POPULAR, INC.
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2006
Commission File Number: 000-13818
POPULAR, INC.
(Exact name of registrant as specified in its charter)
     
Puerto Rico   66-0416582
     
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer Identification Number)
     
Popular Center Building
209 Muñoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico
  00918
     
(Address of principal executive offices)   (Zip code)
(787) 765-9800
 
(Registrant’s telephone number, including area code)
NOT APPLICABLE
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     þ Yes               o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ           Accelerated filer o           Non-accelerated filer  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     o Yes               þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value, 278,362,258 shares outstanding as of April 28, 2006.
 
 

 


Table of Contents

POPULAR, INC.
INDEX
         
    Page  
Part I — Financial Information
       
 
       
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    8  
 
       
    9  
 
       
    47  
 
       
    67  
 
       
    71  
 
       
       
 
       
    71  
 
       
    71  
 
       
    72  
 
       
    72  
 
    73  
 EX-12.1 COMPUTATION OF THE RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
 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

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

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ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
                         
    March 31,   December 31,   March 31,
(In thousands, except share information)   2006   2005   2005
 
ASSETS
                       
Cash and due from banks
  $ 860,606     $ 906,397     $ 812,481  
 
Money market investments:
                       
Federal funds sold
    488,200       186,000       85,983  
Securities purchased under agreements to resell
    491,710       554,770       629,606  
Time deposits with other banks
    10,005       8,653       7,686  
 
 
    989,915       749,423       723,275  
 
Investment securities available-for-sale, at fair value:
                       
Pledged securities with creditors’ right to repledge
    5,934,017       6,110,179       4,722,576  
Other investment securities available-for-sale
    5,576,651       5,606,407       6,549,304  
Investment securities held-to-maturity, at amortized cost
    344,385       153,104       179,073  
Other investment securities, at lower of cost or realizable value
    304,609       319,103       308,781  
Trading account securities, at fair value:
                       
Pledged securities with creditors’ right to repledge
    365,096       343,659       259,153  
Other trading securities
    144,516       175,679       111,561  
Loans held-for-sale, at lower of cost or market value
    535,719       699,181       1,227,329  
 
Loans held-in-portfolio:
                       
Loans held-in-portfolio pledged with creditors’ right to repledge
    21,210       208,774       624,701  
Other loans held-in-portfolio
    31,174,832       31,099,865       27,835,290  
Less — Unearned income
    301,376       297,613       259,294  
Allowance for loan losses
    468,321       461,707       448,222  
 
 
    30,426,345       30,549,319       27,752,475  
 
Premises and equipment, net
    600,792       596,571       563,542  
Other real estate
    82,352       79,008       64,775  
Accrued income receivable
    274,620       245,646       247,169  
Other assets
    1,388,662       1,325,800       1,079,606  
Goodwill
    655,743       653,984       519,915  
Other intangible assets
    107,675       110,208       46,823  
 
 
  $ 48,591,703     $ 48,623,668     $ 45,167,838  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Non-interest bearing
  $ 4,453,965     $ 3,958,392     $ 4,257,121  
Interest bearing
    18,957,847       18,679,613       17,471,556  
 
 
    23,411,812       22,638,005       21,728,677  
Federal funds purchased and assets sold under agreements to repurchase
    8,315,380       8,702,461       7,765,064  
Other short-term borrowings
    2,645,521       2,700,261       2,043,391  
Notes payable
    9,933,218       9,893,577       9,663,008  
Subordinated notes
                125,000  
Other liabilities
    798,102       1,240,002       777,596  
 
 
    45,104,033       45,174,306       42,102,736  
 
Commitments and contingencies (See Note 9)
                       
 
Minority interest in consolidated subsidiaries
    113       115       102  
 
Stockholders’ equity:
                       
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 shares issued and outstanding in all periods presented
    186,875       186,875       186,875  
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 291,497,120 shares issued (December 31, 2005 — 289,407,190; March 31, 2005 — 280,200,216) and 278,072,323 shares outstanding (December 31, 2005 — 275,955,391; March 31, 2005 — 266,795,924)
    1,748,983       1,736,443       1,681,201  
Surplus
    486,863       452,398       283,419  
Retained earnings
    1,526,634       1,456,612       1,246,999  
Accumulated other comprehensive loss, net of tax of ($82,657) (December 31, 2005 — ($58,292); March 31, 2005 — ($37,665))
    (255,265 )     (176,000 )     (127,644 )
Treasury stock — at cost, 13,424,797 shares (December 31, 2005 — 13,451,799; March 31, 2005 — 13,404,292)
    (206,533 )     (207,081 )     (205,850 )
 
 
    3,487,557       3,449,247       3,065,000  
 
 
  $ 48,591,703     $ 48,623,668     $ 45,167,838  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
                 
    Quarter ended
    March 31,
(In thousands, except per share information)   2006   2005
 
INTEREST INCOME:
               
Loans
  $ 591,835     $ 505,321  
Money market investments
    7,982       7,534  
Investment securities
    133,533       114,367  
Trading account securities
    8,860       6,058  
 
 
    742,210       633,280  
 
INTEREST EXPENSE:
               
Deposits
    124,411       97,056  
Short-term borrowings
    124,803       65,803  
Long-term debt
    133,232       113,135  
 
 
    382,446       275,994  
 
Net interest income
    359,764       357,286  
Provision for loan losses
    48,947       44,336  
 
Net interest income after provision for loan losses
    310,817       312,950  
Service charges on deposit accounts
    47,469       43,692  
Other service fees (See Note 10)
    80,346       79,015  
Net gain on sale and valuation adjustment of investment securities
    12,340       51,250  
Trading account profit
    11,475       3,763  
Gain on sale of loans
    47,261       9,816  
Other operating income
    29,942       18,053  
 
 
    539,650       518,539  
 
OPERATING EXPENSES:
               
Personnel costs:
               
Salaries
    135,532       115,542  
Pension, profit sharing and other benefits
    42,520       40,374  
 
 
    178,052       155,916  
Net occupancy expenses
    28,638       24,814  
Equipment expenses
    33,197       28,614  
Other taxes
    10,241       9,255  
Professional fees
    37,078       27,583  
Communications
    17,300       15,677  
Business promotion
    32,823       20,253  
Printing and supplies
    4,632       4,537  
Other operating expenses
    28,831       27,943  
Impact of change in fiscal period of certain subsidiaries
    9,741        
Amortization of intangibles
    2,721       2,242  
 
 
    383,254       316,834  
 
Income before income tax and cumulative effect of accounting change
    156,396       201,705  
Income tax
    37,893       42,433  
 
Income before cumulative effect of accounting change
    118,503       159,272  
Cumulative effect of accounting change, net of tax
          3,607  
 
NET INCOME
  $ 118,503     $ 162,879  
 
NET INCOME APPLICABLE TO COMMON STOCK
  $ 115,525     $ 159,901  
 
BASIC EARNINGS PER COMMON SHARE (EPS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
  $ 0.42     $ 0.59  
 
DILUTED EPS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
  $ 0.42     $ 0.58  
 
BASIC AND DILUTED EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE
  $ 0.42     $ 0.60  
 
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.16     $ 0.16  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
                 
    Quarter ended
    March 31,
(In thousands)   2006   2005
 
Preferred stock:
               
Balance at beginning and end of year
  $ 186,875     $ 186,875  
 
Common stock:
               
Balance at beginning of year
    1,736,443       1,680,096  
Common stock issued under the Dividend Reinvestment Plan
    1,184       1,079  
Issuance of common stock
    11,312        
Stock options exercised
    44       26  
 
Balance at end of period
    1,748,983       1,681,201  
 
Surplus:
               
Balance at beginning of year
    452,398       278,840  
Common stock issued under the Dividend Reinvestment Plan
    2,789       3,775  
Issuance of common stock
    28,281        
Issuance cost of common stock
    1,527        
Stock options expense on unexercised options
    768       724  
Stock options exercised
    100       80  
Transfer from retained earnings
    1,000        
 
Balance at end of period
    486,863       283,419  
 
Retained earnings:
               
Balance at beginning of year
    1,456,612       1,129,793  
Net income
    118,503       162,879  
Cash dividends declared on common stock
    (44,503 )     (42,695 )
Cash dividends declared on preferred stock
    (2,978 )     (2,978 )
Transfer to surplus
    (1,000 )      
 
Balance at end of period
    1,526,634       1,246,999  
 
Accumulated other comprehensive loss:
               
Balance at beginning of year
    (176,000 )     35,454  
Other comprehensive loss, net of tax
    (79,265 )     (163,098 )
 
Balance at end of period
    (255,265 )     (127,644 )
 
Treasury stock — at cost:
               
Balance at beginning of year
    (207,081 )     (206,437 )
Reissuance of common stock
    548       587  
 
Balance at end of period
    (206,533 )     (205,850 )
 
Total stockholders’ equity
  $ 3,487,557     $ 3,065,000  
 
Disclosure of changes in number of shares:
                         
    March 31,   December 31,   March 31,
    2006   2005   2005
 
Preferred Stock:
                       
Balance at beginning and end of period
    7,475,000       7,475,000       7,475,000  
 
Common Stock — Issued:
                       
Balance at beginning of year
    289,407,190       280,016,007       280,016,007  
Issued under the Dividend Reinvestment Plan
    197,196       728,705       179,867  
Issuance of common stock
    1,885,380       8,614,620        
Stock options exercised
    7,354       47,858       4,342  
 
Balance at end of period
    291,497,120       289,407,190       280,200,216  
 
Treasury stock
    (13,424,797 )     (13,451,799 )     (13,404,292 )
 
Common Stock — Outstanding
    278,072,323       275,955,391       266,795,924  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
                 
    Quarter ended
    March 31,
(In thousands)   2006   2005
 
Net income
  $ 118,503     $ 162,879  
 
Other comprehensive loss, before tax:
               
Foreign currency translation adjustment
    (686 )     (246 )
Unrealized holding losses on securities available-for-sale arising during the period
    (91,965 )     (159,719 )
Reclassification adjustment for gains included in net income
    (12,340 )     (50,727 )
Net gain on cash flow hedges
    1,200       2,538  
Reclassification adjustment for losses included in net income
    161       611  
 
 
    (103,630 )     (207,543 )
Income tax benefit
    24,365       44,445  
 
Total other comprehensive loss, net of tax
    (79,265 )     (163,098 )
 
Comprehensive income (loss)
  $ 39,238     ($ 219 )
 
Disclosure of accumulated other comprehensive loss:
                         
    March 31,   December 31,   March 31,
(In thousands)   2006   2005   2005
 
Foreign currency translation adjustment
  ($ 37,001 )   ($ 36,315 )   ($ 35,776 )
 
Minimum pension liability adjustment
    (2,354 )     (2,354 )      
Tax effect
    918       918        
 
Net of tax amount
    (1,436 )     (1,436 )      
 
Unrealized losses on securities available-for-sale
    (299,995 )     (195,690 )     (131,941 )
Tax effect
    82,162       57,297       38,373  
 
Net of tax amount
    (217,833 )     (138,393 )     (93,568 )
 
Unrealized gains (losses) on cash flows hedges
    1,185       (176 )     2,042  
Tax effect
    (423 )     77       (708 )
 
Net of tax amount
    762       (99 )     1,334  
 
Cumulative effect of accounting change, net of tax
    243       243       366  
 
Accumulated other comprehensive loss, net of tax
  ($ 255,265 )   ($ 176,000 )   ($ 127,644 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
                 
    Quarter ended March 31,
(In thousands)   2006   2005
 
Cash flows from operating activities:
               
Net income
  $ 118,503     $ 162,879  
Less: Cumulative effect of accounting change, net of tax
          3,607  
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
    (6,129 )      
 
Net income before cumulative effect of accounting change and change in fiscal period
    124,632       159,272  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization of premises and equipment
    21,437       20,010  
Provision for loan losses
    48,947       44,336  
Amortization of intangibles
    2,721       2,242  
Amortization of servicing assets
    13,501       3,421  
Net gain on sale and valuation adjustment of investment securities
    (12,340 )     (51,250 )
Net gain on disposition of premises and equipment
    (1,512 )     (1,663 )
Net gain on sale of loans
    (47,261 )     (9,816 )
Net amortization of premiums and accretion of discounts on investments
    7,012       10,597  
Net amortization of premiums and deferred loan origination fees and costs
    31,887       28,728  
Earnings from investments under the equity method
    (4,261 )     (1,969 )
Stock options expense
    800       746  
Net disbursements on loans held-for-sale
    (2,046,227 )     (800,476 )
Acquisitions of loans held-for-sale
    (166,540 )     (563,223 )
Proceeds from sale of loans held-for-sale
    2,166,951       913,688  
Net decrease in trading securities
    677,764       19,097  
Net increase in accrued income receivable
    (30,589 )     (32,331 )
Net decrease in other assets
    19,470       46,405  
Net increase in interest payable
    23,849       20,084  
Net increase in deferred income tax
    (1,751 )     (4,478 )
Net increase in postretirement benefit obligation
    1,585       1,414  
Net increase (decrease) in other liabilities
    3,286       (44,652 )
 
Total adjustments
    708,729       (399,090 )
 
Net cash provided by (used in) operating activities
    833,361       (239,818 )
 
Cash flows from investing activities:
               
Net (increase) decrease in money market investments
    (240,350 )     186,209  
Purchases of investment securities:
               
Available-for-sale
    (175,975 )     (674,022 )
Held-to-maturity
    (7,747,198 )     (7,671,759 )
Other
    (10,580 )     (28,204 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
               
Available-for-sale
    247,055       586,877  
Held-to-maturity
    7,556,192       7,851,301  
Other
    25,074       21,863  
Proceeds from sale of investment securities available-for-sale
    43,894       99,944  
Net repayments on loans
    193,009       842,978  
Proceeds from sale of loans
    73,038       80,246  
Acquisition of loan portfolios
    (141,658 )     (660,023 )
Assets acquired, net of cash
    (218 )     (173,666 )
Acquisition of premises and equipment
    (38,799 )     (38,770 )
Proceeds from sale of premises and equipment
    14,452       10,505  
 
