Popular, Inc. (Banco Popular de Puerto Rico)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended September 30, 2006

Commission File Number: 000-13818

POPULAR, INC.

(Exact name of registrant as specified in its charter)


Puerto Rico		66-0667416

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

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

(Address of principal executive offices)		(Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value 278,827,612 shares outstanding as of October 31, 2006.

POPULAR, INC.
INDEX


	Page
Part I — Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Condition as of September 30, 2006, December 31, 2005 and September 30, 2005		4

Unaudited Consolidated Statements of Income for the quarters and nine months ended September 30, 2006 and 2005		5

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2006 and 2005		6

Unaudited Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2006 and 2005		7

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005		8

Notes to Unaudited Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		63

Item 3. Quantitative and Qualitative Disclosures about Market Risk		93

Item 4. Controls and Procedures		97

Part II – Other Information

Item 1. Legal Proceedings		97

Item 1A. Risk Factors		97

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

Item 6. Exhibits		100

Signatures		101
EX-12.1 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

2

Forward-Looking Information

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

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

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

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

3

ITEM 1. FINANCIAL STATEMENTS

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(UNAUDITED)


	September 30,			December 31,			September 30,
(In thousands, except share information)	2006			2005			2005

ASSETS
Cash and due from banks	$	736,669		$	906,397		$	889,145

Money market investments:
Federal funds sold		323,980			186,000			69,005
Securities purchased under agreements to resell		211,439			554,770			562,636
Time deposits with other banks		9,830			8,653			6,580

		545,249			749,423			638,221

Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge		4,463,023			6,110,179			5,607,849
Other investment securities available-for-sale		5,695,302			5,606,407			5,885,359
Investment securities held-to-maturity, at amortized cost		357,430			153,104			359,228
Other investment securities, at lower of cost or realizable value		297,472			319,103			331,141
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge		211,942			343,659			361,411
Other trading securities		239,720			175,679			180,578
Loans held-for-sale, at lower of cost or market value		447,314			699,181			867,059

Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge		—			208,774			259,779
Other loans held-in-portfolio		31,614,759			31,099,865			29,717,001
Less – Unearned income		305,114			297,613			293,756
Allowance for loan losses		487,339			461,707			459,425

		30,822,306			30,549,319			29,223,599

Premises and equipment, net		588,282			596,571			592,250
Other real estate		83,636			79,008			77,993
Accrued income receivable		288,342			245,646			261,097
Other assets		1,374,900			1,325,800			1,276,576
Goodwill		678,666			653,984			525,036
Other intangible assets		104,497			110,208			43,566

	$	46,934,750		$	48,623,668		$	47,120,108

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	3,822,584		$	3,958,392		$	3,733,226
Interest bearing		19,314,861			18,679,613			18,845,483

		23,137,445			22,638,005			22,578,709
Federal funds purchased and assets sold under agreements to repurchase		7,045,466			8,702,461			8,017,783
Other short-term borrowings		2,709,511			2,700,261			2,908,523
Notes payable		9,681,897			9,893,577			9,564,425
Subordinated notes		—			—			125,000
Other liabilities		724,296			1,240,002			704,171

		43,298,615			45,174,306			43,898,611

Commitments and contingencies (See Note 11)

Minority interest in consolidated subsidiaries		111			115			101

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; 291,977,949 shares issued (December 31, 2005 – 289,407,190; September 30, 2005 – 280,604,768) and 278,553,152 outstanding (December 31, 2005 – 275,955,391; September 30, 2005 – 267,152,969)		1,751,868			1,736,443			1,683,629
Surplus		494,398			452,398			292,418
Retained earnings		1,611,103			1,456,612			1,403,133
Accumulated other comprehensive loss, net of tax of ($61,834) (December 31, 2005 – ($58,292); September 30, 2005 – ($40,310))		(201,687	)		(176,000	)		(137,578	)
Treasury stock – at cost, 13,424,797 shares (December 31, 2005 – 13,451,799; September 30, 2005 – 13,451,799)		(206,533	)		(207,081	)		(207,081	)

		3,636,024			3,449,247			3,221,396

	$	46,934,750		$	48,623,668		$	47,120,108

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

4

POPULAR, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Quarter ended					Nine months ended
	September 30,					September 30,
(In thousands, except per share information)	2006		2005			2006		2005

INTEREST INCOME:
Loans	$	637,246	$	527,134		$	1,842,873	$	1,542,639
Money market investments		7,038		7,502			22,926		22,942
Investment securities		129,323		123,701			396,130		358,757
Trading account securities		7,724		7,751			23,649		22,126

		781,331		666,088			2,285,578		1,946,464

INTEREST EXPENSE:
Deposits		151,008		113,799			411,380		310,543
Short-term borrowings		141,727		89,213			393,604		232,392
Long-term debt		146,558		114,966			413,013		340,703

		439,293		317,978			1,217,997		883,638

Net interest income		342,038		348,110			1,067,581		1,062,826
Provision for loan losses		63,445		49,960			179,488		144,232

Net interest income after provision for loan losses		278,593		298,150			888,093		918,594
Service charges on deposit accounts		47,484		46,836			142,277		135,660
Other service fees (See Note 12)		79,637		85,004			240,000		247,860
Net gain (loss) on sale and valuation adjustment of investment securities		7,123		(920	)		5,039		50,891
Trading account profit		10,019		4,707			23,324		28,138
Gain on sale of loans		20,113		17,585			96,428		42,675
Other operating income		26,973		21,836			97,100		65,871

		469,942		473,198			1,492,261		1,489,689

OPERATING EXPENSES:
Personnel costs:
Salaries		130,613		120,012			392,845		351,361
Pension, profit sharing and other benefits		34,083		34,670			116,386		113,489

		164,696		154,682			509,231		464,850
Net occupancy expenses		31,573		27,719			88,840		78,414
Equipment expenses		34,346		31,185			101,516		90,029
Other taxes		11,770		10,368			32,940		29,088
Professional fees		29,618		27,888			105,184		82,787
Communications		17,343		15,640			51,936		46,579
Business promotion		33,855		23,940			98,669		69,860
Printing and supplies		4,408		4,845			13,331		13,971
Other operating expenses		28,706		30,759			85,609		88,098
Impact of change in fiscal period of certain subsidiaries		—		—			9,741		—
Amortization of intangibles		3,608		2,387			9,160		6,770

		359,923		329,413			1,106,157		970,446

Income before income tax and cumulative effect of accounting change		110,019		143,785			386,104		519,243
Income tax		27,859		28,569			88,060		112,395

Income before cumulative effect of accounting change		82,160		115,216			298,044		406,848
Cumulative effect of accounting change, net of tax		—		—			—		3,607

NET INCOME	$	82,160	$	115,216		$	298,044	$	410,455

NET INCOME APPLICABLE TO COMMON STOCK	$	79,181	$	112,237		$	289,109	$	401,520

BASIC EARNINGS PER COMMON SHARE (EPS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE	$	0.28	$	0.42		$	1.04	$	1.49

DILUTED EPS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE	$	0.28	$	0.42		$	1.04	$	1.49

BASIC EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE	$	0.28	$	0.42		$	1.04	$	1.50

DILUTED EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE	$	0.28	$	0.42		$	1.04	$	1.50

DIVIDENDS DECLARED PER COMMON SHARE	$	0.16	$	0.16		$	0.48	$	0.48

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

5

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Nine months ended
	September 30,
(In thousands)	2006			2005

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

Common stock:
Balance at beginning of year		1,736,443			1,680,096
Common stock issued under the Dividend Reinvestment Plan		3,919			3,307
Issuance of common stock		11,312			—
Stock options exercised		194			226

Balance at end of period		1,751,868			1,683,629

Surplus:
Balance at beginning of year		452,398			278,840
Common stock issued under the Dividend Reinvestment Plan		8,634			10,211
Issuance of common stock		28,281			—
Issuance cost of common stock		1,462			—
Stock options expense on unexercised options		2,160			2,791
Stock options exercised		463			576
Transfer from retained earnings		1,000			—

Balance at end of period		494,398			292,418

Retained earnings:
Balance at beginning of year		1,456,612			1,129,793
Net income		298,044			410,455
Cash dividends declared on common stock		(133,618	)		(128,180	)
Cash dividends declared on preferred stock		(8,935	)		(8,935	)
Transfer to surplus		(1,000	)		—

Balance at end of period		1,611,103			1,403,133

Accumulated other comprehensive loss:
Balance at beginning of year		(176,000	)		35,454
Other comprehensive loss, net of tax		(25,687	)		(173,032	)

Balance at end of period		(201,687	)		(137,578	)

Treasury stock – at cost:
Balance at beginning of year		(207,081	)		(206,437	)
Purchase of common stock		—			(1,467	)
Reissuance of common stock		548			823

Balance at end of period		(206,533	)		(207,081	)

Total stockholders’ equity	$	3,636,024		$	3,221,396

Disclosure of changes in number of shares:


	September 30,			December 31,			September 30,
	2006			2005			2005

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		289,407,190			280,016,007			280,016,007
Issued under the Dividend Reinvestment Plan		653,142			728,705			551,175
Issuance of common stock		1,885,380			8,614,620			—
Stock options exercised		32,237			47,858			37,586

Balance at end of period		291,977,949			289,407,190			280,604,768

Treasury stock		(13,424,797	)		(13,451,799	)		(13,451,799	)

Common Stock – Outstanding		278,553,152			275,955,391			267,152,969

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

6

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	Quarter ended						Nine months ended
	September 30,						September 30,
(In thousands)	2006			2005			2006			2005

Net income	$	82,160		$	115,216		$	298,044		$	410,455

Other comprehensive income (loss), before tax:
Foreign currency translation adjustment		(150	)		(183	)		(467	)		(611	)
Unrealized holding gains (losses) on securities available-for-sale arising during the period		192,674			(166,553	)		(23,150	)		(170,856	)
Reclassification adjustment for (gains) losses included in net income		(7,123	)		920			(5,039	)		(50,368	)
Net loss on cash flow hedges		(4,992	)		(1,717	)		(1,082	)		(3,496	)
Reclassification adjustment for losses included in net income		1,126			2,210			509			5,209

		181,535			(165,323	)		(29,229	)		(220,122	)
Income tax (expense) benefit		(48,433	)		40,646			3,542			47,090

Total other comprehensive income (loss), net of tax		133,102			(124,677	)		(25,687	)		(173,032	)

Comprehensive income (loss)	$	215,262		($	9,461	)	$	272,357		$	237,423

Disclosure of accumulated other comprehensive loss:


	September 30,			December 31,			September 30,
(In thousands)	2006			2005			2005

Foreign currency translation adjustment	($	36,782	)	($	36,315	)	($	36,141	)

Minimum pension liability adjustment		(2,354	)		(2,354	)		—
Tax effect		918			918			—

Net of tax amount		(1,436	)		(1,436	)		—

Unrealized losses on securities available-for-sale		(223,879	)		(195,690	)		(142,719	)
Tax effect		60,642			57,297			40,512

Net of tax amount		(163,237	)		(138,393	)		(102,207	)

Unrealized (losses) gains on cash flows hedges		(749	)		(176	)		606
Tax effect		274			77			(202	)

Net of tax amount		(475	)		(99	)		404

Cumulative effect of accounting change, net of tax		243			243			366

Accumulated other comprehensive loss, net of tax		($201,687	)		($176,000	)		($137,578	)

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

7

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine months ended
	September 30,
(In thousands)	2006			2005

Cash flows from operating activities:
Net income	$	298,044		$	410,455
Less: Cumulative effect of accounting change, net of tax					3,607
Less: Impact of change in fiscal period of certain subsidiaries, net of tax		(6,129	)

Net income before cumulative effect of accounting change and change in fiscal period		304,173			406,848

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		63,805			60,767
Provision for loan losses		179,488			144,232
Amortization of intangibles		9,160			6,770
Amortization of servicing assets		43,309			15,085
Net gain on sale and valuation adjustment of investment securities		(5,039	)		(50,891	)
Net gain on disposition of premises and equipment		(7,177	)		(11,165	)
Net gain on sale of loans		(96,428	)		(42,675	)
Net amortization of premiums and accretion of discounts on investments		19,060			30,709
Net amortization of premiums and deferred loan origination fees and costs		99,065			92,586
Earnings from investments under the equity method		(9,081	)		(8,917	)
Stock options expense		2,308			2,970
Net disbursements on loans held-for-sale		(4,940,234	)		(3,036,706	)
Acquisitions of loans held-for-sale		(1,188,844	)		(672,186	)
Proceeds from sale of loans held-for-sale		5,559,968			2,607,051
Net decrease in trading securities		1,195,639			982,919
Net increase in accrued income receivable		(44,311	)		(46,259	)
Net increase in other assets		(14,308	)		(179,575	)
Net increase in interest payable		41,257			35,737
Net decrease (increase) in deferred income tax		20,423			(13,174	)
Net increase in postretirement benefit obligation		3,028			3,631
Net decrease in other liabilities		(88,160	)		(37,950	)

Total adjustments		842,928			(117,041	)

Net cash provided by operating activities		1,147,101			289,807

Cash flows from investing activities:
Net decrease in money market investments		204,322			271,264
Purchases of investment securities:
Available-for-sale		(243,481	)		(3,321,802	)
Held-to-maturity		(20,847,771	)		(25,548,426	)
Other		(50,980	)		(63,394	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		1,560,612			2,716,663
Held-to-maturity		20,644,100			25,549,005
Other		72,611			34,693
Proceeds from sale of investment securities available-for-sale		198,191			272,609
Net (disbursements) repayments on loans		(877,628	)		656,262
Proceeds from sale of loans		759,518			109,244
Acquisition of loan portfolios		(291,330	)		(2,301,771	)
Assets acquired, net of cash		(2,752	)		(180,744	)
Acquisition of premises and equipment		(85,415	)		(118,382	)
Proceeds from sale of premises and equipment		39,031			30,631
Proceeds from sale of foreclosed assets		99,928			84,008

Net cash provided by (used in) investing activities		1,178,956			(1,810,140	)

Cash flows from financing activities:
Net increase in deposits		494,091			1,313,013
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase		(1,770,146	)		1,543,210
Net decrease in other short-term borrowings		(97,642	)		(234,365	)
Payments of notes payable		(1,822,303	)		(2,076,130	)
Proceeds from issuance of notes payable		777,171			1,273,203
Dividends paid		(140,765	)		(137,014	)
Proceeds from issuance of common stock		51,895			14,141
Treasury stock acquired		—			(1,467	)

Net cash (used in) provided by financing activities		(2,507,699	)		1,694,591

Cash effect of change in fiscal period of certain subsidiaries and change in accounting principle		11,914			(1,572	)

Net (decrease) increase in cash and due from banks		(169,728	)		172,686
Cash and due from banks at beginning of period		906,397			716,459

Cash and due from banks at end of period	$	736,669		$	889,145

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

8

Notes to Unaudited Consolidated Financial Statements

Note 1 – Nature of operations and basis of presentation

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution based in Puerto Rico, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending and insurance services through specialized subsidiaries. In the United States, the Corporation provides complete financial solutions to all the communities it serves through branches of Banco Popular North America (“BPNA”) in California, Texas, Illinois, New York, New Jersey and Florida. The Corporation’s consumer finance subsidiary in the United States, Popular Financial Holdings, Inc. (“PFH”), offers mortgage and personal loans, and maintains a substantial wholesale loan brokerage network, a warehouse lending division and a loan servicing unit. PFH, through its subsidiary E-LOAN, Inc. (“E-LOAN”), provides online consumer direct lending to obtain mortgage, auto and home equity loans. The Corporation strives to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. EVERTEC, Inc. (“EVERTEC”), the Corporation’s main subsidiary in this business segment, is the leading provider of financial transaction processing and information technology solutions in Puerto Rico and the Caribbean. EVERTEC serves customers in 11 Latin American countries. Also, the Corporation recently incorporated EVERTEC USA, Inc. with plans to expand its service offerings in the U.S. mainland. Note 19 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 unaudited consolidated financial statements to conform to the 2006 presentation.

In the normal course of business, except for the Corporation’s banks and the parent holding company, the Corporation utilized a one-month lag in the consolidation of the financial results of its other subsidiaries (the “non-banking subsidiaries”). As previously described in the Corporation’s 2005 Annual Report on Form 10-K (the “2005 Annual Report”) for the year ended December 31, 2005, in that year, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31^st calendar period, primarily as part of a strategic plan to put in place a corporate-wide integrated financial system and to facilitate the consolidation process. In 2005, the impact of this change in net income was included as a cumulative effect of accounting change in the Corporation’s consolidated financial results for the first quarter, and corresponded to the financial results for the month of December 2004 of the non-banking subsidiaries which implemented the change in the first reporting period of 2005. In the first quarter of 2006, the Corporation completed the second phase of the two-year plan, as such the financial results for the month of December 2005 of PFH (excluding E-LOAN which already had a December 31^st year-end closing), Popular FS, Popular Securities and Popular North America (holding company only) were included in a separate line within operating expenses (before tax) in the consolidated statement of operations for the nine months ended September 30, 2006. The financial impact amounted to a loss of $9.7 million (before tax). After tax, this change resulted in a net loss of $6.1 million, which was included in the quarterly results for the period ended March 31, 2006 and thus, as part of the results of the nine-month period ended September 30, 2006. As of the end of the first quarter of 2006, all subsidiaries of the Corporation had aligned their year-end closings to December 31^st, similar to the parent holding company. There were no unadjusted significant intervening events resulting from the difference in fiscal periods, which management believed could have materially affected the financial position or results of operations of the Corporation for the periods presented.

The statement of condition data as of December 31, 2005 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally

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accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of September 30, 2006, December 31, 2005 and September 30, 2005 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, 2005, included in the Corporation’s 2005 Annual Report.

Foreign Currency Translation

Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive (loss) income, except for highly inflationary environments in which the effects are included in other operating income, as described below.

The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. At September 30, 2006, the Corporation had approximately $37 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss (December 31, 2005 — $36 million; September 30, 2005 — $36 million).

The Corporation has been monitoring the inflation levels in the Dominican Republic to evaluate whether it still meets the “highly inflationary economy” test prescribed by SFAS No. 52, “Foreign Currency Translation.” Such statement defines highly inflationary as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy are remeasured as if the functional currency were the reporting currency. Accordingly, since June 2004, the Corporation’s interests in the Dominican Republic have been remeasured into the U.S. dollar. Although as of September 30, 2006, the cumulative inflation rate in the Dominican Republic over a 3-year period was below 100 percent, approximating 66% at quarter-end, the Corporation continued to apply the remeasurement accounting as of September 30, 2006 based on the accounting guidance obtained. The International Practices Task Force (“IPTF”) of the SEC Regulations Committee of the American Institute of Certified Public Accountants had concluded that the Dominican Republic was considered highly inflationary as of December 31, 2005, and concluded that such country would not cease being regarded as highly inflationary for the first nine months of 2006. The Dominican peso’s exchange rate to the U.S. dollar was $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, compared with $33.14 at December 31, 2005 and $32.85 at September 30, 2006. During the quarter and nine months ended September 30, 2006, approximately $0.5 million and $1.1 million, respectively, in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive loss. The net remeasurement gains totaled $1.0 million and $1.3 million for quarter and nine months ended September 30, 2005, respectively. These remeasurement gains will continue to be reflected in earnings until the economy is no longer considered highly inflationary. The unfavorable cumulative translation adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $32 million.

Other event

The Corporation exercised certain Tag Along Rights granted under the Shareholders Agreement dated as of March 2, 1999 by and among Telecomunicaciones de Puerto Rico, Inc. (“TelPRI”), GTE International Telecommunications Incorporated, GTE Holdings (Puerto Rico) LLC, Popular and Puerto Rico Telephone Authority and entered into a Joinder Agreement dated as of May 4, 2006 (the “Joinder Agreement”) by and among Popular, GTE Holdings and Sercotel S.A. de C.V. (“Sercotel”). Pursuant to the Joinder Agreement, Popular has agreed to sell to Sercotel all the shares of common stock of TelPRI owned by Popular under similar terms and conditions set forth in the Stock Purchase Agreement dated as of April 2, 2006, by and between Sercotel and GTE Holdings. The estimated gain net of taxes for Popular is approximately $86.0 million; however, such gain is subject to purchase price adjustments at the date of the closing. The transaction is expected to close in 2006 or early in 2007 subject to obtaining the necessary governmental and regulatory approvals.

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Note 2 – Recent Accounting Developments

SFAS No. 123-R “Share-Based Payment”

In December 2004, the Financial Accounting Standard Board (“FASB”) issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123-R, “Share-Based Payment.” SFAS No. 123-R focuses primarily on transactions in which an entity exchanges its equity instruments for employee services and generally establishes standards for the accounting of transactions in which an entity obtains goods or services in share-based payment transactions. SFAS No. 123-R requires companies to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting, which APB 25 allowed and resulted in no expense for many awards of stock options for which the exercise price of the option did not exceed the price of the underlying stock at the grant date. In addition, SFAS No. 123-R retains the modified grant date model from SFAS No. 123. Under that model, compensation cost is measured at the grant date fair value of the award and is adjusted to reflect anticipated forfeitures and the expected outcome of certain conditions. The fair value of an award is not remeasured after its initial estimation on the grant date, except in the case of a liability award or if the award is modified, based on specific criteria included in SFAS No. 123-R. Also, SFAS 123-R clarifies the financial impact of vesting and/or acceleration clauses due at retirement. Under the revised SFAS, the expense should be fully accrued for any employee that is eligible to retire regardless of the actual retirement experience of the employer. The Corporation prospectively applied SFAS No. 123-R to its financial statements as of January 1, 2006. The impact of this adoption was not significant for the results of the quarter. Refer to Note 12 to these consolidated financial statements for required disclosures and further information on the impact of the adoption of this accounting pronouncement.

SFAS No. 153 “Exchanges of Nonmonetary Assets”

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred; or b) the entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This Statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows upon adoption in 2006.

SFAS No. 154 “Accounting Changes and Error Corrections”

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Statement 154 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board toward development of a single set of high-quality accounting standards. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. APB Opinion No. 20 previously required that such a change be reported as a change in accounting principle. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. SFAS No. 154 did not have a significant impact on the statement of condition or results of operations upon adoption in 2006.

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

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155:

	•		Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;

	•		Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133;

	•		Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;

	•		Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives;

	•		Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this SFAS 155 may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS No. 155. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings. An entity should separately disclose the gross gains and losses that make up the cumulative-effect adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated. The Corporation elected to adopt SFAS No. 155 commencing in January 2007. The Corporation is currently evaluating the impact that this accounting pronouncement may have in its financial condition and results of operations.

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

This Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:

1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations:

a. A transfer of the servicer’s financial assets that meets the requirements for sale accounting

b. A transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”

c. An acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates.

2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.

3. Permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:

a. Amortization method—Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.

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b. Fair value measurement method—Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur.

4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.

5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.

The Corporation elected to adopt SFAS No. 156 commencing in January 2007. The Corporation is currently evaluating the impact that this accounting pronouncement may have in its financial condition and results of operations, subject to the measurement methods, class definitions and other determinations that need to be made upon adoption.

SFAS No. 157 “Fair Value Measurements”

SFAS No. 157, issued in September 2006, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. This Statement, among other matters:

	•		Clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price).

	•		Emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

	•		Clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine.

	•		Clarifies that market participant assumptions also include assumptions about the effect of a restriction on the sale or use of an asset.

	•		Clarifies that a fair value measurement for a liability reflects its nonperformance risk (the risk that the obligation will not be fulfilled).

SFAS No. 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs, and the effect of the measurements on earnings (or changes in net assets) for the period.

The guidance in this Statement applies for derivatives and other financial instruments measured at fair value under Statement 133 at initial recognition and in all subsequent periods. Therefore, this Statement nullifies the guidance in footnote 3 of EITF Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” This Statement also amends

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Statement 133 to remove the similar guidance to that in Issue 02-3, which was added by FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments.

SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for particular financial instruments indicated in the Statement in which the provisions should be applied retrospectively as of the beginning of the fiscal year in which this Statement is initially applied (a limited form of retrospective application).

The Corporation plans to adopt the provisions of SFAS No. 157 commencing with the first quarter of 2008. The Corporation is evaluating the impact that this accounting pronouncement may have in its financial condition, results of operations and financial statement disclosures.

SFAS No. 158 “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans”

In September 2006, the FASB issued SFAS No. 158 (an amendment of FASB Statements No. 87, 88, 106, and 132R), which requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to:

	a.		Recognize the funded status of a benefit plan—measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation—in its statement of financial position. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation.

	b.		Recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to FASB Statement No. 87, Employers’ Accounting for Pensions, or No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. Amounts recognized in accumulated other comprehensive income, including the gains or losses, prior service costs or credits, and the transition asset or obligation remaining from the initial application of Statements 87 and 106, are adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of those Statements.

	c.		Measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position (with limited exceptions).

	d.		Disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.

Upon initial application of SFAS No. 158 and subsequently, an employer should continue to apply the provisions in Statements 87, 88, and 106 in measuring plan assets and benefit obligations as of the date of its statement of financial position and in determining the amount of net periodic benefit cost.

An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006.

The Corporation provides pension, benefit restoration and postretirement benefit plans for certain employees. Upon adoption of SFAS No. 158 in December 31, 2006, the Corporation will be required to recognize the underfunded status of the plans as a liability on its statement of financial condition. The Corporation has always used December 31^st as the measurement date of the plans.

The impact of the adoption of SFAS No. 158 as of December 31, 2006 is estimated to be a reduction in equity of approximately $77 million (after tax), with a corresponding increase in total liabilities of $126 million and in the deferred tax asset of $49 million. The estimated impact is based on the Corporation’s expected funded status of its pension and postretirement benefit plans. The actual impact of the implementation of SFAS No. 158 on the financial

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statements may differ due to changes in economic assumptions such as discount rates, fair values of assets, and other changes in actuarial assumptions that will occur in connection with the upcoming December 31, 2006 measurement date. The Corporation expects that the effect of the implementation of SFAS No. 158 on its financial covenants will be immaterial. Additionally, based on the estimated impact in regulatory capital ratios, the Corporation will continue to be well-capitalized.

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

In June 2006, the FASB issued FIN 48, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under the Interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values.

FIN 48 is applicable to all uncertain positions for taxes accounted for under SFAS 109, “Accounting for Income Taxes,” and is not intended to be applied by analogy to other taxes, such as sales taxes, value-added taxes, or property taxes. Significant elements of the new guidance include the following:

	•		Recognition: A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.

	•		Measurement: The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.

	•		Change in judgment: The assessment of the recognition threshold and the measurement of the associated tax benefit might change as new information becomes available. Unrecognized tax benefits should be recognized in the period that the position reaches the recognition threshold, which might occur prior to absolute finality of the matter. Similarly, recognized tax benefits should be derecognized in the period in which the position falls below the threshold.

	•		Interest/Penalties: A taxpayer is required to accrue interest and penalties that, under relevant tax law, the taxpayer would be regarded as having incurred. Accordingly, under FIN 48, interest would start to accrue in the period that it would begin accruing under the relevant tax law, and penalties should be accrued in the first period for which a position is taken (or is expected to be taken) on a tax return that would give rise to the penalty. How a company classifies interest and penalties in the income statement is an accounting policy decision. The company should disclose that policy and the amounts recognized.

	•		Balance sheet classification: Liabilities resulting from FIN 48 are classified as long-term, unless payment is expected within the next 12 months.

	•		Disclosures: FIN 48 requires qualitative and quantitative disclosures, including discussion of reasonably possible changes that might occur in the recognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on a worldwide aggregated basis.

After considering other applicable guidance (such as the guidance that the Emerging Issues Task Force specifies in Issue 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination)”, a company should record the change in net assets that results from the application of the Interpretation as an adjustment to retained earnings.

The accounting provisions of FIN 48 will be effective for the Corporation beginning January 1, 2007. Based on a preliminary analysis performed at this time, management does not expect that the adoption of this accounting interpretation will have a material impact to its financial condition or results of operations.

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

In June 2006, the EITF reached a consensus on EITF Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF 06-03 will be effective for the Corporation as of January 1, 2007. The adoption of EITF 06-03 is not expected to have a material impact on the Corporation’s consolidated financial statements.

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

EITF Issue 06-5 focuses on how an entity should determine the “amount that could be realized under the insurance contract” at the balance sheet date in applying FTB 85-4, and whether the determination should be on an individual or group policy basis.

At the September 2006 meeting, the Task Force affirmed as a final consensus agreeing that the cash surrender value and any additional amounts provided by the contractual terms of the insurance policy that are realizable at the balance sheet date should be considered in determining the amount that could be realized under FTB 85-4, and any amounts that are not immediately payable to the policyholder in cash should be discounted to their present value. Additionally, the Task Force affirmed as a final consensus the tentative conclusion that in determining “the amount that could be realized,” companies should assume that policies will be surrendered on an individual-by-individual basis, rather than surrendering the entire group policy. Also, the Task Force reached a consensus that contractual limitations on the ability to surrender a policy do not affect the amount to be reflected under FTB 85-4, but, if significant, the nature of those restrictions should be disclosed.

