SECURITIES AND EXCHANGE COMMISSION

FORM 10 - Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

POPULAR, INC.

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

Registrant’s telephone number, including area code (787) 765-9800

Not Applicable

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.

     Yes [X]       No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes [X]       No [  ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

POPULAR, INC.

INDEX

     Forward-Looking Information. The information included in this Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the adequacy of the allowance for loan losses, the Corporation’s market and liquidity risks and the effect of legal proceedings on Popular, Inc.’s financial condition and results of operations, among others. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could.” These forward-looking statements involve certain risks, uncertainties, estimates and assumptions by management. Various factors such as regional and national economic conditions, competitive and regulatory factors, and legislative changes, could cause actual results to differ from those contemplated by such forward-looking statements.

     With respect to the adequacy of the allowance for loan losses and market risk, these factors include, among others, the rate of growth in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, the performance of the stock and bond market and the magnitude of interest rate and foreign currency exchange rate changes. Moreover, the outcome of litigation, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of judges and juries. The Corporation assumes no obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

ITEM 1. FINANCIAL STATEMENTS

POPULAR, INC.

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

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POPULAR, INC.

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

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POPULAR, INC.

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

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POPULAR, INC.

Disclosure of accumulated other comprehensive income:

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

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POPULAR, INC.

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

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Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share information)

Note 1 – Nature of operations and basis of presentation

Popular, Inc. (the “Corporation”) is a financial holding company offering a full range of financial products and services to consumer and corporate customers through its offices in Puerto Rico, the United States and the Caribbean, including the U.S. and British Virgin Islands, and Central America. The Corporation’s subsidiaries are engaged in the following businesses: commercial banking, auto loans and lease financing, mortgage and consumer lending, broker/dealer and investment banking services, retail financial services, insurance agency and reinsurance services , information technology and ATM and data processing services. Note 15 to the unaudited consolidated financial statements presents information about the Corporation’s business segments.

The unaudited consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. 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 presented and include all necessary adjustments, 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 2004 presentation.

As further described in Note 12 to the unaudited consolidated financial statements, during the second quarter of 2004, the Corporation’s Board of Directors authorized a two-for-one stock split in the form of a stock dividend. All references to the numbers of common shares and per share amounts in the financial statements and notes to the financial statements, except for the number of shares authorized in 2003 and the number of shares issued, outstanding and held in treasury as of September 30, 2003 and December 31, 2003 presented in the consolidated statements of condition, have been restated to reflect the stock split.

Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission and, accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2003, included in the Corporation’s Annual Report on Form 10-K.

Recent Acquisitions

On August 31, 2004, the Corporation completed its acquisition of Quaker City Bancorp, Inc. (“Quaker City”), the holding company of Quaker City Bank, based in Whittier, California. As of that date, excluding the effect of purchase accounting entries, Quaker City had assets of approximately $2,100,000, a loan portfolio of approximately $1,500,000 and deposits of approximately $1,200,000.

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 income, except for highly inflationary environments in which the effects are included in other operating income.

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. and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s particular foreign currency. At September 30, 2004, the Corporation had $35,329 in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive income. The Corporation had been monitoring the inflation levels in the Dominican Republic to evaluate whether it

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met the “highly inflationary economy” test prescribed by SFAS No. 52 “Foreign Currency Translation.” Such statement defines a highly inflationary economy as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” The cumulative inflation in the Dominican Republic for the 36 months ended September 30, 2004 and June 30, 2004 exceeded the 100 percent threshold. In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy shall be remeasured as if the functional currency were the reporting currency. Accordingly, the Corporation’s interests in the Dominican Republic were remeasured into the U.S. dollar. During the third quarter of 2004, approximately $229 in remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive income. These remeasurement gains / losses will continue to be reflected in earnings until the economy is no longer highly inflationary. The unfavorable cumulative translation adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $32,000.

Note 2 – Recent Accounting Developments

FIN No. 46 “Consolidation of Variable Interest Entities”

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” The FASB’s stated intent in issuing FIN No. 46 was to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 requires an enterprise to consolidate a variable interest entity (as defined in FIN No. 46) if that enterprise has a variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected returns if they occur, or both.

In December 2003, the FASB issued a revised FIN No. 46 (FIN No. 46R), which attempts to clarify the guidance in the original interpretation. FIN No. 46 applies to variable interest entities created after January 31, 2003. FIN No. 46 also applies to all variable interest entities created prior to February 1, 2003 that are considered to be special-purpose entities (as defined in FIN No. 46R) as of December 31, 2003. FIN No. 46R must be applied to all variable interest entities no later than the end of the first reporting period that ends after March 15, 2004. Certain variable interest entities that are qualifying special purpose entities subject to the reporting requirements of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” are not required to be consolidated under the provisions of FIN No. 46.

At December 31, 2003, the Corporation had two wholly-owned issuer trusts that issued trust preferred securities (also referred to as “Capital Securities”). Prior to FIN No. 46R, the issuer trusts were consolidated subsidiaries of the Corporation. In relation to these issuer trusts, the Corporation adopted the provisions of FIN No. 46R at December 31, 2003, requiring the deconsolidation of these trusts. Refer to Note 11 to the unaudited consolidated financial statements for further information on the issuer trusts and the impact in the Corporation’s consolidated financial statements. Except for the impact described above, there was no other material impact on the Corporation’s financial condition or results of operations as a result of the adoption of FIN No. 46R.

SAB 105 “Application of Accounting Principles to Loan Commitments”

On March 9, 2004, the SEC issued Staff Accounting Bulletin 105, “Application of Accounting Principles to Loan Commitments,” (SAB 105) to inform registrants of the Staff’s view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. The adoption of SAB 105 did not have a material impact on the Corporation’s financial condition or results of operations.

