318
Depreciation expense		7,378		13,214		573		—			21,165
Other operating expenses		88,353		231,927		32,891		(179	)		352,992
Income tax		27,400		26,722		4,328		(68	)		58,382

Net income	$	69,896	$	87,132	$	9,975	$	(120	)	$	166,883

2006

For the quarter ended June 30, 2006


										Total Banco
	Commercial		Consumer and		Other Financial					Popular de
(In thousands)	Banking		Retail Banking		Services		Eliminations			Puerto Rico

Net interest income	$	85,070	$	140,290	$	2,332	$	806		$	228,498
Provision for loan losses		9,548		24,128		—		—			33,676
Non-interest income		23,372		57,695		20,661		(89	)		101,639
Amortization of intangibles		223		333		77		—			633
Depreciation expense		3,538		7,194		282		—			11,014
Other operating expenses		44,415		110,501		14,744		(209	)		169,451
Income tax		12,037		10,179		2,752		103			25,071

Net income	$	38,681	$	45,650	$	5,138	$	823		$	90,292

Segment Assets	$	10,911,596	$	18,032,662	$	1,035,550	$	(3,596,786	)	$	26,383,022

For the six months ended June 30, 2006


											Total Banco
	Commercial		Consumer and		Other Financial						Popular de
(In thousands)	Banking		Retail Banking		Services			Eliminations			Puerto Rico

Net interest income	$	166,223	$	283,236	$	5,055		$	287		$	454,801
Provision for loan losses		15,203		42,262		—			—			57,465
Non-interest income		46,511		129,182		42,641			(1,610	)		216,724
Amortization of intangibles		441		671		154			—			1,266
Depreciation expense		6,992		14,495		557			—			22,044
Other operating expenses		88,088		220,717		30,373			(502	)		338,676
Impact of change in fiscal period		—		—		(2,072	)		—			(2,072	)
Income tax		28,110		29,532		6,464			(382	)		63,724

Net income	$	73,900	$	104,741	$	12,220		$	(439	)	$	190,422

43

Additional disclosures with respect to the Popular North America reportable segment are as follows:

2007

For the quarter ended June 30, 2007


	Banco Popular		Popular Financial						Total Popular
(In thousands)	North America		Holdings			Eliminations			North America

Net interest income	$	91,954	$	46,755		$	867		$	139,576
Provision for loan losses		12,217		39,468			—			51,685
Non-interest income		45,667		11,751			(277	)		57,141
Amortization of intangibles		1,938		—			—			1,938
Depreciation expense		4,059		647			—			4,706
Other operating expenses		107,070		30,018			(276	)		136,812
Income tax		3,905		(3,552	)		355			708

Net income (loss)	$	8,432	$	(8,075	)	$	511		$	868

Segment Assets	$	12,914,122	$	7,759,262		$	(74,739	)	$	20,598,645

For the six months ended June 30, 2007


	Banco Popular		Popular Financial						Total Popular
(In thousands)	North America		Holdings			Eliminations			North America

Net interest income	$	181,738	$	88,409		$	1,524		$	271,671
Provision for loan losses		22,650		78,376			—			101,026
Non-interest income (loss)		102,609		(50,603	)		(13,171	)		38,835
Amortization of intangibles		4,011		—			—			4,011
Depreciation expense		8,082		1,260			—			9,342
Other operating expenses		212,757		81,338			(628	)		293,467
Income tax		12,902		(42,708	)		(4,510	)		(34,316	)

Net income (loss)	$	23,945	$	(80,460	)	$	(6,509	)	$	(63,024	)

2006

For the quarter ended June 30, 2006


	Banco Popular		Popular Financial						Total Popular
(In thousands)	North America		Holdings			Eliminations			North America

Net interest income	$	97,800	$	50,683			—		$	148,483
Provision for loan losses		12,953		20,467			—			33,420
Non-interest income (loss)		52,422		(5,133	)	$	(698	)		46,591
Amortization of intangibles		1,991		90			—			2,081
Depreciation expense		3,918		1,449			—			5,367
Other operating expenses		106,100		41,715			(141	)		147,674
Income tax		9,149		(6,188	)		(195	)		2,766

Net income (loss)	$	16,111	$	(11,983	)	$	(362	)	$	3,766

Segment Assets	$	12,955,528	$	8,741,514		$	(361,705	)	$	21,335,337

44

For the six months ended June 30, 2006


	Banco Popular		Popular Financial						Total Popular
(In thousands)	North America		Holdings			Eliminations			North America

Net interest income	$	195,108	$	96,554			—		$	291,662
Provision for loan losses		23,445		35,133			—			58,578
Non-interest income		105,448		16,021		$	(761	)		120,708
Amortization of intangibles		3,885		179			—			4,064
Depreciation expense		8,117		3,008			—			11,125
Other operating expenses		212,006		90,356			(141	)		302,221
Impact of change in fiscal period		—		6,181			—			6,181
Income tax		19,700		(7,749	)		(217	)		11,734

Net income (loss)	$	33,403	$	(14,533	)	$	(403	)	$	18,467

A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues are recorded follows:


INTERSEGMENT REVENUES*	Quarter ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
(In thousands)	2007			2006			2007			2006

Banco Popular de Puerto Rico:
P.R. Commercial Banking	$	(64	)	$	(311	)	$	(58	)	$	(615	)
P.R. Consumer and Retail Banking		(163	)		(683	)		(178	)		(1,351	)
P.R. Other Financial Services		(102	)		(77	)		(231	)		(155	)
Popular North America:
Banco Popular North America		199			958			172			1,892
Popular Financial Holdings		—			—			—			—
EVERTEC		(34,671	)		(36,424	)		(68,839	)		(70,238	)

Total	$	(34,801	)	$	(36,537	)	$	(69,134	)	$	(70,467	)


*		For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany transactions, mainly related to processing / information technology services.

45

A breakdown of revenues and selected balance sheet information by geographical area follows:


Geographic Information	Quarter ended				Six months ended
	June 30,		June 30,		June 30,		June 30,
(In thousands)	2007		2006		2007		2006

Revenues**
Puerto Rico	$	362,811	$	346,625	$	840,796	$	708,207
United States		190,244		185,091		297,483		391,893
Other		21,737		18,049		43,671		38,262

Total consolidated revenues	$	574,792	$	549,765	$	1,181,950	$	1,138,362


**		Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain (loss) on sale and valuation adjustments of investment securities, trading account profit (loss), gain on sale of loans and valuation adjustments on loans held-for-sale, and other operating income.


	June 30,		December 31,		June 30,
(In thousands)	2007		2006		2006

Selected Balance Sheet Information:
Puerto Rico
Total assets	$	24,996,466	$	24,621,684	$	25,696,083
Loans		15,129,703		14,735,092		14,583,979
Deposits		14,237,308		13,504,860		13,741,481
Mainland United States
Total assets	$	20,733,903	$	21,570,276	$	21,529,730
Loans		16,955,769		17,363,382		17,015,808
Deposits		9,900,375		9,735,264		8,494,076
Other
Total assets	$	1,254,994	$	1,212,027	$	1,173,701
Loans		666,373		638,465		616,845
Deposits *		1,248,312		1,198,207		1,213,963


*		Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.

Note 22 – Restructuring Costs

During the second quarter and six months ended June 30, 2007, the Corporation recorded pre-tax restructuring costs in the Popular North America segment related to the Restructuring Plan as follows:


	Quarter ended			Six months ended
(In thousands)	June 30, 2007			June 30, 2007

Personnel costs	$	(34	)	$	8,124	(a)
Net occupancy expenses		—			4,413	(b)
Equipment expenses		—			281
Professional fees		(185	)(d)		1,762	(c)
Communications		—			67
Other operating expenses		—			269

Total	$	(219	)	$	14,916


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

(b)		Lease terminations

(c)		Outplacement and professional service contract terminations

(d)		Reversal of certain outplacement costs

46

Of the above restructuring costs, approximately $5.5 million were recognized as a liability as of June 30, 2007.

During the fourth quarter of 2006, and as a result of the Restructuring Plan, the Corporation recognized impairment charges on long-lived assets of $7.2 million, mainly associated with software and leasehold improvements, and impairment in goodwill of $14.2 million.

As of June 30, 2007, it is anticipated that the Restructuring Plan will result in the estimated combined charges presented in the table below.


	Impairments
	on goodwill
	and long-lived		Restructuring
(In thousands)	assets		costs			Total

Quarter ended:
December 31, 2006	$	21,471		—		$	21,471
March 31, 2007		—	$	15,135			15,135
June 30, 2007		—		(219	)		(219	)

Total	$	21,471	$	14,916		$	36,387

The Corporation does not expect to incur additional significant restructuring costs in the remaining quarters of 2007. Settlement amounts in lease terminations may differ and are subject to the outcome of negotiations.

Note 23 – Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities

The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”), and all other subsidiaries of the Corporation as of June 30, 2007, December 31, 2006 and June 30, 2006, and the results of their operations and cash flows for the periods ended June 30, 2007 and 2006.

PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: ATH Costa Rica S.A., EVERTEC Centroamérica S.A., T.I.I. Smart Solutions Inc., Popular Insurance V.I., Inc. and PNA.

PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:

	•		PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Housing Services, Inc., and Popular Mortgage Servicing, Inc.;

	•		Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Leasing, U.S.A. (name being changed to Popular Equipment Finance, Inc.), Popular Insurance Agency, U.S.A., Popular FS, LLC and E-LOAN, Inc.;

	•		Banco Popular, National Association (“BP, N.A.”), including its wholly-owned subsidiary Popular Insurance, Inc.; and

	•		EVERTEC USA, Inc.

PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under a shelf registration filed with the Securities and Exchange Commission.

PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA.

The principal source of income for PIHC consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of

47

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

48

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2007
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

ASSETS
Cash and due from banks	$	1,775		$	317		$	377		$	842,176		$	(82,560	)	$	762,085
Money market investments					19,025			212			700,317			(144,567	)		574,987
Investment securities available-for-sale, at fair value		6,354			36,261						8,940,725			(8,872	)		8,974,468
Investment securities held-to-maturity, at amortized cost		670,336			1,501						187,642			(430,000	)		429,479
Other investment securities, at lower of cost or realizable value		14,425			1			12,392			133,332						160,150
Trading account securities, at fair value											677,247			(389	)		676,858
Investment in subsidiaries		3,144,484			1,052,636			1,995,552			736,311			(6,928,983	)
Loans held-for-sale, at lower of cost or market value											605,990						605,990

Loans held-in-portfolio		340,197						2,958,637			36,423,591			(7,252,706	)		32,469,719
Less – Unearned income											323,864						323,864
Allowance for loan losses		40									564,807						564,847

		340,157						2,958,637			35,534,920			(7,252,706	)		31,581,008

Premises and equipment, net		24,891						133			562,613			(132	)		587,505
Other real estate											112,858						112,858
Accrued income receivable		446			110			12,473			262,339			(25,622	)		249,746
Other assets		42,239			59,686			53,233			1,405,397			(61,094	)		1,499,461
Goodwill											668,469						668,469
Other intangible assets		554									101,745						102,299

	$	4,245,661		$	1,169,537		$	5,033,009		$	51,472,081		$	(14,934,925	)	$	46,985,363


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4.362,697		$	(82,502	)	$	4,280,195
Interest bearing											21,180,691			(74,891	)		21,105,800

											25,543,388			(157,393	)		25,385,995
Federal funds purchased and assets sold under agreements to repurchase							$	153,952			5,559,984			(58,000	)		5,655,936
Other short-term borrowings								857,763			4,938,587			(2,412,245	)		3,384,105
Notes payable	$	486,479						2,890,535			9,502,276			(4,810,652	)		8,068,638
Subordinated notes											430,000			(430,000	)
Other liabilities		62,102		$	66			94,464			736,241			(99,373	)		793,500

		548,581			66			3,996,714			46,710,476			(7,967,663	)		43,288,174

Minority interest in consolidated subsidiaries											109						109

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,756,337			3,961			2			70,421			(74,384	)		1,756,337
Surplus		528,151			851,193			734,964			3,158,688			(4,739,844	)		533,152
Retained earnings		1,706,101			380,548			323,165			1,775,179			(2,483,893	)		1,701,100
Accumulated other comprehensive loss, net of tax		(274,817	)		(66,231	)		(21,836	)		(242,128	)		330,195			(274,817	)
Treasury stock, at cost		(205,567	)								(664	)		664			(205,567	)

		3,697,080			1,169,471			1,036,295			4,761,496			(6,967,262	)		3,697,080

	$	4,245,661		$	1,169,537		$	5,033,009		$	51,472,081		$	(14,934,925	)	$	46,985,363

49

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

ASSETS
Cash and due from banks	$	2		$	157		$	322		$	1,015,470		$	(65,793	)	$	950,158
Money market investments		8,700			1,075			2,553			508,424			(219,044	)		301,708
Investment securities available-for-sale, at fair value					71,262						9,782,815			(3,215	)		9,850,862
Investment securities held-to-maturity, at amortized cost		430,000			2,157						89,183			(430,000	)		91,340
Other investment securities, at lower of cost or realizable value		143,469			5,001			26,152			122,772						297,394
Trading account securities, at fair value											382,325						382,325
Investment in subsidiaries		3,177,371			1,135,808			2,062,710			816,684			(7,192,573	)
Loans held-for-sale, at lower of cost or market value											719,922						719,922

Loans held-in-portfolio		467,649						2,958,559			35,467,096			(6,567,940	)		32,325,364
Less — Unearned income											308,347						308,347
Allowance for loan losses		40									522,192						522,232

		467,609						2,958,559			34,636,557			(6,567,940	)		31,494,785

Premises and equipment, net		25,628						134			569,545			(167	)		595,140
Other real estate											84,816						84,816
Accrued income receivable		1,058			12			11,581			264,089			(28,500	)		248,240
Other assets		60,430			42,883			28,125			1,528,398			(47,946	)		1,611,890
Goodwill											667,853						667,853
Other intangible assets		554									107,000						107,554

	$	4,314,821		$	1,258,355		$	5,090,136		$	51,295,853		$	(14,555,178	)	$	47,403,987


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,287,868		$	(65,735	)	$	4,222,133
Interest bearing											20,283,441			(67,243	)		20,216,198

											24,571,309			(132,978	)		24,438,331
Federal funds purchased and assets sold under agreements to repurchase							$	159,829			5,739,416			(136,800	)		5,762,445
Other short-term borrowings	$	150,787						894,959			5,297,595			(2,309,216	)		4,034,125
Notes payable		484,406						2,835,595			9,651,217			(4,233,972	)		8,737,246
Subordinated notes											430,000			(430,000	)
Other liabilities		59,322		$	60			78,988			758,613			(85,559	)		811,424

		694,515			60			3,969,371			46,448,150			(7,328,525	)		43,783,571

Minority interest in consolidated subsidiaries											110						110

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,753,146			3,961			2			70,421			(74,384	)		1,753,146
Surplus		521,855			851,193			734,964			3,182,285			(4,763,441	)		526,856
Retained earnings		1,599,145			458,922			406,811			1,804,476			(2,675,210	)		1,594,144
Accumulated other comprehensive loss, net of tax		(233,728	)		(55,781	)		(21,012	)		(207,443	)		284,236			(233,728	)
Treasury stock, at cost		(206,987	)								(2,146	)		2,146			(206,987	)

		3,620,306			1,258,295			1,120,765			4,847,593			(7,226,653	)		3,620,306

	$	4,314,821		$	1,258,355		$	5,090,136		$	51,295,853		$	(14,555,178	)	$	47,403,987

50

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

ASSETS
Cash and due from banks	$	954		$	1,486		$	395		$	905,522		$	(59,465	)	$	848,892
Money market investments					300			411			861,021			(241,210	)		620,522
Investment securities available-for-sale, at fair value		11,407			67,810			9,559			10,806,922			(6,400	)		10,889,298
Investment securities held-to-maturity, at amortized cost		629,692			2,164						218,542			(430,000	)		420,398
Other investment securities, at lower of cost or realizable value		144,994			5,001			13,392			148,655						312,042
Trading account securities, at fair value											376,757			(487	)		376,270
Investment in subsidiaries		3,005,963			1,147,170			2,054,174			795,977			(7,003,284	)
Loans held-for-sale, at lower of cost or market value											606,620						606,620

Loans held-in-portfolio		169,755						2,847,908			34,746,847			(5,849,504	)		31,915,006
Less – Unearned income											304,994						304,994
Allowance for loan losses		40									483,775						483,815

		169,715						2,847,908			33,958,078			(5,849,504	)		31,126,197

Premises and equipment, net		26,244						136			566,528			(204	)		592,704
Other real estate											83,658						83,658
Accrued income receivable		408			10			11,319			257,335			(23,074	)		245,998
Other assets		66,786			39,522			47,817			1,367,976			(6,419	)		1,515,682
Goodwill											656,189						656,189
Other intangible assets		554									104,490						105,044

	$	4,056,717		$	1,263,463		$	4,985,111		$	51,714,270		$	(13,620,047	)	$	48,399,514


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,429,844		$	(59,407	)	$	4,370,437
Interest bearing											19,223,844			(144,761	)		19,079,083

											23,653,688			(204,168	)		23,449,520
Federal funds purchased and assets sold under agreements to repurchase							$	119,400			7,892,780			(85,449	)		7,926,731
Other short-term borrowings				$	30,378			132,224			3,683,448			(1,189,114	)		2,656,936
Notes payable	$	532,305						3,533,056			10,753,352			(4,620,038	)		10,198,675
Subordinated notes											430,000			(430,000	)
Other liabilities		61,419			138			62,929			622,096			(42,035	)		704,547

		593,724			30,516			3,847,609			47,035,364			(6,570,804	)		44,936,409

Minority interest in consolidated subsidiaries											112						112

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,750,310			3,961			2			70,385			(74,348	)		1,750,310
Surplus		485,630			815,193			734,964			3,098,740			(4,643,896	)		490,631
Retained earnings		1,581,500			493,693			446,943			1,826,634			(2,772,271	)		1,576,499
Accumulated other comprehensive loss, net of tax		(334,789	)		(79,900	)		(44,407	)		(315,151	)		439,458			(334,789	)
Treasury stock, at cost		(206,533	)								(1,814	)		1,814			(206,533	)

		3,462,993			1,232,947			1,137,502			4,678,794			(7,049,243	)		3,462,993

	$	4,056,717		$	1,263,463		$	4,985,111		$	51,714,270		$	(13,620,047	)	$	48,399,514

51

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2007
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	4,158					$	38,419		$	701,620		$	(87,712	)	$	656,485
Money market investments		793		$	98			10			7,082			(2,231	)		5,752
Investment securities		9,548			821			224			109,663			(7,193	)		113,063
Trading account securities											9,611						9,611

		14,499			919			38,653			827,976			(97,136	)		784,911

INTEREST EXPENSE:
Deposits											184,114			(1,384	)		182,730
Short-term borrowings		78						14,418			134,435			(29,465	)		119,466
Long-term debt		8,366						37,033			135,323			(69,424	)		111,298

		8,444						51,451			453,872			(100,273	)		413,494

Net interest income (expense)		6,055			919			(12,798	)		374,104			3,137			371,417
Provision for loan losses											115,167						115,167

Net interest income (expense) after provision for loan losses		6,055			919			(12,798	)		258,937			3,137			256,250
Service charges on deposit accounts											48,392						48,392
Other service fees											118,143			(28,553	)		89,590
Net (loss) gain on sale and valuation adjustment of investment securities		(2,132	)		(907	)					4,214						1,175
Trading account profit											10,377						10,377
Gain on sale of loans and valuation adjustments on loans held-for-sale											28,293			1			28,294
Other operating income (loss)		529			1,201			(102	)		33,714			(9,795	)		25,547

		4,452			1,213			(12,900	)		502,070			(35,210	)		459,625

OPERATING EXPENSES:
Personnel costs:
Salaries		5,518			98						121,991			(657	)		126,950
Pension, profit sharing and other benefits		1,277			17						36,234			(190	)		37,338

		6,795			115						158,225			(847	)		164,288
Net occupancy expenses		612			8			1			25,880						26,501
Equipment expenses		385									31,908			(48	)		32,245
Other taxes		335									11,500						11,835
Professional fees		3,295			8			57			70,797			(35,515	)		38,642
Communications		136									16,874			(37	)		16,973
Business promotion		881									29,756			(268	)		30,369
Printing and supplies		24									4,525						4,549
Other operating expenses		(12,112	)		(100	)		117			45,317			(384	)		32,838
Amortization of intangibles											2,813						2,813