The consensus would be effective for fiscal years beginning after December 15, 2006. Early application of this guidance would be permitted as of the beginning of a fiscal year in financial statements for any period for which interim or annual financial statements have not yet been issued. The guidance should be adopted with a cumulative effect adjustment to beginning retained earnings for all existing arrangements or retrospectively in accordance with SFAS No. 154.

The Corporation is currently evaluating any impact that the adoption of Issue 06-5 may have on its statement of financial condition or results of operations as it relates to the bank-owned life insurance policy for which the Corporation is beneficiary. Management does not expect such impact to be material.

Staff Accounting Bulletin No. 108 — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”)

In September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108 expressing the SEC staff’s views regarding the process of quantifying financial statement misstatements and the build up of improper amounts on the balance sheet. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. The built up misstatements, while not considered material in the individual years in which the misstatements were built up, may be considered material in a subsequent year if a company were to correct those misstatements through current period earnings. Initial application of SAB No. 108 allows registrants to elect not to restate prior periods but to reflect the initial application in their annual financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment, net of tax, should be made to the opening balance of retained earnings for that year. Registrants will need to disclose the nature and amount of each item, when and how each error being

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corrected arose, and the fact that the errors were previously considered immaterial. SAB 108 is effective for the Corporation’s annual financial statements for the year ended December 31, 2006. The adoption of SAB 108 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Note 3 — Restrictions on cash and due from banks and highly liquid securities

The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or with a correspondent bank. Those required average reserve balances were approximately $591 million at September 30, 2006 (December 31, 2005 — $584 million; September 30, 2005 — $540 million). Cash and due from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances.

In compliance with rules and regulations of the Securities and Exchange Commission, at September 30, 2006, the Corporation had securities with a market value of $445 thousand (December 31, 2005 - $549 thousand; September 30, 2005 — $699 thousand) segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.

As required by the Puerto Rico International Banking Center Law, at September 30, 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally split for the two IBEs, which were considered restricted assets (December 31, 2005 — $600 thousand; September 30, 2005 — $600 thousand).

The Corporation had restricted securities available-for-sale with a market value of $1.2 million at September 30, 2006 (December 31, 2005 — $1.2 million; September 30, 2005 — $1.2 million) to comply with certain requirements of the Insurance Code of Puerto Rico.

As part of a line of credit facility with a financial institution, at September 30, 2006, the Corporation maintained restricted cash of $1.9 million as collateral for the line of credit (December 31, 2005 — $2.4 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.

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:


	September 30,		December 31,		September 30,
(In thousands)	2006		2005		2005

Investment securities available-for-sale	$	2,882,589	$	2,566,668	$	2,928,729
Investment securities held-to-maturity		659		953		1,255
Loans held-for-sale		20,838		30,584		—
Loans held-in-portfolio		10,694,144		12,049,850		11,289,750

	$	13,598,230	$	14,648,055	$	14,219,734

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 September 30, 2006, December 31, 2005 and September 30, 2005 were as follows:

17


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

U.S. Treasury securities	$	521,885		—	$	28,418	$	493,467
Obligations of U.S. Government sponsored entities		6,776,956	$	178		154,923		6,622,211
Obligations of Puerto Rico, States and political subdivisions		119,999		308		3,927		116,380
Collateralized mortgage obligations		1,725,068		5,031		17,198		1,712,901
Mortgage-backed securities		1,099,321		1,412		29,535		1,071,198
Equity securities		70,987		4,938		3,109		72,816
Others		67,745		2,289		682		69,352

	$	10,381,961	$	14,156	$	237,792	$	10,158,325


	AS OF DECEMBER 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	528,378	$	14	$	24,067	$	504,325
Obligations of U.S. Government sponsored entities		7,867,613		540		157,477		7,710,676
Obligations of Puerto Rico, States and political subdivisions		107,864		631		1,841		106,654
Collateralized mortgage obligations		1,854,843		8,209		14,289		1,848,763
Mortgage-backed securities		1,396,246		6,251		28,755		1,373,742
Equity securities		68,521		15,120		1,107		82,534
Others		88,568		1,324		—		89,892

	$	11,912,033	$	32,089	$	227,536	$	11,716,586


	AS OF SEPTEMBER 30, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	551,152		—	$	22,803	$	528,349
Obligations of U.S. Government sponsored entities		7,640,659	$	1,158		121,114		7,520,703
Obligations of Puerto Rico, States and political subdivisions		165,872		4,402		931		169,343
Collateralized mortgage obligations		1,694,299		5,639		12,914		1,687,024
Mortgage-backed securities		1,441,383		10,161		18,540		1,433,004
Equity securities		61,453		12,102		304		73,251
Others		80,743		1,048		257		81,534

	$	11,635,561	$	34,510	$	176,863	$	11,493,208

The following table shows the Corporation’s gross unrealized losses and market value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2006, December 31, 2005 and September 30, 2005:

18


	AS OF SEPTEMBER 30, 2006
	Less than 12 Months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	19,410	$	91	$	19,319
Obligations of U.S. Government sponsored entities		443,593		4,348		439,245
Obligations of Puerto Rico, States and political subdivisions		26,398		375		26,023
Collateralized mortgage obligations		507,121		4,037		503,084
Mortgage-backed securities		165,200		2,363		162,837
Equity securities		46,811		2,811		44,000
Others		10,360		682		9,678

	$	1,218,893	$	14,707	$	1,204,186


	12 months or more
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	502,475	$	28,327	$	474,148
Obligations of U.S. Government sponsored entities		6,254,447		150,575		6,103,872
Obligations of Puerto Rico, States and political subdivisions		53,305		3,552		49,753
Collateralized mortgage obligations		576,660		13,161		563,499
Mortgage-backed securities		858,717		27,172		831,545
Equity securities		300		298		2

	$	8,245,904	$	223,085	$	8,022,819

19


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	521,885	$	28,418	$	493,467
Obligations of U.S. Government sponsored entities		6,698,040		154,923		6,543,117
Obligations of Puerto Rico, States and political subdivisions		79,703		3,927		75,776
Collateralized mortgage obligations		1,083,781		17,198		1,066,583
Mortgage-backed securities		1,023,917		29,535		994,382
Equity securities		47,111		3,109		44,002
Others		10,360		682		9,678

	$	9,464,797	$	237,792	$	9,227,005


	AS OF DECEMBER 31, 2005
	Less than 12 Months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	9,854	$	136	$	9,718
Obligations of U.S. Government sponsored entities		4,401,412		69,250		4,332,162
Obligations of Puerto Rico, States and political subdivisions		18,070		33		18,037
Collateralized mortgage obligations		672,546		6,394		666,152
Mortgage-backed securities		486,266		9,406		476,860
Equity securities		22,168		915		21,253

	$	5,610,316	$	86,134	$	5,524,182


	12 months or more
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	499,148	$	23,931	$	475,217
Obligations of U.S. Government sponsored entities		3,379,970		88,227		3,291,743
Obligations of Puerto Rico, States and political subdivisions		54,680		1,808		52,872
Collateralized mortgage obligations		238,254		7,895		230,359
Mortgage-backed securities		672,428		19,349		653,079
Equity securities		3,837		192		3,645

	$	4,848,317	$	141,402	$	4,706,915


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	509,002	$	24,067	$	484,935
Obligations of U.S. Government sponsored entities		7,781,382		157,477		7,623,905
Obligations of Puerto Rico, States and political subdivisions		72,750		1,841		70,909
Collateralized mortgage obligations		910,800		14,289		896,511
Mortgage-backed securities		1,158,694		28,755		1,129,939
Equity securities		26,005		1,107		24,898

	$	10,458,633	$	227,536	$	10,231,097

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	AS OF SEPTEMBER 30, 2005
	Less than 12 Months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	24,814	$	271	$	24,543
Obligations of U.S. Government sponsored entities		6,276,514		89,341		6,187,173
Obligations of Puerto Rico, States and political subdivisions		13,240		41		13,199
Collateralized mortgage obligations		673,542		6,256		667,286
Mortgage-backed securities		520,241		7,628		512,613
Equity securities		29		5		24
Others		11,180		257		10,923

	$	7,519,560	$	103,799	$	7,415,761


	12 months or more
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	526,238	$	22,532	$	503,706
Obligations of U.S. Government sponsored entities		1,163,926		31,773		1,132,153
Obligations of Puerto Rico, States and political subdivisions		52,370		890		51,480
Collateralized mortgage obligations		225,321		6,658		218,663
Mortgage-backed securities		482,962		10,912		472,050
Equity securities		300		299		1

	$	2,451,117	$	73,064	$	2,378,053


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	551,052	$	22,803	$	528,249
Obligations of U.S. Government sponsored entities		7,440,440		121,114		7,319,326
Obligations of Puerto Rico, States and political subdivisions		65,610		931		64,679
Collateralized mortgage obligations		898,863		12,914		885,949
Mortgage-backed securities		1,003,203		18,540		984,663
Equity securities		329		304		25
Others		11,180		257		10,923

	$	9,970,677	$	176,863	$	9,793,814

At September 30, 2006, “Obligations of Puerto Rico, States and political subdivisions” include approximately $57 million in Commonwealth of Puerto Rico Appropriation Bonds (“Appropriation Bonds”) the rating on which was downgraded in May 2006 by Moody’s Investors Service (“Moody’s”) to Ba1, one notch below investment grade. At that time, Moody’s commented that this action reflected the Government’s strained financial condition, the ongoing political conflict and the lack of agreement regarding the measures necessary to end the government’s multi-year trend of financial deterioration. In July 2006, this credit rating agency maintained the credit rating, but removed the Puerto Rico Government obligations from its watch list for further downgrades as the Government of Puerto Rico approved the 2007 fiscal year budget and established a new sales tax. A percentage of this sales tax is designated to be used as a revenue source to repay Puerto Rico Government Obligations. Future rating stability will be subject to the Government’s actions to reduce operating expenditures, improve managerial and budgetary controls, and eliminate its reliance on loans from the Government Development Bank for Puerto Rico, the Commonwealth’s fiscal

21

agent, to cover operating deficits. Standard & Poor’s (S&P), another nationally recognized credit rating agency, rated the Appropriation Bonds BBB-, which is still considered investment grade. As of September 30, 2006, the appropriation bonds indicated above represented approximately $3.2 million in unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island and evaluates 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 at September 30, 2006, except for the obligations of the Puerto Rico government described above, are primarily associated with U.S. government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly liquid securities which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in these available-for-sale securities at September 30, 2006 are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

During the quarter and nine months ended September 30, 2006, the Corporation recognized through earnings approximately $0.4 million and $17.4 million, respectively, in losses in interest-only securities classified as available-for-sale that management considered to be other than temporarily impaired. For the nine months ended September 30, 2005, the impairment adjustment amounted to $12.6 million and was associated with interest-only strips and equity securities.

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


	September 30, 2006				December 31, 2005				September 30, 2005
(In thousands)	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value

FNMA	$	1,594,165	$	1,570,842	$	1,790,840	$	1,776,604	$	1,694,826	$	1,688,626
FHLB		6,621,836		6,470,786		7,480,188		7,327,736		7,422,223		7,304,602
Freddie Mac		1,195,093		1,178,715		1,244,044		1,228,566		1,189,090		1,177,706

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Note 6 — Investment Securities Held-to-Maturity

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of September 30, 2006, December 31, 2005 and September 30, 2005 were as follows:


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

Obligations of U.S. Government sponsored entities	$	269,683		—	$	34	$	269,649
Obligations of Puerto Rico, States and political subdivisions		72,154	$	1,605		158		73,601
Collateralized mortgage obligations		409		—		22		387
Others		15,184		43		15		15,212

	$	357,430	$	1,648	$	229	$	358,849


	AS OF DECEMBER 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of U.S. Government sponsored entities	$	42,011		—	$	25	$	41,986
Obligations of Puerto Rico, States and political subdivisions		78,248	$	2,845		134		80,959
Collateralized mortgage obligations		497		—		27		470
Others		32,348		315		10		32,653

	$	153,104	$	3,160	$	196	$	156,068


	AS OF SEPTEMBER 30, 2005
			Gross
	Amortized		Unrealized		Gross		Market
(In thousands)	Cost		Gains		Unrealized Losses		Value

Obligations of U.S. Government sponsored entities	$	246,861		—	$	96	$	246,765
Obligations of Puerto Rico, States and political subdivisions		79,550	$	2,879		129		82,300
Collateralized mortgage obligations		527		—		26		501
Others		32,290		357		10		32,637

	$	359,228	$	3,236	$	261	$	362,203

23

The following table shows the Corporation’s gross unrealized losses and fair value of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2006, December 31, 2005 and September 30, 2005:


	AS OF SEPTEMBER 30, 2006
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value
\| \| \|
Obligations of U.S. Government sponsored entities	$	269,683	$	34		269,649
Obligations of Puerto Rico, States and political subdivisions		2,110		3		2,107

	$	271,793	$	37	$	271,756


	12 months or more
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	2,534	$	155	$	2,379
Collateralized mortgage obligations		409		22		387
Others		1,250		15		1,235

	$	4,193	$	192	$	4,001


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	269,683	$	34	$	269,649
Obligations of Puerto Rico, States and political subdivisions		4,644		158		4,486
Collateralized mortgage obligations		409		22		387
Others		1,250		15		1,235

	$	275,986	$	229	$	275,757

24


	AS OF DECEMBER 31, 2005
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	42,011	$	25	$	41,986
Obligations of Puerto Rico, States and political subdivisions		3,605		20		3,585
Others		1,000		10		990

	$	46,616	$	55	$	46,561


	12 months or more
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	22,533	$	114	$	22,419
Collateralized mortgage obligations		497		27		470
Others		250		—		250

	$	23,280	$	141	$	23,139


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	42,011	$	25	$	41,986
Obligations of Puerto Rico, States and political subdivisions		26,138		134		26,004
Collateralized mortgage obligations		497		27		470
Others		1,250		10		1,240

	$	69,896	$	196	$	69,700

25


	AS OF SEPTEMBER 30, 2005
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	237,818	$	96	$	237,722
Obligations of Puerto Rico, States and political subdivisions		4,205		21		4,184
Others		750		10		740

	$	242,773	$	127	$	242,646


	12 months or more
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	21,580	$	108	$	21,472
Collateralized mortgage obligations		527		26		501
Others		250		—		250

	$	22,357	$	134	$	22,223


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of U.S. Government sponsored entities	$	237,818	$	96	$	237,722
Obligations of Puerto Rico, States and political subdivisions		25,785		129		25,656
Collateralized mortgage obligations		527		26		501
Others		1,000		10		990

	$	265,130	$	261	$	264,869

Management believes that the unrealized losses in the held-to-maturity portfolio at September 30, 2006 are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers.

26

Note 7 – Retained Interests on Sales of Mortgage Loans

During the nine months ended September 30, 2006, the Corporation retained servicing responsibilities and other residual interests on various securitization transactions and whole loan sales of residential mortgage loans performed by various subsidiaries. Refer to Note 1 to the audited consolidated financial statements included in Popular’s 2005 Annual Report for the accounting policies followed by the Corporation with respect to mortgage servicing rights (“MSRs”) and interest-only strips (“IOs”). Also, refer to the Critical Accounting Policies / Estimates section of the Management’s Discussion and Analysis included in the 2005 Annual Report for valuation methodologies used by the Corporation in determining the fair value of these retained interests.

Popular Financial Holdings

During the nine-month period ended September 30, 2006, the Corporation, through its consumer lending subsidiary PFH, retained MSRs and IOs on mortgage loans securitizations.

During 2006, the Corporation has conducted three asset securitizations that involve the transfer of mortgage loans to qualifying special purpose entities (QSPE), which in turn transferred these assets and their titles, to different trusts, thus isolating those loans from the Corporation’s assets. Approximately, $1.0 billion in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH during 2006, with a gain on sale of approximately $18.8 million. As part of these transactions, the Corporation recognized MSRs of $19 million and IOs of $37 million.

When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria, the Corporation is not permitted to derecognize the transferred financial assets and the transaction is accounted for as a secured borrowing (“on-balance sheet securitization”). The loans are included on the balance sheet as loans pledged as collateral for secured borrowings.

During 2006, the Corporation has completed two on-balance sheet securitizations consisting of approximately $898 million in ARM and fixed-rate loans. As part of these transactions, the Corporation recognized mortgage servicing rights of $16 million.

IOs retained as part of off-balance sheet securitizations of non-prime mortgage loans prior to 2006 had been classified as investment securities available-for-sale and are presented at fair value in the unaudited consolidated statements of condition. PFH’s IOs classified as available-for-sale as of September 30, 2006 amounted to $51 million.

Commencing in January 2006, the IOs derived from newly-issued PFH’s off-balance sheet securitizations are being accounted for as trading securities. As such, any valuation adjustment related to these particular IOs is being recorded as part of trading account profit (loss) in the consolidated statements of income. Interest-only strips accounted for as trading securities from PFH securitizations approximated $37 million at September 30, 2006. The Corporation recognized trading losses on these IOs of $0.4 million for the quarter and nine months ended September 30, 2006.

The Corporation reviews the IOs for potential impairment on a quarterly basis and records impairment in accordance with SFAS No. 115 and EITF 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” During the quarter and nine months ended September 30, 2006, the Corporation recorded other-than-temporary impairment losses of $0.4 million and $17.4 million, respectively, related with the IOs derived from the off-balance sheet securitizations.

27

Key economic assumptions used in measuring the retained interests at the date of the off-balance sheet and on-balance sheet securitizations performed during the nine-month period ended September 30, 2006 were:


				MSRs

	IOs			Fixed-rate loans			ARM loans

Weighted average prepayment speed	28% (Fixed-rate loans)
	35% (ARM loans)				28	%		35	%
Weighted average life of collateral (in years)		2.4 to 2.9 years		3.5 years				2.4 to 2.6 years
Expected credit losses (annual rate)	1.7% to 3.2		%		—			—
Discount rate (annual rate)		15% - 17	%		14% - 16	%		14% - 16	%

As of September 30, 2006, key economic assumptions used to estimate the fair value of IOs and MSRs derived from PFH’s securitizations and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:


				MSRs
(In thousands)	IOs			Fixed-rate loans			ARM loans

Carrying amount of retained interests		$87,767		$	51,151		$	39,557
Fair value of retained interests		$87,767		$	53,763		$	43,602
Weighted average life of collateral (in years)	2.1 years			3.0 years			2.0 years
Weighted average prepayment speed (annual rate)	28% (Fixed-rate loans		)		28	%		35	%
	35% (ARM loans		)
Impact on fair value of 10% adverse change		($6,897	)	$	211		($	439	)
Impact on fair value of 20% adverse change		($10,022	)	$	64		($	916	)
Weighted average discount rate (annual rate)		17	%		16	%		16	%
Impact on fair value of 10% adverse change		($5,819	)	($	991	)	($	639	)
Impact on fair value of 20% adverse change		($9,670	)	($	2,102	)	($	1,440	)
Weighted expected credit losses (annual rate)	1.28% to 3.19		%		—			—
Impact on fair value of 10% adverse change		($6,302	)		—			—
Impact on fair value of 20% adverse change		($10,648	)		—			—

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.

Banking subsidiaries

In addition, the Corporation’s banking subsidiaries retain servicing responsibilities on the sale of wholesale mortgage loans. Also, servicing responsibilities are retained under pooling / selling arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized have fixed rates. Under the servicing agreements, the banking subsidiaries do not earn significant prepayment penalties on the underlying loans serviced.

Key economic assumptions used in measuring the MSRs at the date of the securitizations and whole loan sales by the banking subsidiaries performed during the nine months ended September 30, 2006 were:


	MSRs

Weighted average prepayment speed		14.0	%
Weighted average life of collateral (in years)	10.2 years
Weighted average expected credit losses (annual rate)		—
Weighted average discount rate (annual rate)		10.28	%

28

As of September 30, 2006, 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:


(In thousands)		MSRs

Carrying amount of retained interests		$	77,055
Fair value of retained interests		$	88,558
Weighted average life of collateral (in years)		9.2 years
Weighted average prepayment speed (annual rate)			12.80	%
Impact on fair value of 10% adverse change	(	$	3,035	)
Impact on fair value of 20% adverse change	(	$	5,880	)
Weighted average discount rate (annual rate)			10	%
Impact on fair value of 10% adverse change	(	$	2,776	)
Impact on fair value of 20% adverse change	(	$	5,385	)

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

Note 8 – Derivative Instruments and Hedging Activities

Refer to Note 28 to the consolidated financial statements included in the 2005 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities in the third quarter of 2006:

Cash Flow Hedges

Derivative financial instruments designated as cash flow hedges outstanding as of September 30, 2006 and December 31, 2005 were as follows:


As of September 30, 2006
(In thousands)	Notional amount		Derivative assets		Derivative liabilities		Equity OCI			Ineffectiveness

Asset Hedges
Forward commitments	$	75,000	$	6	$	289	($	173	)		—


Liability Hedges
Interest rate swaps	$	390,000	$	899	$	856	$	28			—


Year ended December 31, 2005
(In thousands)	Notional amount			Derivative assets		Derivative liabilities		Equity OCI			Ineffectiveness

Asset Hedges
Forward commitments		$	95,500	$	20	$	420		($244	)		—

The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with terms over one month. These securities are hedging 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

29

forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding at September 30, 2006 have a maximum remaining maturity of 79 days.

During 2006, the Corporation entered into interest rate swap contracts to convert floating rate debt to fixed rate debt with the objective of minimizing the exposure to changes in cash flows due to higher interest rates. These interest rate swaps have a maximum remaining maturity of 2.5 years.

Fair Value Hedges

Derivative financial instruments designated as fair value hedges outstanding as of December 31, 2005 were as described in the table below. As of September 30, 2006 there were no derivative financial instruments outstanding that were designated as fair value hedges for accounting purposes.


Year ended December 31, 2005

(In thousands)	Notional amount		Derivative assets		Derivative liabilities		Ineffectiveness

Asset Hedges
Interest rate swaps	$	534,623	$	3,145		—	($	388	)

At December 31, 2005, the Corporation had outstanding interest rate swaps designated as fair value hedges to protect its exposure to the changes in fair value resulting from movements in the benchmark interest rate of fixed rate assets, particularly loans and investment securities. These interest rate swaps were terminated during the first quarter of 2006.

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Non-Hedging Activities

Financial instruments designated as non-hedging derivatives outstanding at September 30, 2006 and December 31, 2005 were as follows:


September 30, 2006
			Fair Values
			Derivative		Derivative
(In thousands)	Notional amount		assets		liabilities

Forward contracts	$	299,209		—	$	1,281
Futures contracts		6,100	$	19		—
Call options and put options		64,000		174		80
Interest rate swaps associated with:
- short-term borrowings		400,000		1,978		—
- bond certificates offered in an on-balance sheet securitization		280,070		—		1,461
- financing of auto loan portfolio held-for-investment		450,707		493		214
- auto loans approvals locked interest rates		21,399		—		22
- swaps with corporate clients		374,159		—		2,092
- swaps offsetting position of corporate client swaps		374,159		2,092		—
- mortgage loan portfolio prior to securitization		80,000		86		—
- investment securities		89,385		—		1,587
Credit default swap		33,463		—		—
Interest rate caps		1,096,065		5,728		—
Interest rate caps for benefit of corporate clients		50,000		—		142
Indexed options on deposits		204,085		33,486		—
Indexed options on S&P Notes		31,152		3,769		—
Embedded options		250,757		11,381		38,418
Mortgage rate lock commitments		278,997		326		6

Total	$	4,383,707	$	59,532	$	45,303


December 31, 2005
			Fair Values
			Derivative		Derivative
(In thousands)	Notional amount		assets		liabilities

Forward contracts	$	486,457	$	15	$	1,691
Futures contracts		11,500		17		—
Call options and put options		47,500		114		—
Interest rate swaps associated with:
- brokered certificates of deposit		157,088		—		3,226
- short-term borrowings		400,000		—		—
- auto loan portfolio held-for-investment		209,222		851		—
- auto loans approvals locked interest rates		26,297		—		13
- swaps with corporate clients		293,331		—		2,361
- swaps offsetting position of corporate client swaps		293,331		2,361		—
- investment securities		40,250		837		—
Foreign currency and exchange rate commitments with clients		252		—		32
Foreign currency and exchange rate commitments offsetting clients’ positions		252		32		—
Interest rate caps		1,650,907		12,215		—
Indexed options on deposits		122,711		17,715		—
Indexed options on S&P Notes		31,152		3,626		—
Embedded options		170,121		10,593		24,398
Mortgage rate lock commitments		234,938		330		—

Total	$	4,175,309	$	48,706	$	31,721

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Interest Rates Swaps

At September 30, 2006, the Corporation had outstanding an interest rate swap to economically hedge the payments of the bonds certificates offered as part of an on-balance sheet securitization. This swap contract is marked-to-market quarterly and recognized as part of interest expense. The Corporation recognized a valuation loss of $2.4 million for the quarter and nine months ended September 30, 2006 associated with this interest rate swap.

At September 30, 2006, the Corporation also had outstanding an interest rate swap used to economically hedge the cost of short-term borrowings associated with certain mortgage loan securitizations. For the third quarter of 2006, the Corporation recognized as part of short-term interest expense a loss of $3.4 million due to changes in the fair value of this derivative contract. On a year-to-date basis the Corporation had recognized a favorable change in the fair value of this derivative contract of $2.0 million, which is reflected as a reduction of short-term interest expense.

Additionally, in 2006, the Corporation entered into amortizing swap contracts to economically convert to a fixed- rate the cost of funding a portion of the auto loans held-in-portfolio. For the quarter and nine months ended September 30, 2006, the Corporation recognized a loss of approximately $3.5 million and $0.6 million, respectively, which was included as part of long-term interest expense.

During the quarter ended September 30, 2006, the Corporation entered into an interest rate swap to economically hedge the changes in fair value of loans acquired and originated prior to securitization. Changes in the swap fair value are reported as part of interest income, and were not significant for the quarter and nine months ended September 30, 2006.

At December 31, 2005, the Corporation had outstanding interest rate swaps that economically hedged the exposure of certain brokered certificates of deposit to changes in fair value due to movements in the benchmark interest rate. The terms of the interest rate swaps were identical to the terms of the callable certificates of deposit. These interest rate swap agreements were terminated in the first quarter of 2006.

Interest Rate Caps

In periods prior to 2006, the Corporation entered into interest rate caps in conjunction with a series of mortgage loans securitizations that are used to limit the interest rate payable to the security holders. These interest rate caps are designated as non-hedging derivative instruments and are marked-to-market currently in the consolidated statements of income. Valuation losses of $3.5 million were recognized as part of long-term interest expense in the third quarter of 2006. Valuation losses amounted to $6.6 million for the nine months ended September 30, 2006.

Note 9 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2006 and 2005, allocated by reportable segment, and in the case of Banco Popular de Puerto Rico, as an additional disclosure, by business area, were as follows (refer to Note 19 for the definition of the Corporation’s reportable segments):


					Purchase
	Balance at		Goodwill		accounting					Balance at
(In thousands)	January 1, 2006		acquired		adjustments		Other			September 30, 2006

Banco Popular de Puerto Rico:
P.R. Commercial Banking	$	14,674		—		—		—		$	14,674
P.R. Consumer and Retail Banking		34,999		—		—		—			34,999
P.R. Other Financial Services		4,110		—		—		—			4,110
Banco Popular North America		404,447		—		—		($210	)		404,237
Popular Financial Holdings		152,623		—	$	23,381		—			176,004
EVERTEC		43,131	$	1,511		—		—			44,642

Total Popular, Inc.	$	653,984	$	1,511	$	23,381		($210	)	$	678,666

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					Purchase
	Balance at		Goodwill		Accounting			Balance at
(In thousands)	January 1, 2005		acquired		Adjustments			September 30, 2005

Banco Popular de Puerto Rico:
P.R. Commercial Banking	$	14,674		—		—		$	14,674
P.R. Consumer and Retail Banking		34,999		—		—			34,999
P.R. Other Financial Services		3,322	$	513		—			3,835
Banco Popular North America		309,709		111,995		($2,931	)		418,773
Popular Financial Holdings		9,514		—		—			9,514
EVERTEC		39,090		3,948		203			43,241

Total Popular, Inc.	$	411,308	$	116,456		($2,728	)	$	525,036

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 adjustments recorded during the nine-month period ended September 30, 2006 were mostly related to E-LOAN acquisition, completed during the fourth quarter of 2005.

The amount included in the “other” category during 2006 for Banco Popular North America reportable segment is related to the sale of the remaining retail outlets of Popular Cash Express (“PCE”) operations to PLS Financial during the first quarter of 2006. The increase in goodwill during the nine months ended September 30, 2005 was mostly related to the Kislak acquisition.

The Corporation performed the annual impairment test required by SFAS No. 142, “Goodwill and Other Intangible Assets.” This test did not result in impairment of the Corporation’s recorded goodwill.

No goodwill was written-down during the nine months ended September 30, 2006 and 2005.