Net cash (used in) provided investing activities
    (202,064 )     433,479  
 
Cash flows from financing activities:
               
Net increase in deposits
    769,477       465,576  
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase
    (500,232 )     1,290,492  
Net decrease in other short-term borrowings
    (161,597 )     (1,108,510 )
Payments of notes payable
    (900,117 )     (844,936 )
Proceeds from issuance of notes payable
    106,252       142,009  
Dividends paid
    (45,768 )     (45,636 )
Proceeds from issuance of common stock
    42,983       4,938  
 
Net cash used in financing activities
    (689,002 )     (96,067 )
 
Cash effect of change in fiscal period of certain subsidiaries and change in accounting principle
    11,914       (1,572 )
 
Net (decrease) increase in cash and due from banks
    (45,791 )     96,022  
Cash and due from banks at beginning of period
    906,397       716,459  
 
Cash and due from banks at end of period
  $ 860,606     $ 812,481  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Notes to Unaudited Consolidated Financial Statements
Note 1 — Nature of operations and basis of presentation
Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending and insurance services through specialized subsidiaries. In the United States, the Corporation provides complete financial solutions to all the communities it serves through branches of Banco Popular North America (“BPNA”) in California, Texas, Illinois, New York, New Jersey and Florida. The Corporation’s consumer finance subsidiary in the United States, Popular Financial Holdings, Inc. (“PFH”), offers mortgage and personal loans, and also maintains a substantial wholesale loan brokerage network, a warehouse lending division and a loan servicing unit. PFH, through its subsidiary E-LOAN, Inc. (“E-LOAN”), provides online consumer direct lending to obtain mortgage, auto and home equity loans. The Corporation strives to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. EVERTEC, Inc. (“EVERTEC”), the Corporation’s main subsidiary in this business segment, is the leading provider of financial transaction processing and information technology solutions in Puerto Rico and the Caribbean. With offices in San Juan, Caracas, Santo Domingo, and Miami, EVERTEC has presence in 11 Latin American countries. Note 17 to the consolidated financial statements presents further information about the Corporation’s business segments.
The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain reclassifications have been made to the prior period unaudited consolidated financial statements to conform to the 2006 presentation.
In the normal course of business, except for the Corporation’s banks and the parent holding company, the Corporation utilized a one-month lag in the consolidation of the financial results of its other subsidiaries (the “non-banking subsidiaries”). As previously described in the Corporation’s 2005 Annual Report on Form 10-K (the “2005 Annual Report”) for the year ended December 31, 2005, in that year, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31st calendar period, primarily as part of a strategic plan to put in place a corporate-wide integrated financial system and to facilitate the consolidation process. In 2005, the impact of this change in net income was included as a cumulative effect of accounting change in the Corporation’s consolidated financial results for the first quarter, and corresponded to the financial results for the month of December 2004 of the non-banking subsidiaries which implemented the change in the first reporting period of 2005. In the first quarter of 2006, the Corporation completed the second phase of the two-year plan, as such the financial results for the month of December 2005 of PFH (excluding E-LOAN which already had a December 31st year-end closing), Popular FS, Popular Securities and Popular North America (holding company only) were included in a separate line within operating expenses in the consolidated statement of operations for the quarter ended March 31, 2006. The financial impact amounted to a loss of $9.7 million (before tax). After tax, this change resulted in a net loss of $6.1 million, which is included in the quarterly results for the period ended March 31, 2006. As of the end of the first quarter of 2006, all subsidiaries of the Corporation have aligned their year-end closings to December 31st, similar to the parent holding company. There were no unadjusted significant intervening events resulting from the difference in fiscal periods, which management believed could have materially affected the financial position or results of operations of the Corporation for the periods presented.
The statement of condition data as of December 31, 2005 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of March 31, 2006, December 31, 2005 and March 31, 2005 pursuant to the rules and regulations of the

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Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2005, included in the Corporation’s 2005 Annual Report.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive (loss) income, except for highly inflationary environments in which the effects are included in other operating income, as described below.
The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. At March 31, 2006, the Corporation had approximately $37 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive (loss) income (December 31, 2005 — $36 million; March 31, 2005 — $36 million).
The Corporation has been monitoring the inflation levels in the Dominican Republic to evaluate whether it still meets the “highly inflationary economy” test prescribed by SFAS No. 52, “Foreign Currency Translation.” Such statement defines highly inflationary as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy are remeasured as if the functional currency were the reporting currency. Accordingly, since June 2004, the Corporation’s interests in the Dominican Republic have been remeasured into the U.S. dollar. Although as of March 31, 2006, the cumulative inflation rate in the Dominican Republic over a 3-year period was below 100 percent, approximating 86% at quarter-end, the Corporation continued to apply the remeasurement accounting as of March 31, 2006 based on the accounting guidance obtained. The International Practices Task Force (“IPTF”) of the SEC Regulations Committee of the American Institute of Certified Public Accountants had concluded that the Dominican Republic was considered highly inflationary as of December 31, 2005, and concluded that such country would not cease being regarded as highly inflationary for the first quarter of 2006. The Dominican peso’s exchange rate to the U.S. dollar was $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, compared with $33.14 at December 31, 2005 and $33.50 at March 31, 2006. During the quarter ended March 31, 2006, approximately $197 thousand in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive (loss) income. Net remeasurement gains totaled $864 thousand for the quarter ended March 31, 2005. 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 $32 million.
Subsequent events
In April 2006, the Corporation issued $450 million in medium-term notes maturing in 2009. Of the total amount issued, $250 million bear interest at a fixed rate of 5.65% and $200 million bear interest at floating rates tied to the 3-month LIBOR plus a spread of 40 basis points, which reset quarterly. The Corporation simultaneously entered into an interest swap contract to convert the floating rate notes to fixed rate notes. The cash inflows were used to substitute short-term borrowings and finance operations. Under the swap arrangement, the Corporation pays a fixed rate equal to 5.58%.
On April 28, 2006, Popular, Inc. and Grupo Cuscatlán, through Corporación UBC International, S.A. (“UBCI”), announced that the agreement subscribed on April 24, 2005 for the acquisition by Popular, Inc. of a 19.99% equity participation in UBCI, Grupo Cuscatlán’s holding company, will not be completed. Due to the time lapsed and changes in economic conditions, both parties could not reach a final consensus before the deadline set in the original agreement.
On May 1, 2006, as a result of a lack of current budgetary funds and lack of legislative authorization for the Government of Puerto Rico to obtain a loan, the Government closed a number of government agencies for the remainder of its current fiscal year, which ends on June 30, 2006. Approximately 95,000 public sector employees have been placed on unpaid leave until the budgetary crisis is resolved. Furthermore, on May 8, 2006, a nationally recognized rating agency downgraded the Government of Puerto Rico’s debt obligations. Refer to Item 1A. Risk Factors included in Part II - Other Information on this Form 10-Q for further information on these events.

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Note 2 — Recent Accounting Developments
SFAS No. 123-R “Share-Based Payments”
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 of transactions in which an entity obtains goods or services in share-based payment transactions. SFAS No. 123-R requires companies to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting, which APB 25 allowed and resulted in no expense for many awards of stock options for which the exercise price of the option did not exceed the price of the underlying stock at the grant date. In addition, SFAS No. 123-R retains the modified grant date model from SFAS No. 123. Under that model, compensation cost is measured at the grant date fair value of the award and is adjusted to reflect anticipated forfeitures and the expected outcome of certain conditions. The fair value of an award is not remeasured after its initial estimation on the grant date, except in the case of a liability award or if the award is modified, based on specific criteria included in SFAS No. 123-R. Also, SFAS 123-R clarifies the financial impact of vesting and/or acceleration clauses due at retirement. Under the revised SFAS, the expense should be fully accrued for any employee that is eligible to retire regardless of the actual retirement experience of the employer. The Corporation prospectively applied SFAS No. 123-R to its financial statements as of January 1, 2006. The impact of this adoption was not significant for the results of the quarter. Refer to Note 11 to these consolidated financial statements for required disclosures and further information on the impact of the adoption of this accounting pronouncement.
SFAS No. 153 “Exchanges of Nonmonetary Assets”
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred; or b) the entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this Statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows for the quarter ended March 31, 2006.
SFAS No. 154 “Accounting Changes and Error Corrections”
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Statement 154 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board toward development of a single set of high-quality accounting standards. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. APB Opinion No. 20 previously required that such a change be reported as a change in accounting principle. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. The adoption of SFAS No. 154 did not have a significant impact on the statement of condition or results of operations for the quarter ended March 31, 2006.

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SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155:
- Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
- Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133;
- Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;
- Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives;
- Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this SFAS 155 may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS No. 155. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings. An entity should separately disclose the gross gains and losses that make up the cumulative-effect adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated. The Corporation elected to adopt SFAS No. 155 commencing in January 2007.
SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140”
This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations:
a. A transfer of the servicer’s financial assets that meets the requirements for sale accounting
b. A transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”
c. An acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates.
2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:
a. Amortization method—Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.
b. Fair value measurement method—Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur.
4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as

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offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.
5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.
The Corporation elected to adopt SFAS No. 156 commencing in January 2007. The Corporation is currently evaluating the impact that this accounting pronouncement may have in its financial condition and results of operations, subject to the measurement methods, class definitions and other determinations that need to be made upon adoption.
Note 3 — Restrictions on cash and due from banks and highly liquid securities
The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or with a correspondent bank. Those required average reserve balances were approximately $607 million at March 31, 2006 (December 31, 2005 — $584 million; March 31, 2005 — $555 million). Cash and due from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances.
In compliance with rules and regulations of the Securities and Exchange Commission, at March 31, 2006, the Corporation had securities with a market value of $446 thousand (December 31, 2005 — $549 thousand; March 31, 2005 — $699 thousand) segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.
As required by the Puerto Rico International Banking Center Law, at March 31, 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally split for the two IBEs, which were considered restricted assets (December 31, 2005 — $600 thousand; March 31, 2005 — $600 thousand).
As part of a line of credit facility with a financial institution, at March 31, 2006, the Corporation maintained restricted cash of $1.9 million as collateral for the line of credit (December 31, 2005 — $2.4 million). The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.

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Note 4 — Pledged Assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
                         
    March 31,   December 31,   March 31,
(In thousands)   2006   2005   2005
 
Investment securities available-for-sale
  $ 2,648,586     $ 2,566,668     $ 2,969,823  
Investment securities held-to-maturity
    810       953       1,258  
Loans
    11,368,056       11,835,842       10,464,104  
 
 
  $ 14,017,452     $ 14,403,463     $ 13,435,185  
 
Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.
Note 5 — Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of March 31, 2006, December 31, 2005 and March 31, 2005 were as follows:
                                 
    AS OF MARCH 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 526,258           $ 39,042     $ 487,216  
Obligations of U.S. Government sponsored entities
    7,814,649             222,747       7,591,902  
Obligations of Puerto Rico, States and political subdivisions
    108,047     $ 499       1,892       106,654  
Collateralized mortgage obligations
    1,868,088       6,944       19,374       1,855,658  
Mortgage-backed securities
    1,350,993       4,510       36,249       1,319,254  
Equity securities
    59,511       7,030       199       66,342  
Others
    82,874       1,109       341       83,642  
 
 
  $ 11,810,420     $ 20,092     $ 319,844     $ 11,510,668  
 

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    AS OF DECEMBER 31, 2005
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 528,378     $ 14     $ 24,067     $ 504,325  
Obligations of U.S. Government sponsored entities
    7,867,613       540       157,477       7,710,676  
Obligations of Puerto Rico, States and political subdivisions
    107,864       631       1,841       106,654  
Collateralized mortgage obligations
    1,854,843       8,209       14,289       1,848,763  
Mortgage-backed securities
    1,396,246       6,251       28,755       1,373,742  
Equity securities
    68,521       15,120       1,107       82,534  
Others
    88,568       1,324             89,892  
 
 
  $ 11,912,033     $ 32,089     $ 227,536     $ 11,716,586  
 
                                 
    AS OF MARCH 31, 2005
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 555,338           $ 31,359     $ 523,979  
Obligations of U.S. Government sponsored entities
    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  
 
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, 2006, December 31, 2005 and March 31, 2005:

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    AS OF MARCH 31, 2006
    Less than 12 Months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 29,259     $ 323     $ 28,936  
Obligations of U.S. Government sponsored entities
    4,249,522       118,785       4,130,737  
Obligations of Puerto Rico, States and political subdivisions
    15,572       77       15,495  
Collateralized mortgage obligations
    651,405       7,333       644,072  
Mortgage-backed securities
    266,027       4,734       261,293  
Equity securities
    35       1       34  
Others
    14,104       341       13,763  
 
 
  $ 5,225,924     $ 131,594     $ 5,094,330  
 
                         
    12 months or more
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 496,999     $ 38,719     $ 458,280  
Obligations of U.S. Government sponsored entities
    3,565,127       103,962       3,461,165  
Obligations of Puerto Rico, States and political subdivisions
    66,501       1,815       64,686  
Collateralized mortgage obligations
    367,529       12,041       355,488  
Mortgage-backed securities
    887,313       31,515       855,798  
Equity securities
    300       198       102  
 
 
  $ 5,383,769     $ 188,250     $ 5,195,519  
 
                         
    Total
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 526,258     $ 39,042     $ 487,216  
Obligations of U.S. Government sponsored entities
    7,814,649       222,747       7,591,902  
Obligations of Puerto Rico, States and political subdivisions
    82,073       1,892       80,181  
Collateralized mortgage obligations
    1,018,934       19,374       999,560  
Mortgage-backed securities
    1,153,340       36,249       1,117,091  
Equity securities
    335       199       136  
Others
    14,104       341       13,763  
 
