POPULAR, INC.
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2008
Commission File Number: 000-13818
POPULAR, INC.
 
(Exact name of registrant as specified in its charter)
     
Puerto Rico   66-0667416
     
(State or other jurisdiction of
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     o Yes           þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value 281,024,719 shares outstanding as of May 7, 2008.
 
 

 


 

POPULAR, INC.
INDEX
         
    Page
Part I — Financial Information
       
 
       
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    8  
 
       
    9  
 
       
    61  
 
       
    98  
 
       
    103  
 
       
       
 
       
    103  
 
       
    103  
 
       
    103  
 
       
    104  
 
       
    105  
 EX-10.1 ASSET PURCHASE AGREEMENT
 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 CFO
 EX-32.2 SECTION 302, CERTIFICATION OF THE CEO

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

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ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
                         
(In thousands, except share information)   March 31, 2008   December 31, 2007   March 31, 2007
 
ASSETS
                       
Cash and due from banks
  $ 782,498     $ 818,825     $ 753,550  
 
Money market investments:
                       
Federal funds sold
    494,940       737,815       389,000  
Securities purchased under agreements to resell
    391,958       145,871       227,046  
Time deposits with other banks
    14,331       123,026       24,162  
 
 
    901,229       1,006,712       640,208  
 
Investment securities available-for-sale, at fair value:
                       
Pledged securities with creditors’ right to repledge
    3,146,549       4,249,295       3,729,502  
Other investment securities available-for-sale
    4,512,959       4,265,840       5,748,859  
Investment securities held-to-maturity, at amortized cost (market value as of March 31, 2008 - $376,306; December 31, 2007 - $486,139; March 31, 2007 - $88,868)
    374,903       484,466       87,483  
Other investment securities, at lower of cost or realizable value (realizable value as of March 31, 2008 - $297,535; December 31, 2007 - $216,819; March 31, 2007 - $153,339)
    252,157       216,584       152,951  
Trading account securities, at fair value:
                       
Pledged securities with creditors’ right to repledge
    494,839       673,958       344,401  
Other trading securities
    67,018       93,997       303,749  
Loans held-for-sale measured at lower of cost or market value
    447,097       1,889,546       1,049,230  
Loans measured at fair value pursuant to SFAS No. 159:
                       
Loans measured at fair value pledged with creditors’ right to repledge
    56,523              
Other loans measured at fair value
    870,297              
 
Loans held-in-portfolio:
                       
Loans held-in-portfolio pledged with creditors’ right to repledge
          149,610       563,871  
Other loans
    26,742,124       28,053,956       31,578,452  
Less — Unearned income
    184,815       182,110       310,936  
Allowance for loan losses
    579,379       548,832       541,748  
 
 
    25,977,930       27,472,624       31,289,639  
 
Premises and equipment, net
    639,840       588,163       591,008  
Other real estate
    85,277       81,410       89,479  
Accrued income receivable
    215,454       216,114       284,791  
Servicing assets (at fair value on March 31, 2008 - $183,756; December 31, 2007 $191,624; March 31, 2007 - $172,643)
    188,558       196,645       176,994  
Other assets
    2,110,675       1,456,994       1,149,050  
Goodwill
    630,764       630,761       668,616  
Other intangible assets
    67,032       69,503       105,154  
 
 
  $ 41,821,599     $ 44,411,437     $ 47,164,664  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Non-interest bearing
  $ 4,253,885     $ 4,510,789     $ 4,177,446  
Interest bearing
    22,712,829       23,823,689       20,560,607  
 
 
    26,966,714       28,334,478       24,738,053  
Federal funds purchased and assets sold under agreements to repurchase
    4,490,693       5,437,265       6,272,417  
Other short-term borrowings
    1,525,310       1,501,979       3,201,972  
Notes payable at cost
    4,190,169       4,621,352       8,368,825  
Notes payable at fair value pursuant to SFAS No. 159
    186,171              
Other liabilities
    990,713       934,372       846,979  
 
 
    38,349,770       40,829,446       43,428,246  
 
Commitments and contingencies (See Note 16)
                       
 
Minority interest in consolidated subsidiaries
    109       109       110  
 
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; 294,182,809 shares issued (December 31, 2007 - 293,651,398; March 31, 2007 - 292,448,935) and 280,547,741 outstanding (December 31, 2007 - 280,029,215; March 31, 2007 - 279,073,657)
    1,765,097       1,761,908       1,754,694  
Surplus
    570,548       568,184       530,073  
Retained earnings
    1,113,089       1,319,467       1,673,826  
Accumulated other comprehensive income (loss), net of tax of $19,446 (December 31, 2007 - ($15,438); March 31, 2007 - ($74,005))
    43,719       (46,812 )     (203,935 )
Treasury stock — at cost, 13,635,068 shares (December 31, 2007 - 13,622,183; March 31, 2007 - 13,375,278)
    (207,608 )     (207,740 )     (205,225 )
 
 
    3,471,720       3,581,882       3,736,308  
 
 
  $ 41,821,599     $ 44,411,437     $ 47,164,664  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
                 
    Quarter ended
    March 31,
(In thousands, except per share information)   2008   2007
 
INTEREST INCOME:
               
Loans
  $ 561,117     $ 644,114  
Money market investments
    6,728       4,609  
Investment securities
    94,405       115,491  
Trading account securities
    18,693       9,381  
 
 
    680,943       773,595  
 
INTEREST EXPENSE:
               
Deposits
    194,940       173,102  
Short-term borrowings
    65,145       124,809  
Long-term debt
    63,669       120,702  
 
 
    323,754       418,613  
 
Net interest income
    357,189       354,982  
Provision for loan losses
    168,222       96,346  
 
Net interest income after provision for loan losses
    188,967       258,636  
Service charges on deposit accounts
    51,087       48,471  
Other service fees (See Note 17)
    105,467       87,849  
Net gain on sale and valuation adjustments of investment securities
    47,940       81,771  
Trading account profit (loss)
    4,464       (14,164 )
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
    (3,020 )      
Gain on sale of loans and valuation adjustments on loans held-for-sale
    68,745       3,434  
Other operating income
    33,292       44,815  
 
 
    496,942       510,812  
 
OPERATING EXPENSES:
               
Personnel costs:
               
Salaries
    136,709       136,479  
Pension, profit sharing and other benefits
    38,470       41,896  
 
 
    175,179       178,375  
Net occupancy expenses
    34,992       32,014  
Equipment expenses
    31,998       32,396  
Other taxes
    13,143       11,847  
Professional fees
    36,625       35,987  
Communications
    15,303       17,062  
Business promotion
    17,216       28,372  
Printing and supplies
    4,275       4,276  
Other operating expenses
    41,292       32,016  
Amortization of intangibles
    2,492       2,983  
 
 
    372,515       375,328  
 
Income before income tax
    124,427       135,484  
Income tax expense
    21,137       16,837  
 
NET INCOME
  $ 103,290     $ 118,647  
 
NET INCOME APPLICABLE TO COMMON STOCK
  $ 100,312     $ 115,669  
 
BASIC EARNINGS PER COMMON SHARE (“EPS”)
  $ 0.36     $ 0.41  
 
DILUTED EPS
  $ 0.36     $ 0.41  
 
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.16     $ 0.16  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
                 
    Quarter ended
    March 31,
(In thousands)   2008   2007
 
Preferred stock:
               
Balance at beginning and end of year
  $ 186,875     $ 186,875  
 
Common stock:
               
Balance at beginning of year
    1,761,908       1,753,146  
Common stock issued under the Dividend Reinvestment Plan
    3,189       1,488  
Stock options exercised
          60  
 
Balance at end of period
    1,765,097       1,754,694  
 
Surplus:
               
Balance at beginning of year
    568,184       526,856  
Common stock issued under the Dividend Reinvestment Plan
    2,080       2,628  
Stock options expense on unexercised options, net of forfeitures
    284       440  
Stock options exercised
          149  
 
Balance at end of period
    570,548       530,073  
 
Retained earnings:
               
Balance at beginning of year
    1,319,467       1,594,144  
Net income
    103,290       118,647  
Cumulative effect of accounting change-adoption of SFAS No. 159 in 2008 (2007-SFAS No. 156 and EITF 06-5)
    (261,831 )     8,667  
Cash dividends declared on common stock
    (44,859 )     (44,654 )
Cash dividends declared on preferred stock
    (2,978 )     (2,978 )
 
Balance at end of period
    1,113,089       1,673,826  
 
Accumulated other comprehensive income (loss):
               
Balance at beginning of year
    (46,812 )     (233,728 )
Other comprehensive income, net of tax
    90,531       29,793  
 
Balance at end of period
    43,719       (203,935 )
 
Treasury stock — at cost:
               
Balance at beginning of year
    (207,740 )     (206,987 )
Purchase of common stock
    (339 )     (10 )
Reissuance of common stock
    471       1,772  
 
Balance at end of period
    (207,608 )     (205,225 )
 
Total stockholders’ equity
  $ 3,471,720     $ 3,736,308  
 
Disclosure of changes in number of shares:
                         
    March 31,   December 31,   March 31,
    2008   2007   2007
 
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
    293,651,398       292,190,924       292,190,924  
Issued under the Dividend Reinvestment Plan
    531,411       1,450,410       247,947  
Stock options exercised
          10,064       10,064  
 
Balance at end of period
    294,182,809       293,651,398       292,448,935  
 
Treasury stock
    (13,635,068 )     (13,622,183 )     (13,375,278 )
 
Common Stock — outstanding
    280,547,741       280,029,215       279,073,657  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
                 
    Quarter ended
    March 31,
(In thousands)   2008   2007
 
Net income
  $ 103,290     $ 118,647  
 
Other comprehensive income before tax:
               
Foreign currency translation adjustment
    219       1,780  
Adjustment of pension and postretirement benefit plans
    (37 )     (519 )
Unrealized gains on securities available-for-sale arising during the period
    127,490       39,483  
Reclassification adjustment for losses (gains) included in net income
    1,312       (82 )
Unrealized net losses on cash flows hedges
    (5,070 )     (892 )
Reclassification adjustment for losses included in net income
    1,501       161  
 
 
    125,415       39,931  
Income tax expense
    (34,884 )     (10,138 )
 
Total other comprehensive income, net of tax
    90,531       29,793  
 
Comprehensive income
  $ 193,821     $ 148,440  
 
Tax Effects Allocated to Each Component of Other Comprehensive Income:
                 
    Quarter ended  
    March 31,  
(In thousands)   2008     2007  
 
Underfunding of pension and postretirement benefit plans
        $ 180  
Unrealized gains on securities available-for-sale arising during the period
    ($35,263 )     (10,592 )
Reclassification adjustment for losses (gains) included in net income
    (901 )     13  
Unrealized net losses on cash flows hedges
    1,869       317  
Reclassification adjustment for losses included in net income
    (589 )     (56 )
 
Income tax expense
    ($34,884 )     ($10,138 )
 
Disclosure of accumulated other comprehensive income:
                         
    March 31,   December 31,   March 31,
(In thousands)   2008   2007   2007
 
Foreign currency translation adjustment
    ($34,369 )     ($34,588 )     ($34,921 )
 
Underfunding of pension and postretirement benefit plans
    (51,176 )     (51,139 )     (69,779 )
Tax effect
    20,108       20,108       27,214  
 
Net of tax amount
    (31,068 )     (31,031 )     (42,565 )
 
Unrealized gains (losses) on securities available-for-sale
    155,894       27,092       (172,842 )
Tax effect
    (42,114 )     (5,950 )     46,567  
 
Net of tax amount
    113,780       21,142       (126,275 )
 
Unrealized losses on cash flows hedges
    (7,184 )     (3,615 )     (641 )
Tax effect
    2,560       1,280       224  
 
Net of tax amount
    (4,624 )     (2,335 )     (417 )
 
Cumulative effect of accounting change, net of tax
                243  
 
Accumulated other comprehensive income (loss), net of tax
  $ 43,719       ($46,812 )     ($203,935 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Quarter ended March 31,
(In thousands)   2008   2007
 
Cash flows from operating activities:
               
Net income
  $ 103,290     $ 118,647  
 
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization of premises and equipment
    18,711       19,994  
Provision for loan losses
    168,222       96,346  
Amortization of intangibles
    2,492       2,983  
Amortization and fair value adjustments of servicing assets
    15,404       10,229  
Net gain on sale and valuation adjustments of investment securities
    (47,940 )     (81,771 )
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
    3,020        
Net gain on disposition of premises and equipment
    (1,323 )     (3,677 )
Net gain on sale of loans and valuation adjustments on loans held-for-sale
    (68,745 )     (3,434 )
Net amortization of premiums and accretion of discounts on investments
    6,086       6,331  
Net amortization of premiums and deferred loan origination fees and costs
    13,190       23,930  
Earnings from investments under the equity method
    (4,194 )     (14,229 )
Stock options expense
    284       490  
Deferred income taxes
    (34,815 )     (19,394 )
Net disbursements on loans held-for-sale
    (716,848 )     (1,685,149 )
Acquisitions of loans held-for-sale
    (76,474 )     (282,110 )
Proceeds from sale of loans held-for-sale
    526,534       1,280,146  
Net decrease in trading securities
    134,437       346,150  
Net increase in accrued income receivable
    (10,906 )     (36,551 )
Net (increase) decrease in other assets
    (84,473 )     35,955  
Net decrease in interest payable
    (21,075 )     (315 )
Net (decrease) increase in postretirement benefit obligation
    (362 )     728  
Net increase in other liabilities
    34,975       1,208  
 
Total adjustments
    (143,800 )     (302,140 )
 
Net cash used in operating activities
    (40,510 )     (183,493 )
 
Cash flows from investing activities:
               
Net decrease (increase) in money market investments
    105,483       (272,064 )
Purchases of investment securities:
               
Available-for-sale
    (120,932 )     (28,186 )
Held-to-maturity
    (2,748,155 )     (5,670,466 )
Other
    (88,720 )     (6,744 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
               
Available-for-sale
    1,067,689       399,204  
Held-to-maturity
    2,859,246       5,674,358  
Other
    53,147       2,454  
Proceeds from sale of investment securities available-for-sale
    8,477        
Proceeds from sale of other investment securities
    49,252       246,352  
Net (disbursements) repayments on loans
    (253,856 )     50,493  
Proceeds from sale of loans
    1,585,375       962  
Acquisition of loan portfolios
    (1,394 )     (784 )
Assets acquired, net of cash
          (1,823 )
Mortgage servicing rights purchased
    (2,215 )     (795 )
Acquisition of premises and equipment
    (81,111 )     (26,117 )
Proceeds from sale of premises and equipment
    13,255       14,307  
Proceeds from sale of foreclosed assets
    29,086       41,835  
 
Net cash provided by investing activities
    2,474,627       422,986  
 
Cash flows from financing activities:
               
Net (decrease) increase in deposits
    (1,346,959 )     297,872  
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase
    (946,572 )     509,972  
Net increase (decrease) in other short-term borrowings
    23,331       (832,153 )
Payments of notes payable
    (693,280 )     (416,272 )
Proceeds from issuance of notes payable
    535,894       47,719  
Dividends paid
    (47,788 )     (47,591 )
Proceeds from issuance of common stock
    5,269       4,362  
Treasury stock acquired
    (339 )     (10 )
 
Net cash used in financing activities
    (2,470,444 )     (436,101 )
 
Net decrease in cash and due from banks
    (36,327 )     (196,608 )
Cash and due from banks at beginning of period
    818,825       950,158  
 
Cash and due from banks at end of period
  $ 782,498     $ 753,550  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
Note 1 — Nature of Operations and Basis of Presentation
Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN, and Popular Financial Holdings (“PFH”). BPNA is a community bank providing a broad range of financial services and products to the communities it serves. BPNA operates branches in New York, California, Illinois, New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending and provides an online platform to raise deposits for BPNA. As described in Note 19 to the consolidated financial statements, E-LOAN restructured its business operations during the fourth quarter of 2007 and beginning of 2008. PFH, after certain restructuring events discussed also in Note 19 to the consolidated financial statements, exited the branch network loan origination business during the first quarter of 2008, but continues to operate a mortgage loan servicing unit, a small scale origination / refinancing unit and carry a maturing loan portfolio. The Corporation, through its transaction processing company, EVERTEC, continues to use its expertise in technology as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. Note 24 to the consolidated financial statements presents further information about the Corporation’s business segments.
The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain reclassifications have been made to the prior period consolidated financial statements to conform to the 2008 presentation.
The statement of condition data as of December 31, 2007 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the statements presented as of March 31, 2008, December 31, 2007 and March 31, 2007 pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2007, included in the Corporation’s 2007 Annual Report. The Corporation’s Form 10-K filed on February 29, 2008 incorporates by reference the 2007 Annual Report.
Note 2 — Recent Accounting Developments
SFAS No. 157 “Fair Value Measurements”
SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets carried at fair value will be classified and disclosed in one of the three categories in accordance with the hierarchy. The three levels of the fair value hierarchy are (1) quoted market prices for identical assets or liabilities in active markets, (2) observable market-based inputs or unobservable inputs that are corroborated by market data, and (3) unobservable inputs that are not corroborated by market data. SFAS No. 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued financial staff position FSP FAS No. 157-2 which defers for one year the effective date for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The staff position also amends SFAS No. 157