At September 30, 2006 and December 31, 2005, other than goodwill, the Corporation had $59 million of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark. At September 30, 2005, the Corporation had $65 thousand of identifiable intangibles with an indefinite useful life related to a trademark. The following table reflects the components of other intangible assets subject to amortization:


	September 30, 2006				December 31, 2005				September 30, 2005
	Gross		Accumulated		Gross		Accumulated		Gross		Accumulated
(In thousands)	Amount		Amortization		Amount		Amortization		Amount		Amortization

Core deposits	$	76,956	$	46,688	$	76,956	$	40,848	$	76,956	$	38,901
Other customer relationships		10,028		1,703		8,175		507		2,875		229
Other intangibles		10,808		4,003		9,320		1,807		4,328		1,528

Total	$	97,792	$	52,394	$	94,451	$	43,162	$	84,159	$	40,658

During the quarter and nine months ended September 30, 2006, the Corporation recognized $3.6 million and $9.2 million, respectively, in amortization expense related to other intangible assets with definite lives (September 30, 2005 — $2.4 million and $6.8 million, respectively).

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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)
2006	$	12,318
2007		10,363
2008		8,406
2009		6,295
2010		5,431

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

Note 10 – Borrowings

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


	September 30,		December 31,		September 30,
(In thousands)	2006		2005		2005

Federal funds purchased	$	2,056,610	$	1,500,575	$	1,214,753
Assets sold under agreements to repurchase		4,988,856		7,201,886		6,803,030

	$	7,045,466	$	8,702,461	$	8,017,783

Other short-term borrowings consisted of:


	September 30,		December 31,		September 30,
(In thousands)	2006		2005		2005

Advances with FHLB paying interest at:
-fixed rates ranging from 5.40% to 5.42% (September 30, 2005 – 3.56% to 3.91%)	$	230,000	$	475,000	$	455,000
-floating rate with a spread over the fed funds rate ( Fed funds rate at September 30, 2006 was 5.38%, September 30, 2005 - 4.00% )		55,000				100,000

Advances under credit facilities with other institutions at:
-fixed rates ranging from 5.38% to 5.52% (September 30, 2005 – 3.50% to 3.95%)		23,385		282,734		202,770
-floating rates ranging from 0.45% to 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2006 was 5.32%)		112,915		29,274
-a floating rate of 0.20% (September 30, 2005 – 0.16% to 1.75%) over the 3-month LIBOR rate (3-month LIBOR rate at September 30, 2006 was 5.37%; September 30, 2005 – 4.07%)		10,000		20,000		20,970

Commercial paper at rates ranging from 4.85% to 5.33% (September 30, 2005 – 3.35% to 3.97%)		97,172		419,423		377,047

Term funds purchased at:
-fixed rates ranging from 5.28% to 5.39% (September 30, 2005 – 3.63% to 3.93%)		1,487,162		1,122,000		1,401,993
-floating rate of 0.08% over the fed funds rate (Fed funds rate at September 30, 2006 was 5.38%; September 30, 2005 - 4.00%)		600,000		350,000		350,000

Others		93,877		1,830		743

	$	2,709,511	$	2,700,261	$	2,908,523


		Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2005, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Notes payable and subordinated notes outstanding consisted of:


	September 30,		December 31,		September 30,
(In thousands)	2006		2005		2005

Advances with FHLB:
-maturing from 2006 through 2018 paying interest at fixed rates ranging from 2.44% to 6.98% (September 30, 2005 – 1.77% to 6.98%)	$	414,403	$	906,623	$	1,022,409
-maturing in 2008 paying interest at a floating rate of 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2006 was 5.32%; September 30, 2005 – 3.86%)		250,000		250,000		250,000
-maturing in 2007 paying interest at floating rates tied to l and 3 month LIBOR rates		11,000		12,250		12,250

Advances under revolving lines of credit with maturities until 2007 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2006 was 5.32%)		388,432		195,008

Term notes with maturities ranging from 2006 through 2010 paying interest semiannually at fixed rates ranging from 3.25% to 6.39% (September 30, 2005 – 2.40% to 7.29%)		2,713,078		2,427,113		2,426,829

Term notes with maturities ranging from 2007 through 2009 paying interest quarterly at floating rates ranging from 0.35% to 0.45% (September 30, 2005– 0.45%) over the 3-month LIBOR rate (3-month LIBOR rate at September 30, 2006 was 5.37 %; September 30, 2005 – 4.07%)		469,182		54,988		50,000

Term notes with maturities ranging from 2008 through 2030 paying interest monthly at fixed rates ranging from 3.00% to 7.54 % (September 30, 2005 - 3.00% to 7.14%)		14,129		15,883		16,595

Secured borrowings with maturities until 2015 paying interest monthly at fixed rates ranging from 3.05% to 7.12% (September 30, 2005 – 2.48% to 7.12%)		2,914,523		3,241,677		2,749,101

Secured borrowings with maturities until 2015 paying interest monthly at rates ranging from 5.37% to 10.07% (September 30, 2005 – 3.79% to 8.44%) which are tied to the 1-month LIBOR rate (1-month LIBOR rate at September 30, 2006 was 5.32%; September 30, 2005 – 3.86%)		1,623,142		1,905,953		2,148,443

Notes linked to the S&P 500 Index maturing in 2008		34,136		33,703		33,336

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 15)		849,672		849,672		849,672

Subordinated notes maturing on December 2005 paying interest semi-annually at 6.75%						125,000

Mortgage notes and other debt		200		707		5,790

	$	9,681,897	$	9,893,577	$	9,689,425


		Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2005, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Note 11 – Commitments and Contingencies

In the normal course of business, the Corporation has outstanding commercial letters of credit and stand-by letters of credit, which contract amounts at September 30, 2006 were $21 million and $169 million, respectively (December 31, 2005 — $22 million and $177 million; September 30, 2005 - $15 million and $251 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit and commitments to originate mortgage loans, which were not reflected in the accompanying financial statements.

At September 30, 2006, the Corporation recorded a liability of $574 thousand (December 31, 2005 - $548 thousand; September 30, 2005 — $425 thousand), which represents the fair value of the obligations undertaken in issuing the guarantees under standby letters of credit issued or modified after December 31, 2002. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The liability was included as part of “other liabilities” in the consolidated statements of condition. The standby letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in standby letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries which aggregated to $3.9 billion at September 30, 2006 (December 31, 2005 and September 30, 2005 — $4.0 billion). In addition, at September 30, 2006, PIHC fully and unconditionally guaranteed $824 million of capital securities (December 31, 2005 and September 30, 2005 — $824 million) issued by four wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R. During the first quarter of 2005, Popular North America, Inc. concluded its full and unconditional guarantee of certain borrowing obligations issued by one of its non-banking subsidiaries.

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

Note 12 – Other Service Fees

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


	Quarter ended September 30,				Nine months ended September 30,
(In thousands)	2006		2005		2006		2005

Credit card fees and discounts	$	22,035	$	21,111	$	66,979	$	59,694
Debit card fees		15,345		12,832		45,349		39,047
Insurance fees		13,327		12,986		39,879		37,420
Processing fees		11,164		11,311		32,382		31,888
Other		17,766		26,764		55,411		79,811

Total	$	79,637	$	85,004	$	240,000	$	247,860

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Note 13 – Stock Option and Other Incentive Plans

Since 2001, the Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. All outstanding award grants under the Stock Option Plan continue to remain outstanding at September 30, 2006 under the original terms of the Stock Option Plan. The aggregate number of shares of common stock which may be issued under the Incentive Plan is limited to 10,000,000 shares, subject to adjustments for stock splits, recapitalizations and similar events.

In 2002, the Corporation opted to use the fair value method of recording stock-based compensation as described in SFAS No. 123 “Accounting for Stock Based Compensation”. The Corporation adopted SFAS No. 123-R “Share-Based Payment” on January 1, 2006 using the modified prospective transition method. Under the modified prospective transition method, results for prior periods have not been restated to reflect the effects of implementing SFAS No. 123-R. Accounting and reporting under SFAS No. 123-R is generally similar to the SFAS No. 123 approach since fair value accounting has been used by the Corporation to recognize the stock-based compensation expense since 2002.

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.

Upon the adoption of SFAS No. 123-R during the first quarter of 2006, the compensation cost related to the Stock Option Plan is being recognized in full for those employees that, as of quarter-end, had attained their minimum required eligible age for retirement, since the vesting is accelerated at retirement. The impact of SFAS No. 123-R related to the Stock Option Plan resulted in additional expense of $280 thousand for the nine months ended September 30, 2006.

The following table presents information on stock options at September 30, 2006:

(Not in thousands)


			Weighted Average		Weighted Average		Weighted Average
Exercise Price	Options		Exercise Price of		Remaining Life of	Options	Exercise Price of
Range per Share	Outstanding		Options Outstanding		Options Outstanding	Exercisable	Options Exercisable
					(in years)	(fully vested)

$14.39 - $18.50		1,546,876	$	15.81	5.98	1,174,640	$	15.70
$19.25 - $27.20		1,625,354	$	25.28	7.75	778,966	$	24.97

$14.39 - $27.20		3,172,230	$	20.66	6.89	1,953,606	$	19.39

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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, 2005		2,584,620		$	18.76
Granted		707,342			27.20
Exercised		(47,858	)		16.14
Forfeited		(20,401	)		22.18

Outstanding at December 31, 2005		3,223,703		$	20.63
Granted		—			—
Exercised		(32,237	)		15.78
Forfeited		(17,599	)		23.86
Expired		(1,637	)		24.05

Outstanding at September 30, 2006		3,172,230		$	20.66

The stock options exercisable at September 30, 2006 totaled 1,953,606 (September 30, 2005 — 1,058,706).

The fair value of the options was estimated on the date of the grants using the Black-Scholes Option Pricing Model. The weighted average assumptions used for the grants issued during 2005 were:


	2005

Expected dividend yield		2.56	%
Expected life of options	10 years
Expected volatility		17.54	%
Risk-free interest rate		4.16	%
Weighted average fair value of options granted (per option)	$	5.95

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

The cash received from the stock options exercised during the quarter ended September 30, 2006 amounted to $296 thousand. For the nine months ended September 30, 2006 the cash received from stock options exercised amounted to $509 thousand.

The Corporation recognized $724 thousand in stock option expense for the quarter ended September 30, 2006, with a tax benefit of $293 thousand (September 30, 2005 — $1.3 million, with a tax benefit of $525 thousand). For the nine months ended September 30, 2006, the Corporation recognized $2.3 million in stock option expense, with a tax benefit of $899 thousand (September 30, 2005 - $3.0 million, with a tax benefit of $1.1 million). The total unrecognized compensation cost at September 30, 2006 related to non-vested stock option awards was $4.3 million and is expected to be recognized over a weighted-average period of 1.6 years

Incentive Plan

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

The compensation cost associated with the shares of restricted stock is estimated based on a two-prong vesting schedule, unless otherwise stated in an agreement. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10

38

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.

No additional compensation cost related to the Incentive Plan was recognized by the Corporation during the quarter and nine-month period ended September 30, 2006 as a result of the adoption of SFAS No. 123-R.

The following table summarizes the restricted stock under Management Incentive Award and related information:


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


Nonvested at January 1, 2005		—			—
Granted		172,622		$	27.65
Vested		—			—
Forfeited		—			—


Nonvested at December 31, 2005		172,622		$	27.65
Granted		444,036			20.65
Vested		—			—
Forfeited		(1,010	)		19.95


Nonvested at September 30, 2006		615,648		$	22.53

During the quarters ended September 30, 2006 and 2005, no shares of restricted stock were awarded under the Incentive Plan for management. During the nine-month period ended September 30, 2006, the Corporation granted 444,036 shares of restricted stock to management (September 30, 2005 – 172,622). Also, in the beginning of 2006, the Compensation Committee approved incentive awards under the Incentive Plan based on the 2006 performance, payable in the form of restricted stock. Shares of restricted stock could be granted at the beginning of 2007 subject to the attainment of the established performance goals for 2006.

During the quarter ended September 30, 2006, the impact in the statement of income associated with the management incentives for 2006 payable in the form of restricted stock resulted in a credit to the restricted stock expense of $433 thousand, with a tax benefit of $160 thousand. Based on the Corporation’s forecasted financial performance for 2006 it will be unlikely that the 2006 awards be granted at the beginning of 2007, thus the Corporation reversed the associated restricted stock expense previously accrued in the first half of 2006. The reversal was partially offset by recognized compensation costs related to the vesting proportion of shares of restricted stock granted in previous grants associated with the 2004 and 2005 performance goals. The restricted stock expense for the quarter ended September 30, 2005 amounted to $1.3 million, with an income tax benefit of $503 thousand. For the nine-month period ended September 30, 2006, the Corporation recognized $1.7 million of restricted stock expense related to the management incentive awards, with an income tax benefit of $663 thousand (September 30, 2005 — $2.5 million, with an income tax benefit of $963 thousand). The total unrecognized compensation cost related to non-vested restricted stock awards was $7.3 million and is expected to be recognized over a weighted-average period of 2.7 years.

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

39


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

Nonvested at January 1, 2005		20,802		$	23.51
Granted		29,208			23.71
Vested		(3,062	)		23.87
Forfeited		—			—

Nonvested at December 31, 2005		46,948		$	23.61
Granted		30,897			19.88
Vested		(2,601	)		23.54
Forfeited		—			—

Nonvested at September 30, 2006		75,244		$	22.08

During the quarter ended September 30, 2006, the Corporation granted 1,038 (September 30, 2005 – 750) shares of restricted stock under the Incentive Plan to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $150 thousand, with a tax benefit of $59 thousand (September 30, 2005 — $158 thousand, with a tax benefit of $62 thousand) of restricted stock expense related to these restricted stock grants. For the nine-month period ended September 30, 2006, the Corporation granted 30,897 (September 30, 2005 – 27,593) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $430 thousand, with a tax benefit of $168 thousand (September 30, 2005 — $421 thousand, with a tax benefit of $164 thousand) of restricted stock expense related to these restricted stock grants.

Note 14 – Pension and Other Benefits

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

The components of net periodic pension cost for the quarters and nine months ended September 30, 2006 and 2005 were as follows:


	Pension Plans												Benefit Restoration Plans
	Quarters ended						Nine months ended						Quarters ended						Nine months ended
	September 30,						September 30,						September 30,						September 30,
(In thousands)	2006			2005			2006			2005			2006			2005			2006			2005

Service cost	$	3,135		$	3,858		$	9,405		$	11,689		$	262		$	240		$	786		$	720
Interest cost		7,641			7,438			22,923			22,314			400			313			1,200			939
Expected return on plan assets		(10,009	)		(10,281	)		(29,918	)		(30,462	)		(264	)		(203	)		(792	)		(609	)
Amortization of asset obligation		—			(215	)		—			(645	)		—			—			—			—
Amortization of prior service cost		44			100			132			300			(13	)		(27	)		(39	)		(81	)
Amortization of net loss		488			17			1,464			51			276			147			828			441

Total net periodic cost	$	1,299		$	917		$	4,006		$	3,247		$	661		$	470		$	1,983		$	1,410

For the nine months ended September 30, 2006, contributions made to the pension and restoration plans approximated $5.5 million. The contributions expected to be paid during 2006 for the pension and restoration plans approximate $7 million.

In October 2005, the Board of Directors of BPPR adopted an amendment to the Puerto Rico Retirement and Tax Qualified Retirement Restoration Plans to freeze benefits for all employees under age 30 or who had less than 10 years of credited service effective January 1, 2006 and providing 100% vesting to all employees in their accrued benefit as of December 31, 2005. The expense for these plans was remeasured as of September 30, 2005 to consider this change using a discount rate of 5.50%. Curtailment costs were considered for these plans and are included as part of the December 31, 2005 disclosures. In connection with the amendments to the plans, these employees received a base salary increase according to their age and years of service, effective January 1, 2006.

40

The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and nine months ended September 30, 2006 and 2005 were as follows:


	Quarters ended						Nine months ended
	September 30,						September 30,
(In thousands)	2006			2005			2006			2005

Service cost	$	696		$	680		$	2,095		$	2,033
Interest cost		1,927			2,067			5,781			6,201
Amortization of prior service cost		(262	)		(262	)		(786	)		(786	)
Amortization of net loss		240			423			720			1,269

Total net periodic cost	$	2,601		$	2,908		$	7,810		$	8,717

For the nine months ended September 30, 2006, contributions made to the postretirement benefit plan approximated $5.3 million. The contributions expected to be paid during 2006 for the postretirement benefit plan approximate $7 million.

Note 15 — Trust Preferred Securities

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

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

(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.

41


(f)		The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem 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 46R.

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

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

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

Note 16 — Stockholders’ Equity

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

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

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

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $317 million at September 30, 2006 (December 31, 2005 — $316 million; September 30, 2005 — $285 million). During the nine months ended September 30, 2006, BPPR transferred $1 million to the statutory reserve account. There were no transfers between the statutory reserve account and the retained earnings account during the nine months ended September 30, 2005.

42

Note 17 — Earnings per Common Share

The computation of earnings per common share and diluted earnings per common share follows:


	Quarter ended				Nine months ended
	September 30,				September 30,

(In thousands, except share information)	2006		2005		2006		2005

Net income	$	82,160	$	115,216	$	298,044	$	410,455
Less: Preferred stock dividends		2,979		2,979		8,935		8,935

Net income applicable to common stock after cumulative effect of accounting change	$	79,181	$	112,237	$	289,109	$	401,520

Net income applicable to common stock before cumulative effect of accounting change	$	79,181	$	112,237	$	289,109	$	397,913


Average common shares outstanding		278,602,482		267,244,997		278,349,354		267,043,298
Average potential common shares		210,465		590,367		255,751		539,824

Average common shares outstanding – assuming dilution		278,812,947		267,835,364		278,605,105		267,583,122


Basic earnings per common share before cumulative effect of accounting change	$	0.28	$	0.42	$	1.04	$	1.49

Diluted earnings per common share before cumulative effect of accounting change	$	0.28	$	0.42	$	1.04	$	1.49	*

Basic and diluted earnings per common share after cumulative effect of accounting change	$	0.28	$	0.42	$	1.04	$	1.50


*		Quarterly amounts for 2005 do not add to the year-to-date total due to rounding.

Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter and nine month periods ended September 30, 2006, there were 755,147 and 686,909 weighted average antidilutive stock options outstanding, respectively (September 30, 2005 – 245,332 and 555,961 respectively). All shares of restricted stock are treated as outstanding for purposes of this computation.

Note 18 — Supplemental Disclosure on the Consolidated Statements of Cash Flows

As previously mentioned in Note 1, the Corporation commenced in 2005 a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31^st calendar period. The impact of this change corresponds to the financial results for the month of December 2004 of those non-banking subsidiaries which implemented the change in the first reporting period of 2005 and the month of December 2005 for those which implemented the change in the first reporting period of 2006.

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


	Nine months ended
	September 30,

(In thousands)	2006			2005

Net cash used in operating activities	($	80,906	)	($	26,648	)
Net cash (used in) provided by investing activities		(104,732	)		19,503
Net cash provided by financing activities		197,552			5,573

Net increase (decrease) in cash and due from banks	$	11,914		($	1,572	)

43

Loans receivable transferred to other real estate and other property for the nine months ended September 30, 2006, amounted to $92 million and $24 million, respectively (September 30, 2005 - $86 million and $18 million, respectively).

During the nine months ended September 30, 2006, $613 million in non-conforming loans classified as held-in-portfolio was pooled into trading securities and subsequently sold. The cash inflow from this sale was reflected as operating activities in the consolidated statement of cash flows. In addition, the consolidated statements of cash flows exclude the effect of $519 million and $590 million in non-cash reclassifications of loans held-for-sale to trading securities for the nine months ended September 30, 2006 and 2005, respectively.

Note 19 — Segment Reporting

The Corporation’s corporate structure consists of four reportable segments, which represent the Corporation’s four principal businesses – 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 towards products and services, as well as on the markets the segments serve. Other factors, such as the credit risk characteristics of the loan products, distribution channels and clientele, were also considered in the determination of reportable segments.

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes approximately 107% and 93% of the Corporation’s net income for the quarter and nine months ended September 30, 2006, respectively, and 54% of its total assets as of that date, 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:

This reportable segment includes principally the activities of BPNA, including its subsidiaries Popular Leasing, U.S.A and Popular Insurance Agency, U.S.A. BPNA operates through a branch network of over 135 branches in six states. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Leasing, U.S.A. provides mainly small to mid-ticket commercial and medical equipment financing. The BPNA segment also included in the quarter and nine months ended September 30, 2005, the financial results of PCE, a fee driven business that served the unbanked, retail customer. As stated in the 2005 Annual Report, PCE sold most of its branch operations during the fourth quarter of 2005. The remaining four retail outlets that existed as of year-end 2005, were sold during the first quarter of 2006.

44

Popular Financial Holdings:

This reportable segment corresponds to the Corporation’s consumer lending subsidiaries in the United States, principally Popular Financial Holdings, Inc. and its wholly-owned subsidiaries Equity One, Inc., E-LOAN, Popular Financial Management, LLC, Popular Mortgage Servicing, Inc. and Popular Housing Services, Inc., and Popular FS, LLC. These subsidiaries are primarily engaged in the business of originating mortgage and personal loans, acquiring retail installment contracts and providing warehouse lines to small and medium-sized mortgage companies. This segment also maintains a wholesale broker network as well as a loan servicing unit.

EVERTEC:

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

Corporate:

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

The Corporation may periodically reclassify business segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment.

The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between operating segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

2006

For the quarter ended September 30, 2006


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

Net interest income (loss)	$	227,245	$	88,789	$	35,870		($	501	)		—		$	351,403
Provision for loan losses		31,930		9,760		21,755			—			—			63,445
Non-interest income		101,827		27,422		41,744			57,481		($	33,264	)		195,210
Amortization of intangibles		634		1,516		1,335			123			—			3,608
Depreciation expense		10,871		3,116		2,571			4,173			(18	)		20,713
Other operating expenses		169,356		67,836		81,439			40,793			(33,277	)		326,147
Impact of change in fiscal period		—		—		—			—			—			—
Income tax		28,342		12,914		(10,251	)		4,168			12			35,185


Net income (loss)	$	87,939	$	21,069	($	19,235	)	$	7,723		$	19		$	97,515


Segment Assets	$	25,124,056	$	12,300,119	$	8,782,613		$	217,658		($	174,524	)	$	46,249,922

45

For the quarter ended September 30, 2006


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

Net interest income (loss)	$	351,403	($	9,664	)	$	299		$	342,038
Provision for loan losses		63,445		—			—			63,445
Non-interest income		195,210		(1,571	)		(2,290	)		191,349
Amortization of intangibles		3,608		—			—			3,608
Depreciation expense		20,713		586			—			21,299
Other operating expenses		326,147		11,481			(2,612	)		335,016
Impact of change in fiscal period		—		—			—			—
Income tax		35,185		(7,575	)		249			27,859


Net income (loss)	$	97,515	($	15,727	)	$	372		$	82,160


Segment Assets	$	46,249,922	$	6,579,170		($	5,894,342	)	$	46,934,750

For the nine months ended September 30, 2006


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

Net interest income (loss)	$	682,046		$	273,447	$	142,874		($	1,568	)		—		$	1,096,799
Provision for loan losses		89,395			29,997		60,096			—			—			179,488
Non-interest income		318,551			81,500		108,374			169,523		($	103,731	)		574,217
Amortization of intangibles		1,900			4,546		2,369			345			—			9,160
Depreciation expense		32,915			9,674		7,138			12,411			(53	)		62,085
Other operating expenses		508,032			205,050		246,446			126,515			(103,776	)		982,267
Impact of change in fiscal period		(2,072	)		—		6,181			—			—			4,109
Income tax		92,066			39,109		(24,712	)		10,441			38			116,942


Net income (loss)	$	278,361		$	66,571	($	46,270	)	$	18,243		$	60		$	316,965

For the nine months ended September 30, 2006


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

Net interest income (loss)	$	1,096,799		($30,047	)	$	829		$	1,067,581
Provision for loan losses		179,488		—			—			179,488
Non-interest income		574,217		33,260			(3,309	)		604,168
Amortization of intangibles		9,160		—			—			9,160
Depreciation expense		62,085		1,724			—			63,809
Other operating expenses		982,267		44,229			(3,049	)		1,023,447
Impact of change in fiscal period		4,109		3,495			2,137			9,741
Income tax		116,942		(28,176	)		(706	)		88,060

Net income (loss)	$	316,965		($18,059	)	($	862	)	$	298,044

46

2005

For the quarter ended September 30, 2005


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

Net interest income (loss)	$	224,050	$	88,430	$	43,769		($	84	)		—		$	356,165
Provision for loan losses		25,268		6,750		17,942			—			—			49,960
Non-interest income		99,740		31,472		9,049			55,413		($	35,080	)		160,594
Amortization of intangibles		633		1,676		—			78			—			2,387
Depreciation expense		10,171		3,835		1,311			4,472			(18	)		19,771
Other operating expenses		170,793		73,741		40,311			41,722			(35,196	)		291,371
Income tax		24,473		12,317		(2,336	)		3,204			(84	)		37,574

Net income (loss)	$	92,452	$	21,583	($	4,410	)	$	5,853		$	218		$	115,696


Segment Assets	$	26,187,604	$	12,201,801	$	8,711,470		$	251,989		($	582,443	)	$	46,770,421

For the quarter ended September 30, 2005


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

Net interest income (loss)	$	356,165	($	8,400	)	$	345		$	348,110
Provision for loan losses		49,960		—			—			49,960
Non-interest income		160,594		14,494			(40	)		175,048
Amortization of intangibles		2,387		—			—			2,387
Depreciation expense		19,771		377			—			20,148
Other operating expenses		291,371		15,547			(40	)		306,878
Income tax		37,574		(9,235	)		230			28,569

Net income (loss)	$	115,696	($	595	)	$	115		$	115,216


Segment Assets	$	46,770,421	$	6,160,815		($	5,811,128	)	$	47,120,108

For the nine months ended September 30, 2005


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

Net interest income (loss)	$	669,778	$	265,033		$	153,173	($	386	)		—		$	1,087,598
Provision for loan losses		74,679		21,045			48,508		—			—			144,232
Non-interest income		316,991		87,976			36,898		166,070		($	105,641	)		502,294
Amortization of intangibles		1,889		4,732			—		149			—			6,770
Depreciation expense		31,409		11,535			3,553		13,191			(54	)		59,634
Other operating expenses		507,034		217,094			118,840		123,057			(105,220	)		860,805
Income tax		79,493		36,760			7,375		9,832			(197	)		133,263

Net income before cumulative effect of accounting change	$	292,265	$	61,843		$	11,795	$	19,455		($	170	)	$	385,188
Cumulative effect of accounting change		3,221		(209	)		—		412			(247	)		3,177

Net income after cumulative effect of accounting change	$	295,486	$	61,634		$	11,795	$	19,867		($	417	)	$	388,365

47

For the nine months ended September 30, 2005


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

Net interest income (loss)	$	1,087,598	($	25,806	)	$	1,034		$	1,062,826
Provision for loan losses		144,232		—			—			144,232
Non-interest income		502,294		68,880			(79	)		571,095
Amortization of intangibles		6,770		—			—			6,770
Depreciation expense		59,634		1,133			—			60,767
Other operating expenses		860,805		42,183			(79	)		902,909
Income tax		133,263		(21,266	)		398			112,395

Net income before cumulative effect of accounting change	$	385,188	$	21,024		$	636		$	406,848
Cumulative effect of accounting change		3,177		430			—			3,607

Net income after cumulative effect of accounting change	$	388,365	$	21,454		$	636		$	410,455

During the nine months ended September 30, 2006, the holding companies realized net gains on sale of securities, mainly marketable equity securities, (before tax) of approximately $14.3 million, compared with net gains (before tax) of approximately $59.7 million in the nine months ended September 30, 2005. These net gains are included in “non-interest income” within the “Corporate” circle.