 
  $ 10,609,693     $ 319,844     $ 10,289,849  
 

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    AS OF DECEMBER 31, 2005
    Less than 12 Months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 9,854     $ 136     $ 9,718  
Obligations of U.S. Government sponsored entities
    4,401,412       69,250       4,332,162  
Obligations of Puerto Rico, States and political subdivisions
    18,070       33       18,037  
Collateralized mortgage obligations
    672,546       6,394       666,152  
Mortgage-backed securities
    486,266       9,406       476,860  
Equity securities
    22,168       915       21,253  
 
 
  $ 5,610,316     $ 86,134     $ 5,524,182  
 
                         
    12 months or more
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 499,148     $ 23,931     $ 475,217  
Obligations of U.S. Government sponsored entities
    3,379,970       88,227       3,291,743  
Obligations of Puerto Rico, States and political subdivisions
    54,680       1,808       52,872  
Collateralized mortgage obligations
    238,254       7,895       230,359  
Mortgage-backed securities
    672,428       19,349       653,079  
Equity securities
    3,837       192       3,645  
 
 
  $ 4,848,317     $ 141,402     $ 4,706,915  
 
                         
    Total
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 509,002     $ 24,067     $ 484,935  
Obligations of U.S. Government sponsored entities
    7,781,382       157,477       7,623,905  
Obligations of Puerto Rico, States and political subdivisions
    72,750       1,841       70,909  
Collateralized mortgage obligations
    910,800       14,289       896,511  
Mortgage-backed securities
    1,158,694       28,755       1,129,939  
Equity securities
    26,005       1,107       24,898  
 
 
  $ 10,458,633     $ 227,536     $ 10,231,097  
 

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    AS OF 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 U.S. Government sponsored entities
    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 U.S. Government sponsored entities
    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 U.S. Government sponsored entities
    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  
 
The unrealized loss positions of available-for-sale securities at March 31, 2006 are primarily associated with U.S. government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly liquid securities which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in the available-for-sale portfolio at March 31, 2006 are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
During the quarter ended March 31, 2006, the Corporation recognized through earnings approximately $1.9 million in

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losses in the available-for-sale portfolio that management considered to be other than temporarily impaired. These realized losses were associated with interest only strips.
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, 2006   December 31, 2005   March 31, 2005
(In thousands)   Amortized Cost   Market Value   Amortized Cost   Market Value   Amortized Cost   Market Value
 
FNMA
  $ 1,715,490     $ 1,691,774     $ 1,790,840     $ 1,776,604     $ 1,832,411     $ 1,830,563  
FHLB
    7,652,208       7,435,051       7,480,188       7,327,736       6,855,704       6,741,377  
Freddie Mac
    1,291,314       1,271,426       1,244,044       1,228,566       1,217,131       1,206,597  
 
Note 6 — Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of March 31, 2006, December 31, 2005 and March 31, 2005 were as follows:
                                 
    AS OF MARCH 31, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 238,520     $ 57     $ 2     $ 238,575  
Obligations of Puerto Rico, States and political subdivisions
    73,045       925       216       73,754  
Collateralized mortgage obligations
    456             25       431  
Others
    32,364       108       15       32,457  
 
 
  $ 344,385     $ 1,090     $ 258     $ 345,217  
 
                                 
    AS OF DECEMBER 31, 2005
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of other U.S. Government sponsored entities
  $ 42,011           $ 25     $ 41,986  
Obligations of Puerto Rico, States and political subdivisions
    78,248     $ 2,845       134       80,959  
Collateralized mortgage obligations
    497             27       470  
Others
    32,348       315       10       32,653  
 
 
  $ 153,104     $ 3,160     $ 196     $ 156,068  
 
                                 
    AS OF MARCH 31, 2005
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 52,725           $ 32     $ 52,693  
Obligations of Puerto Rico, States and political subdivisions
    77,253     $ 2,231       235       79,249  
Collateralized mortgage obligations
    575             52       523  
Others
    48,520       851       6       49,365  
 
 
  $ 179,073     $ 3,082     $ 325     $ 181,830  
 

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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, 2006, December 31, 2005 and March 31, 2005:
                         
    AS OF MARCH 31, 2006
    Less than 12 months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 13,577     $ 2     $ 13,575  
Obligations of Puerto Rico, States and political subdivisions
    11,255       102       11,153  
Others
    1,250       15       1,235  
 
 
  $ 26,082     $ 119     $ 25,963  
 
                         
    12 months or more
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 22,389     $ 114     $ 22,275  
Collateralized mortgage obligations
    456       25       431  
Others
    250             250  
 
 
  $ 23,095     $ 139     $ 22,956  
 
                         
    Total
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 13,577     $ 2     $ 13,575  
Obligations of Puerto Rico, States and political subdivisions
    33,644       216       33,428  
Collateralized mortgage obligations
    456       25       431  
Others
    1,500       15       1,485  
 
 
  $ 49,177     $ 258     $ 48,919  
 

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    AS OF DECEMBER 31, 2005
    Less than 12 months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 42,011     $ 25     $ 41,986  
Obligations of Puerto Rico, States and political subdivisions
    3,605       20       3,585  
Others
    1,000       10       990  
 
 
  $ 46,616     $ 55     $ 46,561  
 
                         
    12 months or more
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 22,533     $ 114     $ 22,419  
Collateralized mortgage obligations
    497       27       470  
Others
    250             250  
 
 
  $ 23,280     $ 141     $ 23,139  
 
                         
    Total
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 42,011     $ 25     $ 41,986  
Obligations of Puerto Rico, States and political subdivisions
    26,138       134       26,004  
Collateralized mortgage obligations
    497       27       470  
Others
    1,250       10       1,240  
 
 
  $ 69,896     $ 196     $ 69,700  
 

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    AS OF MARCH 31, 2005
    Less than 12 months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 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 U.S. Government sponsored entities
  $ 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  
 
Management believes that the unrealized losses in the held-to-maturity portfolio at March 31, 2006 are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers.

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Note 7 — Derivative Instruments and Hedging Activities
Refer to Note 28 to the consolidated financial statements included in the 2005 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities in the first quarter of 2006:
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of March 31, 2006 and December 31, 2005 were as follows:
                                         
Quarter ended March 31, 2006
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 75,000     $ 422           $ 257        
 
                                       
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 190,000     $ 1,200           $ 780        
 
                                         
Year ended December 31, 2005
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 95,500     $ 20     $ 420       ($244 )      
 
                                       
 
The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with terms over one month. These securities are hedging a forecasted transaction and thus qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair value of the derivatives are recorded in other comprehensive income. The amount included in accumulated other comprehensive income corresponding to these forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding at March 31, 2006 have a maximum remaining maturity of 122 days.
During the first quarter of 2006, the Corporation entered into interest rate swap contracts to convert floating rate debt to fixed rate debt with the objective of minimizing the exposure to changes in cash flows due to higher interest rates. These interest rate swaps have a maximum remaining maturity of 1.7 years.
Fair Value Hedges
Derivative financial instruments designated as fair value hedges outstanding as of March 31, 2006 and December 31, 2005 were as follows:
                                 
Quarter ended March 31, 2006
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Ineffectiveness
 
Asset Hedges
                               
Interest rate swaps
  $ 75,000                    
 
                               
 
                                 
Year ended December 31, 2005
(In thousands)   Notional amount   Derivative assets   Derivative liabilities   Ineffectiveness
 
Asset Hedges
                               
Interest rate swaps
  $ 534,623     $ 3,145             ($388 )
 
                               
 

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The interest rate swaps outstanding at March 31, 2006 were entered to hedge the change in fair value of loans acquired and originated prior to securitization. The net gains representing the hedge ineffectiveness are reported as part of interest income. There was no impact in earnings during the first quarter of 2006.
At December 31, 2005, the Corporation had outstanding interest rate swaps designated as fair value hedges to protect its exposure to the changes in fair value resulting from movements in the benchmark interest rate of fixed rate assets, particularly loans and investment securities. The net losses representing the hedge ineffectiveness is reported as part of other income. As of March 31, 2006, these interest rate swaps were terminated and a result, the Corporation recognized a net loss of $499 thousand during the quarter.
Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding at March 31, 2006 and December 31, 2005 were as follows:
                         
March 31, 2006
            Fair Values
(In thousands)   Notional amount   Derivative assets   Derivative liabilities
 
Forward contracts
  $ 677,573     $ 2,263     $ 5  
Futures contracts
    3,000       3        
Call options and put options
    25,000       13        
Interest rate swaps associated with:
                       
- short-term borrowings
    400,000       1,411        
- auto loan portfolio held-for-investment
    314,000       2,378        
- auto loans approvals locked interest rates
    26,877       24        
- corporate clients swaps
    336,230       6,601       6,601  
Foreign currency and exchange rate commitments
    1,548       26       26  
Interest rate caps
    1,445,418       9,769        
Indexed options on deposits
    205,488       31,939        
Index options on S&P Notes
    31,152       3,823        
Embedded options
    249,531       11,652       38,020  
Mortgage rate lock commitments
    272,429             1,094  
 
Total
  $ 3,988,246     $ 69,902     $ 45,746  
 
                         
December 31, 2005
            Fair Values
(In thousands)   Notional amount   Derivative assets   Derivative liabilities
 
Forward contracts
  $ 486,457     $ 15     $ 1,691  
Futures contracts
    11,500       17        
Call options and put options
    47,500       114        
Interest rate swaps associated with:
                       
- brokered CDs
    157,088             3,226  
- short-term borrowings
    400,000              
- auto loan portfolio held-for-investment
    209,222       851        
- auto loans approvals locked interest rates
    26,297       (13 )      
- investment securities
    40,250       837        
- corporate clients swaps
    293,331       2,361       2,361  
Foreign currency and exchange rate commitments
    252       32       32  
Interest rate caps
    1,650,907       12,215        
Indexed options on deposits
    122,711       17,715        
Index options on S&P Notes
    31,152       3,626        
Embedded options
    170,121       10,593       24,398  
Mortgage rate lock commitments
    234,938       330        
 
Total
  $ 3,881,726     $ 48,693     $ 31,708  
 
Interest Rates Swaps
At December 31, 2005, the Corporation had outstanding interest rate swaps that economically hedged the exposure of certain brokered certificates of deposit to changes in fair value due to movements in the benchmark interest rate. The terms of the interest rate swaps were identical to the terms of the callable CD’s. These interest rate swap agreements

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were terminated in the quarter ended March 31, 2006 and, as a result, the Corporation recognized a loss of $284 thousand upon cancellation.
Note 8 — Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the quarters ended March 31, 2006 and 2005, allocated by reportable segment, and in the case of Banco Popular de Puerto Rico, as an additional disclosure, by business area, were as follows (refer to Note 18 for the definition of the Corporation’s reportable segments):
                                 
            Purchase            
    Balance at   accounting           Balance at
(In thousands)   January 1, 2006   adjustments   Other   March 31, 2006
 
Banco Popular de Puerto Rico:
                               
P.R. Commercial Banking
  $ 14,674                 $ 14,674  
P.R. Consumer and Retail Banking
    34,999                   34,999  
P.R. Other Financial Services
    4,110                   4,110  
Banco Popular North America
    404,447             ($210 )     404,237  
Popular Financial Holdings
    152,623     $ 1,969             154,592  
EVERTEC
    43,131                   43,131  
 
Total Popular, Inc.
  $ 653,984     $ 1,969       ($210 )   $ 655,743  
 
                                 
                    Purchase    
    Balance at   Goodwill   accounting   Balance at
(In thousands)   January 1, 2005   acquired   adjustments   March 31, 2005
 
Banco Popular de Puerto Rico:
                               
P.R. Commercial Banking
  $ 14,674                 $ 14,674  
P.R. Consumer and Retail Banking
    34,999                   34,999  
P.R. Other Financial Services
    3,322     $ 513             3,835  
Banco Popular North America
    309,709       109,514       ($1,443 )     417,780  
Popular Financial Holdings
    9,514                   9,514  
EVERTEC
    39,090             23       39,113  
 
Total Popular, Inc.
  $ 411,308     $ 110,027       ($1,420 )   $ 519,915  
 
Purchase accounting adjustments consist of adjustments to the value of the assets acquired and liabilities assumed resulting from the completion of appraisals or other valuations, adjustments to initial estimates recorded for transaction costs, if any, and contingent consideration paid during a contractual contingency period.
The amount included in the “other” category for Banco Popular North America reportable segment is related to the sale of the remaining retail outlets of Popular Cash Express (“PCE”) operations to PLS Financial during the first quarter of 2006. The increase in goodwill during the first quarter of 2005 was mostly related to the Kislak acquisition.
No goodwill was written-down during the quarters ended March 31, 2006 and 2005.
At March 31, 2006 and December 31, 2005, other than goodwill, the Corporation had $58.9 million of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark. At March 31, 2005, the Corporation had $65 thousand of identifiable intangibles with an indefinite useful life related to a trademark. The following table reflects the components of other intangible assets subject to amortization:

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    March 31, 2006   December 31, 2005   March 31, 2005
    Gross   Accumulated   Gross   Accumulated   Gross   Accumulated
(In thousands)   Amount   Amortization   Amount   Amortization   Amount   Amortization
 
Core deposits
  $ 76,956     $ 42,795     $ 76,956     $ 40,848     $ 95,898     $ 52,506  
 
                                               
Other customer relationships
    8,393       884       8,175       507       1,008       84  
 
                                               
Other intangibles
    9,320       2,234       9,320       1,807       3,443       1,001  
 
 
                                               
Total
  $ 94,669     $ 45,913     $ 94,451     $ 43,162     $ 100,349     $ 53,591  
 
Other intangible assets subject to amortization decreased from March 31, 2005 partly due to certain core deposits intangibles that became fully amortized during 2005 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, 2006, the Corporation recognized $2.7 million in amortization expense related to other intangible assets with definite lives (March 31, 2005 — $2.2 million).
The following table presents the estimated aggregate annual amortization expense of the intangible assets with definite lives for each of the following fiscal years:
         
    (In thousands)
2006
  $ 11,173  
2007
    9,079  
2008
    7,408  
2009
    6,547  
2010
    5,712  
No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.
Note 9 — 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, 2006 were $23 million and $183 million, respectively (December 31, 2005 — $22 million and $177 million; March 31, 2005 — $26 million and $211 million). There were also other commitments outstanding and contingent liabilities, such as commitments to extend credit and commitments to originate mortgage loans, which were not reflected in the accompanying financial statements.
At March 31, 2006, the Corporation recorded a liability of $688 thousand (December 31, 2005 — $548 thousand; March 31, 2005 — $356 thousand), which represents the fair value of the obligations undertaken in issuing the guarantees under standby letters of credit issued or modified after December 31, 2002. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The liability was included as part of “other liabilities” in the consolidated statements of condition. The standby letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in standby letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others.