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

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the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward. The Corporation will be required to prospectively apply SFAS 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. Management will be evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented on the consolidated financial statements.
SFAS No. 160 “Statement of Financial Accounting Standards No. 160, Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51”
In December 2007, the FASB issued SFAS No. 160, which amends ARB No. 51, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will require entities to classify noncontrolling interests as a component of stockholders’ equity on the consolidated financial statements and will require subsequent changes in ownership interests in a subsidiary to be accounted for as an equity transaction. Additionally, SFAS No. 160 will require entities to recognize a gain or loss upon the loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on that date. This statement also requires expanded disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which are required to be applied retrospectively. Early adoption is not permitted. Management will be evaluating the effects, if any, that the adoption of this statement will have on its consolidated financial statements.
SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities”
In March 2008, the FASB issued SFAS No. 161, an amendment of SFAS No. 133. The standard requires enhanced disclosures about derivative instruments and hedged items that are accounted for under SFAS No. 133 and related interpretations. The standard will be effective for all of the Corporation’s interim and annual financial statements for periods beginning after November 15, 2008, with early adoption permitted. The standard expands the disclosure requirements for derivatives and hedged items and has no impact on how the Corporation accounts for these instruments. Management will be evaluating the enhanced disclosure requirements.
Staff Accounting Bulletin No. 109 (“SAB 109”) “Written Loan Commitments Recorded at Fair Value through Earnings”
On November 5, 2007, the SEC issued Staff SAB 109, which requires that the fair value of a written loan commitment that is marked to market through earnings should include the future cash flows related to the loan’s servicing rights. However, the fair value measurement of a written loan commitment still must exclude the expected net cash flows related to internally developed intangible assets (such as customer relationship intangible assets). SAB 109 applies to two types of loan commitments: (1) written mortgage loan commitments for loans that will be held-for-sale when funded that are marked to market as derivatives under SFAS No. 133 (derivative loan commitments); and (2) other written loan commitments that are accounted for at fair value through earnings under SFAS No. 159’s fair-value election.
SAB 109 supersedes SAB 105, which applied only to derivative loan commitments and allowed the expected future cash flows related to the associated servicing of the loan to be recognized only after the servicing asset had been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. SAB 109 will be applied prospectively to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The implementation of SAB 109 during the first quarter of 2008 did not have a material impact to the Corporation’s consolidated financial statements, including disclosures.
Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP FAS 140-3”)

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In February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” The objective of this FSP is to provide implementation guidance on whether the security transfer and contemporaneous repurchase financing involving the transferred financial asset must be evaluated as one linked transaction or two separate de-linked transactions.
Current practice records the transfer as a sale and the repurchase agreement as a financing. The FSP requires the recognition of the transfer and the repurchase agreement as one linked transaction, unless all of the following criteria are met: (1) the initial transfer and the repurchase financing are not contractually contingent on one another; (2) the initial transferor has full recourse upon default, and the repurchase agreement’s price is fixed and not at fair value; (3) the financial asset is readily obtainable in the marketplace and the transfer and repurchase financing are executed at market rates; and (4) the maturity of the repurchase financing is before the maturity of the financial asset. The scope of this FSP is limited to transfers and subsequent repurchase financings that are entered into contemporaneously or in contemplation of one another.
The FSP will be effective for the Corporation on January 1, 2009. Early adoption is prohibited. The Corporation will be evaluating the potential impact of adopting this FSP.
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 $655 million as of March 31, 2008 (December 31, 2007 — $678 million; March 31, 2007 — $614 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, the Corporation may be required to establish a special reserve account for the benefit of brokerage customers of its broker-dealer subsidiary, which may consist of securities segregated in the special reserve account. There were no reserve requirements as of March 31, 2008 (December 31, 2007 — securities with a market value of $273 thousand; March 31, 2007 — securities with a market value of $445 thousand). These securities were classified in the consolidated statement of condition within the other trading securities category.
As required by the Puerto Rico International Banking Center Regulatory Act, as of March 31, 2008, December 31, 2007, and March 31, 2007, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally divided for the two IBEs, which were considered restricted assets.
As part of a line of credit facility with a financial institution, as of March 31, 2008, the Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2007 — $1.9 million; March 31, 2007 — $1.9 million). The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.
As of March 31, 2008, the Corporation had restricted cash of $3.5 million (December 31, 2007 — $3.5 million) to support a letter of credit related to a service settlement agreement.

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Note 4 — Pledged Assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
                         
    March 31,   December 31,   March 31,
(In thousands)   2008   2007   2007
 
Investment securities available-for-sale, at fair value
  $ 2,808,803     $ 2,944,643     $ 2,825,470  
Investment securities held-to-maturity, at amortized cost
          339       502  
Loans held-for-sale measured at lower of cost or market value
    38,553       42,428        
Loans measured at fair value pursuant to SFAS No. 159
    193,781              
Loans held-in-portfolio
    7,586,260       8,489,814       9,548,747  
 
 
  $ 10,627,397     $ 11,477,224     $ 12,374,719  
 
Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.
Note 5 — Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of March 31, 2008, December 31, 2007 and March 31, 2007 were as follows:
                                 
    AS OF MARCH 31, 2008
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 463,769     $ 18,219           $ 481,988  
Obligations of U.S. Government sponsored entities
    4,582,861       154,438             4,737,299  
Obligations of Puerto Rico, States and political subdivisions
    102,378       728     $ 1,894       101,212  
Collateralized mortgage obligations
    1,366,306       7,299       24,686       1,348,919  
Mortgage-backed securities
    956,964       8,000       6,390       958,574  
Equity securities
    28,550       884       704       28,730  
Others
    2,786                   2,786  
 
 
  $ 7,503,614     $ 189,568     $ 33,674     $ 7,659,508  
 

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    AS OF DECEMBER 31, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 476,104     $ 3     $ 5,011     $ 471,096  
Obligations of U.S. Government sponsored entities
    5,450,028       52,971       5,885       5,497,114  
Obligations of Puerto Rico, States and political subdivisions
    103,206       470       2,184       101,492  
Collateralized mortgage obligations
    1,403,292       3,754       10,506       1,396,540  
Mortgage-backed securities
    1,017,302       4,690       11,864       1,010,128  
Equity securities
    33,299       690       36       33,953  
Others
    4,812                   4,812  
 
 
  $ 8,488,043     $ 62,578     $ 35,486     $ 8,515,135  
 
                                 
    AS OF MARCH 31, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 502,445           $ 27,102     $ 475,343  
Obligations of U.S. Government sponsored entities
    6,322,704     $ 392       115,897       6,207,199  
Obligations of Puerto Rico, States and political subdivisions
    117,895       282       3,116       115,061  
Collateralized mortgage obligations
    1,597,684       5,378       13,055       1,590,007  
Mortgage-backed securities
    1,021,608       1,770       22,739       1,000,639  
Equity securities
    70,109       4,197       3,399       70,907  
Others
    18,515       690             19,205  
 
 
  $ 9,650,960     $ 12,709     $ 185,308     $ 9,478,361  
 
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, as of March 31, 2008, December 31, 2007 and March 31, 2007.
                         
    AS OF MARCH 31, 2008
    Less than 12 months
 
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 20,343     $ 22     $ 20,321  
Collateralized mortgage obligations
    628,360       16,343       612,017  
Mortgage-backed securities
    144,912       1,803       143,109  
 
Equity securities
    13,654       704       12,950  
 
 
  $ 807,269     $ 18,872     $ 788,397  
 
                         
    12 months or more
    Gross
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 49,662     $ 1,872     $ 47,790  
Collateralized mortgage obligations
    176,527       8,343       168,184  
Mortgage-backed securities
    319,054       4,587       314,467  
 
 
  $ 545,243     $ 14,802     $ 530,441  
 

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    Total
    Amortized   Gross
Unrealized
  Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 70,005     $ 1,894     $ 68,111  
Collateralized mortgage obligations
    804,887       24,686       780,201  
Mortgage-backed securities
    463,966       6,390       457,576  
 
Equity securities
    13,654       704       12,950  
 
 
  $ 1,352,512     $ 33,674     $ 1,318,838  
 
                         
    AS OF DECEMBER 31, 2007
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 67,107     $ 185     $ 66,922  
Obligations of Puerto Rico, States and political subdivisions
    2,600       2       2,598  
Collateralized mortgage obligations
    349,084       2,453       346,631  
Mortgage-backed securities
    99,328       667       98,661  
Equity securities
    28       10       18  
 
 
  $ 518,147     $ 3,317     $ 514,830  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 466,111     $ 5,011     $ 461,100  
Obligations of U.S. Government sponsored entities
    1,807,457       5,700       1,801,757  
Obligations of Puerto Rico, States and political subdivisions
    65,642       2,182       63,460  
Collateralized mortgage obligations
    430,034       8,053       421,981  
Mortgage-backed securities
    656,879       11,197       645,682  
Equity securities
    300       26       274  
 
 
  $ 3,426,423     $ 32,169     $ 3,394,254  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 466,111     $ 5,011     $ 461,100  
Obligations of U.S. Government sponsored entities
    1,874,564       5,885       1,868,679  
Obligations of Puerto Rico, States and political subdivisions
    68,242       2,184       66,058  
Collateralized mortgage obligations
    779,118       10,506       768,612  
Mortgage-backed securities
    756,207       11,864       744,343  
Equity securities
    328       36       292  
 
 
  $ 3,944,570     $ 35,486     $ 3,909,084  
 

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    AS OF MARCH 31, 2007
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 320,519     $ 6,849     $ 313,670  
Obligations of Puerto Rico, States and political subdivisions
    19,329       293       19,036  
Collateralized mortgage obligations
    333,165       2,187       330,978  
Mortgage-backed securities
    15,728       184       15,544  
Equity securities
    22,639       3,372       19,267  
 
 
  $ 711,380     $ 12,885     $ 698,495  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 502,445     $ 27,102     $ 475,343  
Obligations of U.S. Government sponsored entities
    5,847,813       109,048       5,738,765  
Obligations of Puerto Rico, States and political subdivisions
    58,452       2,823       55,629  
Collateralized mortgage obligations
    570,196       10,868       559,328  
Mortgage-backed securities
    912,630       22,555       890,075  
Equity securities
    300       27       273  
 
 
  $ 7,891,836     $ 172,423     $ 7,719,413  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 502,445     $ 27,102     $ 475,343  
Obligations of U.S. Government sponsored entities
    6,168,332       115,897       6,052,435  
Obligations of Puerto Rico, States and political subdivisions
    77,781       3,116       74,665  
Collateralized mortgage obligations
    903,361       13,055       890,306  
Mortgage-backed securities
    928,358       22,739       905,619  
Equity securities
    22,939       3,399       19,540  
 
 
  $ 8,603,216     $ 185,308     $ 8,417,908  
 
As of March 31, 2008, “Obligations of Puerto Rico, States and political subdivisions” include approximately $55 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”). The rating on these bonds by Moody’s Investors Service (“Moody’s”) is Ba1, one notch below investment grade, while Standard & Poor’s (“S&P”) rates them as investment grade. As of March 31, 2008, these Appropriation Bonds represented approximately $1.7 million in unrealized losses in the Corporation’s investment securities available-for-sale portfolio. The Corporation is closely monitoring the political and economic situation of the Island as part of its evaluation of its available-for-sale portfolio for any declines in value that management may consider being other-than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
The unrealized loss positions of available-for-sale securities as of March 31, 2008, except for the obligations of the Puerto Rico government described above, are primarily associated with U.S. Agency and government sponsored-

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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 as of March 31, 2008 are temporary and are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
During the three months ended March 31, 2008, the Corporation recognized through earnings approximately $2.3 million in losses considered other-than-temporary on residual interests classified as available-for-sale. During the quarter ended March 31, 2007, the Corporation recognized through earnings approximately $29.3 million in losses in residual interests classified as available-for-sale and $7.6 million in losses in equity securities that management considered to be other-than-temporarily impaired.
The following table states the names of issuers and the aggregate amortized cost and market value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.
                                                 
    March 31, 2008   December 31, 2007   March 31, 2007
(In thousands)   Amortized Cost   Market Value   Amortized Cost   Market Value   Amortized Cost   Market Value
 
FNMA
  $ 1,156,383     $ 1,158,103     $ 1,132,834     $ 1,128,544     $ 1,307,581     $ 1,292,296  
FHLB
    4,725,045       4,875,028       5,649,729       5,693,170       6,015,720       5,902,317  
Freddie Mac
    794,885       790,067       918,976       913,609       1,073,605       1,063,275  
 
Note 6 — Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of March 31, 2008, December 31, 2007 and March 31, 2007 were as follows:
                                 
    AS OF MARCH 31, 2008
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 288,601           $ 8     $ 288,593  
Obligations of Puerto Rico, States and political subdivisions
    74,918     $ 1,369       53       76,234  
Collateralized mortgage obligations
    283             16       267  
Others
    11,101       114       3       11,212  
 
 
  $ 374,903     $ 1,483     $ 80     $ 376,306  
 

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    AS OF DECEMBER 31, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 395,974     $ 15     $ 1,497     $ 394,492  
Obligations of Puerto Rico, States and political subdivisions
    76,464       3,108       26       79,546  
Collateralized mortgage obligations
    310             17       293  
Others
    11,718       94       4       11,808  
 
 
  $ 484,466     $ 3,217     $ 1,544     $ 486,139  
 
                                 
    AS OF MARCH 31, 2007
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 70,862     $ 1,493     $ 145     $ 72,210  
Collateralized mortgage obligations
    368             20       348  
Others
    16,253       68       11       16,310  
 
 
  $ 87,483     $ 1,561     $ 176     $ 88,868  
 
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, as of March 31, 2008, December 31, 2007 and March 31, 2007:
                         
    AS OF MARCH 31, 2008
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 38,601     $ 8     $ 38,593  
Obligations of Puerto Rico, States and political subdivisions
    10,555       53       10,502  
Others
    250       1       249  
 
 
  $ 49,406     $ 62     $ 49,344  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Collateralized mortgage obligations
  $ 283     $ 16     $ 267  
Others
    1,000       2       998  
 
 
  $ 1,283     $ 18     $ 1,265  
 

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    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 38,601     $ 8     $ 38,593  
Obligations of Puerto Rico, States and political subdivisions
    10,555       53       10,502  
Collateralized mortgage obligations
    283       16       267  
Others
    1,250       3       1,247  
 
 
  $ 50,689     $ 80     $ 50,609  
 
                         
    AS OF DECEMBER 31, 2007
    Less than 12 months
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 196,129     $ 1,497     $ 194,632  
Obligations of Puerto Rico, States and political subdivisions
    1,883       26       1,857  
Other
    1,250       1       1,249  
 
 
  $ 199,262     $ 1,524     $ 197,738  
 
                         
    12 months or more
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Collateralized mortgage obligations
  $ 310     $ 17     $ 293  
Others
    1,250       3       1,247  
 
 
  $ 1,560     $ 20     $ 1,540  
 
                         
    Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 196,129     $ 1,497     $ 194,632  
Obligations of Puerto Rico, States and political subdivisions
    1,883       26       1,857  
Collateralized mortgage obligations
    310       17       293  
Others
    2,500       4       2,496  
 
 
  $ 200,822     $ 1,544     $ 199,278  
 
                         
    AS OF MARCH 31, 2007
    12 months or more and Total
            Gross    
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 25,272     $ 145     $ 25,127  
Collateralized mortgage obligations
    368       20       348  
Others
    1,250       11       1,239  
 
 
  $ 26,890     $ 176     $ 26,714  
 
Management believes that the unrealized losses in the held-to-maturity portfolio as of March 31, 2008 are temporary and are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Management has the intent and ability to hold these investments until maturity.

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Note 7 – 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).
Effective January 1, 2007, under SFAS No. 156, the Corporation identified servicing rights related to residential mortgage loans as a class of servicing rights and elected to apply fair value accounting to these mortgage servicing rights (“MSRs”). These MSRs are segregated between loans serviced by PFH and by the Corporation’s banking subsidiaries. Fair value determination is performed on a subsidiary basis, with assumptions varying in accordance with the types of assets or markets served.
Classes of mortgage servicing rights were determined based on the different markets or types of assets served. Under the fair value accounting method of SFAS No. 156, purchased MSRs and MSRs resulting from asset transfers are capitalized and carried at fair value.
Effective January 1, 2007, upon the remeasurement of the MSRs at fair value in accordance with SFAS No. 156, the Corporation recorded a cumulative effect adjustment to increase the 2007 beginning balance of MSRs by $15.3 million, which resulted in a $9.6 million, net of tax, increase in the retained earnings account of stockholders’ equity.
At the end of each quarter, the Corporation uses a discounted cash flow model to estimate the fair value of MSRs, which is benchmarked against third party opinions of fair value. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractural servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. Refer to Note 8 to the consolidated financial statements for information on assumptions used in the valuation model of MSRs.
The changes in MSRs measured using the fair value method for the three months ended March 31, 2008 and March 31, 2007 were:
                         
    Residential MSRs    
(In thousands)   Banking subsidiaries   PFH   Total
 
Fair value at January 1, 2008
  $ 110,612     $ 81,012     $ 191,624  
Purchases
    2,215             2,215  
Servicing from securitizations or asset transfers
    4,720             4,720  
Changes due to payments on loans (1)
    (2,876 )     (7,277 )     (10,153 )
Changes in fair value due to changes in valuation model inputs or assumptions
    847       (5,497 )     (4,650 )
 
Fair value as of March 31, 2008
  $ 115,518     $ 68,238     $ 183,756  
 
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
 
       
 
                         
    Residential MSRs    
(In thousands)   Banking subsidiaries   PFH   Total
 
Fair value at January 1, 2007
  $ 91,431     $ 84,038     $ 175,469  
Purchases
    795             795  
Servicing from securitizations or asset transfers
    6,054             6,054  
Changes due to payments on loans (1)
    (2,120 )     (8,412 )     (10,532 )
Changes in fair value due to changes in valuation model inputs or assumptions
    2,261       (1,404 )     857  
 
Fair value as of March 31, 2007
  $ 98,421     $ 74,222     $ 172,643  
 
 
(1)   Represents changes due to collection / realization of expected cash flows over time.
 
       
 
Residential mortgage loans serviced for others were $20.4 billion as of March 31, 2008 (December 31, 2007 — $20.5 billion; March 31, 2007 — $14.8 billion).
Net mortgage servicing fees, a component of other service fees in the consolidated statements of operations, include the changes from period to period in fair value of the MSRs, which may result from changes in the valuation model

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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.
Servicing rights associated with Small Business Administration (“SBA”) commercial loans are the other class of servicing assets held by the Corporation. These SBA servicing rights are accounted under the amortization method. The changes in SBA servicing rights for the three months ended March 31, 2008 and March 31, 2007 were as follows:
                 
(In thousands)   March 31, 2008   March 31, 2007
 
Balance at January 1,
  $ 5,021     $ 4,860  
Rights originated
    382       3  
Amortization
    (601 )     (512 )
 
Balance at March 31,
  $ 4,802     $ 4,351  
Less: Valuation allowance
           
 
Balance at March 31, net of valuation allowance
  $ 4,802     $ 4,351  
 
Fair value at March 31,
  $ 6,945     $ 7,107  
 
SBA loans serviced for others were $537 million as of March 31, 2008 (December 31, 2007 — $527 million; March 31, 2007 — $453 million).
Note 8 – Retained Interests on Transfers of Mortgage Loans
Popular Financial Holdings
Key economic assumptions used to estimate the fair value of residual interests and MSRs derived from PFH’s securitizations transactions and the sensitivity of residual cash flows to immediate changes in those assumptions as of period end were as follows:
                                                   
    March 31, 2008     December 31, 2007
            MSRs             MSRs
    Residual   Fixed-rate   ARM     Residual   Fixed-rate   ARM
(In thousands)   Interests   loans   loans     Interests   loans   loans
       
Carrying amount of retained interests
  $ 37,491     $ 45,326     $ 5,902       $ 45,009     $ 47,243     $ 11,335  
Fair value of retained interests
  $ 37,491     $ 45,326     $ 5,902       $ 45,009     $ 47,243     $ 11,335  
Weighted average life of collateral
  8.5 years     5.4 years     3.4 years       7.6 years     4.3 years     2.6 years  
 
  16.6% (Fixed-
rate loans)
                      20.7% (Fixed-
rate loans)
                 
Weighted average prepayment speed (annual rate)
  24.0% (ARM
loans)
      16.6 %     24.0 %     30.0% (ARM loans)       20.7 %     30.0 %
Impact on fair value of 10% adverse change
  $ 5,721     ($ 711 )   $ 167       $ 5,031     ($ 192 )   $ 272  
Impact on fair value of 20% adverse change
  $ 19,805     ($ 1,841 )   $ 336       $ 6,766     ($ 886 )   $ 688  
Weighted average discount rate (annual rate)
    40.0 %     17.0 %     17.0 %       40.0 %     17.0 %     17.0 %
Impact on fair value of 10% adverse change
  ($ 2,548 )   ($ 1,606 )   ($ 119 )     ($ 2,884 )   ($ 1,466 )   ($ 225 )
Impact on fair value of 20% adverse change
  ($ 4,776 )   ($ 3,105 )   ($ 232 )     ($ 5,427 )   ($ 2,846 )   ($ 441 )
Cumulative credit losses
  5.80% to 14.33%                   3.35% to 11.03%              
Impact on fair value of 10% adverse change
  ($ 7,942 )                 ($ 8,829 )            
Impact on fair value of 20% adverse change
  ($ 14,874 )                 ($ 15,950 )            
       
PFH, as servicer, collects prepayment penalties on a substantial portion of the underlying serviced loans. As such, an adverse change in the prepayment assumptions with respect to the MSRs could be partially offset by the benefit derived from the prepayment penalties estimated to be collected.

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The amounts included in the tables above exclude any purchased MSRs since these assets were not derived from securitizations or loan sales executed by the Corporation.
Banking subsidiaries
The Corporation’s banking subsidiaries retain servicing responsibilities on the sale of wholesale mortgage loans and under pooling / selling arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by the banking subsidiaries have fixed rates. Under these servicing agreements, the banking subsidiaries do not earn significant prepayment penalties on the underlying loans serviced.
Key economic assumptions used in measuring the servicing rights retained at the date of the residential mortgage loan securitizations and whole loan sales by the banking subsidiaries during the quarter ended March 31, 2008 and year ended December 31, 2007 were:
                 
    March 31, 2008   December 31, 2007
 
Prepayment speed
    13.2 %     9.5 %
Weighted average life
  7.6 years   10.6 years
Discount rate (annual rate)
    11.4 %     10.7 %
 
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:
                 
    MSRs
(In thousands)   March 31, 2008   December 31, 2007
 
Fair value of retained interests
  $ 92,781     $ 86,453  
Weighted average life (in years)
  11.5 years   12.5 years
Weighted average prepayment speed (annual rate)
    8.7 %     8.0 %
Impact on fair value of 10% adverse change
    ($2,993 )     ($1,983 )
Impact on fair value of 20% adverse change
    ($5,617 )     ($3,902 )
Weighted average discount rate (annual rate)
    12.28 %     10.83 %
Impact on fair value of 10% adverse change
    ($4,286 )     ($2,980 )
Impact on fair value of 20% adverse change
    ($8,027 )     ($5,795 )
 
The amounts of MSRs presented in the table above exclude purchased MSRs as these are not derived from transfers of loans by the Corporation.
The expected credit losses for the residential mortgage loans securitized / sold are minimal.
The sensitivity analyses presented in the tables above for residual interests and servicing rights of PFH and the banking subsidiaries are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

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Note 9 – Derivative Instruments and Hedging
Refer to Note 30 to the consolidated financial statements included in the 2007 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities during the first quarter of 2008.
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of March 31, 2008 and December 31, 2007 were as follows:
                                         
As of March 31, 2008
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 182,000     $ 84     $ 1,398     ($ 802 )   ($ 162 )
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 200,000           $ 6,032     ($ 3,921 )      
 
                                         
As of December 31, 2007
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 142,700     $ 169     $ 509     ($ 207 )      
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 200,000           $ 3,179     ($ 2,066 )      
 
The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with duration terms over one month. Interest rate forward contracts are contracts for the delayed delivery of securities which the seller agrees to deliver on a specified future date at a specified price or yield. These forward contracts are used to hedge a forecasted transaction and thus qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair value of the derivatives are recorded in other comprehensive income. The amount included in accumulated other comprehensive income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding as of March 31, 2008 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 year.

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Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding as of March 31, 2008 and December 31, 2007 were as follows:
                         
March 31, 2008
            Fair Values  
(In thousands)   Notional amount     Derivative assets     Derivative liabilities  
 
Forward contracts
  $ 518,513     $ 559     $ 1,873  
Interest rate swaps associated with:
                       
- bond certificates offered in an on-balance sheet securitization
    169,907             5,004  
- swaps with corporate clients
    888,133             55,247  
- swaps offsetting position of corporate client swaps
    888,133       55,247        
Credit default swap
    33,463              
Foreign currency and exchange rate commitments w/ clients
    247             2  
Foreign currency and exchange rate commitments w/ counterparty
    248       3        
Interest rate caps
    150,000       11        
Interest rate caps for benefit of corporate clients
    50,000             11  
Indexed options on deposits
    199,167       23,427        
Indexed options on S&P Notes
    31,152       3,049        
Bifurcated embedded options
    210,464             25,370  
Mortgage rate lock commitments
    163,752       84       135  
 
Total
  $ 3,303,179     $ 82,380     $ 87,642  
 
                         
As of December 31, 2007
            Fair Values  
(In thousands)   Notional amount     Derivative assets     Derivative liabilities  
 
Forward contracts
  $ 693,096     $ 74     $ 3,232  
Interest rate swaps associated with:
                       
- short-term borrowings
    200,000             1,129  
- bond certificates offered in an on-balance sheet securitization
    185,315             2,918  
- swaps with corporate clients
    802,008             24,593  
- swaps offsetting position of corporate client swaps
    802,008       24,593        
Credit default swap
    33,463              
Foreign currency and exchange rate commitments w/ clients
    146             1  
Foreign currency and exchange rate commitments w/ counterparty
    146       2        
Interest rate caps
    150,000       27        
Interest rate caps for benefit of corporate clients
    50,000             18  
Indexed options on deposits
    211,267       45,954        
Indexed options on S&P Notes
    31,152       5,962        
Bifurcated embedded options
    218,327             50,227  
Mortgage rate lock commitments
    148,501       258       386  
 
Total
  $ 3,525,429     $ 76,870     $ 82,504  
 
Interest Rates Swaps
The Corporation has an interest rate swap outstanding with a notional amount of $170 million to economically hedge the payments of certificates issued as part of a securitization. This swap is marked-to-market quarterly and recognized as part of interest expense. The Corporation recognized losses of $2.1 million for the first quarter of 2008 due to changes in its fair value. During the quarter ended March 31, 2007, the Corporation recognized gains of $281 thousand associated with changes in the fair value of certain swaps.
During the quarter ended March 31, 2008, the Corporation unwinded the swaps that were utilized to economically hedge the cost of certain short-term debt. During the first quarter of 2008, the Corporation recognized a loss of $2.3

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million due to changes in their fair value, which were included as part of short-term interest expense. During the first quarter of 2007, the Corporation recognized a loss of $798 thousand associated with changes in the fair value of these interest rate swaps.
In addition, the Corporation also utilizes interest rate swaps in its capacity as an intermediary on behalf of its customers. The Corporation minimizes its market risk and credit risk by taking offsetting positions under the same terms and conditions with credit limit approvals and monitoring procedures.
Interest Rate Caps
The Corporation has an interest rate cap to economically hedge the exposure to rising interest rates of certain short-term borrowings. Additionally, the Corporation enters into interest rate caps as an intermediary on behalf of its customers and simultaneously takes offsetting positions with creditworthy counterparts under the same terms and conditions thus minimizing its market and credit risks.
Forward Contracts
The Corporation has loan sales commitments to economically hedge the changes in fair value of mortgage loans held-for-sale associated with interest rate lock commitments through both mandatory and best efforts forward sales agreements. These contracts are entered into in order to optimize the gain on sales of loans. These contracts are recognized at fair market value with changes directly reported in income as part of gain on sale of loans. For the quarter ended March 31, 2008, a gain of $1.1 million was recognized due to changes in fair value of these forward sales commitments. During the first quarter ended March 31, 2007, the Corporation recognized a loss of $672 thousand related to these forward contracts. Additionally, the Corporation has forward commitments to hedge the changes in fair value of certain MBS securities classified as trading securities. For the first quarter of 2008, the Corporation recognized a gain of $762 thousand, compared to a loss of $169 thousand in the first quarter of 2007 due to changes in the fair value of these forward commitments, which were recognized as part of trading gains and losses.
Mortgage Rate Lock Commitments
The Corporation has mortgage rate lock commitments to fund mortgage loans at interest rates previously agreed for a specified period of time. The mortgage rate lock commitments are accounted as derivatives pursuant to SFAS No. 133. These contracts are recognized at fair value with changes directly reported in income as part of gain on sale of loans. For the quarter ended March 31, 2008, a gain of $77 thousand was recognized due to changes in fair value of these commitments. During the first quarter ended March 31, 2007, the Corporation recognized gains of $741 thousand related to these commitments.
Note 10 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March 31, 2008 and 2007, allocated by reportable segment, were as follows (refer to Note 24 for the definition of the Corporation’s reportable segments):
                                         
2008
                    Purchase            
    Balance at   Goodwill   accounting           Balance at
(In thousands)   January 1, 2008   acquired   adjustments   Other   March 31, 2008
 
Banco Popular de Puerto Rico:
                                       
Commercial Banking
  $ 35,371             ($115 )         $ 35,256  
Consumer and Retail Banking
    136,407             (564 )           135,843  
Other Financial Services
    8,621                 $ 3       8,624  
Banco Popular North America:
                                       
Banco Popular North America
    404,237                         404,237  
E-LOAN
                             
Popular Financial Holdings
                             
EVERTEC
    46,125     $ 700             (21 )     46,804  
 
Total Popular, Inc.
  $ 630,761     $ 700       ($679 )     ($18 )   $ 630,764  
 

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2007
    Balance at   Goodwill           Balance at
(In thousands)   January 1, 2007   acquired   Other   March 31, 2007
 
Banco Popular de Puerto Rico:
                               
Commercial Banking
  $ 14,674                 $ 14,674  
Consumer and Retail Banking
    34,999                   34,999  
Other Financial Services
    4,391                   4,391  
Banco Popular North America:
                               
Banco Popular North America
    404,237                   404,237  
E-LOAN
    164,410                   164,410  
Popular Financial Holdings
                       
EVERTEC
    45,142     $ 775       ($12 )     45,905  
 
Total Popular, Inc.
  $ 667,853     $ 775       ($12 )   $ 668,616  
 
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 quarter ended March 31, 2008 at the BPPR reportable segment were mostly related to the acquisition of Citibank’s retail branches in Puerto Rico (acquisition completed in December 2007).
As of March 31, 2008, other than goodwill, the Corporation had $17 million of identifiable intangibles with indefinite useful lives (December 31, 2007 — $17 million; March 31, 2007 — $65 million).
The following table reflects the components of other intangible assets subject to amortization:
                                                 
    March 31, 2008   December 31, 2007   March 31, 2007
    Gross   Accumulated   Gross   Accumulated   Gross   Accumulated
(In thousands)   Amount   Amortization   Amount   Amortization   Amount   Amortization
 
Core deposits
  $ 66,040     $ 24,490     $ 66,381     $ 23,171     $ 76,708     $ 50,285  
Other customer relationships
    10,396       4,583       10,375       4,131       11,672       2,670  
Other intangibles
    8,165       5,766       8,164       5,385       9,099       3,980  
 
Total
  $ 84,601     $ 34,839     $ 84,920     $ 32,687     $ 97,479     $ 56,935  
 
Certain core deposit intangibles with a gross amount of $340 thousand became fully amortized during the quarter ended March 31, 2008 and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented above.
During the quarter ended March 31, 2008, the Corporation recognized $2.5 million in amortization expense related to other intangible assets with definite lives (March 31, 2007 — $3.0 million).
The following table presents the estimated aggregate annual amortization expense of the intangible assets with definite lives for each of the following fiscal years:
         
    (In thousands)
2008
  $ 7,242  
2009
    8,378  
2010
    7,523  
2011
    6,164  
2012
    5,154  

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

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Upon adoption of SFAS No. 159 the Corporation recognized a $262 million negative after-tax adjustment ($409 million before tax) to beginning retained earnings due to the transitional adjustment for electing the fair value option, as detailed in the following table.
                         
            Cumulative effect    
    January 1, 2008   adjustment to   January 1, 2008
    (Carrying value   January 1, 2008   fair value
    prior to   retained earnings -   (Carrying value
(In thousands)   adoption)   Gain (Loss)   after adoption)
 
Loans
  $ 1,481,297     ($ 494,180 )   $ 987,117  
 
 
                       
Notes payable (bond certificates)
  ($ 286,611 )   $ 85,625     ($ 200,986 )
 
 
                       
Pre-tax cumulative effect of adopting fair value option accounting
          ($ 408,555 )        
Net increase in deferred tax asset
            146,724          
 
After-tax cumulative effect of adopting fair value option accounting
          ($ 261,831 )        
 
As of January 1, 2008, the Corporation eliminated $37 million in allowance for loan losses associated to the loan portfolio elected for fair value option accounting and recognized it as part of the cumulative effect adjustment.
In the Corporation’s 2007 Annual Report filed on February 29, 2008, the Corporation disclosed that it expected to recognize a negative after-tax fair value adjustment upon the adoption of SFAS No. 159 in the range of $158 million and $169 million, which differs from the $262 million actually recorded as reported in this Form 10-Q. The difference resulted principally from refinement of the valuation methodology used and validation of the assumptions, which at the time of the 2007 Annual Report filing were under evaluation as disclosed in the 2007 Annual Report.
The following table presents the differences as of March 31, 2008 between the aggregate fair value, including accrued interest, and aggregate unpaid principal balance (“UPB”) of those loans / notes payable that have contractual principal amounts and for which the fair value option has been elected. Also, the table presents information of non-accruing loans accounted under the fair value option.
                         
    Aggregate   Aggregate    
    fair value   UPB as of    
    as of March   March 31,    
(In thousands)   31, 2008   2008   Difference
 
Loans
  $ 926,820     $ 1,433,137     ($ 506,317 )
 
Loans past due 90 days or more
  $ 110,407     $ 188,922     ($ 78,515 )
 
Non-accrual loans (1)
  $ 110,407     $ 188,922     ($ 78,515 )
 
 
                       
 
Notes payable (bond certificates)
  ($ 186,171 )   ($ 270,884 )   $ 84,713  
 
 
(1)   It is the Corporation’s policy to recognize interest income separately from other changes in fair value. Interest income is included as part of net interest income in the consolidated statement of operations and is based on the note’s contractual rate. Interest income is reversed, if necessary, in accordance with the Corporation’s non-accruing policy for each particular loan type.
 
During the quarter ended March 31, 2008, the Corporation recognized $1.7 million in estimated net losses attributable to changes in the fair value of loans, including changes in instrument-specific credit spreads. These estimated net losses were included in the caption “Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159” in the consolidated statement of operations.
During the quarter ended March 31, 2008, the Corporation recognized $1.3 million in estimated net losses attributable to changes in the fair value of notes payable (bond certificates), including changes in instrument-specific credit spreads. The estimated net losses were included in the caption “Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159” in the consolidated statement of operations.

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The fair value of the loans and bonds as of January 1 and March 31, 2008 was provided by an external source and the assumptions were validated internally by management with market data and pricing indicators obtained from other sources. As indicated in Note 12 to the consolidated financial statements, these assets and liabilities are categorized as Level 3 under the requirements of SFAS No. 157.
Note 12 — Fair Value Measurement
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2008, the Corporation adopted SFAS No. 157, which provides a framework for measuring fair value under accounting principles generally accepted.
Under SFAS No. 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect the Corporation’s estimates about assumptions that market participants would use in pricing the asset or liability based on the best information available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
    Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market.
 
    Level 2- Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the financial instrument.
 
    Level 3- Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Corporation’s own assumptions about assumptions that market participants would use in pricing the asset or liability.
The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed price or quotes are not available, the Corporation employs internally-developed models that primarily use market based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the market place. These adjustments include amounts that reflect counterparty credit quality, the Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently.
The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. In addition, the fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business. Therefore, the estimated fair value may materially differ from the value that could actually be realized on a sale.

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Fair Value on a Recurring Basis
The following fair value hierarchy table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2008:
                                 
    Quarter ended March 31, 2008
    Quoted Prices in            
    Active Markets   Significant        
    for Identical   Other   Significant    
    Assets or   Observable   Unobservable   Balance as of
    Liabilities   Inputs   Inputs   March 31,
(In millions)   Level 1   Level 2   Level 3   2008
 
Assets
                               
 
Investment securities available-for-sale (1)
  $ 24     $ 7,594     $ 42     $ 7,660  
Trading account securities (1)
          282       280       562  
Loans measured at fair value (SFAS No. 159)
                927       927  
Derivatives
          82             82  
Mortgage servicing rights
                184       184  
 
Total
  $ 24     $ 7,958     $ 1,433     $ 9,415  
 
 
                               
Liabilities
                               
 
Notes payable measured at fair value (SFAS No. 159)
              ($ 186 )   ($ 186 )
Derivatives
        ($ 95 )           (95 )
 
Total
        ($ 95 )   ($ 186 )   ($ 281 )
 
(1)   Includes residual interests which are classified as Level 3
 
       
 
The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2008:
                                                         
    Quarter ended March 31, 2008
                                                    Changes in
                                                    unrealized
                                                    gains
                                                    (losses)
                                                    included in
                                    Purchases,           earnings
                                    sales,           related to
                            Increase   issuances,           assets and
                    Gains (losses)   (decrease)   settlements,           liabilities
    Balance   Gains   included in   in accrued   paydowns           still held
    as of   (losses)   other   interest   and   Balance as   as of
    January 1,   included in   comprehensive   receivable   maturities   of March   March 31,
(In millions)   2008   earnings   income   / payable   (net)   31, 2008   2008
 
Assets
                                                       
 
Investment securities available-for-sale (e)
  $ 43     ($ 2 )   $ 1                 $ 42        (a)
Trading account securities
    289       4                 ($ 13 )     280     ($ 8 )(b)
Loans measured at fair value (SFAS No. 159)
    987       (2 )         ($ 1 )     (57 )     927       8  (c)
Mortgage servicing rights
    192       (15 )                 7       184       (5 ) (d)
 
 
Total
  $ 1,511     ($ 15 )   $ 1     ($ 1 )   ($ 63 )   $ 1,433     ($ 5 )
 
 
                                                       
Liabilities
                                                       
 
Notes payable measured at fair value (SFAS No. 159)
  ($ 201 )   ($ 1 )               $ 16     ($ 186 )   ($ 1 )(c)
 
Total
  ($ 201 )   ($ 1 )               $ 16     ($ 186 )   ($ 1 )
 
a)   Gains (losses) are included in “Net (loss) gain on sale and valuation adjustments of investment securities” in the statement of operations.
 
b)   Gains (losses) are included in “Trading account profit (loss)” in the statement of operations.
 
c)   Gains (losses) are included in “Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159” in the statement of operations.

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d)   Gains (losses) are included in “Other service fees” in the statement of operations.
 
e)   Other-than-temporary impairment on residual interests classified as available-for-sale amounted to $2.3 million and is classified as realized losses.
 
       
 
There were no transfers in and / or out of Level 3 for financial instruments fair valued on a recurring basis during the quarter ended March 31, 2008.
Gains and losses (realized and unrealized) included in earnings for the quarter ended March 31, 2008 for Level 3 assets and liabilities included in the previous table are reported in the consolidated statement of operations as follows:
                 
    Quarter ended March 31, 2008
            Change in unrealized gains
            or losses relating to assets /
    Total gains (losses)   liabilities still held at
(In millions)   included in earnings   reporting date
 
Interest income
  $ 5        
Other service fees
    (15 )     ($5 )
Net (loss) gain on sale and valuation adjustments of investment securities
    (2 )      
Trading account profit (loss)
    (1 )     (8 )
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
    (3 )     7  
 
Additionally, the Corporation may be required to measure certain assets at fair value on a nonrecurring basis in accordance with accounting principles generally accepted. The adjustments to fair value usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis in first quarter of 2008 that were still held in the statement of condition as of March 31, 2008, the following table presents the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at quarter-end.
                                 
    Carrying value as of March 31, 2008
    Quoted Prices in   Significant        
    Active Markets   Other   Significant    
    for Identical   Observable   Unobservable   Total as of
    Assets   Inputs   Inputs   March 31,
(In millions)   Level 1   Level 2   Level 3   2008
 
Assets
                               
 
Loans (1)
              $   51   $   51
 
(1)   Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of SFAS No. 114 (as amended by SFAS No. 118).
 
       
 
Following is a description of the Corporation’s valuation methodologies used for assets and liabilities measured at fair value. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts of the financial instruments presented in Note 12 do not represent management’s estimate of the underlying value of the Corporation.
Trading Account Securities and Investment Securities Available-for-Sale
    U.S. Treasury securities: The fair value of U.S. Treasury securities is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2.
 
    Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S agency securities. The fair value of U.S. agency securities, except for structured notes, are based on an active exchange market and are based on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2. U.S. agency structured notes are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which the fair value

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      incorporates an option adjusted spread in deriving their fair value. These securities are classified as Level 2.
 
    Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks and Libor and swap curves, market data feeds such as MSRB, discount rate and capital rates, and trustee reports. The municipal bonds are classified as Level 2.
 
    Mortgage-backed securities: Certain agency mortgage-backed securities (“MBS”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced using an internally-prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are classified as Level 3.
 
    Collateralized mortgage obligations: Agency and private collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These investment securities are classified as Level 2.
 
    Equity securities: Equity securities with quoted market prices obtained from an active exchange market are classified as Level 1.
 
    Corporate securities and mutual funds: Quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, the corporate securities and mutual funds are classified as Level 2. The important variables in determining the prices of Puerto Rico tax-exempt mutual fund shares are net asset value, dividend yield and type of assets in the fund. All funds trade based on a relevant dividend yield taking into consideration the aforementioned variables. In addition, demand and supply also affect the price. Corporate securities that trade less frequently are classified as Level 3.
 
    Residual interests: Residual interests do not trade in an active market with readily observable prices and, based on their valuation methodology, are classified as Level 3. The estimated fair value of the residual interests associated to PFH’s securitizations is determined by using a third-party cash flow valuation model to calculate the present value of projected future cash flows. All economic assumptions are internally-developed and provided to the third-party (internal-based valuation). The assumptions, which are highly uncertain and require a high degree of judgment, include primarily market discount rates, anticipated prepayment speeds, delinquency and loss rates. The assumptions used are drawn from a combination of internal and external data sources. A third-party valuation of the residual interests, in which all economic assumptions are determined by this third-party (external-based valuation), is obtained on a quarterly basis in connection with the preparation of the financial statements, and is used by management as a benchmark to evaluate the adequacy of the cash flow model and the reasonableness of the assumptions and fair value estimates developed internally for the internal-based valuation. The external-based valuations are analyzed and assumptions are evaluated and incorporated in the internal-based valuation model when deemed necessary and agreed by management.
Derivatives
Interest rate swaps, interest rate caps and index options are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes. Their fair value is obtained from counterparties or an external pricing source and validated by management. The derivatives are substantially classified as Level 2. Other derivatives that are exchange-traded, such as futures and options, or that are liquid and have quoted prices, such as forward contracts or TBA’s, are classified as Level 2.

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Mortgage servicing rights
Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced internally using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayments assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Third-party valuations of the fair value of MSRs, in which all economic assumptions are determined by the third-party, are obtained on a quarterly basis, and are used by management as a benchmark to evaluate the reasonableness of the fair value estimates made internally. These external-based valuations are analyzed and assumptions are evaluated and incorporated in the internal-based valuation model when validated and agreed upon by management. Due to the unobservable nature of the valuation inputs, the MSRs are classified as Level 3.
Loans held-in-portfolio considered impaired under SFAS No. 114 and are collateral dependent
The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of SFAS No. 114 (as amended by SFAS No. 118). Currently, the associated loans considered impaired as of March 31, 2008 are classified as Level 3.
Loans measured at fair value pursuant to SFAS No. 159
The fair value of loans measured at fair value pursuant to the SFAS No. 159 election was estimated using discounted cash flow analyses that incorporate assumptions or considerations such as prepayment rates, credit loss estimates, delinquency rates, loss severities, among others. Due to the subprime characteristics of the loan portfolio measured at fair value, the lack of trading activity in that market, and the nature of the valuation inputs, these loans are classified as Level 3. The fair value of these loans was provided by an external service provider and the assumptions were validated internally by management with market data and other pricing indicators obtained from other sources.
Notes payable measured at fair value pursuant to SFAS No. 159 (bond certificates associated with PFH’s on-balance sheet securitizations)
Bond certificates associated with PFH’s on-balance sheet securitizations are measured at fair value on a recurring basis due to the election of the fair value option of SFAS No. 159. The fair value of these bond certificates is derived from discounted cash flow analyses based on historical performance measures, credit risks, interest rate assumptions, and rates of return for similar instruments given the current market environment. The estimated fair value of these bond certificates was derived from an external service provider and the assumptions were validated internally by management with market data and pricing indicators obtained from other sources. The notes payable measured at fair value pursuant to SFAS No. 159 are classified as Level 3.

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Note 13 — Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as follows:
                         
    March 31,   December 31,   March 31,
(In thousands)   2008   2007   2007
 
Federal funds purchased
  $ 175,000     $ 303,492     $ 1,390,015  
Assets sold under agreements to repurchase
    4,315,693       5,133,773       4,882,402  
 
 
  $ 4,490,693     $ 5,437,265     $ 6,272,417  
 
Other short-term borrowings consisted of:
                         
    March 31,   December 31,   March 31,
(In thousands)   2008   2007   2007
 
Advances with the FHLB paying interest monthly at fixed rates (March 31, 2007 - ranging from 5.40% to 5.44%)
        $ 72,000     $ 355,000  
 
                       
Advances with the FHLB paying interest at maturity at fixed rates ranging from 1.93% to 2.45%
  $ 1,110,000       570,000        
 
                       
Advances under credit facilities with other institutions at:
                       
-fixed rates ranging from 3.40% to 4.94% (March 31, 2007 - 5.32% to 5.57%)
    191,000       487,000       433,000  
-a floating rate of 0.20% over the 3-month LIBOR rate
                10,000  
 
                       
Commercial paper paying interest at fixed rates (March 31, 2007 - ranging from 4.80% to 5.41%)
          7,329       99,578  
 
                       
Term notes purchased paying interest at maturity at fixed rates ranging from 2.25% to 5.00%
    57,807              
 
                       
Term funds purchased at:
                       
-fixed rates ranging from 2.95% to 3.09% (March 31, 2007 - 5.28% to 5.38%)
    165,000       280,000       1,935,000  
-a floating rate of 0.08% over the fed funds rate
                275,000  
 
                       
Others
    1,503       85,650       94,394  
 
 
  $ 1,525,310     $ 1,501,979     $ 3,201,972  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2007, for rates and maturity information corresponding to the borrowings outstanding as of such date. Key index rates as of March 31, 2008 and March 31, 2007, respectively, were as follows: 1-month LIBOR = 2.70% and 5.32%; 3-month LIBOR rate = 2.69% and 5.35%; fed funds rate = 2.50% and 5.38%; 10-year U.S. Treasury note = 3.41% and 4.65%.

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Notes payable consisted of:
                         
    March 31,   December 31,   March 31,
(In thousands)   2008   2007   2007
 
Advances with FHLB:
                       
-with maturities ranging from 2008 through 2018 paying interest at fixed rates ranging from 2.51% to 6.98% (March 31, 2007 - 3.07% to 6.55%)
  $ 932,385     $ 813,958     $ 237,289  
-maturing in 2008 paying interest monthly at a floating rate of 0.0075% over the 1-month LIBOR rate
          250,000       250,000  
-maturing in 2007 paying interest monthly at the 1-month LIBOR rate plus 0.02%
                5,000  
-maturing in 2007 paying interest quarterly at the 3-month LIBOR rate less 0.04%
                6,000  
 
                       
Advances under revolving lines of credit maturing in 2007 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate
                410,737  
 
                       
Advances under revolving lines of credit with maturities ranging from 2008 to 2009 paying interest quarterly at floating rates ranging from 0.20% to 0.30% (March 31, 2007 - 0.35%) over the 3-month LIBOR rate
    110,000       110,000       69,996  
 
                       
Term notes maturing in 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00%
    3,100       3,100       3,100  
 
                       
Term notes with maturities ranging from 2008 to 2013 paying interest semiannually at fixed rates ranging from 3.88% to 6.85% (March 31, 2007 - 3.35% to 5.65%)
    2,026,059       2,038,259       2,014,533  
 
                       
Term notes with maturities ranging from 2008 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury notes rate
    6,116       6,805       8,833  
 
                       
Term notes maturing in 2009 paying interest quarterly at a floating rate of 0.40% (March 31, 2007 - 0.35% to 0.40%) over the 3-month LIBOR rate
    199,764       199,706       349,399  
 
                       
Secured borrowings with maturities ranging from 2009 to 2032 paying interest monthly at fixed rates ranging from 6.04% to 7.04% (March 31, 2007 - 3.86% to 7.12%)
    38,000  *     59,241       2,611,445  
 
                       
Secured borrowings with maturities ranging from 2008 to 2046 paying interest monthly at rates ranging from 2.65% to 4.50% (March 31, 2007 - 0.10% to 3.50%) over the 1-month LIBOR rate
    148,171  *     227,743       1,495,005  
 
                       
Notes linked to the S&P 500 Index maturing in 2008
    34,002       36,498       36,342  
 
                       
Junior subordinated deferrable interest debentures with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.13% to 8.33% (Refer to Note 14)
    849,672       849,672       849,672  
 
                       
Other
    29,071       26,370       21,474  
 
 
  $ 4,376,340     $ 4,621,352     $ 8,368,825  
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2007, for rates and maturity information corresponding to the borrowings outstanding as of such date. Key index rates as of March 31, 2008 and March 31, 2007, respectively were as follows: 1-month LIBOR = 2.70% and 5.32%; 3-month LIBOR rate = 2.69% and 5.35%; fed funds rate = 2.50% and 5.38%; 10-year U.S. Treasury note = 3.41% and 4.65%.
 
*   These secured borrowings are measured at fair value as of March 31, 2008 pursuant to the fair value option election under SFAS No. 159.

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Note 14 — Trust Preferred Securities
As of March 31, 2008 and 2007, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under the provisions of FIN No. 46(R).
The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.
Financial data pertaining to the trusts follows:
                                 
(In thousands, including reference notes)  
                    Popular North        
    BanPonce     Popular Capital     America Capital     Popular Capital  
Issuer   Trust I     Trust I     Trust I     Trust II  
 
Issuance date
  February 1997   October 2003   September 2004   November 2004
Capital securities
  $ 144,000     $ 300,000     $ 250,000     $ 130,000  
Distribution rate
    8.327 %     6.700 %     6.564 %     6.125 %
Common securities
  $ 4,640     $ 9,279     $ 7,732     $ 4,021  
Junior subordinated debentures aggregate liquidation amount
  $ 148,640     $ 309,279     $ 257,732     $ 134,021  
Stated maturity date
  February 2027   November 2033   September 2034   December 2034
Reference notes
    (a),(c),(e),(f), (g)     (b),(d), (f)     (a),(c), (f)     (b),(d), (f)
 
(a)   Statutory business trust that is wholly-owned by Popular North America (PNA) and indirectly wholly-owned by the Corporation.
 
(b)   Statutory business trust that is wholly-owned by the Corporation.
 
(c)   The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
 
(d)   These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
 
(e)   The original issuance was for $150,000. In 2003, the Corporation reacquired $6,000 of the 8.327% capital securities.
 
(f)   The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below, the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. A capital treatment event would include a change in the regulatory capital treatment of the capital securities as a result of the recent accounting changes affecting the criteria for consolidation of variable interest entities such as the trust under FIN 46(R).
 
(g)   Same as (f) above, except that the investment company event does not apply for early redemption.
The capital securities of Popular Capital Trust I and Popular Capital Trust II are traded on the NASDAQ under the symbols “BPOPN” and “BPOPM”, respectively.

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Note 15 — Stockholders’ Equity
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 $374 million as of March 31, 2008 (December 31, 2007 — $374 million; March 31, 2007 — $346 million). There were no transfers between the statutory reserve account and the retained earnings account during the three months ended March 31, 2008 and 2007.
Note 16 — Commitments and Contingencies
Commercial letters of credit and stand-by letters of credit amounted to $15 million and $172 million, respectively, as of March 31, 2008 (December 31, 2007 — $26 million and $174 million; March 31, 2007 — $23 million and $186 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit.
As of March 31, 2008, the Corporation recorded a liability of $633 thousand (December 31, 2007 - $636 thousand; March 31, 2007 — $774 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 $3.1 billion as of March 31, 2008 (December 31, 2007 — $2.9 billion and March 31, 2007 — $3.2 billion). In addition, as of March 31, 2008, PIHC fully and unconditionally guaranteed $824 million of capital securities (December 31, 2007 and March 31, 2007 — $824 million) issued by four wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R.
The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.

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Note 17 — Other Service Fees
The caption of other service fees in the consolidated statements of operations consists of the following major categories:
                 
    Quarter ended
    March 31,
(In thousands)   2008   2007
 
Credit card fees and discounts
  $ 27,244     $ 23,524  
Debit card fees
    25,370       16,101  
Insurance fees
    12,695       12,949  
Processing fees
    12,385       12,112  
Sale and administration of investment products
    10,997       7,260  
Mortgage servicing fees, net of amortization and fair value adjustments
    6,949       6,228  
Other
    9,827       9,675  
 
Total
  $ 105,467     $ 87,849  
 
Note 18 — Pension and Postretirement Benefits
The Corporation has noncontributory defined benefit pension plans and supplementary benefit pension plans for regular employees of certain of its subsidiaries.
The components of net periodic pension cost for the quarters ended March 31, 2008 and 2007 were as follows:
                                 
                    Benefit Restoration
    Pension Plans   Plans
    March 31,   March 31,
(In thousands)   2008   2007   2008   2007
 
Service cost
  $ 2,315     $ 3,106     $ 182     $ 237  
Interest cost
    8,611       7,973       461       420  
Expected return on plan assets
    (10,169 )     (10,524 )     (420 )     (368 )
Amortization of prior service cost
    67       52       (13 )     (13 )
Amortization of net loss
                171       248  
 
Net periodic cost
    824       607       381       524  
Curtailment gain
          (246 )           (258 )
 
Total cost
  $ 824     $ 361     $ 381     $ 266  
 
For the three months ended March 31, 2008, contributions made to the pension and restoration plans amounted to approximately $0.5 million. The total contributions expected to be paid during the year 2008 for the pension and restoration plans amount to approximately $1.9 million.
The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters ended March 31, 2008 and 2007 were as follows:
                 
    March 31,
(In thousands)   2008   2007
 
Service cost
  $ 485     $ 578  
Interest cost
    1,967       1,889  
Amortization of prior service cost
    (262 )     (262 )
 
Total net periodic cost
  $ 2,190     $ 2,205  
 
For the quarter ended March 31, 2008, contributions made to the postretirement benefit plan amounted to approximately $1.5 million. The total contributions expected to be paid during the year 2008 for the postretirement benefit plan amount to approximately $6.3 million.

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Note 19 — Restructuring Plans
PFH Branch Network Restructuring Plan
The Corporation closed Equity One’s consumer service branches during the first quarter of 2008 as part of the initiatives to exit its subprime loan origination operations at PFH (the “PFH Branch Network Restructuring Plan”). PFH continues to hold a $1.3 billion maturing loan portfolio as of March 31, 2008. The PFH Branch Network Restructuring Plan followed the sale on March 1, 2008 of approximately $1.4 billion of PFH consumer and mortgage loans that were originated through Equity One’s consumer branch network to American General Financial (“American General”). The gain on sale of these loans approximated $54.5 million for the first quarter of 2008. American General hired certain of Equity One’s consumer services employees and retained certain branch locations. Equity One closed substantially all branches not assumed by American General during the quarter ended March 31, 2008. Workforce reductions at Equity One resulted in the loss of employment for those employees at the consumer services branches not hired by American General, as well as for other related support functions. Full-time equivalent employees at the PFH reportable segment were 384 as of March 31, 2008, compared with 979 as of March 31, 2007.
During the quarter ended March 31, 2008 and as part of this particular restructuring plan, the Corporation incurred certain costs, on a pre-tax basis, as detailed in the table below.
         
    Quarter ended
(In thousands)   March 31, 2008
 
Personnel costs
  $ 7,993  (a)
Net occupancy expenses
    6,750  (b)
Equipment expenses
    675  
Communications
    590  
Other operating expenses
    1,021  (c)
 
Total restructuring charges
  $ 17,029  
 
 
(a)   Severance, retention bonuses and other benefits
 
(b)   Lease terminations
 
(c)   Contract cancellations and branch closing costs
 
       
 
Also, during the fourth quarter of 2007, and as disclosed in the 2007 Annual Report, the Corporation recognized impairment charges on long-lived assets of $1.9 million, mainly associated with leasehold improvements, furniture and equipment.
As of March 31, 2008, the PFH Branch Network Restructuring Plan has resulted in combined charges for 2007 and 2008, broken down as follows:
                         
    Impairments on   Restructuring    
(In thousands)   long-lived assets   costs   Total
 
Quarter ended:
                       
December 31, 2007
  $ 1,892           $ 1,892  
March 31, 2008
        $ 17,029       17,029  
 
Total
  $ 1,892     $ 17,029     $ 18,921  
 
The following table presents the changes in restructuring costs reserves for 2008 associated with the PFH Branch Network Restructuring Plan.
         
(In thousands)        
 
Balance at January 1, 2008
     
Charges in quarter ended March 31
  $ 17,029  
Cash payments
    (4,728 )
 
Balance as of March 31, 2008
  $ 12,301  
 

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E-LOAN Restructuring Plan
As indicated in the 2007 Annual Report, in November 2007, the Corporation began a restructuring plan for its Internet financial services subsidiary E-LOAN (the “E-LOAN Restructuring Plan”). This plan included a substantial reduction of marketing and personnel costs at E-LOAN and changes in E-LOAN’s business model. The changes include concentrating marketing investment toward the Internet and the origination of first mortgage loans that qualify for sale to government sponsored entities (“GSEs”). Also, as a result of escalating credit costs in the current economic environment and lower liquidity in the secondary markets for mortgage related products, in the fourth quarter of 2007, the Corporation determined to hold back the origination by E-LOAN of home equity lines of credit, closed-end second lien mortgage loans and auto loans. The E-LOAN Restructuring Plan resulted in charges recorded in the fourth quarter of 2007 amounting to $231.9 million, which included $211.8 million in non-cash impairment losses related to its goodwill and trademark intangible assets.
The cost-control plan initiative and changes in loan origination strategies incorporated as part of the plan resulted in the elimination of over 400 positions between the fourth quarter of 2007 and first quarter of 2008.
The following table presents the changes in restructuring costs reserves for 2008 associated with the E-LOAN Restructuring Plan.
         
    Restructuring
(In thousands)   costs
 
Balance at January 1, 2008
  $ 8,808  
Charges in quarter ended March 31
     
Payments
    (4,628 )
Reversals
    (301 )
 
Balance as of March 31, 2008
  $ 3,879  
 
The E-LOAN Restructuring Plan charges are part of the results of the BPNA reportable segment.
Note 20 — Income Taxes
The reconciliation of unrecognized tax benefits, including accrued interest, was as follows:
                 
    Quarter ended
    March 31,   March 31,
(In millions)   2008   2007
 
Balance as of beginning of year
  $ 22.2     $ 20.4  
Additions for tax positions during the quarter
    1.4       1.7  
 
Balance as of end of quarter
  $ 23.6     $ 22.1  
 
As of March 31, 2008, the related accrued interest approximated $3.2 million (March 31, 2007 — $2.4 million). Management determined that as of March 31, 2008 there was no need to accrue for the payment of penalties.
After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico that, if recognized, would affect the Corporation’s effective tax rate, was approximately $22.3 million as of March 31, 2008 (March 31, 2007 — $19.2 million).
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. During this quarter, the Internal Revenue Service (“IRS”) completed the audit of our consolidated U.S. income tax return for 2005 without any material impact on our

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unrecognized tax benefit. As of March 31, 2008, the following years remain subject to examination: U.S. Federal jurisdictions — 2006 and Puerto Rico — 2003 through 2006. The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
Note 21 — Stock-Based Compensation
The Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. Nevertheless, all outstanding award grants under the Stock Option Plan continue to remain in effect as of March 31, 2008 under the original terms of the Stock Option Plan.
Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.
The following table presents information on stock options outstanding as of March 31, 2008:
                                         
(Not in thousands)
                    Weighted-Average        
            Weighted-Average   Remaining Life of   Options   Weighted-Average
Exercise Price   Options   Exercise Price of   Options Outstanding   Exercisable   Exercise Price of
Range per Share   Outstanding   Options Outstanding   In Years   (fully vested)   Options Exercisable
 
$14.39 - $18.50
    1,509,952     $ 15.81       4.48       1,508,752     $ 15.80  
$19.25 - $27.20
    1,569,628     $ 25.26       6.25       1,242,748     $ 25.09  
 
$14.39 - $27.20
    3,079,580     $ 20.62       5.38       2,751,500     $ 20.00  
 
The aggregate intrinsic value of options outstanding as of March 31, 2008 was $3.8 million (March 31, 2007 — $13.4 million). There was no intrinsic value of options exercisable as of March 31, 2008 (March 31, 2007 — $1.4 million).

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The following table summarizes the stock option activity and related information:
                 
    Options   Weighted-Average
(Not in thousands)   Outstanding   Exercise Price
 
Outstanding at January 1, 2007
    3,144,799     $ 20.65  
Granted
           
Exercised
    (10,064 )     15.83  
Forfeited
    (19,063 )     25.50  
Expired
    (23,480 )     20.08  
 
Outstanding as of December 31, 2007
    3,092,192     $ 20.64  
Granted
           
Exercised
           
Forfeited
    (12,612 )     25.42  
Expired
           
 
Outstanding as of March 31, 2008
    3,079,580     $ 20.62  
 
The stock options exercisable as of March 31, 2008 totaled 2,751,500 (March 31, 2007 — 2,404,826). There were no stock options exercised during the quarter ended March 31, 2008. There was no intrinsic value of options exercised during the quarter ended March 31, 2008 (March 31, 2007- $28 thousand).
There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2007 and 2008.
The Corporation recognized $0.3 million of stock option expense, with a tax benefit of $ 0.1 million, for the quarter ended March 31, 2008 (March 31, 2007 — $0.5 million, with a tax benefit of $0.2 million). The total unrecognized compensation cost as of March 31, 2008 related to non-vested stock option awards was $1.4 million and is expected to be recognized over a weighted-average period of 1.1 years.
Incentive Plan
The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards, Long-term Performance Unit Awards, Options, Stock Appreciation Rights, Restricted Stock, Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and / or any of its subsidiaries are eligible to participate in the Incentive Plan. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock. The Corporation’s policy with respect to the shares of restricted stock has been to purchase such shares in the open market to cover each grant.
Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service.
Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under the Incentive Plan. The performance shares award consists of the opportunity to receive shares of Popular, Inc.’s common stock provided the Corporation achieves certain performance goals during a 3-year performance cycle. The compensation cost associated with the performance shares will be recorded ratably over a three-year performance period. The performance shares will be granted at the end of the three-year period and will be vested at grant date except when the participant employment is terminated by the Corporation without cause. In such case the participant will receive a prorata amount of shares calculated as if the Corporation would have met the performance

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goal for the performance period. As of March 31, 2008, 1,069 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, 2007
    611,470     $ 22.55  
Granted
           
Vested
    (304,003 )     22.76  
Forfeited
    (3,781 )     19.95  
 
Non-vested as of December 31, 2007
    303,686     $ 22.37  
Granted
           
Vested
    (47,340 )     20.36  
Forfeited
    (2,141 )     19.95  
 
Non-vested as of March 31, 2008
    254,205     $ 22.76  
 
During the quarters ended March 31, 2008 and 2007, no shares of restricted stock were awarded to management under the Incentive Plan.
During the quarter ended March 31, 2008, the Corporation recognized $0.9 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.3 million (March 31, 2007 — $1.4 million, with a tax benefit of $0.5 million). The fair market value of the restricted stock vested was $ 1.5 million at grant date and $0.8 million at vesting date. This triggers a shortfall of $0.7 million that was recorded as an additional income tax expense since the Corporation does not have any surplus due to windfalls. The fair market value of the restricted stock earned was $20 thousand. During this period, the Corporation recognized $0.4 million of performance shares expense, with a tax benefit of $0.2 million. The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management as of March 31, 2008 was $13 million and is expected to be recognized over a weighted-average period of 2.3 years.
The following table summarizes the restricted stock under the Incentive Plan and related information to members of the Board of Directors:
                 
    Restricted   Weighted-Average
(Not in thousands)   Stock   Grant Date Fair Value
 
Non-vested at January 1, 2007
    76,614     $ 22.02  
Granted
    38,427       15.89  
Vested
    (115,041 )     19.97  
Forfeited
           
 
Non-vested as of December 31, 2007
           
Granted
    3,422       13.56  
Vested
    (3,422 )     13.56  
Forfeited
           
 
Non-vested as of March 31, 2008
           
 
During the quarter ended March 31, 2008, the Corporation granted 3,422 (March 31, 2007 — 2,612) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date. During this period, the Corporation recognized $115 thousand of restricted stock expense related to these restricted stock grants, with a tax benefit of $45 thousand (March 31, 2007 — $160 thousand, with a tax benefit of $62 thousand). The fair value of all restricted stocks outstanding as of March 31, 2008 was $1.8 million.

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Note 22 — Earnings per Common Share
The computation of earnings per common share (“EPS”) follows:
                 
    Quarter ended
    March 31,
(In thousands, except share information)   2008   2007
 
Net income
  $ 103,290     $ 118,647  
Less: Preferred stock dividends
    2,978       2,978  
 
 
               
Net income applicable to common stock
  $ 100,312     $ 115,669  
 
 
               
Average common shares outstanding
    280,254,814       279,079,065  
Average potential common shares
          147,512  
 
Average common shares outstanding — assuming dilution
    280,254,814       279,226,577  
 
 
               
Basic and diluted EPS
  $ 0.36     $ 0.41  
 
Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter ended March 31, 2008, there were 3,079,580 weighted average antidilutive stock options outstanding (March 31, 2007 — 1,761,311).
Note 23 — Supplemental Disclosure on the Consolidated Statements of Cash Flows
Additional disclosures on non-cash activities are listed in the following table:
                 
(In thousands)   March 31, 2008   March 31, 2007
 
Non-cash activities:
               
Loans transferred to other real estate
  $ 22,757     $ 37,870  
Loans transferred to other property
    10,937       8,622  
 
Total loans transferred to foreclosed assets
    33,694       46,492  
Transfers from loans held-in-portfolio to loans held-for-sale
    122,886       2,268  
Transfers from loans held-for-sale to loans held-in-portfolio
    28,573       21,112  
Loans securitized into trading securities (a)
    321,168       353,296  
Recognition of mortgage servicing rights on securitizations or asset transfers
    4,720       6,054  
Business acquisitions:
               
Fair value of assets acquired
          703  
Goodwill and other intangible assets acquired
          1,846  
Other liabilities assumed
          (726 )
 
 
(a)   Includes loans securitized into trading securities and subsequently sold before quarter end.

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Note 24 — Segment Reporting
The Corporation’s corporate structure consists of four reportable segments — Banco Popular de Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. Also, a corporate group has been defined to support the reportable segments.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments. Also, management has considered its business strategies with respect to the discontinuance of certain loan origination operations of PFH and runoff of its loan portfolio.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets as of March 31, 2008, additional disclosures are provided for the business areas included in this reportable segment, as described below:
    Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.
 
    Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.
 
    Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I. and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.
Banco Popular North America:
Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a branch network with presence in 6 states, while E-LOAN provides online consumer direct lending and supports BPNA’s deposit gathering through its online platform. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Equipment Finance, Inc. provides mainly small to mid-ticket commercial and medical equipment financing. The U.S. operations also include the mortgage business unit of Banco Popular, National Association.
Due to the significant losses in the E-LOAN operations during 2007, impacted in part by the restructuring charges and impairment losses that resulted from the restructuring plan effected in 2007, management has determined to provide as additional disclosure the results of E-LOAN apart from the other BPNA subsidiaries.
Popular Financial Holdings:
PFH, after certain restructuring events discussed in Note 19 to the consolidated financial statements, exited the branch network loan origination business during the first quarter of 2008, but continues to operate a small scale origination / refinancing unit, to carry a maturing loan portfolio and to operate a mortgage loan servicing unit. PFH’s clientele is primarily subprime borrowers. PFH continues to carry a maturing loan portfolio that approximated $1.3 billion as of March 31, 2008.
EVERTEC:
This reportable segment includes the financial transaction processing and technology functions of the Corporation, including EVERTEC, with offices in Puerto Rico, Florida, the Dominican Republic and Venezuela; EVERTEC

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USA, Inc. incorporated in the United States; and ATH Costa Rica, S.A., EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA and T.I.I. Smart Solutions Inc. located in Costa Rica. In addition, this reportable segment includes the equity investments in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Servicios Financieros, S.A. de C.V. (“Serfinsa”), which operate in the Dominican Republic and El Salvador, respectively. This segment provides processing and technology services to other units of the Corporation as well as to third parties, principally other financial institutions in Puerto Rico, the Caribbean and Central America.
The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America and Popular International Bank, excluding the equity investments in CONTADO and Serfinsa, which due to the nature of their operations are included as part of the EVERTEC segment. The holding companies obtain funding in the capital markets to finance the Corporation’s growth, including acquisitions. The Corporate group also includes the expenses of the four administrative corporate areas that are identified as critical for the organization: Finance, Risk Management, Legal and People, and Communications. These corporate administrative areas have the responsibility of establishing policy, setting up controls and coordinating the activities of their corresponding groups in each of the reportable segments.
The Corporation may periodically reclassify reportable segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment.
The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.
2008
For the quarter ended March 31, 2008
                                         
                    Popular            
    Banco Popular de   Banco Popular   Financial           Intersegment
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   Eliminations
 
Net interest income (expense)
  $ 244,672     $ 95,440     $ 21,396     ($ 235 )   $ 53  
Provision for loan losses
    102,479       58,717       6,986              
Non-interest income
    177,686       53,822       43,223       69,710       (37,663 )
Amortization of intangibles
    743       1,515             234        
Depreciation expense
    10,467       3,594       374       3,710       (18 )
Other operating expenses
    187,329       90,674       48,844       48,263       (37,505 )
Income tax expense (benefit)
    22,512       (3,265 )     4,376       5,506       (32 )
 
Net income (loss)
  $ 98,828     ($ 1,973 )   $ 4,039     $ 11,762     ($ 55 )
 
Segment Assets
  $ 26,741,251     $ 12,743,671     $ 2,064,665     $ 240,216     ($ 181,667 )
 
For the quarter ended March 31, 2008
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 361,326     ($ 4,436 )   $ 299     $ 357,189  
Provision for loan losses
    168,182       40             168,222  
Non-interest income
    306,778       2,743       (1,546 )     307,975  
Amortization of intangibles
    2,492                   2,492  
Depreciation expense
    18,127       584             18,711  
Other operating expenses
    337,605       15,703       (1,996 )     351,312  
Income tax expense (benefit)
    29,097       (8,253 )     293       21,137  
 
Net income (loss)
  $ 112,601     ($ 9,767 )   $ 456     $ 103,290  
 
Segment Assets
  $ 41,608,136     $ 6,113,472     ($ 5,900,009 )   $ 41,821,599  
 

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2007
For the quarter ended March 31, 2007
                                         
            Banco   Popular            
    Banco Popular de   Popular North   Financial           Intersegment
(In thousands)   Puerto Rico   America   Holdings   EVERTEC   Eliminations
 
Net interest income (expense)
  $ 232,224     $ 89,784     $ 41,654     ($ 233 )   $ 657  
Provision for loan losses
    46,998       10,433       38,908              
Non-interest income (loss)
    116,752       56,942       (62,354 )     59,622       (47,227 )
Amortization of intangibles
    662       2,073             248        
Depreciation expense
    10,724       4,023       613       4,064       (18 )
Other operating expenses
    173,828       105,687       51,320       43,896       (34,716 )
Income tax expense (benefit)
    30,495       8,997       (39,156 )     3,935       (4,846 )
 
Net income (loss)
  $ 86,269     $ 15,513     ($ 72,385 )   $ 7,246     ($ 6,990 )
 
Segment Assets
  $ 25,644,976     $ 12,862,809     $ 8,408,750     $ 230,080     ($ 154,444 )
 
For the quarter ended March 31, 2007
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (expense)
  $ 364,086     ($ 9,403 )   $ 299     $ 354,982  
Provision for loan losses
    96,339       7             96,346  
Non-interest income
    123,735       129,663       (1,222 )     252,176  
Amortization of intangibles
    2,983                   2,983  
Depreciation expense
    19,406       588             19,994  
Other operating expenses
    340,015       13,943       (1,607 )     352,351  
Income tax (benefit) expense
    (575 )     17,136       276       16,837  
 
Net income
  $ 29,653     $ 88,586     $ 408     $ 118,647  
 
Segment Assets
  $ 46,992,171     $ 6,436,771     ($ 6,264,278 )   $ 47,164,664  
 
During the three months ended March 31, 2007, the Corporation’s holding companies realized net gains on sale of securities (before tax) mainly marketable equity securities, of approximately $119 million. There were no realized net gains on sale of securities recorded by the Corporation’s holding companies during the three months ended March 31, 2008. These net gains are included in “non-interest income” within the “Corporate” group.

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Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:
2008
For the quarter ended March 31, 2008
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 93,358     $ 148,390     $ 2,787     $ 137     $ 244,672  
Provision for loan losses
    56,868       45,611                   102,479  
Non-interest income
    25,401       127,681       24,630       (26 )     177,686  
Amortization of intangibles
    30       572       141             743  
Depreciation expense
    3,527       6,627       313             10,467  
Other operating expenses
    47,029       123,059       17,303       (62 )     187,329  
Income tax (benefit) expense
    (530 )     19,377       3,581       84       22,512  
 
Net income
  $ 11,835     $ 80,825     $ 6,079     $ 89     $ 98,828  
 
Segment Assets
  $ 11,583,207     $ 19,299,029     $ 689,414     ($ 4,830,399 )   $ 26,741,251  
 
2007
For the quarter ended March 31, 2007
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular de
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 90,428     $ 139,410     $ 2,247     $ 139     $ 232,224  
Provision for loan losses
    12,933       34,065                   46,998  
Non-interest income
    23,107       73,894       19,851       (100 )     116,752  
Amortization of intangibles
    220       333       109             662  
Depreciation expense
    3,804       6,645       275             10,724  
Other operating expenses
    44,305       113,449       16,174       (100 )     173,828  
Income tax expense
    14,893       14,019       1,525       58       30,495  
 
Net income
  $ 37,380     $ 44,793     $ 4,015     $ 81     $ 86,269  
 
Segment Assets
  $ 11,292,949     $ 18,134,909     $ 596,197     ($ 4,379,079 )   $ 25,644,976  
 
Additional disclosures with respect to the Banco Popular North America reportable segment are as follows:
2008
For the quarter ended March 31, 2008
                                 
                            Total
    Banco Popular                   Banco Popular
(In thousands)   North America   E-LOAN   Eliminations   North America
 
Net interest income
  $ 88,467     $ 6,646     $ 327     $ 95,440  
Provision for loan losses
    32,281       26,436             58,717  
Non-interest income
    45,923       8,004       (105 )     53,822  
Amortization of intangibles
    1,065       450             1,515  
Depreciation expense
    3,113       481             3,594  
Other operating expenses
    72,994       17,677       3       90,674  
Income tax expense (benefit)
    9,120       (12,462 )     77       (3,265 )
 
Net income (loss)
  $ 15,817     ($ 17,932 )   $ 142     ($ 1,973 )
 
Segment Assets
  $ 13,002,164     $ 1,167,297     ($ 1,425,790 )   $ 12,743,671  
 

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2007
For the quarter ended March 31, 2007
                                 
                            Total Banco
    Banco Popular                   Popular North
(In thousands)   North America   E-LOAN   Eliminations   America
 
Net interest income
  $ 85,964     $ 3,646     $ 174     $ 89,784  
Provision for loan losses
    8,879       1,554             10,433  
Non-interest income
    24,125       33,082       (265 )     56,942  
Amortization of intangibles
    1,376       697             2,073  
Depreciation expense
    3,251       772             4,023  
Other operating expenses
    69,521       36,154       12       105,687  
Income tax expense (benefit)
    10,041       (1,007 )     (37 )     8,997  
 
Net income (loss)
  $ 17,021     ($ 1,442 )   ($ 66 )   $ 15,513  
 
Segment Assets
  $ 12,834,187     $ 809,680     ($ 781,058 )   $ 12,862,809  
 
A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues are recorded follows:
                 
INTERSEGMENT REVENUES*   Quarter ended
    March 31,   March 31,
(In thousands)   2008   2007
 
Banco Popular de Puerto Rico:
               
Commercial Banking
  $ 400     $ 6  
Consumer and Retail Banking
    923       (15 )
Other Financial Services
    (33 )     (129 )
Banco Popular North America:
               
Banco Popular North America
    (2,988 )     (27 )
E-LOAN
    (627 )     (12,540 )
Popular Financial Holdings
    1,722       303  
EVERTEC
    (37,007 )     (34,168 )
 
Total
  ($ 37,610 )   ($ 46,570 )
 
 
*   For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany transactions, mainly related to processing / information technology services.

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A breakdown of revenues and selected balance sheet information by geographical area follows:
Geographic Information
                 
    Quarter ended
    March 31,   March 31,
(In thousands)   2008   2007
 
Revenues**
               
Puerto Rico
  $ 422,602     $ 477,985  
United States
    210,572       107,239  
Other
    31,990       21,934  
 
Total consolidated revenues
  $ 665,164     $ 607,158  
 
 
**   Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain (loss) on sale and valuation adjustments of investment securities, trading account profit (loss), losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159, gain on sale of loans and valuation adjustments on loans held- for-sale, and other operating income.
                         
    March 31,   December 31,   March 31,
(In thousands)   2008   2007   2007
 
Selected Balance Sheet Information:
                       
Puerto Rico
                       
Total assets
  $ 25,537,660     $ 26,017,716     $ 24,607,654  
Loans
    15,724,666       15,679,181       14,906,570  
Deposits
    16,495,197       17,341,601       13,602,697  
Mainland United States
                       
Total assets
  $ 14,981,418     $ 17,093,929     $ 21,330,513  
Loans
    11,485,471       13,517,728       17,319,205  
Deposits
    9,208,348       9,737,996       9,947,205  
Other
                       
Total assets
  $ 1,302,521     $ 1,299,792     $ 1,226,497  
Loans
    721,089       714,093       654,842  
Deposits *
    1,263,169       1,254,881       1,188,151  
 
 
*   Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.
Note 25 – Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities
The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”), and all other subsidiaries of the Corporation as of March 31, 2008, December 31, 2007 and March 31, 2007, and the results of their operations and cash flows for the periods ended March 31, 2008 and 2007.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: ATH Costa Rica S.A., EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA, T.I.I. Smart Solutions Inc., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:
    PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Housing Services, Inc., and Popular Mortgage Servicing, Inc.;
 
    Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., Popular FS, LLC and E-LOAN, Inc.;
 
    Banco Popular, National Association (“BP, N.A.”), including its wholly-owned subsidiary Popular Insurance, Inc.; and

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    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 the PIHC consists of dividends from BPPR. As members subject to the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by each entity during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. As of March 31, 2008, BPPR could have declared a dividend of approximately $75 million (December 31, 2007 — $45 million; March 31, 2007 — $164 million) without the approval of the Federal Reserve Board. As of March 31, 2008, BPNA was required to obtain the approval of the Federal Reserve Board to declare a dividend. The Corporation has never received dividend payments from its U.S. subsidiaries. Refer to Popular, Inc.’s Form 10-K for the year ended December 31, 2007 for further information on dividend restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR, BPNA and BP, N.A.

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
MARCH 31, 2008
(UNAUDITED)
                                                 
                            All other        
    Popular, Inc.   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 3,982     $ 226     $ 405     $ 782,101     ($ 4,216 )   $ 782,498  
Money market investments
    63,503       34,300       12,057       901,229       (109,860 )     901,229  
Investment securities available-for-sale, at fair value
            23,354               7,636,154               7,659,508  
Investment securities held-to-maturity, at amortized cost
    456,488       1,250               347,165       (430,000 )     374,903  
Other investment securities, at lower of cost or realizable value
    14,425       1       12,392       225,339               252,157  
Trading account securities, at fair value
                            561,857               561,857  
Investment in subsidiaries
    2,701,524       389,630       1,562,260               (4,653,414 )        
Loans held-for-sale measured at lower of cost or market value
                            447,097               447,097  
Loans measured at fair value pursuant to SFAS No. 159
                            926,820               926,820  
 
Loans held-in-portfolio
    862,917               1,655,075       26,747,207       (2,523,075 )     26,742,124  
Less – Unearned income
                            184,815               184,815  
Allowance for loan losses
    60                       579,319               579,379  
 
 
    862,857               1,655,075       25,983,073       (2,523,075 )     25,977,930  
 
Premises and equipment, net
    23,255               131       616,454               639,840  
Other real estate
                            85,277               85,277  
Accrued income receivable
    879       117       8,729       215,198       (9,469 )     215,454  
Servicing assets
                            188,558               188,558  
Other assets
    37,133       64,473       61,442       1,976,673       (29,046 )     2,110,675  
Goodwill
                            630,764               630,764  
Other intangible assets
    554                       66,478               67,032  
 
 
  $ 4,164,600     $ 513,351     $ 3,312,491     $ 41,590,237     ($ 7,759,080 )   $ 41,821,599  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,258,043     ($ 4,158 )   $ 4,253,885  
Interest bearing
                            22,747,286       (34,457 )     22,712,829  
 
 
                            27,005,329       (38,615 )     26,966,714  
Federal funds purchased and assets sold under agreements to repurchase
                            4,566,095       (75,402 )     4,490,693  
Other short-term borrowings
  $ 140,000     $ 75     $ 124,807       2,299,503       (1,039,075 )     1,525,310  
Notes payable at cost
    477,302               2,744,195       2,452,672       (1,484,000 )     4,190,169  
Notes payable at fair value
                            186,171               186,171  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    75,578       59       78,474       874,600       (37,998 )     990,713  
 
 
    692,880       134       2,947,476       37,814,370       (3,105,090 )     38,349,770  
 
Minority interest in consolidated subsidiaries
                            109               109  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,765,097       3,961       2       51,619       (55,582 )     1,765,097  
Surplus
    565,547       851,193       734,964       2,809,595       (4,390,751 )     570,548  
Retained earnings
    1,118,090       (306,908 )     (369,618 )     832,906       (161,381 )     1,113,089  
Accumulated other comprehensive income (loss), net of tax
    43,719       (35,029 )     (333 )     82,130       (46,768 )     43,719  
Treasury stock, at cost
    (207,608 )                     (492 )     492       (207,608 )
 
 
    3,471,720       513,217       365,015       3,775,758       (4,653,990 )     3,471,720  
 
 
  $ 4,164,600     $ 513,351     $ 3,312,491     $ 41,590,237     ($ 7,759,080 )   $ 41,821,599  
 

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

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
MARCH 31, 2007
(UNAUDITED)
                                                 
                            All other        
                            subsidiaries        
    Popular, Inc.   PIBI   PNA   and   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   eliminations   entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 1,439     $ 97     $ 356     $ 753,015     ($ 1,357 )   $ 753,550  
Money market investments
    196,500       1,500       235       696,308       (254,335 )     640,208  
Investment securities available-for-sale, at fair value
    7,608       60,749               9,422,451       (12,447 )     9,478,361  
Investment securities held-to-maturity, at amortized cost
    430,000       2,153               85,330       (430,000 )     87,483  
Other investment securities, at lower of cost or realizable value
    14,425       1       12,392       126,133               152,951  
Trading account securities, at fair value
                            648,150               648,150  
Investment in subsidiaries
    3,186,977       1,065,820       2,001,751               (6,254,548 )        
Loans held-for-sale measured at lower of cost or market value
                            1,049,230               1,049,230  
 
Loans held-in-portfolio
    380,491               2,950,021       32,129,075       (3,317,264 )     32,142,323  
Less – Unearned income
                            310,936               310,936  
Allowance for loan losses
    40                       541,708               541,748  
 
 
    380,451               2,950,021       31,276,431       (3,317,264 )     31,289,639  
 
Premises and equipment, net
    25,226               134       565,648               591,008  
Other real estate
                            89,479               89,479  
Accrued income receivable
    376       49       11,095       284,330       (11,059 )     284,791  
Servicing assets
                            176,994               176,994  
Other assets
    62,951       59,576       45,532       1,026,649       (45,658 )     1,149,050  
Goodwill
                            668,616               668,616  
Other intangible assets
    554                       104,600               105,154  
 
 
  $ 4,306,507     $ 1,189,945     $ 5,021,516     $ 46,973,364     ($ 10,326,668 )   $ 47,164,664  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,178,745     ($ 1,299 )   $ 4,177,446  
Interest bearing
                            20,758,842       (198,235 )     20,560,607  
 
 
                            24,937,587       (199,534 )     24,738,053  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 126,115       6,202,402       (56,100 )     6,272,417  
Other short-term borrowings
                    919,525       3,659,415       (1,376,968 )     3,201,972  
Notes payable
  $ 484,637               2,835,305       7,001,626       (1,952,743 )     8,368,825  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    85,562     $ 93       90,372       726,479       (55,527 )     846,979  
 
 
    570,199       93       3,971,317       42,957,509       (4,070,872 )     43,428,246  
 
Minority interest in consolidated subsidiaries
                            110               110  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,754,694       3,961       2       51,619       (55,582 )     1,754,694  
Surplus
    525,072       851,193       734,964       2,571,295       (4,152,451 )     530,073  
Retained earnings
    1,678,827       387,292       331,808       1,566,544       (2,290,645 )     1,673,826  
Accumulated other comprehensive loss, net of tax
    (203,935 )     (52,594 )     (16,575 )     (173,338 )     242,507       (203,935 )
Treasury stock, at cost
    (205,225 )                     (375 )     375       (205,225 )
 
 
    3,736,308       1,189,852       1,050,199       4,015,745       (6,255,796 )     3,736,308  
 
 
  $ 4,306,507     $ 1,189,945     $ 5,021,516     $ 46,973,364     ($ 10,326,668 )   $ 47,164,664  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2008
(UNAUDITED)
                                                 
                            All other        
    Popular, Inc.   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
INTEREST AND DIVIDEND INCOME:
                                               
Dividend income from subsidiaries
  $ 44,900                             ($ 44,900 )        
Loans
    6,897     $ 219     $ 35,090     $ 561,525       (42,614 )   $ 561,117  
Money market investments
    82       106       180       7,751       (1,391 )     6,728  
Investment securities
    8,709       316       223       92,173       (7,016 )     94,405  
Trading account securities
                            18,693               18,693  
 
 
    60,588       641       35,493       680,142       (95,921 )   $ 680,943  
 
INTEREST EXPENSE:
                                               
Deposits
                            195,041       (101 )     194,940  
Short-term borrowings
    2,020               9,853       68,351       (15,079 )     65,145  
Long-term debt
    8,284               36,552       54,973       (36,140 )     63,669  
 
 
    10,304               46,405       318,365       (51,320 )     323,754  
 
Net interest income (loss)
    50,284       641       (10,912 )     361,777       (44,601 )     357,189  
Provision for loan losses
    40                       168,182               168,222  
 
Net interest income (loss) after provision for loan losses
    50,244       641       (10,912 )     193,595       (44,601 )     188,967  
Service charges on deposit accounts
                            51,087               51,087  
Other service fees
                            106,277       (810 )     105,467  
Net gain on sale and valuation adjustments of investment securities
                            47,940               47,940  
Trading account profit
                            4,464               4,464  
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
                            (3,020 )             (3,020 )
Gain on sale of loans and valuation adjustments on loans held-for-sale
                            68,745               68,745  
Other operating income
    (35 )     3,550       4       30,509       (736 )     33,292  
 
 
    50,209       4,191       (10,908 )     499,597       (46,147 )     496,942  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    6,084       91               130,769       (235 )     136,709  
Pension, profit sharing and other benefits
    1,509       23               37,000       (62 )     38,470  
 
 
    7,593       114               167,769       (297 )     175,179  
Net occupancy expenses
    629       7       1       34,355               34,992  
Equipment expenses
    849                       31,149               31,998  
Other taxes
    439                       12,704               13,143  
Professional fees
    4,156       3       90       33,625       (1,249 )     36,625  
Communications
    122       5       9       15,167               15,303  
Business promotion
    289                       16,927               17,216  
Printing and supplies
    23                       4,252               4,275  
Other operating expenses
    (14,057 )     (100 )     53       55,845       (449 )     41,292  
Amortization of intangibles
                            2,492               2,492  
 
 
    43       29       153       374,285       (1,995 )     372,515  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    50,166       4,162       (11,061 )     125,312       (44,152 )     124,427  
Income tax
    1,668               (3,651 )     22,828       292       21,137  
 
Income (loss) before equity in earnings of subsidiaries
    48,498       4,162       (7,410 )     102,484       (44,444 )     103,290  
Equity in undistributed earnings (losses) of subsidiaries
    54,792       (2,342 )     (572 )             (51,878 )        
 
NET INCOME (LOSS)
  $ 103,290     $ 1,820     ($ 7,982 )   $ 102,484     ($ 96,322 )   $ 103,290  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2007
(UNAUDITED)
                                                 
                            All other        
                            subsidiaries        
    Popular, Inc.   PIBI   PNA   and   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   eliminations   entries   Consolidated
 
INTEREST AND DIVIDEND INCOME:
                                               
Dividend income from subsidiaries
  $ 44,700                             ($ 44,700 )        
Loans
    5,381             $ 37,755     $ 643,746       (42,768 )   $ 644,114  
Money market investments
    147     $ 17       1       5,723       (1,279 )     4,609  
Investment securities
    7,815       375       223       114,295       (7,217 )     115,491  
Trading account securities
                            9,381               9,381  
 
 
    58,043       392       37,979       773,145       (95,964 )     773,595  
 
INTEREST EXPENSE:
                                               
Deposits
                            173,175       (73 )     173,102  
Short-term borrowings
    1,887               14,468       129,547       (21,093 )     124,809  
Long-term debt
    8,366               36,852       105,886       (30,402 )     120,702  
 
 
    10,253               51,320       408,608       (51,568 )     418,613  
 
Net interest income (loss)
    47,790       392       (13,341 )     364,537       (44,396 )     354,982  
Provision for loan losses
    7                       96,339               96,346  
 
Net interest income (loss) after provision for loan losses
    47,783       392       (13,341 )     268,198       (44,396 )     258,636  
Service charges on deposit accounts
                            48,471               48,471  
Other service fees
                            88,548       (699 )     87,849  
Net gain (loss) on sale and valuation adjustments of investment securities
    118,724       (7,600 )             (29,353 )             81,771  
Trading account loss
                            (14,164 )             (14,164 )
Gain on sale of loans
                            3,434               3,434  
Other operating income (loss)
    9,233       10,009       (527 )     26,628       (528 )     44,815  
 
 
    175,740       2,801       (13,868 )     391,762       (45,623 )     510,812  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    6,100       96               130,689       (406 )     136,479  
Pension, profit sharing and other benefits
    2,040       20               39,956       (120 )     41,896  
 
 
    8,140       116               170,645       (526 )     178,375  
Net occupancy expenses
    553       7       1       31,453               32,014  
Equipment expenses
    288               2       32,106               32,396  
Other taxes
    375                       11,472               11,847  
Professional fees
    2,482       11       64       34,127       (697 )     35,987  
Communications
    142                       16,920               17,062  
Business promotion
    282                       28,090               28,372  
Printing and supplies
    18                       4,258               4,276  
Other operating expenses
    (12,840 )     (100 )     116       45,224       (384 )     32,016  
Amortization of intangibles
                            2,983               2,983  
 
 
    (560 )     34       183       377,278       (1,607 )     375,328  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    176,300       2,767       (14,051 )     14,484       (44,016 )     135,484  
Income tax
    27,861               (4,918 )     (6,382 )     276       16,837  
 
Income (loss) before equity in earnings of subsidiaries
    148,439       2,767       (9,133 )     20,866       (44,292 )     118,647  
Equity in undistributed losses of subsidiaries
    (29,792 )     (74,991 )     (66,466 )             171,249          
 
NET INCOME (LOSS)
  $ 118,647     ($ 72,224 )   ($ 75,599 )   $ 20,866     $ 126,957     $ 118,647  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2008 (UNAUDITED)
                                                 
            PIBI           All other        
    Popular, Inc.   Holding   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Co.   Holding Co.   and eliminations   entries   Consolidated
 
Cash flows from operating activities:
                                               
Net income (loss)
  $ 103,290     $ 1,820     ($ 7,982 )   $ 102,484     ($ 96,322 )   $ 103,290  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (54,792 )     2,342       572               51,878          
Depreciation and amortization of premises and equipment
    583               1       18,127               18,711  
Provision for loan losses
    40                       168,182               168,222  
Amortization of intangibles
                            2,492               2,492  
Amortization and fair value adjustment of servicing assets
                            15,404               15,404  
Net gain on sale and valuation adjustment of investment securities
                            (47,940 )             (47,940 )
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
                            3,020               3,020  
Net gain on disposition of premises and equipment
                            (1,323 )             (1,323 )
Net gain on sale of loans and valuation adjustments on loans held-for-sale
                            (68,745 )             (68,745 )
Net amortization of premiums and accretion of discounts on investments
    (1,476 )                     7,562               6,086  
Net amortization of premiums and deferred loan origination fees and costs
                            13,190               13,190  
Losses (earnings) from investments under the equity method
    35       (3,550 )     (4 )     (162 )     (513 )     (4,194 )
Stock options expense
    110                       174               284  
Deferred income taxes
    29               (3,651 )     (31,485 )     292       (34,815 )
Net disbursements on loans held-for-sale
                            (716,848 )             (716,848 )
Acquisitions of loans held-for-sale
                            (76,474 )             (76,474 )
Proceeds from sale of loans held-for-sale
                            526,534               526,534  
Net decrease in trading securities
                            134,756       (319 )     134,437  
Net decrease (increase) in accrued income receivable
    796       (54 )     (8,251 )     (11,047 )     7,650       (10,906 )
Net decrease (increase) in other assets
    628       11       (9,579 )     (76,356 )     823       (84,473 )
Net increase (decrease) in interest payable
    1,944               13,533       (28,902 )     (7,650 )     (21,075 )
Net decrease in postretirement benefit obligation
                            (362 )             (362 )
Net increase (decrease) in other liabilities
    2,447       (59 )     29       33,616       (1,058 )     34,975  
 
Total adjustments
    (49,656 )     (1,310 )     (7,350 )     (136,587 )     51,103       (143,800 )
 
Net cash provided by (used in) operating activities
    53,634       510       (15,332 )     (34,103 )     (45,219 )     (40,510 )
 
Cash flows from investing activities:
                                               
Net (increase) decrease in money market investments
    (17,103 )     (34,000 )     (11,906 )     181,983       (13,491 )     105,483  
Purchases of investment securities:
                                               
Available-for-sale
            (181 )             (120,751 )             (120,932 )
Held-to-maturity
    (418,383 )                     (2,329,772 )             (2,748,155 )
Other
                            (88,720 )             (88,720 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            1,067,689               1,067,689  
Held-to-maturity
    589,500                       2,269,746               2,859,246  
Other
                            53,147               53,147  
Proceeds from sale of investment securities available-for-sale
            8,296               181               8,477  
Proceeds from sale of other investment securities
                            49,252               49,252  
Net (disbursements) repayments on loans
    (137,530 )     25,150       1,237,246       (180,026 )     (1,198,696 )     (253,856 )
Proceeds from sale of loans
                            1,585,375               1,585,375  
Acquisition of loan portfolios
                            (1,394 )             (1,394 )
Mortgage servicing rights purchased
                            (2,215 )             (2,215 )
Acquisition of premises and equipment
    (67 )                     (81,044 )             (81,111 )
Proceeds from sale of premises and equipment
                            13,255               13,255  
Proceeds from sale of foreclosed assets
                            29,086               29,086  
 
Net cash provided by (used in) investing activities
    16,417       (735 )     1,225,340       2,445,792       (1,212,187 )     2,474,627  
 
Cash flows from financing activities:
                                               
Net decrease in deposits
                            (1,310,533 )     (36,426 )     (1,346,959 )
Net decrease in federal funds purchased and assets sold under agreements to repurchase
                    (168,892 )     (825,177 )     47,497       (946,572 )
Net (decrease) increase in other short-term borrowings
    (25,000 )     75       (1,030,967 )     578,527       500,696       23,331  
Payments of notes payable
                    (17,500 )     (1,376,099 )     700,319       (693,280 )
Proceeds from issuance of notes payable
    99               7,356       530,439       (2,000 )     535,894  
Dividends paid to parent company
                            (44,900 )     44,900          

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            PIBI           All other        
    Popular, Inc.   Holding   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Co.   Holding Co.   and eliminations   entries   Consolidated
 
Dividends paid
    (47,788 )                                     (47,788 )
Proceeds from issuance of common stock
    5,269                                       5,269  
Treasury stock acquired
    (40 )                     (299 )             (339 )
 
Net cash (used in) provided by financing activities
    (67,460 )     75       (1,210,003 )     (2,448,042 )     1,254,986       (2,470,444 )
 
Net increase (decrease) in cash and due from banks
    2,591       (150 )     5       (36,353 )     (2,420 )     (36,327 )
Cash and due from banks at beginning of period
    1,391       376       400       818,454       (1,796 )     818,825  
 
Cash and due from banks at end of period
  $ 3,982     $ 226     $ 405     $ 782,101     $ (4,216 )   $ 782,498  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2007
(UNAUDITED)
                                                 
    Popular,                   All other        
    Inc. Holding   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
Cash flows from operating activities:
                                               
Net income (loss)
  $ 118,647     ($ 72,224 )   ($ 75,599 )   $ 20,866     $ 126,957     $ 118,647  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    29,792       74,991       66,466               (171,249 )        
Depreciation and amortization of premises and equipment
    588               1       19,405               19,994  
Provision for loan losses
    7                       96,339               96,346  
Amortization of intangibles
                            2,983               2,983  
Amortization and fair value adjustments of servicing assets
                            10,229               10,229  
Net (gain) loss on sale and valuation adjustment of investment securities
    (118,724 )     7,600               29,353               (81,771 )
Net gain on disposition of premises and equipment
                            (3,677 )             (3,677 )
Net gain on sale of loans and valuation adjustments on loans held-for-sale
                            (3,434 )             (3,434 )
Net amortization of premiums and accretion of discounts on investments
            3               6,328               6,331  
Net amortization of premiums and deferred loan origination fees and costs
                            23,930               23,930  
(Earnings) losses from investments under the equity method
    (3,986 )     (10,009 )     527       (347 )     (414 )     (14,229 )
Stock options expense
    217                       273               490  
Deferred income taxes
    1,272               (4,918 )     (20,600 )     4,852       (19,394 )
Net disbursements on loans held-for-sale
                            (1,685,149 )             (1,685,149 )
Acquisitions of loans held-for-sale
                            (282,110 )             (282,110 )
Proceeds from sale of loans held-for-sale
                            1,280,146               1,280,146  
Net decrease in trading securities
                            346,150               346,150  
Net decrease (increase) in accrued income receivable
    682       (37 )     485       (36,689 )     (992 )     (36,551 )
Net decrease in other assets
    2,503       6       822       32,663       (39 )     35,955  
Net (decrease) increase in interest payable
    (88 )             6,052       (7,271 )     992       (315 )
Net increase in postretirement benefit obligation
                            728               728  
Net increase (decrease) in other liabilities
    26,561       33       4,844       (25,423 )     (4,807 )     1,208  
 
Total adjustments
    (61,176 )     72,587       74,279       (216,173 )     (171,657 )     (302,140 )
 
Net cash provided by (used in) operating activities
    57,471       363       (1,320 )     (195,307 )     (44,700 )     (183,493 )
 
Cash flows from investing activities:
                                               
 
Net (increase) decrease in money market investments
    (187,800 )     (425 )     2,317       (277,364 )     191,208       (272,064 )
Purchases of investment securities:
                                               
Available-for-sale
                            (283,456 )     255,270       (28,186 )
Held-to-maturity
    (426,756 )                     (5,243,710 )             (5,670,466 )
Other
                    (928 )     (5,816 )             (6,744 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            645,202       (245,998 )     399,204  
Held-to-maturity
    420,000                       5,254,358               5,674,358  
Other
                            2,454               2,454  
Proceeds from sale of other investment securities
    245,484       2       865       1               246,352  
Net repayments on loans
    87,151               8,538       52,055       (97,251 )     50,493  
Proceeds from sale of loans
                            962               962  
Acquisition of loan portfolios
                            (784 )             (784 )
Capital contribution to subsidiary
                            500       (500 )        
Assets acquired, net of cash
                            (1,823 )             (1,823 )
Mortgage servicing rights purchased
                            (795 )             (795 )
Acquisition of premises and equipment
    (186 )                     (25,931 )             (26,117 )
Proceeds from sale of premises and equipment
                            14,307               14,307  
Proceeds from sale of foreclosed assets
                            41,835               41,835  
 
Net cash provided by (used in) investing activities
    137,893       (423 )     10,792       171,995       102,729       422,986  
 
Cash flows from financing activities:
                                               
 
Net increase in deposits
                            493,646       (195,774 )     297,872  
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase
                    (33,714 )     540,286       3,400       509,972  
Net (decrease) increase in other short-term borrowings
    (150,787 )             24,566       (743,886 )     37,954       (832,153 )
Payments of notes payable
                    (3,720 )     (462,577 )     50,025       (416,272 )
Proceeds from issuance of notes payable
    99               3,430       44,190               47,719  
Dividends paid to parent company
                            (44,700 )     44,700          
Dividends paid
    (47,591 )                                     (47,591 )
Proceeds from issuance of common stock
    4,362                                       4,362  

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    Popular,                   All other        
    Inc. Holding   PIBI   PNA   subsidiaries   Elimination   Popular, Inc.
(In thousands)   Co.   Holding Co.   Holding Co.   and eliminations   entries   Consolidated
 
Treasury stock acquired
    (10 )                                     (10 )
Capital contribution from parent
                            (500 )     500          
 
Net cash used in financing activities
    (193,927 )             (9,438 )     (173,541 )     (59,195 )     (436,101 )
 
Net increase (decrease) in cash and due from banks
    1,437       (60 )     34       (196,853 )     (1,166 )     (196,608 )
Cash and due from banks at beginning of period
    2       157       322       949,868       (191 )     950,158  
 
Cash and due from banks at end of period
  $ 1,439     $ 97     $ 356     $ 753,015       ($1,357 )   $ 753,550  
 

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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. (the “Corporation” or “Popular”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking, broker-dealer and insurance services through specialized subsidiaries. In the United States, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN, and Popular Financial Holdings (“PFH”). BPNA is a community bank providing a broad range of financial services and products to the communities it serves. BPNA operates branches in New York, California, Illinois, New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending and provides an online platform to raise deposits for BPNA. As described in Note 19 to the consolidated financial statements, E-LOAN restructured its business operations during the fourth quarter of 2007 and beginning of 2008. PFH, after certain restructuring events discussed also in Note 19 to the consolidated financial statements, exited the branch network loan origination business during the first quarter of 2008, but continues to operate a mortgage loan servicing unit, a small scale origination / refinancing unit and carry a maturing loan portfolio. The Corporation, through its transaction processing company, EVERTEC, continues to use its expertise in technology as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. Note 24 to the consolidated financial statements presents further information about the Corporation’s business segments.
The Corporation reported net income for the quarter ended March 31, 2008 of $103.3 million, compared with $118.6 million in the same quarter of 2007. Table A provides selected financial data and performance indicators for the quarters ended March 31, 2008 and 2007.
The first quarter of 2008 was another difficult period as credit continued to deteriorate and the financial markets continued to face the challenges of a recessionary economy. The Corporation continued to work on the initiatives undertaken in the Corporation’s U.S. mainland operations, including the reduction in its U.S. mortgage exposure. The specific significant events impacting 2008 first quarter performance were:
    The sale of certain assets of Equity One, a subsidiary of PFH, to American General Financial (“American General”), a member of American International Group. As part of the transaction, American General acquired $1.4 billion of mortgage and consumer loans and retained some of Equity One’s branch locations. The gain on sale of these loans approximated $54.5 million (approximately $35.4 million after tax), which included the premium paid by American General as well as the recovery of the write-down taken at the time the loans were reclassified to loans held-for-sale and the impact of the reversal of any outstanding deferred loan origination costs or fees. This sale transaction also led to branch closures as part of the PFH Branch Network Restructuring Plan during the first quarter of 2008. This plan resulted in charges for the Corporation of approximately $17.0 million in the first quarter of 2008 (approximately $11.1 million after tax). Refer to the Restructuring Plans section of this MD&A for further information.
 