		351			31			175			397,595			(37,099	)		361,053

Income (loss) before income tax and equity in earnings of subsidiaries		4,101			1,182			(13,075	)		104,475			1,889			98,572
Income tax		1,385						(4,576	)		26,174			639			23,622

Income (loss) before equity in earnings of subsidiaries		2,716			1,182			(8,499	)		78,301			1,250			74,950
Equity in earnings of subsidiaries		72,234			(7,926	)		(143	)		(12,080	)		(52,085	)

NET INCOME (LOSS)	$	74,950		$	(6,744	)	$	(8,642	)	$	66,221		$	(50,835	)	$	74,950

52

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	2,761					$	36,267		$	643,505		$	(68,741	)	$	613,792
Money market investments		450		$	52			399			9,740			(2,735	)		7,906
Investment securities		8,759			351			223			130,874			(6,933	)		133,274
Trading account securities											7,065						7,065

		11,970			403			36,889			791,184			(78,409	)		762,037

INTEREST EXPENSE:
Deposits											137,034			(1,073	)		135,961
Short-term borrowings		49			395			3,625			137,142			(14,137	)		127,074
Long-term debt		9,067						47,370			142,116			(65,330	)		133,223

		9,116			395			50,995			416,292			(80,540	)		396,258

Net interest income (expense)		2,854			8			(14,106	)		374,892			2,131			365,779
Provision for loan losses											67,096						67,096

Net interest income (expense) after provision for loan losses		2,854			8			(14,106	)		307,796			2,131			298,683
Service charges on deposit accounts											47,324						47,324
Other service fees											106,949			(26,932	)		80,017
Net gain (loss) on sale and valuation adjustments of investment securities		580									(15,004	)					(14,424	)
Trading account profit											1,830						1,830
Gain on sale of loans											37,178			(8,124	)		29,054
Other operating income		11,629			608			2,819			35,675			(10,546	)		40,185

		15,063			616			(11,287	)		521,748			(43,471	)		482,669

OPERATING EXPENSES:
Personnel costs:
Salaries		4,766			95						123,113			(1,274	)		126,700
Pension, profit sharing and other benefits		1,392			16						38,749			(374	)		39,783

		6,158			111						161,862			(1,648	)		166,483
Net occupancy expenses		525			4						28,100						28,629
Equipment expenses		405			3			3			33,578			(16	)		33,973
Other taxes		234									10,695						10,929
Professional fees		5,731			12			38			67,721			(35,014	)		38,488
Communications		182									17,128			(17	)		17,293
Business promotion		624									31,507			(140	)		31,991
Printing and supplies		10									4,281						4,291
Other operating expenses		(15,279	)		(96	)		111			43,719			(383	)		28,072
Amortization of intangibles											2,831						2,831

		(1,410	)		34			152			401,422			(37,218	)		362,980

Income (loss) before income tax and equity in earnings of subsidiaries		16,473			582			(11,439	)		120,326			(6,253	)		119,689
Income tax		1,939						(3,586	)		25,796			(1,841	)		22,308

Income (loss) before equity in earnings of subsidiaries		14,534			582			(7,853	)		94,530			(4,412	)		97,381
Equity in earnings of subsidiaries		82,847			(5,712	)		1,935			(18,402	)		(60,668	)

NET INCOME (LOSS)	$	97,381		$	(5,130	)	$	(5,918	)	$	76,128		$	(65,080	)	$	97,381

53

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2007
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	9,539					$	76,174		$	1,383,307		$	(168,421	)	$	1,300,599
Money market investments		940		$	115			11			13,408			(4,113	)		10,361
Investment securities		17,363			1,196			447			223,949			(14,401	)		228,554
Trading account securities											18,992						18,992

		27,842			1,311			76,632			1,639,656			(186,935	)		1,558,506

INTEREST EXPENSE:
Deposits											357,776			(1,944	)		355,832
Short-term borrowings		1,965						28,886			273,140			(59,716	)		244,275
Long-term debt		16,732						73,885			272,687			(131,304	)		232,000

		18,697						102,771			903,603			(192,964	)		832,107

Net interest income (expense)		9,145			1,311			(26,139	)		736,053			6,029			726,399
Provision for loan losses		7									211,506						211,513

Net interest income (expense) after provision for loan losses		9,138			1,311			(26,139	)		524,547			6,029			514,886
Service charges on deposit accounts											96,863						96,863
Other service fees											233,454			(56,015	)		177,439
Net gain (loss) on sale and valuation adjustments of investment securities		116,592			(8,507	)					(25,139	)					82,946
Trading account loss											(3,787	)					(3,787	)
Gain on sale of loans											44,268			(12,540	)		31,728
Other operating income (loss)		9,762			11,210			(629	)		68,700			(18,681	)		70,362

		135,492			4,014			(26,768	)		938,906			(81,207	)		970,437

OPERATING EXPENSES:
Personnel costs:
Salaries		11,618			194						252,716			(1,099	)		263,429
Pension, profit sharing and other benefits		3,317			37						76,201			(321	)		79,234

		14,935			231						328,917			(1,420	)		342,663
Net occupancy expenses		1,165			15			2			57,333						58,515
Equipment expenses		673						2			64,063			(97	)		64,641
Other taxes		710									22,972						23,682
Professional fees		5,777			19			121			139,338			(70,626	)		74,629
Communications		278									33,837			(80	)		34,035
Business promotion		1,163									58,186			(608	)		58,741
Printing and supplies		42									8,783						8,825
Other operating expenses		(24,952	)		(200	)		233			90,541			(768	)		64,854
Amortization of intangibles											5,796						5,796

		(209	)		65			358			809,766			(73,599	)		736,381

Income (loss) before income tax and equity in earnings of subsidiaries		135,701			3,949			(27,126	)		129,140			(7,608	)		234,056
Income tax		29,246						(9,494	)		24,116			(3,409	)		40,459

Income (loss) before equity in earnings of subsidiaries		106,455			3,949			(17,632	)		105,024			(4,199	)		193,597
Equity in earnings of subsidiaries		87,142			(82,917	)		(66,609	)		(88,916	)		151,300

NET INCOME (LOSS)	$	193,597		$	(78,968	)	$	(84,241	)	$	16,108		$	147,101		$	193,597

54

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans	$	5,425					$	73,168		$	1,263,556		$	(136,522	)	$	1,205,627
Money market investments		1,522		$	118			437			20,156			(6,345	)		15,888
Investment securities		16,367			664			447			263,242			(13,913	)		266,807
Trading account securities											15,925						15,925

		23,314			782			74,052			1,562,879			(156,780	)		1,504,247

INTEREST EXPENSE:
Deposits											262,472			(2,100	)		260,372
Short-term borrowings		103			841			10,103			269,480			(28,650	)		251,877
Long-term debt		18,049						90,337			288,276			(130,207	)		266,455

		18,152			841			100,440			820,228			(160,957	)		778,704

Net interest income (expense)		5,162			(59	)		(26,388	)		742,651			4,177			725,543
Provision for loan losses											116,043						116,043

Net interest income (expense) after provision for loan losses		5,162			(59	)		(26,388	)		626,608			4,177			609,500
Service charges on deposit accounts											94,793						94,793
Other service fees											215,013			(54,650	)		160,363
Net gain (loss) on sale and valuation adjustments of investment securities		732			13,490						(16,717	)		411			(2,084	)
Trading account profit											1,183			12,122			13,305
Gain on sale of loans											84,231			(7,916	)		76,315
Other operating income		14,472			3,501			2,819			68,529			(19,194	)		70,127

		20,366			16,932			(23,569	)		1,073,640			(65,050	)		1,022,319

OPERATING EXPENSES:
Personnel costs:
Salaries		10,658			188						252,932			(1,546	)		262,232
Pension, profit sharing and other benefits		3,020			36						79,700			(453	)		82,303

		13,678			224						332,632			(1,999	)		344,535
Net occupancy expenses		1,128			8						56,131						57,267
Equipment expenses		800			3			7			66,391			(31	)		67,170
Other taxes		500									20,670						21,170
Professional fees		10,160			23			76			134,054			(68,747	)		75,566
Communications		319									34,310			(36	)		34,593
Business promotion		3,087									61,867			(140	)		64,814
Printing and supplies		36									8,887						8,923
Other operating expenses		(30,199	)		(200	)		218			87,790			(706	)		56,903
Impact of change in fiscal period at certain subsidiaries								3,495			4,109			2,137			9,741
Amortization of intangibles											5,552						5,552

		(491	)		58			3,796			812,393			(69,522	)		746,234

Income (loss) before income tax and equity in earnings of subsidiaries		20,857			16,874			(27,365	)		261,247			4,472			276,085
Income tax		2,717						(9,160	)		66,413			231			60,201

Income (loss) before equity in earnings of subsidiaries		18,140			16,874			(18,205	)		194,834			4,241			215,884
Equity in earnings of subsidiaries		197,744			(3,721	)		13,877			(10,634	)		(197,266	)

NET INCOME (LOSS)	$	215,884		$	13,153		$	(4,328	)	$	184,200		$	(193,025	)	$	215,884

55

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 (UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Consolidated
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Popular, Inc.

Cash flows from operating activities:
Net income (loss)	$	193,597		$	(78,968	)	$	(84,241	)	$	16,108		$	147,101		$	193,597

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries		(87,142	)		82,917			66,609			88,916			(151,300	)
Depreciation and amortization of premises and equipment		1,180						2			38,827			(36	)		39,973
Provision for loan losses		7									211,506						211,513
Amortization of intangibles											5,796						5,796
Amortization and fair value adjustment of servicing assets											22,606						22,606
Net (gain) loss on sale and valuation adjustment of investment securities		(116,592	)		8,507						25,139						(82,946	)
Net loss (gain) on disposition of premises and equipment		1									(4,852	)					(4,851	)
Net gain on sale of loans											(44,268	)		12,540			(31,728	)
Net amortization of premiums and accretion of discounts on investments		(2,665	)		6						13,911			(17	)		11,235
Net amortization of premiums and deferred loan origination fees and costs											52,684			(4,746	)		47,938
(Earnings) losses from investments under the equity method		(4,515	)		(11,210	)		629			(682	)		(812	)		(16,590	)
Stock options expense		364									543						907
Deferred income taxes		1,470						(9,494	)		(53,203	)		13,115			(48,112	)
Net disbursements on loans held-for-sale											(3,087,103	)					(3,087,103	)
Acquisitions of loans held-for-sale											(403,712	)					(403,712	)
Proceeds from sale of loans held-for-sale											2,833,030						2,833,030
Net decrease in trading securities											645,291			389			645,680
Net decrease (increase) in accrued income receivable		613			(98	)		(893	)		1,749			(2,877	)		(1,506	)
Net decrease (increase) in other assets		23,320			2,541			(2,625	)		(40,341	)		844			(16,261	)
Net increase (decrease) in interest payable		130						(533	)		(16,487	)		2,877			(14,013	)
Net increase in postretirement benefit obligation											1,824						1,824
Net increase (decrease) in other liabilities		3,108			6			16,532			(55,028	)		(16,689	)		(52,071	)

Total adjustments		(180,721	)		82,669			70,227			236,146			(146,712	)		61,609

Net cash provided by (used in) operating activities		12,876			3,701			(14,014	)		252,254			389			255,206

Cash flows from investing activities:
Net decrease (increase) in money market investments		8,700			(17,950	)		2,341			(125,458	)		(74,476	)		(206,843	)
Purchases of investment securities:
Available-for-sale		(6,808	)		(2	)					(520,700	)		462,125			(65,385	)
Held-to-maturity		(1,215,671	)								(11,077,940	)					(12,293,611	)
Other								(928	)		(16,007	)					(16,935	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale											1,267,162			(456,452	)		810,710
Held-to-maturity		978,000			400						10,979,564						11,957,964
Other											5,445						5,445
Proceeds from sale of investment securities available -for- sale					14,009						14,972						28,981
Proceeds from sale of other investment securities		245,484			2			865			1						246,352
Net repayments (disbursements) on loans		127,445						(78	)		(1,222,139	)		732,203			(362,569	)
Proceeds from sale of loans											3,549						3,549
Acquisition of loan portfolios											(784	)					(784	)
Capital contribution to subsidiary											(3,428	)		3,428
Assets acquired, net of cash											(1,633	)					(1,633	)
Mortgage servicing rights purchased											(23,988	)					(23,988	)
Acquisition of premises and equipment		(445	)								(49,207	)					(49,652	)
Proceeds from sale of premises and equipment											21,951						21,951
Proceeds from sale of foreclosed assets											80,278						80,278
Dividends received from subsidiary		89,400												(89,400	)

Net cash provided by (used in) investing activities		226,105			(3,541	)		2,200			(668,362	)		577,428			133,830

Cash flows from financing activities:
Net increase in deposits											961,225			(24,415	)		936,810
Net decrease in federal funds purchased and assets sold under agreements to repurchase								(5,877	)		(179,432	)		78,800			(106,509	)
Net decrease in other short-term borrowings		(150,787	)					(37,195	)		(359,008	)		(103,030	)		(650,020	)
Payments of notes payable								(3,920	)		(1,627,943	)		858,132			(773,731	)
Proceeds from issuance of notes payable		198						58,861			1,534,233			(1,490,043	)		103,249
Dividends paid to parent company											(89,400	)		89,400
Dividends paid		(95,223	)														(95,223	)
Proceeds from issuance of common stock		8,667															8,667
Treasury stock acquired		(63	)								(289	)					(352	)
Capital contribution from parent											3,428			(3,428	)

56


	Popular, Inc.			PIBI		PNA		All other			Elimination			Consolidated
(In thousands)	Holding Co.			Holding Co.		Holding Co.		Subsidiaries			Entries			Popular, Inc.

Net cash (used in) provided by financing activities		(237,208	)				11,869		242,814			(594,584	)		(577,109	)

Net increase (decrease) in cash and due from banks		1,773			160		55		(173,294	)		(16,767	)		(188,073	)
Cash and due from banks at beginning of period		2			157		322		1,015,470			(65,793	)		950,158

Cash and due from banks at end of period	$	1,775		$	317	$	377	$	842,176		$	(82,560	)	$	762,085

57

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)


	Popular, Inc.			PIBI			PNA			All other			Elimination			Consolidated
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Popular, Inc.

Cash flows from operating activities:
Net income (loss)	$	215,884		$	13,153		$	(4,328	)	$	184,200		$	(193,025	)	$	215,884
Less: Impact of change in fiscal period of certain subsidiaries, net of tax								(2,271	)		(2,638	)		(1,220	)		(6,129	)

Net income before impact of change in fiscal period		215,884			13,153			(2,057	)		186,838			(191,805	)		222,013

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries		(197,744	)		3,721			(13,877	)		10,634			197,266
Depreciation and amortization of premises and equipment		1,138									41,404			(36	)		42,506
Provision for loan losses											116,043						116,043
Amortization of intangibles											5,552						5,552
Amortization of servicing assets											28,307			(17	)		28,290
Net (gain) loss on sale and valuation adjustment of investment securities		(732	)		(13,490	)					16,717			(411	)		2,084
Net gain on disposition of premises and equipment											(2,269	)					(2,269	)
Net gain on sale of loans											(84,231	)		7,916			(76,315	)
Net amortization of premiums and accretion of discounts on investments		(261	)		7						14,763			(151	)		14,358
Net amortization of premiums and deferred loan origination fees and costs		(46	)								70,055			(3,300	)		66,709
Earnings from investments under the equity method		(1,419	)		(3,490	)					(508	)		(746	)		(6,163	)
Stock options expense		387									1,198						1,585
Deferred income taxes		(454	)					(9,160	)		(18,998	)		231			(28,381	)
Net disbursements on loans held-for-sale											(3,559,262	)					(3,559,262	)
Acquisitions of loans held-for-sale											(846,117	)					(846,117	)
Proceeds from sale of loans held-for-sale											3,834,624						3,834,624
Net decrease in trading securities											1,000,341						1,000,341
Net decrease (increase) in accrued income receivable		123			24			1,225			(2,326	)		(1,012	)		(1,966	)
Net (increase) decrease in other assets		(20,366	)		4,492			315			(66,447	)		2,726			(79,280	)
Net increase in interest payable		535			75			1,154			7,168			954			9,886
Net increase in postretirement benefit obligation											2,755						2,755
Net increase (decrease) in other liabilities		11,318			(15	)		16,503			(91,725	)		266			(63,653	)

Total adjustments		(207,521	)		(8,676	)		(3,840	)		477,678			203,686			461,327

Net cash provided by (used in) operating activities		8,363			4,477			(5,897	)		664,516			11,881			683,340

Cash flows from investing activities:

Net decrease (increase) in money market investments		230,000						(260	)		199,108			(299,800	)		129,048
Purchases of investment securities:
Available-for-sale					(17,284	)					(315,246	)		121,391			(211,139	)
Held-to-maturity		(199,692	)								(16,647,740	)					(16,847,432	)
Other								(250	)		(31,952	)					(32,202	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale											876,918			(115,060	)		761,858
Held-to-maturity											16,580,599						16,580,599
Other		541									38,722						39,263
Proceeds from sale of investment securities available for sale		7,235			27,924						9,315						44,474
Net disbursements on loans		(144,056	)					(16,432	)		(501,092	)		189,306			(472,274	)
Proceeds from sale of loans											212,791						212,791
Acquisition of loan portfolios											(175,856	)					(175,856	)
Capital contribution to subsidiary								(4,127	)		(29,891	)		34,018
Assets acquired, net of cash											(418	)					(418	)
Mortgage servicing rights purchased											(9,599	)					(9,599	)
Acquisition of premises and equipment		(4,356	)								(59,113	)					(63,469	)
Proceeds from sale of premises and equipment											26,762						26,762
Proceeds from sale of foreclosed assets											66,685						66,685
Dividends received from subsidiary		148,600									60,763			(209,363	)

Net cash provided by (used in) investing activities		38,272			10,640			(21,069	)		300,756			(279,508	)		49,091

Cash flows from financing activities:

Net increase in deposits											817,232			(5,733	)		811,499
Net decrease in federal funds purchased and assets sold under agreements to repurchase								(22,300	)		(1,175,629	)		309,048			(888,881	)
Net (decrease) increase in other short-term borrowings					(15,734	)		(226,879	)		28,135			64,295			(150,183	)
Payments of notes payable		(450	)					(205,462	)		(1,615,920	)		611,097			(1,210,735	)
Proceeds from issuance of notes payable		196						481,476			1,079,305			(878,571	)		682,406
Dividends paid to parent company											(209,362	)		209,362

58


	Popular, Inc.			PIBI			PNA			All other			Elimination			Consolidated
(In thousands)	Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Popular, Inc.

Dividends paid		(93,249	)														(93,249	)
Proceeds from issuance of common stock		47,126												167			47,293
Capital contribution from parent											34,524			(34,524	)

Net cash (used in) provided by financing activities		(46,377	)		(15,734	)		26,835			(1,041,715	)		275,141			(801,850	)

Cash effect of change in fiscal period of certain subsidiaries								78			19,570			(7,734	)		11,914

Net increase (decrease) in cash and due from banks		258			(617	)		(53	)		(56,873	)		(220	)		(57,505	)
Cash and due from banks at beginning of period		696			2,103			448			962,395			(59,245	)		906,397

Cash and due from banks at end of period	$	954		$	1,486		$	395		$	905,522			($59,465	)	$	848,892

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

OVERVIEW

Popular, Inc. is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution based in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation has established a community banking franchise providing a broad range of financial services and products to the communities it serves. Banco Popular North America (“BPNA”) operates branches in California, Texas, Illinois, New York, New Jersey and Florida, while E-LOAN provides online consumer direct lending to obtain mortgage, auto and home equity loans, and provides an online platform to raise deposits for BPNA. Popular Financial Holdings (“PFH”) offers mortgage and personal loans and provides mortgage loan servicing. The Corporation also owns a financial transaction processing operation, EVERTEC, which strives to use its expertise in technology and electronic banking as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses.

The financial results for the quarter ended June 30, 2007 were principally impacted by a higher provision for loan losses which continues to reflect a difficult housing environment, particularly in the U.S. mainland, and weak economic conditions in Puerto Rico impacting both the consumer and commercial sectors. Table A provides selected financial data and performance metrics for the quarters and six months ended June 30, 2007 and 2006.