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Issue 03-1, “Meaning of Other Than Temporary Impairment”

In March 2004, the Emerging Issues Task Force reached a consensus on EITF Issue 03-1, “Meaning of Other Than Temporary Impairment” (Issue 03-1). The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired is as follows: Step 1: Determine whether the investment is impaired. An investment is impaired if its fair value is less than its cost. Step 2: Evaluate whether the impairment is other-than-temporary. Step 3: If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value. The three-step model used to determine other-than-temporary impairments was required to be applied prospectively to all current and future investments in interim or annual reporting periods beginning after June 15, 2004.

On September 15, 2004, the FASB issued proposed FSP EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1” (Issue 03-1-a) to address the application of Issue 03-1 to debt securities that are impaired solely because of interest-rates and / or sector-spread increases and that are analyzed for impairment under paragraph 16 of Issue 03-1. On September 30, 2004, the FASB issued FSP EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1,” (Issue 03-1-1) which delayed the effective date of paragraphs 10-20 of Issue 03-1. Paragraphs 10-20 of Issue 03-1 give guidance on how to evaluate and recognize an impairment loss that is other than temporary (i.e., steps 2 and 3 of the impairment model). Issue 03-1-1 expands the scope of the deferral to include all securities covered by Issue 03-1. The delay of the effective date for paragraphs 10-20 of Issue 03-1 will be superseded concurrent with the final issuance of Issue 03-1-a.

The Corporation is currently evaluating the effects that this proposed statement may have on its financial condition and results of operations.

FASB Staff Position No. FAS 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”

On December 8, 2003, The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law, authorizing Medicare to provide prescription drug benefits to retirees. To encourage employers to retain or provide postretirement drug benefits for their Medicare-eligible retirees, the federal government will begin in 2006 to make subsidy payments to employers that sponsor postretirement benefit plans under which retirees receive prescription drug benefits that are “actuarially equivalent” to the prescription drug benefits provided under Medicare. FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the FSP 106-2), was issued on May 19, 2004. The FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D. It also contains basic guidance on related income tax accounting, and complex rules for transition that permit various alternative prospective and retroactive transition approaches.

Popular, Inc. elected to adopt the provisions of FSP 106-2 on a prospective basis in the third quarter of 2004 with remeasurement as of July 1, 2004. Refer to Note 10, Pension and Other Benefits, for disclosures on effects of the subsidy in the measurement of the net periodic postretirement benefit costs and the accumulated postretirement benefit obligation.

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Note 3 - Investment Securities Available-For-Sale

The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), and contractual maturities of investment securities available-for-sale as of September 30, 2004, December 31, 2003 and September 30, 2003 were as follows:

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Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity.

The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

During the quarter ended June 30, 2004, the Corporation reassessed the appropriateness of the classification of certain mortgage-backed securities and transferred $351,000 from trading to available-for-sale securities based on management’s intention and business purpose. The securities were transferred into the available-for-sale category at fair value.

The following table shows the Corporation’s gross unrealized losses and fair 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, 2004:

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The unrealized loss positions of available-for-sale securities at September 30, 2004 are primarily associated with U.S. Agency and Treasury obligations, and to a lesser extent, U.S. Agency-issued collateralized mortgage obligations, and mortgage-backed securities. 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 the available-for-sale portfolio at September 30, 2004 are substantially related to market interest rate fluctuations and not to a 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.

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Note 4 - Investment Securities Held-to-Maturity

The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), and contractual maturities of investment securities held-to-maturity as of September 30, 2004, December 31, 2003 and September 30, 2003 were as follows:

Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity.

The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities

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may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

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, 2004:

Management believes that the unrealized losses in the held-to-maturity portfolio at September 30, 2004 are substantially related to market interest rate fluctuations and not to a deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments until maturity.

Note 5 – 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:

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

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Note 6 – Derivative Instruments and Hedging Activities

In managing its market risk the Corporation enters, to a limited extent, into certain derivative transactions, primarily interest rate swaps, interest rate forwards and future contracts, interest rate caps, index options, foreign exchange contracts, floors and options embedded in financial contracts. There were no significant changes in derivative instruments and hedging activities from December 31, 2003 to September 30, 2004.

For the quarter and nine months ended September 30, 2004, the Corporation recognized net losses of $10 and $124, respectively, as a result of the changes in fair value of the non-hedging derivatives included as part of interest expense (September 30, 2003 – net gains of $282 and net losses of $7,825, respectively).

Note 7 – Goodwill and Other Intangible Assets

The Corporation’s management has defined its reporting units based on legal entity, which is the way that operating decisions are made and performance is measured. For presentation purposes, these reporting units have been aggregated by reportable segments based on the provisions of SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information.” These segments have been defined as follows: Commercial Banking, Mortgage and Consumer Lending, Auto and Lease Financing and Other. All the operating segments and components that constitute reporting units were determined evaluating the nature of the products and services offered, types of customers, methods used to distribute their products and provide their services, and the nature of their regulatory environment, as well as other similar economic characteristics. Goodwill is assigned to each reporting unit at the time of acquisition.

The Corporation performed the annual impairment test required by SFAS No. 142 “Goodwill and Other Intangible Assets” during the third quarter of 2004. The results of this test did not reveal impairment in the Corporation’s recorded goodwill.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2004 are as follows:

Except for goodwill, the Corporation has no other intangible assets not subject to amortization as of September 30, 2004, December 31, 2003 and September 30, 2003.

The following table reflects the components of other intangible assets subject to amortization as of September 30, 2004, December 31, 2003 and September 30, 2003: