POPULAR INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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


		For the quarterly period ended March 31, 2005

Commission File Number:0-13818

POPULAR, INC.

(Exact name of registrant as specified in its charter)


Puerto Rico		66-0416582

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

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

(Address of principal executive offices)		(Zip code)

(787) 765-9800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

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

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


þ Yes		o No

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


þ Yes		o 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, 267,037,679 Shares Outstanding as of May 3, 2005.

Forward-Looking Information.

The information included in this report on 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.

ITEM 1. FINANCIAL STATEMENTS

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)


	March 31,			December 31,			March 31,
(In thousands, except share information)	2005			2004			2004

ASSETS
Cash and due from banks	$	812,481		$	716,459		$	737,599

Money market investments:
Federal funds sold and securities purchased under agreements to resell		715,589			879,321			896,671
Time deposits with other banks		7,686			319			3,057
Bankers’ acceptances		—			—			22

		723,275			879,640			899,750

Investment securities available-for-sale, at market value:
Pledged securities with creditors’ right to repledge		4,722,576			4,828,716			3,418,094
Other investment securities available-for-sale		6,549,304			6,333,429			6,768,280
Investment securities held-to-maturity, at amortized cost		179,073			340,850			260,103
Other investment securities, at lower of cost or realizable value		308,781			302,440			242,281
Trading account securities, at market value:
Pledged securities with creditors’ right to repledge		259,153			257,857			558,737
Other trading securities		111,561			127,282			116,285
Loans held-for-sale, at lower of cost or market		1,227,329			750,728			345,414

Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge		624,701			318,409			408,310
Other loans held-in-portfolio		27,835,290			27,935,514			23,222,908
Less – Unearned income		259,294			262,390			276,298
Allowance for loan losses		448,222			437,081			417,143

		27,752,475			27,554,452			22,937,777

Premises and equipment		563,542			545,681			493,613
Other real estate		64,775			59,717			55,224
Accrued income receivable		247,169			207,542			212,351
Other assets		1,079,606			1,046,374			838,717
Goodwill		519,915			411,308			192,174
Other intangible assets		46,823			39,101			25,587

	$	45,167,838		$	44,401,576		$	38,101,986

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	4,257,121		$	4,173,268		$	3,866,999
Interest bearing		17,471,556			16,419,892			14,735,941

		21,728,677			20,593,160			18,602,940
Federal funds purchased and assets sold under agreements to repurchase		7,765,064			6,436,853			5,683,001
Other short-term borrowings		2,043,391			3,139,639			2,697,294
Notes payable		9,663,008			10,180,710			7,394,612
Subordinated notes		125,000			125,000			125,000
Other liabilities		777,596			821,491			649,278

		42,102,736			41,296,853			35,152,125

Commitments and contingencies (See Note 8)

Minority interest in consolidated subsidiaries		102			102			105

Stockholders’ equity:
Preferred stock, $25 liquidation value; 30,000,000 shares authorized (December 31, 2004 – 30,000,000; March 31, 2004 – 10,000,000); 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 (December 31, 2004 – 470,000,000; March 31, 2004 – 180,000,000); 280,200,216 shares issued (December 31, 2004 – 280,016,007; March 31, 2004 – 139,677,401) and 266,795,924 shares outstanding (December 31, 2004 – 266,582,103; March 31, 2004 – 132,960,449)		1,681,201			1,680,096			838,064
Surplus		283,419			278,840			318,342
Retained earnings		1,246,999			1,129,793			1,681,467
Accumulated other comprehensive (loss) income, net of tax of ($37,665) (December 31, 2004 - $6,780; March 31, 2004 - $43,402)		(127,644	)		35,454			131,445
Treasury stock – at cost, 13,404,292 shares (December 31, 2004 – 13,433,904; March 31, 2004 – 6,716,952)		(205,850	)		(206,437	)		(206,437	)

		3,065,000			3,104,621			2,949,756

	$	45,167,838		$	44,401,576		$	38,101,986

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


	Quarter ended
	March 31,
(In thousands, except per share information)	2005		2004

INTEREST INCOME:
Loans	$	505,321	$	408,496
Money market investments		7,534		5,813
Investment securities		114,367		95,032
Trading account securities		6,058		9,401

		633,280		518,742

INTEREST EXPENSE:
Deposits		97,056		78,115
Short-term borrowings		65,803		32,162
Long-term debt		113,135		77,751

		275,994		188,028

Net interest income		357,286		330,714
Provision for loan losses		44,336		44,678

Net interest income after provision for loan losses		312,950		286,036
Service charges on deposit accounts		43,692		41,082
Other service fees		79,015		69,554
Gain on sale of investment securities		51,250		13,033
Trading account profit (loss)		3,763		(2,166	)
Gain on sale of loans		9,816		6,268
Other operating income		18,053		17,465

		518,539		431,272

OPERATING EXPENSES:
Personnel costs:
Salaries		115,542		101,564
Profit sharing		5,647		5,682
Pension and other benefits		34,727		33,318

		155,916		140,564
Net occupancy expenses		24,814		21,045
Equipment expenses		28,614		27,180
Other taxes		9,255		9,492
Professional fees		27,583		20,086
Communications		15,677		15,433
Business promotion		20,253		16,391
Printing and supplies		4,537		4,571
Other operating expenses		27,943		23,174
Amortization of intangibles		2,242		1,802

		316,834		279,738

Income before income tax and cumulative effect of accounting change		201,705		151,534
Income tax		42,433		33,030

Income before cumulative effect of accounting change		159,272		118,504
Cumulative effect of accounting change, net of tax		3,607		—

NET INCOME	$	162,879	$	118,504

NET INCOME APPLICABLE TO COMMON STOCK	$	159,901	$	115,526

BASIC EPS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE	$	0.59	$	0.43

DILUTED EPS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE	$	0.58	$	0.43

BASIC AND DILUTED EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE	$	0.60	$	0.43

DIVIDENDS DECLARED PER COMMON SHARE	$	0.16	$	0.14

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)


	Quarter ended
	March 31,
(In thousands)	2005			2004

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

Common stock:
Balance at beginning of year		1,680,096			837,566
Common stock issued under Dividend Reinvestment Plan		1,079			489
Options exercised		26			9

Balance at end of period		1,681,201			838,064

Surplus:
Balance at beginning of year		278,840			314,638
Common stock issued under Dividend Reinvestment Plan		3,775			2,985
Options granted		724			663
Options exercised		80			56

Balance at end of period		283,419			318,342

Retained earnings:
Balance at beginning of year		1,129,793			1,601,851
Net income		162,879			118,504
Cash dividends declared on common stock		(42,695	)		(35,910	)
Cash dividends declared on preferred stock		(2,978	)		(2,978	)

Balance at end of period		1,246,999			1,681,467

Accumulated other comprehensive income:
Balance at beginning of year		35,454			19,014
Other comprehensive (loss) income, net of tax		(163,098	)		112,431

Balance at end of period		(127,644	)		131,445

Treasury stock — at cost:
Balance at beginning of year		(206,437	)		(205,527	)
Purchase of common stock		—			(1,259	)
Reissuance of common stock		587			349

Balance at end of period		(205,850	)		(206,437	)

Total stockholders’ equity	$	3,065,000		$	2,949,756

Disclosure of changes in number of shares:



	March 31,			December 31,			March 31,
	2005			2004			2004

Preferred Stock:
Balance at beginning and end of year		7,475,000			7,475,000			7,475,000

Common Stock – Issued:
Balance at beginning of year		280,016,007			139,594,296			139,594,296
Issued under the Dividend Reinvestment Plan		179,867			447,138			81,527
Stock split		—			139,877,770			—
Options exercised		4,342			96,803			1,578

Balance at end of year		280,200,216			280,016,007			139,677,401

Treasury stock		(13,404,292	)		(13,433,904	)		(6,716,952	)

Common Stock – Outstanding		266,795,924			266,582,103			132,960,449

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)


	Quarter ended
	March 31,
(In thousands)	2005			2004

Net income	$	162,879		$	118,504

Other comprehensive (loss) income, before tax:
Foreign currency translation adjustment		(246	)		(15,503	)
Unrealized (losses) gains arising during the period		(159,719	)		182,185
Reclassification adjustment for gains included in net income		(50,727	)		(11,613	)

Net gain (loss) on cash flow hedges		2,538			(3,727	)

Reclassification adjustment for losses included in net income		611			1,577

		(207,543	)		152,919
Income tax benefit (expense)		44,445			(40,488	)

Total other comprehensive (loss) income, net of tax	($	163,098	)	$	112,431

Comprehensive (loss) income	($	219	)	$	230,935

Disclosure of accumulated other comprehensive income:


	March 31,			December 31,			March 31,
(In thousands)	2005			2004			2004

Foreign currency translation adjustment	($	35,776	)	($	35,530	)	($	40,000	)

Unrealized (losses) gains on securities		(131,941	)		78,505			220,830
Tax effect		38,373			(7,198	)		(45,763	)

Net of tax amount		(93,568	)		71,307			175,067

Unrealized gains (losses) on cash flows hedges		2,042			(1,107	)		(6,349	)
Tax effect		(708	)		418			2,361

Net of tax amount		1,334			(689	)		(3,988	)

Cumulative effect of accounting change		366			366			366

Accumulated other comprehensive (loss) income, net of tax	($	127,644	)	$	35,454		$	131,445

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Quarter ended
	March 31,
(In thousands)	2005			2004

Cash flows from operating activities:
Net income	$	162,879		$	118,504
Less: Cumulative effect of accounting change		3,607			—

Net income before cumulative effect of accounting change		159,272			118,504

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		20,010			18,208
Provision for loan losses		44,336			44,678
Amortization of intangibles		2,242			1,802
Net gain on sale of investment securities		(51,250	)		(13,033	)
Net gain on disposition of premises and equipment		(1,663	)		(1,373	)
Net gain on sale of loans, excluding loans held-for-sale		(2,673	)		(1,318	)
Net amortization of premiums and accretion of discounts on investments		10,597			10,004
Net amortization of premiums and deferred loan origination fees and costs		28,728			22,789
Earnings from investments under the equity method		(1,969	)		(2,144	)
Stock options expense		746			679
Net decrease (increase) in loans held-for-sale		677,638			(78,664	)
Net decrease (increase) in trading securities		19,097			(69,247	)
Net increase in accrued income receivable		(32,331	)		(36,199	)
Net decrease (increase) in other assets		55,056			(41,355	)
Net increase in interest payable		20,084			24,818
Net increase in deferred and current taxes		16,781			21,793
Net increase in postretirement benefit obligation		1,414			2,693
Net decrease in other liabilities		(78,284	)		(38,259	)

Total adjustments		728,559			(134,128	)

Net cash provided by (used in) operating activities		887,831			(15,624	)

Cash flows from investing activities:
Net decrease (increase) in money market investments		186,209			(126,857	)
Purchases of investment securities:
Available-for-sale		(674,022	)		(1,150,553	)
Held-to-maturity		(14,616,759	)		(246,562	)
Other		(28,204	)		(9,137	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		586,877			1,101,239
Held-to-maturity		14,796,301			173,383
Other		21,863			—
Proceeds from sale of investment securities available-for-sale		99,944			14,815
Net disbursements on loans		(284,671	)		(111,927	)
Proceeds from sale of loans		80,246			31,753
Acquisition of loan portfolios		(660,023	)		(1,059,908	)
Assets acquired, net of cash		(173,666	)		—
Acquisition of premises and equipment		(38,770	)		(28,033	)
Proceeds from sale of premises and equipment		10,505			3,037

Net cash used in investing activities		(694,170	)		(1,408,750	)

Cash flows from financing activities:
Net increase in deposits		465,576			503,171
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase		1,290,492			(95,986	)
Net (decrease) increase in other short-term borrowings		(1,108,510	)		700,670
Net (payments of) proceeds from notes payable and capital securities		(702,927	)		402,629
Dividends paid		(45,636	)		(38,865	)
Proceeds from issuance of common stock		4,938			3,523
Treasury stock acquired		—			(1,259	)

Net cash (used in) provided by financing activities		(96,067	)		1,473,883
Cash effect of accounting change		(1,572	)		—

Net increase in cash and due from banks		96,022			49,509
Cash and due from banks at beginning of period		716,459			688,090

Cash and due from banks at end of period	$	812,481		$	737,599

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

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

Note 1 – Nature of operations and basis of presentation

Popular, Inc. (the “Corporation”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending, insurance and information processing 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 in California, Texas, Illinois, New York, New Jersey and Florida, and financial services stores under the name of Popular Cash Express. The Corporation’s consumer finance subsidiary in the United States, Popular Financial Holdings, offers mortgage and personal loans, and also maintains a substantial wholesale broker network, a warehouse lending division and loan servicing and assets acquisition units. The Corporation continues to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, through its financial transaction processing company, EVERTEC, Inc. Note 15 to the unaudited consolidated financial statements presents information about each of 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 presentation of the results for the periods reported and include all necessary adjustments, of a normal recurring nature, for a fair presentation of such results. Certain reclassifications have been made to the prior period unaudited consolidated financial statements to conform to the 2005 presentation.

In the normal course of business, except for the Corporation’s banks and the parent holding company, the Corporation has utilized a one-month lag in the consolidation of the financial results of its other subsidiaries (the “non-banking subsidiaries”), mainly to facilitate timely reporting. In 2005, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a calendar period. The impact of this change in the net income was included as a cumulative effect of accounting change in the Corporation’s consolidated financial results for the quarter ended March 31, 2005, and corresponds 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. Refer to Note 16 for further information on the subsidiaries which continue to have a fiscal year-end during 2005.

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 March 31, 2004 and the number of shares issued, outstanding and held in treasury as of March 31, 2004 presented in the consolidated statements of condition and of changes in stockholders’ equity, have been restated to reflect this 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, 2004, included in the Corporation’s Annual Report on Form 10-K.

Acquisition during the quarter

In January 2005, the Corporation completed the acquisition of Kislak Financial Corporation (“Kislak”), the holding company of Kislak National Bank, based in South Florida. As of that date, excluding the effect of purchase accounting entries, Kislak had assets of approximately $965,000, a loan portfolio of approximately $590,000 and deposits of approximately $659,000.

Subsequent event

In April 2005, the Corporation and Grupo Cuscatlán, through Corporación UBC Internacional, S.A., signed an agreement for the acquisition by Popular, Inc. of a 19.99% equity participation in UBCI, Grupo Cuscatlán’s holding company. The investment by Popular approximates $125,000. Grupo Cuscatlán is a financial services corporation based in Central America with more than $4,400,000 in assets, and a distribution network of 188 agencies. Grupo Cuscatlán has operations in El Salvador, Guatemala, Costa Rica, Honduras, Panama, British Virgin Islands, Montserrat and Bahamas. This agreement advances Popular, Inc.’s objectives to offer high-quality technological services and participate in the economic growth of the Central American region.

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 March 31, 2005, the Corporation had approximately $35,776 in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive (loss) income (March 31, 2004 - $40,000; December 31, 2004 - $35,530).

The Corporation is 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.” The cumulative inflation in the Dominican Republic for the 36 months ended 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 commencing on that date. During the quarter ended March 31, 2005, approximately $864 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 loss. These remeasurement gains / losses 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 $31,787. The cumulative inflation rate in the Dominican Republic over a 3-year period approximated 103.4 percent at March 31, 2005.

Note 2 – Recent Accounting Developments

Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”

In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3). This statement addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an

investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 prohibits investors from displaying accretable securities, yield and nonaccretable difference in the balance sheet. Subsequent substantial increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as an impairment.