Financial highlights for the quarter ended June 30, 2007, compared with the same quarter in 2006, are described below.

	•		Net interest income improved as a result of a change in the mix of the Corporation’s earning assets and interest bearing liabilities. The investment portfolio declined due to the maturity of low yielding securities that were not replaced with securities, while the mortgage loan portfolio decreased due to sales of low yielding mortgage loans from the Puerto Rico operations in 2006 and lower origination volume experienced in the U.S. mortgage sector. These decreases were partially offset by an increase in the commercial and consumer loan portfolios, which due to their nature and characteristics have higher yields. Furthermore, earning assets were funded with a greater proportion of interest bearing deposits, which generally carry a lower average cost than other borrowings. The cost of short-term borrowings increased in part due to two interest rate tightenings by the Federal Reserve in the mid to latter part of the second quarter of 2006. Refer to the Net Interest Income section of this MD&A for further details on the variance in net interest income on a taxable equivalent basis.

	•		The financial results for the quarter ended June 30, 2007 were impacted by a $48.1 million increase in the provision for loan losses, which was mostly influenced by higher charge-offs in most portfolio categories due to weak economic conditions in Puerto Rico and a slowdown in the housing sector, particularly in the U.S. mainland. Further details on credit quality metrics are included later in the MD&A.

	•		Non-interest income totaled $203.4 million for the quarter ended June 30, 2007, compared with $184.0 million for the same quarter in 2006. This increase resulted from the net impact of the following principal factors / variances:

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	o		Lower unfavorable valuation adjustments in the fair value of PFH’s residual interests derived from off-balance sheet mortgage loan securitizations (also known as interest-only securities or “IOs”) during the second quarter of 2007. Unfavorable valuation adjustments in PFH’s residual interests, including those classified as available-for-sale and as trading securities, amounted to $2.2 million in the second quarter of 2007, compared with $15.5 million in the second quarter of 2006. As of June 30, 2007, the aggregate balance of PFH’s residual interests was $36 million. As indicated in the Corporation’s Form 10-Q filed on May 10, 2007 and in the Corporation’s 2006 Annual Report incorporated by reference in Popular, Inc.’s Form 10-K, the Corporation exited the wholesale nonprime mortgage loan origination business during the first quarter of 2007. It shut down its wholesale broker, retail and call center business divisions. Nonprime mortgage loan securitizations that resulted in the accounting for residual interests involved loans originated through those channels.

	o		Trading account profits, isolating the change related to the mark-to-market of PFH’s residual interests classified as trading securities which amounted to $0.4 million, increased by $8.9 million primarily due to gains on the sale of mortgage-backed securities issued by the Corporation’s mortgage banking subsidiary in Puerto Rico and favorable mark-to-market adjustments in the valuation of mortgage-backed securities held for trading purposes.

	o		Other operating income in the second quarter of 2006 included $11.0 million in dividends received from Telecomunicaciones de Puerto Rico, Inc. (“TELPRI”) in that period. The shares of common stock in TELPRI were sold by the Corporation during the first quarter of 2007.

	o		Other service fees improved by $9.6 million driven mostly by increases in credit and debit card fees, and in net mortgage servicing fees.

Refer to the Non-Interest Income section of this MD&A for other factors influencing the variance in non-interest income. Also, refer to the Critical Accounting Policies / Estimates section of this MD&A for more detailed information on the valuation of residual interests and changes in assumptions.

	•		Operating expenses for the quarter ended June 30, 2007 decreased by $1.9 million, or less than 1%, when compared with the same quarter in 2006, mainly as a result of lower personnel costs which were reduced by approximately $2.2 million. Personnel costs were influenced by a decline in Popular North America’s reportable segment primarily due to the Restructuring Plan (the “Restructuring Plan”) in the U.S. operations. In particular, PFH, which was greatly impacted by the Restructuring Plan, experienced a decline in personnel costs of $10.6 million, when comparing its results for the second quarter of 2007 versus the same quarter in the previous year. This reduction in the Corporation’s personnel costs was offset in part by other increases across the Corporation’s subsidiaries, including the impact of merit increases and new units to support initiatives for new products and services. Other operating expense categories in the aggregate remained stable for the quarter ended June 30, 2007, as compared to the same quarter in the previous year. The Corporation did not incur significant charges during the second quarter of 2007 related to the Restructuring Plan of the U.S. operations. Refer to the Restructuring Plan section of this MD&A and Note 22 to the consolidated financial statements for information on the Restructuring Plan. Also, investors may refer to the Corporation’s Form 10-Q filed on May 10, 2007 and the 2006 Annual Report incorporated by reference in the Corporation’s Form 10-K filed on March 1, 2007 for additional information on this plan.

	•		Higher income tax expense despite lower taxable income as a result of the impact of the reversal of certain tax positions upon the completion during the second quarter of 2006 of various federal and Puerto Rico tax audits, as well as lower exempt income.

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•

Total earning assets at June 30, 2007 decreased slightly by less than 1% compared with December 31, 2006. When compared to June 30, 2006, earning assets decreased by 3%. This decline was due in part to strategies to reduce the Corporation’s financial leverage and low yielding assets. Refer to the Financial Condition section of this MD&A for descriptive information on the composition of assets, deposits, borrowings and capital of the Corporation.

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TABLE A
Financial Highlights


Financial Condition Highlights	At June 30,							Average for the six months
(In thousands)	2007		2006		Variance				2007		2006		Variance

Money market investments	$	574,987	$	620,522	$	(45,535	)		$	404,686	$	625,784	$	(221,098	)
Investment and trading securities		10,240,955		11,998,008		(1,757,053	)			10,785,609		12,839,939		(2,054,330	)
Loans*		32,751,845		32,216,632		535,213				32,712,076		31,932,840		779,236
Total earning assets		43,567,787		44,835,162		(1,267,375	)			43,902,371		45,398,563		(1,496,192	)
Total assets		46,985,363		48,399,514		(1,414,151	)			47,224,603		48,759,631		(1,535,028	)
Deposits		25,385,995		23,449,520		1,936,475				24,630,221		22,810,528		1,819,693
Borrowings		17,108,679		20,782,342		(3,673,663	)			17,940,022		21,536,404		(3,596,382	)
Stockholders’ equity		3,697,080		3,462,993		234,087				3,854,240		3,689,641		164,599


Operating Highlights	Second Quarter							Six months ended June 30,
(In thousands, except per share information)	2007		2006		Variance			2007		2006			Variance

Net interest income	$	371,417	$	365,779	$	5,638		$	726,399	$	725,543		$	856
Provision for loan losses		115,167		67,096		48,071			211,513		116,043			95,470
Non-interest income		203,375		183,986		19,389			455,551		412,819			42,732
Operating expenses		361,053		362,980		(1,927	)		736,381		746,234			(9,853	)
Income tax		23,622		22,308		1,314			40,459		60,201			(19,742	)
Net income	$	74,950	$	97,381	$	(22,431	)	$	193,597	$	215,884		$	(22,287	)
Net income applicable to common stock	$	71,972	$	94,403	$	(22,431	)	$	187,641	$	209,928		$	(22,287	)
Basic and diluted EPS	$	0.26	$	0.34	$	(0.08	)	$	0.67	$	0.75	(a)	$	(0.08	)


Selected Statistical Information	Second Quarter						Six months ended June 30,
	2007			2006			2007			2006

Common Stock Data — Market price
High	$	17.49		$	21.98		$	18.94		$	21.98
Low		15.82			18.53			15.82			18.53
End		16.07			19.20			16.07			19.20
Book value per share at period end		12.57			11.77			12.57			11.77
Dividends declared per share		0.16			0.16			0.32			0.32
Dividend payout ratio		62.04	%		47.14	%		47.57	%		40.98	%
Price/earnings ratio		13.97	x		11.64	x		13.97	x		11.64	x

Profitability Ratios — Return on assets		0.64	%		0.80	%		0.83	%		0.91	%
Return on common equity		7.80			10.72			10.32			12.27
Net interest spread (taxable equivalent)		3.06			3.05			2.99			3.02
Net interest margin (taxable equivalent)		3.60			3.49			3.52			3.45
Effective tax rate		23.96			18.64			17.29			21.81
Overhead ratio**		42.45			48.94			38.66			45.95
Efficiency ratio ***		62.94			64.34			67.19			65.44

Capitalization Ratios — Equity to assets		8.24	%		7.66	%		8.16	%		7.57	%
Tangible equity to assets		6.72			6.19			6.63			6.10
Equity to loans		11.86			11.65			11.78			11.55
Internal capital generation		2.81			5.36			5.10			6.72
Tier I capital to risk – adjusted assets		10.66			11.26			10.66			11.26
Total capital to risk – adjusted assets		11.92			12.51			11.92			12.51
Leverage ratio		8.17			7.81			8.17			7.81

*

Includes loans held-for-sale.

**

Non-interest expense less non-interest income divided by net interest income.

***

Non-interest expense divided by net interest income plus recurring non-interest income (refer to the “Operating expenses” section of this MD&A for a description of items not considered “recurring”).

(a)

Quarterly amounts do not add to the year-to-date total due to rounding.

The Corporation, like other financial institutions, is subject to a number of risks, many of which are outside of management’s control, though efforts are made to manage those risks while optimizing returns. Among the risks assumed are: (1) market risk, which is the risk that changes in market rates and prices will adversely affect the Corporation’s financial condition or results of operations, (2) liquidity risk, which is the risk that the Corporation

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will have insufficient cash or access to cash to meet operating needs and financial obligations, (3) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their contractual obligations, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. In addition, the Corporation is subject to legal, compliance and reputational risks, among others.

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

The description of the Corporation’s business contained in Item 1 of the Corporation’s Form 10-K for the year ended December 31, 2006, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control, that in addition to the other information in this Form 10-Q, readers should consider.

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

The shares of the Corporation’s common and preferred stock are traded on the National Association of Securities Dealers Automated Quotation (“NASDAQ”) system under the symbols BPOP and BPOPO, respectively.

CRITICAL ACCOUNTING POLICIES / ESTIMATES

The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to securities’ classification and related values, loans and allowance for loan losses, retained interests on transfers of financial assets – subprime mortgage loans securitizations (valuations of interest-only strips and mortgage servicing rights), income taxes, goodwill and other intangible assets, and pension and postretirement benefit obligations. For a summary of the Corporation’s critical accounting policies, refer to that particular section in the MD&A included in Popular, Inc.’s 2006 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Annual Report”). Also, refer to Note 1 to the consolidated financial statements included in the 2006 Annual Report for a summary of the Corporation’s significant accounting policies.

As indicated in the 2006 Annual Report, one of the accounting policies / estimates considered critical by the Corporation’s management is that associated with the valuation of PFH’s residual interests. During the six-month period ended June 30, 2007, the Corporation recognized unfavorable valuation adjustments of $55.0 million in the fair value of PFH’s residual interests. Of this amount, $30.7 million corresponded to residual interests classified as available-for-sale and $24.3 million corresponded to residual interests classified as trading securities. As of June 30, 2007, the aggregate balance of PFH’s residual interests recognized in the Corporation’s statement of financial condition was $36 million. The unpaid principal balance of mortgage loans sold in off-balance sheet securitizations to which these residual interests are associated amounted to approximately $2.5 billion at June 30, 2007. This

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portfolio is almost equally split between fixed-rate and adjustable-rate mortgage loans.

During the first quarter of 2007, management reviewed the critical assumptions used in the valuation of residual interests derived from off-balance sheet securitizations performed by PFH. As indicated in the Form 10-Q filed on May 10, 2007, during the first quarter of 2007, adjustments were made to two critical assumptions utilized for the valuation of PFH’s residual interests, namely the discount rate and cumulative credit losses. There were no significant changes in valuation assumptions in the second quarter of 2007. There were no significant changes in the methodology or models used to value the residual interests that are described in the 2006 Annual Report.

The subprime mortgage market has experienced (1) deteriorating credit performance trends, particularly in loans originated in 2005 and 2006, (2) continued turmoil with subprime lenders due to increases in losses, bankruptcies and liquidity problems, (3) lower levels of housing activity and home price appreciation, and (4) a general tightening of credit standards that may adversely affect subprime borrowers when trying to refinance their mortgages. These factors have led to an increase in cash flow uncertainty for investors in subprime mortgage securities thereby causing risk premiums to increase. Given the increase in risk premiums along with lower liquidity for subprime securities observed in the market, in the first quarter of 2007, the Corporation changed the discount rate utilized to discount projected residual cash flows at the end of the first quarter of 2007 to 25% from 17% at the end of the fourth quarter in 2006.

With respect to credit losses, lower levels of home price appreciation, declining demand for housing units leading to rising inventories, housing affordability challenges and a general tightening of underwriting standards are expected to lead to higher future cumulative credit losses. Based on an analysis by management of PFH’s historical collateral performance, risk model estimates and rating agency loss coverage levels, the cumulative credit loss assumptions were also changed during the first quarter of 2007. The changes reflect an increase in the cumulative credit loss estimate range for the nine securitization transactions completed and accounted for as sale transactions during 2005 and 2006 of between 112 and 364 basis points.

The analysis performed by the Corporation reflects that all transactions, from a cumulative loss standpoint, are performing better than the median loss projection calculated by Loan Performance Corporation’s Risk Model (“Risk Model”). Notwithstanding, leading credit indicators of future loss performance (60-day delinquency, 90-day delinquency, foreclosure and REO levels) for the most recent four transactions executed in 2005 and 2006 show underperformance compared to the model projections. Although this tendency (i.e. higher delinquency but lower loss levels) is not inconsistent with the historical performance of PFH’s collateral when compared to the risk model, conditions in the housing and credit markets have changed materially. Furthermore, the overall industry credit performance of mortgage collateral originated in 2005 and 2006 is showing considerable underperformance relative to other vintages (i.e. higher delinquency levels at the same stage of seasoning), which implies higher cumulative losses than originally estimated.

Refer to Note 8 to the consolidated financial statements for information on key economic assumptions used in measuring the fair value of the residual interests as of June 30, 2007. Also, the note provides a sensitivity analysis based on immediate changes to the most critical assumptions used in the valuations at June 30, 2007.

Another of the Corporation’s critical accounting policies relates to the valuation of mortgage servicing rights. As further described in Note 2 to the consolidated financial statements and in the Recent Accounting Pronouncements and Interpretations section included in this MD&A, in January 2007, the Corporation adopted SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140.” The provisions of SFAS No. 156 did not have an impact on the estimation techniques, valuation assumptions and other subjective assessments associated with the mortgage servicing rights computations. Refer to Note 8 to the consolidated financial statements for information on key economic assumptions used in measuring the fair value of mortgage servicing rights as of June 30, 2007 and to Note 7 for SFAS No. 156 required disclosures.

There were no significant changes in the valuation methodology or assumptions related to MSRs. The valuations for the second quarter of 2007 included a slowdown in the prepayment speed in the Puerto Rico serviced portfolio and an evaluation of delinquency assumptions for PFH’s purchased MSRs. Delinquency assumptions were adjusted on several acquired MSRs to better reflect market expectations given higher than projected delinquency levels in the collateral underlying those transactions.

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Also, during the quarter ended March 31, 2007, the Corporation adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (FIN 48), which also relates to one of the Corporation’s critical accounting policies, namely income taxes. As indicated in the section below, the impact of the FIN 48 adoption in the first quarter of 2007 was not material to the Corporation. Refer to Note 14 to the consolidated financial statements for information on the financial impact and required disclosures.

RECENT ACCOUNTING PRONOUNCEMENTS AND INTERPRETATIONS

SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 permits companies to elect, on a transaction-by-transaction basis, to apply a fair value measurement to hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation under SFAS No. 133. This statement also clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of SFAS No. 155 in 2007 did not have a material impact on the Corporation’s consolidated financial statements during the six months ended June 30, 2007.

SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140”

SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes by class of servicing asset or liability. The Corporation adopted SFAS No. 156 in January 2007. The Corporation elected the fair value measurement for mortgage servicing rights (“MSRs”). Servicing rights associated with Small Business Administration (“SBA”) commercial loans will continue to be accounted at the lower of cost or market method. The initial impact of adoption of the fair value measurement for MSRs was included as a cumulative effect of a change in accounting principle directly in stockholders’ equity and resulted in a net increase in stockholders’ equity of approximately $9.6 million, net of deferred taxes. Refer to Note 7 to the consolidated financial statements for additional information on the adoption of SFAS No. 156 disclosures.

FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109” (FIN 48)

In 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition related to income taxes. The accounting provisions of FIN 48 were effective for the Corporation beginning in the first quarter of 2007. Based on management’s assessment, there was no impact on retained earnings as of January 1, 2007 due to the initial application of the provisions of FIN 48. Also, as a result of the implementation, the Corporation did not recognize any change in the liability for unrecognized tax benefits. Refer to Note 14 to the consolidated financial statements for further information on the impact of FIN 48.

EITF Issue No. 06-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-03)

EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The

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Corporation’s accounting policy is to account on a net basis for the taxes collected from customers and remitted to governmental authorities. The corresponding amounts recognized in the consolidated financial statements are not significant.

EITF Issue No. 06-5 “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (EITF 06-5)

EITF 06-5 focuses on how an entity should determine the “amount that could be realized under the insurance contract” at the balance sheet date in applying FTB 85-4, and whether the determination should be on an individual or group policy basis. At the September 2006 meeting, the Task Force affirmed as a final consensus that the cash surrender value and any additional amounts provided by the contractual terms of the insurance policy that are realizable at the balance sheet date should be considered in determining the amount that could be realized under FTB 85-4, and any amounts that are not immediately payable in cash to the policyholder should be discounted to their present value. Additionally, the Task Force affirmed as a final consensus the tentative conclusion that in determining “the amount that could be realized,” companies should assume that policies will be surrendered on an individual-by-individual basis, rather than surrendering the entire group policy. Also, the Task Force reached a consensus that contractual limitations on the ability to surrender a policy do not affect the amount to be reflected under FTB 85-4, but, if significant, the nature of those restrictions should be disclosed. The Corporation adopted the EITF 06-5 guidance in the first quarter of 2007 and as a result recorded a $0.9 million cumulative effect adjustment to beginning retained earnings (reduction of capital) for the existing bank-owned life insurance arrangement.

SFAS No. 157 “Fair Value Measurements”

SFAS No. 157, issued in September 2006, defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are: (1) quoted market prices for identical assets or liabilities in active markets; (2) observable market-based inputs or unobservable inputs that are corroborated by market data; and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation will adopt the provisions of SFAS No. 157 commencing with the first quarter of 2008. The Corporation is evaluating the impact that this accounting pronouncement may have in its consolidated financial statements and disclosures.

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

In February 2007, the FASB issued SFAS No. 159, which provides companies with an option to report selected financial assets and liabilities at fair value. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, “Fair Value Measurements,” and No. 107, “Disclosures about Fair Value of Financial Instruments.” SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Corporation will adopt the provisions of SFAS No. 159 commencing in January 2008. Management is evaluating the impact that this accounting standard may have on its consolidated financial statements.

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

In April 2007, the FASB issued Staff Position FSP FIN 39-1 which defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP permits the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty

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under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. This interpretation is effective for fiscal years beginning after November 15, 2007, with early application permitted. The adoption of FSP FIN 39-1 is not expected to have a material impact on the Corporation’s consolidated financial statements.

FSP FIN No. 46(R) – 7 “Application of FASB Interpretation No. 46(R) to Investment Companies”

In May 2007, the FASB issued Staff Position FSP FIN No. 46 (R) which amends the scope of the exception to FIN 46 (R) to indicate that investments accounted for at fair value in accordance with the specialized accounting guidance in the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies, are not subject to consolidation under FIN No. 46 (R). This interpretation is effective for fiscal years beginning on or after December 15, 2007. Management is evaluating the impact, if any, that the adoption of this interpretation may have on its consolidated financial statements.

SOP 07-01“Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies”

The Statement of Position SOP 07-01 issued in June 2007 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies (“AICPA Guide”). Additionally, it provides guidance as to whether a parent company or an equity method investor can apply the specialized industry accounting principles of the AICPA Guide. SOP 07-01 is effective for fiscal years beginning on or after December 15, 2007, with early application encouraged. Management is evaluating the impact, if any, that the adoption of SOP 07-1 may have on its consolidated financial statements.

NET INTEREST INCOME

Tables B and C present the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the quarter and six months ended June 30, 2007, compared with the same periods in 2006, segregated by major categories of interest earning assets and interest bearing liabilities.