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

2006

For the quarter ended September 30, 2006


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

Net interest income	$	86,555	$	138,006	$	2,640	$	44		$	227,245
Provision for loan losses		9,007		22,923		—		—			31,930
Non-interest income		41,147		34,403		26,596		(319	)		101,827
Amortization of intangibles		222		333		79		—			634
Depreciation expense		4,089		6,477		305		—			10,871
Other operating expenses		56,500		96,570		16,421		(135	)		169,356
Income tax		18,245		5,432		4,685		(20	)		28,342


Net income	$	39,639	$	40,674	$	7,746	($	120	)	$	87,939


Segment Assets	$	10,825,897	$	17,794,686	$	564,088	($	4,060,615	)	$	25,124,056

For the nine months ended September 30, 2006


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

Net interest income	$	252,750	$	421,270	$	7,695		$	331		$	682,046
Provision for loan losses		24,210		65,185		—			—			89,395
Non-interest income		116,070		135,173		69,237			(1,929	)		318,551
Amortization of intangibles		667		1,000		233			—			1,900
Depreciation expense		12,143		19,910		862			—			32,915
Other operating expenses		169,363		292,512		46,794			(637	)		508,032
Impact of change in fiscal period		—		—		(2,072	)		—			(2,072	)
Income tax		47,505		33,814		11,149			(402	)		92,066

Net income (loss)	$	114,932	$	144,022	$	19,966		($	559	)	$	278,361

48

2005

For the quarter ended September 30, 2005


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

Net interest income	$	77,891	$	143,034	$	3,108	$	17		$	224,050
Provision for loan losses		6,920		18,348		—		—			25,268
Non-interest income		38,789		42,411		20,745		(2,205	)		99,740
Amortization of intangibles		225		332		76		—			633
Depreciation expense		3,901		5,970		300		—			10,171
Other operating expenses		55,806		99,663		15,656		(332	)		170,793
Income tax		12,278		10,185		2,748		(738	)		24,473

Net income (loss)	$	37,550	$	50,947	$	5,073	($	1,118	)	$	92,452


Segment Assets	$	10,216,277	$	18,119,091	$	968,357	($	3,116,121	)	$	26,187,604

For the nine months ended September 30, 2005


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

Net interest income	$	223,959	$	435,873	$	9,929	$	17		$	669,778
Provision for loan losses		21,425		53,254		—		—			74,679
Non-interest income		122,187		139,053		57,178		(1,427	)		316,991
Amortization of intangibles		665		993		231		—			1,889
Depreciation expense		11,259		19,112		1,038		—			31,409
Other operating expenses		165,325		299,287		43,486		(1,064	)		507,034
Income tax		34,373		37,770		7,502		(152	)		79,493

Net income before cumulative effect of accounting change	$	113,099	$	164,510	$	14,850	($	194	)	$	292,265
Cumulative effect of accounting change		—		3,797		755		(1,331	)		3,221

Net income after cumulative effect of accounting change	$	113,099	$	168,307	$	15,605	($	1,525	)	$	295,486

INTERSEGMENT REVENUES*


	Quarter ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
(In thousands)	2006			2005			2006			2005

Banco Popular Puerto Rico:
P.R. Commercial Banking	($	271	)	($	363	)	($	886	)	($	1,047	)
P.R. Consumer and Retail Banking		(689	)		(891	)		(2,040	)		(2,368	)
P.R. Other Financial Services		(86	)		(129	)		(241	)		(370	)
Banco Popular North America		154			280			506			590
Popular Financial Holdings		768			934			2,308			2,681
EVERTEC		(33,140	)		(34,911	)		(103,378	)		(105,127	)

Total reportable segments	($	33,264	)	($	35,080	)	($	103,731	)	($	105,641	)


*		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 gain on sales of loans and processing / information technology services.

49

Geographic Information


	Quarter ended				Nine months ended
	September 30,		September 30,		September 30,		September 30,
(In thousands)	2006		2005		2006		2005

Revenues**
Puerto Rico	$	336,086	$	340,441	$	1,044,293	$	1,058,100
United States		178,218		170,164		570,111		528,619
Other		19,083		12,553		57,345		47,202

Total consolidated revenues	$	533,387	$	523,158	$	1,671,749	$	1,633,921


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


	September 30,		December 31,		September 30,
(In thousands)	2006		2005		2005

Selected Balance Sheet Information:
Puerto Rico
Total assets	$	24,559,859	$	25,759,437	$	25,956,498
Loans		14,275,223		14,130,645		13,513,112
Deposits		13,091,696		13,093,540		13,083,189
Mainland United States
Total assets	$	21,200,909	$	21,780,226	$	20,141,315
Loans		16,870,565		17,023,443		16,506,652
Deposits		8,880,915		8,370,150		8,376,354
Other
Total assets	$	1,173,982	$	1,084,005	$	1,022,295
Loans		611,171		556,119		530,319
Deposits *		1,164,834		1,174,315		1,119,166


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

Note 20 — 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 September 30, 2006, December 31, 2005 and September 30, 2005, and the results of their operations and cash flows for the periods ended September 30, 2006 and 2005.

In 2005, the Corporation commenced a two-year plan to change its non-banking subsidiaries to a calendar reporting year-end. As of September 30, 2005 and December 31, 2005, Popular Securities, Inc., Popular North America (holding company), Popular FS, LLC and Popular Financial Holdings, Inc. (“PFH”), including its wholly-owned subsidiaries (except E-LOAN, which already had a December 31^st year-end since its acquisition), continued to have a fiscal year that ended on November 30. Accordingly, their financial information as of August 31, 2005 and November 30, 2005 corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of September 30, 2005 and December 31, 2005. As of September 30, 2006, all subsidiaries have aligned their year-end closing to that of the Corporation’s calendar year.

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

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

•

PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Housing Services, Inc.,

50

			Popular Mortgage Servicing, Inc. and E-LOAN, Inc.;

	•		Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Leasing, U.S.A., Popular Insurance Agency, U.S.A. and Popular FS, LLC;

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

	•		EVERTEC USA, Inc.

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

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

The principal source of income for PIHC consists of dividends from Banco Popular de Puerto Rico (“BPPR”). As a member of the Federal Reserve System, BPPR is subject to the regulations of the Federal Reserve Board. BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. At September 30, 2006, BPPR could have declared a dividend of approximately $211 million without the approval of the Federal Reserve Board (December 31, 2005 — $231 million; September 30, 2005 — $210 million). Refer to Popular, Inc.’s Form 10-K for the year ended December 31, 2005 for further information on dividend restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR, BPNA and BP, N.A.

51

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


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

ASSETS

Cash and due from banks	$	769		$	204		$	15,019		$	777,966		($	57,289	)	$	736,669
Money market investments		60,000			300			242			678,444			(193,737	)		545,249
Investment securities available-for-sale, at fair value		8,536			70,500			9,677			10,069,659			(47	)		10,158,325
Investment securities held-to-maturity, at amortized cost		699,683			2,160						85,587			(430,000	)		357,430
Other investment securities, at lower of cost or realizable value		143,782			5,001			18,671			130,018						297,472
Trading account securities, at fair value											451,684			(22	)		451,662
Investment in subsidiaries		3,198,490			1,158,368			2,077,657			803,046			(7,237,561	)
Loans held-for-sale, at lower of cost or market value											447,314						447,314

Loans held-in-portfolio		27,032						2,819,009			34,601,455			(5,832,737	)		31,614,759
Less — Unearned income											305,114						305,114
Allowance for loan losses		40									487,299						487,339

		26,992						2,819,009			33,809,042			(5,832,737	)		30,822,306

Premises and equipment, net		26,217						135			562,117			(187	)		588,282
Other real estate											83,636						83,636
Accrued income receivable		359			43			11,243			301,402			(24,705	)		288,342
Other assets		61,963			41,661			44,255			1,236,372			(9,351	)		1,374,900
Goodwill											678,666						678,666
Other intangible assets		554									103,943						104,497

	$	4,227,345		$	1,278,237		$	4,995,908		$	50,218,896		($	13,785,636	)	$	46,934,750


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	3,879,816		($	57,232	)	$	3,822,584
Interest bearing											19,408,598			(93,737	)		19,314,861

											23,288,414			(150,969	)		23,137,445
Federal funds purchased and assets sold under agreements to repurchase							$	73,000			7,058,466			(86,000	)		7,045,466
Other short-term borrowings				$	300			130,556			3,711,662			(1,133,007	)		2,709,511
Notes payable	$	532,428						3,533,639			10,286,509			(4,670,679	)		9,681,897
Subordinated notes											430,000			(430,000	)
Other liabilities		58,894			58			114,508			594,723			(43,887	)		724,296

		591,322			358			3,851,703			45,369,774			(6,514,542	)		43,298,615

Minority interest in consolidated subsidiaries											111						111

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,751,868			3,961			2			70,421			(74,384	)		1,751,868
Surplus		489,397			851,193			734,964			3,103,198			(4,684,354	)		494,398
Retained earnings		1,616,104			481,905			432,772			1,852,429			(2,772,107	)		1,611,103
Accumulated other comprehensive loss, net of tax		(201,688	)		(59,180	)		(23,533	)		(175,251	)		257,965			(201,687	)
Treasury stock, at cost		(206,533	)								(1,786	)		1,786			(206,533	)

		3,636,023			1,277,879			1,144,205			4,849,011			(7,271,094	)		3,636,024

	$	4,227,345		$	1,278,237		$	4,995,908		$	50,218,896		($	13,785,636	)	$	46,934,750

52

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2005
(UNAUDITED)


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

ASSETS
Cash and due from banks	$	696		$	2,103		$	448		$	962,395		($	59,245	)	$	906,397
Money market investments		230,000			300			245			1,048,586			(529,708	)		749,423
Investment securities available-for-sale, at fair value		18,271			77,861						11,620,673			(219	)		11,716,586
Investment securities held-to-maturity, at amortized cost		430,000			2,170						150,934			(430,000	)		153,104
Other investment securities, at lower of cost or realizable value		145,535			5,001			13,142			155,425						319,103
Trading account securities, at fair value											520,236			(898	)		519,338
Investment in subsidiaries		3,112,125			1,169,867			1,832,349			767,615			(6,881,956	)
Loans held-for-sale, at lower of cost or market value											699,181						699,181

Loans held-in-portfolio		25,752						2,993,028			34,034,625			(5,744,766	)		31,308,639
Less — Unearned income											297,613						297,613
Allowance for loan losses		40									461,667						461,707

		25,712						2,993,028			33,275,345			(5,744,766	)		30,549,319

Premises and equipment, net		23,026									573,786			(241	)		596,571
Other real estate											79,008						79,008
Accrued income receivable		532			33			11,982			253,818			(20,719	)		245,646
Other assets		44,252			40,526			23,804			1,221,472			(4,254	)		1,325,800
Goodwill											653,984						653,984
Other intangible assets		554									109,654						110,208

	$	4,030,703		$	1,297,861		$	4,874,998		$	52,092,112		($	13,672,006	)	$	48,623,668


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,025,227		($	66,835	)	$	3,958,392
Interest bearing											18,811,225			(131,612	)		18,679,613

											22,836,452			(198,447	)		22,638,005
Federal funds purchased and assets sold under agreements to repurchase							$	117,226			8,968,332			(383,097	)		8,702,461
Other short-term borrowings				$	46,112			721,866			3,521,486			(1,589,203	)		2,700,261
Notes payable	$	532,441						2,833,035			11,055,117			(4,527,016	)		9,893,577
Subordinated notes											430,000			(430,000	)
Other liabilities		49,015			871			42,382			757,646			390,088			1,240,002

		581,456			46,983			3,714,509			47,569,033			(6,737,675	)		45,174,306

Minority interest in consolidated subsidiaries											115						115

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,736,443			3,961			2			70,385			(74,348	)		1,736,443
Surplus		449,787			815,193			734,964			2,778,437			(4,325,983	)		452,398
Retained earnings		1,459,223			480,541			451,271			1,838,530			(2,772,953	)		1,456,612
Accumulated other comprehensive loss, net of tax		(176,000	)		(48,817	)		(25,748	)		(159,996	)		234,561			(176,000	)
Treasury stock, at cost		(207,081	)								(4,392	)		4,392			(207,081	)

		3,449,247			1,250,878			1,160,489			4,522,964			(6,934,331	)		3,449,247

	$	4,030,703		$	1,297,861		$	4,874,998		$	52,092,112		($	13,672,006	)	$	48,623,668

53

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2005
(UNAUDITED)


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

ASSETS
Cash and due from banks	$	781		$	3,032		$	419		$	940,348		($	55,435	)	$	889,145
Money market investments		164,300			300			220			1,196,681			(723,280	)		638,221
Investment securities available-for-sale, at fair value		17,654			68,536			7,295			11,398,575			1,148			11,493,208
Investment securities held-to-maturity, at amortized cost		430,000			2,174						357,054			(430,000	)		359,228
Other investment securities, at lower of cost or realizable value		145,785			5,001			12,642			167,713						331,141
Trading account securities, at fair value											542,755			(766	)		541,989
Investment in subsidiaries		3,066,272			1,153,679			1,507,428			458,779			(6,186,158	)
Loans held-for-sale, at lower of cost or market value											702,559			164,500			867,059

Loans held-in-portfolio		25,927						3,210,339			33,067,354			(6,326,840	)		29,976,780
Less — Unearned income											293,756						293,756
Allowance for loan losses		40									459,385						459,425

		25,887						3,210,339			32,314,213			(6,326,840	)		29,223,599

Premises and equipment, net		23,405									569,104			(259	)		592,250
Other real estate		18									77,975						77,993
Accrued income receivable		572			35			11,777			268,680			(19,967	)		261,097
Other assets		49,852			41,568			20,518			1,157,075			7,563			1,276,576
Goodwill											525,036						525,036
Other intangible assets											43,566						43,566

	$	3,924,526		$	1,274,325		$	4,770,638		$	50,720,113		($	13,569,494	)	$	47,120,108


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	3,788,585		($	55,359	)	$	3,733,226
Interest bearing											19,237,755			(392,272	)		18,845,483

											23,026,340			(447,631	)		22,578,709
Federal funds purchased and assets sold under agreements to repurchase							$	132,635			8,201,162			(316,014	)		8,017,783
Other short-term borrowings				$	41,663			600,117			4,153,601			(1,886,858	)		2,908,523
Notes payable	$	527,086						2,837,729			10,408,944			(4,209,334	)		9,564,425
Subordinated notes		125,000									430,000			(430,000	)		125,000
Other liabilities		51,044			586			55,629			641,172			(44,260	)		704,171

		703,130			42,249			3,626,110			46,861,219			(7,334,097	)		43,898,611

Minority interest in consolidated subsidiaries											101						101

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,683,629			3,962			2			70,385			(74,349	)		1,683,629
Surplus		289,807			815,193			734,964			2,140,696			(3,688,242	)		292,418
Retained earnings		1,405,744			452,470			424,085			1,770,058			(2,649,224	)		1,403,133
Accumulated other comprehensive loss, net of tax		(137,578	)		(39,549	)		(14,523	)		(120,012	)		174,084			(137,578	)
Treasury stock, at cost		(207,081	)								(2,334	)		2,334			(207,081	)

		3,221,396			1,232,076			1,144,528			3,858,793			(6,235,397	)		3,221,396

	$	3,924,526		$	1,274,325		$	4,770,638		$	50,720,113		($	13,569,494	)	$	47,120,108

54

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


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

INTEREST INCOME:
Loans	$	694					$	37,876		$	671,409	($	72,733	)	$	637,246
Money market investments		200		$	12			2			9,234		(2,410	)	$	7,038
Investment securities		11,318			366			517			124,119		(6,997	)		129,323
Trading account securities											7,724					7,724

		12,212			378			38,395			812,486		(82,140	)		781,331

INTEREST EXPENSE:
Deposits											152,164		(1,156	)		151,008
Short-term borrowings		71			396			3,776			152,553		(15,069	)		141,727
Long-term debt		9,134						47,722			157,288		(67,586	)		146,558

		9,205			396			51,498			462,005		(83,811	)		439,293

Net interest income (loss)		3,007			(18	)		(13,103	)		350,481		1,671			342,038
Provision for loan losses											63,445					63,445

Net interest income (loss) after provision for loan losses		3,007			(18	)		(13,103	)		287,036		1,671			278,593
Service charges on deposit accounts											47,484					47,484
Other service fees											106,498		(26,861	)		79,637
Net (loss) gain on sale and valuation adjustment of investment securities		(143	)		106						846		6,314			7,123
Trading account profit											5,221		4,798			10,019
Gain on sale of loans											16,421		3,692			20,113
Other operating income (loss)		696			1,676			(3,090	)		38,318		(10,627	)		26,973

		3,560			1,764			(16,193	)		501,824		(21,013	)		469,942

OPERATING EXPENSES:
Personnel costs:
Salaries		4,165			95						127,252		(899	)		130,613
Pension, profit sharing and other benefits		1,129			15						33,178		(239	)		34,083

		5,294			110						160,430		(1,138	)		164,696
Net occupancy expenses		594			4			1			30,974					31,573
Equipment expenses		420			3			3			33,946		(26	)		34,346
Other taxes		353									11,417					11,770
Professional fees		2,028			11			56			62,044		(34,521	)		29,618
Communications		152									17,221		(30	)		17,343
Business promotion		800									33,694		(639	)		33,855
Printing and supplies		26						1			4,381					4,408
Other operating expenses		(9,309	)		(100	)		109			38,391		(385	)		28,706
Amortization of intangibles											3,608					3,608

		358			28			170			396,106		(36,739	)		359,923

Income (loss) before income tax and equity in earnings of subsidiaries		3,202			1,736			(16,363	)		105,718		15,726		$	110,019
Income tax		(938	)					(1,855	)		26,845		3,807			27,859

Income (loss) before equity in earnings of subsidiaries		4,140			1,736			(14,508	)		78,873		11,919			82,160
Equity in earnings of subsidiaries		78,020			(13,525	)		337			1,523		(66,355	)

NET INCOME (LOSS)	$	82,160		($	11,789	)	($	14,171	)	$	80,396	($	54,436	)	$	82,160

55

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
(UNAUDITED)


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

INTEREST INCOME:
Loans	$	542					$	35,544		$	550,328		($	59,280	)	$	527,134
Money market investments		1,151		$	2			9			10,428			(4,088	)		7,502
Investment securities		7,637			289			316			122,442			(6,983	)		123,701
Trading account securities											7,751						7,751

		9,330			291			35,869			690,949			(70,351	)		666,088

INTEREST EXPENSE:
Deposits											115,101			(1,302	)		113,799
Short-term borrowings		68			426			4,098			99,634			(15,013	)		89,213
Long-term debt		11,026						38,644			121,615			(56,319	)		114,966

		11,094			426			42,742			336,350			(72,634	)		317,978

Net interest (loss) income		(1,764	)		(135	)		(6,873	)		354,599			2,283			348,110
Provision for loan losses											49,960						49,960

Net interest (loss) income after provision for loan losses		(1,764	)		(135	)		(6,873	)		304,639			2,283			298,150
Service charges on deposit accounts											46,836						46,836
Other service fees											111,190			(26,186	)		85,004
Net gain (loss) on sale and valuation adjustment of investment securities					9,237						(9,648	)		(509	)		(920	)
Trading account profit											4,529			178			4,707
Gain on sale of loans											23,768			(6,183	)		17,585
Other operating income		3,292			2,877						25,472			(9,805	)		21,836

		1,528			11,979			(6,873	)		506,786			(40,222	)		473,198

OPERATING EXPENSES:
Personnel costs:
Salaries					92						120,877			(957	)		120,012
Pension, profit sharing and other benefits					14						34,928			(272	)		34,670

					106						155,805			(1,229	)		154,682
Net occupancy expenses					4						27,715						27,719
Equipment expenses		8						2			31,190			(15	)		31,185
Other taxes		237									10,131						10,368
Professional fees		1,299			4			9			60,584			(34,008	)		27,888
Communications		18									15,640			(18	)		15,640
Business promotion		1,967									21,973						23,940
Printing and supplies											4,845						4,845
Other operating expenses		(3,265	)		5			112			34,265			(358	)		30,759
Amortization of intangibles											2,387						2,387

		264			119			123			364,535			(35,628	)		329,413

Income (loss) before income tax and equity in earnings of subsidiaries		1,264			11,860			(6,996	)		142,251			(4,594	)		143,785
Income tax								(2,463	)		32,301			(1,269	)		28,569

Income (loss) before equity in earnings of subsidiaries		1,264			11,860			(4,533	)		109,950			(3,325	)		115,216
Equity in earnings of subsidiaries		113,952			10,867			14,951			4,277			(144,047	)

NET INCOME	$	115,216		$	22,727		$	10,418		$	114,227		($	147,372	)	$	115,216

56

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)


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

INTEREST INCOME:
Loans	$	6,118					$	111,043		$	1,934,965		($	209,253	)	$	1,842,873
Money market investments		1,722		$	131			439			29,389			(8,755	)		22,926
Investment securities		27,686			1,029			964			387,361			(20,910	)		396,130
Trading account securities											23,649						23,649

		35,526			1,160			112,446			2,375,364			(238,918	)		2,285,578

INTEREST EXPENSE:
Deposits											414,636			(3,256	)		411,380
Short-term borrowings		174			1,237			13,878			422,032			(43,717	)		393,604
Long-term debt		27,184						138,060			445,564			(197,795	)		413,013

		27,358			1,237			151,938			1,282,232			(244,768	)		1,217,997

Net interest income (loss)		8,168			(77	)		(39,492	)		1,093,132			5,850			1,067,581
Provision for loan losses											179,488						179,488

Net interest income (loss) after provision for loan losses		8,168			(77	)		(39,492	)		913,644			5,850			888,093
Service charges on deposit accounts											142,277						142,277
Other service fees											321,510			(81,510	)		240,000
Net gain (loss) on sale and valuation adjustment of investment securities		589			13,595						(15,869	)		6,724			5,039
Trading account profit											6,404			16,920			23,324
Gain on sale of loans											100,653			(4,225	)		96,428
Other operating income (loss)		15,169			5,177			(271	)		106,845			(29,820	)		97,100

		23,926			18,695			(39,763	)		1,575,464			(86,061	)		1,492,261

OPERATING EXPENSES:
Personnel costs:
Salaries		14,823			283						380,183			(2,444	)		392,845
Pension, profit sharing and other benefits		4,149			51						112,878			(692	)		116,386

		18,972			334						493,061			(3,136	)		509,231
Net occupancy expenses		1,723			11			1			87,105						88,840
Equipment expenses		1,221			6			10			100,336			(57	)		101,516
Other taxes		853									32,087						32,940
Professional fees		12,187			34			132			196,099			(103,268	)		105,184
Communications		471									51,531			(66	)		51,936
Business promotion		3,887									95,561			(779	)		98,669
Printing and supplies		62						1			13,268						13,331
Other operating expenses		(39,508	)		(299	)		327			126,182			(1,093	)		85,609
Impact of change in fiscal period of certain subsidiaries								3,495			4,109			2,137			9,741
Amortization of intangibles											9,160						9,160

		(132	)		86			3,966			1,208,499			(106,262	)		1,106,157

Income (loss) before income tax and equity in earnings of subsidiaries		24,058			18,609			(43,729	)		366,965			20,201			386,104
Income tax		1,778						(11,015	)		93,258			4,039			88,060

Income (loss) before equity in earnings of subsidiaries		22,280			18,609			(32,714	)		273,707			16,162			298,044
Equity in earnings of subsidiaries		275,764			(17,246	)		14,214			(9,110	)		(263,622	)

NET INCOME (LOSS)	$	298,044		$	1,363		($	18,500	)	$	264,597		($	247,460	)	$	298,044

57

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)


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

INTEREST INCOME:
Loans	$	1,572					$	104,803		$	1,606,368		($	170,104	)	$	1,542,639
Money market investments		2,671		$	5			27			30,957			(10,718	)		22,942
Investment securities		22,650			322			948			355,585			(20,748	)		358,757
Trading account securities											22,126						22,126

		26,893			327			105,778			2,015,036			(201,570	)		1,946,464

INTEREST EXPENSE:
Deposits											314,211			(3,668	)		310,543
Short-term borrowings		184			534			10,403			259,060			(37,789	)		232,392
Long-term debt		32,920						115,876			359,056			(167,149	)		340,703

		33,104			534			126,279			932,327			(208,606	)		883,638

Net interest (loss) income		(6,211	)		(207	)		(20,501	)		1,082,709			7,036			1,062,826
Provision for loan losses											144,232						144,232

Net interest (loss) income after provision for loan losses		(6,211	)		(207	)		(20,501	)		938,477			7,036			918,594
Service charges on deposit accounts											135,660						135,660
Other service fees											325,194			(77,334	)		247,860
Net gain (loss) on sale and valuation adjustment of investment securities		50,469			9,237						(8,306	)		(509	)		50,891
Trading account profit											14,968			13,170			28,138
Gain on sale of loans											60,172			(17,497	)		42,675
Other operating income		7,268			5,190						84,027			(30,614	)		65,871

		51,526			14,220			(20,501	)		1,550,192			(105,748	)		1,489,689

OPERATING EXPENSES:
Personnel costs:
Salaries					274						353,850			(2,763	)		351,361
Pension, profit sharing and other benefits					45						114,241			(797	)		113,489

					319						468,091			(3,560	)		464,850
Net occupancy expenses					11						78,403						78,414
Equipment expenses		24			1			7			90,043			(46	)		90,029
Other taxes		784									28,304						29,088
Professional fees		2,693			9			21			182,191			(102,127	)		82,787
Communications		42									46,592			(55	)		46,579
Business promotion		4,467									65,393						69,860
Printing and supplies											13,971						13,971
Other operating expenses		(7,104	)		27			345			95,940			(1,110	)		88,098
Amortization of intangibles											6,770						6,770

		906			367			373			1,075,698			(106,898	)		970,446

Income (loss) before income tax, cumulative effect of accounting change and equity in earnings of subsidiaries		50,620			13,853			(20,874	)		474,494			1,150			519,243
Income tax		3,155						(7,349	)		116,151			438			112,395

Income (loss) before cumulative effect of accounting change and equity in earnings of subsidiaries		47,465			13,853			(13,525	)		358,343			712			406,848
Cumulative effect of accounting change, net of tax					691						4,494			(1,578	)		3,607

Income (loss) before equity in earnings of subsidiaries		47,465			14,544			(13,525	)		362,837			(866	)		410,455
Equity in earnings of subsidiaries		362,990			56,430			68,949			55,008			(543,377	)

NET INCOME	$	410,455		$	70,974		$	55,424		$	417,845		($	544,243	)	$	410,455

58

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


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

Cash flows from operating activities:
Net income (loss)	$	298,044		$	1,363			($18,500	)	$	264,597			($247,460	)	$	298,044
Less: Impact of change in fiscal period of certain subsidiaries, net of tax								(2,271	)		(2,638	)		(1,220	)		(6,129	)

Net income before impact of change in fiscal period		298,044			1,363			(16,229	)		267,235			(246,240	)		304,173

Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(275,764	)		17,246			(14,214	)		9,110			263,622
Depreciation and amortization of premises and equipment		1,723						1			62,135			(54	)		63,805
Provision for loan losses											179,488						179,488
Amortization of intangibles											9,160						9,160
Amortization of servicing assets											43,333			(24	)		43,309
Net (gain) loss on sale and valuation adjustment of investment securities		(589	)		(13,595	)					15,870			(6,725	)		(5,039	)
Net loss (gain) on disposition of premises and equipment		4									(7,181	)					(7,177	)
Net gain on sale of loans											(100,653	)		4,225			(96,428	)
Net amortization of premiums and accretion of discounts on investments		(394	)		10			(118	)		19,752			(190	)		19,060
Net amortization of premiums and deferred loan origination fees and costs		(54	)								103,619			(4,500	)		99,065
Earnings from investments under the equity method		(1,924	)		(5,165	)					(894	)		(1,098	)		(9,081	)
Stock options expense		566									1,742						2,308
Net disbursements on loans held-for-sale											(4,940,234	)					(4,940,234	)
Acquisitions of loans held-for-sale											(1,188,844	)					(1,188,844	)
Proceeds from sale of loans held-for-sale											5,559,968						5,559,968
Net decrease in trading securities											1,196,104			(465	)		1,195,639
Net decrease (increase) in accrued income receivable		172			(9	)		1,301			(48,925	)		3,150			(44,311	)
Net (increase) decrease in other assets		(12,670	)		4,644			2,316			(10,184	)		1,586			(14,308	)
Net increase (decrease) in interest payable		818			(23	)		27,452			16,173			(3,163	)		41,257
Net (increase) decrease in deferred income tax								(8,993	)		24,756			4,660			20,423
Net increase in postretirement benefit obligation											3,028						3,028
Net increase (decrease) in other liabilities		9,014			3			40,905			(138,083	)		1			(88,160	)

Total adjustments		(279,098	)		3,111			48,650			809,240			261,025			842,928

Net cash provided by operating activities		18,946			4,474			32,421			1,076,475			14,785			1,147,101

Cash flows from investing activities:
Net decrease (increase) in money market investments		170,000						(91	)		381,685			(347,272	)		204,322
Purchases of investment securities:
Available-for-sale					(21,189	)					(437,372	)		215,080			(243,481	)
Held-to-maturity		(269,683	)								(20,578,088	)					(20,847,771	)
Other								(5,529	)		(45,451	)					(50,980	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale											1,777,303			(216,691	)		1,560,612
Held-to-maturity											20,644,100						20,644,100
Other		1,753									70,858						72,611
Proceeds from sale of investment securities available-for-sale		7,195			28,628						154,426			7,942			198,191
Net (disbursements) repayments on loans		(1,325	)					12,467			(1,066,200	)		177,430			(877,628	)
Proceeds from sale of loans											759,518						759,518
Acquisition of loan portfolios											(291,330	)					(291,330	)
Capital contribution to subsidiary		(36,000	)		(4,000	)		(4,127	)		(30,891	)		75,018
Assets acquired, net of cash											(2,752	)					(2,752	)
Acquisition of premises and equipment		(4,919	)								(80,496	)					(85,415	)
Proceeds from sale of premises and equipment											39,031						39,031
Proceeds from sale of foreclosed assets		99									99,829						99,928
Dividends received from subsidiary		203,200									60,763			(263,963	)

Net cash provided by investing activities		70,320			3,439			2,720			1,454,933			(352,456	)		1,178,956

Cash flows from financing activities:
Net increase in deposits											446,624			47,467			494,091
Net decrease in federal funds purchased and assets sold under agreements to repurchase								(68,700	)		(2,009,943	)		308,497			(1,770,146	)
Net (decrease) increase in other short-term borrowings					(45,812	)		(228,545	)		56,315			120,400			(97,642	)
Payments of notes payable		(450	)					(205,962	)		(2,363,884	)		747,993			(1,822,303	)
Proceeds from issuance of notes payable		294						482,559			1,360,425			(1,066,107	)		777,171
Dividends paid to parent company											(263,962	)		263,962
Dividends paid		(140,765	)														(140,765	)
Proceeds from issuance of common stock		51,728									3,300			(3,133	)		51,895
Capital contribution from parent					36,000						35,718			(71,718	)

59


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

Net cash used in financing activities		(89,193	)		(9,812	)		(20,648	)		(2,735,407	)		347,361			(2,507,699	)

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

Net increase (decrease) in cash and due from banks		73			(1,899	)		14,571			(184,429	)		1,956			(169,728	)
Cash and due from banks at beginning of period		696			2,103			448			962,395			(59,245	)		906,397

Cash and due from banks at end of period	$	769		$	204		$	15,019		$	777,966			($57,289	)	$	736,669

60

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)


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

Cash flows from operating activities:
Net income	$	410,455		$	70,974		$	55,424		$	417,845			($544,243	)	$	410,455
Less: Cumulative effect of accounting change, net of tax					691						4,494			(1,578	)		3,607

Net income before cumulative effect of accounting change		410,455			70,283			55,424			413,351			(542,665	)		406,848

Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(362,990	)		(56,430	)		(68,949	)		(55,008	)		543,377
Depreciation and amortization of premises and equipment		1,133									59,688			(54	)		60,767
Provision for loan losses											144,232						144,232
Amortization of intangibles											6,770						6,770
Amortization of servicing assets											15,122			(37	)		15,085
Net gain (loss) on sale and valuation adjustment of investment securities		(50,469	)		(9,237	)					8,306			509			(50,891	)
Net gain on disposition of premises and equipment											(11,165	)					(11,165	)
Net gain on sale of loans											(60,172	)		17,497			(42,675	)
Net amortization of premiums and accretion of discounts on investments		(403	)		7						31,666			(561	)		30,709
Net amortization of premiums and deferred loan origination fees and costs		(76	)								98,086			(5,424	)		92,586
Earnings from investments under the equity method		(2,344	)		(4,859	)					(507	)		(1,207	)		(8,917	)
Stock options expense		253									2,714			3			2,970
Net disbursements on loans held-for-sale											(3,036,706	)					(3,036,706	)
Acquisitions of loans held-for-sale											(672,186	)					(672,186	)
Proceeds from sale of loans held-for-sale											2,607,051						2,607,051
Net decrease in trading securities											984,028			(1,109	)		982,919
Net increase in accrued income receivable		(387	)		(34	)		(941	)		(47,021	)		2,124			(46,259	)
Net (increase) decrease in other assets		(231	)		911			2,414			(149,473	)		(33,196	)		(179,575	)
Net increase (decrease) in interest payable		3,544			(2	)		14,859			19,460			(2,124	)		35,737
Net increase in deferred income tax		(182	)					(7,349	)		(5,921	)		278			(13,174	)
Net increase in postretirement benefit obligation											3,631						3,631
Net increase (decrease) in other liabilities		3,382			(14	)		5,722			(42,623	)		(4,417	)		(37,950	)

Total adjustments		(408,770	)		(69,658	)		(54,244	)		(100,028	)		515,659			(117,041	)

Net cash provided by operating activities		1,685			625			1,180			313,323			(27,006	)		289,807

Cash flows from investing activities:

Net (increase) decrease in money market investments		(115,800	)					(6	)		61,028			326,042			271,264
Purchases of investment securities:
Available-for-sale		(127,628	)		(64,386	)					(3,834,956	)		705,168			(3,321,802	)
Held-to-maturity					(2,431	)					(25,545,995	)					(25,548,426	)
Other		(195	)					(270	)		(62,929	)					(63,394	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		110,432									3,316,108			(709,877	)		2,716,663
Held-to-maturity		150,000			250						25,398,755						25,549,005
Other											34,693						34,693
Proceeds from sale of investment securities available for sale		57,458			32,111						183,040						272,609
Net repayments (disbursements) on loans		15,601						(373,639	)		232,814			781,486			656,262
Proceeds from sale of loans											109,244						109,244
Acquisition of loan portfolios											(2,301,771	)					(2,301,771	)
Capital contribution to subsidiary		(75,000	)		(75,000	)		(176,433	)		(2,500	)		328,933
Assets acquired, net of cash											(180,744	)					(180,744	)
Acquisition of premises and equipment		(5	)								(118,377	)					(118,382	)
Proceeds from sale of premises and equipment											30,631						30,631
Proceeds from sale of foreclosed assets		279									83,729						84,008
Dividends received from subsidiary		128,200						150,000			52,500			(330,700	)

Net cash provided by (used in) investing activities		143,342			(109,456	)		(400,348	)		(2,544,730	)		1,101,052			(1,810,140	)

Cash flows from financing activities:

Net increase in deposits											1,452,474			(139,461	)		1,313,013
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase		(6,690	)					61,335			1,671,278			(182,713	)		1,543,210
Net (decrease) increase in other short-term borrowings		(4,501	)		36,837			260,464			138,443			(665,608	)		(234,365	)
Payments of notes payable		(10,750	)					(10,830	)		(1,632,137	)		(422,413	)		(2,076,130	)
Proceeds from issuance of notes payable		285						13,234			930,142			329,542			1,273,203
Dividends paid to parent company											(330,700	)		330,700
Dividends paid		(137,014	)														(137,014	)
Proceeds from issuance of common stock		14,141															14,141
Treasury stock acquired											(1,467	)					(1,467	)
Capital contribution from parent					75,000			75,000			178,174			(328,174	)

61


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

Net cash (used in) provided by financing activities		(144,529	)		111,837			399,203		2,406,207			(1,078,127	)		1,694,591

Cash effect of accounting change					(28	)				(1,544	)					(1,572	)

Net increase in cash and due from banks		498			2,978			35		173,256			(4,081	)		172,686
Cash and due from banks at beginning of period		283			54			384		767,092			(51,354	)		716,459

Cash and due from banks at end of period	$	781		$	3,032		$	419	$	940,348			($55,435	)	$	889,145

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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

As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending, reinsurance and insurance agency services through specialized subsidiaries. In the United States, the Corporation has established the largest Hispanic-owned financial services franchise, Banco Popular North America (“BPNA”), providing complete financial solutions to all the communities it serves. Also, in the United States, Popular Financial Holdings, Inc. (“PFH”), holding company of Equity One, Inc., offers mortgage and personal loans, and maintains a substantial wholesale loan brokerage network, a warehouse lending division and a loan servicing unit. PFH, through its newly acquired subsidiary E-LOAN, Inc. (“E-LOAN”), also provides online consumer direct lending to obtain mortgage, auto and home equity loans. The Corporation strives to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. EVERTEC, Inc. (“EVERTEC”), the Corporation’s main subsidiary in this business segment, is the leading provider of financial transaction processing and information technology solutions in Puerto Rico and the Caribbean. EVERTEC serves customers in 11 Latin American countries. Also, the Corporation recently incorporated EVERTEC USA, Inc. with plans to expand its service offerings in the U.S. mainland.

Financial highlights for the quarter ended September 30, 2006, compared with the same quarter in 2005, are included below. Also, Table A provides selected financial data for those quarters, as well as several year-to-date selected financial information and performance metrics.

	•		Reduced net interest income resulting from a decline in the Corporation’s net interest margin, partially offset by growth in earning assets. Tables B and C provide information on the Corporation’s net interest income on a taxable equivalent basis for the quarter and nine months ended September 30, 2006 and 2005.

	•		Higher provision for loan losses, primarily associated with growth in the loan portfolio, higher non-performing loans and higher net charge-offs. Refer to the Credit Risk Management and Loan Quality section, including Tables J, K and L, for a more detailed analysis of the allowance for loan losses, net charge-offs, non-performing assets and credit quality metrics. Also, refer to Item 1A — Risk Factors included in Part II — Other Information in this Form 10-Q for information on Puerto Rico’s current economic condition.

	•		Favorable variance in non-interest income by 9% resulting from higher gains on the sale of loans and trading profits related primarily to mortgage-backed securities, higher gains on the sale of real estate property and lower unfavorable adjustments on interest-only securities, partially offset by a reduction in other service fees. Refer to the Non-interest Income section of this MD&A for more detailed information.

63

TABLE A
Financial Highlights


Financial Condition Highlights	At September 30,							Average for the nine months
(In thousands)	2006		2005		Variance			2006		2005		Variance

Money market investments	$	545,249	$	638,221		($92,972	)	$	585,959	$	816,484		($230,525	)
Investment and trading securities		11,264,889		12,725,566		(1,460,677	)		12,613,184		12,656,906		(43,722	)
Loans*		31,756,959		30,550,083		1,206,876			32,047,516		29,213,718		2,833,798
Total earning assets		43,567,097		43,913,870		(346,773	)		45,246,659		42,687,108		2,559,551
Total assets		46,934,750		47,120,108		(185,358	)		48,630,196		45,699,254		2,930,942
Deposits		23,137,445		22,578,709		558,736			22,947,394		22,169,512		777,882
Borrowings		19,436,874		20,615,731		(1,178,857	)		21,218,840		19,602,104		1,616,736
Stockholders’ equity		3,636,024		3,221,396		414,628			3,718,691		3,229,283		489,408


Operating Highlights	Third Quarter							Nine months ended September 30,
(In thousands, except per share information)	2006		2005		Variance			2006		2005			Variance

Net interest income	$	342,038	$	348,110	$	(6,072	)	$	1,067,581	$	1,062,826		$	4,755
Provision for loan losses		63,445		49,960		13,485			179,488		144,232			35,256
Non-interest income		191,349		175,048		16,301			604,168		571,095			33,073
Operating expenses		359,923		329,413		30,510			1,106,157		970,446			135,711
Income tax		27,859		28,569		(710	)		88,060		112,395			(24,335	)
Cumulative effect of accounting change, net of tax		—		—		—			—		3,607			(3,607	)
Net income	$	82,160	$	115,216	$	(33,056	)	$	298,044	$	410,455		$	(112,411	)
Net income applicable to common stock	$	79,181	$	112,237	$	(33,056	)	$	289,109	$	401,520		$	(112,411	)
Basic EPS before cumulative effect of accounting change	$	0.28	$	0.42	$	(0.14	)	$	1.04	$	1.49		$	(0.45	)
Diluted EPS before cumulative effect of accounting change	$	0.28	$	0.42	$	(0.14	)	$	1.04	$	1.49	(a)	$	(0.45	)
Basic and diluted EPS after cumulative effect of accounting change	$	0.28	$	0.42	$	(0.14	)	$	1.04	$	1.50		$	(0.46	)


Selected Statistical Information	Third Quarter						Nine months ended September 30,
	2006			2005			2006			2005

Common Stock Data — Market price
High	$	20.12		$	27.52		$	21.98		$	28.03
Low		17.41			24.22			17.41			22.94
End		19.44			24.22			19.44			24.22
Book value per share at period end		12.38			11.36			12.38			11.36
Dividends declared per share		0.16			0.16			0.48			0.48
Dividend payout ratio		56.25	%		38.07	%		45.36	%		31.97	%
Price/earnings ratio		12.79x			12.29x			12.79x			12.29x



Profitability Ratios — Return on assets		0.67	%		0.99	%		0.82	%		1.20	%
Return on common equity		8.75			14.21			11.00			17.61
Net interest spread (taxable equivalent)		2.81			3.30			2.95			3.24
Net interest margin (taxable equivalent)		3.31			3.67			3.40			3.61
Effective tax rate		25.32			19.87			22.81			21.65
Overhead ratio**		49.29			44.34			47.02			37.57
Efficiency ratio ***		69.00			62.87			66.55			61.63



Capitalization Ratios - Equity to assets		7.81	%		7.21	%		7.65	%		7.07	%
Tangible equity to assets		6.32			6.04			6.17			5.92
Equity to loans		11.70			11.33			11.60			11.05
Internal capital generation		3.67			8.37			5.63			11.25
Tier I capital to risk – adjusted assets		10.87			11.40			10.87			11.40
Total capital to risk – adjusted assets		12.13			12.67			12.13			12.67
Leverage ratio		7.88			7.71			7.88			7.71

*		Includes loans held-for-sale.

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

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

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

64

	•		Higher operating expenses for the quarter ended September 30, 2006 by 9%, primarily associated with E-LOAN’s operations, mostly in the nature of business promotion and personnel costs, since this subsidiary was acquired subsequent to the third quarter of 2005. Partially offsetting the increase were lower costs as a result of the no longer existent operations of PCE. Refer to the Operating Expenses section of this MD&A for further information. Isolating the aforementioned impact in operating expenses from E-LOAN and PCE, the Corporation’s operating expenses for the quarter ended September 30, 2006 declined $2.2 million or 1%, compared with the same quarter in the previous year. Operating expenses for the quarter ended September 30, 2006 reflected a reduction of $23.3 million, or 6%, compared with the first quarter of 2006, and $3.1 million, or 1%, compared with the second quarter of 2006.

	•		During the third quarter ended September 30, 2006, in light of deteriorating market conditions impacting the profitability of the business, PFH made strategic decisions to scale back its manufactured housing division into one operating office. Marketing representatives will continue to solicit business in its core markets in the east coast of the U.S. mainland. Also, during the quarter, PFH added two new regions in the broker loan business and at the same time flattened the sales management organization by reducing the number of sales managers in the broker division to enable regional managers to be closer to the market. In addition, broker loan processing centers were reduced to two. Furthermore, as a need to compete in today’s challenging mortgage marketplace and because a vast majority of business is generated from telemarketing leads, PFH’s retail mortgage division consolidated more than 40 branches into five regional hubs. All the above strategies strive to achieve efficiencies and cost savings in the origination channels. As part of these streamlining initiatives, PFH recorded approximately $4.4 million of charges in the third quarter of 2006. Components of the re-engineering charges consisted of $3.1 million of lease buyouts; $0.8 million of severance and payroll tax charges; and $0.5 million related to fixed asset write-offs.

	•		Total earning assets at September 30, 2006 decreased by approximately 4% compared with December 31, 2005, in part due to the implementation of strategies to reduce the Corporation’s financial leverage. When compared to September 30, 2005, earning assets decreased by 1%. Refer to the Financial Condition section of this MD&A for descriptive information on the composition of assets, deposits, borrowings and capital of the Corporation.

	•		In August 2005, the Government of Puerto Rico approved an increase in the maximum statutory tax rate from 39.0% to 41.5% for corporations and partnerships for a two-year period. The tax rate was applied retroactively effective January 1, 2005 to all of the Corporation’s subsidiaries doing business in Puerto Rico with fiscal years ended December 31, 2005. The additional tax related to the income earned from January 1 to the date of the enactment of the law was fully recorded in the third quarter of 2005, net of the impact in the deferred taxes, and approximated $5.9 million. In addition, in May 2006, the Government of Puerto Rico approved an additional transitory tax applicable only to the banking industry that raised the maximum statutory tax rate to 43.5% for taxable years commenced during calendar year 2006. For taxable years beginning after December 31, 2006, the maximum statutory tax rate will be 39%. The additional transitory tax of 4.5% over the original maximum statutory tax rate of 39% resulted in additional income tax expense recorded in books for the nine months ended September 30, 2006 of approximately $9.2 million, including the impact of the measurement of deferred tax assets.

			Also, in May 2006, the Government of Puerto Rico enacted a law that imposes a tax of 5% over the 2005 taxable net income applicable to for-profit partnerships and corporations with gross income over $10.0 million, which was required to be paid by July 31, 2006. The Corporation could use the full payment as a tax credit in the income tax return for future years. This prepayment of tax resulted in a disbursement of approximately $18.2 million. No net income tax expense will be recorded since such prepayment will be used as a tax credit in future taxable years.

	•		The Corporation exercised certain Tag Along Rights granted under the Shareholders Agreement

65

			dated as of March 2, 1999 by and among Telecomunicaciones de Puerto Rico, Inc. (“TelPRI”), GTE International Telecommunications Incorporated, GTE Holdings (Puerto Rico) LLC, Popular and Puerto Rico Telephone Authority and entered into a Joinder Agreement dated as of May 4, 2006 (the “Joinder Agreement”) by and among Popular, GTE Holdings and Sercotel S.A. de C.V. (“Sercotel”). Pursuant to the Joinder Agreement, Popular has agreed to sell to Sercotel all the shares of common stock of TelPRI owned by Popular under similar terms and conditions set forth in the Stock Purchase Agreement dated as of April 2, 2006, by and between Sercotel and GTE Holdings. The estimated gain net of taxes for Popular is approximately $86.0 million; however, such gain is subject to purchase price adjustments at the date of the closing. The transaction is expected to close in 2006 or early 2007 subject to the receipt of the necessary governmental and regulatory approvals.

	•		During the third quarter of 2006, the Corporation acquired T.I.I. Smart Solutions Inc. (“TII”), a technology company based in Costa Rica that develops financial processing software applications and sells hardware products (ATM, POS and communication products). For the fiscal year-ended September 30, 2005, TII generated approximately $3 million in revenues and had $3 million in assets. The company has approximately 21 employees. This acquisition will allow EVERTEC, through ATH Costa Rica, to enhance its competitiveness in the Central American region.

	•		In the latter part of the third quarter of 2006, BPNA commenced to offer deposit products through the online webpage of its affiliate E-LOAN. As of September 30, 2006, BPNA had captured approximately $27 million in savings accounts and certificates of deposit through E-LOAN’s webpage. As of October 31, 2006, these deposits approximated $728 million. This funding source is expected to provide additional liquidity to the Corporation and support asset growth.

The Corporation, like other financial institutions, is subject to a number of risks, many of which are outside of management’s control. Among the risks assumed are: (1) market risk, which is the risk that changes in market rates and prices will adversely affect the Corporation’s financial condition or results of operations, (2) liquidity risk, which is the risk that the Corporation 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. 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 our 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, 2005, 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 report, 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.

66

SUPERVISION AND REGULATION – STATUS OF REGULATORY APPLICATIONS

In September 2006, we filed an application with the Office of the Comptroller of the Currency (the “OCC”) to convert Banco Popular North America (“BPNA”), our New York state-chartered bank subsidiary, into a national bank by merging it into our national bank subsidiary, Banco Popular, National Association. At the same time we filed an application with the Board of Governors of the Federal Reserve System to contribute the stock of our non banking subsidiary, Popular Financial Holdings, Inc. (“PFH”), to the merged U.S. mainland bank. Under these proposals, BPNA, PFH, and their subsidiaries would have become subject to OCC supervision and regulation.

In addition to this structural reorganization, we are currently in the process of developing a plan for an operational reorganization of our operations on the U.S. mainland, including those of BPNA and PFH and their subsidiaries. In the course of our interaction with the OCC since the filing of the application, we have concluded that the process of bringing the operations of BPNA, PFH, and their subsidiaries under OCC supervision and regulation could have involved difficulties in satisfying the OCC regarding various aspects of our operations, including certain of our risk management procedures and reserve policies primarily related to the nonprime business at PFH and BPNA. These additional requirements also had the potential of diverting our resources away from the operational reorganization effort. In light of these difficulties and our reorganization plans, we have decided to withdraw our applications. As a result, BPNA will remain a New York state-chartered member bank.

Even though we have decided to withdraw these applications, we will take into account the preliminary recommendations we received from the OCC regarding our operations as we move forward with the operational reorganization and with our other business goals.

CRITICAL ACCOUNTING POLICIES

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

Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to securities’ classification and related values, loans and allowance for loan losses, retained interests on transfers of financial assets – non-prime mortgage loans securitizations (valuations of interest-only strips and mortgage servicing rights), income taxes, goodwill and other intangible assets, and pension and postretirement benefit obligations. For a summary of the Corporation’s critical accounting policies, refer to that particular section in the MD&A included in Popular, Inc.’s 2005 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Annual Report”). Also, refer to Note 1 to the consolidated financial statements included in the 2005 Annual Report for a summary of the Corporation’s significant accounting policies.

One of the Corporation’s critical accounting policies relates to pension and postretirement obligations on employee benefit plans. As further described in Note 2 to the consolidated financial statements and in the section below (Recently Issued Accounting Pronouncements and Interpretations), in September 2006, the Financial Accounting Standards Board issued SFAS No. 158“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which is applicable to the Corporation commencing in December 31, 2006. The standard will make it easier for investors, employees, retirees and others to understand and assess an employer’s financial position and its ability to fulfill the obligations under its benefit plans. The provisions of SFAS No. 158 will not have an impact on the estimation techniques, valuation assumptions and other subjective assessments associated with the pension and postretirement benefit plan computations.

67

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND INTERPRETATIONS

The following is a list of recently issued accounting pronouncements and interpretations that are applicable for adoption by the Corporation in 2006 or thereafter. Refer to Note 2 to the consolidated financial statements for a description of each statement and management’s assessment as to the impact of the adoptions.

SFAS No. 123-R “Share-Based Payment” — This Statement focuses primarily on transactions in which an entity exchanges its equity instruments for employee services and generally establishes standards for the accounting of transactions in which an entity obtains goods or services in share-based payment transactions. The impact of the adoption of SFAS 123-R in January 2006 was not significant for the results of the quarter and nine months ended September 30, 2006. Refer to Note 13 to the consolidated financial statements for required disclosures and further information on the impact of this accounting pronouncement.

SFAS No. 153 “Exchanges of Nonmonetary Assets” — This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. The adoption of this Statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows for the quarter and nine months ended September 30, 2006.

SFAS No. 154 “Accounting Changes and Error Corrections” — This Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. The Corporation adopted SFAS No. 154 in January 2006. The adoption of SFAS No. 154 did not have a significant impact on the statement of condition or results of operations for the quarter and nine months ended September 30, 2006.

SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” — This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Corporation elected to adopt SFAS No. 155 commencing in January 2007. The Corporation is currently evaluating the impact that this accounting pronouncement may have in its financial condition and results of operations.

SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” — This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:

	•		Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under specific situations.

	•		Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.

	•		Permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: amortization or fair value measurement method.

	•		At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some

68

			manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.

	•		Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.

The Corporation elected to adopt SFAS No. 156 commencing in January 2007. The Corporation is currently evaluating the impact that this accounting pronouncement may have in its financial condition and results of operations, subject to the measurement methods, class definitions and other determinations that need to be made upon adoption.

SFAS No. 157 “Fair Value Measurements” — Provides enhanced guidance for using fair value to measure assets and liabilities. The Statement also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The Statement clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the Statement establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy.

SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation plans to adopt the provisions of SFAS No. 157 commencing with the first quarter of 2008. The Corporation is evaluating the impact that this accounting pronouncement may have in its financial condition, results of operations and financial statement disclosures.

SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” — This accounting standard requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. Under past accounting standards, the funded status of an employer’s postretirement benefit plan (i.e., the difference between the plan assets and obligations) was not always completely reported in the balance sheet. Past standards only required an employer to disclose the complete funded status of its plans in the notes to the financial statements. Specifically, SFAS No. 158 requires an employer to:

	•		Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status

	•		Measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions)

	•		Recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization.

The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective for the Corporation as of December 31, 2006.

The Corporation provides pension, benefit restoration and postretirement benefit plans for certain employees. Upon adoption of SFAS No. 158 in December 31, 2006, the Corporation will be required to recognize the underfunded status of the plans as a liability on its statement of financial condition. The Corporation has always used December 31^st as the measurement date of the plans.

The Corporation provides pension, benefit restoration and postretirement benefit plans for certain employees. Upon adoption of SFAS No. 158 in December 31, 2006, the Corporation will be required to recognize the underfunded

69

status of the plans as a liability on its statement of financial condition. The Corporation has always used December 31^st as the measurement date of the plans.

The impact of the adoption of SFAS No. 158 as of December 31, 2006 is estimated to be a reduction in equity of approximately $77 million (after tax), with a corresponding increase in total liabilities of $126 million and in the deferred tax asset of $49 million. The estimated impact is based on the Corporation’s expected funded status of its pension and postretirement benefit plans. The actual impact of the implementation of SFAS No. 158 on the financial statements may differ due to changes in economic assumptions such as discount rates, fair values of assets, and other changes in actuarial assumptions that will occur in connection with the upcoming December 31, 2006 measurement date. The Corporation expects that the effect of the implementation of SFAS No. 158 on its financial covenants will be immaterial. Additionally, based on the estimated impact in regulatory capital ratios, the Corporation will continue to be well-capitalized.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48) — In June 2006, the FASB issued FIN 48, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under the Interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values.

Among the significant elements of the new guidance are:

	•		Recognition: A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.

	•		Measurement: The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.

	•		Change in judgment: The assessment of the recognition threshold and the measurement of the associated tax benefit might change as new information becomes available. Unrecognized tax benefits should be recognized in the period that the position reaches the recognition threshold, which might occur prior to absolute finality of the matter. Similarly, recognized tax benefits should be derecognized in the period in which the position falls below the threshold.

	•		Disclosures: The Interpretation requires qualitative and quantitative disclosures, including discussion of reasonably possible changes that might occur in the recognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on a worldwide aggregated basis.

A company should record the change in net assets that results from the application of the Interpretation as an adjustment to retained earnings. Based on a preliminary analysis performed at this time, management does not expect that the adoption of this accounting interpretation will have a material impact to its financial condition or results of operations upon adoption on January 1, 2007.

EITF Issue No. 06-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation” (“EITF 06-03”) — In June 2006, the EITF reached a consensus on EITF Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF 06-03 will be effective for the Corporation as of January 1, 2007. The adoption of EITF 06-03 is not expected to have a material impact on the Corporation’s consolidated financial statements.

EITF Issue 06-5 “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in

70

Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” — EITF Issue 06-5 focuses on how an entity should determine the “amount that could be realized under the insurance contract” at the balance sheet date in applying FTB 85-4, and whether the determination should be on an individual or group policy basis.

At the September 2006 meeting, the Task Force affirmed as a final consensus that the cash surrender value and any additional amounts provided by the contractual terms of the insurance policy that are realizable at the balance sheet date should be considered in determining the amount that could be realized under FTB 85-4, and any amounts that are not immediately payable to the policyholder in cash should be discounted to their present value. Additionally, the Task Force affirmed as a final consensus the tentative conclusion that in determining “the amount that could be realized” companies should assume that policies will be surrendered on an individual-by-individual basis, rather than surrendering the entire group policy. Also, the Task Force reached a consensus that contractual limitations on the ability to surrender a policy do not affect the amount to be reflected under FTB 85-4, but, if significant, the nature of those restrictions should be disclosed.

The Corporation is currently evaluating any impact that the adoption of Issue 06-5 may have on its statement of financial condition or results of operations as it relates to the bank-owned life insurance policy for which the Corporation is beneficiary. Management does not expect such impact to be material.

Staff Accounting Bulletin No. 108 — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”) — In September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108 expressing the SEC staff’s views regarding the process of quantifying financial statement misstatements and the build up of improper amounts on the balance sheet. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. The built up misstatements, while not considered material in the individual years in which the misstatements were built up, may be considered material in a subsequent year if a company were to correct those misstatements through current period earnings. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year and the offsetting adjustment, net of tax, should be made to the opening balance of retained earnings for that year. Registrants will need to disclose the nature and amount of each item, when and how each error being corrected arose, and the fact that the errors were previously considered immaterial. SAB 108 is effective for the Corporation’s annual financial statements for the year ended December 31, 2006. The adoption of SAB 108 is not expected to have a material impact on the Corporation’s consolidated financial statements.

71

NET INTEREST INCOME

Tables B and C present the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the quarter and nine months ended September 30, 2006, as compared with the same periods in 2005, segregated by major categories of interest earning assets and interest bearing liabilities.

The Corporation’s interest earning assets include investment securities and loans on which the interest is exempt from income tax, principally in Puerto Rico (P.R.). The main sources of tax-exempt interest income are investments in obligations of some U.S. Government agencies, the U.S. Government, and government-sponsored entities, and the P.R. Commonwealth and its agencies, and assets held by the Corporation’s international banking entities, which are tax-exempt under P.R. laws. To facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates at each respective quarter end. During the third quarter of 2005, the Government of P.R. approved a temporary, two-year additional tax of 2.5% for corporations, which increased the marginal tax rate from a 39% to 41.5%. The impact of the additional tax, including the retroactive amounts corresponding to the first nine months of 2005, was included in the Corporation’s results of operations in the third quarter of 2005. In addition, during the second quarter of 2006 the Government of P.R. approved a temporary one-year additional tax of 2.0% for banking entities. The statutory income tax rates considered for the Corporation’s P.R. operations in the quarter ended September 30, 2006 were 43.5% for BPPR and 41.5% for the non-bank subsidiaries. The taxable equivalent computation considers the interest expense disallowance required by the P.R. tax law, also affected by the mentioned increases in tax rates. The statutory income tax rate considered for the Corporation’s U.S. operations was 35%.

Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Interest income for the quarter and nine months ended September 30, 2006 included an unfavorable impact of $2.9 million and $14.9 million, respectively, consisting principally of amortization of net loan origination costs (net of fees), amortization of net premiums on loans purchased, prepayment penalties and late payment charges. These amounts approximated $11.1 million and $28.6 million for the quarter and nine months ended September 30, 2005, respectively.

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TABLE B

ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS

Quarter ended September 30,


																								Variance
Average Volume							Average Yields / Costs										Interest							Attributable to
2006		2005		Variance			2006			2005			Variance				2006		2005		Variance			Rate			Volume
($ in millions)																	(In thousands)
$	508	$	745	($	237	)		5.88	%		4.51	%		1.37	%	Money market investments	$	7,525	$	8,455	($	930	)	$	1,729		($	2,659	)
	11,672		12,379		(707	)		5.23			5.24			(0.01	)	Investment securities		152,614		162,132		(9,518	)		(882	)		(8,636	)
	495		504		(9	)		6.56			6.07			0.49		Trading securities		8,183		7,719		464			609			(145	)

	12,675		13,628		(953	)		5.31			5.23			0.08				168,322		178,306		(9,984	)		1,456			(11,440	)

																Loans:
	13,824		11,959		1,865			7.79			6.94			0.85		Commercial		271,419		209,142		62,277			27,411			34,866
	1,273		1,310		(37	)		7.15			7.54			(0.39	)	Leasing		22,766		24,691		(1,925	)		(1,231	)		(694	)
	12,053		11,612		441			6.98			6.48			0.50		Mortgage		210,432		188,041		22,391			15,072			7,319
	5,123		4,416		707			10.71			10.06			0.65		Consumer		137,986		111,662		26,324			6,501			19,823

	32,273		29,297		2,976			7.93			7.25			0.68				642,603		533,536		109,067			47,753			61,314

$	44,948	$	42,925	$	2,023			7.19	%		6.61	%		0.58	%	Total earning assets	$	810,925	$	711,842	$	99,083		$	49,209		$	49,874

																Interest bearing deposits:
$	3,862	$	3,783	$	79			2.20	%		1.51	%		0.69	%	NOW and money market*	$	21,396	$	14,363	$	7,033		$	6,565		$	468
	5,231		5,727		(496	)		1.34			1.26			0.08		Savings		17,735		18,141		(406	)		1,119			(1,525	)
	10,154		9,114		1,040			4.37			3.54			0.83		Time deposits		111,877		81,295		30,582			20,633			9,949

	19,247		18,624		623			3.11			2.42			0.69				151,008		113,799		37,209			28,317			8,892

	10,607		10,040		567			5.30			3.53			1.77		Short-term borrowings		141,727		89,213		52,514			46,731			5,783
	9,987		9,445		542			5.83			4.84			0.99		Medium and long-term debt		146,558		114,966		31,592			25,605			5,987

	39,841		38,109		1,732			4.38			3.31			1.07		Total interest bearing liabilities		439,293		317,978		121,315			100,653			20,662
	3,970		3,943		27											Non-interest bearing demand deposits
	1,137		873		264											Other sources of funds

$	44,948	$	42,925	$	2,023			3.88	%		2.94	%		0.94	%

								3.31	%		3.67	%		(0.36	%)	Net interest margin

																Net interest income on a taxable equivalent basis		371,632		393,864		(22,232	)	($	51,444	)	$	29,212

								2.81	%		3.30	%		(0.49	%)	Net interest spread

																Taxable equivalent adjustment		29,594		45,754		(16,160	)

																Net interest income	$	342,038	$	348,110	($	6,072	)

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


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

As shown in Table B, the decrease in net interest income and margin on a taxable equivalent basis for the quarter ended September 30, 2006, compared with the same quarter in the previous year, was mainly due to the increase in the average cost of interest bearing liabilities, partially offset by an increase in the average balance of earning assets.

The decrease in the Corporation’s net interest margin was principally the result of the following:

•

Higher cost of short-term borrowings as a result of the Federal Reserve (FED) tightening monetary policy. The FED raised the federal funds target rate 150 basis points from October 1^st, 2005 to June 30, 2006, leaving it flat at 5.25% for the 3^rdquarter of 2006.

73

	•		Increased cost of long-term debt resulting from issuances of medium-term notes during the last quarter of 2005, renewals of debt maturities at higher costs during the second quarter of 2006, and secured debt derived from mortgage loans on-balance sheet securitization transactions settled during the end of 2005 and in June 2006.

	•		A negative impact resulting from unfavorable valuations of interest rate swap contracts that were acquired to fix the cost of financing certain mortgage and auto loan portfolios, and of interest rate swap and cap contracts entered to limit the interest rate payable to security holders associated with on-balance sheet securitization. These derivative contracts were designated “non-hedge” for accounting purposes, as such the change in their fair value was recorded in the statement of operations. For the quarter ended September 30, 2006, the unfavorable fair value of those instruments totaled approximately $13 million pretax, which was recognized as interest expense, and reduced net interest margin by approximately 12 basis points.

	•		Increased cost of interest bearing deposits since the growth in this category has been attained principally in time deposits. This category of interest bearing deposits carries a higher cost in part influenced by interest rate campaigns to attract deposits in a very competitive environment, both in P.R. and the U.S. mainland. Also, the Corporation has experienced higher costs in money market and savings accounts due to sustained marketing campaigns and competition in the U.S. mainland.

	•		Reversal in the third quarter of 2006 of approximately $1.3 million of interest income on a specific commercial lease financing relationship which reached non-accrual status during the third quarter of 2006. Refer to the Credit Risk Management and Loan Quality section of this MD&A for additional information.

	•		The difficulty in passing along the rise in market rates to commercial and consumer loan clients. Intense competition is limiting the Corporation’s ability to raise interest rates on loans, and this is a source of pressure on our net interest margin.

Partially offsetting these unfavorable variances were the following contributors:

	•		Somewhat higher yields in commercial loans, mainly the portfolio with short-term repricing terms, which are favorably impacted by the rising interest rates. As of September 30, 2006, approximately 58% of the commercial and construction loans portfolio had floating or adjustable interest rates. Also, yields in fixed rate loans originated in 2006 increased due to the higher interest rate scenario, with these rate increases partially limited by competitive pressures in new originations.

	•		Increase in the yield of consumer loans driven in part by home equity lines of credit (“HELOC”) with floating rates, an increase in the average balance of credit cards, which carry a higher rate, and an increase in the rate for the P.R. consumer loan portfolio.

	•		Higher yields in the mortgage loan portfolio in part as a result of higher rates for new loans and a reduction in the amortization of premiums associated to purchased loans, in part due to a reduction in mortgage prepayment rates.

Refer to the Financial Condition section of this MD&A for detailed factors that contributed to the growth in the loan portfolio and the decline in investment securities, as well as variance explanations on funding / liquidity sources.

The decrease in the taxable equivalent adjustment relates to the previously discussed temporary two-year additional tax of 2.5% approved by the Government of P.R. during the third quarter of 2005. As a result, the Corporation recognized the impact of the additional tax for the nine months ended September 30, 2005 during that third quarter of 2005. Therefore, the taxable equivalent adjustment reported in the third quarter of 2005 includes the favorable impact of this additional tax.

As shown in Table C, for the nine-month period ended September 30, 2006, net interest income on a taxable equivalent basis decreased mainly as a result of a lower taxable equivalent adjustment, and lower net interest margin, partially offset by an increase in the average earning assets. The decrease in the taxable equivalent adjustment for the nine months ended September 30, 2006, compared with the same period in the previous year, is mainly the result of a rising cost for the Corporation’s interest bearing liabilities. The interest expense disallowance required by the P.R. tax law is determined by applying the ratio of exempt assets to total assets to the Corporation’s interest expense for the period. Due to the Corporation’s liability sensitive position, the cost of funds has increased at a higher pace than the yield of earning assets, thus generating margin compression. This trend is reflected in the taxable equivalent adjustment causing an increase in the interest expense disallowed.

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Average tax-exempt earning assets approximated $9.9 billion during the nine-month period ended September 30, 2006, of which 89% represented tax-exempt investment securities, compared with $9.8 billion and 92%, respectively, during the same period in 2005.

TABLE C

ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS

Nine-month period ended September 30,


																								Variance
Average Volume							Average Yields / Costs										Interest							Attributable to
2006		2005		Variance			2006			2005			Variance				2006		2005		Variance			Rate			Volume
($ in millions)																	(In thousands)
$	586	$	816	($	230	)		5.54	%		3.91	%		1.63	%	Money market investments	$	24,274	$	23,896	$	378		$	8,148		($	7,770	)
	12,104		12,173		(69	)		5.13			4.81			0.32		Investment securities		465,432		438,744		26,688			30,440			(3,752	)
	509		484		25			6.56			6.15			0.41		Trading securities		24,979		22,253		2,726			1,538			1,188

	13,199		13,473		(274	)		5.20			4.80			0.40				514,685		484,893		29,792			40,126		($	10,334	)

																Loans:
	13,400		11,571		1,829			7.56			6.60			0.96		Commercial		757,704		571,035		186,669			89,547			97,122
	1,299		1,302		(3	)		7.37			7.60			(0.23	)	Leasing		71,752		74,242		(2,490	)		(2,286	)		(204	)
	12,336		12,073		263			6.86			6.50			0.36		Mortgage		634,691		588,304		46,387			33,343			13,044
	5,013		4,268		745			10.51			10.12			0.39		Consumer		394,367		323,297		71,070			12,053			59,017

	32,048		29,214		2,834			7.74			7.12			0.62				1,858,514		1,556,878		301,636			132,657			168,979

$	45,247	$	42,687	$	2,560			7.00	%		6.38	%		0.62	%	Total earning assets	$	2,373,199	$	2,041,771	$	331,428		$	172,783		$	158,645

																Interest bearing deposits:
$	3,848	$	3,761	$	87			1.96	%		1.46	%		0.50	%	NOW and money market*	$	56,408	$	41,128	$	15,280		$	13,657		$	1,623
	5,374		5,659		(285	)		1.33			1.21			0.12		Savings		53,286		51,178		2,108			4,472			(2,364	)
	9,772		8,567		1,205			4.13			3.41			0.72		Time deposits		301,686		218,237		83,449			50,290			33,159

	18,994		17,987		1,007			2.90			2.31			0.59				411,380		310,543		100,837			68,419			32,418

	11,017		9,840		1,177			4.78			3.16			1.62		Short-term borrowings		393,604		232,392		161,212			131,162			30,050
	10,202		9,762		440			5.41			4.66			0.75		Medium and long-term debt		413,013		340,703		72,310			59,323			12,987

	40,213		37,589		2,624			4.05			3.14			0.91		Total interest bearing liabilities		1,217,997		883,638		334,359			258,904			75,455
	3,953		4,182		(229	)										Non-interest bearing demand deposits
	1,081		916		165											Other sources of funds

$	45,247	$	42,687	$	2,560			3.60	%		2.77	%		0.83	%

								3.40	%		3.61	%		(0.21	%)	Net interest margin

																Net interest income on a taxable equivalent basis		1,155,202		1,158,133		(2,931	)	($	86,121	)	$	83,190

								2.95	%		3.24	%		(0.29	%)	Net interest spread

																Taxable equivalent adjustment		87,621		95,307		(7,686	)

																Net interest income	$	1,067,581	$	1,062,826	$	4,755

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


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

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NON-INTEREST INCOME

Refer to Table D for a breakdown of non-interest income by major categories for the quarters and nine-month periods ended September 30, 2006 and 2005.

The increase in non-interest income for the quarter ended September 30, 2006 compared with the same quarter in the previous year was mostly impacted by:

	•		Lower other-than-temporary impairment adjustments of investment securities available-for-sale in the third quarter of 2006, particularly interest-only securities of PFH. These unfavorable adjustments amounted to $0.4 million in the third quarter of 2006, compared with $10.7 million in the same quarter of the previous year.

	•		Lower net gains on the sale of investment securities available-for-sale by approximately $2.2 million. In the quarter ended September 30, 2005, the Corporation realized gains of $9.2 million on the sale of marketable equity securities. For the third quarter of 2006, the main sale of available-for-sale securities was associated with the sale of FNMA securities with a carrying value of approximately $144 million, resulting in a gain of approximately $7.6 million.

	•		Higher trading profits in 2006 by $5.3 million, which are associated primarily with the pooling of approximately $149 million in mortgage loans into FNMA mortgage-backed securities by BPPR, which were subsequently sold in the secondary markets with a realized gain of approximately $2.0 million. Also, there were higher profits in 2006 mainly as a result of increases in unrealized profits on the mark-to-market of outstanding positions primarily from the mortgage banking subsidiary and in the portfolio available for retail customers of the Corporation’s investment banking subsidiary.

	•		Higher gains on the sales of loans in the third quarter of 2006, mainly due to E-LOAN’s production, which was inexistent in the third quarter of 2005 since the E-LOAN acquisition was consummated in the fourth quarter of 2005. This subsidiary contributed $20.7 million in gains resulting from the sale of approximately $0.8 billion in loans during the quarter ended September 30, 2006, primarily residential mortgage loans. These gains were partially offset by losses of $20.1 million in a bulk sale of approximately $0.6 billion of individual loans by BPPR to a U.S. financial institution, done in part to deleverage its balance sheet. PFH (excluding its wholly-owned subsidiary E-LOAN) also contributed with an increase in gain on sale of loans of approximately $2.4 million.

	•		Increase in other operating income primarily due to higher gains on the sale of real estate properties by $4.5 million, higher investment banking fees related to underwriting business in the Corporation’s investment banking subsidiary and other revenues from E-LOAN related in part to the mortgage loan closing services business and referral fees. These increases were partially offset by an unfavorable fair value adjustment of approximately $3.1 million associated with the subordinated convertible note issued by ACE Cash Express, Inc. (“ACE”) as part of Popular Cash Express (PCE) sale transaction. This note was cancelled in the third quarter of 2006 following the approval of ACE’s leverage buyout. Results for the third quarter of 2006, compared with the same period in the previous year, included lower remeasurement gains on investments accounted under the equity method held in the Dominican Republic and lower dividend income from TelPRI, among the principal variance contributors.

	•		Decline in other service fees due in part to lower check cashing fees resulting from the sale of PCE in the fourth quarter of 2005, and lower mortgage servicing fees, net of amortization, due to higher amortization of mortgage servicing rights. Also, for on-balance sheet securitizations, the mortgage servicing rights recorded at the time of securitization are amortized through other service fees, while the accretion of the related loan discount is recorded as an increase in interest income. The “other fees” category was unfavorably impacted by lower revenues from PCE related to money transfer and other services that are no longer offered. These negative variances were partially offset principally by higher debit card fees as a result of higher transactional volume at a higher average price. Also, credit card fees increase was mostly associated with higher merchant business income resulting from increased sales and higher credit card late payment fees derived from higher volume, partially offset by lower credit card membership fees that resulted from promotional campaigns with no annual fee. The composition of other service fees by major categories is presented in Table D.

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TABLE D

Non-interest income


	Quarter ended September 30,								Nine months ended September 30,
(In thousands)	2006		2005			$ Variance			2006		2005		$ Variance

Service charges on deposit accounts	$	47,484	$	46,836		$	648		$	142,277	$	135,660	$	6,617

Other service fees:
Credit card fees and discounts	$	22,035	$	21,111		$	924		$	66,979	$	59,694	$	7,285
Debit card fees		15,345		12,832			2,513			45,349		39,047		6,302
Insurance fees		13,327		12,986			341			39,879		37,420		2,459
Processing fees		11,164		11,311			(147	)		32,382		31,888		494
Sale and administration of investment products		7,345		7,138			207			21,451		21,105		346
Trust fees		2,400		2,135			265			7,044		6,268		776
Mortgage servicing fees, net of amortization		483		4,591			(4,108	)		4,523		11,126		(6,603	)
Check cashing fees		113		4,372			(4,259	)		653		14,841		(14,188	)
Other fees		7,425		8,528			(1,103	)		21,740		26,471		(4,731	)

Total other service fees	$	79,637	$	85,004		($	5,367	)	$	240,000	$	247,860	($	7,860	)

Net gain (loss) on sale and valuation adjustment of investment securities	$	7,123	($	920	)	$	8,043		$	5,039	$	50,891	($	45,852	)
Trading account profit		10,019		4,707			5,312			23,324		28,138		(4,814	)
Gain on sale of loans		20,113		17,585			2,528			96,428		42,675		53,753
Other operating income		26,973		21,836			5,137			97,100		65,871		31,229

Total non-interest income	$	191,349	$	175,048		$	16,301		$	604,168	$	571,095	$	33,073

Non-interest income for the nine months ended September 30, 2006, compared with the same period in 2005 included:

	•		Higher gains on sales of loans in 2006, which resulted mostly from E-LOAN. This subsidiary contributed approximately $64 million in gains on the sale of over $2.8 billion in loans during 2006, primarily residential mortgage loans. This variance was partially offset by losses resulting from the bulk sale of individual loans by BPPR discussed earlier. On a year-to-date basis, in 2006, there were also higher gains derived from mortgage loans sold at PFH and Small Business Administration (“SBA”) loans at BPNA.

	•		Other operating income rose for the nine months ended September 30, 2006, compared with the same period in 2005, primarily due to higher dividend income derived from the Corporation’s investment in TelPRI, increased income derived from securitization related invested funds, and higher bank-owned life insurance income. Also, the increase was influenced by those factors covered in the quarterly variance, namely revenues from E-LOAN and investment banking fees.

	•		Increased service charges on deposit accounts for 2006 that was principally associated to higher volume of approvals on checks paid in commercial accounts with non-sufficient funds.

	•		Lower gains on sale and valuation adjustments of investment securities. The results for the nine months ended September 30, 2005 included $50.9 million in gains on sale of investment securities, mainly marketable equity securities, net of $12.1 million of unfavorable valuation adjustments for other-than-temporary impairments of investment securities available-for-sale, principally interest-only securities of PFH, compared with $5.0 million in gains for the same period of 2006, net of $17.4 million of unfavorable valuation adjustments for other-than-temporary impairments of investment securities.

	•		Lower other service fees influenced by similar factors previously described in the quarterly results. Refer to Table D for a detail.

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OPERATING EXPENSES

Refer to the consolidated statements of income included in this Form 10-Q for a breakdown of operating expenses by major categories.

Operating expenses for the quarter ended September 30, 2006 increased 9% compared with the same period in 2005. E-LOAN’s operating expenses, mostly in the nature of business promotion and personnel costs, totaled $40.1 million in the third quarter of 2006, and were the major factor for the incremental costs for Popular since this subsidiary was acquired subsequent to the third quarter of 2005. Partially offsetting the increase were lower costs as a result of the sold operations of PCE which recorded approximately $7.4 million in operating expenses during the third quarter of 2005. Isolating the aforementioned impact in operating expenses from E-LOAN and PCE, the Corporation’s operating expenses for the quarter ended September 30, 2006 declined 1% compared with the same quarter in the previous year.

Personnel costs for the quarter ended September 30, 2006 increased by $10.0 million, or 6%, compared with the same quarter in 2005. E-LOAN’s acquisition added over 820 FTEs in 2006 and represented approximately $13.6 million in personnel costs for the third quarter, while the sale of PCE impacted with a reduction in FTEs of over 360, or approximately $2.8 million in personnel costs. Isolating the impact of E-LOAN’s costs and the sale of PCE operations, personnel costs for the quarter ended September 30, 2006 declined slightly by $0.8 million, or 1%, compared to the same period in 2005. Full-time equivalent employees (FTEs) were 12,580 at September 30, 2006, a decrease of 103 from the same date in 2005. Besides the aforementioned impact of E-LOAN acquisition and the sale of PCE operations, other event which contributed to the reduction in headcount was the layoffs at PFH associated with the streamlining of branch operations as described in the Overview section of this MD&A. PFH (excluding E-LOAN) had a workforce reduction of approximately 260 employees when compared to September 30, 2005. Also, the Corporation’s operations of the Puerto Rico reportable segment contributed with a reduction of over 350 FTEs due to freezes in job replacements as part of cost control initiatives.

All other operating expenses for the quarter ended September 30, 2006, excluding personnel costs, increased $20.5 million, or 12%, compared with the third quarter of 2005. E-LOAN impacted with approximately $26.5 million in all other operating expenses, mostly in business promotion and professional fees, while the sale of PCE represented a reduction of approximately $4.6 million, principally in net occupancy expenses. Isolating the impact of E-LOAN and the sale of PCE operations, all other operating expenses (excluding personnel costs) for the third quarter of 2006 decreased by $1.5 million, or 1%, compared with the third quarter of 2005. As discussed in the Overview section, included in the third quarter of 2006 were approximately $4.4 million in re-engineering charges of PFH, primarily consisting of costs for lease buyouts.

As presented in Table A, the Corporation’s efficiency ratio increased from 62.87% for the quarter ended September 30, 2005 to 69.00% for the same quarter in 2006. The efficiency ratio measures how much of a company’s revenues are used to pay operating expenses. As stated in the Glossary of Selected Financial Terms included in the 2005 Annual Report, in determining the efficiency ratio the Corporation includes only recurring non-interest income items, thus isolating income items that may be considered volatile in nature. Management believes that the exclusion of those items permits greater comparability for analytical purposes. Amounts within non-interest income not considered recurring in nature by the Corporation amounted to net revenues of $11.7 million in the quarter ended September 30, 2006, compared with net losses of $0.8 million in the same quarter in the previous year, and corresponded principally to net gains (losses) on the sale of investment securities and unfavorable adjustments in the valuation of investment securities, and capital gains on the sale of real estate.

For the nine-month period ended September 30, 2006, operating expenses increased $135.7 million, or 14%, compared with the same period in 2005. E-LOAN represented $117.3 million of that increase mostly reflected in personnel costs, business promotion and professional fees. The sale of PCE contributed with a reduction of $23 million, which represents the subsidiary’s costs for the same period in 2005, mainly in the categories of net occupancy and other operating expenses. Isolating the aforementioned impact in operating expenses from E-LOAN and PCE, the Corporation’s operating expenses for the nine months ended September 30, 2006 increased $41 million or 4%, compared with the same period in the previous year. This 4% increase was mostly due to increased personnel costs, primarily higher salaries and related taxes and 401K savings plan expenses, mainly driven by the impact of plan amendments in certain employee benefits plans effective January 1, 2006, which are described in Note 14 to the

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consolidated financial statements. This was partially offset by a reduction in profit sharing costs also impacted by changes in the benefit plans. Also contributing to the rise in personnel costs were higher medical insurance costs, offset in part by higher deferred costs associated with lending business, particularly origination costs. In addition, the increase in operating expenses incorporates a $9.7 million pre-tax loss ($6.1 million after-tax) on the impact of the change in fiscal year of certain of the Corporation’s subsidiaries which was completed during the first quarter of 2006. As previously described in the Corporation’s Form 10-K for the year ended December 31, 2005, in 2005 the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31^st calendar period, primarily as part of a strategic plan to put in place a corporate-wide integrated financial system and to facilitate the consolidation process. The financial results for the month of December 2005 of PFH (excluding E-LOAN which already had a December 31^st year-end closing), Popular FS, Popular Securities and Popular North America (holding company only) are included in a separate line within operating expenses for the nine months ended September 30, 2006. As of the end of the first quarter of 2006, all subsidiaries of the Corporation have aligned their year-end closings to December 31^st, similar to the parent holding company. The increase in operating costs for the nine months ended September 30, 2006 also included, among others, higher net occupancy, equipment expenses and professional fees, incurred to support business processes.

INCOME TAX

Income tax expense for the quarter ended September 30, 2006 decreased compared with the same quarter of 2005, primarily due to lower income before tax, offset by a decrease in exempt interest income net of the disallowance of expenses attributed to such exempt income. The effective tax rate for the third quarter of 2006 and 2005 were 25.32% and 19.87%, respectively.

Income tax expense for the nine-month period ended September 30, 2006 also decreased when compared to the same period in 2005. The decrease was primarily due to lower pretax earnings, partially offset by a decrease in income subject to a lower preferential tax rate and to higher income tax in 2006 due to the increase in the statutory tax rate from 41.5% to 43.5% for BPPR. The effective tax rate for the first nine months of 2006 was 22.81%, compared with 21.65% in 2005.

REPORTABLE SEGMENT RESULTS

The Corporation’s reportable segments for managerial reporting consist of 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. For managerial reporting purposes, the costs incurred by this latter group are not allocated to the four reportable segments.

For a more complete description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 19 to the consolidated financial statements. The Corporate group, which supports the four reportable segments, had a net loss of $15.7 million in the third quarter of 2006, compared with a net loss of $0.6 million in the same quarter of 2005. On a year-to-date basis, the Corporate group had a net loss of $18.1 million for the nine months ended September 30, 2006, compared to net income of $21.5 million in the same period of the previous year. During the third quarter of 2005, the Corporation’s holding companies within the Corporate group realized gains on the sale of securities, mainly marketable equity securities, approximating $9.2 million, while on the same period in 2006 these companies realized minimal losses. During the nine months ended September 30, 2005, the realized gains on the sale of securities, mainly marketable equity securities, approximated $59.7 million, compared with $14.3 million in the same period of 2006. The variance in gain on sale of securities was partially offset by an increase in TelPRI’s dividend income in 2006.

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

Banco Popular de Puerto Rico

The segment of Banco Popular de Puerto Rico reported net income of $87.9 million for the quarter ended September 30, 2006, a decrease of $4.5 million, or 5%, compared with the same quarter in the previous year. The main factors that contributed to the variance in results for the quarter ended September 30, 2006 when compared to the third quarter of 2005 included:

	•		higher net interest income by $3.2 million, or less than 2%. The increase was primarily related to the commercial banking business, which experienced a $8.7 million, or 11%, growth. This favorable variance was partially offset by a decline of $5.0 million, or 4%, in the net interest income of the consumer and retail banking business.

	•		higher provision for loan losses by $6.7 million, or 26%, primarily associated with growth in the commercial loan portfolio, higher non-performing loans, mainly mortgage, and higher net charge-offs, mostly in the consumer and lease financing portfolios. The allowance for loan losses to loans held-in-portfolio for the Banco Popular de Puerto Rico reportable segment was 2.06% at September 30, 2006, compared with 2.09% at September 30, 2005 and 1.99% at December 31, 2005. The provision for loan losses represented 103% of net charge-offs for the third quarter of 2006, compared with 105% of net charge-offs in the same period of 2005. The increase in provision levels for 2006 also considered probable deterioration in the portfolio in P.R. due to the uncertainty in the local economy associated with the government’s fiscal crisis.

	•		rise in non-interest income by $2.1 million, or 2%, mainly due to higher gains on the sale of real estate properties and higher debit and credit card fees and discounts. This was partially offset by net losses on the sale of loans and mortgage-backed securities in the secondary markets in the third quarter of 2006, and lower service charges on deposit accounts, mainly commercial account analyses fees due to a higher earnings credit applied to clients on deposit balances in part due to the higher interest rate scenario.

	•		a decrease in operating expenses by $0.7 million, or less than 1%, primarily associated to lower business promotion expenses.

	•		higher income taxes by $3.9 million, or 16%, primarily due to a decrease in exempt interest income net of the disallowance of expenses attributed to such exempt income and an increase in the Puerto Rico statutory income tax rate from 39% to 41.5% on regular corporations and 43.5% on banks, partially offset by lower pretax earnings.

Net income for the nine months ended September 30, 2006 totaled $278.4 million, a decrease of $17.1 million, or 6%, compared with the same period in the previous year. These results reflected:

	•		higher net interest income by $12.3 million, or 2%, mainly associated with the commercial banking business, which experienced $28.8 million, or 13%, growth. This increase in commercial banking net interest income was primarily the result of a greater average volume of commercial loans, coupled with a higher yield. A substantial portion of Banco Popular de Puerto Rico’s commercial portfolio has adjustable or floating rate characteristics, thus was favorably impacted by the higher short-term interest rates experienced in 2005 and 2006. The decrease was primarily related to the consumer and retail banking business, whereby net interest income declined by $14.6 million, or 3%. The net interest margin in Banco Popular de Puerto Rico’s reportable segment was negatively impacted by the higher cost of funding in the rising rate scenario.

	•		higher provision for loan losses by $14.7 million, or 20%;

	•		lower non-interest income by $1.6 million;

	•		higher operating expenses by $0.4 million, or less than 1%;

	•		lower cumulative effect of accounting change of $3.2 million; and

	•		higher income tax expense by $12.6 million primarily due to a decrease in exempt interest income net of the disallowance of expenses attributed to such exempt income and an increase in the Puerto Rico statutory income tax rate from 39% to 41.5% on regular corporations and 43.5% on banks, partially offset by lower taxable income.