    The sale of six retail bank branches of BPNA in Houston, Texas to Prosperity Bank. Prosperity Bank paid a premium of 10.10% for approximately $125 million in deposits, as well as purchasing certain loans and other assets attributable to the branches. The Corporation realized a gain of

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      approximately $12.8 million (approximately $8.3 million after tax) in the first quarter of 2008 related with this transaction. BPNA will continue to operate its mortgage business based in Houston as well as its franchise and small business lending activities in Texas. BPNA will also continue to maintain a retail branch in Arlington, Texas.
 
    Gain of $49.3 million (approximately $40.6 million after tax) resulting from the mandatory partial redemption of Visa stock as a result of Visa’s initial public offering (“IPO”) in the first quarter of 2008. The Visa stock had a book basis of zero in the Corporation’s financial statements prior to the redemption by Visa. On a comparative basis to the first quarter of 2007, the financial impact of the sale of Visa stock is diluted as there were also non-recurring gains on the sale of securities in 2007, primarily $118.7 million from the sale of the Corporation’s interest in Telecomunicaciones de Puerto Rico, Inc. (“TELPRI”).
 
      After the mandatory partial redemption of Visa stock, the Corporation continues to hold 883,435 Class C (Series I) and 21,454 Class B unredeemed shares of Visa stock with a book value of zero as of March 31, 2008. No gains will be recognized on the unredeemed stock until such time they are redeemed for cash or sold.
 
    During the first quarter of 2008, the Corporation adopted the fair value option under the provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities — Including an Amendment of FASB Statement No. 155”, to approximately $1.2 billion of whole loans held by PFH. Additionally, the Corporation elected the fair value option for approximately $287 million of loans and $287 million of bond certificates associated with PFH’s on-balance sheet securitizations. The Corporation recognized a $262 million negative after-tax adjustment ($409 million before tax) to beginning retained earnings due to the transitional adjustment for electing the fair value option on the previously described financial instruments. During the first quarter of 2008, the Corporation recorded through earnings $3.0 million in unfavorable valuation adjustments on these financial instruments measured at fair value. Further information on the financial instruments accounted at fair value pursuant to the SFAS No. 159 fair value option is included in the SFAS No. 159 Fair Value Option Election section in this MD&A.
 
    Higher provision for loan losses for the first quarter of 2008, which increased by $71.9 million as compared with the same period in 2007, driven principally by higher net charge-offs, and deteriorating credit quality trends, primarily in the U.S. mainland consumer loan portfolio, and in the Corporation’s commercial and construction loan portfolios. Details on credit quality indicators are included in the Credit Risk Management and Loan Quality Section in this MD&A.

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TABLE A
Financial Highlights
                                                 
Financial Condition Highlights   At March 31,   Average for the three months
(In thousands)   2008   2007   Variance   2008   2007   Variance
 
Money market investments
  $ 901,229     $ 640,208     $ 261,021     $ 778,600     $ 375,516     $ 403,084  
Investment and trading securities
    8,848,425       10,366,945       (1,518,520 )     9,454,888       10,944,249       (1,489,361 )
Loans
    27,931,226       32,880,617       (4,949,391 )     28,834,091       32,657,846       (3,823,755 )
Total earning assets
    37,680,880       43,887,770       (6,206,890 )     39,067,579       43,977,611       (4,910,032 )
Total assets
    41,821,599       47,164,664       (5,343,065 )     42,704,707       47,310,284       (4,605,577 )
Deposits
    26,966,714       24,738,053       2,228,661       27,557,154       24,332,692       3,224,462  
Borrowings
    10,392,343       17,843,214       (7,450,871 )     10,947,840       18,321,696       (7,373,856 )
Stockholders’ equity
    3,471,720       3,736,308       (264,588 )     3,331,531       3,821,808       (490,277 )
 
                         
Operating Highlights   First Quarter
(In thousands, except per share information)   2008   2007   Variance
 
Net interest income
  $ 357,189     $ 354,982     $ 2,207  
Provision for loan losses
    168,222       96,346       71,876  
Non-interest income
    307,975       252,176       55,799  
Operating expenses
    372,515       375,328       (2,813 )
Income tax
    21,137       16,837       4,300  
Net income
  $ 103,290     $ 118,647     ($ 15,357 )
Net income applicable to common stock
  $ 100,312     $ 115,669     ($ 15,357 )
Basic and diluted EPS
  $ 0.36     $ 0.41     ($ 0.05 )
 
                 
    First Quarter
Selected Statistical Information   2008   2007
 
Common Stock Data — Market price
               
High
  $ 14.07     $ 18.94  
Low
    8.90       15.82  
End
    11.66       16.56  
Book value per share at period end
    11.71       12.72  
Dividends declared per share
    0.16       0.16  
Dividend payout ratio
    44.67 %     38.57 %
Price/earnings ratio
    (55.52 )x     13.46 x
 
 
 
               
Profitability Ratios — Return on assets
    0.97 %     1.02 %
Return on common equity
    12.83       12.91  
Net interest spread (taxable equivalent)
    3.45       2.90  
Net interest margin (taxable equivalent)
    3.91       3.43  
Effective tax rate
    16.99       12.43  
Overhead ratio*
    18.07       34.69  
Efficiency ratio **
    61.65       71.84  
 
 
 
               
Capitalization Ratios — Equity to assets
    7.80 %     8.08 %
Tangible equity to assets
    6.26       6.55  
Equity to loans
    11.55       11.70  
Internal capital generation
    6.66       7.43  
Tier I capital to risk — adjusted assets
    9.55       10.80  
Total capital to risk — adjusted assets
    10.82       12.05  
Leverage ratio
    7.43       8.17  
 
 
*   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”).
 
       
 
Total earning assets as of March 31, 2008 amounted to $37.7 billion, compared with $40.9 billion as of December 31, 2007 and $43.9 billion as of March 31, 2007. 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. The decline in total earning assets from December 31, 2007 to March 31, 2008 was principally due to the sale of loans to American General, a reduction in the investment securities portfolio due to maturities which funds were not

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reinvested in securities, and unfavorable fair value adjustments in the loan portfolio subject to SFAS No. 159. When compared to March 31, 2007, the reduction in earning assets was influenced by similar factors, as well as the impact of the PFH recharacterization transaction effected in December 2007 and downsizing of PFH’s and E-LOAN’s loan origination operations.
The Corporation’s funding sources as of March 31, 2008 reflect a reduction in deposits and federal funds purchased when compared to December 31, 2007. Funds raised from the sale of PFH’s loan portfolio to American General were used to repay outstanding debt, mainly short-term funds. Refer to the Financial Condition and Liquidity sections of this MD&A for further information on the composition of the Corporation’s financing sources.
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 to which the Corporation is subject are: (1) market risk, which is the risk that changes in market rates and prices will adversely affect the Corporation’s financial condition or results of operations, (2) liquidity risk, which is the risk that the Corporation will have insufficient cash or access to cash to meet operating needs and financial obligations, (3) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their contractual obligations, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. 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, 2007, 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.
RESTRUCTURING PLANS
PFH Branch Network Restructuring Plan
Given the disruption in the capital markets since the summer of 2007 and its impact on funding, management of the Corporation concluded during the fourth quarter of 2007 that it would be difficult to generate an adequate return on the capital invested at Equity One’s consumer service branches.
The Corporation closed Equity One’s consumer service branches during the first quarter of 2008 as part of the initiatives to exit its subprime loan origination operations at PFH (the “PFH Branch Network Restructuring Plan”). PFH continues to hold a $1.3 billion maturing portfolio as of March 31, 2008. The PFH Branch Network Restructuring Plan followed the sale on March 1, 2008 of approximately $1.4 billion of PFH consumer and mortgage loans that were originated through Equity One’s consumer branch network to American General. This company hired certain of Equity One’s consumer services employees and retained certain branch locations. Equity

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One closed substantially all branches not assumed by American General during the quarter ended March 31, 2008. Workforce reductions at Equity One resulted in the loss of employment for those employees at the consumer services branches not hired by American General, as well as for other related support functions. Full-time equivalent employees at the PFH reportable segment were 384 as of March 31, 2008, compared with 979 as of March 31, 2007.
During the quarter ended March 31, 2008 and as part of this particular restructuring plan, the Corporation incurred certain costs, on a pre-tax basis, as detailed in the table below.
         
    Quarter ended
(In thousands)   March 31, 2008
 
Personnel costs
  $ 7,993  (a)
Net occupancy expenses
    6,750  (b)
Equipment expenses
    675  
Communications
    590  
Other operating expenses
    1,021  (c)
 
Total restructuring costs
  $ 17,029  
 
(a)   Severance, retention bonuses and other benefits
 
(b)   Lease terminations
 
(c)   Contract cancellations and branch closing costs
 
       
 
Also, during the fourth quarter of 2007, and as disclosed in the 2007 Annual Report, the Corporation recognized impairment charges on long-lived assets of $1.9 million, mainly associated with leasehold improvements, furniture and equipment.
As of March 31, 2008, the PFH Branch Network Restructuring Plan has resulted in combined charges for 2007 and 2008, broken down as follows:
                         
    Impairments on   Restructuring    
(In thousands)   long-lived assets   costs   Total
 
Quarter ended:
                       
December 31, 2007
  $ 1,892           $ 1,892  
March 31, 2008
        $ 17,029       17,029  
 
Total
  $ 1,892     $ 17,029     $ 18,921  
 
The following table presents the changes in restructuring costs reserves for 2008 associated with the PFH Branch Network Restructuring Plan.
         
(In thousands)        
 
Balance at January 1, 2008
     
Charges in quarter ended March 31
  $ 17,029  
Cash payments
    (4,728 )
 
Balance as of March 31, 2008
  $ 12,301  
 
The amounts accrued as of March 31, 2008 related to the PFH Branch Network Restructuring Plan are expected to be substantially paid during 2008.

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As disclosed in Note 24 to the consolidated financial statements, PFH’s reportable segment reported net income of $4.0 million for the quarter ended March 31, 2008, compared with a net loss of $72.4 million for the same quarter in the previous year. The following table summarizes the main categories in the statement of operations for PFH’s reportable segment:
                                 
    March 31,   March 31,        
(In thousands)   2008   2007   Variance   Notes
 
Net interest income
  $ 21,396     $ 41,654     ($ 20,258 )     (a )
Provision for loan losses
    6,986       38,908       (31,922 )     (b )
Fair value adjustments on residual interests
    (11,162 )     (52,831 )     41,669       (c )
Mortgage servicing fees, net of fair value adjustments
    1,846       7       1,839       (d )
Gain (loss) on sale of loans
    54,478       (12,848 )     67,326       (e )
Other operating income
    1,081       3,318       (2,237 )        
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
    (3,020 )           (3,020 )        
Personnel costs
    11,217       13,650       (2,433 )     (f )
Restructuring plan costs and related charges
    17,029       15,135       1,894          
Other operating expenses
    20,972       23,148       (2,176 )        
Income tax
    4,376       (39,156 )     43,532          
 
Net income (loss)
  $ 4,039     ($ 72,385 )   $ 76,424          
 
(a)   Decline due to reduction in loan portfolio as a result of exiting origination channels.
 
(b)   Reduction in the provision for loan losses was also associated to decline in portfolio due to exiting origination channels, sale of loan portfolio to American General and reclassification of loans to fair value measurement (SFAS No. 159). Allowance for loan losses to loans held-in-portfolio was 2.84% as of March 31, 2008, compared with 1.69% as of March 31, 2007. PFH loans held-in-portfolio amounted to $347 million as of March 31, 2008, compared with $7.6 billion as of the same date in 2007.
 
(c)   Residual interests outstanding as of March 31, 2008 amounted to $37 million. PFH will no longer originate residual interests as it has no plans to execute asset-backed securitization transactions.
 
(d)   Refer to Note 7 to the consolidated financial statements for information on PFH’s MSRs.
 
(e)   2008 results were impacted by the gain on sale of loans to American General. PFH’s loans held-for-sale as of March 31, 2008 approximated only $2 million; 2007 results included lower of cost or market valuation adjustments.
 
(f)   Headcount was reduced to 384 FTEs as of March 31, 2008 after the closing of the Equity One branches, compared to 979 FTEs as of March 31, 2007.
 
       
 
E-LOAN Restructuring Plan
As indicated in the 2007 Annual Report, in November 2007, the Corporation began a restructuring plan for its Internet financial services subsidiary E-LOAN (the “E-LOAN Restructuring Plan”). This plan included a substantial reduction of marketing and personnel costs at E-LOAN and changes in E-LOAN’s business model. The changes include concentrating marketing investment toward the Internet and the origination of first mortgage loans that qualify for sale to government sponsored entities (“GSEs”). Also, as a result of escalating credit costs in the current economic environment and lower liquidity in the secondary markets for mortgage related products, in the fourth quarter of 2007, the Corporation determined to hold back the origination by E-LOAN of home equity lines of credit, closed-end second lien mortgage loans and auto loans. The E-LOAN Restructuring Plan resulted in charges recorded in the fourth quarter of 2007 amounting to $231.9 million, which included $211.8 million in non-cash impairment losses related to its goodwill and trademark intangible assets.
The cost-control plan initiative and changes in loan origination strategies incorporated as part of the plan resulted in the elimination of over 400 positions between the fourth quarter of 2007 and first quarter of 2008. Full-time equivalent employees at E-LOAN were 342 as of March 31, 2008, compared with 771 as of March 31, 2007.

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The following table presents the changes in restructuring costs reserves for 2008 associated with the E-LOAN Restructuring Plan.
         
    Restructuring
(In thousands)   costs
 
Balance at January 1, 2008
  $ 8,808  
Charges in quarter ended March 31
     
Payments
    (4,628 )
Reversals
    (301 )
 
Balance as of March 31, 2008
  $ 3,879  
 
The Corporation does not expect to incur additional significant restructuring costs related to the E-LOAN Restructuring Plan during the remainder of year 2008. The associated liability outstanding as of March 31, 2008 is mostly related to lease terminations.
The E-LOAN Restructuring Plan charges are part of the results of the BPNA reportable segment. Refer to Note 24 to the consolidated financial statements for disclosures on the financial results of E-LOAN for the quarter ended March 31, 2008 and the comparable quarter in 2007.
SFAS No. 159 FAIR VALUE OPTION ELECTION
SFAS No. 159 provides entities the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. SFAS No. 159 permits the fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.
As indicated in Note 2 to the consolidated financial statements, the Corporation elected to measure at fair value certain loans and borrowings outstanding at January 1, 2008 pursuant to the fair value option provided by SFAS No. 159. These financial instruments, all of which pertained to the operations of Popular Financial Holdings that are running off, were as follows:
    Approximately $1.2 billion of whole loans held-in-portfolio by PFH outstanding as of December 31, 2007. These whole loans consist principally of first lien residential mortgage loans and closed-end second lien loans that were originated through the exited origination channels of PFH (e.g. asset acquisition, broker and retail channels), and home equity lines of credit that had been originated by E-LOAN, but sold to PFH as part of the Corporation’s 2007 U.S. reorganization whereby E-LOAN became a subsidiary of BPNA. Also, to a lesser extent, the loan portfolio included mixed-use / multi-family loans (small commercial category) and manufactured housing loans.
 
      Management believes that accounting for these loans at fair value provides a more relevant and transparent measurement of the realizable value of the assets and differentiates the PFH portfolio from the loan portfolios that the Corporation will continue to originate through channels other than PFH. Due to their subprime characteristics and current market disruptions, these loans are being held-in portfolio as potential buyers have withdrawn from the market, given heightened concerns over credit quality of borrowers and continued deterioration in the housing markets.
 
    Approximately $287 million of “owned-in-trust” loans and $287 million of bond certificates associated with PFH securitization activities that were outstanding as of December 31, 2007. The “owned-in-trust” loans are pledged as collateral for the bond certificates as a financing vehicle through on-balance sheet securitization transactions. These loan securitizations conducted by the Corporation did not meet the sale criteria under SFAS No. 140; accordingly, the transactions are treated as on-balance sheet securitizations for accounting purposes. Due to terms of the transactions, particularly the existence of an interest rate swap agreement and to a lesser extent clean up calls, the Corporation was unable to recharacterize these loan securitizations as sales for accounting purposes in 2007. The “owned-in-trust” loans include first lien residential mortgage loans, closed-end second lien loans, mixed-use / multi-family loans (small commercial category) and manufactured housing loans. The majority of the portfolio is comprised of first lien residential mortgage loans.

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      These “owned-in-trust” loans do not pose the same magnitude of risk to the Corporation as those loans owned outright because certain of the potential losses related to “owned-in-trust” loans are born by the bondholders and not the Corporation. Upon the adoption of SFAS No. 159, the loans and related bonds are both measured at fair value, thus their net position better portrays the credit risk born by the Corporation.
Excluding the PFH loans elected for the fair value option as described above, PFH’s reportable segment held approximately $1.8 billion of additional loans at the time of fair value option election on January 1, 2008. Of these remaining loans, $1.4 billion were classified as loans held-for-sale and were not subject to the fair value option as the loans were intended to be sold to an institutional buyer during the first quarter of 2008. As indicated in the Overview section, these loans were sold in March 2008. The remaining $0.4 billion in other loans held-in-portfolio at PFH as of that same date consisted principally of a small portfolio of auto loans that was acquired from E-LOAN, warehousing revolving lines of credit with monthly advances and pay-downs, and construction credit agreements in which permanent financing will be with a lender other than PFH. Although these businesses are running off, PFH must contractually continue to fund the revolv