SOP 03-3 prohibits “carrying over” or the creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this statement. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. The adoption of SOP 03-3 did not have a material impact on the Corporation’s financial condition or results of operations for the quarter ended March 31, 2005.

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 and Its Application to Certain Investments” (Issue 03-1). Issue 03-1 provides recognition and measurement guidance regarding when impairments of equity and debt securities are considered other-than-temporary requiring a charge to earnings, and also requires additional annual disclosures for investments in unrealized loss positions. The additional annual disclosure requirements were implemented by the Corporation for the year ended December 31, 2003. In September 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) EITF Issue 03-1-1, which delays the recognition and measurement provisions of Issue 03-1 pending the issuance of further implementation guidance. The Corporation is currently evaluating the effects of the recognition and measurement provisions that this proposed statement may have on its financial condition and results of operations.

SFAS No. 123-R, “Share-Based Payment”

In December 2004, the 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 for 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 equaled 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 actual forfeitures and the 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. In April 2005, the Securities and Exchange Commission approved a rule that delays the effective date of SFAS No. 123-R to annual, rather than interim, periods that begin after June 15, 2005. Management is currently evaluating the effect of the adoption of SFAS No. 123-R, but does not expect the adoption to have a material effect on the Corporation’s financial condition, results of operations or cash flows due to the fact that in 2002, the Corporation voluntarily adopted the fair value recognition method under SFAS No. 123.

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; 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. The adoption of this statement is not expected to have a material impact on the Corporation’s financial condition, results of operations, or cashflows.

FIN No. 47, Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143

In March 2005, the FASB issued financial interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143. This Interpretation clarifies the term conditional asset retirement obligation as used in FASB No. 143 and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by this Interpretation are those for which an entity has a legal obligation to perform an asset retirement activity, however the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than December 31, 2005. The adoption of this statement is not expected to have a material impact on the Corporation’s financial condition, results of operations, or cashflows.

FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004

In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2). The American Jobs Creation Act of 2004 (the “Act”) provides for a special one-time deduction of 85 percent of certain foreign earnings repatriated into the U.S. from non-U.S. subsidiaries through September 30, 2006. To date, the Corporation has not provided for income taxes on unremitted earnings generated by the non-U.S. subsidiary given the Corporation’s intent to permanently reinvest these earnings.

Note 3 — Investment Securities Available-For-Sale

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of March 31, 2005, December 31, 2004 and March 31, 2004 were as follows:

AS OF MARCH 31, 2005

Gross

Amortized

Unrealized

Market

(In thousands)

Cost

Gains

Losses

Value

U.S. Treasury securities

555,338

—

31,359

523,979

Obligations of other U.S. Government agencies and corporations

7,098,780

3,938

121,827

6,980,891

Obligations of Puerto Rico, States and political subdivisions

172,781

4,419

1,367

175,833

Collateralized mortgage obligations

1,676,786

8,018

11,158

1,673,646

Mortgage-backed securities

1,746,559

15,828

21,131

1,741,256

Equity securities

20,460

20,304

306

40,458

Others

132,751

3,368

302

135,817

11,403,455

55,875

187,450

11,271,880


	AS OF MARCH 31, 2004
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	553,767	$	387	$	14,670	$	539,484
Obligations of other U.S. Government agencies and corporations		6,243,063		131,900		5,470		6,369,493
Obligations of Puerto Rico, States and political subdivisions		128,206		6,256		1,675		132,787
Collateralized mortgage obligations		1,728,125		10,937		2,901		1,736,161
Mortgage-backed securities		1,230,226		35,117		364		1,264,979
Equity securities		23,667		62,595		298		85,964
Others		58,124		1,116		1,734		57,506

	$	9,965,178	$	248,308	$	27,112	$	10,186,374


	AS OF DECEMBER 31, 2004
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities	$	547,581		—	$	23,596	$	523,985
Obligations of other U.S. Government agencies and corporations		6,882,662	$	28,196		31,995		6,878,863
Obligations of Puerto Rico, States and political subdivisions		128,900		4,616		1,558		131,958
Collateralized mortgage obligations		1,606,721		6,598		7,365		1,605,954
Mortgage-backed securities		1,828,919		25,476		6,626		1,847,769
Equity securities		22,796		84,425		298		106,923
Others		65,695		1,243		245		66,693

	$	11,083,274	$	150,554	$	71,683	$	11,162,145

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 March 31, 2005, December 31, 2004 and March 31, 2004:


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

U.S. Treasury securities	$	64,719	$	565	$	64,154
Obligations of other U.S. Government agencies and corporations		5,407,359		90,117		5,317,242
Obligations of Puerto Rico, States and political subdivisions		64,282		103		64,179
Collateralized mortgage obligations		482,045		4,721		477,324
Mortgage-backed securities		860,946		16,112		844,834
Equity securities		8,308		306		8,002
Others		6,548		302		6,246

	$	6,894,207	$	112,226	$	6,781,981


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

U.S. Treasury securities	$	490,619	$	30,794	$	459,825
Obligations of other U.S. Government agencies and corporations		1,035,381		31,710		1,003,671
Obligations of Puerto Rico, States and political subdivisions		45,226		1,264		43,962
Collateralized mortgage obligations		241,054		6,437		234,617
Mortgage-backed securities		261,857		5,019		256,838

	$	2,074,137	$	75,224	$	1,998,913


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	555,338	$	31,359	$	523,979
Obligations of other U.S. Government agencies and corporations		6,442,740		121,827		6,320,913
Obligations of Puerto Rico, States and political subdivisions		109,508		1,367		108,141
Collateralized mortgage obligations		723,099		11,158		711,941
Mortgage-backed securities		1,122,803		21,131		1,101,672
Equity securities		8,308		306		8,002
Others		6,548		302		6,246

	$	8,968,344	$	187,450	$	8,780,894


	AS OF DECEMBER 31, 2004
	Less than 12 Months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	54,889	$	292	$	54,597
Obligations of other U.S. Government agencies and corporations		3,371,503		19,038		3,352,465
Obligations of Puerto Rico, States and political subdivisions		10,957		129		10,828
Collateralized mortgage obligations		434,001		4,690		429,311
Mortgage-backed securities		921,534		6,581		914,953
Equity securities		300		298		2
Others		6,553		245		6,308

	$	4,799,737	$	31,273	$	4,768,464


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

U.S. Treasury securities	$	492,692	$	23,304	$	469,388
Obligations of other U.S. Government agencies and corporations		492,816		12,957		479,859
Obligations of Puerto Rico, States and political subdivisions		43,700		1,429		42,271
Collateralized mortgage obligations		136,923		2,675		134,248
Mortgage-backed securities		1,217		45		1,172

	$	1,167,348	$	40,410	$	1,126,938


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	547,581	$	23,596	$	523,985
Obligations of other U.S. Government agencies and corporations		3,864,319		31,995		3,832,324
Obligations of Puerto Rico, States and political subdivisions		54,657		1,558		53,099
Collateralized mortgage obligations		570,924		7,365		563,559
Mortgage-backed securities		922,751		6,626		916,125
Equity securities		300		298		2
Others		6,553		245		6,308

	$	5,967,085	$	71,683	$	5,895,402


	AS OF MARCH 31, 2004
	Less than 12 Months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	498,889	$	14,670	$	484,219
Obligations of other U.S. Government agencies and corporations		746,743		4,912		741,831
Obligations of Puerto Rico, States and political subdivisions		43,700		1,649		42,051
Collateralized mortgage obligations		341,768		2,846		338,922
Mortgage-backed securities		117,470		337		117,133
Equity securities		300		298		2
Others		12,590		1,732		10,858

	$	1,761,460	$	26,444	$	1,735,016


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

Obligations of other U.S. Government agencies and corporations	$	250,000	$	558	$	249,442
Obligations of Puerto Rico, States and political subdivisions		5,279		26		5,253
Collateralized mortgage obligations		64,615		55		64,560
Mortgage-backed securities		1,037		27		1,010
Others		1,002		2		1,000

	$	321,933	$	668	$	321,265


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

U.S. Treasury securities	$	498,889	$	14,670	$	484,219
Obligations of other U.S. Government agencies and corporations		996,743		5,470		991,273
Obligations of Puerto Rico, States and political subdivisions		48,979		1,675		47,304
Collateralized mortgage obligations		406,383		2,901		403,482
Mortgage-backed securities		118,507		364		118,143
Equity securities		300		298		2
Others		13,592		1,734		11,858

	$	2,083,393	$	27,112	$	2,056,281

The unrealized loss positions of available-for-sale securities at March 31, 2005 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 March 31, 2005 are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers.

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.


	March 31, 2005				December 31, 2004				March 31, 2004
(In thousands)	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value

FNMA	$	1,832,411	$	1,830,563	$	1,915,392	$	1,931,026	$	1,326,462	$	1,349,299
FHLB		6,855,704		6,741,377		6,669,002		6,671,910		5,928,701		6,051,362
Freddie Mac		1,217,131		1,206,597		1,322,095		1,318,525		1,374,108		1,375,727

Note 4 — Investment Securities Held-to-Maturity

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available)of investment securities held-to-maturity as of March 31, 2005, December 31, 2004 and March 31, 2004 were as follows:

AS OF MARCH 31, 2005

Gross

Amortized

Unrealized

Market

(In thousands)

Cost

Gains

Losses

Value

Obligations of other U.S. Government agencies and corporations

52,725

—

52,693

Obligations of Puerto Rico, States and political subdivisions

77,253

2,231

235

79,249

Collateralized mortgage obligations

575

—

523

Others

48,520

851

49,365

179,073

3,082

325

181,830


	AS OF DECEMBER 31, 2004
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of other U.S. Government agencies and corporations	$	176,954	$	9	$	1	$	176,962
Obligations of Puerto Rico, States and political subdivisions		116,878		2,904		119		119,663
Collateralized mortgage obligations		623		—		65		558
Others		46,395		1,325		4		47,716

	$	340,850	$	4,238	$	189	$	344,899


	AS OF MARCH 31, 2004
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of other U.S. Government agencies and corporations	$	43,098	$	1		—	$	43,099
Obligations of Puerto Rico, States and political subdivisions		157,092		900	$	3,102		154,890
Collateralized mortgage obligations		790		—		103		687
Others		59,123		2,901		2		62,022

	$	260,103	$	3,802	$	3,207	$	260,698

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 March 31, 2005, December 31, 2004 and March 31, 2004:


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

Obligations of other U.S. Government agencies and corporations	$	47,732	$	32	$	47,700
Obligations of Puerto Rico, States and political subdivisions		24,325		227		24,098
Collateralized mortgage obligations		575		52		523
Others		750		6		744

	$	73,382	$	317	$	73,065


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

Obligations of Puerto Rico, States and political subdivisions	$	958	$	8	$	950
Others		250		—		250

	$	1,208	$	8	$	1,200


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of other U.S. Government agencies and corporations	$	47,732	$	32	$	47,700
Obligations of Puerto Rico, States and political subdivisions		25,283		235		25,048
Collateralized mortgage obligations		575		52		523
Others		1,000		6		994

	$	74,590	$	325	$	74,265


	AS OF MARCH 31, 2004
	Less than 12 months
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	86,980	$	2,932	$	84,048
Others		250		2		248

	$	87,230	$	2,934	$	84,296


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

Obligations of Puerto Rico, States and political subdivisions	$	10,902	$	170	$	10,732
Collateralized mortgage obligations		790		103		687

	$	11,692	$	273	$	11,419


	Total
	Amortized		Unrealized		Market
(In thousands)	Cost		Losses		Value

Obligations of Puerto Rico, States and political subdivisions	$	97,882	$	3,102	$	94,780
Collateralized mortgage obligations		790		103		687
Others		250		2		248

	$	98,922	$	3,207	$	95,715

Management believes that the unrealized losses in the held-to-maturity portfolio at March 31, 2005 are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers.

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:


	March 31,		December 31,		March 31,
(In thousands)	2005		2004		2004

Investment securities available-for-sale	$	2,969,823	$	2,802,647	$	2,506,395
Investment securities held-to-maturity		1,258		1,378		1,492
Loans		10,464,104		10,749,244		9,169,403

	$	13,435,185	$	13,553,269	$	11,677,290

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 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, 2004 to March 31, 2005.

For the quarter ended March 31, 2005, the Corporation recognized net losses of $63 as a result of the changes in fair value of the non-hedging derivatives included as part of interest expense (March 31, 2004 – net losses of $137).

Note 7 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the quarters ended March 31, 2004 and 2005, allocated by reportable segment and in the case of Popular Puerto Rico by business area, were as follows (refer to Note 15 for the definition of the Corporation’s reportable segments):


	Balance at		Goodwill		Balance at
(In thousands)	January 1, 2004		acquired		March 31, 2004

Popular 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		1,556		—		1,556
U.S. Financial Services		93,586		—		93,586
Popular Financial Holdings		8,870	$	644		9,514
Processing		37,805		40		37,845

Total Popular, Inc.	$	191,490	$	684	$	192,174


	Balance at		Goodwill		Balance at
(In thousands)	January 1, 2005		Acquired		March 31, 2005

Popular 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
U.S. Financial Services		309,709		108,071		417,780
Popular Financial Holdings		9,514		—		9,514
Processing		39,090		23		39,113

Total Popular, Inc.	$	411,308	$	108,607	$	519,915

No goodwill was written-down during the quarters ended March 31, 2005 and 2004.

At March 31, 2005 and December 31, 2004, other than goodwill, the Corporation had $65 of identifiable intangibles with an indefinite useful life related to a trademark. There were no identifiable intangibles with an indefinite useful life at March 31, 2004. The following table reflects the components of other intangible assets subject to amortization:


	March 31, 2005				December 31, 2004				March 31, 2004
	Gross		Accumulated		Gross		Accumulated		Gross		Accumulated
(In thousands)	Amount		Amortization		Amount		Amortization		Amount		Amortization

Core deposits	$	95,898	$	52,506	$	86,327	$	50,376	$	67,484	$	45,168

Other customer relationships		1,008		84		726		59		550		18

Other intangibles		3,443		1,001		3,295		877		3,345		606


Total	$	100,349	$	53,591	$	90,348	$	51,312	$	71,379	$	45,792

The increase in goodwill and other intangible assets from the end of 2004 to March 31, 2005 was mostly the result of the acquisition of Kislak Financial Corporation. Partially offsetting the increase were certain core deposits intangibles that became fully amortized during 2004 and, as such, their gross amount and accumulated amortization were eliminated from the accounting records and the tabular disclosure presented above.

During the quarter ended March 31, 2005, the Corporation recognized $2,242 in amortization expense related to other intangible assets with definite lives (March 31, 2004 — $1,802).

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)
2005	$	8,597
2006		8,404
2007		6,641
2008		4,987
2009		4,465

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

Note 8 – 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 March 31, 2005 were $25,620 and $210,754, respectively (December 31, 2004 — $19,017 and $187,094; March 31, 2004 — $17,266 and $153,206). There are also other commitments outstanding and contingent liabilities, such as commitments to extend credit and commitments to originate mortgage loans, which are not reflected in the accompanying financial statements.

At March 31, 2005, the Corporation recorded a liability of $356 (December 31, 2004 — $333; March 31, 2004 — $295), which represents the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002. This 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.