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The Corporation fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries which aggregated to $4.1 billion at March 31, 2006 (December 31, 2005 and March 31, 2005 — $4.0 billion). In addition, at March 31, 2006, the Corporation fully and unconditionally guaranteed $824 million of capital securities (December 31, 2005 and March 31, 2005 — $824 million) issued by four wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R. During the first quarter of 2005, Popular North America, Inc. concluded its full and unconditional guarantee of certain borrowing obligations issued by one of its non-banking subsidiaries.
The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.
Note 10 – Other Service Fees
The caption of other service fees in the consolidated statements of income consists of the following major categories:
                 
    Quarter ended March 31,
(In thousands)   2006   2005
 
Credit card fees and discounts
  $ 22,573     $ 18,525  
Debit card fees
    14,919       13,022  
Insurance fees
    12,141       11,673  
Processing fees
    10,279       10,107  
Other
    20,434       25,688  
 
Total
  $ 80,346     $ 79,015  
 
Note 11 — Stock Option and Other Incentive Plans
Since 2001, the Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. All outstanding award grants under the Stock Option Plan continue to remain outstanding at March 31, 2006 under the original terms of the Stock Option Plan. The aggregate number of shares of common stock which may be issued under the Incentive Plan is limited to 10,000,000 shares, subject to adjustments for stock splits, recapitalizations and similar events.
In 2002, the Corporation opted to use the fair value method of recording stock-based compensation as described in SFAS No. 123 “Accounting for Stock Based Compensation”. The Corporation adopted SFAS No. 123-R “Share-Based Payment” on January 1, 2006 using the modified prospective transition method. Under the modified prospective transition method, results for prior periods have not been restated to reflect the effects of implementing SFAS No. 123-R. Accounting and reporting under SFAS No. 123-R is generally similar to the SFAS No. 123 approach since fair value accounting has been used by the Corporation to recognize the stock-based compensation expense since 2002.

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Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.
Upon the adoption of SFAS No. 123-R during the first quarter of 2006, the compensation cost related to the Stock Option Plan is being recognized in full for those employees that, as of quarter-end, had attained their minimum required eligible age for retirement, since the vesting is accelerated at retirement. The adoption of SFAS No. 123-R resulted in an additional expense for the quarter ended March 31, 2006 of $93 thousand related to the Stock Option Plan.
The following table presents information on stock options at March 31, 2006:
                                         
(Not in thousands)  
            Weighted Average     Weighted Average     Options     Weighted Average  
Exercise Price   Options     Exercise Price of     Remaining Life of     Exercisable     Exercise Price of  
Range per Share   Outstanding     Options Outstanding     Options Outstanding     (fully vested)     Options Exercisable  
           
$14.39 - $18.50
    1,575,639     $ 15.81     6.48 years     1,189,116     $ 15.69  
$19.25 - $27.20
    1,640,710     $ 25.29     8.26 years     775,420     $ 25.02  
           
$14.39 - $27.20
    3,216,349     $ 20.64     7.39 years     1,964,536     $ 19.37  
           
The following table summarizes the stock option activity and related information:
                 
   
    Options     Weighted-Average  
(Not in thousands)   Outstanding     Exercise Price  
 
Outstanding at January 1, 2005
    2,584,620     $ 18.76  
Granted
    707,342       27.20  
Exercised
    (47,858 )     16.14  
Forfeited
    (20,401 )     22.18  
 
Outstanding at December 31, 2005
    3,223,703     $ 20.63  
Granted
           
Exercised
    (7,354 )     15.26  
Forfeited
           
 
Outstanding at March 31, 2006
    3,216,349     $ 20.64  
     
The stock options exercisable at March 31, 2006 totaled 1,964,536 (March 31, 2005 — 1,066,126).

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The fair value of the options was estimated on the date of the grants using the Black-Scholes Option Pricing Model. The weighted average assumptions used for the grants issued during 2005 were:
         
    2005  
 
Expected dividend yield
    2.56 %
Expected life of options
  10 years
Expected volatility
    17.54 %
Risk-free interest rate
    4.16 %
Weighted average fair value of options granted (per option)
  $ 5.95  
 
There were no new grants issued by the Corporation under the Stock Option Plan during the quarter ended March 31, 2006.
The cash received from the stock options exercised during the quarter ended March 31, 2006 amounted to $112 thousand.
The Corporation recognized $0.8 million in stock option expense for the quarter ended March 31, 2006, with a tax benefit of $0.3 million (March 31, 2005 — $0.7 million, with a tax benefit of $0.3 million). The total unamortized compensation cost at March 31, 2006 related to non-vested stock option awards was $6.3 million, and is expected to be recognized over a 1.9 weighted-average period (in years).
Incentive Plan
The Incentive Plan permits the granting of incentive awards in the form of an Annual Incentive Award, a Long-term Performance Unit Award, an Option, a Stock Appreciation Right, Restricted Stock, Restricted Unit or Performance Share. Participants in the Incentive Plan are designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation and/or any of its subsidiaries are eligible to participate in the Incentive Plan. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock. The Corporation’s policy with respect to the shares of restricted stock has been to purchase such shares in the open market to cover each grant.
The compensation cost associated with the shares of restricted stock is estimated based on a two-prong vesting schedule, unless otherwise stated in an agreement. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service.
No additional compensation cost related to the Incentive Plan was recognized by the Corporation during the quarter ended March 31, 2006 as a result of the adoption of SFAS No. 123-R.
The following table summarizes the restricted stock activity and related information:
                 
   
    Restricted     Weighted-Average  
(Not in thousands)   Stock     Grant Date Fair Value  
 
Outstanding at January 1, 2005
           
Granted
    172,622     $ 27.65  
Exercised
           
Forfeited
           
 
Outstanding at December 31, 2005
    172,622     $ 27.65  
Granted
    444,036       20.65  
Exercised
           
Forfeited
           
 
Outstanding at March 31, 2006
    616,658     $ 22.53  
     

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During the quarter ended March 31, 2006, the Corporation granted 444,036 (March 31, 2005 — 172,622) shares of restricted stock under the Incentive Plan for corporate executive officers. Also, during 2006, the Compensation Committee approved incentive awards under the Incentive Plan based on the 2006 performance, payable in the form of restricted stock. Shares of restricted stock will be granted at the beginning of 2007 subject to the attainment of the established performance goals for 2006.
During the quarter ended March 31, 2006, the Corporation recognized $1.3 million (March 31, 2005 — $0.7 million) of restricted stock expense related to the executive officers’ incentive awards, with an income tax benefit of $0.5 million (March 31, 2005 — $0.3 million). The total unamortized compensation cost related to non-vested restricted stock awards was $18.4 million and is expected to be recognized over a 2.9 weighted-average period (in years).
During the quarter ended March 31, 2006, the Corporation granted 1,276 (March 31, 2005 — 1,185) shares of restricted stock under the Incentive Plan to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $150 thousand (March 31, 2005 — $166 thousand) of restricted stock expense related to these restricted stock grants.
Note 12 — 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, 2006 and 2005 were as follows:
                                 
    Pension Plans   Benefit Restoration Plans
    Quarters ended   Quarters ended
    March 31,   March 31,
(In thousands)   2006   2005   2006   2005
 
Service cost
  $ 3,135     $ 3,891     $ 262     $ 240  
Interest cost
    7,641       7,438       400       313  
Expected return on plan assets
    (9,978 )     (9,900 )     (264 )     (203 )
Amortization of asset obligation
          (215 )            
Amortization of prior service cost
    44       100       (13 )     (27 )
Amortization of net loss
    488       17       276       147  
 
Total net periodic cost
  $ 1,330     $ 1,331     $ 661     $ 470  
 
During the quarter ended March 31, 2006, no contributions were made to the pension and restoration plans.
In October 2005, the Board of Directors of BPPR adopted an amendment to the Puerto Rico Retirement and Tax Qualified Retirement Restoration Plans to freeze benefits for all employees under age 30 or who had less than 10 years of credited service effective January 1, 2006 and providing 100% vesting to all employees in their accrued benefit as of December 31, 2005. The expense for these plans was remeasured as of September 30, 2005 to consider this change using a discount rate of 5.50%. Curtailment costs were considered for these plans and are included as part of the December 31, 2005 disclosures. In connection with the amendments to the plans, these employees received a base salary increase according to their age and years of service, effective January 1, 2006.
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, 2006 and 2005 were as follows:
                 
    Quarters ended
    March 31,
(In thousands)   2006   2005
 
Service cost
  $ 712     $ 674  
Interest cost
    1,927       2,067  
Amortization of prior service cost
    (262 )     (262 )
Amortization of net loss
    240       423  
 
Total net periodic cost
  $ 2,617     $ 2,902  
 
As of March 31, 2006, contributions made to the postretirement benefit plan approximated $1.6 million.

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Note 13 — Trust Preferred Securities
At March 31, 2006, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under the provisions of FIN No. 46-R.
The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition. The Corporation also recorded in the caption of other investment securities in the consolidated statements of condition, the common securities issued by the issuer trusts. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.
(In thousands, including reference notes)
                                 
                  Popular North      
  BanPonce   Popular Capital   America Capital   Popular Capital  
Issuer Trust I   Trust I   Trust I   Trust II  
 
Issuance date
February 1997   October 2003      September 2004      November 2004  
Capital securities
$   144,000   $   300,000   $   250,000   $   130,000  
Distribution rate
    8.327 %         6.700 %         6.564 %         6.125 %
Common securities
$   4,640   $   9,279   $   7,732   $   4,021  
Junior subordinated
                               
debentures aggregate
                               
liquidation amount
$   148,640   $   309,279   $   257,732   $   134,021  
Stated maturity date
February 2027   November 2033   September 2034   December 2034  
Reference notes
(a),(c),(e),(f),(g)   (b),(d),(f)   (a),(c),(f)     (b),(d),(f)  
 
     
(a)   Statutory business trust that is wholly-owned by Popular North America (PNA) and indirectly wholly-owned by the Corporation.
 
(b)   Statutory business trust that is wholly-owned by the Corporation.
 
(c)   The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
 
(d)   These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
 
(e)   The original issuance was for $150,000. In 2003, the Corporation reacquired $6,000 of the 8.327% capital securities.
 
(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.

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Note 14 — Stockholders’ Equity
During the fourth quarter of 2005, existing shareholders of record of the Corporation’s common stock at November 7, 2005 fully subscribed to an offering of 10,500,000 newly issued shares of Popular, Inc.’s common stock at a price of $21.00 per share under a subscription rights offering. This represented approximately $216 million in additional capital, of which approximately $175 million impacted stockholders’ equity at December 31, 2005 and the remainder impacted the Corporation’s financial condition in the first quarter of 2006 when 1,885,380 shares of common stock were issued. As of December 31, 2005, this subscription rights offering contributed with 8,614,620 in newly issued shares of common stock.
The Corporation has a dividend reinvestment and stock purchase plan under which stockholders may reinvest their quarterly dividends in shares of common stock at a 5% discount from the average market price at the time of issuance, as well as purchase shares of common stock directly from the Corporation by making optional cash payments at prevailing market prices.
The Corporation’s authorized preferred stock may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation’s only outstanding class of preferred stock is its 6.375% noncumulative monthly income preferred stock, 2003 Series A. These shares of preferred stock are perpetual, nonconvertible and are redeemable solely at the option of the Corporation beginning on March 31, 2008. The redemption price per share is $25.50 from March 31, 2008 through March 30, 2009, $25.25 from March 31, 2009 through March 30, 2010 and $25.00 from March 31, 2010 and thereafter.
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $317 million at March 31, 2006 (December 31, 2005 — $316 million; March 31, 2005 — $285 million). During the quarter ended March 31, 2006, BPPR transferred $1 million to the statutory reserve account. There were no transfers between the statutory reserve account and the retained earnings account during the quarter ended March 31, 2005.

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Note 15 — Earnings per Common Share
The computation of earnings per common share and diluted earnings per common share follows:
                 
    Quarter ended
    March 31,
(In thousands, except share information)   2006   2005
 
Net income
  $ 118,503     $ 162,879  
Less: Preferred stock dividends
    2,978       2,978  
 
Net income applicable to common stock after cumulative effect of accounting change
  $ 115,525     $ 159,901  
 
Net income applicable to common stock before cumulative effect of accounting change
  $ 115,525     $ 156,294  
 
 
               
Average common shares outstanding
    278,085,861       266,842,444  
Average potential common shares
    329,676       586,535  
 
Average common shares outstanding – assuming dilution
    278,415,537       267,428,979  
 
 
               
Basic earnings per common share before cumulative effect of accounting change
  $ 0.42     $ 0.59  
 
Diluted earnings per common share before cumulative effect of accounting change
  $ 0.42     $ 0.58  
 
Basic and diluted earnings per common share after cumulative effect of accounting change
  $ 0.42     $ 0.60  
 
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, 2006, there were 637,128 weighted average antidilutive stock options outstanding (March 31, 2005 – 1,023,235). All shares of restricted stock are treated as outstanding for purposes of this computation.
Note 16 — Supplemental Disclosure on the Consolidated Statements of Cash Flows
As previously mentioned in Note 1, the Corporation commenced in 2005 a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31st calendar period. The impact of this change corresponds to the financial results for the month of December 2004 of those non-banking subsidiaries which implemented the change in the first reporting period of 2005 and the month of December 2005 for those which implemented the change in the first reporting period of 2006.
The following table reflects the effect in the Consolidated Statements of Cash Flows of the change in reporting period mentioned above.
                 