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Banco Popular North America

For the quarter ended September 30, 2006, net income for the reportable segment of Banco Popular North America totaled $21.1 million, a decrease of $0.5 million compared with the financial results for the third quarter of 2005. The main factors that contributed to this quarterly variance included:

	•		higher net interest income by $0.4 million, or less than 1%;

	•		an increase in the provision for loan losses by $3.0 million, primarily due to growth in the commercial loan portfolio and higher net charge-offs in the consumer loan portfolio, partially offset by lower net charge-offs in commercial loans;

	•		lower non-interest income by $4.1 million, or 13%, mainly due to lower service fees as a result of lower check cashing and money transfer fees due to the sale of PCE operations, partially offset by higher service charges on deposit accounts;

	•		lower operating expenses by $6.8 million, or 9%, mainly due to the sale of PCE operations; and

	•		higher income tax expense by $0.6 million impacted in part by tax considerations upon the filing of the 2005 tax return in the third quarter of 2006 .

Net income for the nine months ended September 30, 2006 totaled $66.6 million, an increase of $4.9 million, or 8%, compared with the same period in the previous year. These results reflected:

	•		higher net interest income by $8.4 million, or 3%, mostly due to an increase in the volume of earning assets, particularly commercial loans. Earning asset growth was funded primarily through deposits, mainly retail certificates of deposits, and short-term borrowings;

	•		higher provision for loan losses by $9.0 million, or 43%;

	•		lower non-interest income by $6.5 million, or 7%, influenced by lower fees from PCE, offset in part by higher service charges on deposit accounts and gains of sale of SBA loans;

	•		lower operating expenses by $14.1 million, or 6%, primarily due to PCE; and

	•		higher income tax expense by $2.3 million, or 6%.

Popular Financial Holdings

PFH’s net loss for the quarter ended September 30, 2006, totaled $19.2 million, compared with a net loss of $4.4 million for the third quarter of 2005. Factors that contributed to the variance in these financial results included:

	•		net interest income decreased by $7.9 million, or 18%. This variance includes an unfavorable valuation in interest rate caps acquired in conjunction with a series of mortgage loans securitizations that are used to limit the interest rate payable to the security holders and from swap contracts acquired to economically hedge the cost of financing certain mortgage and auto loan portfolios. Also, profit margins in the mortgage lending segment continued to tighten in 2006 as short-term rates continued to rise while the rates on the mortgage loans originated increased at a lesser rate. This lower net interest margin was partially offset by higher average volume of earning assets, primarily related to the auto loans and HELOC portfolio of E-LOAN.

	•		the provision for loan losses increased by $3.8 million, or 21%, primarily due to higher net charge-offs and non-performing assets in the mortgage and consumer loan portfolios.

	•		higher non-interest income by $32.7 million was mainly due to higher gains on the sale of mortgage loans due to E-LOAN. Also, there were lower write-downs in the valuation of interest-only strips in the quarter ended September 30, 2006 as explained in the Non-Interest Income section of this MD&A.

	•		operating expenses rose $43.7 million, mainly as a result of $40.1 million in operating expenses of E-LOAN, which did not exist in the third quarter of 2005. Also, PFH’s operating expenses include the re-engineering charges described in the Overview section of this MD&A associated with PFH’s branch consolidation efforts.

	•		income tax benefit in the quarter ended September 30, 2006 of $10.3 million resulting from the quarter’s taxable loss, compared to $2.3 million in the third quarter of 2005.

Net loss for the nine months ended September 30, 2006 totaled $46.3 million, compared with a net income of $11.8 million for the same period in the previous year. These results reflected:

	•		lower net interest income by $10.3 million, or 7%;

	•		higher provision for loan losses by $11.6 million, or 24%;

	•		higher non-interest income by $71.5 million;

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	•		higher operating expenses by $139.7 million, which included an unfavorable impact of the change in fiscal year in the PFH reportable segment amounting to $6.2 million and E-LOAN’s costs of $117.3 million; and

	•		income tax benefit of $24.7 million in 2006, compared with income tax expense of $7.4 million in 2005.

Mortgage banking profit margins have decreased as a result of a flatter yield curve as well as lower gain on sale margins. The spreads between funding costs and loan yields have narrowed. Also, the origination market in the U.S. has begun to stabilize after a multiyear boom. The non-prime mortgage industry continues to pose challenges for 2006. Over the next few months management will continue reengineering its mortgage business in the United States. Cost containment and production efficiencies will be a major focus.

EVERTEC

EVERTEC’s net income for the quarter ended September 30, 2006 totaled $7.7 million, an increase of $1.9 million, or 32%, compared with the results of the same quarter in the previous year.

The principal factors that contributed to the variance in results for 2006 when compared with the third quarter of 2005 included:

	•		growth in non-interest income of $2.1 million, or 4%, as a result of higher electronic transactions processing fees, internet banking services, and other technology consulting fees, including disaster recovery and network support, among other services. This was partially offset by a lower remeasurement adjustment of the Corporation’s investment in CONTADO in the Dominican Republic. This figure is impacted by the currency exchange rate of the Dominican peso at the remeasurement date, and to the mix in the composition of monetary and non-monetary balance sheet components of the entity being remeasured. For further information on this subject, refer to Note 1 to the consolidated financial statements.

	•		lower operating expenses by $1.2 million, primarily personnel costs and business promotion; and

	•		higher income tax expense by $1.0 million.

Net income for the nine months ended September 30, 2006 totaled $18.2 million, compared with $19.9 million for the same period in the previous year. These results reflected:

	•		higher net interest loss by $1.2 million due to higher intercompany funding requirements, primarily obtained from the holding company;

	•		higher non-interest income by $3.5 million, or 2%;

	•		lower cumulative effect of accounting change of $0.4 million;

	•		higher operating expenses by $2.9 million, or 2%;. and

	•		higher income tax expense by $0.6 million.

FINANCIAL CONDITION

Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of condition and to Table A for financial highlights on major line items of the statement of condition.

A breakdown of the Corporation’s loan portfolio, the principal category of earning assets, is presented in Table E.

TABLE E

Loans Ending Balances


					Variance					Variance
					September 30, 2006					September 30, 2006
	September 30,		December 31,		vs.			September 30,		vs.
(In thousands)	2006		2005		December 31, 2005			2005		September 30, 2005

Commercial *	$	14,071,713	$	12,757,886	$	1,313,827		$	12,267,643	$	1,804,070
Lease financing		1,265,843		1,308,091		(42,248	)		1,318,105		(52,262	)
Mortgage *		11,252,771		12,872,452		(1,619,681	)		12,481,545		(1,228,774	)
Consumer *		5,166,632		4,771,778		394,854			4,482,790		683,842

Total	$	31,756,959	$	31,710,207	$	46,752		$	30,550,083	$	1,206,876


*		Includes loans held-for-sale

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Commercial loan growth since December 31, 2005 was mostly in commercial loans reflecting continued success of sales efforts, primarily towards new credit lines on the corporate, construction and small business sectors. Also, there has been higher volume of funds drawn under existing commercial lines of credit and significant progress in construction phases at various large construction projects.

As shown in Table F, consumer loans also increased from December 31, 2005 to September 30, 2006 in all loan categories. The increase in consumer loans was principally reflected in the personal loans category, primarily in E-LOAN and BPPR. E-LOAN contributed with a portfolio of home equity lines of credit of approximately $139 million at September 30, 2006, after a strategic decision was made in mid-2006 to substantially retain those loans in portfolio. The increase in personal loans at BPPR was associated with favorable customer response to mailing campaigns, cross selling initiatives and competitive pricing. Auto loans also increased from the end of 2005 principally due to strong loan originations at E-LOAN and to originations by the Corporation’s P.R. auto lending subsidiary, fostered in part by marketing campaigns. Also, due to the increases in interest rates, early pay-offs of auto loans have declined in recent months. Credit cards also increased mostly as a result of higher sales volume and an increase in the number of credit card holders attracted by novel campaigns, offers of no annual membership fees, tiered pricing and new products directed to increase Popular’s credit card market share in Puerto Rico.

TABLE F
Breakdown of Consumer Loans


					Variance				Variance
					September 30, 2006				September 30, 2006
	September 30,		December 31,		vs.		September 30,		vs.
(In thousands)	2006		2005		December 31, 2005		2005		September 30, 2005

Personal	$	2,331,814	$	2,053,175	$	278,639	$	2,025,442	$	306,372
Auto		1,661,662		1,598,634		63,028		1,392,582		269,080
Credit cards		1,020,108		968,550		51,558		913,972		106,136
Other		153,048		151,419		1,629		150,794		2,254

Total	$	5,166,632	$	4,771,778	$	394,854	$	4,482,790	$	683,842

Partially offsetting the increase in commercial and consumer loans from the end of 2005 to September 30, 2006 was a decrease in mortgage loans. This decline was mostly associated with the pooling, during the year-to-date period ended September 30, 2006, of $0.6 billion in mortgage loans at BPPR into FNMA mortgage-backed securities that were subsequently sold to investors, a bulk sale of individual loans to a U.S. financial institution involving approximately $0.6 billion in mortgage loans and to the sale of mortgage loans in three off-balance sheet securitization transactions performed by PFH in 2006 involving approximately $1.0 billion in mortgage loans. The impact of these sales was partially offset by new loan originations. The Corporation has implemented strategic changes at PFH during 2006 primarily reducing non-prime mortgage loan acquisitions and increasing origination and sale of prime mortgage loans as a result of the acquisition of E-LOAN.

Also, the lease financing portfolio reflected a decline from December 31, 2005 to September 30, 2006, which was principally associated with the Corporation’s lease financing operations in the U.S. mainland.

Similar factors influenced the increases (decreases) in the various loan categories as of September 30, 2006 when compared to September 30, 2005. E-LOAN, acquired in the fourth quarter of 2005, had $578 million and $245 million in loans at September 30, 2006 and December 31, 2005, respectively, mainly auto loans.

At September 30, 2006, investment securities, including trading and other securities, totaled $11.3 billion, compared with $12.7 billion at December 31, 2005 and September 30, 2005. Notes 5 and 6 to the consolidated financial statements provide additional information on the Corporation’s available-for-sale and held-to-maturity investment portfolios. The decline in the Corporation’s investment securities portfolio was mainly due to maturities of U.S. agency securities with low rates in the third quarter of 2006, which were not replaced, in part due to a reduction in arbitrage activity as the interest spread is not favorable in the current interest rate scenario, and to a strategy to

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deleverage the balance sheet and direct funding toward loan growth. Commencing in the quarter ended March 31, 2006, the interest-only strips derived from newly-issued PFH’s off-balance sheet securitizations are being accounted for as trading securities. As such, any valuation adjustment is being recorded as part of trading account profit (loss) in the consolidated statements of income, which amounted to losses of $0.4 million for the quarter and nine months ended September 30, 2006. Interest-only strips accounted for as trading securities from PFH securitizations approximated $37 million at September 30, 2006.

The increase in goodwill and other intangible assets at September 30, 2006, compared with the same date in the previous year, was mostly related with the acquisition of E-LOAN during the last quarter of 2005. The increase in goodwill from December 31, 2005 was related to purchase accounting entries recorded within the one-year allocation period for E-LOAN, which were mainly related to the recording of a deferred tax liability associated with the trademark. Refer to Note 9 to the consolidated financial statements for further details on the composition of intangible assets.

Table G provides a breakdown of the “Other Assets” caption presented in the consolidated statements of condition. The principal variances from December 31, 2005 to September 30, 2006 were:

	•		Increase in the “others” caption was mostly due to securities trade receivables outstanding at September 30, 2006 for mortgage-backed securities sold prior to quarter-end, with settlement date in October 2006.

	•		Increase in servicing rights, principally related to securitization transactions performed by PFH after their fiscal year end 2005, which contributed with approximately $35 million in servicing rights at issuance date. Also, during the nine months ended September 30, 2006, PFH acquired approximately $14 million in rights to service approximately $1.8 million in mortgage loans from a third-party. Also, BPPR retained servicing responsibilities on the mortgage loan portfolios sold or securitized in the third quarter of 2006, which were previously described in this report. These capitalized servicing rights were partially offset by their amortization in the period.

	•		Increase in prepaid expenses was mostly related to higher prepaid software packages supporting specialized systems.

	•		Decrease in securitization advances and related assets was associated with PFH operations primarily due the collection in the third quarter of 2006 of excess cash held by the securitization trusts for approximately $69 million. Also, related to on-balance sheet securitizations, funds collected by PFH, as servicer, and remitted to the securitization trusts to be distributed to bond holders in future periods declined. This decline was primarily as a result of a decrease in borrower prepayment rates during the year, as well as unpaid principal balance runoff of securitizations classified as on-balance sheet.

	•		Refer to Note 8 to the consolidated financial statements for a detail of the Corporation’s derivatives as of September 30, 2006 and December 31, 2005.

TABLE G

Breakdown of Other Assets


					Variance					Variance
					September 30, 2006					September 30, 2006
	September 30,		December 31,		vs. December 31,			September 30,		vs. September 30,
(In thousands)	2006		2005		2005			2005		2005

Net deferred tax assets	$	305,943	$	305,723	$	220		$	284,075	$	21,868
Bank-owned life insurance program		203,967		197,202		6,765			195,119		8,848
Prepaid expenses		179,102		153,395		25,707			156,950		22,152
Servicing rights		172,323		141,489		30,834			121,752		50,571
Securitization advances and related assets		139,914		236,719		(96,805	)		247,565		(107,651	)
Investments under the equity method		65,760		62,745		3,015			62,682		3,078
Derivative assets		58,427		50,246		8,181			39,354		19,073
Others		249,464		178,281		71,183			169,079		80,385

Total	$	1,374,900	$	1,325,800	$	49,100		$	1,276,576	$	98,324

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The variances in “others”, prepaid expenses and securitization advances and related assets from September 30, 2005 to the same date in 2006 were influenced by the same factors described in the December 31,2005 comparison. Servicing rights increased in a higher proportion compared to September 30, 2005 also resulting primarily from three securitization transactions performed by PFH in the fourth quarter of 2005. Furthermore, other explanations to the variances in other assets from September 30, 2005 to the same date in 2006 included:

	•		Derivative assets increased from September 30, 2005 primarily due to higher index options purchased by the Corporation from major broker-dealer companies. These were principally associated with customers’ deposits whose returns are also tied to the performance of the particular index.

	•		Higher net deferred tax asset from September 30, 2005 primarily due to higher net unrealized loss position in the portfolio of available-for-sale securities. Also, the increase is due to the prepaid income tax of 5% imposed by the Government of Puerto Rico after the enactment of a law signed in May 2006. Refer to the Overview section of this MD&A for a general description of the law and the payment required to be made by the Corporation in July 2006. This variance was partially reduced by the recording of a deferred tax liability associated with the E-LOAN trademark. This deferred tax liability will exist unless it is reversed, if and only if, the trademark is written-off in a future period. This trademark was determined by management to have an indefinite life for accounting purposes. Also, as the E-LOAN acquisition was treated as a stock purchase, the trademark cannot be amortized for tax return purposes.

Popular has accomplished deposit growth despite intense competitive pressures. A breakdown of the Corporation’s deposits at period-end is included in Table H:

TABLE H
Deposits ending balances


					Variance					Variance
	September 30,		December 31,		September 30, 2006 vs.			September 30,		September 30, 2006 vs.
(In thousands)	2006		2005		December 31, 2005			2005		September 30, 2005

Demand deposits *	$	4,324,476	$	4,415,972	($	91,496	)	$	4,182,281	$	142,195
Savings, NOW and money market deposits		8,397,040		8,800,047		(403,007	)		8,944,495		(547,455	)
Time deposits		10,415,929		9,421,986		993,943			9,451,933		963,996

Total	$	23,137,445	$	22,638,005	$	499,440		$	22,578,709	$	558,736


*		Includes interest and non-interest bearing demand deposits.

The increase in time deposits from December 31, 2005 and September 30, 2005 was mostly related to retail certificates of deposits due to aggressive marketing campaigns. Also, greater volume of IRA deposits and public funds, and new deposit products launched such as CDs linked to stock market indexes, contributed to the growth in time deposits. During the third quarter of 2006, Banco Popular North America commenced to offer deposits through the convenient online webpage of its affiliate E-LOAN. As of September 30, 2006, $27 million were captured in savings accounts and certificates of deposits. Brokered certificates of deposit, included in the category of time deposits, totaled $968 million at September 30, 2006, compared with $1.3 billion at September 30, 2005 and $1.2 billion at December 31, 2005.

The decline in savings, NOW and money market deposits from December 31, 2005 and September 30, 2005 to September 30, 2006 was in part due to a shift to time deposits, resulting from higher interest rates offered in time deposits from competitive campaigns.

The decrease in demand deposits from December 31, 2005 to September 30, 2006 was primarily associated with commercial checking accounts and deposits in trust. The increase from September 30, 2005 was primarily in commercial checking accounts. The aggregate amount of overdrafts in demand deposit accounts that was reclassified to loans totaled $101 million as of September 30, 2006, $119 million as of December 31, 2005 and $70 million as of September 30, 2005.

At September 30, 2006, borrowed funds totaled $19.4 billion, compared with $21.3 billion at December 31, 2005 and $20.6 billion at September 30, 2005. Refer to Note 10 to the consolidated financial statements for the composition of the Corporation’s borrowings as of such dates. The Federal Home Loan Banks (FHLB) provide

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funding to the Corporation’s banking subsidiaries through advances. At September 30, 2006 and December 31, 2005, the Corporation had short-term and long-term borrowings under these credit facilities totaling $960 million and $1.6 billion, respectively. At September 30, 2005, these borrowings totaled $1.8 billion. Such advances are collateralized by securities and mortgage loans, do not have restrictive covenants and in the most part do not have any callable features. The reduction in borrowed funds from December 31, 2005 was partly as a result of the approach to reduce reliance on short-term debt by funding loan originations through deposits and from cash inflows from loan sales and maturities of investment securities.

Among the principal borrowing activities of the Corporation that were effected during the nine months ended September 30, 2006 were:

	•		In April 2006, the Corporation issued $450 million in medium-term notes maturing in 2009. Of the total amount issued, $250 million bear interest at a fixed rate of 5.65% and $200 million bear interest at floating rates tied to the 3-month LIBOR plus a spread of 40 basis points, which reset quarterly. The Corporation simultaneously entered into an interest swap contract to convert the floating rate notes to fixed rate notes in the rising interest rate scenario. Under the swap arrangement, the Corporation pays a fixed rate equal to 5.58%. The cash inflows were used to substitute short-term borrowings and finance operations.

	•		The Corporation executed three on-balance sheet securitizations of mortgage loans. These transactions are further described in the Off-Balance Sheet Activities section of this MD&A.

Other liabilities declined from December 31, 2005 to September 30, 2006 as reflected in the consolidated statements of condition included in the consolidated financial statements. As explained in the 2005 Annual Report and the Overview section of this MD&A, in 2005, certain of the Corporation’s non-banking subsidiaries continued to have a fiscal year ended on November 30, 2005. In preparing the consolidated statement of condition as of December 31, 2005, management had to reverse an intercompany elimination in order to reinstall loans outstanding to third parties. The impact of this reversal resulted in an increase of $429 million in the caption of other liabilities at year-end 2005. This intercompany transaction was not outstanding at June 30, 2006. As explained in the Overview section of this MD&A, all of the Corporation’s subsidiaries have aligned their closing periods to that of the Corporation; as such, timing differences no longer exist. The remainder of the decrease in other liabilities is primarily due to lower accrued taxes payables.

Refer to the consolidated statements of condition and of stockholders’ equity included in this Form 10-Q for information on the composition of stockholders’ equity at September 30, 2006, December 31, 2005 and September 30, 2005. Also, the disclosures of accumulated other comprehensive loss, an integral component of stockholders’ equity, are included in the consolidated statements of comprehensive income (loss). The increase in stockholders’ equity since September 30, 2005 was due in part to earnings retention and from approximately $216 million in capital derived from the issuance of new shares of common stock under the subscription rights offering that took effect in the fourth quarter of 2005. These favorable variances were partially offset by a higher net unrealized loss position in the valuation of the available-for-sale securities portfolio by $61 million.

The Corporation offers a dividend reinvestment and stock purchase plan for stockholders that allows them to reinvest dividends in shares of common stock at a 5% discount from the average market price at the time of the issuance, as well as purchase shares of common stock directly from the Corporation by making optional cash payments.

The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage at September 30, 2006 and 2005, and December 31, 2005 are presented on Table I. At September 30, 2006, December 31, 2005 and September 30, 2005, BPPR, BPNA and Banco Popular, National Association were all well-capitalized.

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The average tangible equity amounted to $3.0 billion at September 30, 2006, compared to $2.7 billion at December 31, 2005 and September 30, 2005. Total tangible equity was $2.9 billion at September 30, 2006 and $2.7 billion at December 31, 2005 and September 30, 2005. The average tangible equity to average tangible assets ratio was 6.17% at September 30, 2006, 5.86% at December 31, 2005 and 5.92% at September 30, 2005.

TABLE I
Capital Adequacy Data


	September 30,			December 31,			September 30,
(Dollars in thousands)	2006			2005			2005

Risk-based capital
Tier I capital	$	3,738,641		$	3,540,270		$	3,495,710
Supplementary (Tier II) capital		431,443			403,355			389,647


Total capital	$	4,170,084		$	3,943,625		$	3,885,357

Risk-weighted assets
Balance sheet items	$	31,816,193		$	29,557,342		$	28,523,983
Off-balance sheet items		2,574,095			2,141,922			2,147,889


Total risk-weighted assets	$	34,390,288		$	31,699,264		$	30,671,872


Average assets	$	47,445,563		$	47,415,254		$	45,347,557

Ratios:
Tier I capital (minimum required — 4.00%)		10.87	%		11.17	%		11.40	%
Total capital (minimum required — 8.00%)		12.13	%		12.44	%		12.67	%
Leverage ratio *		7.88	%		7.47	%		7.71	%


*		All banks are required to have a minimum Tier I leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank’s classification.

At September 30, 2006, the capital adequacy minimum requirement for Popular, Inc. was (in thousands): Total Capital of $2,751,223, Tier I Capital of $1,375,612, and a Tier I Leverage of $1,423,367 based on a 3% ratio or $1,897,823 based on a 4% ratio according to the Bank’s classification.

OFF-BALANCE SHEET AND ON-BALANCE SHEET SECURITIZATION ACTIVITIES

In connection with PFH’s securitization transactions, the Corporation is a party to pooling and servicing agreements pursuant to each of which the Corporation transfers (on a servicing retained basis) certain of the Corporation’s loans to a special purpose entity, which in turn transfers the loans to a securitization trust fund that has elected to be treated as one or more Real Estate Mortgage Investment Conduits (REMICs). The two-step transfer of loans by the Corporation to a securitization trust fund, in which the Company surrenders control over the loans, is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” sets forth the criteria that must be met for control over transferred assets to be considered to have been surrendered. When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria the Corporation is then prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing.

During 2006, the Corporation has conducted three asset securitizations that involved the transfer of mortgage loans to qualifying special purpose entities (QSPE), which in turn transferred these assets and their titles, to different trusts, thus isolating those loans from the Corporation’s assets. Approximately, $1.0 billion in adjustable and fixed-rate loans were securitized and sold by PFH during 2006, with a gain on sale of approximately $18.8 million. As part of these transactions, the Corporation recognized mortgage servicing rights of $19 million and interest-only strips of $37 million. Key economic assumptions used in measuring the retained interests at the date of these securitizations were: discount rate of 15% to 17% for IOs and 14% to 16% for MSRs, average conditional prepayment rates of 35% in adjustable rate loans and 28% in fixed-rate loans; and loss rates ranging from 1.7% to 3.2%.

The trusts created as part of off-balance sheet mortgage loans securitizations, conducted prior to 2001, in 2005 and in 2006, are not consolidated in the Corporation’s financial statements since the transactions qualified for sale

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accounting based on the provisions of SFAS No. 140. The investors and the securitization trusts have no recourse to the Corporation’s assets or revenues. The Corporation’s creditors have no recourse to any assets or revenues of the special purpose entity, or the securitization trust funds. At September 30, 2006 and 2005, these trusts held approximately $2.6 billion and $1.7 billion, respectively, in assets in the form of mortgage loans. Their liabilities in the form of debt principal due to investors approximated $2.5 billion and $1.7 billion at September 30, 2006 and 2005, respectively. The Corporation retained servicing responsibilities and certain subordinated interests in these securitizations in the form of interest-only strips. Their value is subject to credit, prepayment and interest rate risks on the transferred financial assets. The servicing rights retained by the Corporation are recorded in the statements of condition at the lower of cost or market value, while the interest-only strips are recorded at fair value.

In securitization transactions accounted for as secured borrowings (“on-balance sheet securitizations”) under the SFAS No. 140 criteria, the loans are included on the balance sheet as loans pledged as collateral for secured borrowings. The proceeds from the sale of the securities to investors are included on the balance sheet as secured borrowings. During 2006, the Corporation completed two on-balance sheet securitizations consisting of approximately $898 million in adjustable and fixed-rate loans. As part of these transactions, the Corporation recognized mortgage servicing rights of $16 million. Key economic assumptions used in measuring the servicing rights at the date of the securitizations were: discount rate of 14% to 16% and average conditional prepayment rates of 35% in adjustable rate loans and 28% in fixed-rate loans.

As of September 30, 2006, interest-only strips related to the securitization transactions performed by PFH amounted to $88 million. During the nine-months ended September 30, 2006, the Corporation recorded $17 million in write-downs in the value of interest-only strips classified as available-for-sale securities since their decline in fair value was considered other-than-temporary. Considering market trends for the sub-prime mortgage industry and benchmarking procedures followed against industry and third-party valuation data, the Corporation adjusted certain critical assumptions utilized in the valuation of its interest-only securities in the second quarter of 2006. Changes considered included an increase in the discount rate from 15% to 17%, and certain revisions in the discounted cash flow models for prepayment speeds and credit loss assumptions.

Refer to Note 7 to the consolidated financial statements in this Form 10-Q for further information on these securitizations transactions and the related retained beneficial interests.

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CREDIT RISK MANAGEMENT AND LOAN QUALITY

Table J summarizes the movement in the allowance for loan losses and presents several loan loss statistics for the quarters and nine months ended September 30, 2006 and 2005.

TABLE J

Allowance for Loan Losses and Selected Loan Losses Statistics


	Third Quarter									Nine months ended September 30,
(Dollars in thousands)	2006			2005			Variance			2006			2005			Variance

Balance at beginning of period	$	483,815		$	456,954		$	26,861		$	461,707		$	437,081		$	24,626
Allowance purchased		—			—			—						3,685			(3,685	)
Provision for loan losses		63,445			49,960			13,485			179,488			144,232			35,256
Impact of change in reporting period *		—			—			—			2,510			1,586			924


		547,260			506,914			40,346			643,705			586,584			57,121

Losses charged to the allowance:
Commercial		12,606			15,774			(3,168	)		38,031			49,474			(11,443	)
Lease financing		6,599			5,503			1,096			18,622			14,720			3,902
Mortgage		15,515			12,037			3,478			40,898			34,144			6,754
Consumer		39,862			27,992			11,870			104,141			75,997			28,144


Subtotal		74,582			61,306			13,276			201,692			174,335			27,357

Recoveries:
Commercial		4,048			4,174			(126	)		12,776			17,296			(4,520	)
Lease financing		3,190			2,530			660			9,263			7,327			1,936
Mortgage		186			167			19			612			588			24
Consumer		7,237			6,946			291			22,675			21,965			710


Subtotal		14,661			13,817			844			45,326			47,176			(1,850	)

Net loans charged-off:
Commercial		8,558			11,600			(3,042	)		25,255			32,178			(6,923	)
Lease financing		3,409			2,973			436			9,359			7,393			1,966
Mortgage		15,329			11,870			3,459			40,286			33,556			6,730
Consumer		32,625			21,046			11,579			81,466			54,032			27,434


Subtotal		59,921			47,489			12,432			156,366			127,159			29,207


Balance at end of period	$	487,339		$	459,425		$	27,914		$	487,339		$	459,425		$	27,914


Ratios:
Net charge-offs to average loans held-in-portfolio		0.77	%		0.66	%					0.67	%		0.60	%
Provision to net charge-offs		1.06x			1.05x						1.15x			1.13x


*		Represents the net effect of provision for loan losses, less net charge-offs corresponding to the impact of the change in fiscal period at certain subsidiaries (as described in Note 1 to the consolidated financial statements and in the 2005 Annual Report).

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Also, Table K presents annualized net charge-offs to average loans by loan category for the quarters and nine months ended September 30, 2006 and 2005.

TABLE K

Annualized Net Charge-offs to Average Loans Held-in-Portfolio


	Quarter ended September 30,						Nine months ended September 30,
	2006			2005			2006			2005

Commercial		0.25	%		0.39	%		0.25	%		0.37	%
Lease financing		1.07			0.91			0.96			0.76
Mortgage		0.55			0.43			0.46			0.40
Consumer		2.58			1.91			2.20			1.69

		0.77	%		0.66	%		0.67	%		0.60	%

The decline in commercial loans net charge-offs to average loans held-in-portfolio ratio was mostly associated with portfolio growth and the continuing identification and monitoring of potential problem loans.

The increase in net charge-offs to average loans in the lease financing portfolio was the result of higher delinquencies in Puerto Rico and increased charge-offs in the U.S. leasing subsidiary related to a particular customer lending relationship.

Mortgage loans net charge-offs as a percentage of average mortgage loans held-in-portfolio increased primarily due to higher delinquency levels experienced in the U.S. mainland, primarily in the Corporation’s non-prime mortgage loan portfolio. Although deteriorating economic conditions have impacted the mortgage delinquency rates in Puerto Rico increasing the levels of non-accruing mortgage loans, historically the Corporation has experienced a low level of losses in its P.R. mortgage loan portfolio. This portfolio consists primarily of loans with high credit scores and adequate collateral. Refer to Part II — Item 1A — Risk Factors of this Form 10-Q for information on Puerto Rico’s current economic condition and on risk factors impacting the U.S. mortgage banking business, primarily the non-prime market which PFH serves.

Consumer loans net charge-offs as a percentage of average consumer loans held-in-portfolio rose primarily due to higher delinquencies and growth in the unsecured portfolio, mainly in personal loans and credit cards.

NON-PERFORMING ASSETS

A summary of non-performing assets, which includes past-due loans that are no longer accruing interest, renegotiated loans and real estate property acquired through foreclosure, is presented in Table L, along with certain credit quality metrics. For a summary of the Corporation’s policy for placing loans on non-accrual status, refer to the sections of Loans and Allowance for Loan Losses included in Note 1 to the audited consolidated financial statements included in Popular, Inc.’s 2005 Annual Report.

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TABLE L

Non-Performing Assets


																					$ Variance
																		As a			September 30,
													$ Variance					percentage			2006
				As a percentage						As a percentage			September 30, 2006					of loans			vs.
	September			of loans HIP			December 31,			of loans HIP			vs.		September 30,			HIP			September 30,
(Dollars in thousands)	30, 2006			by category			2005			by category			December 31, 2005		2005			by category			2005

Commercial	$	156,242			1.1	%	$	133,746			1.1	%	$	22,496	$	140,093			1.1	%	$	16,149
Lease financing		14,569			1.2			2,562			0.2			12,007		3,252			0.2			11,317
Mortgage		438,684			4.1			371,885			3.0			66,799		373,126			3.2			65,558
Consumer		44,666			0.9			39,316			0.8			5,350		35,479			0.8			9,187

Total non-performing loans		654,161			2.1	%		547,509			1.8	%		106,652		551,950			1.9	%		102,211
Other real estate		83,636						79,008						4,628		77,993						5,643


Total non-performing assets	$	737,797					$	626,517					$	111,280	$	629,943					$	107,854

Accruing loans past due 90 days or more	$	92,201					$	86,662					$	5,539	$	80,401					$	11,800


Non-performing assets to loans held-in-portfolio		2.36	%					2.02	%							2.12	%
Non-performing assets to total assets		1.57						1.29								1.34
Allowance for loan losses to loans held-in-portfolio		1.56						1.49								1.55
Allowance for loan losses to non-performing assets		66.05						73.69								72.93
Allowance for loan losses to non-performing loans		74.50						84.33								83.24

Non-performing mortgage loans increased from December 31, 2005 to September 30, 2006 mainly due to higher delinquencies in the U.S. mainland portfolio, mainly in the non-prime market, and also in Puerto Rico resulting from deteriorating economic conditions, as discussed in the previous credit quality section of this MD&A. The increase in non-performing commercial loans from December 31, 2005 was primarily due to growth in the commercial loan portfolio. Non-performing leases increased mainly due to one particular commercial lease financing relationship in the U.S. leasing subsidiary, which reached non-performing status in the third quarter of 2006. Management expects to collect the full amount of principal and interest on this particular lease financing relationship. Finally, the increase in non-performing consumer loans was in part due to the growth in the portfolio and the impact of current economic conditions. The increase in non-performing assets from September 30, 2005 was substantially associated to similar factors. The higher ratio of non-performing mortgage loans to loans held-in-portfolio experienced as of September 30, 2006 was in part influenced by a reduction in the loan portfolio of BPPR, as a result of certain loan sales in the first nine months of 2006 amounting to approximately $1.2 billion, which are described in the Non-interest section of this MD&A.

Accruing loans past due 90 days or more are composed primarily of credit cards, FHA/VA and other insured mortgage loans, and delinquent mortgage loans included in the Corporation’s financial statements pursuant to the GNMA’s buy-back option program. Under SFAS No. 140, servicers of loans underlying Ginnie Mae mortgage-backed securities must report as their own assets defaulted loans that they have the option to purchase, even when they elect not to exercise the option. Also, accruing loans ninety days or more include residential conventional loans purchased from other financial institutions that although delinquent, the Corporation has received timely payment from the sellers / servicers, and in some instances have partial guarantees under recourse agreements.

The allowance for loan losses, which represents management’s estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for these estimated loan losses based on evaluations of the risks in the loan portfolios. In evaluating the adequacy of the allowance for loan losses, the Corporation’s management considers current economic conditions, loan portfolio composition and risk characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors. The methodology used to establish the allowance for loan losses is based on

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SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 5, “Accounting for Contingencies.” Under SFAS No. 114, certain commercial loans are identified for evaluation on an individual basis, and specific reserves are calculated based on impairment analyses. SFAS No. 5 provides for the recognition of a loss allowance for a group of homogeneous loans when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of September 30, 2006, there have been no significant changes in evaluation methods or assumptions from December 31, 2005 that had an effect on the Corporation’s methodology for assessing the adequacy of the allowance for loan losses.

The Corporation considers a commercial loan to be impaired when interest and/or principal are past due 90 days or more, or, when based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. The Corporation’s recorded investment in impaired commercial loans and the related valuation allowance calculated under SFAS No. 114 at September 30, 2006, December 31, 2005 and September 30, 2005 were:


	September 30, 2006				December 31, 2005				September 30, 2005
	Recorded		Valuation		Recorded		Valuation		Recorded		Valuation
(In millions)	Investment		Allowance		Investment		Allowance		Investment		Allowance

Impaired loans:
Valuation allowance required	$	94.0	$	25.4	$	69.6	$	20.4	$	89.7	$	27.1
No valuation allowance required		74.5		—		46.3		—		52.6		—

Total impaired loans	$	168.5	$	25.4	$	115.9	$	20.4	$	142.3	$	27.1

Average impaired loans during the third quarter of 2006 and 2005 were $148 million and $138 million, respectively. The Corporation recognized interest income on impaired loans of $0.7 million and $1.4 million for the quarters ended September 30, 2006 and September 30, 2005, respectively, and $2.4 million and $3.5 million for the nine months ended on those same dates, respectively.

In addition to the non-performing loans included in Table L, there were $54 million of loans at September 30, 2006, which in management’s opinion are currently subject to potential future classification as non-performing, and are considered impaired under SFAS No. 114. At December 31, 2005 and September 30, 2005, these potential problem loans approximated $30 million and $51 million, respectively.

Under standard industry practice, closed-end consumer loans are not customarily placed on non-accrual status prior to being charged-off. Excluding the closed-end consumer loans from non-accruing at September 30, 2006, adjusted non-performing assets would have been $693 million or 2.21% of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 79.96%. At December 31, 2005, adjusted non-performing assets would have been $587 million or 1.89% of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 90.85%. At September 30, 2005, adjusted non-performing assets would have been $594 million or 2.00% of loans held-in-portfolio and the allowance to non-performing loans would have been 88.95%.

The Corporation’s management considers the allowance for loan losses to be at a level sufficient to provide for estimated losses based on current economic conditions, the level of net loan losses, the loan portfolio mix which includes a high proportion of real estate secured loans, and the methodology established to evaluate the adequacy of the allowance for loan losses.

As explained in the 2005 Annual Report, the Corporation is exposed to geographical and government risk. Popular, Inc. has diversified its geographical risk as a result of its growth strategy in the United States and the Caribbean. Puerto Rico’s share of the Corporation’s total loan portfolio has decreased from 59% at the end of 1999 to approximately 45% at September 30, 2006. The Corporation’s assets and revenue composition by geographical area and by business segment reporting is presented in Note 19 to the consolidated financial statements.

Even though Puerto Rico’s economy is closely integrated with that of the U.S. mainland and its Government and many of its instrumentalities are investment-grade rated borrowers in the U.S. capital markets, the current fiscal situation of the Commonwealth’s government (“P.R. Government”) has led nationally recognized rating agencies to

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downgrade the credit rating of the P.R. Government debt obligations. Refer to Part II — Other Information, Item 1A. Risk Factors, included in this Form 10-Q for further information on Puerto Rico’s current economic condition and government debt ratings.

After the approval in July 2006 of the P.R. Government’s fiscal year 2006-2007 budget and the adoption of a sales tax, the rating agencies removed the P.R. Government obligations from their respective watch lists, thus reducing the possibility of an immediate additional downgrade. Both rating agencies maintained the negative outlook for the Puerto Rico obligation bonds. Factors such as the government’s ability to implement meaningful steps to curb operating expenditures, improve managerial and budgetary controls, and eliminate the government’s reliance on loans from the Government Development Bank of Puerto Rico to cover budget deficits will be key determinants of future rating stability and restoration of the long-term outlook.

At September 30, 2006, the Corporation had $998 million of credit facilities granted to or guaranteed by the P.R. Government and its political subdivisions, of which $50 million are uncommitted lines of credit. Of this total, $846 million in loans were outstanding at September 30, 2006. A substantial portion of the credit exposure to the Government of Puerto Rico has an identified repayment stream, which includes in some cases the good faith, credit and unlimited taxation of certain municipalities, an assignment of basic property taxes and other revenues.

Furthermore, as of September 30, 2006, the Corporation had outstanding $189 million in Obligations of Puerto Rico, States and Political Subdivisions as part of its investment portfolio (refer to Notes 5 and 6 to the consolidated financial statements). Of that total, $164 million is exposed to the creditworthiness of the P.R. Government and its municipalities. Of that portfolio, $57 million are in the form of Puerto Rico Commonwealth’s Appropriation Bonds, which are currently rated Ba1, one notch below investment grade, by Moody’s and BBB-, the lowest investment grade rating, by Standard & Poor’s Rating Services (“S&P”), another nationally recognized credit rating agency. As of September 30, 2006, the Appropriation Bonds indicated above represented approximately $3.2 million in unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island and evaluates the 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 or up to maturity for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments or other assets due to changes in interest rates, currency exchange rates or equity prices. Interest rate risk, a component of market risk, is the exposure to adverse changes in net interest income due to changes in interest rates. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk may occur for one or more reasons, such as the maturity or repricing of assets and liabilities at different times, changes in short and long-term market interest rates, or the maturity of assets or liabilities may be shortened or lengthened as interest rates change. Depending on the duration and repricing characteristics of the Corporation’s assets, liabilities and off-balance sheet items, changes in interest rates could either increase or decrease the level of net interest income.

The techniques for measuring the potential impact of the Corporation’s exposure to market risk from changing interest rates, which were described in the 2005 Annual Report, have remained substantially constant from the end of 2005. Due to the importance of critical assumptions in measuring market risk, the risk models currently incorporate third-party developed data for critical assumptions such as prepayment speeds on mortgage-related products, estimates on the duration of the Corporation’s deposits, and interest rate scenarios.

The Corporation maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. Management employs a variety of measurement techniques including the use of an earnings simulation model to analyze the net interest income sensitivity to changing interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model, which incorporates actual balance sheet figures detailed by

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maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. The asset and liability management group also performs validation procedures on various assumptions used as part of the sensitivity analysis.

Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, interest rate spreads, loan prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual results. Furthermore, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what actually may occur in the future.

Based on the results of the sensitivity analyses as of September 30, 2006, the Corporation’s net interest income for the next twelve months is estimated to increase by $3.1 million in a hypothetical 200 basis points rising rate scenario, and the change for the same period, utilizing a similar hypothetical decline in the rate scenario, is an estimated decrease of $8.6 million. Both hypothetical rate scenarios consider the gradual change to be achieved during a twelve-month period from the prevailing rates at September 30, 2006. These estimated changes are within the policy guidelines established by the Board of Directors.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income that are caused by interest rate volatility. The market value of these derivatives is subject to interest rate fluctuations, and as a result it could have a positive or negative effect in the Corporation’s net interest income. Refer to Note 8 to the consolidated financial statements for further information on the Corporation’s derivative instruments.

The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. (CONTADO) and Centro Financiero BHD, S.A. (BHD) in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. The resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive loss in the consolidated statements of condition, except for highly inflationary environments in which the effects are included in other operating income in the consolidated statements of income, as described below.

At September 30, 2006, the Corporation had approximately $37 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive loss, compared with $36 million at December 31, 2005 and September 30, 2005. The Corporation has been monitoring the inflation levels in the Dominican Republic to evaluate whether it still meets the “highly inflationary economy” test prescribed by SFAS No. 52, “Foreign Currency Translation.” Such statement defines highly inflationary as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy are remeasured as if the functional currency were the reporting currency. Accordingly, since June 2004, the Corporation’s interests in the Dominican Republic have been remeasured into the U.S. dollar. Although as of September 30, 2006, the cumulative inflation rate in the Dominican Republic over a 3-year period was below 100 percent, approximating 66% at quarter-end, the Corporation continued to apply the remeasurement accounting as of September 30, 2006 based on the accounting guidance obtained. The International Practices Task Force (“IPTF”) of the SEC Regulations Committee of the American Institute of Certified Public Accountants had concluded that the Dominican Republic was considered highly inflationary as of December 31, 2005, and concluded that such country would not cease being regarded as highly inflationary for the nine months ended September 30, 2006. The Dominican peso’s exchange rate to the U.S. dollar was $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, compared with $33.14 at December 31, 2005 and $32.85 at September 30, 2006. During the quarter and nine months ended September 30, 2006, approximately $0.5 million and $1.1 million, respectively, in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive loss. The net remeasurement gains totaled $1.0 million and $1.3 million for the quarter and nine months ended September 30, 2005, respectively. These remeasurement gains (losses) will continue to be reflected in earnings until the economy is no longer considered highly inflationary. The unfavorable cumulative translation

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adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $32 million.

LIQUIDITY

Liquidity risk may arise whenever the Corporation’s ability to raise cash and the runoff of its assets are substantially less than the runoff of its liabilities and its commitments to fund loans, meet customer deposit withdrawals and other cash commitments. The Corporation has established policies and procedures to assist it in remaining sufficiently liquid to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal operating conditions and under unpredictable circumstances of industry or market stress.

The Corporation has adopted contingency plans for raising financing under stress scenarios, where important sources of funds that are usually fully available are temporarily not willing to lend to the Corporation. These plans call for using alternate funding mechanisms such as the pledging or securitization of certain asset classes, committed credit lines, and loan facilities put in place with the FHLB and the FED. The Corporation has a substantial amount of assets available for raising funds through non-traditional channels and is confident that it has adequate alternatives to rely on under a scenario where some primary funding sources are temporarily unavailable.

The Corporation’s liquidity position is closely monitored on an ongoing basis. Management believes that available sources of liquidity are adequate to meet the funding needs in the normal course of business.

The composition of the Corporation’s financing to total assets at September 30, 2006 and December 31, 2005 follows.


					% increase
					(decrease)
					from
					December 31, 2005			% of total assets
	September 30,				to September 30,			September 30,			December 31,
(Dollars in millions)	2006		December 31, 2005		2006			2006			2005

Non-interest bearing deposits	$	3,823	$	3,958		(3.4	%)		8.2	%		8.1	%
Interest-bearing core deposits		13,765		13,699		0.5			29.3			28.2
Other interest-bearing deposits		5,550		4,981		11.4			11.8			10.2
Federal funds and repurchase agreements		7,045		8,702		(19.0	)		15.0			17.9
Other short-term borrowings		2,710		2,700		0.4			5.8			5.6
Notes payable		9,682		9,894		(2.1	)		20.6			20.3
Others		724		1,241		(41.7	)		1.5			2.6
Stockholders’ equity		3,636		3,449		5.4			7.8			7.1

The Corporation’s core deposits, which consist of demand, savings, money markets, and time deposits under $100 thousand, constituted 76% of total deposits at September 30, 2006. Certificates of deposit with denominations of $100 thousand and over at September 30, 2006 represented 24% of total deposits. Their distribution by maturity was as follows:


(In thousands)

3 months or less	$	2,320,863
3 to 6 months		828,161
6 to 12 months		1,064,180
Over 12 months		1,337,064

	$	5,550,268

Refer to Note 10 to the consolidated financial statements for the composition of the Corporation’s borrowings at September 30, 2006, December 31, 2005 and September 30, 2005. During the quarter ended September 30, 2006, the Corporation placed less reliance on short-term borrowings. Loan originations and payments of short-term obligations in the quarter ended September 30, 2006 were funded mainly through deposits and from proceeds of loan sales and

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maturities of investment securities available-for-sale.

There have been no significant changes in the Corporation’s aggregate contractual obligations since the end of 2005, except for the changes in funding sources that could be identified in Note 10 and described in the Statement of Condition section of this MD&A. Refer to Note 11 to the consolidated financial statements for the Corporation’s involvement in certain commitments at September 30, 2006.

Risks to Liquidity

Maintaining adequate credit ratings on Popular’s debt issues is an important factor for liquidity because credit ratings affect the ability of the Corporation to attract funds from various sources on a cost competitive basis. Credit ratings by the major credit rating agencies are an important component of the Corporation’s liquidity profile. Among other factors, the credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the Corporation’s ability to access a broad array of wholesale funding sources. Changes in the credit rating of the Corporation or any of its subsidiaries to a level below “investment grade” may affect the Corporation’s ability to raise funds in the capital markets as well as their cost. The Corporation’s counterparties are sensitive to the risk of a rating downgrade. In the event of a downgrade, it may be expected that the cost of borrowing funds in the institutional market would increase. In addition, the ability of the Corporation to raise new funds or renew maturing debt may be more difficult.

In early August 2005, Fitch, a nationally recognized credit rating agency, changed the Corporation’s rating outlook from “stable” to “negative”. This rating outlook continued to be in effect as of September 30, 2006. In the opinion of management, this does not necessarily imply that a change in the actual rating of the Corporation is imminent, but does suggest that the agency has identified financial and / or business trends, which if left unchanged, may result in a rating change. The Corporation is also rated by two other nationally recognized credit rating agencies. Management has not been advised by these agencies of any potential changes to either the Corporation’s ratings or rating outlook. Following the announcement by the Corporation of the acquisition of E-LOAN, Fitch expressed concerns indicating that, while the Corporation’s capital profile is acceptable for current ratings, the level of tangible common equity would fall following the E-LOAN acquisition as a result of the intangibles recorded, primarily goodwill and trademark. Also, the outlook change considered the risk of greater exposure to the non-prime lending business. Management evaluated such concerns and has taken and continues to evaluate actions to address them. As described in the 2005 Annual Report, in the fourth quarter of 2005, the Corporation issued additional shares of common stock to strengthen the level of tangible equity capital. Furthermore, strategic changes have been implemented at PFH that should have the effect of decreasing the growth of the non-prime loan portfolio at the Corporation.

The Corporation and BPPR’s debt ratings at September 30, 2006 were as follows:

Popular, Inc.

BPPR

Short-term

Long-term

Short-term

Long-term

debt

Fitch

F-1

A

F-1

A

Moody’s

P-2

A3

P-1

A2

S&P

A-2

BBB+

A-2

A-

The ratings above are subject to revisions or withdrawals at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.

Some of the Corporation’s borrowings and deposits are subject to “rating triggers”, contractual provisions that accelerate the maturity of the underlying obligations in the case of a change in rating. Therefore, the need for the Corporation to raise funding in the marketplace could increase more than usual in the case of a rating downgrade. The amount of obligations subject to rating triggers that could accelerate the maturity of the underlying obligations was $15 million at September 30, 2006.

In the course of borrowing from institutional lenders, the Corporation has entered into contractual agreements to maintain certain levels of debt, capital and asset quality, among other financial covenants. If the Corporation were to

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fail to comply with those agreements, it may result in an event of default. Such failure may accelerate the repayment of the related obligations. An event of default could also affect the ability of the Corporation to raise new funds or renew maturing borrowings. At September 30, 2006, the Corporation had $738 million in outstanding obligations subject to covenants, including those which are subject to rating triggers. During the third quarter of 2006, one of the Corporation’s subsidiaries had breached a condition under a warehouse line agreement with a counterparty whereby the subsidiary did not maintain the required tangible net worth ratio. A covenant waiver was obtained contingent upon having the subsidiary’s holding company provide a capital infusion to the subsidiary, which was made in October 2006. At September 30, 2006, the total available line of credit under this facility was $200 million, of which less than $1 million was outstanding.

Management believes that there have been no significant changes in liquidity risk compared with the disclosures in Popular, Inc.’s 2005 Annual Report for the year ended December 31, 2005.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act and such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosures.

Internal Control Over Financial Reporting

There have been no changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended on September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting, except that, as previously stated in “Management’s Report to Stockholders” included in Popular, Inc.’s Form 10-K for the year ended December 31, 2005, the Corporation remediated the design of the control associated with the presentation and classification of certain cash flows. The consolidated statement of cash flows for the year ended December 31, 2005 was fairly stated, in all material respects, in conformity with accounting principles generally accepted in the United States of America.

Part II — Other Information

Item 1. Legal Proceedings

The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions will not have a material adverse effect on the financial position and results of operations of the Corporation.

Item 1A. Risk Factors

Except as noted below, there have been no material changes to the risk factors as previously disclosed under Item 1A. in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.

Puerto Rico’s current economic condition

The slowdown in the island’s growth rate, which appears to have started in 2005 according to P.R. Planning Dept. (“PRPD”) statistics, has continued during the first half of 2006.

Manufacturing has shown an outright decline in overall activity during the first half of 2006 as compared to the same

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period in 2005, for the first time since 2002. The trend worsened somewhat as the semester progressed, but appeared to be leveling off towards the end.

Construction remained relatively weak during the first half of 2006, as the combination of rising interest rates, the Commonwealth’s fiscal situation and decreasing public investment in construction projects affected the sector. However, it did manage to expand very modestly vs. the prior-year period. The value of construction permits during the year ending June 2006 declined 4.3%, with most of the drop coming from the public sector.

Retail sales during the six months ending June 2006 also reflected the uncertainty prevalent at the time related to the Commonwealth’s fiscal situation, as well as increased oil and utility prices. Sales registered a decline of 1.9% as compared to the same period in 2005, as the months surrounding the temporary government shutdown were particularly affected. The unemployment rate, after spiking temporarily to almost 20% in May as a result of the shutdown, has declined to 10.7% as of August 2006.

Tourism is the one sector that has been resilient. Activity in the sector has expanded consistently since 2004, and in the year ending June 2006 it registered the strongest increase in four years. Factors that may be boosting the tourism sector are geo-political tensions throughout the world, a relative benign hurricane season for the past two years, and a relative firm U.S. economy.

In general, it is apparent that in 2006 the P.R. economy continued its trend of decreasing growth and ended the first half of the year with minimal momentum, primarily due to weaker manufacturing, softer consumption and decreased government investment in construction.

The above economic concerns and uncertainty in the private and public sectors may also have an adverse effect in the credit quality of the Corporation’s loan portfolios, as delinquency rates are expected to increase in the short-term, until the economy stabilizes. Also, a potential reduction in consumer spending may also impact growth in other interest and non-interest revenue sources of the Corporation.

Rating downgrades on the Government of Puerto Rico’s debt obligations

Even though Puerto Rico’s economy is closely integrated to that of the U.S. mainland and its government and many of its instrumentalities are investment-grade rated borrowers in the U.S. capital markets, the current fiscal situation of the Government of Puerto Rico has led nationally recognized rating agencies to downgrade its debt obligations.

In May 2006, Moody’s Investors Service downgraded the Government’s general obligation bond rating to Baa3 from Baa2, and put the credit on “watch list” for possible further downgrades. The Commonwealth’s appropriation bonds and some of the subordinated revenue bonds were also downgraded by one notch and are now rated just below investment grade at Ba1. Moody’s commented that this action reflects the Government’s strained financial condition, the ongoing political conflict and lack of agreement regarding the measures necessary to end the government’s multi-year trend of financial deterioration. Standard & Poor’s Rating Services (“S&P”) still rates the Government’s general obligations two notches above junk at BBB, and the Commonwealth’s appropriation bonds and some of the subordinated revenue bonds BBB-, a category that continues to be investment-grade rated.

In July 2006, S&P and Moody’s affirmed their credit ratings on the Commonwealth debt, and removed the debt from their respective watch lists, thus reducing the possibility of an immediate additional downgrade. These actions resulted after the Government approved the budget for the fiscal year 2007, which runs from July 2006 through June 2007, which included the adoption of a new sales tax. Revenues from the sales tax will be dedicated primarily to fund the government’s operating expenses, and to a lesser extent, to repay government debt and fund local municipal governments.

Both rating agencies maintained the negative outlook for the Puerto Rico obligation bonds. Factors such as the government’s ability to implement meaningful steps to curb operating expenditures, improve managerial and budgetary controls, and eliminate the government’s reliance on operating budget loans from the Government Development Bank of Puerto Rico will be key determinants of future rating stability and restoration of a stable long-term outlook. Also, the inability to agree on future fiscal year Commonwealth budgets could result in ratings pressure from the rating agencies.

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It is uncertain how the financial markets may react to any potential future ratings downgrade in Puerto Rico’s debt obligations. However, the fallout from recent budgetary crisis and a possible ratings downgrade could adversely affect the value of Puerto Rico’s Government obligations.

A substantial portion of the Corporation’s credit exposure to the Government of Puerto Rico has an identified repayment stream assigned, which includes in some cases the good faith and credit and the unlimited taxation authority of certain municipalities, an assignment of basic property taxes and other revenues.

A prolonged economic slowdown or a decline in the real estate market in the U.S mainland could harm the results of operations of one of our business segments

The residential mortgage loan origination business has historically been cyclical, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. Any decline in residential mortgage loan originations in the market could also reduce the level of mortgage loans the Corporation may produce in the future and adversely impact our business. During periods of rising interest rates, refinancing originations for many mortgage products tend to decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the residential mortgage loan origination business is impacted by home values. Over the past several years, residential real estate values in some areas of the U.S. mainland have increased greatly, which has contributed to the recent rapid growth in the residential mortgage industry, particularly with respect to refinancings. If residential real estate values decline, this could lead to lower volumes and higher losses across the industry, adversely impacting our business.

Because the Corporation makes a substantial number of loans to credit-impaired borrowers through its subsidiary PFH, the actual rates of delinquencies, foreclosures and losses on these loans could be higher during economic slowdowns. Rising unemployment, higher interest rates or declines in housing prices tend to have a greater negative effect on the ability of such borrowers to repay their mortgage loans. As of September 30, 2006, approximately 30% of PFH’s mortgage loan portfolio was non-prime, meaning that they have a credit score of 660 or below. This represented approximately 18% of the Corporation’s mortgage loan portfolio as of such date. Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to sell loans, the prices we receive for our loans, the values of our mortgage loans held-for-sale or our residual interests in securitizations, which could harm our financial condition and results of operations. In addition, any material decline in real estate values would weaken our collateral loan-to-value ratios and increase the possibility of loss if a borrower defaults. In such event, we will be subject to the risk of loss on such mortgage asset arising from borrower defaults to the extent not covered by third-party credit enhancement.

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

The following table sets forth the details of purchases of Common Stock during the quarter ended September 30, 2006 under the 2004 Omnibus Incentive Plan.

Issuer Purchases of Equity Securities

Not in thousands


					Total Number of Shares		Maximum Number of Shares
	Total Number of Shares		Average Price Paid		Purchased as Part of Publicly		that May Yet be Purchased
Period	Purchased		per Share		Announced Plans or Programs		Under the Plans or Programs

July 1 – July 31		—		—		—		8,585,353
August 1 – August 31		1,038		17.91		1,038		8,584,315
September 1 – September 30		—		—		—		8,584,315

Total September 30, 2006		1,038	$	17.91		1,038		8,584,315

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Item 6. Exhibits


Exhibit No.		Exhibit Description
12.1		Computation of the ratios of earnings to fixed charges and preferred stock dividends.

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		POPULAR, INC.

		(Registrant)

Date: November 9, 2006	By:	/s/ Jorge A. Junquera

		Jorge A. Junquera
		Senior Executive Vice President &
		Chief Financial Officer

Date: November 9, 2006	By:	/s/ Ileana González Quevedo

		Ileana González Quevedo
		Senior Vice President & Corporate Comptroller

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Popular, Inc. (Banco Popular de Puerto Rico) - 10-Q quarterly report FY

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