The Corporation fully and unconditionally guarantees certain borrowing obligations issued by certain of its

wholly-owned consolidated subsidiaries totaling $3,962,926 at March 31, 2005 (December 31, 2004 - $3,926,087; March 31, 2004 — $3,485,960). In addition, at March 31, 2005, the Corporation fully and unconditionally guaranteed $824,000 of capital securities (December 31, 2004 — $824,000; March 31, 2004 — $444,000) issued by four (December 31, 2004 – four; March 31, 2004 – two) wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R. During the quarter ended March 31, 2005, Popular North America, Inc. concluded its full and unconditional guarantee of certain borrowing obligations issued by one of its non-banking subsidiaries, which as of March 31, 2004 and December 31, 2004 amounted to $400,144 and $209,661, respectively.

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 9 – Stock Option and Other Incentive Plans

Since 2001, the Corporation had 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 replaces and supersedes the Stock Option Plan. All outstanding award grants under the Stock Option Plan continue to remain outstanding at March 31, 2005 under the original terms of the Stock Option Plan.

The Corporation recognized $746 in stock options expense for the quarter ended March 31, 2005 (March 31, 2004 — $679).

The following table presents information on stock options at March 31, 2005:


(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

$14.39 – $18.50		1,632,025	$	15.81	7.48 years		825,100	$	15.60
$19.25 – $27.20		1,653,284	$	25.28	9.26 years		241,026	$	23.92

$14.39 – $27.20		3,285,309	$	20.58	8.37 years		1,066,126	$	17.48

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



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

Outstanding at January 1, 2004		1,778,588		$	15.88
Granted		997,232			23.95
Exercised		(110,681	)		15.82
Forfeited		(81,150	)		23.22

Outstanding at December 31, 2004		2,583,989		$	18.76
Granted		705,662			27.20
Exercised		(4,342	)		19.42
Forfeited		—			—

Outstanding at March 31, 2005		3,285,309		$	20.58

The stock options exercisable at March 31, 2005 totaled 1,066,126 (March 31, 2004 – 515,672).

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 and 2004 were:


		2005		2004

Expected dividend yield		2.56%		2.00%
Expected life of options		10 years		10 years
Expected volatility		17.54%		16.50%
Risk-free interest rate		4.16%		4.06%
Weighted average fair value of options granted (per option)	$	5.95	$	5.74

During the quarter ended March 31, 2005, there were 173,806 shares purchased and granted under the Incentive Plan for both corporate executive officers and members of the Board of Directors of Popular, Inc. and BPPR. Also, during this quarter, the Compensation Committee approved incentive awards for certain corporate executive officers under the Incentive Plan, based on the 2005 performance payable in the form of restricted stock. Shares of restricted stock will be granted at the beginning of 2006 subject to the attainment of the established performance goals for 2005.

During the quarter ended March 31, 2005, the Corporation recognized $741 of restricted stock expense related to the executive officers incentive awards, which represents a form of deferred compensation. The compensation cost was estimated based upon a vesting period which extends up to each participant attaining 55 years of age.

In addition, during the quarter ended March 31, 2005, shares of restricted stock were granted to members of the Board of Directors of Popular, Inc. and BPPR. During the first quarter of 2005, the Corporation recognized $166 of restricted stock expense related to such grants.

Note 10 – 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 ended March 31, 2005 and 2004 were as follows:


	Pension Plans						Benefit Restoration Plans
	March 31						March 31
(In thousands)	2005			2004			2005			2004

Service cost	$	3,891		$	3,966		$	240		$	163
Interest cost		7,438			7,027			313			233
Expected return on plan assets		(9,900	)		(9,322	)		(203	)		(172	)
Amortization of asset obligation		(215	)		(615	)		—			—
Amortization of prior service cost		100			120			(27	)		(26	)
Amortization of net loss		17			11			147			75

Net periodic cost		1,331			1,187			470			273
Curtailment loss		—			849			—			—
Early retirement cost		—			2,219			—			—

Total cost	$	1,331		$	4,255		$	470		$	273

As of March 31, 2005, contributions made to the pension and restoration plans approximated $469. The Corporation expects to contribute $317 to the pension plans and $1,718 to the benefit restoration plans during 2005.

The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters ended March 31, 2005 and 2004 were as follows:


	Postretirement benefit plan
	March 31
(In thousands)	2005			2004

Service cost	$	674		$	813
Interest cost		2,067			2,329
Amortization of prior service cost		(262	)		(286	)
Amortization of net loss		423			689

Net periodic cost		2,902			3,545
Curtailment gain		—			(1,005	)
Early retirement cost		—			347

Total cost	$	2,902		$	2,887

As of March 31, 2005, contributions made to the postretirement benefit plan approximated $1,548. The Corporation presently expects to contribute $6,728 to the postretirement benefit plan during 2005.

Note 11 – Trust preferred securities

At March 31, 2005, 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.

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.

(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 includable in the Corporation’s Tier I capital.

Note 12 — Stockholders’ Equity

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

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 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 $285,192 at March 31, 2005 (March 31, 2004 — $338,192). During the quarters ended March 31, 2005 and 2004 there were no transfers from / to the statutory reserve account to / from retained earnings.

Note 13 — Earnings per Common Share

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


	Quarter ended
	March 31,

(In thousands, except share information)	2005		2004

Net income	$	162,879	$	118,504
Less: Preferred stock dividends		2,978		2,978

Net income applicable to common stock after cumulative effect of accounting change	$	159,901	$	115,526

Net income applicable to common stock before cumulative effect of accounting change	$	156,294	$	115,526


Average common shares outstanding		266,842,444		265,997,350
Average potential common shares		586,535		284,954

Average common shares outstanding – assuming dilution		267,428,979		266,282,304


Basic earnings per common share before cumulative effect of accounting change	$	0.59	$	0.43

Diluted earnings per common share before cumulative effect of accounting change	$	0.58	$	0.43

Basic and diluted earnings per common share after cumulative effect of accounting change	$	0.60	$	0.43

Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter ended March 31, 2005, there were 1,023,235 weighted average antidilutive stock options outstanding (March 31, 2004 – 871,084). All shares of restricted stock are treated as outstanding for purposes of this computation.

Note 14 — Supplemental Disclosure on the Consolidated Statements of Cash Flows

During the quarter ended March 31, 2005, the Corporation paid interest and income taxes amounting to $255,910 and $13,777, respectively (March 31, 2004 – $163,210 and $3,420, respectively). Loans receivable transferred to other real estate and other property for the quarter ended March 31, 2005, amounted to $29,200 and $6,771, respectively (March 31, 2004 — $22,007 and $7,283, respectively).

In addition, during the quarter ended March 31, 2005, the Corporation transferred $1,127,649 of mortgage loans held-in-portfolio to loans held-for-sale with the intent to securitize the financial assets in transactions structured as sales under the provisions of SFAS No. 140, or for future whole-loan sales in the secondary market. The transfer was accounted at lower of cost or fair value.

Note 15 — Segment Reporting

In connection with the reorganization of the Corporation’s corporate structure during 2004, the Corporation realigned its business segments to reflect its new business structure, referred by management as “business circles”. There is one circle for each of the Corporation’s four principal businesses – Popular Puerto Rico, United

States Financial Services, Popular Financial Holdings and Processing. Each business circle has been identified as a reportable segment. Also, a corporate circle has been defined to support the business circles.

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 new 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.

Popular Puerto Rico:

Given that Popular Puerto Rico constitutes approximately 56% of the Corporation’s net income and 55% of its total assets as of March 31, 2005, additional disclosures are provided for the business areas included in this reportable segment, as described below:

–   Commercial banking represents the Corporation’s banking operations in Puerto Rico 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.

United States Financial Services:

This reportable segment includes principally the activities of Banco Popular North America (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 U.S. Financial Services segment also includes the retail financial services of Popular Cash Express, a fee driven business that serves the unbanked, retail customer.

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., Popular Financial Management, LLC, Popular Financial Services, LLC, and Popular Warehouse Lending, LLC; and Popular FS, LLC. These subsidiaries are primarily engaged in the business of originating non-prime mortgage and personal loans, acquiring retail installment contracts and providing warehouse lines to small and medium-sized mortgage companies. This segment also maintains a substantial wholesale broker network as well as loan servicing and asset acquisition units.

Processing:

This reportable segment includes the financial transaction processing and technology functions of the Corporation, including EVERTEC, Inc. with offices in Puerto Rico, the Dominican Republic and Venezuela; and ATH Costa Rica, S.A. and CreST, S.A., 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:

Corporate 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. Corporate also includes the expenses of the four administrative corporate areas that were 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 fair value, resulting in profits that are eliminated for reporting consolidated results of operations.

Prior period amounts corresponding to the periods ended March 31, 2004 and December 31, 2004 have been restated to reflect changes in segment reporting.

2005

For the quarter ended March 31, 2005


						Popular								Total
	Popular Puerto		U.S. Financial			Financial					Intersegment			Reportable
(In thousands)	Rico		Services			Holdings		Processing			Eliminations			Segments

Net interest income (loss)	$	217,960	$	89,425		$	58,054	($	182	)				$	365,257
Provision for loan losses		25,464		7,243			11,629								44,336
Other income		94,205		28,796			10,622		54,693		($	33,958	)		154,358
Amortization of intangibles		623		1,601					18						2,242
Depreciation expense		10,502		3,911			1,047		4,191			(19	)		19,632
Other operating expenses		163,438		72,581			39,222		40,947			(33,539	)		282,649
Income tax		24,046		12,808			6,285		2,768			(160	)		45,747

Net income before cumulative effect of accounting change		88,092		20,077			10,493		6,587			(240	)		125,009
Cumulative effect of accounting change		3,221		(209	)				152			(247	)		2,917

Net income after cumulative effect of accounting change	$	91,313	$	19,868		$	10,493	$	6,739		($	487	)	$	127,926

Segment Assets	$	24,815,709	$	11,349,492		$	8,730,848	$	241,278		($	5,305,633	)	$	39,831,694

For the quarter ended March 31, 2005


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

Net interest income (loss)	$	365,257	($	8,315	)	$	344		$	357,286
Provision for loan losses		44,336								44,336
Other income		154,358		51,250			(19	)		205,589
Amortization of intangibles		2,242								2,242
Depreciation expense		19,632		378						20,010
Other operating expenses		282,649		11,953			(20	)		294,582
Income tax		45,747		(3,447	)		133			42,433

Net income before cumulative effect of accounting change		125,009		34,051			212			159,272
Cumulative effect of accounting change		2,917		690						3,607

Net income after cumulative effect of accounting change	$	127,926	$	34,741		$	212		$	162,879

Segment Assets	$	39,831,694	$	5,650,332		($	314,188	)	$	45,167,838

2004

For the quarter ended March 31, 2004


					Popular								Total
	Popular Puerto		U.S. Financial		Financial					Intersegment			Reportable
(In thousands)	Rico		Services		Holdings		Processing			Eliminations			Segments

Net interest income (loss)	$	217,442	$	59,980	$	62,731	($	1,617	)	($	13	)	$	338,523
Provision for loan losses		25,095		8,025		11,558								44,678
Other income		74,063		22,431		2,553		57,280			(26,273	)		130,054
Amortization of intangibles		641		1,147				14						1,802
Depreciation expense		10,118		3,280		766		3,854			(12	)		18,006
Other operating expenses		139,992		55,141		32,957		47,494			(25,612	)		249,972
Income tax		21,373		5,316		7,501		813			(258	)		34,745

Net income	$	94,286	$	9,502	$	12,502	$	3,488		($	404	)	$	119,374

Segment Assets	$	23,690,109	$	6,727,118	$	7,522,468	$	260,567		($	443,789	)	$	37,756,473

For the quarter ended March 31, 2004


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

Net interest income (loss)	$	338,523	($	8,000	)	$	191		$	330,714
Provision for loan losses		44,678								44,678
Other income		130,054		15,205			(23	)		145,236
Amortization of intangibles		1,802								1,802
Depreciation expense		18,006		202						18,208
Other operating expenses		249,972		9,756						259,728
Income tax		34,745		(1,771	)		56			33,030

Net income	$	119,374	($	982	)	$	112		$	118,504

Segment Assets	$	37,756,473	$	4,677,746		($	4,332,233	)	$	38,101,986

Additional disclosures with respect to Popular Puerto Rico reportable segment follow:

For the quarter ended March 31, 2005


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

Net interest income	$	71,698	$	142,878	$	3,384				$	217,960
Provision for loan losses		7,462		18,002							25,464
Other income		38,447		38,824		16,993		($59	)		94,205
Amortization of intangibles				546		77					623
Depreciation expense		3,867		6,257		378					10,502
Other operating expenses		54,649		95,966		13,180		(357	)		163,438
Income tax		9,907		11,875		2,146		118			24,046

Net income before cumulative effect of accounting change		34,260		49,056		4,596		180		$	88,092
Cumulative effect of accounting change				3,797		758		(1,334	)		3,221

Net income after cumulative effect of accounting change	$	34,260	$	52,853	$	5,354	($	1,154	)	$	91,313

Segment Assets	$	9,283,495	$	16,294,023	$	1,013,120	($	1,774,929	)	$	24,815,709

For the quarter ended March 31, 2004


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

Net interest income	$	65,574	$	147,972	$	3,896				$	217,442
Provision for loan losses		3,761		21,334							25,095
Other income		27,183		32,894		14,556		($570	)		74,063
Amortization of intangibles				564		77					641
Depreciation expense		2,891		6,861		366					10,118
Other operating expenses		37,655		91,681		10,848		(192	)		139,992
Income tax		12,710		6,343		2,456		(136	)		21,373

Net income	$	35,740	$	54,083	$	4,705	($	242	)	$	94,286

Segment Assets	$	8,340,892	$	14,379,242	$	1,107,692	($	137,717	)	$	23,690,109

During the quarter ended March 31, 2005, the holding companies realized net gains on sale of marketable equity securities of approximately $50,469 (March 31, 2004 — $12,741). These gains are included in “other income” within the “Corporate” circle.


INTERSEGMENT REVENUES *
(In thousands)	March 31, 2005			March 31, 2004

Popular Puerto Rico:
P.R. Commercial Banking	($	338	)	($	361	)
P.R. Consumer and Retail Banking		(761	)		(672	)
P.R. Other Financial Services		(112	)		(15	)
U.S. Financial Services		216			310
Popular Financial Holdings		842			626
Processing		(33,805	)		(26,174	)

Total reportable segments	($	33,958	)	($	26,286	)

For purposes of the intersegment revenues disclosure, revenues were mainly related to intercompany processing / information technology services.

The increase in intersegment revenues for the quarter ended March 31, 2005, compared with the corresponding period in the previous year, for the “Processing” segment corresponds to financial transaction processing and information technology services provided by EVERTEC, Inc. to other subsidiaries of the Corporation. As a result of the reorganization to consolidate the information processing and technology functions into EVERTEC effective during the second quarter of 2004, certain internal services previously provided by BPPR or internally serviced by other subsidiaries, are being provided by EVERTEC, Inc. The revenues are categorized by the service provider as “other income” while the service receivers categorize the amounts billed as “other operating expenses.”


*Geographic Information*

	Quarter ended
	March 31,		March 31,
(In thousands)	2005		2004

Revenues**
Puerto Rico	$	364,931	$	312,470
United States		181,441		147,468
Other		16,503		16,012

Total consolidated revenues	$	562,875	$	475,950

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


	March 31,		December 31,		March 31,
(In thousands)	2005		2004		2004

Selected Balance Sheet Information:
Puerto Rico
Total assets	$	24,200,221	$	24,226,240	$	23,116,229
Loans		12,838,815		12,540,668		11,127,324
Deposits		12,871,489		12,630,045		12,482,000
Mainland United States
Total assets	$	20,088,165	$	19,303,924	$	14,181,382
Loans		16,110,775		15,736,033		12,153,160
Deposits		7,786,323		6,898,517		5,152,336
Other
Total assets	$	879,452	$	871,412	$	804,375
Loans		478,436		465,560		419,850
Deposits *		1,070,865		1,064,598		968,604

Represents deposits from BPPR – U.S. and British Virgin Islands

Note 16 – Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities:

The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (PIHC) (parent only), Popular International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and all other subsidiaries of the Corporation as of March 31, 2005, December 31, 2004 and March 31, 2004, and the results of their operations and cash flows for the periods ended March 31, 2005 and 2004.