    Quarter ended
    March 31,
(In thousands)   2006   2005
 
Net cash used in operating activities
  ($ 80,906 )   ($ 26,648 )
Net cash (used in) provided by investing activities
    (104,732 )     19,503  
Net cash provided by financing activities
    197,552       5,573  
 
Net increase (decrease) in cash and due from banks
  $ 11,914     ($ 1,572 )
 

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Loans receivable transferred to other real estate and other property for the quarter ended March 31, 2006, amounted to $47 million and $7 million, respectively (March 31, 2005 — $29 million and $7 million, respectively).
During the first quarter of 2006, $464 million in non-conforming loans classified as held-in-portfolio was pooled into trading securities and subsequently sold. The cash inflow from this sale was reflected as operating activities in the consolidated statement of cash flows.
Note 17 — Segment Reporting
The Corporation’s corporate structure consists of four reportable segments, which represent the Corporation’s four principal businesses – Banco Popular de Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. Also, a corporate group has been defined to support the reportable segments.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily towards products and services, as well as on the markets the segments serve. Other factors, such as the credit risk characteristics of the loan products, distribution channels and clientele, were also considered in the determination of reportable segments.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes approximately 84% of the Corporation’s net income for the quarter ended March 31, 2006 and 55% of its total assets as of that date, additional disclosures are provided for the business areas included in this reportable segment, as described below:
    Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds as well as a proportionate share of the investment function of BPPR.
 
    Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.
 
    Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I. and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.
Banco Popular North America:
This reportable segment includes principally the activities of BPNA, including its subsidiaries Popular Leasing, U.S.A. and Popular Insurance Agency, U.S.A. BPNA operates through a branch network of over 135 branches in six states. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Leasing, U.S.A. provides mainly small to mid-ticket commercial and medical equipment financing. The BPNA segment also included in the quarter ended March 31, 2005, the financial results of PCE, a fee driven business that served the unbanked, retail customer. As stated in the 2005 Annual Report, PCE sold most of its branch operations during the fourth quarter of 2005. The remaining four retail outlets that existed as of year-end 2005, were sold during the first quarter of 2006.
Popular Financial Holdings:
This reportable segment corresponds to the Corporation’s consumer lending subsidiaries in the United States, principally Popular Financial Holdings, Inc. and its wholly-owned subsidiaries Equity One, Inc., E-LOAN,

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Popular Financial Management, LLC, Popular Mortgage Servicing, Inc. and Popular Housing Services, Inc. These subsidiaries are primarily engaged in the business of originating mortgage and personal loans, acquiring retail installment contracts and providing warehouse lines to small and medium-sized mortgage companies. This segment also maintains a wholesale broker network as well as a loan servicing unit.
EVERTEC:
This reportable segment includes the financial transaction processing and technology functions of the Corporation, including EVERTEC with offices in Puerto Rico, Florida, the Dominican Republic and Venezuela; 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:
The Corporate group consists primarily of the Holding companies: Popular, Inc., Popular North America and Popular International Bank, excluding the equity investments in CONTADO and Serfinsa, which due to the nature of their operations are included as part of the processing segment. The holding companies obtain funding in the capital markets to finance the Corporation’s growth, including acquisitions. The Corporate group also includes the expenses of the four administrative corporate areas that are identified as critical for the organization: Finance, Risk Management, Legal and People, Communications and Planning. These corporate administrative areas have the responsibility of establishing policy, setting up controls and coordinating the activities of their corresponding groups in each of the business circles.
The Corporation may periodically reclassify business segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment.
The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between operating segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.
2006
For the quarter ended March 31, 2006
                                                 
                    Popular                   Total
    Banco Popular   Banco Popular   Financial           Intersegment   Reportable
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   Eliminations   Segments
 
Net interest income (loss)
  $ 226,303     $ 93,759     $ 49,420     ($ 427 )         $ 369,055  
Provision for loan losses
    23,789       9,345       15,813                   48,947  
Other income
    115,085       25,473       48,644       54,888     ($ 33,930 )     210,160  
Amortization of intangibles
    633       1,515       468       105             2,721  
Depreciation expense
    11,030       3,384       2,374       4,106       (19 )     20,875  
Other operating expenses
    169,225       68,745       85,802       42,457       (33,944 )     332,285  
Impact of change in fiscal period
    (2,072 )           6,181                   4,109  
Income tax
    38,653       13,687       (4,719 )     2,718       13       50,352  
 
Net income (loss)
  $ 100,130     $ 22,556     ($ 7,855 )   $ 5,075     $ 20     $ 119,926  
 
Segment Assets
  $ 26,847,081     $ 12,177,398     $ 9,175,706     $ 201,204     ($ 175,128 )   $ 48,226,261  
 

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For the quarter ended March 31, 2006
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (loss)
  $ 369,055     ($ 9,591 )   $ 300     $ 359,764  
Provision for loan losses
    48,947                   48,947  
Other income
    210,160       18,989       (316 )     228,833  
Amortization of intangibles
    2,721                   2,721  
Depreciation expense
    20,875       564             21,439  
Other operating expenses
    332,285       17,225       (157 )     349,353  
Impact of change in fiscal period
    4,109       3,495       2,137       9,741  
Income tax
    50,352       (11,592 )     (867 )     37,893  
 
Net income (loss)
  $ 119,926     ($ 294 )   ($ 1,129 )   $ 118,503  
 
Segment Assets
  $ 48,226,261     $ 6,432,286     ($ 6,066,844 )   $ 48,591,703  
 
2005
For the quarter ended March 31, 2005
                                                 
                    Popular                   Total
    Banco Popular   Banco Popular   Financial           Intersegment   Reportable
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   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       10       45,917  
 
Net income before cumulative effect of accounting change
    88,092       20,077       10,493       6,587       (410 )     124,839  
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     ($ 657 )   $ 127,756  
 
Segment Assets
  $ 24,815,709     $ 11,349,492     $ 8,730,848     $ 241,278     ($ 289,398 )   $ 44,847,929  
 
For the quarter ended March 31, 2005
                                 
    Total Reportable                   Total
(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
    45,917       (3,447 )     (37 )     42,433  
 
Net income before cumulative effect of accounting change
    124,839       34,051       382       159,272  
Cumulative effect of accounting change
    2,917       690               3,607  
 
Net income after cumulative effect of accounting change
  $ 127,756     $ 34,741     $ 382     $ 162,879  
 
Segment Assets
  $ 44,847,929     $ 5,650,332     ($ 5,330,423 )   $ 45,167,838  
 

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During the quarter ended March 31, 2006, the holding companies realized net gains on sale of marketable equity securities (before tax) of approximately $13.5 million, compared with net gains (before tax) of approximately $50.5 million in the first quarter of 2005. These net gains are included in “other income” within the “Corporate” circle.
Additional disclosures with respect to Banco Popular de Puerto Rico reportable segment are as follows:
2006
For the quarter ended March 31, 2006
                                         
    Commercial   Consumer and   Other Financial       Total Banco Popular
(In thousands)   Banking   Retail Banking   Services   Eliminations   Puerto Rico
 
Net interest income
  $ 81,143     $ 142,956     $ 2,723     ($ 519 )   $ 226,303  
Provision for loan losses
    5,655       18,134                   23,789  
Other income
    37,783       56,843       21,980       (1,521 )     115,085  
Amortization of intangibles
    221       335       77             633  
Depreciation expense
    3,950       6,805       275             11,030  
Other operating expenses
    56,481       97,408       15,629       (293 )     169,225  
Impact of change in fiscal period
                (2,072 )           (2,072 )
Income tax
    16,708       18,718       3,712       (485 )     38,653  
 
Net income
  $ 35,911     $ 58,399     $ 7,082     ($ 1,262 )   $ 100,130  
 
Segment Assets
  $ 10,754,286     $ 18,368,889     $ 1,025,734     ($ 3,301,828 )   $ 26,847,081  
 
2005
For the quarter ended March 31, 2005
                                         
    Commercial   Consumer and   Other Financial       Total Banco Popular
(In thousands)   Banking   Retail 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  
 
                 
INTERSEGMENT REVENUES*   Quarter ended
    March 31,   March 31,
(In thousands)   2006   2005
 
Banco Popular Puerto Rico:
               
P.R. Commercial Banking
  ($ 304 )   ($ 338 )
P.R. Consumer and Retail Banking
    (668 )     (761 )
P.R. Other Financial Services
    (78 )     (112 )
Banco Popular North America
    164       216  
Popular Financial Holdings
    770       842  
EVERTEC
    (33,814 )     (33,805 )
 
Total reportable segments
  ($ 33,930 )   ($ 33,958 )
 
     
*
  For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany transactions, mainly related to gain on sales of loans and processing/information technology services.
 

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Geographic Information   Quarter ended
    March 31,   March 31,
(In thousands)   2006   2005
 
Revenues**
               
Puerto Rico
  $ 361,582     $ 364,068  
United States
    206,802       181,441  
Other
    20,213       17,366  
 
Total consolidated revenues
  $ 588,597     $ 562,875  
 
 
**   Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain (loss) on sale and valuation adjustments of investment securities, trading account profit (loss), gain on sale of loans and other operating income.
                         
    March 31,   December 31,   March 31,
(In thousands)   2006   2005   2005
 
Selected Balance Sheet Information:
                       
Puerto Rico
                       
Total assets
  $ 25,997,603     $ 25,759,437     $ 24,200,221  
Loans
    14,105,008       14,130,645       12,838,815  
Deposits
    13,794,832       13,093,540       12,871,489  
Mainland United States
                       
Total assets
  $ 21,445,054     $ 21,780,226     $ 20,088,165  
Loans
    16,737,800       17,023,443       16,110,775  
Deposits
    8,447,759       8,370,150       7,786,323  
Other
                       
Total assets
  $ 1,149,046     $ 1,084,005     $ 879,452  
Loans
    587,577       556,119       478,436  
Deposits *
    1,169,221       1,174,315       1,070,865  
 
*   Represents deposits from BPPR operations located in the U.S. and British Virgin Islands
Note 18 — 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, 2006, December 31, 2005 and March 31, 2005, and the results of their operations and cash flows for the periods ended March 31, 2006 and 2005.
In 2005, the Corporation commenced a two-year plan to change its non-banking subsidiaries to a calendar reporting year-end. As of March 31, 2005 and December 31, 2005, Popular Securities, Inc., Popular North America (holding company), Popular FS, LLC and Popular Financial Holdings, Inc. (“PFH”), including its wholly-owned subsidiaries (except E-LOAN, which already had a December 31st year-end since its acquisition), continued to have a fiscal year that ended on November 30. Accordingly, their financial information as of February 28, 2005 and November 30, 2005 corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of March 31, 2005 and December 31, 2005. As of March 31, 2006, all subsidiaries have aligned their year-end closing to that of the Corporation’s calendar year.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica S.A., CreST, S.A., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:

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    Popular Cash Express, Inc.;
 
    PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC, Popular Housing Services, Inc., Popular Mortgage Servicing, Inc. and E-LOAN, Inc.;
 
    Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Leasing, U.S.A., Popular Insurance Agency, U.S.A. and Popular FS, LLC; and
 
    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 Securities and Exchange Commission.
PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA.
The principal source of income for PIHC consists of dividends from Banco Popular de Puerto Rico (“BPPR”). As a member of the Federal Reserve System, BPPR is subject to the regulations of the Federal Reserve Board. BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. At March 31, 2006, BPPR could have declared a dividend of approximately $139 million without the approval of the Federal Reserve Board (March 31, 2005 — $256 million; December 31, 2005 — $231 million). Refer to Popular, Inc.’s Form 10-K for the year ended December 31, 2005 for further information on dividend restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR, BPNA and BP, N.A.

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
MARCH 31, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 975     $ 7,415     $ 439     $ 905,160     ($ 53,383 )   $ 860,606  
Money market investments
    314,600       300       183       1,170,659       (495,827 )     989,915  
Investment securities available-for-sale, at fair value
    11,319       63,986               11,441,847       (6,484 )     11,510,668  
Investment securities held-to-maturity, at amortized cost
    430,000       2,167               342,218       (430,000 )     344,385  
Other investment securities, at lower of cost or realizable value
    145,039       5,001       13,142       141,427               304,609  
Trading account securities, at fair value
                            510,099       (487 )     509,612  
Investment in subsidiaries
    3,047,205       1,166,381       2,085,191       818,175       (7,116,952 )        
Loans held-for-sale, at lower of cost or market
                            535,719               535,719  
 
Loans held-in-portfolio
    47,465               2,712,867       34,103,750       (5,668,040 )     31,196,042  
Less – Unearned income
                            301,376               301,376  
Allowance for loan losses
    40                       468,281               468,321  
 
 
    47,425               2,712,867       33,334,093       (5,668,040 )     30,426,345  
 
Premises and equipment, net
    26,231                       574,783       (222 )     600,792  
Other real estate
    99                       82,253               82,352  
Accrued income receivable
    416       39       11,410       284,689       (21,934 )     274,620  
Other assets
    56,541       43,409       28,025       1,267,580       (6,893 )     1,388,662  
Goodwill
                            655,743               655,743  
Other intangible assets
    554                       107,121               107,675  
 
 
  $ 4,080,404     $ 1,288,698     $ 4,851,257     $ 52,171,566     ($ 13,800,222 )   $ 48,591,703  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,507,290     ($ 53,325 )   $ 4,453,965  
Interest bearing
                            19,059,837       (101,990 )     18,957,847  
 
 
                            23,567,127       (155,315 )     23,411,812  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 33,000       8,662,217       (379,837 )     8,315,380  
Other short-term borrowings
          $ 31,489       541,027       3,120,849       (1,047,844 )     2,645,521  
Notes payable
  $ 532,736               3,057,588       10,932,175       (4,589,281 )     9,933,218  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    60,111       1,188       62,859       713,895       (39,951 )     798,102  
 
 
    592,847       32,677       3,694,474       47,426,263       (6,642,228 )     45,104,033  
 
Minority interest in consolidated subsidiaries
                            113               113  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,748,983       3,961       2       70,385       (74,348 )     1,748,983  
Surplus
    484,252       815,193       734,964       3,131,508       (4,679,054 )     486,863  
Retained earnings
    1,529,245       498,823       452,861       1,780,841       (2,735,136 )     1,526,634  
Accumulated other comprehensive loss, net of tax
    (255,265 )     (61,956 )     (31,044 )     (233,639 )     326,639       (255,265 )
Treasury stock, at cost
    (206,533 )                     (3,905 )     3,905       (206,533 )
 
 
    3,487,557       1,256,021       1,156,783       4,745,190       (7,157,994 )     3,487,557  
 
 
  $ 4,080,404     $ 1,288,698     $ 4,851,257     $ 52,171,566     ($ 13,800,222 )   $ 48,591,703  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2005
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 696     $ 2,103     $ 448     $ 962,395     ($ 59,245 )   $ 906,397  
Money market investments
    230,000       300       245       1,048,586       (529,708 )     749,423  
Investment securities available-for-sale, at fair value
    18,271       77,861               11,620,673       (219 )     11,716,586  
Investment securities held-to-maturity, at amortized cost
    430,000       2,170               150,934       (430,000 )     153,104  
Other investment securities, at lower of cost or realizable value
    145,535       5,001       13,142       155,425               319,103  
Trading account securities, at fair value
                            520,236       (898 )     519,338  
Investment in subsidiaries
    3,112,125       1,169,867       1,832,349       767,615       (6,881,956 )        
Loans held-for-sale, at lower of cost or market value
                            699,181               699,181  
 
Loans held-in-portfolio
    25,752               2,993,028       34,034,625       (5,744,766 )     31,308,639  
Less – Unearned income
                            297,613               297,613  
Allowance for loan losses
    40                       461,667               461,707  
 
 
    25,712               2,993,028       33,275,345       (5,744,766 )     30,549,319  
 
Premises and equipment, net
    23,026                       573,786       (241 )     596,571  
Other real estate
                            79,008               79,008  
Accrued income receivable
    532       33       11,982       253,818       (20,719 )     245,646  
Other assets
    44,252       40,526       23,804       1,221,472       (4,254 )     1,325,800  
Goodwill
                            653,984               653,984  
Other intangible assets
    554                       109,654               110,208  
 
 
  $ 4,030,703     $ 1,297,861     $ 4,874,998     $ 52,092,112     ($ 13,672,006 )   $ 48,623,668  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,025,227     ($ 66,835 )   $ 3,958,392  
Interest bearing
                            18,811,225       (131,612 )     18,679,613  
 
 
                            22,836,452       (198,447 )     22,638,005  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 117,226       8,968,332       (383,097 )     8,702,461  
Other short-term borrowings
          $ 46,112       721,866       3,521,486       (1,589,203 )     2,700,261  
Notes payable
  $ 532,441               2,833,035       11,055,117       (4,527,016 )     9,893,577  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    49,015       871       42,382       757,646       390,088       1,240,002  
 
 
    581,456       46,983       3,714,509       47,569,033       (6,737,675 )     45,174,306  
 
Minority interest in consolidated subsidiaries
                            115               115  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,736,443       3,961       2       70,385       (74,348 )     1,736,443  
Surplus
    449,787       815,193       734,964       2,778,437       (4,325,983 )     452,398  
Retained earnings
    1,459,223       480,541       451,271       1,838,530       (2,772,953 )     1,456,612  
Accumulated other comprehensive loss, net of tax
    (176,000 )     (48,817 )     (25,748 )     (159,996 )     234,561       (176,000 )
Treasury stock, at cost
    (207,081 )                     (4,392 )     4,392       (207,081 )
 
 
    3,449,247       1,250,878       1,160,489       4,522,964       (6,934,331 )     3,449,247  
 
 
  $ 4,030,703     $ 1,297,861     $ 4,874,998     $ 52,092,112     ($ 13,672,006 )   $ 48,623,668  
 

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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 fair 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 fair 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 value
                            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, net
    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  
Accumulated other comprehensive loss, net of tax
    (127,644 )     (32,002 )     (15,082 )     (116,053 )     163,137       (127,644 )
Treasury stock, at cost
    (205,850 )                     (1,103 )     1,103       (205,850 )
 
 
    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  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 2,664             $ 36,901     $ 620,050     ($ 67,780 )   $ 591,835  
Money market investments
    1,072     $ 66       38       10,416       (3,610 )     7,982  
Investment securities
    7,609       313       223       132,368       (6,980 )     133,533  
Trading account securities
                            8,860               8,860  
 
 
    11,345       379       37,162       771,694       (78,370 )     742,210  
 
INTEREST EXPENSE:
                                               
Deposits
                            125,438       (1,027 )     124,411  
Short-term borrowings
    54       446       6,477       132,338       (14,512 )     124,803  
Long-term debt
    8,983               42,967       146,160       (64,878 )     133,232  
 
 
    9,037       446       49,444       403,936       (80,417 )     382,446  
 
Net interest income (loss)
    2,308       (67 )     (12,282 )     367,758       2,047       359,764  
Provision for loan losses
                            48,947               48,947  
 
Net interest income (loss) after provision for loan losses
    2,308       (67 )     (12,282 )     318,811       2,047       310,817  
Service charges on deposit accounts
                            47,469               47,469  
Other service fees
                            108,064       (27,718 )     80,346  
Net gain (loss) on sale and valuation adjustment of investment securities
    152       13,490               (1,714 )     412       12,340  
Trading account (loss) profit
                            (647 )     12,122       11,475  
Gain on sale of loans
                            47,054       207       47,261  
Other operating income
    2,842       2,893               32,853       (8,646 )     29,942  
 
 
    5,302       16,316       (12,282 )     551,890       (21,576 )     539,650  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    5,892       93               129,818       (271 )     135,532  
Pension, profit sharing and other benefits
    1,629       20               40,950       (79 )     42,520  
 
 
    7,521       113               170,768       (350 )     178,052  
Net occupancy expenses
    603       4               28,031               28,638  
Equipment expenses
    394       1       4       32,813       (15 )     33,197  
Other taxes
    266                       9,975               10,241  
Professional fees
    4,428       11       38       66,333       (33,732 )     37,078  
Communications
    137                       17,182       (19 )     17,300  
Business promotion
    2,463                       30,360               32,823  
Printing and supplies
    27                       4,605               4,632  
Other operating expenses
    (14,920 )     (104 )     107       44,072       (324 )     28,831  
Impact of change in fiscal period at certain subsidiaries
                    3,495       4,109       2,137       9,741  
Amortization of intangibles
                            2,721               2,721  
 
 
    919       25       3,644       410,969       (32,303 )     383,254  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    4,383       16,291       (15,926 )     140,921       10,727       156,396  
Income tax
    777               (5,574 )     40,617       2,073       37,893  
 
Income (loss) before equity in earnings of subsidiaries
    3,606       16,291       (10,352 )     100,304       8,654       118,503  
Equity in earnings of subsidiaries
    114,897       1,991       11,942       7,768       (136,598 )        
 
NET INCOME
  $ 118,503     $ 18,282     $ 1,590     $ 108,072     ($ 127,944 )   $ 118,503  
 

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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  
Net gain on sale and valuation adjustment of investment 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  
Pension, profit sharing and other benefits
            18               40,543       (187 )     40,374  
 
 
            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  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Cash flows from operating activities:
                                               
Net income
  $ 118,503     $ 18,282     $ 1,590     $ 108,072     ($ 127,944 )   $ 118,503  
Less: Impact of change in fiscal period of certain subsidiaries, net of tax
                    (2,271 )     (2,638 )     (1,220 )     (6,129 )
 
Net income before impact of change in fiscal period
    118,503       18,282       3,861       110,710       (126,724 )     124,632  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (114,897 )     (1,991 )     (11,942 )     (7,768 )     136,598          
Depreciation and amortization of premises and equipment
    564                       20,891       (18 )     21,437  
Provision for loan losses
                            48,947               48,947  
Amortization of intangibles
                            2,721               2,721  
Amortization of servicing assets
                            13,510       (9 )     13,501  
Net (gain) loss on sale and valuation adjustment of investment securities
    (152 )     (13,490 )             1,714       (412 )     (12,340 )
Net gain on disposition of premises and equipment
                            (1,512 )             (1,512 )
Net gain on sale of loans
                            (47,054 )     (207 )     (47,261 )
Net amortization of premiums and accretion of discounts on investments
    (133 )     3               7,208       (66 )     7,012  
Net amortization of premiums and deferred loan origination fees and costs
    (23 )                     33,523       (1,613 )     31,887  
Earnings from investments under the equity method
    (792 )     (2,881 )             (193 )     (395 )     (4,261 )
Stock options expense
    187                       613               800  
Net disbursements on loans held-for-sale
                            (2,046,227 )             (2,046,227 )
Acquisitions of loans held-for-sale
                            (166,540 )             (166,540 )
Proceeds from sale of loans held-for-sale
                            2,166,951               2,166,951  
Net decrease in trading securities
                            677,764               677,764  
Net decrease (increase) in accrued income receivable
    115       (6 )     1,133       (29,449 )     (2,382 )     (30,589 )
Net (increase) decrease in other assets
    (11,221 )     (1 )     551       31,428       (1,287 )     19,470  
Net increase in interest payable
    264       69       18,188       2,959       2,369       23,849  
Net increase in deferred income tax
                    (3,075 )     (3,032 )     4,356       (1,751 )
Net increase in postretirement benefit obligation
                            1,585               1,585  
Net increase (decrease) in other liabilities
    9,725       485       (1,262 )     (6,827 )     1,165       3,286  
 
Total adjustments
    (116,363 )     (17,812 )     3,593       701,212       138,099       708,729  
 
Net cash provided by operating activities
    2,140       470       7,454       811,922       11,375       833,361  
 
Cash flows from investing activities:
                                               
Net increase in money market investments
    (84,600 )             (37 )     (110,530 )     (45,183 )     (240,350 )
Purchases of investment securities:
                                               
Available-for-sale
            (7,954 )             (273,651 )     105,630       (175,975 )
Held-to-maturity
                            (7,747,198 )             (7,747,198 )
Other
                            (10,580 )             (10,580 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            346,354       (99,299 )     247,055  
Held-to-maturity
                            7,556,192               7,556,192  
Other
    496                       24,578               25,074  
Proceeds from sale of investment securities available-for-sale
    6,655       27,924               9,315               43,894  
Net (disbursements) repayments on loans
    (21,789 )             119,522       81,910       13,366       193,009  
Proceeds from sale of loans
                            73,038               73,038  
Acquisition of loan portfolios
                            (141,658 )             (141,658 )
Capital contribution to subsidiary
            (505 )     (797 )     (29,881 )     31,183          
Assets acquired, net of cash
                            (218 )             (218 )
Acquisition of premises and equipment
    (3,769 )                     (35,030 )             (38,799 )
Proceeds from sale of premises and equipment
                            14,452               14,452  
Dividends received from subsidiary
    104,000                       60,763       (164,763 )        
 
Net cash provided by (used in) investing activities
    993       19,465       118,688       (182,144 )     (159,066 )     (202,064 )
 
Cash flows from financing activities:
                                               
Net increase in deposits
                            726,357       43,120       769,477  
Net decrease in federal funds purchased and assets sold under agreements to repurchase
                    (108,700 )     (406,192 )     14,660       (500,232 )
Net (decrease) increase in other short-term borrowings
            (14,623 )     181,925       (534,464 )     205,565       (161,597 )
Payments of notes payable
                    (203,001 )     (1,102,079 )     404,963       (900,117 )
Proceeds from issuance of notes payable
    98               3,547       743,373       (640,766 )     106,252  
Dividends paid to parent company
                            (164,762 )     164,762          
Dividends paid
    (45,768 )                                     (45,768 )
Proceeds from issuance of common stock
    42,816                               167       42,983  
Capital contribution from parent
                            31,184       (31,184 )        
 
Net cash used in financing activities
    (2,854 )     (14,623 )     (126,229 )     (706,583 )     161,287       (689,002 )
 
Cash effect of change in fiscal period of certain subsidiaries
                    78       19,570       (7,734 )     11,914  
 
Net increase (decrease) in cash and due from banks
    279       5,312       (9 )     (57,235 )     5,862       (45,791 )
Cash and due from banks at beginning of period
    696       2,103       448       962,395       (59,245 )     906,397  
 
Cash and due from banks at end of period
  $ 975     $ 7,415     $ 439     $ 905,160     ($ 53,383 )   $ 860,606  
 

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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, net of tax
            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  
Amortization of servicing assets
                            3,434       (13 )     3,421  
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
                            (15,046 )     5,230       (9,816 )
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 disbursements on loans held-for-sale
                            (800,476 )             (800,476 )
Acquisitions of loans held-for-sale
                            (563,223 )             (563,223 )
Proceeds from sale of loans held-for-sale
                            913,688               913,688  
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       40,703       (779 )     46,405  
Net increase in interest payable
    2,991       5       14,766       2,996       (674 )     20,084  
Net increase in deferred income tax
    (181 )             (2,272 )     (1,549 )     (476 )     (4,478 )
Net increase in postretirement benefit obligation
                            1,414               1,414  
Net increase (decrease) in other liabilities
    4,092       (13 )     4,780       (48,880 )     (4,631 )     (44,652 )
 