The interest earning assets include investment securities and loans that are exempt from income tax, principally in Puerto Rico (“P.R.”). The main sources of tax-exempt interest income are investments in obligations of some U.S. Government agencies and sponsored entities of the P.R. Commonwealth and its agencies, and assets held by the Corporation’s international banking entities, which are tax-exempt under P.R. laws. To facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates at each respective quarter and six-month periods. The marginal tax rate for P.R. subsidiaries in 2007 was 39%, compared to 43.5% for BPPR and 41.5% for the other P.R. subsidiaries in the quarter and six-month periods ended June 30, 2006. The marginal tax rates for the quarter and six months ended June 30, 2006 reflected the impact of transitory increases which expired at the end of 2006. The taxable equivalent computation considers the interest expense disallowance required by the P.R. tax law, also affected by the mentioned increases in tax rates. The expiration of the temporary additional tax for the P.R. operations was the main reason for the decrease in the taxable equivalent benefit.

Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loan categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Interest income for the quarter and six months ended June 30, 2007 included unfavorable impacts of $2.5 million and $5.2 million, respectively, consisting principally of amortization of net loan origination costs (net of origination fees) and the amortization of net premiums on loans purchased, partially offset by prepayment penalties and late payment charges. The unfavorable impact for the quarter and six months ended June 30, 2006 amounted to $4.6 million and $11.9 million, respectively. The reduction for the second quarter of 2007, compared to the same quarter in the previous year, was mainly the result of a lower balance of premium amortized related to mortgage loans purchased in the U.S. operations, primarily in years prior to 2006, due to reduced loan prepayments and to the direct impact of the maturity run-off of the purchased mortgage loan portfolio. During late 2005, as part of a strategic business decision, the Corporation reduced the volume of purchases of

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mortgage loans, which in the past were used as part of the loans used to complete securitization transactions.

As shown in Table B, net interest income on a taxable equivalent basis for the second quarter of 2007 remained consistent, when compared to the same quarter of the previous year. Throughout 2006 the Corporation experienced a change in the mix of its earning assets due to the maturities of low yielding securities, the sale of low yielding mortgage loans, and the reduction experienced in the U.S. mortgage sector. Increased production in commercial and consumer loans, which carry a higher yield, partially offset the decrease in investments and mortgage loans and contributed to the increase in the yield of earning assets. Refer to the Financial Condition section of this MD&A for further information on the change in the different categories of earning assets.

TABLE B

Analysis of Levels & Yields on a Taxable Equivalent Basis
Quarter ended June 30,


																								Variance
		Average Volume					Average Yields / Costs												Interest					Attributable to
2007		2006		Variance			2007			2006			Variance				2007		2006		Variance			Rate			Volume
($ in millions)																	(In thousands)
$	434	$	607		($173	)		5.57	%		5.51	%		0.06	%	Money market investments	$	6,018	$	8,333		($2,315	)	$	82			($2,397	)
	9,966		12,217		(2,251	)		5.21			5.12			0.09		Investment securities		129,727		156,481		(26,754	)		2,422			(29,176	)
	662		431		231			6.06			6.90			(0.84	)	Trading securities		10,002		7,421		2,581			(999	)		3,580

	11,062		13,255		(2,193	)		5.27			5.20			0.07				145,747		172,235		(26,488	)		1,505			(27,993	)

																Loans:
	14,885		13,428		1,457			7.83			7.57			0.26		Commercial		290,670		253,358		37,312			9,096			28,216
	1,187		1,304		(117	)		7.81			7.47			0.34		Leasing		23,177		24,352		(1,175	)		1,087			(2,262	)
	11,316		12,192		(876	)		7.20			6.86			0.34		Mortgage		203,705		209,159		(5,454	)		10,014			(15,468	)
	5,378		5,017		361			10.78			10.57			0.21		Consumer		144,646		132,329		12,317			815			11,502

	32,766		31,941		825			8.10			7.77			0.33				662,198		619,198		43,000			21,012			21,988

$	43,828	$	45,196		($1,368	)		7.38	%		7.01	%		0.37	%	Total earning assets	$	807,945	$	791,433	$	16,512		$	22,517			($6,005	)

																Interest bearing deposits:
$	4,419	$	3,892	$	527			2.64	%		1.95	%		0.69	%	NOW and money market*	$	29,123	$	18,872	$	10,251		$	6,297		$	3,954
	5,742		5,375		367			1.99			1.35			0.64		Savings		28,512		18,096		10,416			809			9,607
	10,698		9,682		1,016			4.69			4.10			0.59		Time deposits		125,095		98,993		26,102			13,859			12,243

	20,859		18,949		1,910			3.51			2.88			0.63				182,730		135,961		46,769			20,965			25,804

	9,313		10,977		(1,664	)		5.15			4.64			0.51		Short-term borrowings		119,466		127,074		(7,608	)		16,960			(24,568	)
	8,250		10,168		(1,918	)		5.41			5.25			0.16		Medium and long-term debt		111,298		133,223		(21,925	)		2,876			(24,801	)

	38,422		40,094		(1,672	)		4.32			3.96			0.36		Total interest bearing liabilities		413,494		396,258		17,236			40,801			(23,565	)
	4,065		4,027		38											Non-interest bearing demand deposits
	1,341		1,075		266											Other sources of funds

$	43,828	$	45,196		($1,368	)		3.78	%		3.52	%		0.26	%

								3.60	%		3.49	%		0.11	%	Net interest margin

																Net interest income on a taxable equivalent basis		394,451		395,175		(724	)		($18,284	)	$	17,560

								3.06	%		3.05	%		0.01	%	Net interest spread

																Taxable equivalent adjustment		23,034		29,396		(6,362	)


																Net interest income	$	371,417	$	365,779	$	5,638


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

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

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The Corporation’s funding sources also experienced a change in its mix which contributed to the positive variance related to the change in levels as shown in Table B. The reduction of low yielding assets allowed the Corporation to reduce its levels of borrowed money while focusing on increasing its deposit base, which generally carry a lower cost. The E-LOAN internet deposit gathering initiative, launched in the latter part of 2006, contributed to these efforts. Also, there were increases in non-internet certificates of deposits and money market accounts gathered through the branch network of BPPR and BPNA.

The increase in the net interest margin, on a taxable equivalent basis, was mainly the result of the following factors:

	•		Higher yields in commercial loans and construction loans, mainly in the floating rate portfolios which were favorably impacted by the rising interest rates as a result of the two tightenings performed by the Federal Reserve in the mid to latter part of the second quarter of 2006. As of June 30, 2007, approximately 62% of the commercial and construction loan portfolio had floating or adjustable interest rates.

	•		Higher yields in the mortgage loan portfolio in part as a result of higher rates for new loans, a reduction in the premium amortized for securitized mortgage loans due to a reduction in prepayment speeds, and the sale of low yielding mortgage loans from the P.R. operations during 2006.

	•		Increase in the yield of consumer loans driven in part by home equity lines of credit with floating rates and an increase in the rate for the P.R. consumer loan portfolio.

Unfavorable items impacting net interest margin are detailed as follows:

	•		Higher cost of short-term borrowings as a result of the previously mentioned tightenings performed by the Federal Reserve during the second quarter of 2006.

	•		Increased cost of interest bearing deposits as a result of savings and time deposits raised through the E-LOAN platform in the second half of 2006, which carry higher rates due to the competitive interest rates offered. Also, the Corporation raised a greater volume of certificates of deposit through non-internet channels, a higher cost deposit category. Furthermore, there was an increase in the costs of certain NOW and money market accounts influenced by competitive campaigns to attract and retain customers, mainly in the U.S. operations, as well as certain accounts with floating rates which were impacted by increases in interest rates.

As shown in Table C, for the six-month period ended June 30, 2007, the net interest income on a taxable equivalent basis decreased mainly as a result of a lower benefit derived from the taxable equivalent adjustment due to the expiration of the temporary additional tax for the P.R. operations. In addition the variance is also influenced by the factors previously described in the quarterly results.

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TABLE C

Analysis of Levels & Yields on a Taxable Equivalent Basis

Six month period ended June 30,


																								Variance
Average Volume							Average Yields / Costs										Interest							Attributable to
2007		2006		Variance			2007			2006			Variance				2007		2006		Variance			Rate			Volume

($ in millions)																	(In thousands)
$	405	$	626	$	(221	)		5.46	%		5.40	%		0.06	%	Money market investments	$	10,949	$	16,748	$	(5,799	)	$	142		$	(5,941	)
	10,158		12,324		(2,166	)		5.15			5.08			0.07		Investment securities		261,259		312,819		(51,560	)		3,549			(55,109	)
	627		516		111			6.36			6.57			(0.21	)	Trading securities		19,777		16,795		2,982			(543	)		3,525

	11,190		13,466		(2,276	)		5.22			5.15			0.07				291,985		346,362		(54,377	)		3,148			(57,525	)

																Loans:
	14,770		13,185		1,585			7.81			7.44			0.37		Commercial		572,340		486,285		86,055			24,353			61,702
	1,196		1,312		(116	)		7.85			7.47			0.38		Leasing		46,948		48,986		(2,038	)		2,438			(4,476	)
	11,412		12,480		(1,068	)		7.13			6.80			0.33		Mortgage		406,670		424,260		(17,590	)		19,831			(37,421	)
	5,334		4,956		378			10.78			10.40			0.38		Consumer		285,759		256,380		29,379			5,731			23,648

	32,712		31,933		779			8.06			7.65			0.41				1,311,717		1,215,911		95,806			52,353			43,453

$	43,902	$	45,399	$	(1,497	)		7.34	%		6.91	%		0.43	%	Total earning assets	$	1,603,702	$	1,562,273	$	41,429		$	55,501		$	(14,072	)

																Interest bearing deposits:
$	4,282	$	3,841	$	441			2.57	%		1.84	%		0.73	%	NOW and money market*	$	54,655	$	35,076	$	19,579		$	13,075		$	6,504
	5,770		5,447		323			1.98			1.31			0.67		Savings		56,576		35,476		21,100			2,635			18,465
	10,550		9,578		972			4.68			4.00			0.68		Time deposits		244,601		189,820		54,781			32,275			22,506

	20,602		18,866		1,736			3.48			2.78			0.70				355,832		260,372		95,460			47,985			47,475

	9,522		11,226		(1,704	)		5.17			4.52			0.65		Short-term borrowings		244,275		251,877		(7,602	)		42,746			(50,348	)
	8,418		10,311		(1,893	)		5.55			5.21			0.34		Medium and long-term debt		232,000		266,455		(34,455	)		15,069			(49,524	)

	38,542		40,403		(1,861	)		4.35			3.89			0.46		Total interest bearing liabilities	832,107			778,704		53,403			105,800			(52,397	)
	4,028		3,944		84											Non-interest bearing demand deposits
	1,332		1,052		280											Other sources of funds

$	43,902	$	45,399	$	(1,497	)		3.82	%		3.46	%		0.36	%

								3.52	%		3.45	%		0.07	%	Net interest margin

																Net interest income on a taxable equivalent basis		771,595		783,569		(11,974	)	$	(50,299	)	$	38,325

								2.99	%		3.02	%		(0.03	%)	Net interest spread

																Taxable equivalent adjustment		45,196		58,026		(12,830	)

																Net interest income	$	726,399	$	725,543	$	856

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NON-INTEREST INCOME

Refer to Table D for a breakdown of non-interest income by major categories for the quarters and six months ended June 30, 2007 and 2006.

TABLE D
Non-Interest Income


(In thousands)	Quarter ended June 30,								Six months ended June 30,
	2007		2006			$ Variance			2007			2006			$ Variance
Service charges on deposit accounts	$	48,392	$	47,324		$	1,068		$	96,863		$	94,793		$	2,070

Other service fees:
Credit card fees and discounts	$	24,999	$	22,371		$	2,628		$	48,523		$	44,944		$	3,579
Debit card fees		16,855		15,085			1,770			32,956			30,004			2,952
Insurance fees		14,720		14,411			309			27,669			26,552			1,117
Processing fees		11,677		10,939			738			23,789			21,218			2,571
Sale and administration of investment products		7,311		6,649			662			14,571			14,106			465
Mortgage servicing fees, net of amortization and fair value adjustments		4,641		(919	)		5,560			10,869			(667	)		11,536
Trust fees		2,530		2,313			217			4,926			4,644			282
Other fees		6,857		9,168			(2,311	)		14,136			19,562			(5,426	)

Total other service fees	$	89,590	$	80,017		$	9,573		$	177,439		$	160,363		$	17,076

Net gain (loss) on sale and valuation adjustment of investment securities	$	1,175	$	(14,424	)	$	15,599		$	82,946		$	(2,084	)	$	85,030
Trading account profit (loss)		10,377		1,830			8,547			(3,787	)		13,305			(17,092	)
Gain on sale of loans and valuation adjustments on loans held-for-sale		28,294		29,054			(760	)		31,728			76,315			(44,587	)
Other operating income		25,547		40,185			(14,638	)		70,362			70,127			235

Total non-interest income	$	203,375	$	183,986		$	19,389		$	455,551		$	412,819		$	42,732

The increase in non-interest income for the quarter and six months ended June 30, 2007, compared with the same periods in the previous year, was mostly impacted by:

•

Higher other service fees which are detailed by category in Table D above.

	o		The favorable variance in mortgage servicing fee income was related to higher servicing fees due to growth in the portfolio of loans serviced for others which rose by approximately $4.4 billion from June 30, 2006 to the same date in 2007, and higher late payment fees derived from the serviced portfolio. Also, the positive variance was impacted in part by the adoption of SFAS No. 156 in 2007, which eliminated the monthly amortization of the mortgage servicing rights. As indicated in the “Recent Accounting Pronouncements and Interpretations” section of this MD&A, the Corporation elected the fair value measurement to account for residential mortgage servicing rights. The residential mortgage servicing rights are no longer amortized in proportion to and over the period of estimated net servicing income. Refer to Note 7 to the consolidated financial statements for detailed information on the adoption of SFAS No. 156. Any fair value adjustment of MSRs is being recorded in “other service fees” in the consolidated statement of operations together with the loan servicing fees charged to third-parties on the serviced portfolio. These favorable variances were partially offset by lower prepayment penalty fees on loans serviced due to a slowdown in prepayments.

	o		The increases in credit and debit card fees were the result of higher volume of credit card accounts, increased transactional volume, and reward program membership fees, among others.

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o

There were lower other fees primarily due to lower brokered loan fees related to support services provided to mortgage brokers on the origination of loans for their portfolios. These service fees were reduced as PFH discontinued the broker-origination channel as part of the Restructuring Plan.

•

Higher net gain on sale and valuation adjustments of investment securities, which is broken down as follows:


	Quarter ended June 30,								Six months ended June 30,
(In thousands)	2007			2006			$ Variance		2007			2006			$ Variance

Net gain on sale of investment securities	$	2,493		$	579		$	1,914	$	121,219		$	14,853		$	106,366
Valuation adjustments of investment securities		(1,318	)		(15,003	)		13,685		(38,273	)		(16,937	)	$	(21,336	)

Total	$	1,175		$	(14,424	)	$	15,599	$	82,946		$	(2,084	)	$	85,030

		The variances in the unfavorable valuation adjustments indicated in the table above were principally related to PFH’s residual interests classified as available-for-sale as described in the Overview and Critical Accounting Policies / Estimates sections of this MD&A.

		The increase in the net gain on sale of investment securities for the six months ended June 30, 2007, compared to the same period in 2006, was principally due to a gain of approximately $118.7 million on the sale of the Corporation’s interest in TELPRI in the first quarter of 2007. The gains on sale of securities in 2006 were primarily associated with marketable equity securities.

•

The trading account profit (loss) category is broken down as follows:


	Quarter ended June 30,									Six months ended June 30,
(In thousands)	2007			2006			$ Variance			2007			2006			$ Variance

Mark-to-market of PFH’s residual interests	$	(835	)	$	(467	)	$	(368	)	$	(24,313	)	$	(72	)	$	(24,241	)
Other trading account profit		11,212			2,297			8,915			20,526			13,377			7,149

Total	$	10,377		$	1,830		$	8,547		$	(3,787	)	$	13,305		$	(17,092	)

		Similar to PFH’s residual interests classified as available-for-sale, the residual interests classified as trading securities were also unfavorably impacted by the unfavorable conditions in the subprime market, which heightened in the first quarter of 2007.

		Higher other trading account profit in the second quarter and six months ended June 30, 2007 were mainly due to higher gains on mortgage-backed securities sold as a result of higher price margins in the Puerto Rico secondary mortgage market fostered by the changes that took place in the local mortgage banking industry and a steady demand from loan buyers. Furthermore, the variance in trading profits for the second quarter of 2007 compared with the same quarter in 2006 was associated with favorable mark-to-market adjustments in the valuation of mortgage-backed securities. The other trading account profits for the six months ended June 30, 2006 included $8.5 million in trading profits associated with the pooling of approximately $464 million in mortgage loans at Banco Popular de Puerto Rico into Fannie Mae mortgage-backed securities that were sold to investors during that first quarter of 2006.

•

The category of gain on sales of loans and unfavorable valuation adjustments of loans held-for-sale is broken down as follows:


	Quarter ended June 30,								Six months ended June 30,
(In thousands)	2007			2006		$ Variance			2007			2006		$ Variance

Gain on sales of loans	$	31,905		$	29,054	$	2,851		$	52,218		$	76,315	$	(24,097	)
Lower of cost or market valuation adjustment on loans held-for-sale		(3,611	)		—		(3,611	)		(20,490	)		—		(20,490	)

Total	$	28,294		$	29,054	$	(760	)		31,728		$	76,315	$	(44,587	)

The decrease in gain on sales of loans for the six-month period ended June 30, 2007 compared to the same period in 2006 was primarily related to PFH, which experienced a lower volume of loans originated and sold due to its exiting the wholesale subprime mortgage business. Furthermore, there were lower gains on the sale of

73

Small Business Administration (“SBA”) loans by the Corporation’s U.S. banking subsidiary during the six months ended June 30, 2007.

During the six months ended June 30, 2007, PFH completed one off-balance sheet mortgage loan securitization involving approximately $461 million in loans with realized gains of approximately $13.5 million. The mortgage loan portfolio that was securitized consisted principally of subprime mortgage loans originated by PFH in the latter part of 2006 and in 2007 by the business divisions that were shut down as part of the Restructuring Plan. The Corporation recorded $8 million in mortgage servicing rights and $4.7 million in interest-only residuals associated with this securitization transaction. During the six months ended June 30, 2006, PFH completed two off-balance sheet mortgage loan securitizations involving approximately $652 million in loans, in which the Corporation realized approximately $11.5 million in gains in connection with these transactions.

The unfavorable valuation adjustment of mortgage loans held-for-sale indicated in the table above resulted principally from deterioration in the U.S. subprime market experienced in the first quarter of 2007. These loans were securitized by PFH mostly in the second quarter of 2007.

•

Lower other operating income in the second quarter of 2007, when compared to the same quarter of 2006, was the result of a decline in dividend income from TELPRI. As indicated previously, the Corporation sold its interest in TELPRI in the first quarter of 2007. The dividend income recorded in 2006 was primarily associated with a special dividend resulting from the sale by TELPRI of certain of its operations in 2006.

OPERATING EXPENSES

Refer to Table E for a breakdown of operating expenses by major categories. Also, this table identifies the categories of the statement of income impacted by the restructuring costs related to Popular North America reportable segment. These costs are segregated to ease the financial comparison analysis.

TABLE E
Operating Expenses


								Six months
	Quarter ended June 30,							ended June 30,		Restructuring		Six months ended June 30,
(In thousands)	2007		2006		$ Variance			2007		Costs (“RC”)		2007 excluding RC		2006		$ Variance

Personnel costs	$	164,288	$	166,483	$	(2,195	)	$	342,663	$	8,124	$	334,539		344,535	$	(9,996	)
Net occupancy expenses		26,501		28,629		(2,128	)		58,515		4,413		54,102		57,267		(3,165	)
Equipment expenses		32,245		33,973		(1,728	)		64,641		281		64,360		67,170		(2,810	)
Other taxes		11,835		10,929		906			23,682		—		23,682		21,170		2,512
Professional fees		38,642		38,488		154			74,629		1,762		72,867		75,566		(2,699	)
Communications		16,973		17,293		(320	)		34,035		67		33,968		34,593		(625	)
Business promotion		30,369		31,991		(1,622	)		58,741		—		58,741		64,814		(6,073	)
Printing and supplies		4,549		4,291		258			8,825		—		8,825		8,923		(98	)
Other operating expenses		32,838		28,072		4,766			64,854		269		64,585		56,903		7,682
Impact of change in fiscal period of certain subsidiaries		—		—		—			—		—		—		9,741		(9,741	)
Amortization of intangibles		2,813		2,831		(18	)		5,796		—		5,796		5,552		244

Total	$	361,053	$	362,980	$	(1,927	)	$	736,381	$	14,916	$	721,465	$	746,234	$	(24,769	)

There were no significant restructuring costs incurred in the second quarter of 2007; as such, the breakdown is not included in Table E.

Isolating the severance costs associated with the Restructuring Plan (refer to the Restructuring Plan section later in this MD&A for details), the reduction in personnel costs for the quarter ended June 30, 2007, compared with the same quarter in the previous year, was impacted by a decline in Popular North America’s reportable segment of $8.5 million, primarily due to lower headcount in PFH’s operations. This reduction was offset in part by the impact of

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merit increases across the Corporation’s subsidiaries which, for the most part, took place during the second quarter for exempt employees, and by new hires required to support initiatives for new products and services. Full-time equivalent employees (FTEs) were 12,158 at June 30, 2007, a decrease of 670 from the same date in 2006, primarily as a result of PFH exiting the wholesale subprime mortgage business. Popular North America’s reportable segment experienced a decline of $10.0 million in personnel costs for the six months ended June 30, 2007 when compared to the same period in 2006.

The reduction in net occupancy expenses for the quarter ended June 30, 2007, when compared to the same quarter in the previous year, was the result of lower lease rentals due to certain lease contract terminations, including closing certain PFH’s offices and lower building demolition costs, among various factors. The decrease in equipment expenses was due to lower equipment depreciation, maintenance and repair expenses, as well as lower equipment requirement due to the streamlining of PFH’s operations. The reduction in business promotion resulted primarily from cost control measures on marketing expenditures on the U.S. mainland operations and lower sponsorship expenses, partially offset by higher reward program expenses. Similar factors influenced the variance in those operating expense categories for the six months ended June 30, 2007, isolating the restructuring costs, compared to the same period in 2006. Also, the decrease in professional fees for the six-month period of 2007, excluding the restructuring costs, included lower legal fees, temporary services, and title, appraisal and recording fees associated with the loan business, among others, partially offset by higher business strategy consulting and computer service fees.

Table A presents the Corporation’s efficiency ratio for the quarters and six months ended June 30, 2007 and 2006. The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. As stated in the Glossary of Selected Financial Terms included in the 2006 Annual Report, in determining the efficiency ratio the Corporation includes recurring non-interest income items, thus isolating income items that may be considered volatile in nature. Management believes that the exclusion of those items would permit greater comparability for analytical purposes. Amounts within non-interest income not considered recurring in nature by the Corporation amounted to $1.2 million in the quarter ended June 30, 2007, compared with ($14.4) million in the same quarter of the previous year. These amounts corresponded principally to net gains on sale and valuation adjustments of investment securities available-for-sale.

INCOME TAX

Income tax expense for the quarter ended June 30, 2007 amounted to $23.6 million, compared with $22.3 million in the same quarter of 2006. The increase was primarily due to lower exempt interest income net of disallowance of expenses attributed to such exempt income and to the reversal of several tax positions during 2006 upon the completion of various federal and Puerto Rico tax audits. These variances were partially offset by lower pre-tax earnings and higher capital gain income subject to a preferential tax rate. Also, the income tax expense for the quarter ended June 30, 2007 was impacted by a lower statutory tax rate in the Puerto Rico operations as indicated in the Net Interest Income section of this MD&A. The effective tax rate for second quarter of 2007 was 23.96%, compared with 18.64% for the second quarter of 2006.

Income tax expense for the six-month period ended June 30, 2007 amounted to $40.5 million, compared with $60.2 million reported for the same period in 2006. The decrease was primarily due to lower pre-tax earnings and to higher capital gains subject to a preferential tax rate. On the other hand, these decreases were partially offset by lower exempt interest income net of disallowance of expenses attributed to such exempt income. The effective tax rate for the six-month period ended June 30, 2007 was 17.29 %, compared with 21.81% for the same period in 2006.

REPORTABLE SEGMENT RESULTS

The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico, Popular North America and EVERTEC. Also, a Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by this latter group are not allocated to the three reportable segments.

As described below in the Restructuring Plan section of this MD&A, during the first quarter of 2007, the

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Corporation reorganized the legal structure of its U.S. operations taking into account the changes and expectations of PFH’s restructuring and integration plan. These changes also impacted the Corporation’s determination of reportable segments for managerial reporting purposes. Commencing in the first quarter of 2007, the U.S. operations were combined into a single reportable segment defined as Popular North America. This segment includes the operations of BPNA, including its wholly-owned subsidiary E-LOAN (legally transferred from PFH to BPNA in January 2007), and Popular Financial Holdings. For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 21 to the consolidated financial statements. Financial information for periods prior to 2007 was restated to conform to the 2007 presentation.

The Corporate group had a net loss of $13.0 million in the second quarter of 2007, compared with a net loss of $2.0 million in the same quarter of 2006. During the second quarter of 2006, the Corporate group recorded $11.0 million in dividend income from its investment in TELPRI, as indicated previously in this report. The Corporate group had net income of $75.5 million for the six months ended June 30, 2007, compared to net losses of $2.3 million in the same period of the previous year. During the six months ended June 30, 2007, the Corporate group realized net gains on the sale and valuation adjustment of investment securities approximating $108.1 million, mainly due to a gain on the sale of TELPRI shares in the first quarter of 2007, compared with $14.2 million in the same period of 2006. This favorable variance on the year-to-date results of the Corporate group was offset in part by a higher income tax expense in 2007, compared to tax benefits due to a taxable loss in 2006. Also, the TELPRI dividend income recorded in 2006 was mostly exempt income.

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

Banco Popular de Puerto Rico

The Banco Popular de Puerto Rico reportable segment reported net income of $80.6 million for the quarter ended June 30, 2007, a decrease of $9.7 million, or 11%, when compared with the same quarter in the previous year. The main factors that contributed to the variance in results for the quarter ended June 30, 2007, when compared to the second quarter of 2006, included:

	•		higher net interest income by $8.7 million, or 4%, primarily related to the commercial banking business;

	•		higher provision for loan losses by $29.8 million, or 89%, primarily associated with higher net charge-offs mainly in the consumer and commercial loan portfolios. The ratio of allowance for loan losses to loans held-in-portfolio for the Banco Popular de Puerto Rico reportable segment was 2.17% at June 30, 2007, compared with 2.01% at June 30, 2006 and 2.09% at December 31, 2006. The provision for loan losses represented 130% of net charge-offs for the second quarter of 2007, compared with 139% of net charge-offs in the same period of 2006. The provision for the second quarter of 2007 considers deterioration in the loan portfolio in Puerto Rico due to the slowdown in the local economy;

	•		higher non-interest income by $23.5 million, or 23%, mainly due to higher trading account profits, higher gain on sale of securities and higher other service fees, principally net mortgage servicing fees, credit card fees and fees on the sale and administration of investment products;

	•		higher operating expenses by $9.2 million, or 5%, primarily associated with higher personnel costs due in part to higher commissions, salaries due to annual merit increases, and deferred compensation, among others; also, there were higher professional fees, other operating taxes, business promotion and other operating expenses, partially offset by lower net occupancy expenses; and

	•		higher income taxes by $2.8 million, or 11%, primarily due to lower exempt interest income net of disallowance of expenses attributed to such exempt income, and by the reversal of several tax positions during 2006 upon the completion of various Puerto Rico tax audits, partially offset by lower pre-tax earnings and a lower statutory tax rate.

Net income for the six months ended June 30, 2007 totaled $166.9 million, a decrease of $23.5 million, or 12%, compared with the same period in the previous year. These results reflected:

	•		higher net interest income by $14.6 million, or 3%;

	•		higher provision for loan losses by $53.0 million, or 92%;

	•		higher non-interest income by $25.1 million, or 12%;

	•		higher operating expenses by $15.6 million, or 4%; and

	•		lower income tax expense by $5.3 million.

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EVERTEC

EVERTEC’s net income for the quarter ended June 30, 2007 totaled $6.6 million, an increase of $1.2 million, or 21%, compared with the results of the same quarter in the previous year.

The principal factors that contributed to the variance in results for the quarter ended June 30, 2007, when compared with the second quarter of 2006, included:

	•		higher net interest income by $0.4 million, or 63%;

	•		higher non-interest income of $2.7 million, or 5%, as a result of higher electronic transactions processing fees related to the automated teller machine network. Also, the positive variance was due to business expansion, particularly in payment processing, cash processing, workforce management, and IT consulting services;

	•		higher operating expenses by $1.7 million, or 4%, primarily personnel costs in part due to additional headcount resulting from various small-scale acquisitions during 2006 and 2007 and impact of merit increases, among other factors. Also, there were higher other operating expenses, mainly due to sundry losses related to certain receivables, offset in part by lower net occupancy expenses; and

	•		higher income tax expense by $0.3 million primarily due to higher taxable income, offset in part by the reduction in the tax rate from 41.5% in 2006 to 39% in 2007.

Net income for the six months ended June 30, 2007 totaled $13.8 million, compared with net income of $10.5 million for the same period in the previous year. These results reflected:

	•		higher non-interest income by $7.4 million, or 7%; and

	•		higher operating expenses by $3.2 million, or 3%.

Popular North America

For the quarter ended June 30, 2007, net income for the reportable segment of Popular North America totaled $0.9 million, compared to net income of $3.8 million for the second quarter of 2006. The main factors that contributed to this quarterly variance included:

	•		lower net interest income by $8.9 million, or 6%, mainly due to higher costs of funds, principally savings and time deposits and short-term debt, partially offset by higher loan yields;

	•		higher provision for loan losses by $18.3 million, of 55%, primarily due to higher net charge-offs in the mortgage and consumer loan portfolios, especially in the subprime market;

	•		higher non-interest income by $10.6 million, or 23%, which includes the impact of lower unfavorable valuation adjustments of residual interests held by PFH in 2007 compared to 2006 by $13.3 million, and higher service charges on deposit accounts; partially offset by lower gains on the sale of loans and other operating income;

	•		lower operating expenses by $11.7 million, or 8%, mainly due to lower personnel costs due to the reduction in headcount at PFH and lower business promotion expenses, partially offset by higher professional fees, mainly consulting fees, and lower net occupancy and equipment expenses; and

	•		lower income tax expense by $2.1 million mainly due to lower taxable income.

Net losses for the six months ended June 30, 2007 totaled $63.0 million, compared with net income of $18.5 million in the same period of the previous year. These results reflected:

	•		lower net interest income by $20.0 million, or 7%;

	•		higher provision for loan losses by $42.4 million, or 72%;

	•		lower non-interest income by $81.9 million, or 68%, which includes the impact of the unfavorable valuation adjustments of residual interests held by PFH, the unfavorable valuation adjustment in the value of mortgage loans held-for-sale, and lower gains on the sale of loans. These are generally described in the Non-Interest section of this MD&A. The unfavorable valuation adjustments of residual interests amounted to $55.0 million in the six-month period ended June 30, 2007, compared with $17.0 million in the same period of 2006;

	•		lower operating expenses by $16.8 million, or 5%; mainly due to last year’s recognition of PFH’s subsidiaries impact of change in fiscal period which amounted to $6.2 million (increased operating expenses for 2006), lower business promotion expenses and lower personnel costs due to reduction in headcount. The

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latter was partially offset by the impact of the severance costs associated with the restructuring of PFH and the impact of additional personnel for units that support new products and services. Furthermore, there were higher net occupancy expenses, outplacement costs and consulting services also related with the Restructuring Plan; and

•

income tax benefit of $34.3 million for the six-month period ended June 30, 2007, compared with income tax expense of $11.7 million in the same period in 2006.

RESTRUCTURING PLAN

As indicated in the 2006 Annual Report, in January 2007, the Corporation announced the Restructuring Plan of PFH’s businesses. Since PFH’s performance was poor in 2006, origination volumes had dropped, net interest margin narrowed and the expense base was unsustainable, management initiated the restructuring actions. The Restructuring Plan, which is being implemented throughout 2007, has the following four basic components:

	•		exiting the wholesale subprime mortgage origination business during the first quarter of 2007, which entailed shutting down the wholesale broker, retail and call center business divisions;

	•		consolidating support activities at PFH (Finance, Credit Risk, Compliance, Human Resources, Facilities) within BPNA to reduce expenses;

	•		integrating PFH’s existing commercial lending businesses (mortgage warehouse and mixed use) into BPNA’s business lending groups; and

	•		focusing on the core Equity One network of 132 consumer finance branches in 15 states.

As part of the Restructuring Plan, the Corporation also executed an internal corporate reorganization of its U.S. subsidiaries. In January 2007, E-LOAN, as well as all of its direct and indirect subsidiaries, with the exception of E-LOAN Insurance Services, Inc. and E-LOAN International, Inc., became operating subsidiaries of BPNA. Prior to the consummation of this U.S. reorganization, E-LOAN was a direct wholly-owned subsidiary of PFH. E-LOAN continues to offer its broad range of products and conducts its direct activities through its online platform. Management will be leveraging the E-LOAN brand, technology and internet financial services platform over the next several years to complement BPNA’s community banking growth strategy.

This reorganization and the Restructuring Plan led management to redefine its business reportable segments. Commencing in 2007, the U.S. operations are combined into a single reportable segment defined as “Popular North America”. This segment includes the operations of BPNA and PFH, including all of its wholly-owned subsidiaries.

For the six-month period ended June 30, 2007, the Corporation recorded pre-tax restructuring charges in the Popular North America segment related to the Restructuring Plan as follows:


	Six months ended
(In thousands)	June 30, 2007

Severance, stay bonuses and other benefits	$	8,124
Outplacement costs		1,019
Lease terminations		4,413
Others		1,360

Total restructuring costs	$	14,916

There were no significant charges related to the Restructuring Plan recorded in the second quarter of 2007. The above restructuring costs were recorded substantially in the first quarter of 2007. Refer to the Operating Expenses section of this MD&A for the classification of these charges in the consolidated statement of income. Of the above restructuring costs, approximately $5.5 million were recognized as a liability as of June 30, 2007, and are expected to be paid out with operating cash flows. These costs correspond primarily to lease terminations and severance payments.

During the fourth quarter of 2006, and as a result of the Restructuring Plan, the Corporation recognized impairment charges on long-lived assets of $7.2 million, mainly associated with software and leasehold improvements, and impairment in goodwill of $14.2 million.

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As of June 30, 2007, it is anticipated that the Restructuring Plan will result in the estimated combined charges presented in the table below.


	Impairments on
	goodwill and long-		Restructuring
(In thousands)	lived assets		costs			Total

Quarter ended:
December 31, 2006	$	21,471		—		$	21,471
March 31, 2007		—	$	15,135			15,135
June 30, 2007		—		(219	)		(219	)

Total	$	21,471	$	14,916		$	36,387

The Corporation does not expect to incur additional significant restructuring costs in the remaining quarters of 2007. Settlement amounts in lease terminations may differ and are subject to the outcome of negotiations.

It is anticipated that the cost reduction initiatives resulting from the Restructuring Plan will result in an expense reduction of approximately $39 million on an annualized basis, related to approximately $34 million in salary and benefits, $3 million in net occupancy expenses and $2 million in equipment expenses.

The Corporation exited PFH’s wholesale broker, retail mortgage and call center origination channels during the first quarter of 2007. In addition, the Corporation had previously exited PFH’s asset acquisition channel in early 2006. Certain mortgage loan assets originated through these channels are expected to run-off over a time period which may average between 18 to 30 months.

PFH has conducted mortgage loan securitizations since 1997. Securitizations conducted prior to 2001 and certain securitizations conducted during 2005, 2006 and 2007 qualified for sale accounting under the provisions of SFAS No. 140. Accordingly, the loans sold in these off-balance sheet securitizations are not consolidated in the Corporation’s financial statements. The unpaid principal balances (“UPB”) of the sold loans amounted to $2.5 billion at June 30, 2007. The outstanding balance of residual interests ("IOs") and MSRs related to these off-balance sheet securitizations was $36 million and $33 million, respectively, at June 30, 2007. As previously mentioned, during the six months ended June 30, 2007, the Corporation recognized other-than-temporary impairments amounting to $55.0 million related to these residual interests.

The business channels exited also originated mortgage loans, which were used by PFH in conducting asset securitizations that did not meet the sale criteria under SFAS No. 140; accordingly, the transactions were treated as on-balance sheet securitizations for accounting purposes. The outstanding balance of owned-in-trust loans, which are part of PFH’s portfolio, is presented in the table below and in Table F under the column “Owned-in-Trust”. The table below also presents the excess of trust assets over securitized debt in the form of bond certificates due to investors, as well as the related unamortized net premiums/FAS 91 on loans and the allowance for loan losses attributable to the owned-in-trust portfolio.


(In millions)	June 30, 2007			March 31, 2007			December 31, 2006

Loans	$	3,947		$	4,240		$	4,543
Other real estate		83			63			59
Securitization advances		37			43			56
Delinquency advances		11			11			9
Escrow advances		17			18			17

Total trust assets		4,095			4,375			4,684
Less: Balance of bond certificates		(3,842	)		(4,106	)		(4,391	)

Excess of trust assets (“overcollateralization”)		253			269			293
Unamortized net premiums and net deferred origination fees/costs		99			108			117
Allowance for loan losses		(67	)		(66	)		(55	)

Total exposure	$	285		$	311		$	355

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As of June 30, 2007, the exited lines of business also had outstanding $0.8 billion in mortgage loans that were not sold / securitized, and are included in Table F under the column “Owned”. The remaining $1.3 billion presented under this column in Table F is the outstanding balance of loans originated through the branch network and customer loan center. The allowance for loan losses related to these loans “Owned” amounted to approximately $24 million as of June 30, 2007, $22 million as of March 31, 2007 and $21 million as of December 31, 2006.

Financial results for PFH’s exited operations for the second quarter 2007 were an estimated loss of $13.6 million, net of taxes. For the six-month period ended June 30, 2006 the net loss approximated $86.7 million, net of taxes. The net loss considers the impairments in the valuation of the IOs taken during 2007, the restructuring charges previously mentioned and increased provisioning for loan losses as a result of the credit deterioration in the subprime market.

Table F
PFH Mortgage Loan Portfolio (excludes loans held-for-sale) Performance Trends


	Owned-in-Trust (a)									Owned (b)
	June 30,			March 31,			December			June 30,			March 31,			December 31,
	2007			2007			31, 2006			2007			2007			2006

Current Balance ($ thousands) (c)	$	3,947,029		$	4,240,499		$	4,543,488		$	2,052,381		$	1,994,727		$	2,191,134
Weighted-average coupon (WAC)		7.56	%		7.55	%		7.55	%		8.97	%		9.04	%		8.94	%
Avg. Loan-to-Value (LTV) (d)		83.93	%		83.43	%		83.39	%		82.64	%		74.75	%		78.38	%
Avg. Loan Balance ($)	$	138,658		$	139,508		$	139,942		$	67,067		$	64,913		$	68,514
Avg. FICO^® (e)		617			633			632			606			622			622
Bankruptcy (% of $ )		2.80	%		2.47	%		2.18	%		3.32	%		3.45	%		2.95	%
Charge-offs %-quarter		1.27	%		1.01	%		1.00	%		1.40	%		1.30	%		1.08	%
Total Delinquency		11.94	%		10.57	%		10.93	%		10.21	%		9.68	%		8.67	%
30 Days (% of $ )		3.09	%		2.63	%		3.48	%		2.35	%		2.63	%		2.54	%
60 Days (% of $ )		1.31	%		1.13	%		1.30	%		1.14	%		1.04	%		0.89	%
90+ Days (% of $ )		2.09	%		1.94	%		1.84	%		2.91	%		3.05	%		2.48	%
Foreclosure (% of $)		5.45	%		4.86	%		4.31	%		3.81	%		2.96	%		2.75	%
Business Channel
Broker		16	%		16	%		17	%		17	%		18	%		22	%
Asset Acquisition		72	%		72	%		72	%		15	%		18	%		17	%
Retail Mortgage (call centers)		6	%		6	%		6	%		4	%		4	%		5	%
Customer Loan Center (“CLC”) (f)		5	%		4	%		4	%		7	%		5	%		6	%
Decentralized (branches)		—			—			—			53	%		52	%		47	%
Other		1	%		2	%		1	%		4	%		3	%		3	%
Product Type
Fixed-rate		63	%		62	%		60	%		74	%		73	%		69	%
ARM (Adjustable rate mortgage)		26	%		27	%		29	%		15	%		15	%		20	%
Balloon		4	%		4	%		4	%		10	%		11	%		10	%
Interest only — Fixed		1	%		1	%		1	%		—			—			—
Interest only — ARM		6	%		6	%		6	%		1	%		1	%		1	%


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

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

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

(d)		LTV – a lending risk ratio calculated by dividing the total amount of the mortgage or loan by the fair value of the property.

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

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

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FINANCIAL CONDITION

Refer to the consolidated financial statements included in this Form 10-Q for the Corporation’s consolidated statements of condition as of June 30, 2007, December 31, 2006 and June 30, 2006. Also, refer to Table A for financial highlights on major line items of the consolidated statement of condition.

When compared to December 31, 2006, total assets as of June 30, 2007 remained stable, reflecting a slight decrease of less than 1%. When compared to June 30, 2006, total assets as of June 30, 2007 declined 3%.

A breakdown at period-end of the Corporation’s loan portfolio, its principal category of earning assets, is presented in Table G below.

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


					Variance					Variance
					June 30, 2007					June 30, 2007
	June 30,		December 31,		vs.			June 30,		vs.
(In thousands)	2007		2006		December 31, 2006			2006		June 30, 2006

Commercial *	$	15,145,422	$	14,536,837	$	608,585		$	13,696,562	$	1,448,860
Lease financing		1,184,560		1,226,490		(41,930	)		1,294,966		(110,406	)
Mortgage **		11,008,524		11,695,156		(686,632	)		12,209,940		(1,201,416	)
Consumer		5,413,339		5,278,456		134,883			5,015,164		398,175


Total	$	32,751,845	$	32,736,939	$	14,906		$	32,216,632	$	535,213


*		Includes commercial construction

**		Includes residential construction

The increase in commercial loans from December 31, 2006 to June 30, 2007 was principally in commercial mortgage, construction and SBA loans. The increase in commercial loans from June 30, 2006 to June 30, 2007 also reflected growth in those areas. Commercial construction loans, which are included within the commercial category in Table G, amounted to $1.6 billion at June 30, 2007, compared with $1.4 billion at December 31, 2006 and $1.2 billion at June 30, 2006.

The decline in mortgage loans from December 31, 2006 to June 30, 2007 was mostly due to the off-balance sheet securitization completed by PFH in the second quarter of 2007 as described in the Non-Interest Income section of this MD&A, which involved approximately $461 million in unpaid principal balance of subprime mortgage loans. Also, the reduction was in part due to lower origination volume resulting from exiting certain business channels of the PFH operations, as described in the Restructuring Plan and Overview of Mortgage Loan Exposure at PFH sections of this MD&A, offset in part by successful loan origination business strategies by the banking subsidiary in the U.S. mainland, which targets principally the Hispanic market at attractive loan yields. The decline in mortgage loans from June 30, 2006 to the same date in 2007 was in part due to certain large transactions disclosed in the 2006 Annual Report that took place during that year, which involved bulk sales of mortgage loans, off-balance sheet securitizations of subprime mortgage loans, and pooling of loans and sales of the newly-issued FNMA securities. These sales and securitizations were part of the Corporation’s strategy to deleverage its balance sheet and reduce low-yielding assets.

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A breakdown of the consumer loan portfolio is presented in Table H.

TABLE H
Breakdown of Consumer Loans


					Variance					Variance
					June 30, 2007					June 30, 2007
	June 30,		December 31,		vs.			June 30,		vs.
(In thousands)	2007		2006		December 31, 2006			2006		June 30, 2006

Personal	$	2,638,427	$	2,457,619	$	180,808		$	2,169,186	$	469,241
Auto		1,585,929		1,636,415		(50,486	)		1,682,043		(96,114	)
Credit cards		1,038,096		1,032,546		5,550			1,010,340		27,756
Other		150,887		151,876		(989	)		153,595		(2,708	)


Total	$	5,413,339	$	5,278,456	$	134,883		$	5,015,164	$	398,175

The increase in personal loans from December 31, 2006 to June 30, 2007 was principally attributed to higher volume of home equity lines of credit in the Popular North America operations. The increase from June 30, 2006 to the same date in 2007 was also attributed to higher volume of home equity lines after a strategic decision was made in mid-2006 to substantially retain those loans in portfolio, and to a growth in personal loans at BPPR which was associated with favorable customer response to mailing campaigns and cross-selling initiatives. The reduction in auto loans from December 31, 2006 and June 30, 2006 to June 30, 2007 was twofold. First, there was a decline in the auto loan portfolio of the Popular North America reportable segment as BPNA’s auto loan portfolio continues to runoff because of management’s decision to cease auto loan originations through dealer channels and instead focusing on originating auto loans through the E-LOAN channel. Second, the economic slowdown in the Puerto Rico market has reduced automobile sales.

Investment and trading securities totaled $10.2 billion at June 30, 2007, compared with $10.6 billion at December 31, 2006 and $12.0 billion at June 30, 2006. The decline in the Corporation’s investment securities portfolio from June 30, 2006 was mainly due to maturities of agency securities with low rates which were not replaced because the interest spread was not favorable and as part of the Corporation’s deleveraging strategy. Notes 5 and 6 to the consolidated financial statements provide additional information of the Corporation’s available-for-sale and held-to-maturity investment portfolios.

Refer to Note 10 of the consolidated financial statements for details on the composition of intangible assets.

Table I provides a breakdown of the “Other Assets” caption presented in the consolidated statements of condition.

TABLE I
Breakdown of Other Assets


					Variance					Variance
					June 30, 2007					June 30, 2007
	June 30,		December 31,		vs.			June 30,		vs.
(In thousands)	2007		2006		December 31, 2006			2006		June 30, 2006

Net deferred tax assets	$	419,611	$	359,433	$	60,178		$	376,726	$	42,885
Bank-owned life insurance program		210,333		206,331		4,002			201,635		8,698
Servicing rights		201,861		164,999		36,862			159,486		42,375
Prepaid expenses		200,307		168,717		31,590			176,003		24,304
Securitization advances and related assets		106,123		181,387		(75,264	)		251,482		(145,359	)
Investments under the equity method		82,620		66,794		15,826			63,550		19,070
Derivative assets		77,484		55,413		22,071			79,925		(2,441	)
Others		201,122		408,816		(207,694	)		206,875		(5,753	)


Total	$	1,499,461	$	1,611,890		($112,429	)	$	1,515,682		($16,221	)

Explanations for the principal variances from December 31, 2006 to June 30, 2007 were:

•

Increase in net deferred tax assets was mainly associated with higher unrealized losses on securities available-for-sale, the increase in the allowance for loan losses,

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the residual interests recognized on the off-balance sheet securitization, and the increase in net operating loss carryforward.

	•		Increase in servicing rights was mainly due to purchased mortgage servicing rights in the Popular North America reportable segment resulting from new servicing contracts, mortgage servicing rights derived from the off-balance sheet securitization executed by PFH in 2007, and from sales and securitizations of originated loans by the Puerto Rico operations. Also, the increase was due in part to the adoption of SFAS No. 156 during 2007, in which the Corporation elected to account for residential mortgage servicing rights at fair value. Notes 2 and 7 provide further information on the implementation impact of this accounting pronouncement.

	•		Increase in prepaid expenses was mostly due to the payment during the second quarter of 2007 of the municipal license and corporate property taxes.

	•		Refer to Note 9 to the consolidated financial statements for a detail of the Corporation’s derivatives as of June 30, 2007 and December 31, 2006.

	•		The decrease in securitization advances and related assets was primarily associated to PFH’s on-balance sheet securitization performed in December 2006, which required a pre-funded amount of $66 million to be held in trust. As disclosed in the 2006 Annual Report, this pre-funded amount was classified as an other asset in the consolidated statement of condition. In early 2007, PFH delivered additional loans to the securitization trust and received back the pre-funded amount.

	•		Decrease in the “others” caption was mainly due to lower trade receivables. At June 30, 2007 and December 31, 2006, there were securities trade receivables of $12 million and $232 million, respectively, for mortgage-backed securities sold prior to quarter and year-end, with a settlement date in July 2007 and January 2007, respectively.

Principal variances in other assets from June 30, 2006 to the same date in 2007 were mostly due to similar factors as described above. In addition, the decrease in securitization advances and related assets from June 30, 2006 was also associated with PFH’s collection during the third quarter of 2006 of excess cash held by the securitization trusts of approximately $69 million.

A breakdown of the Corporation’s deposits at period-end is included in Table J:

TABLE J
Deposits Ending Balances


					Variance				Variance
	June 30,		December 31,		June 30, 2007 vs.		June 30,		June 30, 2007 vs.
(In thousands)	2007		2006		December 31, 2006		2006		June 30, 2006

Demand deposits *	$	4,977,827	$	4,910,848	$	66,979	$	4,940,362	$	37,465
Savings, NOW and money market deposits		9,477,737		9,200,732		277,005		8,644,295		833,442
Time deposits		10,930,431		10,326,751		603,680		9,864,863		1,065,568

Total	$	25,385,995	$	24,438,331	$	947,664	$	23,449,520	$	1,936,475

*

Includes interest and non-interest bearing demand deposits.

Deposit growth since December 31, 2006 was influenced in part by competitive rate campaigns in Puerto Rico focused on retail certificates of deposit to individuals. Furthermore, there was additional volume of public funds gathered from successful biding processes with competitive rates and strong sales efforts. Also, the increase in deposits was the result of money market campaigns in the U.S. operations during 2007. The increase in deposits from June 30, 2006 was also influenced by deposits captured through the online webpage of E-LOAN. The latter approximated $1.5 billion at June 30, 2007. Brokered certificates of deposit, included in the category of time deposits, totaled $638 million at June 30, 2007, compared with $866 million at December 31, 2006 and $1.1 billion at June 30, 2006.The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $115 million as of June 30, 2007, $136 million as of December 31, 2006 and $96 million as of June 30, 2006.

At June 30, 2007, borrowed funds totaled $17.1 billion, compared with $18.5 billion at December 31, 2006 and $20.8 billion at June 30, 2006. Refer to Note 11 to the consolidated financial statements for additional information on the Corporation’s borrowings as of such dates.

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Refer to the consolidated statements of condition and of stockholders’ equity included in this Form 10-Q for information on the composition of stockholders’ equity at June 30, 2007, December 31, 2006 and June 30, 2006. Also, the disclosures of accumulated other comprehensive income (loss), an integral component of stockholders’ equity, are included in the consolidated statements of comprehensive income (loss).

The Corporation offers a dividend reinvestment and stock purchase plan for stockholders that allows them to reinvest dividends in shares of common stock at a 5% discount from the average market price at the time of the issuance, as well as purchase shares of common stock directly from the Corporation by making optional cash payments.

The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage at June 30, 2007, December 31, 2006, and June 30, 2006 are presented on Table K. As of such dates, BPPR, BPNA and Banco Popular, National Association were all well-capitalized.

The average tangible equity amounted to $3.1 billion at June 30, 2007, $3.0 billion at December 31, 2006, and $2.9 billion at June 30, 2006. Total tangible equity was $2.9 billion at June 30, 2007, $2.8 billion at December 31, 2006, and $2.7 billion at June 30, 2006.

TABLE K
Capital Adequacy Data


	June 30,			December 31,			June 30,
(Dollars in thousands)	2007			2006			2006

Risk-based capital
Tier I capital	$	3,770,991		$	3,727,860		$	3,722,664
Supplementary (Tier II) capital		443,689			441,591			415,032

Total capital	$	4,214,680		$	4,169,451		$	4,137,696

Risk-weighted assets
Balance sheet items	$	32,502,007		$	32,519,457		$	30,665,611
Off-balance sheet items		2,869,633			2,623,264			2,401,700

Total risk-weighted assets	$	35,371,640		$	35,142,721		$	33,067,311

Average assets	$	46,150,567		$	46,330,505		$	47,676,953

Ratios:
Tier I capital (minimum required – 4.00%)		10.66	%		10.61	%		11.26	%
Total capital (minimum required – 8.00%)		11.92	%		11.86	%		12.51	%
Leverage ratio *		8.17	%		8.05	%		7.81	%


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

At June 30, 2007, the capital adequacy minimum requirement for Popular, Inc. was (in thousands): Total Capital of $2,829,731, Tier I Capital
of $1,414,866, and Tier I Leverage of $1,384,517 based on a 3% ratio or $1,846,023 based on a 4% ratio according to the Bank’s classification.

OFF-BALANCE SHEET SECURITIZATION ACTIVITIES

In connection with PFH’s securitization transactions, the Corporation is a party to pooling and servicing agreements pursuant to each of which the Corporation transfers (on a servicing retained basis) certain of the Corporation’s loans to a special purpose entity, which in turn transfers the loans to a securitization trust fund that has elected to be treated as one or more Real Estate Mortgage Investment Conduits (“REMICs”). The two-step transfer of loans by the Corporation to a securitization trust fund, in which the Company surrenders control over the loans, is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” sets forth the criteria that must be met for control over transferred assets to be considered to have been surrendered. When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria, the Corporation is

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then prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing.

The trusts created as part of off-balance sheet mortgage loans securitizations, conducted prior to 2001, in 2005, 2006 and 2007, are not consolidated in the Corporation’s financial statements since the transactions qualified for sale accounting based on the provisions of SFAS No. 140. The investors and the securitization trusts have no recourse to the Corporation’s assets or revenues. The Corporation’s creditors have no recourse to any assets or revenues of the special purpose entity or the securitization trust funds. At June 30, 2007 and 2006, these trusts held approximately $2.5 billion and $2.4 billion, respectively, in assets in the form of mortgage loans. Their liabilities in the form of debt principal due to investors approximated $2.3 billion at June 30, 2007 and 2006. The Corporation retained servicing responsibilities and certain subordinated interests in these securitizations in the form of interest-only securities. Their value is subject to credit, prepayment and interest rate risks on the transferred financial assets. The servicing rights and interest-only securities retained by the Corporation are recorded in the statements of condition at fair value.

CREDIT RISK MANAGEMENT AND LOAN QUALITY

Table L summarizes the movement in the allowance for loan losses and presents several loan loss statistics for the quarters and six months ended June 30, 2007 and 2006.

TABLE L

Allowance for Loan Losses and Selected Loan Losses Statistics


	Second Quarter									Six months ended June 30,
(Dollars in thousands)	2007			2006			Variance			2007			2006			Variance

Balance at beginning of period	$	541,748		$	468,321		$	73,427		$	522,232		$	461,707		$	60,525
Provision for loan losses		115,167			67,096			48,071			211,513			116,043			95,470
Impact of change in reporting period *		—			—			—			—			2,510			(2,510	)

		656,915			535,417			121,498			733,745			580,260			153,485

Losses charged to the allowance:
Commercial		21,532			12,972			8,560			38,860			25,425			13,435
Lease financing		6,200			7,007			(807	)		12,608			12,023			585
Mortgage		23,492			14,066			9,426			44,100			25,383			18,717
Consumer		55,481			33,047			22,434			102,688			64,279			38,409

Subtotal		106,705			67,092			39,613			198,256			127,110			71,146

Recoveries:
Commercial		3,487			4,369			(882	)		6,969			8,728			(1,759	)
Lease financing		2,510			2,287			223			4,508			6,073			(1,565	)
Mortgage		706			295			411			851			426			425
Consumer		7,934			8,539			(605	)		17,030			15,438			1,592

Subtotal		14,637			15,490			(853	)		29,358			30,665			(1,307	)

Net loans charged-off:
Commercial		18,045			8,603			9,442			31,891			16,697			15,194
Lease financing		3,690			4,720			(1,030	)		8,100			5,950			2,150
Mortgage		22,786			13,771			9,015			43,249			24,957			18,292
Consumer		47,547			24,508			23,039			85,658			48,841			36,817

Subtotal		92,068			51,602			40,466			168,898			96,445			72,453

Balance at end of period	$	564,847		$	483,815		$	81,032		$	564,847		$	483,815		$	81,032


Ratios:
Net charge-offs to average loans held-in-portfolio		1.16	%		0.66	%					1.06	%		0.62	%
Provision to net charge-offs		1.25	x		1.30	x					1.25	x		1.20	x


*		Represents the net effect of provision for loan losses, less net charge-offs corresponding to the impact of the change in fiscal period at certain subsidiaries (as described in the Overview section and in the 2006 Annual Report).

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Also, Table M presents annualized net charge-offs to average loans by loan category for the quarters and six-month period ended June 30, 2007 and 2006.

TABLE M
Annualized Net Charge-offs to Average Loans Held-in-Portfolio


	Quarter ended June 30,						Six months ended June 30,
	2007			2006			2007			2006

Commercial		0.49	%		0.26	%		0.43	%		0.25	%
Lease financing		1.24			1.45			1.35			0.91
Mortgage		0.87			0.48			0.80			0.42
Consumer		3.61			2.00			3.28			2.01

		1.16	%		0.66	%		1.06	%		0.62	%

The increase in the ratio of commercial loans net charge-offs to average loans held-in-portfolio for the quarter and six-month period was mostly associated with deterioration in the economic conditions in Puerto Rico, triggered in part by the local government’s budgetary imbalance, the new sales tax implemented at the end of 2006 and higher cost of living which has impacted consumer spending, and therefore has negatively impacted certain industries and commercial businesses.

The decrease in the charge-offs to average loans held-in-portfolio in the lease financing portfolio during the quarter resulted from a large amount of charge-offs in the U.S. leasing subsidiary during the second quarter of 2006 related to a particular customer lending relationship. The increase in net charge-offs to average loans held-in-portfolio in the lease financing portfolio during the six-month period was the result of higher delinquencies in Puerto Rico.

Mortgage loans net charge-offs as a percentage of average mortgage loans held-in-portfolio increased primarily due to the slowdown in the housing sector and higher delinquency levels experienced in the U.S. mainland, primarily in the Corporation’s subprime mortgage loan portfolio. This increase also reflects the impact of the reduction in the mortgage loan portfolio at PFH. Refer to the Overview of Mortgage Loan Exposure at PFH section in this MD&A for information on PFH’s mortgage loan portfolio, including credit statistics. Although deteriorating economic conditions have impacted the mortgage delinquency rates in Puerto Rico increasing the levels of non-accruing mortgage loans, no significant increase in losses has occurred. The mortgage loans net charge-off to average mortgage loans held-in-portfolio ratio in the Puerto Rico operations was 0.09% for the second quarter of 2007. Historically the Corporation has experienced a low level of losses in its P.R. mortgage loan portfolio.

Consumer loans net charge-offs as a percentage of average consumer loans held-in-portfolio rose primarily due to higher delinquencies in the Puerto Rico operations. This primarily reflects the impact of a slowdown in the Puerto Rico economy, triggered by the government fiscal crisis, higher oil prices and the new sales tax enacted in 2006.

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NON-PERFORMING ASSETS

A summary of non-performing assets, which includes past-due loans that are no longer accruing interest, renegotiated loans and real estate property acquired through foreclosure, is presented in Table N, along with certain credit quality metrics. For a summary of the Corporation’s policy for placing loans on non-accrual status, refer to the sections of Loans and Allowance for Loan Losses included in Note 1 to the audited consolidated financial statements included in Popular, Inc.’s 2006 Annual Report.

TABLE N
Non-Performing Assets


													$ Variance						As a
										As a			June 30, 2007						percentage			$ Variance
				As a percentage			December			percentage			vs.						of loans			June 30, 2007
	June 30,			of loans HIP*			31,			of loans HIP*			December 31,			June 30,			HIP*			vs.
(Dollars in thousands)	2007			by category			2006			by category			2006			2006			by category			June 30, 2006

Commercial	$	240,817			1.6	%	$	158,214			1.1	%	$	82,603		$	147,753			1.1	%	$	93,064
Lease financing		12,682			1.1			11,898			1.0			784			3,038			0.2			9,644
Mortgage		562,523			5.4			499,402			4.5			63,121			409,689			3.5			152,834
Consumer		42,230			0.8			48,074			0.9			(5,844	)		37,823			0.8			4,407

Total non-performing loans		858,252			2.7			717,588			2.2			140,664			598,303			1.9			259,949
Other real estate		112,858						84,816						28,042			83,658						29,200

Total non-performing assets	$	971,110			3.02	%	$	802,404			2.51	%	$	168,706		$	681,961			2.16	%	$	289,149

Accruing loans past due 90 days or more	$	104,497					$	99,996					$	4,501		$	94,183					$	10,314


Non-performing assets to total assets		2.07	%					1.69	%								1.41	%
Allowance for loan losses to loans held-in-portfolio		1.76						1.63									1.53
Allowance for loan losses to non-performing assets		58.17						65.08									70.94
Allowance for loan losses to non-performing loans		65.81						72.78									80.86


*		HIP = “held-in-portfolio”

The increase in non-performing mortgage loans was mainly due to the continued deterioration in the subprime market in the U.S. mainland as well as higher delinquencies triggered by deteriorating economic conditions in Puerto Rico. Refer to the Overview of Mortgage Loan Exposure at PFH section in this MD&A for information on PFH’s mortgage loan portfolio. The rise in non-performing commercial loans reflected principally the current economic conditions, primarily in Puerto Rico. Refer to Part II – Other Information, Item 1A. Risk Factors, included in this Form 10-Q for further information on Puerto Rico’s current economic condition. Also, there was an increase in non-performing commercial loans in the Corporation’s U.S. operations. Non-performing loans as of June 30, 2007 included 84% secured by real estate.

Other real estate owned, representing real estate property acquired through foreclosure, increased principally in the Popular North America reportable segment. With the slowdown in the U.S. housing market, there is a continued economic deterioration in certain geographic areas, which also has a negative effect on the market for resale of the repossessed real estate properties.

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

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The allowance for loan losses, which represents management’s estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for these estimated loan losses based on evaluations of inherent risks in the loan portfolios. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a monthly basis. In this evaluation management considers current economic conditions and the resulting impact on Popular’s loan portfolio, the composition of the portfolio by loan type and risk characteristics, historical loss experience, loss volatility, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors. The increase in the Corporation’s allowance level as of June 30, 2007 reflects the prevailing negative economic outlook, particularly in the non-prime mortgage business, and the deterioration in Puerto Rico’s economy.

The Corporation’s methodology to determine its allowance for loan losses is based on SFAS No. 114,“Accounting by Creditors for Impairment of a Loan” (as amended by SFAS No. 118) and SFAS No. 5,“Accounting for Contingencies.” Under SFAS No. 114, commercial loans over a predetermined amount are identified for evaluation on an individual basis, and specific reserves are calculated based on impairment analyses. SFAS No. 5 provides for the recognition of a loss contingency for a group of homogeneous loans, which are not individually evaluated under SFAS No. 114, when it is probable that a loss has been incurred and the amount can be reasonably estimated. To determine the allowance for loan losses under SFAS No. 5, the Corporation uses historical net charge-offs and volatility experience segregated by loan type and legal entity. Refer to the 2006 Annual Report for additional information on the Corporation’s methodology for assessing the adequacy of the allowance for loan losses.

Under SFAS No. 114, the Corporation considers a commercial loan to be impaired when the loan amounts to $250,000 or more and interest and / or principal is past due 90 days or more, or, when the loan amounts to $500,000 or more and based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. The Corporation’s recorded investment in impaired commercial loans and the related valuation allowance calculated under SFAS No. 114 at June 30, 2007, December 31, 2006 and June 30, 2006 were:


	June 30, 2007				December 31, 2006				June 30, 2006
	Recorded		Valuation		Recorded		Valuation		Recorded		Valuation
(In millions)	Investment		Allowance		Investment		Allowance		Investment		Allowance

Impaired loans:
Valuation allowance required	$	156.6	$	40.7	$	125.7	$	37.0	$	68.6	$	21.3
No valuation allowance required		119.5		—		82.5		—		58.9		—

Total impaired loans	$	276.1	$	40.7	$	208.2	$	37.0	$	127.5	$	21.3

Average impaired loans during the second quarter of 2007 and 2006 were $259 million and $122 million, respectively. The Corporation recognized interest income on impaired loans of $2.1 million and $0.7 million for the quarters ended June 30, 2007 and June 30, 2006, respectively, and $4.2 million and $1.7 million for the six months ended on those same dates, respectively.

In addition to the non-performing loans included in Table N, there were $99 million of loans at June 30, 2007, which in management’s opinion are currently subject to potential future classification as non-performing, and are considered impaired under SFAS No. 114. At December 31, 2006 and June 30, 2006, these potential problem loans approximated $103 million and $32 million, respectively. The increase in potential problem loans since June 30, 2006 was principally associated with particular commercial lending relationships in the Corporation’s Puerto Rico banking operations.

Under standard industry practice, closed-end consumer loans are not customarily placed on non-accrual status prior to being charged-off. Excluding the closed-end consumer loans from non-accruing at June 30, 2007, adjusted non-performing assets would have been $929 million, or 2.89%, of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 69.22%. At December 31, 2006, adjusted non-performing assets would have been $754 million, or 2.36%, of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 78.00%. At June 30, 2006, adjusted non-performing assets would have been $644 million, or 2.04%, of loans held-in-portfolio and the allowance to non-performing loans would have been 86.32%.

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As explained in the 2006 Annual Report, the Corporation is exposed to geographical and government risk. Popular, Inc. has partly diversified its geographical risk as a result of its growth strategy in the United States and the Caribbean. The Corporation’s assets and revenue composition by geographical area and by business segment reporting are presented in Note 21 to the consolidated financial statements.

Refer to Part II – Other Information, Item 1A. Risk Factors, included in this Form 10-Q for further information on Puerto Rico’s current economic condition.

At June 30, 2007, the Corporation had $815 million of credit facilities granted to or guaranteed by the P.R. Government and its political subdivisions, of which $50 million are uncommitted lines of credit. Of these total credit facilities granted, $670 million in loans were outstanding at June 30, 2007. A substantial portion of the Corporation’s credit exposure to the Government of Puerto Rico is either collateralized loans or obligations that have a specific source of income or revenues identified for their repayment. Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for services or products, such as water and electric power utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from the central Government. The Corporation also has loans to various municipalities for which the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all of its general obligation bonds and loans. Another portion of these loans consists of special obligations of various municipalities that are payable from the basic real and personal property taxes collected within such municipalities. The full faith and credit obligations of the municipalities have a first lien on the basic property taxes.

Furthermore, as of June 30, 2007, the Corporation had outstanding $186 million in Obligations of Puerto Rico, States and Political Subdivisions as part of its investment portfolio. Refer to Notes 5 and 6 to the consolidated financial statements for additional information. Of that total, $163 million is exposed to the creditworthiness of the P.R. Government and its municipalities. Of that portfolio, $59 million are in the form of Puerto Rico Commonwealth Appropriation Bonds, which are currently rated Ba1, one notch below investment grade, by Moody’s and BBB-, the lowest investment grade rating, by Standard & Poor’s Rating Services (“S&P”), another nationally recognized credit rating agency.

Overview of Mortgage Loan Exposure at PFH

PFH historically originated mortgage loan production through various channels including asset acquisition, mortgage loan brokers and its retail branch network. As part of the Restructuring Plan, PFH has ceased originating loans through all channels except for loans originated directly through its consumer finance branches and the customer loan center (“CLC”). This has resulted in a significant reduction in total origination of mortgage loans at PFH.

Subprime mortgage loans refer to mortgage loans made to individuals with a FICO^® score of 660 or below. FICO^® scores are used as an indicator of the probability of default for loans. A portion of the loans originated and retained by PFH is subprime under this definition.

As of June 30, 2007, mortgage loans held-in-portfolio outstanding at PFH amounted to $6.0 billion, as compared to $6.9 billion as of December 31, 2006 and $7.1 billion as of June 30, 2006. Refer to Table F for a breakdown of the portfolio between “owned” and “owned-in-trust”. Of the balance as of June 30, 2007, $4.1 billion or approximately 68% had FICO^® scores of 660 or below. As distinguished by coupon type, 74% of the loan portfolio had fixed-rate coupons, while 26% had adjustable rates (ARMs).

As of June 30, 2007, $533 million in ARMs were scheduled to readjust their rate for the first time between July 1, 2007 and December 31, 2007, and $525 million were scheduled to readjust their rate in 2008.

The average FICO^® score for PFH’s mortgage loans was 611 as of June 30, 2007 while the average loan-to-value ratio of the portfolio as of that date was 83.4%. The unpaid principal balance at June 30, 2007 of loans originated in 2006 amounted to $1.1 billion, or approximately 15% of PFH’s total loans held-in-portfolio and 3% of the Corporation’s loans held-in-portfolio at June 30, 2007.

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One of the characteristics of subprime loans is that their delinquency and charge-off rates tend to be higher than for agency conforming loans or “Alt-A” loans. Alt-A loans are loans usually made to borrowers who have unsteady sources of income or simply have too little documented income to qualify for a conforming loan. For the quarter ended June 30, 2007, the ratio of non-performing mortgage loans to mortgage loans held-in-portfolio for PFH amounted to 7.1%, while annualized mortgage charge-offs to average loans for the quarter amounted to 1.3%.

A portion of the mortgage loans held by PFH as of June 30, 2007 is pledged as collateral for asset-backed securities issued by the Corporation as a financing vehicle. These “owned-in-trust” loans pose similar risks to the Corporation as those loans owned outright, with the difference that part of the potential losses related to owned-in-trust loans may be borne by the bondholders under certain circumstances, primarily if cumulative loan losses exceed the level of overcollateralization. As of June 30, 2007, $3.9 billion in mortgage loans were owned-in-trust and its related overcollateralization amounted to $253 million.

Overcollateralization is defined as a type of credit enhancement by which an issuer of bond certificates pledges collateral in excess of what is needed to adequately cover the repayment of the bond certificates.

For more detailed information on PFH’s mortgage loan portfolio, please refer to Table O. As a mean for investors to analyze the trend in PFH’s mortgage loan exposure, Table P includes information as of March 31, 2007.

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Table O
Mortgage Loan Exposure at Popular Financial Holdings – (excludes mortgage loans held-for-sale)
As of June 30, 2007


	Total			Vintage			Vintage			Vintage			Vintage			Vintage
(In thousands)	Vintages			2007			2006			2005			2004			2003 & Prior

Subprime mortgage loans — Owned portfolio	$	1,508,440		$	278,276		$	467,642		$	366,351		$	133,836		$	262,335
FICO^®-Average		572			595			575			563			564			565
Loan-to-value – Average		83.2	%		80.1	%		81.0	%		90.3	%		89.3	%		77.2	%
% Fixed-rate		83	%		92	%		81	%		71	%		88	%		91	%
% ARM		17	%		8	%		19	%		29	%		12	%		9	%
Delinquencies %		13.2	%		1.6	%		11.1	%		18.9	%		17.0	%		19.3	%
Non-performing %		8.6	%		0.4	%		6.8	%		12.4	%		12.0	%		13.7	%
Charge-offs % — Second Quarter 2007 (a)		1.7	%		0.0	%		0.8	%		3.1	%		2.0	%		2.2	%

Subprime mortgage loans – Owned-in-Trust	$	2,591,066		$	0		$	382,924		$	1,016,694		$	490,106		$	701,342
FICO^®-Average		572			—			579			570			575			569
Loan-to-value – Average		84.2	%		—			84.4	%		83.3	%		84.3	%		84.8	%
% Fixed-rate		61	%		—			29	%		47	%		84	%		84	%
% ARM		39	%		—			71	%		53	%		16	%		16	%
Delinquencies %		17.6	%		—			12.5	%		18.6	%		14.5	%		21.0.	%
Non-performing %		11.1	%		—			7.7	%		11.5	%		9.3	%		13.5	%
Charge-offs % — Second Quarter 2007 (a)		1.8	%		—			1.0	%		2.0	%		1.0	%		2.4	%

Prime mortgage loans — Owned portfolio	$	517,817		$	75,511		$	158,225		$	126,421		$	60,384		$	97,276
FICO^®-Average		707			694			702			705			712			719
Loan-to-value – Average		81.2	%		79.4	%		79.9	%		86.9	%		84.7	%		72.8	%
% Fixed-rate		88	%		93	%		81	%		82	%		96	%		98	%
% ARM		12	%		7	%		19	%		18	%		4	%		2	%
Delinquencies %		1.9	%		0.4	%		4.0	%		0.8	%		1.1	%		1.8	%
Non-performing %		1.3	%		—			3.6	%		0.1	%		0.4	%		0.9	%
Charge-offs % — Second Quarter 2007 (a)		1.3	%		0.0	%		0.1	%		3.3	%		1.0	%		1.1	%

Prime mortgage loans – Owned-in-Trust	$	1,355,963			—		$	84,774		$	427,546		$	440,129		$	403,514
FICO^®-Average		712			—			693			705			716			716
Loan-to-value – Average		83.36	%		—			83.5	%		84.9	%		80.6	%		84.4	%
% Fixed-rate		81	%		—			42	%		59	%		95	%		98	%
% ARM		19	%		—			58	%		41	%		5	%		2	%
Delinquencies %		1.2	%		—			2.3	%		1.6	%		0.7	%		1.1	%
Non-performing %		0.7	%		—			1.4	%		0.8	%		0.3	%		0.8	%
Charge-offs % — Second Quarter 2007 (a)		0.1	%		—			0.0	%		0.1	%		0.1	%		0.2	%

Loans without FICO scores	$	26,124		$	20,679		$	3,701		$	239		$	51		$	1,454

PFH — Mortgage Loans (b)	$	5,999,410		$	374,466		$	1,097,266		$	1,937,251		$	1,124,506		$	1,465,921
FICO^®-Average		611			616			603			604			626			614
Loan-to-value – Average		83.4	%		79.9	%		81.7	%		86.1	%		83.4	%		83.0	%
% Fixed-rate		74	%		92	%		60	%		57	%		89	%		90	%
% ARM		26	%		8	%		40	%		43	%		11	%		10	%
Delinquencies %		11.4	%		1.3	%		9.9	%		13.7	%		8.7	%		13.9	%
Non-performing %		7.1	%		0.3	%		6.2	%		8.6	%		5.6	%		9.2	%
Charge-offs % — Second Quarter 2007 (a)		1.3	%		0.0	%		0.7	%		1.9	%		0.8	%		1.7	%

Deferred fees, origination costs, net premiums and other items	$	48,457
PFH Total Mortgage Loans HIP	$	6,047,867


(a)		The average balances used to calculate these net charge-offs to average loans ratios were calculated using the ending balances as of March 31, 2007 and June 30, 2007 for these business areas.

(b)		Includes loans without FICO^® scores.

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Table P
Mortgage Loan Exposure at Popular Financial Holdings – (excludes mortgage loans held-for-sale)
As of March 31, 2007


	Total			Vintage			Vintage			Vintage			Vintage			Vintage
(In thousands)	Vintages			2007			2006			2005			2004			2003 & Prior

Subprime mortgage loans — Owned portfolio	$	1,421,688		$	116,432		$	476,346		$	400,567		$	144,225		$	284,118
FICO^®-Average		599			603			601			607			598			585
Loan-to-value – Average		83.0	%		79.5	%		80.7	%		89.6	%		88.1	%		77.0	%
% Fixed-rate		82.1	%		92.4	%		82.4	%		69.0	%		90.9	%		91.3	%
% ARM		17.9	%		7.6	%		17.6	%		31.0	%		9.1	%		8.7	%
Delinquencies %		11.5	%		—			8.0	%		13.6	%		14.2	%		18.1	%
Non-performing %		7.2	%		—			3.2	%		9.4	%		10.0	%		12.3	%
Charge-offs % — First Quarter 2007 (a)		1.7	%		0.0	%		0.1	%		2.6	%		1.9	%		4.0	%

Subprime mortgage loans – Owned-in-Trust	$	2,960,095			—		$	430,621		$	1,129,023		$	581,337		$	819,114
FICO^®-Average		606			—			591			607			617			608
Loan-to-value – Average		83.5	%		—			84.0	%		83.1	%		82.6	%		84.3	%
% Fixed-rate		62.8	%		—			29.1	%		48.1	%		85.0	%		85.0	%
% ARM		37.2	%		—			70.9	%		51.9	%		15.0	%		15.0	%
Delinquencies %		12.6	%		—			7.7	%		13.3	%		9.7	%		16.3	%
Non-performing %		8.0	%		—			4.6	%		8.3	%		6.1	%		10.9	%
Charge-offs % — First Quarter 2007 (a)		1.4	%		—			0.2	%		1.0	%		1.1	%		3.0	%

Prime mortgage loans — Owned portfolio	$	478,106		$	28,874		$	139,002		$	138,513		$	66,764		$	104,953
FICO^®-Average		699			692			694			700			701			707
Loan-to-value – Average		80.7	%		78.2	%		79.6	%		88.4	%		85.7	%		71.4	%
% Fixed-rate		85.5	%		87.6	%		78.5	%		82.1	%		88.1	%		97.1	%
% ARM		14.5	%		12.4	%		21.5	%		17.9	%		11.9	%		2.9	%
Delinquencies %		5.2	%		—			4.2	%		6.4	%		5.1	%		6.5	%
Non-performing %		3.2	%		—			1.5	%		4.1	%		4.1	%		4.4	%
Charge-offs % — First Quarter 2007 (a)		0.4	%		0.0	%		0.2	%		0.6	%		0.9	%		0.4	%

Prime mortgage loans – Owned-in-Trust	$	1,277,861			—		$	68,362		$	438,174		$	411,172		$	360,153
FICO^®-Average		698			—			695			697			702			699
Loan-to-value – Average		84.1	%		—			84.1	%		85.3	%		81.4	%		85.7	%
% Fixed-rate		76.1	%		—			45.2	%		51.8	%		91.6	%		93.9	%
% ARM		23.9	%		—			54.8	%		48.2	%		8.4	%		6.1	%
Delinquencies %		5.8	%		—			5.5	%		6.6	%		4.1	%		6.7	%
Non-performing %		3.9	%		—			3.9	%		4.4	%		3.0	%		4.5	%
Charge-offs % — First Quarter 2007 (a)		0.1	%		—			0.0	%		0.1	%		0.1	%		0.2	%

Loans without FICO scores	$	97,476		$	14,177		$	55,501		$	8,715		$	4,033		$	15,050

PFH — Mortgage Loans (b)	$	6,235,226		$	159,483		$	1,169,832		$	2,114,992		$	1,207,531		$	1,583,388
FICO^®-Average		627			621			616			631			640			627
Loan-to-value – Average		80.5	%		74.4	%		77.4	%		85.4	%		82.7	%		82.5	%
% Fixed-rate		72.2	%		92.2	%		61.0	%		55.3	%		88.1	%		89.1	%
% ARM		27.8	%		7.8	%		39.0	%		44.7	%		11.9	%		10.9	%
Delinquencies %		10.3	%		—			7.0	%		11.5	%		8.1	%		13.7	%
Non-performing %		6.3	%		—			3.4	%		7.4	%		5.4	%		9.2	%
Charge-offs % — First Quarter 2007 (a)		1.1	%		0.0	%		0.1	%		1.1	%		0.8	%		2.3	%

Deferred fees, origination costs, net premiums and other items	$	135,835
PFH Total Mortgage Loans HIP	$	6,371,061


(a)		The average balances used to calculate these net charge-offs to average loans ratios were calculated using the ending balances as of December 31, 2006 and March 31, 2007 for these business areas.

(b)		Includes loans without FICO^® scores.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments or other assets due to changes in interest rates, currency exchange rates or equity prices. Interest rate risk, a component of market risk, is the exposure to adverse changes in net interest income due to changes in interest rates, which can be affected by the shape and the slope of the yield curves to which the financial products of the Corporation are related. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk may occur for one or more reasons, such as the maturity or repricing of assets and liabilities at different times, changes in credit spreads, changes in short and long-term market interest rates, or the maturity of assets or liabilities may be shortened or lengthened as interest rates change. Depending on the duration and repricing characteristics of the Corporation’s assets, liabilities and off-balance sheet items, changes in interest rates could either increase or decrease the level of net interest income.

The techniques for measuring the potential impact of the Corporation’s exposure to market risk from changing interest rates, which were described in the 2006 Annual Report, have remained substantially constant from the end of 2006. Due to the importance of critical assumptions in measuring market risk, the risk models currently incorporate third-party developed data for critical assumptions such as prepayment speeds on mortgage-related products, estimates on the duration of the Corporation’s deposits, and interest rate scenarios.