PIBI, PNA, and their wholly-owned subsidiaries, except for Banco Popular North America (BPNA) and Banco Popular, National Association (BP, N.A.), had a fiscal year that ended on November 30. Accordingly, the consolidated financial information of PIBI and PNA as of February 29, 2004 and November 30, 2004, corresponded to their financial information included in the consolidated financial statements of Popular, Inc. as of March 31, 2004 and December 31, 2004.

As stated in Note 1, in 2005, the Corporation commenced a two-year plan to change to a calendar reporting year-end for its non-banking subsidiaries. As of March 31, 2005, Popular Securities, Inc., Popular North America, Popular FS, LLC and Popular Financial Holdings, including its wholly-owned subsidiaries, continue to have a fiscal year that ends on November 30. Accordingly, their financial information as of February 28, 2005 corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of March 31, 2005. All other 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, CreST, S.A., Popular Insurance V.I., Inc. and PNA.

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

–   Popular Cash Express, Inc.;

–   Popular Financial Holdings, Inc., including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Financial Services, LLC, and Popular Warehouse Lending, LLC;

–   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.

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

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

The principal source of income for PIHC consists of dividends from BPPR. As a member 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 March 31, 2005, BPPR could have declared a dividend of approximately $255,842 without the approval of the Federal Reserve (March 31, 2004 — $186,495; December 31, 2004 — $222,480). Refer to Popular, Inc.’s Form 10-K for the year ended December 31, 2004 for further information on dividend restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR, BPNA and BP, N.A.

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
MARCH 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	$	301		$	13		$	5,290		$	847,377		($	40,500	)	$	812,481
Money market investments		147,300			300			162			1,051,647			(476,134	)		723,275
Investment securities available-for-sale, at market value		46,663			34,259			7,249			11,199,402			(15,693	)		11,271,880
Investment securities held-to-maturity, at amortized cost		430,000			2,181						176,892			(430,000	)		179,073
Other investment securities, at lower of cost or realizable value		145,635			5,001			12,392			145,753						308,781
Trading account securities, at market value											371,396			(682	)		370,714
Investment in subsidiaries		2,917,661			1,122,683			1,564,029			297,643			(5,902,016	)
Loans held-for-sale, at lower of cost or market											1,227,329						1,227,329

Loans held-in-portfolio		25,905						2,840,334			31,002,398			(5,408,646	)		28,459,991
Less – Unearned income											259,294						259,294
Allowance for loan losses		40									448,182						448,222

		25,865						2,840,334			30,294,922			(5,408,646	)		27,752,475

Premises and equipment		24,156									539,681			(295	)		563,542
Other real estate		173									64,602						64,775
Accrued income receivable		195			29			11,321			254,141			(18,517	)		247,169
Other assets		49,145			38,763			17,325			1,003,509			(29,136	)		1,079,606
Goodwill											519,915						519,915
Other intangible assets											46,823						46,823

	$	3,787,094		$	1,203,229		$	4,458,102		$	48,041,032		($	12,321,619	)	$	45,167,838


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,297,546		($	40,425	)	$	4,257,121
Interest bearing											17,653,793			(182,237	)		17,471,556

											21,951,339			(222,662	)		21,728,677
Federal funds purchased and assets sold under agreements to repurchase							$	104,100			7,947,826			(286,862	)		7,765,064
Other short-term borrowings				$	7,083			349,150			2,843,687			(1,156,529	)		2,043,391
Notes payable	$	535,925						2,836,410			10,497,568			(4,206,895	)		9,663,008
Subordinated notes		125,000									430,000			(430,000	)		125,000
Other liabilities		61,169			88			54,594			726,419			(64,674	)		777,596

		722,094			7,171			3,344,254			44,396,839			(6,367,622	)		42,102,736

Minority interest in consolidated subsidiaries											102						102

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,681,201			3,962			2			70,384			(74,348	)		1,681,201
Surplus		280,808			815,193			734,964			1,985,333			(3,532,879	)		283,419
Retained earnings		1,249,610			408,905			393,964			1,705,530			(2,511,010	)		1,246,999
Treasury stock, at cost		(205,850	)								(1,103	)		1,103			(205,850	)
Accumulated other comprehensive loss, net of tax		(127,644	)		(32,002	)		(15,082	)		(116,053	)		163,137			(127,644	)

		3,065,000			1,196,058			1,113,848			3,644,091			(5,953,997	)		3,065,000

	$	3,787,094		$	1,203,229		$	4,458,102		$	48,041,032		($	12,321,619	)	$	45,167,838

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2004
(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	$	283		$	54		$	384		$	767,092		($	51,354	)	$	716,459
Money market investments		48,500			300			214			1,236,659			(406,033	)		879,640
Investment securities available-for-sale, at market value		66,428			39,207			7,067			11,054,856			(5,413	)		11,162,145
Investment securities held-to-maturity, at amortized cost		579,985									190,865			(430,000	)		340,850
Other investment securities, at lower of cost or realizable value		145,590			5,001			12,372			139,477						302,440
Trading account securities, at market value											391,420			(6,281	)		385,139
Investment in subsidiaries		2,878,211			1,036,960			1,376,296			287,639			(5,579,106	)
Loans held-for-sale, at lower of cost or market value											750,728						750,728

Loans held-in-portfolio		41,509						2,836,701			30,711,045			(5,335,332	)		28,253,923
Less – Unearned income											262,390						262,390
Allowance for loan losses		40									437,041						437,081

		41,469						2,836,701			30,011,614			(5,335,332	)		27,554,452

Premises and equipment		24,534									521,460			(313	)		545,681
Other real estate		240									59,477						59,717
Accrued income receivable		185						10,836			213,977			(17,456	)		207,542
Other assets		45,178			36,905			65,662			1,012,132			(113,503	)		1,046,374
Goodwill											411,308						411,308
Other intangible assets											39,101						39,101

	$	3,830,603		$	1,118,427		$	4,309,532		$	47,087,805		($	11,944,791	)	$	44,401,576


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing										$	4,224,546		($	51,278	)	$	4,173,268
Interest bearing											16,685,578			(265,686	)		16,419,892


											20,910,124			(316,964	)		20,593,160
Federal funds purchased and assets sold under agreements to repurchase	$	6,690					$	71,300			6,492,165			(133,302	)		6,436,853
Other short-term borrowings		4,501		$	4,825			339,653			3,962,975			(1,172,315	)		3,139,639
Notes payable		536,673						2,835,325			10,839,526			(4,030,814	)		10,180,710
Subordinated notes		125,000									430,000			(430,000	)		125,000
Other liabilities		53,118			100			35,048			966,387			(233,162	)		821,491

		725,982			4,925			3,281,326			43,601,177			(6,316,557	)		41,296,853

Minority interest in consolidated subsidiaries											102						102

Stockholders’ equity:
Preferred stock		186,875															186,875
Common stock		1,680,096			3,961			2			77,393			(81,356	)		1,680,096
Surplus		276,229			740,193			659,964			1,805,514			(3,203,060	)		278,840
Retained earnings		1,132,404			381,496			368,661			1,612,126			(2,364,894	)		1,129,793
Treasury stock, at cost		(206,437	)								(1,690	)		1,690			(206,437	)
Accumulated other comprehensive income (loss), net of tax		35,454			(12,148	)		(421	)		(6,817	)		19,386			35,454

		3,104,621			1,113,502			1,028,206			3,486,526			(5,628,234	)		3,104,621

	$	3,830,603		$	1,118,427		$	4,309,532		$	47,087,805		($	11,944,791	)	$	44,401,576

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
MARCH 31, 2004
(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	$	86		$	885		$	4,224	$	769,678		$	(37,274	)	$	737,599
Money market investments		92,787			300			4,277		1,273,945			(471,559	)		899,750
Investment securities available-for-sale, at market value		49,150			35,088			7,766		10,100,093			(5,723	)		10,186,374
Investment securities held-to-maturity, at amortized cost										260,103						260,103
Other investment securities, at lower of cost or realizable value		441,813			5,002			4,640		90,826			(300,000	)		242,281
Trading account securities, at market value										675,022						675,022
Investment in subsidiaries		2,844,602			913,313			960,985		232,785			(4,951,685	)
Loans held-for-sale, at lower of cost or market value										345,414						345,414

Loans held-in-portfolio		94,967						2,548,597		25,804,196			(4,816,542	)		23,631,218
Less – Unearned income										276,298						276,298
Allowance for loan losses										417,143						417,143

		94,967						2,548,597		25,110,755			(4,816,542	)		22,937,777

Premises and equipment		10,174								483,806			(367	)		493,613
Other real estate										55,224						55,224
Accrued income receivable		191						10,371		218,269			(16,480	)		212,351
Other assets		46,811			31,660			2,553		747,971			9,722			838,717
Goodwill										192,174						192,174
Other intangible assets										25,587						25,587

	$	3,580,581		$	986,248		$	3,543,413	$	40,581,652		$	(10,589,908	)	$	38,101,986


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing									$	3,904,189		$	(37,190	)	$	3,866,999
Interest bearing										15,017,587			(281,646	)		14,735,941

										18,921,776			(318,836	)		18,602,940
Federal funds purchased and assets sold under agreements to repurchase							$	6,941		5,857,972			(181,912	)		5,683,001
Other short-term borrowings	$	35,000		$	290			388,986		3,271,265			(998,247	)		2,697,294
Notes payable		424,872			8,573			2,196,351		8,543,188			(3,778,372	)		7,394,612
Subordinated notes		125,000														125,000
Other liabilities		45,953			163			46,361		578,330			(21,529	)		649,278

		630,825			9,026			2,638,639		37,172,531			(5,298,896	)		35,152,125

Minority interest in consolidated subsidiaries										105						105

Stockholders’ equity:
Preferred stock		186,875								300,000			(300,000	)		186,875
Common stock		838,064			3,962			2		69,537			(73,501	)		838,064
Surplus		315,731			700,193			619,964		1,363,998			(2,681,544	)		318,342
Retained earnings		1,684,078			290,381			281,807		1,558,968			(2,133,767	)		1,681,467
Treasury stock, at cost		(206,437	)							(1,690	)		1,690			(206,437	)
Accumulated other comprehensive income (loss), net of tax		131,445			(17,314	)		3,001		118,203			(103,890	)		131,445

		2,949,756			977,222			904,774		3,409,016			(5,291,012	)		2,949,756

	$	3,580,581		$	986,248		$	3,543,413	$	40,581,652		$	(10,589,908	)	$	38,101,986

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 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	$	538					$	35,201		$	524,529	($	54,947	)	$	505,321
Money market investments		586		$	1			6			10,111		(3,170	)		7,534
Investment securities		7,527						316			113,413		(6,889	)		114,367
Trading account securities											6,058					6,058

		8,651			1			35,523			654,111		(65,006	)		633,280

INTEREST EXPENSE:
Deposits											98,268		(1,212	)		97,056
Short-term borrowings		61			32			3,258			73,006		(10,554	)		65,803
Long-term debt		10,920						38,590			119,106		(55,481	)		113,135

		10,981			32			41,848			290,380		(67,247	)		275,994

Net interest (loss) income		(2,330	)		(31	)		(6,325	)		363,731		2,241			357,286
Provision for loan losses											44,336					44,336

Net interest (loss) income after provision for loan losses		(2,330	)		(31	)		(6,325	)		319,395		2,241			312,950
Service charges on deposit accounts											43,692					43,692
Other service fees											103,728		(24,713	)		79,015
Gain on sale of securities		50,469									781					51,250
Trading account profit											3,414		349			3,763
Gain on sale of loans											15,045		(5,229	)		9,816
Other operating income		1,355			1,252						24,878		(9,432	)		18,053

		49,494			1,221			(6,325	)		510,933		(36,784	)		518,539

OPERATING EXPENSES:
Personnel costs:
Salaries					89						116,102		(649	)		115,542
Profit sharing											5,647					5,647
Pension and other benefits					18						34,896		(187	)		34,727

					107						156,645		(836	)		155,916
Net occupancy expenses					4						24,810					24,814
Equipment expenses		8						2			28,619		(15	)		28,614
Other taxes		273									8,982					9,255
Professional fees		572			3			5			60,219		(33,216	)		27,583
Communications		16									15,679		(18	)		15,677
Business promotion		625									19,628					20,253
Printing and supplies											4,537					4,537
Other operating expenses		(455	)		17			120			28,652		(391	)		27,943
Amortization of intangibles											2,242					2,242

		1,039			131			127			350,013		(34,476	)		316,834

Income (loss) before income tax, cumulative effect of accounting change and equity in earnings of subsidiaries		48,455			1,090			(6,452	)		160,920		(2,308	)		201,705
Income tax		3,155						(2,273	)		41,865		(314	)		42,433

Income (loss) before cumulative effect of accounting change and equity in earnings of subsidiaries		45,300			1,090			(4,179	)		119,055		(1,994	)		159,272
Cumulative effect of accounting change, net of tax					691						4,494		(1,578	)		3,607

Income (loss) before equity in earnings of subsidiaries		45,300			1,781			(4,179	)		123,549		(3,572	)		162,879
Equity in earnings of subsidiaries		117,579			25,628			29,482			12,555		(185,244	)

NET INCOME	$	162,879		$	27,409		$	25,303		$	136,104	($	188,816	)	$	162,879

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 2004
(UNAUDITED)


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

INTEREST INCOME:
Loans	$	585					$	32,897		$	423,819		$	(48,805	)	$	408,496
Money market investments		194		$	1			120			7,880			(2,382	)		5,813
Investment securities		211						193			94,392			236			95,032
Trading account securities											9,401						9,401

		990			1			33,210			535,492			(50,951	)		518,742

INTEREST EXPENSE:
Deposits											79,291			(1,176	)		78,115
Short-term borrowings		156			6			1,421			36,430			(5,851	)		32,162
Long-term debt		8,726			56			31,837			82,753			(45,621	)		77,751

		8,882			62			33,258			198,474			(52,648	)		188,028

Net interest (loss) income		(7,892	)		(61	)		(48	)		337,018			1,697			330,714
Provision for loan losses											44,678						44,678

Net interest (loss) income after provision for loan losses		(7,892	)		(61	)		(48	)		292,340			1,697			286,036
Service charges on deposit accounts											41,082						41,082
Other service fees											70,265			(711	)		69,554
Gain on sale of investment securities		10,535			2,206			9			283						13,033
Trading account loss											(2,166	)					(2,166	)
Gain on sales of loans											9,223			(2,955	)		6,268
Other operating income		1,478			1,755						14,337			(105	)		17,465

		4,121			3,900			(39	)		425,364			(2,074	)		431,272

OPERATING EXPENSES:
Personnel costs:
Salaries					81						101,458			25			101,564
Profit sharing											5,682						5,682
Pension and other benefits					18						33,300						33,318

					99						140,440			25			140,564
Net occupancy expenses					3						21,042						21,045
Equipment expenses											27,190			(10	)		27,180
Other taxes		358									9,134						9,492
Professional fees		294			1			84			19,853			(146	)		20,086
Communications		10									15,435			(12	)		15,433
Business promotion											16,391						16,391
Printing and supplies											4,571						4,571
Other operating expenses		138			23			133			22,501			379			23,174
Amortization of intangibles											1,802						1,802

		800			126			217			278,359			236			279,738

Income (loss) before income tax and equity in earnings of subsidiaries		3,321			3,774			(256	)		147,005			(2,310	)		151,534
Income tax		1,317						390			32,012			(689	)		33,030

Income (loss) before equity in earnings of subsidiaries		2,004			3,774			(646	)		114,993			(1,621	)		118,504
Equity in earnings of subsidiaries		116,500			22,767			23,093			13,466			(175,826	)

NET INCOME	$	118,504		$	26,541		$	22,447		$	128,459		$	(177,447	)	$	118,504

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 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	$	162,879		$	27,409		$	25,303		$	136,104		$	(188,816	)	$	162,879
Less: Cumulative effect of accounting change					691						4,495			(1,579	)		3,607

Net income before cumulative effect of accounting change		162,879			26,718			25,303			131,609			(187,237	)		159,272

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries		(117,579	)		(25,628	)		(29,482	)		(12,555	)		185,244
Depreciation and amortization of premises and equipment		378									19,650			(18	)		20,010
Provision for loan losses											44,336						44,336
Amortization of intangibles											2,242						2,242
Net gain on sale of investment securities		(50,469	)								(781	)					(51,250	)
Net gain on disposition of premises and equipment											(1,663	)					(1,663	)
Net gain on sale of loans, excluding loans held-for-sale											(2,673	)					(2,673	)
Net amortization of premiums and accretion of discounts on investments		(147	)								10,939			(195	)		10,597
Net amortization of premiums and deferred loan origination fees and costs		(24	)								30,452			(1,700	)		28,728
Earnings from investments under the equity method		(628	)		(1,147	)					(194	)					(1,969	)
Stock options expense		61									687			(2	)		746
Net decrease in loans held-for-sale											677,638						677,638
Net decrease in trading securities											20,289			(1,192	)		19,097
Net increase in accrued income receivable		(10	)		(29	)		(485	)		(32,483	)		676			(32,331	)
Net decrease in other assets		5,930			5			546			44,137			4,438			55,056
Net increase in interest payable		2,991			5			14,766			2,996			(674	)		20,084
Net increase in deferred and current taxes		3,156						2,651			11,450			(476	)		16,781
Net increase in postretirement benefit obligation											1,414						1,414
Net increase (decrease) in other liabilities		755			(13	)		(143	)		(74,252	)		(4,631	)		(78,284	)

Total adjustments		(155,586	)		(26,807	)		(12,147	)		741,629			181,470			728,559

Net cash provided by (used in) operating activities		7,293			(89	)		13,156			873,238			(5,767	)		887,831

Cash flows from investing activities:
Net (increase) decrease in money market investments		(98,800	)					52			206,061			78,896			186,209
Purchases of investment securities:
Available-for-sale		(103,729	)								(757,114	)		186,821			(674,022	)
Held-to-maturity					(2,181	)					(14,614,578	)					(14,616,759	)
Other		(45	)					(20	)		(28,139	)					(28,204	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale		57,066									704,357			(174,546	)		586,877
Held-to-maturity		150,000									14,646,301						14,796,301
Other											21,863						21,863
Proceeds from sale of investment securities available-for-sale		57,506									42,438						99,944
Net collections (disbursements) on loans		15,571						(3,634	)		(325,277	)		28,669			(284,671	)
Proceeds from sale of loans											80,246						80,246
Acquisition of loan portfolios											(660,023	)					(660,023	)
Capital contribution to subsidiary		(75,000	)		(75,000	)		(173,030	)		(500	)		323,530
Assets acquired, net of cash											(173,666	)					(173,666	)
Acquisition of premises and equipment											(38,770	)					(38,770	)
Proceeds from sale of premises and equipment											10,505						10,505
Dividends received from subsidiary		42,700						50,000			50,500			(143,200	)

Net cash provided by (used in) investing activities		45,269			(77,181	)		(126,632	)		(835,796	)		300,170			(694,170	)

Cash flows from financing activities:
Net increase in deposits											380,069			85,507			465,576
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase		(6,690	)					32,800			1,417,941			(153,559	)		1,290,492
Net (decrease) increase in other short-term borrowings		(4,501	)		2,257			9,497			(1,170,310	)		54,547			(1,108,510	)
Net (payments of) proceeds from notes payable and capital securities		(655	)					1,085			(612,924	)		(90,433	)		(702,927	)
Dividends paid to parent company											(143,200	)		143,200
Dividends paid		(45,636	)														(45,636	)
Proceeds from issuance of common stock		4,938															4,938
Treasury stock acquired
Capital contribution from parent					75,000			75,000			172,811			(322,811	)

Net cash (used in) provided by financing activities		(52,544	)		77,257			118,382			44,387			(283,549	)		(96,067	)
Cash effect of accounting change					(28	)					(1,544	)					(1,572	)

Net increase (decrease) in cash and due from banks		18			(41	)		4,906			80,285			10,854			96,022
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	$	301		$	13		$	5,290		$	847,377			($40,500	)	$	812,481

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004
(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	$	118,504		$	26,541		$	22,447		$	128,459		($	177,447	)	$	118,504

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Equity in undistributed earnings of subsidiaries		(116,500	)		(22,767	)		(23,093	)		(13,466	)		175,826
Depreciation and amortization of premises and equipment		203									18,017			(12	)		18,208
Provision for loan losses											44,678						44,678
Amortization of intangibles											1,802						1,802
Net gain on sale of investment securities		(10,535	)		(2,206	)		(9	)		(283	)					(13,033	)
Net gain on disposition of premises and equipment											(1,373	)					(1,373	)
Net gain on sale of loans, excluding loans held-for-sale											(1,318	)					(1,318	)
Net amortization of premiums and accretion of discounts on investments											10,004						10,004
Net amortization of premiums and deferred loan fees and costs											22,789						22,789
Earnings from investments under the equity method		(494	)		(1,650	)											(2,144	)
Stock options expense		70									586			23			679
Net increase in loans held-for-sale											(78,664	)					(78,664	)
Net increase in trading securities											(69,247	)					(69,247	)
Net decrease (increase) in accrued income receivable		14			1			809			(36,330	)		(693	)		(36,199	)
Net increase in other assets		(16,671	)		(22,215	)		(150	)		(2,572	)		253			(41,355	)
Net increase in interest payable		2,325			57			15,157			6,587			692			24,818
Net increase in deferred and current taxes		1,317						510			20,656			(690	)		21,793
Net increase in postretirement benefit obligation											2,693						2,693
Net increase (decrease) in other liabilities		348			(27	)		140			(39,118	)		398			(38,259	)

Total adjustments		(139,923	)		(48,807	)		(6,636	)		(114,559	)		175,797			(134,128	)

Net cash (used in) provided by operating activities		(21,419	)		(22,266	)		15,811			13,900			(1,650	)		(15,624	)

Cash flows from investing activities:
Net (increase) decrease in money market investments		21,510						52,613			(134,232	)		(66,748	)		(126,857	)
Purchases of investments securities:
Available-for-sale								(1,500	)		(1,221,518	)		72,465			(1,150,553	)
Held-to-maturity											(246,562	)					(246,562	)
Other		(126	)								(9,011	)					(9,137	)
Proceeds from calls, paydowns, maturities and redemptions of investments securities:
Available-for-sale											1,173,082			(71,843	)		1,101,239
Held-to-maturity											173,383						173,383
Proceeds from sales of investment securities available-for-sale		9,898			864			1,009			3,044						14,815
Net disbursements on loans		(15,500	)					(37,334	)		(252,440	)		193,347			(111,927	)
Proceeds from sales of loans											31,753						31,753
Acquisition of loan portfolios											(1,059,908	)					(1,059,908	)
Capital contribution to subsidiary		(559	)											559
Acquisition of premises and equipment											(28,412	)		379			(28,033	)
Proceeds from sale of premises and equipment											3,037						3,037
Dividends received from subsidiary		41,025												(41,025	)

Net cash provided by (used in) investing activities		56,248			864			14,788			(1,567,784	)		87,134			(1,408,750	)

Cash flows from financing activities:
Net increase in deposits											480,312			22,859			503,171
Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase								6,941			(180,742	)		77,815			(95,986	)
Net (decrease) increase in other short-term borrowings		(675	)		85			213,225			538,860			(50,825	)		700,670
Net proceeds from (payments of) notes payable and capital securities		279						(248,985	)		805,235			(153,900	)		402,629
Dividends paid to parent company											(41,025	)		41,025
Dividends paid		(38,865	)														(38,865	)
Proceeds from issuance of common stock		3,523															3,523
Treasury stock acquired											(1,259	)					(1,259	)
Capital contribution from parent					22,155									(22,155	)

Net cash (used in) provided by financing activities		(35,738	)		22,240			(28,819	)		1,601,381			(85,181	)		1,473,883

Net (decrease) increase in cash and due from banks		(909	)		838			1,780			47,497			303			49,509
Cash and due from banks at beginning of period		995			47			2,444			722,181			(37,577	)		688,090

Cash and due from banks at end of period	$	86		$	885		$	4,224		$	769,678		($	37,274	)	$	737,599

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

This discussion contains an analysis 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.

Popular, Inc. is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico with over 280 branches and offices, 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, insurance and information processing through specialized subsidiaries. In the United States, the Corporation has established the largest Hispanic-owned financial services franchise, providing complete financial solutions to all the communities it serves. Banco Popular North America (“BPNA”) operates over 135 branches in California, Texas, Illinois, New York, New Jersey and Florida, as well as 130 financial services stores under the name of Popular Cash Express. The Corporation’s finance subsidiary in the United States, Popular Financial Holdings (“PFH”), operates nearly 200 retail lending locations offering mortgage and personal loans, and also maintains a substantial wholesale broker network, a warehouse lending division and loan servicing and assets acquisition units. The Corporation continues to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, through its financial transaction processing company, EVERTEC, Inc.

Popular, Inc.’s net income for the first quarter of 2005 reached $162.9 million, from $118.5 million in the first quarter of 2004, an increase of $44.4 million, or 37%. The results for the first quarter of 2005 included $51.3 million in gains on sale of investment securities, mainly marketable equity securities, compared with $13.0 million in the same period of 2004.

Table A provides selected financial data for the quarter ended March 31, 2005, compared with the same period in 2004.

Financial highlights for the quarter follow:

-   The increase in net interest income was associated with strong growth in earning assets, partly due to the recent acquisitions of Quaker City Bank (“Quaker City”) in September 2004 and Kislak Financial Corporation (“Kislak”) in January 2005. The positive variance was partially offset by the effects of the rapid increase in short-term rates and the flattening of the yield curve which has compressed Popular’s net interest margin. The net interest yield for the quarter ended March 31, 2005, on a taxable equivalent basis, was 3.58%, compared with 4.12% for the quarter ended March 31, 2004.

-   Credit quality trends and a greater proportion of real estate secured loans contributed to the slight reduction in the provision for loan losses for the quarter ended March 31, 2005, when compared with the same quarter in the previous year. Refer to the Credit Risk Management and Loan Quality section, including Tables I, J and K, for a more detailed analysis of the allowance for loan losses, net charge-offs, non-performing assets and credit quality statistics.

-   The increase in non-interest income of $60 million, or 42%, for the quarter ended March 31, 2005, compared with the same period in 2004, was mostly associated with the aforementioned gains on the sale of investment securities, which contributed with $38 million or 63% on the increase in non-interest

income.  Other categories of non-interest income that contributed to the increase included service charges on deposit accounts, other service fees, trading account profits and gains on sale of loans.

-   Operating expenses for the quarter ended March 31, 2005 rose $37.1 million, or 13%, compared with the first quarter of 2004, principally in the categories of personnel costs, professional fees, business promotion, net occupancy, equipment expenses and other general operating expenses. The increase included expenses associated with the operations of Kislak and Quaker City.

-   Total loans at March 31, 2005 reflected a $0.7 billion, or 2% growth, from December 31, 2004. The increase in loans was driven primarily by loans acquired from Kislak, which approximated $0.6 billion at the acquisition date, excluding purchase accounting entries. Loan growth, which in past years has been mostly attained in mortgage loans, is now shifting toward commercial and consumer loans. Although mortgage loan demand continued strong, period end balances at March 31, 2005 in this loan category reflected a decline compared with December 31, 2004, principally as a result of a securitization transaction at PFH in which the company surrendered control over the mortgage loans that were securitized and sold, recognizing sale accounting. For more detailed information on lending activities, refer to the Balance Sheet Comments and Off-Balance Sheet Activities sections of this report.

-   Borrowed funds at March 31, 2005 decreased slightly by $0.3 billion from $19.9 billion at December 31, 2004. Asset growth from December 31, 2004 to March 31, 2005 was funded principally through deposits, which increased by $1.1 billion, or 6% from the end of 2004, reaching $21.7 billion at March 31, 2005. Kislak contributed approximately $0.7 billion in deposits at its acquisition date, excluding purchase accounting entries. For more detailed information on borrowings and deposits refer to the Balance Sheet Comments section of this report.

-   At March 31, 2005, stockholders’ equity remained stable at $3.1 billion, compared with December 31, 2004. The increase in equity due to earnings retention approximating $117 million since December 31, 2004 was principally offset by an unfavorable change in the fair value of securities classified as available-for-sale of approximately $165 million, net of tax, which net unrealized losses are recorded as part of accumulated other comprehensive (loss) income in the equity section. The net unrealized losses in the available-for-sale portfolio at March 31, 2005 were mostly related to market fluctuations in U.S. Agencies and Treasury securities associated with interest rates. The Corporation’s market capitalization at March 31, 2005 was $6.5 billion, compared with $5.7 billion at March 31, 2004 and $7.7 billion at December 31, 2004.

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

-   Subsequent to quarter end, in April 2005, the Corporation and Grupo Cuscatlán, through Corporación UBC Internacional, S.A., signed an agreement for the acquisition by Popular, Inc. of a 19.99% equity participation in UBCI, Grupo Cuscatlán’s holding company. The investment by Popular approximates $125 million. Grupo Cuscatlán is a financial services corporation based in Central America with more than $4.4 billion in assets, and a distribution network of 188 agencies. Grupo Cuscatlán has operations in El Salvador, Guatemala, Costa Rica, Honduras, Panama, British Virgin Islands, Montserrat and Bahamas. This agreement advances Popular, Inc.’s objectives to offer high-quality technological services and participate in the economic growth of the Central American region.

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

TABLE A
Financial Highlights




Balance Sheet Highlights	At March 31,							Average for the first quarter
(In thousands)	2005		2004		Change			2005		2004		Change

Money market investments	$	723,275	$	899,750		($176,475	)	$	859,211	$	755,883	$	103,328
Investment and trading securities		12,130,448		11,363,780		766,668			12,361,927		11,097,282		1,264,645
Loans*		29,428,026		23,700,334		5,727,692			29,325,771		22,979,153		6,346,618
Total assets		45,167,838		38,101,986		7,065,852			45,438,817		36,915,835		8,522,982
Deposits		21,728,677		18,602,940		3,125,737			21,592,432		18,245,681		3,346,751
Borrowings		19,596,463		15,899,907		3,696,556			19,951,984		15,315,317		4,636,667
Stockholders’ equity		3,065,000		2,949,756		115,244			3,135,594		2,776,307		359,287




Operating Highlights	First Quarter
(In thousands, except per share information)	2005		2004		Change

Net interest income	$	357,286	$	330,714	$	26,572
Provision for loan losses		44,336		44,678		(342	)
Fees and other income		205,589		145,236		60,353
Operating expenses		316,834		279,738		37,096
Income tax		42,433		33,030		9,403
Cumulative effect of accounting change, net of tax		3,607		—		3,607
Net income	$	162,879	$	118,504	$	44,375
Net income applicable to common stock	$	159,901	$	115,526	$	44,375
Basic EPS before cumulative effect of change in accounting principle	$	0.59	$	0.43	$	0.16
Diluted EPS before cumulative effect of change in accounting principle	$	0.58	$	0.43	$	0.15
Basic and diluted EPS after cumulative effect of change in accounting principle	$	0.60	$	0.43	$	0.17

Selected Statistical Information

First Quarter

2005

2004

Common Stock Data - Market price

High

28.03

24.05

Low

23.80

21.50

End

24.32

21.55

Book value per share at period end

10.79

10.39

Dividends declared per share

0.16

0.14

Dividend payout ratio

27.14

31.06

Price/earnings ratio

12.41

11.97

Profitability Ratios - Return on assets

1.43

1.29

Return on common equity

21.62

17.95

Net interest spread (taxable equivalent)

3.21

3.76

Net interest yield (taxable equivalent)

3.58

4.12

Effective tax rate

21.04

21.80

Overhead ratio**

31.14

40.67

Efficiency ratio ***

62.39

60.15

Capitalization Ratios - Equity to assets

6.90

7.52

Tangible equity to assets

5.81

6.97

Equity to loans

10.69

12.08

Internal capital generation

14.61

11.47

Tier I capital to risk – adjusted assets

11.49

12.51

Total capital to risk – adjusted assets

12.77

13.99

Leverage ratio

7.46

7.98

*		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.


Note: All per share data has been adjusted to reflect the two-for-one stock split effected in the form of a stock dividend effective July 8, 2004.

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 and general practices within the financial services industry. These policies require management to make estimates and assumptions which involve significant judgment about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. 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. The Corporation has identified as critical accounting policies those related to securities’ classification and related values, loans and allowance for loan losses, 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 Management’s Discussion and Analysis included in Popular, Inc.’s 2004 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, 2004 (the “2004 Annual Report”). Also, refer to Note 1 to the consolidated financial statements included in the 2004 Annual Report for a summary of the Corporation’s significant accounting policies, as well as to the accompanying notes to the unaudited consolidated financial statements included in this Form 10-Q. No significant changes in critical accounting policies have occurred since December 31, 2004.

NET INTEREST INCOME

Table B presents the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the quarter ended March 31, 2005, as compared with the same period in 2004, segregated by major categories of interest earning assets and interest bearing liabilities. Some of the interest earning assets, mostly investments in obligations of the U.S. Government and its agencies and the Puerto Rico Commonwealth and its agencies, generate interest which is exempt from income tax, principally in Puerto Rico. Therefore, 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 (in Puerto Rico the statutory tax rate is 39%).

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. Fees collected and costs incurred in the origination of loans are deferred and amortized using the interest method over the term of the loan as an adjustment to interest yield. Interest income for the quarters ended March 31, 2005 and 2004 included $8.7 million and $7.4 million, respectively, of amortization of net loan origination costs and net premiums on loans purchased.

As shown in Table B, the increase in net interest income on a taxable equivalent basis was mainly due to the growth in average earning assets, principally loans, partially offset by a reduction of the net interest margin.

The increase in average earning assets for the quarter ended March 31, 2005, compared with the first quarter of 2004, was principally due to the 28% increase in the average loan portfolio. The Corporation continues to diversify its asset base. Commercial loans contributed 43% of the total increase in average loans, while mortgage and consumer loans contributed 41% and 13%, respectively. This growth includes the impact of the acquisitions of Kislak and Quaker City. A substantial portion of the loan portfolios of these acquired institutions, consisted primarily of real estate secured loans. Contributing to the increase in average earning assets were also investment securities, mainly in the form of U.S. Government and agencies and mortgage-backed securities.

The increase in the volume of earning assets was funded mainly through a combination of short and long-term borrowings and interest bearing deposits. During the second half of 2004, the Corporation performed various issuances of long-term debt, including medium-term notes, junior subordinated debentures (trust preferred securities) and secured borrowings, to fund the growth in the balance sheet given the anticipated rise in interest rates. The average balance of interest-bearing deposits also rose due to the impact of the acquisitions of Kislak and Quaker City and to successful marketing campaigns and sales efforts directed to money market accounts and certificates of deposit, principally in the U.S. mainland.

TABLE B
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Quarter ended March 31,


																								Variance
Average Volume							Average Yields / Costs										Interest							Attributable to
2005		2004		Variance			2005			2004			Variance				2005		2004		Variance			Rate			Volume
($ in millions)																	(In thousands)

$	859	$	756	$	103			3.56	%		3.09	%		0.47	%	Money market investments	$	7,534	$	5,813	$	1,721		$	868		$	853
	11,964		10,437		1,527			4.50			4.56			(0.06	)	Investment securities		134,389		118,913		15,476			(3,295	)		18,771
	398		660		(262	)		6.30			6.09			0.21		Trading		6,184		9,987		(3,803	)		259			(4,062	)

	13,221		11,853		1,368			4.49			4.55			(0.06	)			148,107		134,713		13,394			(2,168	)		15,562

																Loans:
	11,313		8,558		2,755			6.27			5.71			0.56		Commercial		174,809		121,511		53,298			11,467			41,831
	1,285		1,082		203			7.68			9.09			(1.41	)	Leasing		24,667		24,598		69			(4,155	)		4,224
	12,616		10,045		2,571			6.51			6.91			(0.40	)	Mortgage		205,335		173,514		31,821			(10,506	)		42,327
	4,112		3,294		818			10.24			11.22			(0.98	)	Consumer		104,359		92,115		12,244			(8,120	)		20,364

	29,326		22,979		6,347			6.99			7.18			(0.19	)			509,170		411,738		97,432			(11,314	)		108,746

$	42,547	$	34,832	$	7,715			6.21	%		6.29	%		(0.08	%)	Total earning assets	$	657,277	$	546,451	$	110,826			($13,482	)	$	124,308

																Interest bearing deposits:
$	3,778	$	2,632	$	1,146			1.39	%		1.05	%		0.34	%	NOW and money market	$	12,934	$	6,887	$	6,047		$	2,079		$	3,968
	5,622		5,323		299			1.19			1.03			0.16		Savings		16,449		13,640		2,809			1,903			906
	7,983		6,622		1,361			3.44			3.50			(0.06	)	Time deposits		67,673		57,588		10,085			(1,177	)		11,262

	17,383		14,577		2,806			2.26			2.16			0.10				97,056		78,115		18,941			2,805			16,136

	9,698		8,063		1,635			2.75			1.60			1.15		Short-term borrowings		65,803		32,162		33,641			26,306			7,335
	10,254		7,252		3,002			4.46			4.31			0.15		Medium and long-term debt		113,135		77,751		35,384			1,323			34,061


	37,335		29,892		7,443			3.00			2.53			0.47		Total interest bearing liabilities		275,994		188,028		87,966			30,434			57,532
	4,210		3,669		541											Demand deposits
	1,002		1,271		(269	)										Other sources of funds

$	42,547	$	34,832	$	7,715			2.63	%		2.17	%		0.46

								3.58	%		4.12	%		(0.54	%)	Net interest margin

																Net interest income on a taxable equivalent basis		381,283		358,423		22,860			($43,916	)	$	66,776

								3.21	%		3.76	%		(0.55	%)	Net interest spread

																Taxable equivalent adjustment		23,997		27,709		(3,712	)

																Net interest income	$	357,286	$	330,714	$	26,572

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.

The decrease in the net interest yield for the quarter ended March 31, 2005, compared with the same quarter in 2004, was mainly due to an increase in the average cost of interest bearing liabilities, principally due to an increase in the cost of short-term borrowings reflecting the upward trend that resulted from revisions in the interest rate scenario by the Federal Reserve (FED) commencing in June 2004. During the quarter ended March 31, 2005, the FED increased the federal funds target rate an additional 50 basis points, which together with increases experienced in 2004, brought the federal funds target rate from 1.00% in March 2004 to 2.75% in March 2005.

The average yield on earning assets, on a taxable equivalent basis, for the quarter ended March 31, 2005 declined compared with the same quarter in the previous year, mostly related to lower yields in mortgage loans due to the flattening of the yield curve and its impact in new volumes, to the implementation of risk-based pricing strategies

in consumer loans and promotional campaigns, and to a mix change, as quarter-over-quarter growth was highest in lower yielding categories, including mortgage loans and investment securities. Also, the decrease in the taxable equivalent adjustment contributed to a lower yield on earning assets. The decline in the adjustment was caused by a higher interest expense disallowance required by the Internal Revenue Code of Puerto Rico, as a result of an increase in the interest expense as compared with the same period of 2004. The decline in the yield on earning assets was partially offset by positive results in the Corporation’s commercial loan portfolio, which was favorably impacted by the rising interest rate scenario due to a higher proportion of commercial loans with floating rates.

Following the guidance in EITF Issue No. 03-11, “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133 and Not Held for Trading Purposes,” and from the meetings held by the AICPA SEC Regulations Committee on September 16, 2003 and the AICPA Insurance Expert Panel, the Corporation included as part of interest expense, approximately $63,000 and $137,000 in derivative losses, for the quarters ended March 31, 2005 and March 31, 2004, respectively. These net derivative losses represent unrealized gains and losses on derivatives not designated as hedges, but that were considered “economic hedges”. EITF 03-11 requires that both realized and unrealized results of such economic hedges be shown within the same financial statement caption.

NON-INTEREST INCOME

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

The increase in non-interest income for the quarter ended March 31, 2005, compared with the same period in 2004, was mostly associated with gains in the sale of investment securities, primarily marketable equity securities, which was previously discussed in the Overview section of this report.

Service charges on deposit accounts also contributed to the increase in non-interest income for the quarter ended March 31, 2005, rising 6%, principally associated with the banking operations acquired in the U.S. mainland, higher consumer non-sufficient funds fees and deposit marketing initiatives in the U.S. mainland. Other service fees increased 14%, mostly attributed to higher insurance commissions in part due to increased volume in credit life, and higher credit card fees due to increased transactional volume related to the merchant business. The increase in other fees was partly related with loan syndication fees and SBA loan servicing fees, among other diverse items. Refer to Table C for a breakdown of other service fees by major categories.

TABLE C
Other Service Fees


	Quarter ended March 31,
(In thousands)	2005		2004		Variance

Other service fees:
Credit card fees and discounts	$	18,525	$	15,804	$	2,721
Debit card fees		13,022		12,278		744
Insurance fees		11,673		7,035		4,638
Processing fees		10,107		10,489		(382	)
Other fees		10,070		7,712		2,358
Sale and administration of investment products		6,146		5,260		886
Check cashing fees		5,826		6,591		(765	)
Mortgage servicing fees, net of amortization		1,531		1,928		(397	)
Trust fees		2,115		2,457		(342	)

Total other service fees	$	79,015	$	69,554	$	9,461

Gains on sale of loans rose 57%, primarily as a result of the transfer of approximately $0.6 billion in residential mortgage loans in an off-balance sheet securitization transaction completed by PFH during the quarter ended March 31, 2005, in which the Corporation surrendered control over the assets. Refer to the Off-Balance Sheet Activities section of this report for further information.

The favorable change in trading account profits for the quarter ended March 31, 2005, compared with trading account losses for the first quarter of 2004, resulted mostly from favorable changes in closed positions on forward commitments to sell mortgage-backed securities.

OPERATING EXPENSES

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

For the first quarter of 2005, the Corporation’s operating expenses increased 13% compared with the same period in the previous year. This increase included expenses associated with the operations of Kislak and Quaker City. Personnel costs, which rose $15.4 million, or 11%, were the major contributor to this rise in operating expenses. Such increase was primarily attributable to higher salaries and related taxes, due in part to higher headcount, incentive compensation, performance and other bonuses. Full-time equivalent employees were 12,398 at March 31, 2005, an increase of 941 employees from March 31, 2004, including employees assumed in connection with the Quaker City and Kislak acquisitions, and other business expansion principally associated with PFH and EVERTEC, Inc. The unfavorable variance in personnel costs was partially offset by lower pension plan costs. The results of the quarter ended March 31, 2004 included $2.4 million in early-retirement window costs and net curtailment gains, which were associated with the realignment of the Corporation’s processing and technology operations.

All other operating expenses, excluding personnel costs, increased $21.7 million, or 16%, for the first quarter of 2005, compared with the same period in 2004. Professional fees rose in part due to higher computer service fees associated with system applications, consulting fees for business initiatives, legal expenses and collection and other credit related costs to support the lending business. Business promotion also increased mainly due to the new institutional campaign launched during the quarter in Puerto Rico, sales efforts in the U.S. banking operations directed to deposit gathering campaigns, and the New York Mets sponsorship. Increases in net occupancy and equipment expenses resulted from the U.S. mainland acquisitions, continuing investments in systems technology and costs to support business initiatives. Other operating expenses increased in part due to higher insurance business costs.

During the first quarter of 2005, Popular, Inc. entered into a five-year agreement to be the official bank of the New York Mets, the largest sports marketing partnership in the institution’s 111 years history. The agreement includes substantial advertising and community outreach opportunities for Popular, including the operation of all ATMs at Shea Stadium. In addition, the Corporation will be involved in community outreach efforts including the co-sponsoring of the Mets’ summer reading program with the New York Public Library and spearheading a large ticket distribution program to community organizations.

INCOME TAX

Income tax expense for the quarter ended March 31, 2005 increased by $9.4 million, or 28% compared with the same quarter of 2004, primarily due to higher pretax earnings and by a decrease in exempt interest income net of the disallowance of expenses attributed to such exempt income. The first quarter of 2005 was also impacted by an increase in gains on the sale of investment securities which are subject to a preferential tax rate on capital gains. The effective tax rates for the quarters ended March 31, 2005 and 2004 were 21.04% and 21.80%, respectively.

BALANCE SHEET COMMENTS

Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of condition as of March 31, 2005, December 31, 2004 and March 31, 2004. Earning assets at March 31, 2005 totaled $42.3 billion, an increase of $0.5 billion, or 1%, from December 31, 2004. At March 31, 2004, earning assets totaled $36.0 billion.

Refer to Table D for a breakdown of the Corporation’s loan portfolio. The commercial and construction loan portfolio increased 5% from December 31, 2004, primarily related to the addition of the Kislak loan portfolio, which consists mainly of commercial loans secured by real estate. The 32% increase in the commercial and construction loan portfolio from March 31, 2004 was also associated with the acquisitions of Kislak and Quaker City and with sales efforts and business initiatives.

TABLE D
Loans Ending Balances


					Variance					Variance
	March 31,		December 31,		March 31, 2005			March 31,		March 31, 2005
(In thousands)	2005		2004		vs. December 31, 2004			2004		vs. March 31, 2004

Commercial, industrial and agricultural *	$	10,846,648	$	10,396,732	$	449,916		$	8,297,800	$	2,548,848
Construction		546,610		501,015		45,595			364,969		181,641
Lease financing		1,280,729		1,164,606		116,123			1,101,987		178,742
Mortgage *		12,579,729		12,641,329		(61,600	)		10,506,283		2,073,446
Consumer		4,174,310		4,038,579		135,731			3,429,295		745,015


Total	$	29,428,026	$	28,742,261	$	685,765		$	23,700,334	$	5,727,692

* Includes loans held-for-sale

The decline in mortgage loans by less than 1% from December 31, 2004 was mainly due to the sale of approximately $0.6 billion in residential mortgage loans as part of an off-balance sheet securitization completed by PFH during the quarter ended March 31, 2005. Refer to the Off-Balance Sheet Activities section of this report for further information. The increase in mortgage loans from March 31, 2004 to the same date in 2005 was mostly related with PFH’s loan production, which derived mainly from loan originations directly performed through its retail branch network and from loans purchased from correspondent lenders. The 2004 on-balance sheet securitizations failed the SFAS No. 140 criteria for “sale accounting”, as such the transactions were accounted for as a secured borrowing and the mortgage loans remained in portfolio, becoming the principal contributor to the growth in mortgage loans in that year.

As reflected in the consolidated statements of condition, loans held-for-sale at March 31, 2005 increased $477 million from the end of 2004. These loans represent primarily mortgage loans that have been originated and are pending securitization or sale in the secondary market. At March 31, 2005, loans held-for-sale consisted primarily of conforming loans for which aggregate fair value exceeded their cost.

A breakdown of the Corporation’s consumer loan portfolio is included in Table E:

TABLE E
Breakdown of Consumer Loans


					Variance					Variance
	March 31,		December 31,		March 31, 2005 vs.			March 31,		March 31, 2005 vs.
(In thousands)	2005		2004		December 31, 2004			2004		March 31, 2004

Personal	$	1,863,277	$	1,816,949	$	46,328		$	1,491,480	$	371,797
Auto		1,328,029		1,244,164		83,865			1,049,583		278,446
Credit cards		834,202		826,961		7,241			735,872		98,330
Other		148,802		150,505		(1,703	)		152,360		(3,558	)


Total	$	4,174,310	$	4,038,579	$	135,731		$	3,429,295	$	745,015

The increase in personal and auto loans from March 31, 2004 to the same date in 2005 was primarily due to favorable customer response to strong marketing efforts, the addition of Quaker City’s portfolio and other acquisitions of home equity loans in the U.S. mainland during 2004. Credit cards also increased mostly as a result of an innovative campaign and new products directed to increase Popular’s credit card market share in Puerto Rico. The “other” category of consumer loans includes marine loans and revolving credit lines.

The investment portfolio, including trading securities, totaled $12.1 billion at March 31, 2005, compared to $12.2 billion at December 31, 2004 and $11.4 billion at March 31, 2004. Notes 3 and 4 to the consolidated financial statements present the breakdown of the Corporation’s available-for-sale and held-to-maturity investment portfolios.

The increase in goodwill and other intangible assets at March 31, 2005, compared with December 31, 2004 was mostly associated with the acquisition of Kislak, which contributed approximately $110 million in goodwill and $10 million in core deposit intangibles. Refer to Note 7 to the consolidated financial statements for further information on goodwill and the composition of other intangible assets. The increase since March 31, 2004 was also associated with the acquisition of Quaker City, as further described in the Management Discussion and Analysis included in the 2004 Annual Report.

Table F presents the categories with the most significant variances within the “Other Assets” caption included in the consolidated statements of condition:

TABLE F
Breakdown of other Assets


					Variance					Variance
					March 31, 2005					March 31, 2005
					vs. December 31,			March 31,		vs. March 31,
(In thousands)	March 31, 2005		December 31, 2004		2004			2004		2004

Deferred tax assets	$	272,192	$	231,892	$	40,300		$	197,251	$	74,941
Securitization advances and related assets		195,466		240,304		(44,838	)		136,014		59,452
Bank-owned life insurance program		156,915		155,527		1,388			77,743		79,172
Prepaid expenses		158,474		140,269		18,205			108,926		49,548
Investments under the equity method		59,771		56,996		2,775			48,042		11,729
Derivative assets		33,287		24,554		8,733			5,916		27,371
Servicing rights		70,041		57,183		12,858			57,175		12,866
Others		133,460		139,649		(6,189	)		207,650		(74,190	)


Total	$	1,079,606	$	1,046,374	$	33,232		$	838,717	$	240,889

The increase in the deferred tax assets from December 31, 2004 and March 31, 2004 to March 31, 2005 was the result of an increase in unrealized losses in the portfolio of available-for-sale securities as evidenced in Note 3 to the financial statements. Securitization advances and related assets at March 31, 2005 decreased compared with the end of 2004 principally as a result of the new structure of the securitization transactions in 2005 in which PFH is surrendering control over the loans, as such no advances are required. The securitization advances pertaining to past transactions which are accounted for as secured borrowings will decrease as the loans underlying the securitization transactions pay down. The advances represent payments received on loans held-in-trust available to pay down security holders under scheduled terms specified in the agreements. The increase from

March 31, 2004 in the securitization assets was related to the transactions performed that year accounted as secured borrowings. The increase in prepaid expenses compared with both periods was primarily related with software packages supporting new branch network and other specialized systems. The rise in servicing assets from December 31, 2004 was principally associated with the servicing assets derived from the securitization performed by PFH during the first quarter of 2005 as further described in the Off-balance Sheet Activities section of this report. The increase in bank owned life insurance since March 31, 2004 was related to additional funding. The increase in derivative assets since March 31, 2004 related mostly to the fair market value of interest rate caps purchased in conjunction with the securitization transactions performed by PFH. The decrease in “others” from March 31, 2004 to the same date in 2005 was related to securities transactions accounted at trade date, which settled in April 2004.

Total deposits increased 6% from December 31, 2004 to March 31, 2005 and 17% from March 31, 2004 to the same date in 2005. Table G provides a breakdown of the Corporation’s deposits by categories. Quaker City and Kislak contributed deposits of approximately $1.2 billion and $0.7 billion, respectively, at their acquisition dates, excluding purchase accounting entries. The increase in deposits was also associated with marketing campaigns and sales efforts. Included within time deposits, at March 31, 2005, were brokered certificates of deposit amounting to $842 million, compared with $559 million at December 31, 2004 and $756 million at March 31, 2004.

TABLE G
Deposits ending balances


					Variance				Variance
	March 31,		December 31,		March 31, 2005 vs.		March 31,		March 31, 2005 vs.
(In thousands)	2005		2004		December 31, 2004		2004		March 31, 2004

Demand deposits	$	4,257,121	$	4,173,267	$	83,854	$	3,866,999	$	390,122
Savings deposits		9,213,693		8,865,832		347,861		7,954,430		1,259,263
Time deposits		8,257,863		7,554,061		703,802		6,781,511		1,476,352


Total	$	21,728,677	$	20,593,160	$	1,135,517	$	18,602,940	$	3,125,737

Borrowed funds increased $3.7 billion, reaching $19.6 billion at March 31, 2005, from $15.9 billion on the same date the previous year. At December 31, 2004, borrowings amounted to $19.9 billion. The increase in borrowings since March 31, 2004 was mostly comprised of secured borrowings arising in securitization transactions, debt issuances in the form of junior subordinated debentures (trust preferred securities), repurchase agreements and federal funds purchased. Funding was principally used for growth in interest earning assets and business expansion. Asset growth from December 31, 2004 to March 31, 2005 was funded principally through deposits.

The Federal Home Loan Banks provide funding to the Corporation’s banking subsidiaries through advances. At March 31, 2005, Popular had short-term and long-term borrowings under these credit facilities totaling $2.1 billion. At March 31, 2004, these borrowings totaled $1.1 billion. Such advances are collateralized by securities and mortgages loans, do not have restrictive covenants and do not have any callable features.

For information on the composition of stockholders’ equity at March 31, 2005, December 31, 2004 and March 31, 2004 refer to the consolidated statements of condition and of stockholders’ equity included in the accompanying consolidated financial statements in this Form 10-Q. Also, the disclosures of accumulated other comprehensive (loss) income, an integral component of stockholders’ equity, are included in the consolidated statements of comprehensive (loss) income. Other comprehensive income includes the Corporation’s unrealized gain (loss) position, net of tax, on securities available-for-sale and the cumulative foreign currency translation adjustment at the end of each reporting period.

The Corporation offers a dividend reinvestment and stock purchase plan for its 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 as of March 31, 2005 and 2004, and December 31, 2004 are presented on Table H. The reduction in the capital ratios since December 31, 2004 was associated with the assets acquired and the goodwill and other intangible assets recorded as a result of the Kislak acquisition, and general business growth, mainly impacting average loans. At March 31, 2005, December 31, 2004 and March 31, 2004, BPPR, BPNA and Banco Popular, National Association were all well-capitalized.

TABLE H
Capital Adequacy Data



	March 31,			December 31,			March 31,
(Dollars in thousands)	2005			2004			2004

Risk-based capital
Tier I capital	$	3,337,612		$	3,316,009		$	2,918,343
Supplementary (Tier II) capital		372,923			389,638			346,318

Total capital	$	3,710,535		$	3,705,647		$	3,264,661

Risk-weighted assets
Balance sheet items	$	27,406,208		$	26,561,212		$	21,910,716
Off-balance sheet items		1,639,509			1,495,948			1,419,953

Total risk-weighted assets	$	29,045,717		$	28,057,160		$	23,330,669

Average assets	$	44,748,930		$	42,597,513		$	36,557,475

Ratios:
Tier I capital (minimum required – 4.00%)		11.49	%		11.82	%		12.51	%
Total capital (minimum required – 8.00%)		12.77	%		13.21	%		13.99	%
Leverage ratio *		7.46	%		7.78	%		7.98	%

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 March 31, 2005, the capital adequacy minimum requirement for Popular, Inc. was: Total Capital of $2,323,657, Tier I Capital of $1,161,829, and a Tier I Leverage of $1,342,468 based on a 3% ratio or $1,789,957 based on a 4% ratio according to the Bank’s classification.

OFF-BALANCE SHEET ACTIVITIES

The Corporation’s business and financing strategy with respect to PFH since 2001 to the end of 2004 was to securitize almost all of its mortgage loan production in transactions structured as secured financing transactions, as such the loans remained in the Corporation’s statement of condition and the securitization indebtedness replaced the warehouse debt associated with the securitized mortgage loans. This practice followed by PFH was the principal contributor to the Corporation’s growth in mortgage loans in recent years. During 2005, PFH completed a securitization transaction which qualified for sale accounting based on specific criteria of SFAS No. 140, “Accounting Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Approximately, $0.6 billion in adjustable and fixed rate loans were securitized and sold during the quarter ended March 31, 2005, with a gain on sale of $4.5 million. As part of this transaction, the Corporation recognized mortgage servicing rights of $13 million and interest-only strips of $21 million. Key economic assumptions used in measuring the retained interests at the date of the securitization were: discount rate of 14%, conditional prepayment rates of 28% in adjustable rate loans and 20% in fixed rate loans; and default rates of 1.50% in adjustable rate loans and 2.19% in fixed rate loans. The asset securitizations conducted prior to 2001 and in 2005 involved the transfer of mortgage loans to a qualifying special purpose entity (QSPE), which in turn transferred these assets and their titles, to different trusts, thus isolating those loans from the Corporation’s assets. These transactions, qualified for sale accounting based on the provisions of

SFAS No. 140, and as such, these trusts are not consolidated in the Corporation’s financial statements. The investors and the securitization trusts have no recourse to the Corporation’s assets. At March 31, 2005, these trusts held approximately $707 million in assets in the form of mortgage loans. Their liabilities in the form of debt principal due to investors approximated $701 million at the end of the first quarter of 2005. The Corporation retained servicing responsibilities and certain subordinated interests in these securitizations in the form of interest-only securities. The servicing rights and interest-only securities retained by the Corporation are recorded in the statement of condition at the lower of cost or market, and fair value, respectively.

CREDIT RISK MANAGEMENT AND LOAN QUALITY

NON-PERFORMING ASSETS

Non-performing assets consist of past-due loans that are no longer accruing interest, renegotiated loans and real estate property acquired through foreclosure. For a summary of the Corporation’s policy in placing loans on non-accrual status, refer to the section Allowance for Loan Losses included in Note 1 to the audited consolidated financial statements included in Popular, Inc.’s 2004 Annual Report.

A summary of non-performing assets by loan categories and related ratios is presented in Table I.

TABLE I
Non-Performing Assets



							Variance						Variance
							March 31, 2005						March 31, 2005
	March 31,			December 31,			vs.			March 31,			vs.
(Dollars in thousands)	2005			2004			December 31, 2004			2004			March 31, 2004

Commercial and construction	$	141,132		$	122,593		$	18,539		$	145,905		$	(4,773	)
Lease financing		3,034			3,665			(631	)		6,199			(3,165	)
Mortgage		401,775			395,749			6,026			368,100			33,675
Consumer		28,872			32,010			(3,138	)		34,021			(5,149	)

Total non-performing loans		574,813			554,017			20,796			554,225			20,588
Other real estate		64,775			59,717			5,058			55,224			9,551

Total non-performing assets	$	639,588		$	613,734		$	25,854		$	609,449		$	30,139

Accruing loans past-due 90 days or more	$	61,294		$	77,378			($16,084	)	$	70,754		$	(9,460	)


Non-performing assets to total loans held-in-portfolio		2.27	%		2.19	%					2.61	%
Non-performing assets to total assets		1.42			1.38						1.60

Non-performing commercial and construction loans represented 1.24% of that loan portfolio at March 31, 2005, compared with 1.68% at March 31, 2004, and 1.13% at December 31, 2004. The increase in non-performing commercial and construction loans since December 31, 2004 was associated principally with certain large relationships in the Corporation’s U.S. banking operations which became delinquent during the quarter. The Corporation continues monitoring these loans.

Non-performing mortgage loans represented 63% of total non-performing assets and 3.5% of mortgage loans held-in-portfolio at March 31, 2005, compared with 60% of total non-performing assets and 3.6% of mortgage loans held-in-portfolio at March 31, 2004. This increase of $34 million, or 9%, in non-performing mortgage loans from March 31, 2004 to the same date in 2005, was associated with higher delinquencies mainly in PFH. Non-performing mortgage loans represented 64% of total non-performing assets and 3.3% of mortgage loans held-in-portfolio at December 31, 2004. Historically, the Corporation has experienced a low level of losses in its mortgage portfolio, both in Puerto Rico and the U.S. mainland.

Non-performing consumer loans were 0.69% of consumer loans at March 31, 2005, compared with 0.99% at March 31, 2004 and 0.79% at December 31, 2004. The decline in the non-performing consumer loans to consumer loans ratio reflects a better credit quality mix, coupled with improved delinquency levels.

Non-performing financing leases represented 0.24% of the lease financing portfolio at March 31, 2005, compared with 0.56% at March 31, 2004, and 0.31% at December 31, 2004. The decline in non-performing leases was the result of lower delinquency levels.

In addition to the non-performing loans discussed earlier, there were $49 million of loans at March 31, 2005, which in management’s opinion are currently subject to potential future classification as non-performing, and therefore are considered impaired under SFAS No. 114. At December 31, 2004 and March 31, 2004, these potential problem loans approximated $32 million and $31 million, respectively.

Under the 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 March 31, 2005, adjusted non-performing assets would have been $611 million or 2.17% of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 82.10%. At December 31, 2004, adjusted non-performing assets would have been $582 million or 2.08% of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 83.73%. At March 31, 2004, adjusted non-performing assets would have been $575 million or 2.46% of loans held-in-portfolio and the allowance to non-performing loans would have been 80.19%.

ALLOWANCE FOR LOAN LOSSES

The methodology used to establish the allowance for loan losses is based on 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. SFAS No. 5 provides for the recognition of a loss allowance for a group of homogeneous loans when it is probable that a loss will be incurred and the amount can be reasonably estimated. As of March 31, 2005, there have been no significant changes in evaluation methods or assumptions from December 31, 2004 that have an effect on the Corporation’s methodology for assessing the adequacy of the allowance for loan losses.

Table J summarizes the movement in the allowance for loan losses and presents several loan loss statistics for the quarters ended March 31, 2005 and 2004.

The ratio of allowance for loan losses to loans reflects improvement in credit quality trends and a shift in the loan portfolio mix to include a greater proportion of real estate secured loans. 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 expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses.

The Corporation considers a 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. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. The allowance for impaired loans is part of the Corporation’s overall allowance for loan losses. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience adjusted for current conditions. Larger balance commercial loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen, it is consistently applied unless there is a significant change in the financial position of the borrower. For more information regarding the Corporation’s allowance for loan losses methodology refer to the Credit Risk and Loan Quality section in the Management’s Discussion and Analysis included in Popular, Inc.’s 2004 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, 2004.

TABLE J
Allowance for Loan Losses and Selected Loan Losses Statistics


(Dollars in thousands)	2005			2004			Variance

Balance at beginning of period	$	437,081		$	408,542		$	28,539
Allowance purchased		3,685			3,942			(257	)
Provision for loan losses		44,336			44,678			(342	)
Impact of change in reporting period *		1,586			—			1,586


		486,688			457,162			29,526


Losses charged to the allowance:
Commercial and construction		15,659			15,916			(257	)
Lease financing		5,123			4,932			191
Mortgage		10,143			6,599			3,544
Consumer		23,533			26,908			(3,375	)


Subtotal		54,458			54,355			103


Recoveries:
Commercial and construction		5,743			4,207			1,536
Lease financing		2,794			3,273			(479	)
Mortgage		133			276			(143	)
Consumer		7,322			6,580			742


Subtotal		15,992			14,336			1,656


Net loans charged-off:
Commercial and construction		9,916			11,709			(1,793	)
Lease financing		2,329			1,659			670
Mortgage		10,010			6,323			3,687
Consumer		16,211			20,328			(4,117	)


Subtotal		38,466			40,019			(1,553	)


Balance at end of period	$	448,222		$	417,143		$	31,079


Ratios:
Allowance for losses to loans held-in-portfolio		1.59	%		1.79	%
Allowance to non-performing assets		70.08			68.45
Allowance to non-performing loans		77.98			75.27
Non-performing assets to loans held-in-portfolio		2.27			2.61
Non-performing assets to total assets		1.42			1.60
Net charge-offs to average loans held-in-portfolio		0.55			0.70
Provision to net charge-offs		1.15	x		1.12	x
Net charge-offs earnings coverage **		6.40			4.90

* Represents the net effect of provision for loan losses, less net charge-offs corresponding to the impact of the change in accounting principle described in the overview section (change from fiscal to calendar reporting year for various subsidiaries).

** (Income before income tax and cumulative effect of accounting change plus provision for loan losses) divided by net charge-offs.

The following table shows the Corporation’s recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 at March 31, 2005, December 31, 2004 and March 31, 2004.


	March 31, 2005				December 31, 2004				March 31, 2004
	Recorded		Valuation		Recorded		Valuation		Recorded		Valuation
(In millions)	Investment		Allowance		Investment		Allowance		Investment		Allowance

Impaired loans:
Valuation allowance required	$	83.8	$	28.3	$	69.2	$	30.7	$	81.9	$	40.5
No valuation allowance required		59.5		—		44.1		—		48.0		—


Total impaired loans	$	143.3	$	28.3	$	113.3	$	30.7	$	129.9	$	40.5

Average impaired loans during the first quarter of 2005 and 2004 were $128 million and $133 million, respectively. The Corporation recognized interest income on impaired loans of $0.7 million and $0.8 million for the quarters ended March 31, 2005 and March 31, 2004.

Also, Table K presents annualized net charge-offs to average loans by loan category for the quarters ended March 31, 2005 and 2004.

TABLE K
Annualized Net Charge-offs to Average Loans Held-in-Portfolio


	Quarter ended March 31,
	2005			2004

Commercial and construction		0.35	%		0.55	%
Lease financing		0.72			0.61
Mortgage		0.35			0.26
Consumer		1.58			2.47

		0.55	%		0.70	%

The decrease in commercial and construction loans net charge-offs was mostly associated with collection efforts and an increase in the mix of the commercial loan portfolio to real estate secured loans, in part due to the loan portfolios acquired. Consumer net charge-offs declined primarily as a result of lower delinquency levels, due to better portfolio credit quality supported in part by more rigorous underwriting standards and collection strategies. The increase in mortgage loans net charge-offs was primarily associated with Popular Financial Holdings. Mortgage loans net charge-offs to average mortgage loans held-in-portfolio at PFH were 0.50% for the quarter ended March 31, 2005, compared with 0.33% in the first quarter of 2004. PFH has established more dynamic foreclosure procedures.

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 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 to identify and manage its interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model, which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, 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.

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. Further, 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 March 31, 2005, the Corporation’s net interest income for the next twelve months is estimated to decrease by $14.6 million on 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 $0.1 million. Both hypothetical rate scenarios consider the gradual change to be achieved during a twelve-month period from the prevailing rates at March 31, 2005. 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 Corporation has not experienced a significant change in its involvement in derivative activities since December 31, 2004.

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 March 31, 2005, the Corporation had approximately $36 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive income, compared with $40 million at March 31, 2004 and $36 million at December 31, 2004.

The Corporation had 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.” The cumulative inflation in the Dominican Republic for the 36 months ended 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 are 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 quarter ended March 31, 2005, approximately $864,000 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 gains relate to improvement in the Dominican peso’s exchange rate to the U.S. dollar from $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, to $27.65 at March 31, 2005. 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 million. The cumulative inflation rate in the Dominican Republic over a 3-year period approximated 103.4 percent at March 31, 2005.

Management understands that there have been no significant changes in market risk compared with the disclosures in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004.

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. The Corporation has established policies and procedures to assist Popular in remaining sufficiently liquid to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for unexpected events.

The Corporation has 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 Federal Reserve Bank of New York. 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 during which 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 March 31, 2005 and December 31, 2004 were as follows:



					% increase
					(decrease) from			% of total assets			% of total assets
	March 31,		December 31,		December 31, 2004			March 31,			December 31,
(Dollars in millions)	2005		2004		to March 31, 2005			2005			2004

Non-interest bearing deposits	$	4,257	$	4,173		2.0	%		9.4	%		9.4	%
Interest-bearing core deposits		13,301		12,835		3.6			29.5			28.9
Other interest-bearing deposits		4,171		3,585		16.3			9.2			8.1
Federal funds and repurchase agreements		7,765		6,437		20.6			17.2			14.5
Other short-term borrowings		2,043		3,140		(34.9	)		4.5			7.1
Notes payable and subordinated notes		9,788		10,306		(5.0	)		21.7			23.2
Others		778		821		(5.2	)		1.7			1.8
Stockholders’ equity		3,065		3,105		(1.3	)		6.8			7.0

The Corporation’s core deposits, which consist of demand, savings, money markets, and time deposits under $100 thousand, constituted 81% of total deposits at March 31, 2005. Certificates of deposit with denominations of $100 thousand and over at March 31, 2005 represented 19% of total deposits. Their distribution by maturity was as follows:


(In thousands)

3 months or less	$	1,394,096
3 to 6 months		651,442
6 to 12 months		752,896
Over 12 months		1,372,407

	$	4,170,841

The Corporation diversifies the sources and the maturities of borrowings in order to avoid undue reliance on any single source and maintain an orderly volume of borrowings maturing in the future. The Corporation has established borrowing relationships with the Federal Home Loan Bank (FHLB), the Federal Reserve Bank of New York and other correspondent banks, which further support and enhance liquidity.

As of March 31, 2005, there have been no significant changes in the Corporation’s funding activities and strategy disclosed in the Management Discussion and Analysis included in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004. Also, there have been no significant changes in the Corporation’s aggregate contractual obligations since the end of 2004. Refer to note 8 to the unaudited consolidated financial statements for the Corporation’s involvement in certain commitments at March 31, 2005.

Risks to Liquidity

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. 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.

The Corporation and BPPR’s debt ratings at March 31, 2005 were as follows:


	Popular, Inc.		BPPR
	Short-term	Long-term	Short-term	Long-term
	debt	debt	debt	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 withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.

Some of the Corporation’s borrowings and deposits are subject to “rating triggers”, contractual provisions that accelerate the maturity of the underlying obligations in the case of a change in rating. Therefore, the need for the Corporation to raise funding in the marketplace could increase more than usual in the case of a rating downgrade. The amount of obligations subject to rating triggers that could accelerate the maturity of the underlying obligations was $232 million at March 31, 2005.

In the course of borrowing from institutional lenders, the Corporation has entered into contractual agreements to maintain certain levels of debt, capital and asset quality, among other financial covenants. If the Corporation were to fail to comply with those agreements, it may result in an event of default. Such failure may accelerate the repayment of the related borrowings. An event of default could also affect the ability of the Corporation to raise new funds or renew maturing borrowings. The Corporation is currently in full compliance with all financial covenants in effect and expects to remain so in the future. At March 31, 2005, the Corporation had $1.1 billion in outstanding obligations subject to covenants, including those which are subject to rating triggers and those outstanding under the commercial paper program.

Management believes that there have been no significant changes in liquidity risk compared with the disclosures in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004.

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.

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 March 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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 would not have a material adverse effect on the financial position and results of operations of the Corporation.

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 March 31, 2005 under the 2004 Omnibus Incentive Plan and under the deferred compensation plan of Popular Securities, Inc.

Issuer Purchases of Equity Securities


Not in thousands
					Total Number of Shares		Maximum Number of Shares
	Total Number of		Average Price Paid		Purchased as Part of Publicly		that May Yet be Purchased
Period	Shares Purchased		per Share		Announced Plans or Programs		Under the Plans or Programs

January 1 – January 31		111,933	$	27.77		111,933		9,850,703
February 1 – February 28		61,873		27.20		61,873		9,083,168
March 1 – March 31 (1)		57,306		25.59		—		—

Total March 31, 2005		231,112	$	27.08		173,806		9,083,168

(1)

The shares repurchased in March are the result of the deferred compensation plan of Popular Securities, Inc.

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.


	Page
Part I — Financial Information

Item 1. Financial Statements

Unaudited Consolidated Statements of Condition as of March 31, 2005, December 31, 2004 and March 31, 2004		4

Unaudited Consolidated Statements of Income for the quarters ended March 31, 2005 and 2004		5

Unaudited Consolidated Statements of Change in Stockholders’ Equity for the quarters ended March 31, 2005 and 2004		6

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2005 and 2004		7

Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2005 and 2004		8

Notes to Unaudited Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Result of Operations		41

Item 3. Quantitative and Qualitative Disclosures about Market Risk		55

Item 4. Controls and Procedures		58

Part II-Other Information

Item 1. Legal Proceedings		59

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		59

Item 6. Exhibits		59

Signatures		60
EX-12.1 COMPUTATION OF THE RATIOS OF EARNINGS
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

	–	Commercial banking represents the Corporation’s banking operations in Puerto Rico 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.

	–	Popular Cash Express, Inc.;

	–	Popular Financial Holdings, Inc., including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Financial Services, LLC, and Popular Warehouse Lending, LLC;

	–	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.

	-	The increase in net interest income was associated with strong growth in earning assets, partly due to the recent acquisitions of Quaker City Bank (“Quaker City”) in September 2004 and Kislak Financial Corporation (“Kislak”) in January 2005. The positive variance was partially offset by the effects of the rapid increase in short-term rates and the flattening of the yield curve which has compressed Popular’s net interest margin. The net interest yield for the quarter ended March 31, 2005, on a taxable equivalent basis, was 3.58%, compared with 4.12% for the quarter ended March 31, 2004.

	-	Credit quality trends and a greater proportion of real estate secured loans contributed to the slight reduction in the provision for loan losses for the quarter ended March 31, 2005, when compared with the same quarter in the previous year. Refer to the Credit Risk Management and Loan Quality section, including Tables I, J and K, for a more detailed analysis of the allowance for loan losses, net charge-offs, non-performing assets and credit quality statistics.

	-	The increase in non-interest income of $60 million, or 42%, for the quarter ended March 31, 2005, compared with the same period in 2004, was mostly associated with the aforementioned gains on the sale of investment securities, which contributed with $38 million or 63% on the increase in non-interest

		income. Other categories of non-interest income that contributed to the increase included service charges on deposit accounts, other service fees, trading account profits and gains on sale of loans.

	-	Operating expenses for the quarter ended March 31, 2005 rose $37.1 million, or 13%, compared with the first quarter of 2004, principally in the categories of personnel costs, professional fees, business promotion, net occupancy, equipment expenses and other general operating expenses. The increase included expenses associated with the operations of Kislak and Quaker City.

	-	Total loans at March 31, 2005 reflected a $0.7 billion, or 2% growth, from December 31, 2004. The increase in loans was driven primarily by loans acquired from Kislak, which approximated $0.6 billion at the acquisition date, excluding purchase accounting entries. Loan growth, which in past years has been mostly attained in mortgage loans, is now shifting toward commercial and consumer loans. Although mortgage loan demand continued strong, period end balances at March 31, 2005 in this loan category reflected a decline compared with December 31, 2004, principally as a result of a securitization transaction at PFH in which the company surrendered control over the mortgage loans that were securitized and sold, recognizing sale accounting. For more detailed information on lending activities, refer to the Balance Sheet Comments and Off-Balance Sheet Activities sections of this report.

	-	Borrowed funds at March 31, 2005 decreased slightly by $0.3 billion from $19.9 billion at December 31, 2004. Asset growth from December 31, 2004 to March 31, 2005 was funded principally through deposits, which increased by $1.1 billion, or 6% from the end of 2004, reaching $21.7 billion at March 31, 2005. Kislak contributed approximately $0.7 billion in deposits at its acquisition date, excluding purchase accounting entries. For more detailed information on borrowings and deposits refer to the Balance Sheet Comments section of this report.

	-	At March 31, 2005, stockholders’ equity remained stable at $3.1 billion, compared with December 31, 2004. The increase in equity due to earnings retention approximating $117 million since December 31, 2004 was principally offset by an unfavorable change in the fair value of securities classified as available-for-sale of approximately $165 million, net of tax, which net unrealized losses are recorded as part of accumulated other comprehensive (loss) income in the equity section. The net unrealized losses in the available-for-sale portfolio at March 31, 2005 were mostly related to market fluctuations in U.S. Agencies and Treasury securities associated with interest rates. The Corporation’s market capitalization at March 31, 2005 was $6.5 billion, compared with $5.7 billion at March 31, 2004 and $7.7 billion at December 31, 2004.

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

	-	Subsequent to quarter end, in April 2005, the Corporation and Grupo Cuscatlán, through Corporación UBC Internacional, S.A., signed an agreement for the acquisition by Popular, Inc. of a 19.99% equity participation in UBCI, Grupo Cuscatlán’s holding company. The investment by Popular approximates $125 million. Grupo Cuscatlán is a financial services corporation based in Central America with more than $4.4 billion in assets, and a distribution network of 188 agencies. Grupo Cuscatlán has operations in El Salvador, Guatemala, Costa Rica, Honduras, Panama, British Virgin Islands, Montserrat and Bahamas. This agreement advances Popular, Inc.’s objectives to offer high-quality technological services and participate in the economic growth of the Central American region.

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


Date: May 9, 2005	By:	/s/ Jorge A. Junquera

		Jorge A. Junquera
		Senior Executive Vice President &
		Chief Financial Officer


Date: May 9, 2005	By:	/s/ Ileana González Quevedo

		Ileana González Quevedo
		Senior Vice President & Corporate Comptroller