Total adjustments
    (155,586 )     (26,807 )     (12,147 )     (386,020 )     181,470       (399,090 )
 
Net cash provided by (used in) operating activities
    7,293       (89 )     13,156       (254,411 )     (5,767 )     (239,818 )
 
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 )             (7,669,578 )             (7,671,759 )
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                       7,701,301               7,851,301  
Other
                            21,863               21,863  
Proceeds from sale of investment securities available-for-sale
    57,506                       42,438               99,944  
Net repayments (disbursements) on loans
    15,571               (3,634 )     802,372       28,669       842,978  
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 )     291,853       300,170       433,479  
 
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 )
Payments of notes payable
    (750 )             (10,830 )     (935,976 )     102,620       (844,936 )
Proceeds from issuance of notes payable
    95               11,915       323,052       (193,053 )     142,009  
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  
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 change in accounting principle
            (28 )             (1,544 )             (1,572 )
 
Net increase (decrease) in cash 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 period
  $ 301     $ 13     $ 5,290     $ 847,377     ($ 40,500 )   $ 812,481  
 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis (MD&A) 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.
OVERVIEW
As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico (BPPR), as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending, reinsurance and insurance agency services through specialized subsidiaries. In the United States, the Corporation has established the largest Hispanic-owned financial services franchise, Banco Popular North America (BPNA), providing complete financial solutions to all the communities it serves. Also, in the United States, Popular Financial Holdings, Inc. (PFH), holding company of Equity One, Inc., offers mortgage and personal loans, and also maintains a substantial wholesale loan brokerage network, a warehouse lending division and a loan servicing unit. PFH, through its newly acquired subsidiary E-LOAN, Inc. (E-LOAN), also provides online consumer direct lending to obtain mortgage, auto and home equity loans. The Corporation strives to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. EVERTEC, Inc. (EVERTEC), the Corporation’s main subsidiary in this business segment, is the leading provider of financial transaction processing and information technology solutions in Puerto Rico and the Caribbean. With offices in San Juan, Caracas, Santo Domingo, and Miami, EVERTEC has presence in 11 Latin American countries.
Financial highlights for the quarter ended March 31, 2006, compared with the same quarter in 2005, are included below. Also, Table A provides selected financial data for those quarters.
    Slight growth in net interest income of $2.5 million, or less than 1%. On a taxable equivalent basis, net interest income increased $7.1 million or 2%. The sustained inversion of the yield curve and competitive pricing continued to put pressure on the Corporation’s net interest margin. Average earning assets rose $3.1 billion or 7%, with sound growth in commercial and consumer loans. The upward repricing of the Corporation’s interest bearing assets continues to lag the increase in the cost of its interest bearing liabilities, primarily in the residential mortgage lending business. Table B provides information on the Corporation’s net interest income on a taxable equivalent basis.
 
    The results for the first quarter of 2006 included $12.3 million in gains on sales of investment securities, mainly marketable equity securities, net of valuation adjustments for other-than-temporary impairments of investment securities available-for-sale, compared with $51.3 million in the same period of 2005.
 
    Non-interest income, excluding the aforementioned net gains on sales and valuation adjustments of investment securities, rose by $62.2 million, primarily from revenues derived from mortgage banking activities resulting from securitization transactions and bulk sales of loans. Refer to the Non-Interest Income section of the MD&A for further explanations, including Table C for a breakdown of other service fees by major categories.
 
    Provision for loan losses increased by $4.6 million. 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. Credit quality statistics indicate higher delinquencies in the consumer and mortgage portfolios and an increase in net charge-off rates, principally in consumer loans, both in Puerto Rico and the U.S. mainland.

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TABLE A
Financial Highlights
                                                 
Financial Condition Highlights   At March 31,   Average for the quarter
(In thousands)   2006   2005   Variance   2006   2005   Variance
 
Money market investments
  $ 989,915     $ 723,275     $ 266,640     $ 644,978     $ 859,211     ($ 214,233 )
Investment and trading securities
    12,669,274       12,130,448       538,826       13,034,368       12,361,927       672,441  
Loans*
    31,430,385       29,428,026       2,002,359       31,924,429       29,325,771       2,598,658  
Total assets
    48,591,703       45,167,838       3,423,865       48,956,516       45,438,817       3,517,699  
Deposits
    23,411,812       21,728,677       1,683,135       22,643,620       21,592,432       1,051,188  
Borrowings
    20,894,119       19,596,463       1,297,656       21,931,525       19,951,984       1,979,541  
Stockholders’ equity
    3,487,557       3,065,000       422,557       3,658,269       3,135,594       522,675  
 
                         
Operating Highlights   First Quarter
(In thousands, except per share information)   2006   2005   Variance
 
Net interest income
  $ 359,764     $ 357,286     $ 2,478  
Provision for loan losses
    48,947       44,336       4,611  
Non-interest income
    228,833       205,589       23,244  
Operating expenses
    383,254       316,834       66,420  
Income tax
    37,893       42,433       (4,540 )
Cumulative effect of accounting change, net of tax
          3,607       (3,607 )
Net income
  $ 118,503     $ 162,879     ($ 44,376 )
Net income applicable to common stock
  $ 115,525     $ 159,901     ($ 44,376 )
Basic EPS before cumulative effect of accounting change
  $ 0.42     $ 0.59     ($ 0.17 )
Diluted EPS before cumulative effect of accounting change
  $ 0.42     $ 0.58     ($ 0.16 )
Basic and diluted EPS after cumulative effect of accounting change
  $ 0.42     $ 0.60     ($ 0.18 )
 
                         
            First Quarter
Selected Statistical Information   2006   2005
 
Common Stock Data —
Market price
               
       
High
  $ 21.20     $ 28.03  
       
Low
    19.54       23.80  
       
End
    20.76       24.32  
Book value per share at period end
    11.87       10.79  
Dividends declared per share
    0.16       0.16  
Dividend payout ratio
    35.62 %     27.14 %
Price/earnings ratio
    11.53 x     12.41 x
       
 
               
 
       
 
               
Profitability Ratios —
Return on assets
    1.02 %     1.43 %
       
Return on common equity
    14.04       21.62  
       
Net interest spread (taxable equivalent)
    2.99       3.21  
       
Net interest margin (taxable equivalent)
    3.40       3.58  
       
Effective tax rate
    24.23       21.04  
       
Overhead ratio**
    42.92       31.14  
       
Efficiency ratio ***
    66.51       61.93  
       
 
               
 
       
 
               
Capitalization Ratios —
Equity to assets
    7.47 %     6.90 %
       
Tangible equity to assets
    6.01       5.81  
       
Equity to loans
    11.46       10.69  
       
Internal capital generation
    8.27       14.61  
       
Tier I capital to risk – adjusted assets
    11.33       11.49  
       
Total capital to risk – adjusted assets
    12.59       12.77  
       
Leverage ratio
    7.62       7.46  
 
 
*   Includes loans held-for-sale
 
**   Non-interest expense less non-interest income divided by net interest income
 
***   Non-interest expense divided by net interest income plus recurring non-interest income (refer to the “Operating expenses” section of this MD&A for a description of items not considered “recurring”)

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    Higher operating expenses by $66.4 million, principally personnel costs, business promotion, professional fees, net occupancy and equipment expenses. E-LOAN, acquired in the fourth quarter of 2005, contributed with $38.4 million or 58% of the total increase in operating expenses. Also, contributing to the increase in operating expenses is the impact of the change in reporting period of certain subsidiaries which was completed during the first quarter of 2006. As previously described in the Corporation’s Form 10-K for the year ended December 31, 2005, in 2005, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31st calendar period, primarily as part of a strategic plan to put in place a corporate-wide integrated financial system and to facilitate the consolidation process. The financial results for the month of December 2005 of PFH (excluding E-LOAN which already had a December 31st year-end closing), Popular FS, Popular Securities and Popular North America (holding company only) are included in a separate line within operating expenses for the quarter ended March 31, 2006 and amounted to a loss of $9.7 million (before tax). After tax, this change resulted in a net loss of $6.1 million that is included in the quarterly results for the period ended March 31, 2006. As of the end of the first quarter of 2006, all subsidiaries of the Corporation have aligned their year-end closings to December 31st, similar to the parent holding company.
 
    Total earning assets at March 31, 2006 decreased slightly by less than 1% compared with December 31, 2005. Refer to the Financial Condition section of this MD&A for descriptive information on the composition of assets, deposits, borrowings and capital of the Corporation.
 
    In the fourth quarter of 2005, the Corporation sold substantially all the retail outlets of Popular Cash Express (PCE). In the first quarter of 2006, the Corporation finalized the sale of the remaining four retail outlets, as such fully divesting this line of business. The impact of the sale of these four outlets was not significant.
 
    Subsequent to quarter end, in April 2006, the Corporation issued $450 million in medium-term notes maturing in 2009. Of the total amount issued, $250 million bear interest at a fixed rate of 5.65% and $200 million bear interest at floating rates tied to the 3-month LIBOR plus a spread of 40 basis points, which reset quarterly. The Corporation simultaneously entered into an interest swap contract to convert the floating rate notes to fixed rate notes in the rising interest rate scenario. Under the swap arrangement, the Corporation pays a fixed rate equal to 5.58%. The cash inflows were used to substitute short-term borrowings and finance operations.
 
    On April 28, 2006, Popular, Inc. and Grupo Cuscatlán, through Corporación UBC International, S.A. (UBCI), announced that the agreement subscribed on April 24, 2005 for the acquisition by Popular, Inc. of a 19.99% equity participation in UBCI, Grupo Cuscatlán’s holding company, will not be completed. Due to the time lapsed and changes in economic conditions, both parties could not reach a final consensus before the deadline set in the original agreement.
 
    On May 1, 2006, as a result of a lack of current budgetary funds and lack of legislative authorization for the Government of Puerto Rico to obtain a loan, the Government closed a number of government agencies for the remainder of its current fiscal year, which ends on June 30, 2006. Approximately 95,000 public sector employees have been placed on unpaid leave until the budgetary crisis is resolved. Furthermore, on May 8, 2006, a nationally recognized rating agency downgraded the Government of Puerto Rico’s debt obligations. Refer to Item 1A. Risk Factors included in Part II — Other Information on this Form 10-Q for further information on these events.
The Corporation, like other financial institutions, is subject to a number of risks, many of which are outside of management’s control. Among the risks assumed are: (1) market risk, which is the risk that changes in market rates and prices will adversely affect the Corporation’s financial condition or results of operation, (2) liquidity risk, which is the risk that the Corporation will have insufficient cash or access to cash to meet operating needs and financial obligations, (3) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their contractual obligations, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. As a financial services company, the Corporation’s earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products. The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies. The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect our profitability.
The description of the Corporation’s business contained in Item 1 of the Corporation’s Form 10-K for the year ended December 31, 2005, while not all inclusive, discusses additional information about the business of the Corporation

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and risk factors – many beyond the Corporation’s control – that, in addition to the other information in this report, readers should consider.
Further discussion of operating results, financial condition and credit, market and liquidity risks is presented in the narrative and tables included herein.
The shares of the Corporation’s common and preferred stock are traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) system under the symbols BPOP and BPOPO, respectively.
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. Various elements of the Corporation’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.
Management has discussed the development and selection of the critical accounting policies and estimates with the Corporation’s Board of Directors’ Audit Committee. The Corporation has identified as critical accounting policies those related to securities’ classification and related values, loans and allowance for loan losses, retained interests on transfers of financial assets – non-prime mortgage loans securitizations (valuations of interest-only strips and mortgage servicing rights), income taxes, goodwill and other intangible assets, and pension and postretirement benefit obligations. For a summary of the Corporation’s critical accounting policies, refer to that particular section in the MD&A included in Popular, Inc.’s 2005 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Annual Report”). Also, refer to Note 1 to the consolidated financial statements included in the 2005 Annual Report for a summary of the Corporation’s significant accounting policies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND INTERPRETATIONS
The following is a list of recently issued accounting pronouncements and interpretations that are applicable for adoption by the Corporation in 2006 or thereafter. Refer to Note 2 to the consolidated financial statements for a description of each statement and management’s assessment as to the impact of the adoptions.
SFAS No. 123-R “Share-Based Payments” — This Statement focuses primarily on transactions in which an entity exchanges its equity instruments for employee services and generally establishes standards for the accounting of transactions in which an entity obtains goods or services in share-based payment transactions. The impact of the adoption of SFAS 123-R in January 2006 was not significant for the results of the quarter. Refer to Note 11 to the consolidated financial statements for required disclosures and further information on the impact of this accounting pronouncement.
SFAS No. 153 “Exchanges of Nonmonetary Assets” — This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. The adoption of this Statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows for the quarter ended March 31, 2006.
SFAS No. 154 “Accounting Changes and Error Corrections” — This Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. The Corporation adopted SFAS No. 154 in January 2006. The adoption of SFAS No. 154 did not have a significant impact on the statement of condition or results of operations for the quarter ended March 31, 2006.
SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” — This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”,

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and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Corporation elected to adopt SFAS No. 155 commencing in January 2007.
SFAS No. 156 “Accounting for Servicing of Financial Assets — an Amendment of FASB No. 140” — This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under specific situations.
2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: amortization or fair value measurement method.
4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.
5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. The Corporation elected to adopt SFAS No. 156 commencing in January 2007. The Corporation is currently evaluating the impact that this accounting pronouncement may have in its financial condition and results of operations, subject to the measurement methods, class definitions and other determinations that need to be made upon adoption.
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, 2006, as compared with the same period in 2005, segregated by major categories of interest earning assets and interest bearing liabilities.
The interest earning assets include investment securities and loans which are exempt from income tax, principally in Puerto Rico (P.R.). The main sources of tax-exempt interest income are investments in obligations of some U.S. Government agencies and sponsored entities, and the P.R. Commonwealth and its agencies, and assets held by the Corporation’s international banking entities, which are tax-exempt under P.R. laws. To facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates at each respective quarter end. The statutory income tax rate considered for the Corporation’s P.R. operations in the first quarter of 2005 was 39%. During the third quarter of 2005, the Government of P.R. approved a temporary, two-year additional tax of 2.5% for corporations, which increased the marginal tax rate from a 39% to 41.5%. The impact of the additional tax, including the retroactive amounts corresponding to the first nine months of 2005, was included in the Corporation’s results of operations in the third quarter of 2005, which was not significant. The statutory income tax rate considered for the Corporation’s P.R. operations in the quarter ended March 31, 2006 was 41.5%. The taxable equivalent computation considers the interest expense disallowance required by the P.R. tax law, also affected by the mentioned increase in tax rate. The statutory income tax rate considered for the Corporation’s U.S. operations was 35%.