The Corporation maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. Management employs a variety of measurement techniques including the use of an earnings simulation model to analyze the net interest income sensitivity to changing interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs. It also incorporates assumptions on balance sheet growth and possible changes in its composition, estimated prepayments in accordance with projected interest rates, pricing and maturity expectations on new volumes and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. The asset and liability management group also performs validation procedures on various assumptions used as part of the sensitivity analysis as well as validations of results on a monthly basis. In addition, third-party validation reports are received for the mortgage related prepayment assumptions.

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

Based on the results of the sensitivity analyses as of June 30, 2007, the Corporation’s net interest income for the next twelve months is estimated to increase by $15.1 million in a hypothetical 200 basis points rising rate scenario, and the change for the same period, utilizing a similar hypothetical decline in the rate scenario, is an estimated increase of $1.8 million. Both hypothetical rate scenarios consider the gradual change to be achieved during a twelve-month period from the prevailing rates at June 30, 2007.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income that are caused by interest rate volatility. The market value of these derivatives is subject to interest rate fluctuations, and as a result, it could have a positive or negative effect in the Corporation’s net interest income. Refer to Note 9 to the consolidated financial statements for further information on the Corporation’s derivative instruments.

The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas

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Dominicanas, S.A. (“CONTADO”) and Centro Financiero BHD, S.A. (“BHD”) in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. The resulting foreign currency translation adjustment, from operations for which the functional currency is other than the U.S. dollar, is reported in accumulated other comprehensive loss in the consolidated statements of condition, except for highly inflationary environments in which the effects are included in other operating income in the consolidated statements of income. At June 30, 2007, the Corporation had approximately $34 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss, compared with $37 million, also unfavorable, at December 31, 2006 and June 30, 2006.

LIQUIDITY

Liquidity risk may arise whenever the Corporation’s ability to raise cash and the runoff of its assets are substantially less than the runoff of its liabilities and its commitments to fund loans, meet customer deposit withdrawals and other cash commitments. The Corporation has established policies and procedures to assist it in remaining sufficiently liquid to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal operating conditions and under unpredictable circumstances of industry or market stress.

The Corporation has adopted contingency plans for raising financing under stress scenarios, where important sources of funds that are usually fully available are temporarily not willing to lend to the Corporation. These plans call for using alternate funding mechanisms such as the pledging or securitization of certain asset classes, committed credit lines, and loan facilities put in place with the FHLB and the FED. The Corporation has a substantial amount of assets available for raising funds through non-traditional channels and is confident that it has adequate alternatives to rely on under a scenario where some primary funding sources are temporarily unavailable.

The Corporation’s liquidity position is closely monitored on an ongoing basis. Management believes that available sources of liquidity are adequate to meet the funding needs in the normal course of business.

The composition of the Corporation’s financing to total assets at June 30, 2007 and December 31, 2006 follows:


					% increase (decrease)
					from			% of total assets
	June 30,		December 31,		December 31, 2006 to			June 30,			December 31,
(Dollars in millions)	2007		2006		June 30, 2007			2007			2006

Non-interest bearing deposits	$	4,280	$	4,222		1.4	%		9.1	%		8.9	%
Interest-bearing core deposits		15,240		14,923		2.1			32.4			31.5
Other interest-bearing deposits		5,866		5,293		10.8			12.5			11.2
Federal funds and repurchase agreements		5,656		5,762		(1.8	)		12.0			12.2
Other short-term borrowings		3,384		4,034		(16.1	)		7.2			8.5
Notes payable		8,069		8,737		(7.6	)		17.2			18.4
Others		793		813		(2.5	)		1.7			1.7
Stockholders’ equity		3,697		3,620		2.1			7.9			7.6

The Corporation’s core deposits, which consist of demand, savings, money markets, and time deposits under $100 thousand, constituted 77% of total deposits at June 30, 2007. Certificates of deposit with denominations of $100 thousand and over at June 30, 2007 represented 23% of total deposits. Their distribution by maturity was as follows:


(In millions)

3 months or less	$	2,316
3 to 6 months		1,263
6 to 12 months		993
Over 12 months		1,294

	$	5,866

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The consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporation’s cash inflows and outflows.

There have been no significant changes in the Corporation’s aggregate contractual obligations since the end of 2006. Refer to Note 11 to the consolidated financial statements for the composition of the Corporation’s borrowings at June 30, 2007. Also, refer to Note 12 to the consolidated financial statements for the Corporation’s involvement in certain commitments at June 30, 2007.

Risks to Liquidity

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

In early August 2005, FitchRatings, a nationally-recognized credit rating agency, changed the Corporation’s rating outlook from “stable” to “negative”. Following the announcement by the Corporation of the acquisition of E-LOAN in 2005, Fitch expressed concerns indicating that, while the Corporation’s capital profile is acceptable for current ratings, the level of tangible common equity would fall following the E-LOAN acquisition as a result of the intangibles recorded, primarily goodwill and trademark. Also, the outlook change considered the risk of greater exposure to the subprime lending business.

Management evaluated such concerns and took actions to address them. In the fourth quarter of 2005 and the first quarter of 2006, the Corporation issued additional shares of common stock to strengthen the level of tangible equity capital. Furthermore, strategic changes have been implemented at PFH that should have the effect of decreasing the growth of the subprime loan portfolio at the Corporation. Refer to the Restructuring Plan section in this MD&A for information on these particular efforts. In May 2007, Fitch changed the Corporation’s senior debt rating to “A-” from “A”, while the outlook was revised to “stable” from “negative”. The primary drivers behind the changes were recent trends in the Corporation’s credit quality and changes in core profitability as compared to a peer group of “A-” rated institutions. The rating for short-term obligations was maintained at “F-1”.

The Corporation is also rated by two other nationally-recognized credit rating agencies. In recent exchanges with these two agencies, the Corporation was advised that they are following closely recent trends in the Corporation’s business. One area of concern is the decline in the profitability of the U.S. business during 2006 and possible impact of the remaining subprime exposure on future financial results. The second concern is the deterioration of general credit quality in the Puerto Rico economy and its possible impact on the level of future credit losses. Nonetheless, in March 2007, Moody’s Investors Service upgraded the senior debt ratings for the Corporation. These were revised to “A2” at the holding company level, from the previous level of “A3”, an increase of one notch. The rating for short-term obligations was also increased to “P-1”, which is Moody’s highest classification. The outlook by Moody’s remains stable. As of June 30, 2007, the Corporation’s ratings with Standard and Poor’s had a stable outlook.

95

The Corporation and BPPR’s debt ratings at June 30, 2007 were as follows:

Popular, Inc.

BPPR

Short-term

Long-term

Short-term

Long-term

debt

FitchRatings

F-1

A-

F-1

A-

Moody’s

P-1

A2

P-1

A1

S&P

A-2

BBB+

A-2

A-

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

Some of the Corporation’s borrowings and deposits are subject to “rating triggers”, contractual provisions that accelerate the maturity of the underlying obligations in the case of a change in rating. Therefore, the need for the Corporation to raise funding in the marketplace could increase more than usual in the case of a rating downgrade. The amount of obligations subject to rating triggers that could accelerate the maturity of the underlying obligations was $14 million at June 30, 2007.

In the course of borrowing from institutional lenders, the Corporation has entered into contractual agreements to maintain certain levels of debt, capital and asset quality, among other financial covenants. If the Corporation were to fail to comply with those agreements, it may result in an event of default. Such failure may accelerate the repayment of the related obligations. An event of default could also affect the ability of the Corporation to raise new funds or renew maturing borrowings. At June 30, 2007, the Corporation had $0.9 billion in outstanding obligations subject to covenants, including those which are subject to rating triggers and those outstanding under the commercial paper program. The Corporation was in compliance with debt covenants in all credit facilities with outstanding balances as of June 30, 2007.

Management believes that there have been no significant changes in liquidity risk compared with the disclosures in Popular, Inc.’s 2006 Annual Report for the year ended December 31, 2006, except for matters covered in this MD&A.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act and such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosures.

Internal Control Over Financial Reporting

There have been no changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended on June 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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Part II — Other Information

Item 1. Legal Proceedings

The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions will not have a material adverse effect on the financial position and results of operations of the Corporation.

Item 1A. Risk Factors

Except as noted below, there have been no material changes to the risk factors as previously disclosed under Item 1A. in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

The Corporation is exposed to greater risk because a significant portion of the business is concentrated in Puerto Rico, which has experienced an economic slowdown.

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

The Commonwealth Government is projecting a slight recovery of Puerto Rico’s economy for fiscal year 2008 (ending June 30), after a contraction of 1.4% in the previous year. The Puerto Rico Planning Board, the public agency in charge of economic analysis for the Commonwealth, projects real growth of 0.8% for fiscal year 2008.

In its monthly Index of Economic Activity, the Puerto Rico Planning Board registered a 0.1% increase on a monthly basis in February 2007. The Index of Economic Activity, which is composed of eight indicators, registered growth of 0.2% on a monthly basis in January 2007 after seven consecutive monthly decreases.

Retail sales for the first quarter of calendar year 2007, for which the most recent government data is available, increased 1.0% on a nominal basis, when compared with the same quarter a year ago. Retail sales of new and used automobiles fell 13.3% in the first quarter of calendar year 2007, when compared with the same period a year ago.

Though consumers’ finances continue to be under stress, the Commonwealth Government avoided a repeat this year of the partial government shutdown in May 2006 that upset consumption trends and overall confidence. The Governor of Puerto Rico signed on June 30, 2007, the measures that were approved by the Legislative Assembly for the General Budget for the Commonwealth for fiscal 2008 totaling $9.2 billion.

However, the Commonwealth’s fiscal situation still poses a challenge for growth. Government receipts amounted to $3.7 billion for the first five months of calendar year 2007, down $6.1 million, or 0.2%, when compared with the same five-month period a year ago.

In general terms, general fund revenue and sales tax receipts have been running below government projections, which increase the risk that revenues will not be sufficient to meet government spending in the current fiscal year, requiring measures to balance the deficit. The political process needed to address this scenario may be a source of instability, as it may impact business and consumer confidence.

In July 2007, the Commonwealth issued $2.7 billion in debt obligations in the U.S. municipal securities market, to refinance outstanding debt previously secured by appropriations from the government’s general fund. In addition, $1.0 billion in bonds were sold by the Commonwealth in the Puerto Rico market, to local investors. The bond offering will reduce the cost of financing outstanding government debt, and is expected to increase the liquidity in the financial system on the Island.

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Though the pace of construction, as measured by the value of permits, increased in May 2007, for which the most recent government data is available, the sector continues to reflect weakness in both public and private sectors. The total value of construction permits, including both the private and public sectors, increased 52.8% in May 2007, when compared with the same month of the previous year. However, the value of permits for the first five months of calendar year 2007 was still down 15.4%, when compared with the same five-month period of the previous year. The value of permits for private projects rose 56.7% in May 2007, when compared with the same month of the previous year. However, the value of permits for private projects was still down 13.6% up until May for calendar year 2007, when compared with the same five-month period of the previous year. The value of permits for public projects rose 34.0% in May 2007, when compared with the same month of the previous year. However, the value of permits for public projects was still down 24.0% up until May for calendar year 2007, when compared with the same five-month period of the previous year.

Unemployment has been trending upward, reaching 11.8% in June 2007. According to the Puerto Rico Labor Department, total employment on the Island had declined by 25,000 jobs from June 2006 to June 2007, a decrease of 2.0%.

Data on tourist activity, which are only available through February 2007, shows fewer visitors during the first eight months of fiscal year 2007 (July 2006 to February 2007). Total hotel registrations amounted to 1.3 million during the eight-month period, down 6.0% when compared with the same period of the previous fiscal year.

Sustained highs in crude oil prices have also negatively impacted the economy of Puerto Rico, where energy production runs close to 70.0% on imported oil.

The current weak state of the economy and uncertainty in the private and public sectors may also have an adverse effect on the credit quality of the Corporation’s loan portfolios, as delinquency rates may increase in the short-term, until the economy stabilizes. Also, a potential reduction in consumer spending may also impact growth in other interest and non-interest revenue sources of the Corporation.

A prolonged economic slowdown, a decline in the real estate market in the U.S mainland, and disruption in the capital markets could harm the results of operations of one of the Corporation’s business segments.

The residential mortgage loan origination business has historically been cyclical, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. Any decline in residential mortgage loan originations in the market could also reduce the level of mortgage loans the Corporation may produce in the future and adversely impact its business. During periods of rising interest rates, refinancing originations for many mortgage products tend to decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the residential mortgage loan origination business is impacted by home values. Over the past several years, residential real estate values in some areas of the U.S. mainland have increased greatly, which has contributed to the recent rapid growth in the residential mortgage industry, particularly with respect to re-financings. If residential real estate values decline, this could lead to lower volumes and higher losses across the industry, adversely impacting the Corporation’s business.

Because the Corporation makes loans to borrowers that have FICO scores below 660 through its subsidiary PFH, the actual rates of delinquencies, foreclosures and losses on these loans could be higher during economic slowdowns. Rising unemployment, higher interest rates, declines in housing prices and an overall tightening by lenders of credit standards on new loans tend to have a greater negative effect on the ability of such borrowers to repay their mortgage loans. As of June 30, 2007 approximately 68% of PFH’s mortgage loan portfolio was subprime, meaning that they have a credit score of 660 or below. This represented approximately 39% of the Corporation’s mortgage loans held-in-portfolio as of such date. Any sustained period of increased delinquencies, foreclosures or losses could harm the Corporation’s ability to sell loans, the prices it receives for its loans, the values of its mortgage loans held-for-sale or its residual interests in securitizations, which could harm the Corporation’s financial condition and results of operations. In addition, any material decline in real estate values would weaken the Corporation’s collateral loan-to-value ratios and increase the possibility of loss if a borrower defaults. In such event, the Corporation will be subject to the risk of loss on such mortgage assets arising from borrower defaults to the extent not covered by third-party credit enhancement.

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Refer to the Management’s Discussion and Analysis on this Form 10-Q for further information on PFH’s credit exposure associated with its subprime mortgage loan portfolio and the Restructuring Plan executed in 2007, which has reduced the Corporation’s exposure in this industry sector.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Corporation previously filed two registration statements covering the offering of the Corporation’s common stock, at market prices, as an investment option for employee and employer contributions under the Banco Popular de Puerto Rico Employees’ Stock Plan (Puerto Rico) (the “BPPR Plan”) and the Popular, Inc. Puerto Rico Savings and Investment Plan (the “Puerto Rico Surviving Plan”). Effective July 1, 2006, the BPPR Plan was merged with and into the Puerto Rico Surviving Plan. When the plans were merged, the shares previously registered with respect to the BPPR Plan were not carried over to the registration statement related to the Puerto Rico Surviving Plan. As a result, subsequent offers of shares to participants in the Puerto Rico Surviving Plan caused the number of shares offered to those participants to exceed the amount of the shares registered with respect to the Puerto Rico Surviving Plan. During the quarter ended June 30, 2007, 374,538 unregistered shares were sold to participants of the Puerto Rico Surviving Plan. Absent an exemption, the offer or sale of securities in an amount in excess of that registered under an effective registration would be an unregistered offering of securities under the Securities Act of 1933 (the “Securities Act”). The Corporation, however, believes that the offer and sale of the Corporation’s common stock and interests in the Puerto Rico Surviving Plan are covered by the exemption for intrastate offers and sales contained in Section 3(a)(11) of the Securities Act since participation in the Puerto Rico Surviving Plan is limited to Puerto Rico employees. On August 9, 2007, the Corporation registered 6,000,000 shares of common stock and related interests in the Puerto Rico Surviving Plan for offer to plan participants.

The Corporation also previously filed two registration statements covering the offering of the Corporation’s common stock, at market prices, as an investment option for employee and employer contributions under the following plans for its U.S.-based employees: the Popular Financial Holdings, Inc. Savings and Retirement Plan (formerly known as the Equity One, Inc. Savings and Retirement Plan (the “PFH Plan”)) and the Popular, Inc. USA 401(k) Savings and Investment Plan (the “U.S. Surviving Plan”). Effective April 1, 2006, the PFH Plan was merged with and into the U.S. Surviving Plan. As a result of an error in recordkeeping and the merger of the PFH Plan with and into the U.S. Surviving Plan and the participation of E-LOAN employees in the Plan starting January 1, 2007, the latter two of which had the effect of significantly increasing the number of participants in the U.S. Surviving Plan, the amount of shares issued under the U.S. Surviving Plan has exceeded the amount of shares registered. For the quarter ended June 30, 2007, the number of unregistered shares sold under the U.S. Surviving Plan was 109,809 shares. The Corporation has determined that the offer and sale of the shares and interests in the U.S. Surviving Plan above the amount registered were not exempt from registration under the Securities Act, and that such sale should have been registered under the Securities Act. Under the applicable provisions of the federal securities laws, plan participants that purchased unregistered shares of common stock may seek to rescind the transaction within one year following the date of purchase. Approximately 546,278 unregistered shares were sold to plan participants under the U.S. Surviving Plan during the twelve-month period ended June 30, 2007, the most recent twelve-month period for which participant account data is available from the Corporation’s third-party plan recordkeeper. During that period, the Corporation’s common stock price ranged from a low of $15.82 per share to a high of $20.12 per share. The closing price of the Corporation’s common stock on August 8, 2007 was $13.05 per share. On August 9, 2007, the Corporation registered 5,000,000 shares of common stock and related interests in the U.S. Surviving Plan for offer to plan participants. All shares of common stock under all the above-referenced Plans were purchased on the open market. The Corporation is considering its alternatives to address the unregistered offering that occurred. The Corporation does not expect that the exercise of any applicable rescission rights by plan participants will have a material impact on the financial condition or liquidity of the Corporation.

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Issuer Purchases of Equity Securities

In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan. The maximum number of shares of common stock issuable under this Plan is 10,000,000.

The following table sets forth the details of purchases of common stock during the quarter ended June 30, 2007 under the 2004 Omnibus Incentive Plan.


Not in thousands
					Total Number of Shares		Maximum Number of Shares
	Total Number of Shares		Average Price Paid		Purchased as Part of Publicly		that May Yet be Purchased
Period	Purchased		per Share		Announced Plans or Programs		Under the Plans or Programs (a)

April 1 – April 30		—		—		—		8,599,185
May 1 – May 31		26,751	$	17.22		26,751		8,572,434
June 1 – June 30		—		—		—		8,575,626

Total June 30, 2007		26,751	$	17.22		26,751		8,575,626


(a)		Includes shares forfeited.

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Shareholders Meeting of Popular, Inc. was held on May 1, 2007. A quorum was obtained with 249,007,435 shares represented in person or by proxy, which represented approximately 89.22% of all votes eligible to be cast at the meeting. Three Directors of the Corporation, Michael Masin, Manuel Morales Jr. and José R. Vizcarrondo, were elected for a three-year term. The following directors were not up for reelection and continued to hold office after the meeting: Juan J. Bermúdez, Richard L. Carrión, María Luisa Ferré, Francisco M. Rexach Jr., Frederic V. Salerno and William J. Teuber Jr. José B. Carrión Jr. would have attained 72 years of age during the term to be served, therefore, in accordance with Board policy, Mr. Carrión Jr. was not nominated for reelection. The ratification of PricewaterhouseCoopers LLP as the Corporation’s independent registered public accounting firm for 2007 was also approved at the Annual Meeting. The result of the voting on each of the proposals is set forth below:

Proposal 1: Election of three (3) Class 2 Directors for a three-year term:


Nominees	Votes For		Withheld

Michael Masin		244,065,864		4,941,572
Manuel Morales Jr.		244,606,210		4,401,226
José R. Vizcarrondo.		244,325,224		4,682,212

Proposal 2: Ratification of the appointment of PricewaterhouseCoopers LLP as the Corporation’s independent registered public accounting firm for 2007:


In favor:			239,254,010
Against:			922,326
Abstain:			8,831,098

Item 6. Exhibits


Exhibit No.		Exhibit Description
12.1		Computation of the ratios of earnings to fixed charges and preferred stock dividends.

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	POPULAR, INC. (Registrant)
Date: August 9, 2007	By:	/s/ Jorge A. Junquera
		Jorge A. Junquera
		Senior Executive Vice President & Chief Financial Officer


Date: August 9, 2007	By:	/s/ Ileana González Quevedo
		Ileana González Quevedo
		Senior Vice President & Corporate Comptroller

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Popular, Inc. (Banco Popular de Puerto Rico) - 10-Q quarterly report FY

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