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Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Interest income for the quarter ended March 31, 2006 included an unfavorable impact of $7.4 million, consisting principally of amortization of net loan origination costs (net of fees), amortization of net premiums on loans purchased, and prepayment penalties and late payment charges. These amounts approximated $8.7 million for the quarter ended March 31, 2005.
TABLE B
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Quarter ended March 31,
                                                                                         
                                                                            Variance
Average Volume   Average Yields / Costs       Interest   Attributable to
2006   2005   Variance   2006   2005   Variance       2006   2005   Variance   Rate   Volume
($ in millions)                               (In thousands)
$ 645     $ 859     ($ 214 )     5.29 %     3.56 %     1.73 %  
Money market investments
  $ 8,415     $ 7,534     $ 881     $ 3,062     ($ 2,181 )
  12,433       11,964       469       5.03       4.50       0.53    
Investment securities
    156,338       134,389       21,949       17,436       4,513  
  601       398       203       6.32       6.30       0.02    
Trading securities
    9,374       6,184       3,190       18       3,172  
         
  13,679       13,221       458       5.10       4.49       0.61    
 
    174,127       148,107       26,020       20,516       5,504  
         
                                               
Loans:
                                       
  12,938       11,313       1,625       7.30       6.27       1.03    
Commercial
    232,927       174,809       58,118       31,077       27,041  
  1,320       1,285       35       7.47       7.68       (0.21 )  
Leasing
    24,633       24,667       (34 )     (691 )     657  
  12,773       12,616       157       6.74       6.51       0.23    
Mortgage
    215,101       205,335       9,766       7,202       2,564  
  4,894       4,112       782       10.23       10.24       (0.01 )  
Consumer
    124,052       104,359       19,693       297       19,396  
         
  31,925       29,326       2,599       7.53       6.99       0.54    
 
    596,713       509,170       87,543       37,885       49,658  
         
$ 45,604     $ 42,547     $ 3,057       6.80 %     6.21 %     0.59 %  
Total earning assets
  $ 770,840     $ 657,277     $ 113,563     $ 58,401     $ 55,162  
         
                                               
Interest bearing deposits:
                                       
$ 3,790     $ 3,778     $ 12       1.73 %     1.39 %     0.34 %  
NOW and money market*
  $ 16,204     $ 12,934     $ 3,270     $ 3,599     ($ 329 )
  5,519       5,622       (103 )     1.28       1.19       0.09    
Savings
    17,373       16,449       924       1,135       (211 )
  9,473       7,983       1,490       3.89       3.44       0.45    
Time deposits
    90,834       67,673       23,161       9,475       13,686  
         
  18,782       17,383       1,399       2.69       2.26       0.43    
 
    124,411       97,056       27,355       14,209       13,146  
         
  11,477       9,698       1,779       4.41       2.75       1.66    
Short-term borrowings
    124,803       65,803       59,000       45,227       13,773  
  10,455       10,254       201       5.16       4.46       0.70    
Medium and long-term debt
    133,232       113,135       20,097       18,777       1,320  
         
                                               
Total interest bearing
                                       
  40,714       37,335       3,379       3.81       3.00       0.81    
liabilities
    382,446       275,994       106,452       78,213       28,239  
                                               
Non-interest bearing
                                       
  3,861       4,210       (349 )                          
demand deposits
                                       
  1,029       1,002       27                            
Other sources of funds
                                       
         
$ 45,604     $ 42,547     $ 3,057       3.40 %     2.63 %     0.77 %  
 
                                       
                                             
                          3.40 %     3.58 %     (0.18 %)  
Net interest margin
                                       
                                                                     
                                               
Net interest income on a taxable equivalent basis
    388,394       381,283       7,111     ($ 19,812 )   $ 26,923  
                                                                             
                          2.99 %     3.21 %     (0.22 %)  
Net interest spread
                                       
                                                                     
                                               
Taxable equivalent adjustment
    28,630       23,997       4,633                  
                                                                     
                                               
Net interest income
  $ 359,764     $ 357,286     $ 2,478                  
                                                                     
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.
*   Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.
 
As shown in Table B, the increase in net interest income on a taxable equivalent basis for the quarter ended March 31, 2006, compared with the same quarter in the previous year, was mainly due to the increase in average earning assets,

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primarily loans, partially offset by a decrease in the net interest margin. The increase in the average loan portfolio was led by growth in commercial, including construction, and consumer loans. Refer to the Financial Condition section of this MD&A for factors that contributed to this growth and other comments on business strategy changes that have limited the increase in mortgage loans, which in past years has been one of the greatest contributors to growth in the Corporation’s earning assets. The increase in average earning assets for the quarter was funded principally with a combination of interest bearing deposits, primarily time deposits, and short-term borrowings. The decrease in average non-interest bearing deposits for the quarter ended March 31, 2006, compared with the same quarter in the previous year, resulted from the conversion of non-interest bearing demand deposits of certain government entities in P.R. to interest bearing demand deposits commencing in the second half of 2005 as accorded by the banking association and certain financial institutions in Puerto Rico.
The decrease in net interest margin, on a taxable equivalent basis, influenced by the Corporation’s liability sensitive position (interest-sensitive liabilities repricing or maturing faster than interest-sensitive assets), was mainly the result of the following factors:
    Higher cost of funds, principally due to an increase in the cost of short-term borrowings reflecting tighter Federal Reserve (FED) monetary policy. The FED raised the federal funds target rate 200 basis points during 2005, and continued the tightening policy during the first quarter of 2006 with an additional 50 basis points increase.
 
    Increase cost of long-term debt, principally resulting from secured debt derived from mortgage loan securitization transactions done in 2005.
 
    Growth in average deposits has been attained principally in time deposits, a higher-cost category, which increased cost was influenced by interest rate campaigns to attract deposits in a very competitive environment, both in Puerto Rico and the U.S. mainland. Also, the Corporation has experienced higher costs in money market and savings accounts to sustain marketing campaigns and competition in the U.S. mainland. The Corporation is striving to increase its deposit base, primarily in the U.S. mainland, and reduce its reliance on short-term borrowings in the rising interest rate scenario.
 
    Competitive pressures and a flattened yield curve which affected the ability to raise interest rates on mortgage loans originated.
Partially offsetting these unfavorable variances were the following contributors:
    Higher yields in commercial loans which were favorably impacted by the rising interest rates due to a high proportion of commercial loans with short-term repricing terms. As of March 31, 2006, approximately 58% of the commercial and construction loans portfolio had floating or adjustable interest rates.
 
    Increased yield in the investment securities portfolios, partly due to purchases of securities in a rising rate environment and the repricing of collateralized mortgage obligations with floating rates. Also, the yield rose as a result of a favorable change in the taxable equivalent adjustment.
The increase in the taxable equivalent adjustment for the quarter ended March 31, 2006, compared with the previous year, resulted mostly from higher tax-exempt interest income and the higher statutory tax rate in Puerto Rico, partially offset by an increase in the interest expense disallowance resulting from the increase in the cost of funds. Average tax-exempt earning assets approximated $10.1 billion in the quarter ended March 31, 2006, of which 88% represented tax-exempt investment securities, compared with $7.2 billion and 90%, respectively, in the quarter ended March 31, 2005.
NON-INTEREST INCOME
Refer to Table C for a breakdown of non-interest income by major categories for the quarters ended March 31, 2006 and 2005.
The principal contributors to the increase in non-interest income for the quarter ended March 31, 2006, compared with the same period in 2005, were higher gains on sales of loans and higher trading account profits, primarily related with the mortgage banking business. The increase in gains on sales of loans resulted from sales by E-LOAN, the

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Corporation’s recently acquired operation, which sold approximately $1 billion in loans during the quarter ended March 31, 2006, primarily residential mortgage loans. Also, PFH contributed to this increase in gains mainly derived from approximately $652 million in mortgage loans off-balance sheet securitizations performed during the first quarter of 2006. The increase in trading account profits was principally associated with the pooling of approximately $464 million in conforming mortgage loans at BPPR into Fannie Mae mortgage-backed securities that were subsequently sold to investors in the first quarter of 2006.
TABLE C
Non-interest income
                         
    Quarter ended March 31,
    2006   2005   $ Variance
Service charges on deposit accounts
  $ 47,469     $ 43,692     $ 3,777  
 
Other service fees:
                       
Credit card fees and discounts
    22,573       18,525       4,048  
Debit card fees
    14,919       13,022       1,897  
Insurance fees
    12,141       11,673       468  
Processing fees
    10,279       10,107       172  
Sale and administration of investment products
    7,457       6,146       1,311  
Mortgage servicing fees, net of amortization
    2,952       2,743       209  
Trust fees
    2,331       2,115       216  
Check cashing fees
    415       5,826       (5,411 )
Other fees
    7,279       8,858       (1,579 )
 
Total other service fees
    80,346       79,015       1,331  
 
Net gain on sale and valuation adjustment of investment securities
    12,340       51,250       (38,910 )
Trading account profit
    11,475       3,763       7,712  
Gain on sale of loans
    47,261       9,816       37,445  
Other operating income
    29,942       18,053       11,889  
 
Total non-interest income
  $ 228,833     $ 205,589     $ 23,244  
 
The increase in service charges on deposit accounts for the first quarter of 2006, compared with the same period in the previous year, was principally associated to higher volume of approvals on checks paid in accounts with non-sufficient funds. Also, there were higher service charges from Automated Clearing House (ACH) electronic transactions in BPPR, principally from an increase in the volume of electronic transactions and also from revisions in the pricing structure. Furthermore, there were increased account analysis fees on commercial accounts, principally at BPNA due to success of its money services business in attracting new clients, benefitting in part from a major competitor leaving this line of business.
The composition of other service fees by major categories is presented in Table C. The increase in credit card fees was mostly associated with higher merchant business income resulting from increased sales, higher interchange income as a result of increased transactional volume, and higher credit card late payment fees derived from higher volume and a price change. This was partially offset by lower credit card membership fees that resulted from promotional campaigns with no annual fee induced by business strategies and industry competition. The increase in debit card fees principally resulted from higher transactional volume at a higher average price. The rise in fees derived from the sale and administration of investment products was related to an increase in commission income from the retail securities division derived in part from the sales of bonds and the sale of a new indexed deposit product developed by BPPR, which contributed approximately $86 million in deposits at the offering date. These favorable variances were partially offset by lower check cashing fees resulting from the sale of the retail outlets of PCE. Also, there was a decrease in the other fees category as a result of many items individually not significant, which principally include lower fees in PCE related to money transfer services and lower revenues from the credit card referral business at BPNA, partially offset by higher revenues from interactive electronic ticketing services in Puerto Rico (Ticketpop) and Small Business Administration (SBA) servicing fees.

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The rise in other operating income included higher income associated with the securitizations performed by PFH, other income from mortgage banking activities associated with loan closing services to mortgage brokers, and higher revenues from the Corporation’s investment in Telecomunicaciones de Puerto Rico, Inc., among others.
These favorable variances in non-interest income categories were partially offset by lower net gains on sale and valuation adjustments of investment securities as previously described in the Overview section of this MD&A. Gains on the sale of investment securities for the quarter ended March 31, 2006 decreased by $37.0 million, mainly from lower sales of marketable equity securities, when compared with the results for the first quarter in 2005. Also, PFH recognized $1.9 million in unfavorable valuation adjustments of interest-only strips in the quarter ended March 31, 2006.
OPERATING EXPENSES
Refer to the consolidated statements of income included in this Form 10-Q for a breakdown of operating expenses by major categories.
Operating expenses for the quarter ended March 31, 2006 increased 21% compared with the same period in 2005. Personnel costs rose by $22.1 million, or 14%. Full-time equivalent employees (FTEs) were 13,049 at March 31, 2006, an increase of 649 from the same date in 2005. E-LOAN’s acquisition added 871 FTEs, and represented approximately $14 million of the total increase in personnel costs. The sale of PCE’s stores in the fourth quarter of 2005 also impacted with a reduction in FTEs of over 370. PCE’s personnel costs for the first quarter of 2006 were $2.9 million lower than the costs incurred in the first quarter of 2005. The increase in personnel costs, besides the impact of higher headcount and E-LOAN’s acquisition, was driven mostly by higher salaries, related taxes, incentive accruals, medical insurance and savings plan expenses, partially offset by lower profit sharing. As described in the paragraph below there were plan amendments in certain employee benefits plans.
As disclosed in the 2005 Annual Report, in October 2005, the Board of Directors of BPPR adopted an amendment to the Puerto Rico Retirement and Tax Qualified Retirement Restoration Plans to freeze benefits for all employees under age 30 or who had less than 10 years of credited service effective January 1, 2006 and providing 100% vesting to all employees in their accrued benefit as of December 31, 2005. The expense for these plans was remeasured as of September 30, 2005 to consider this change using a discount rate of 5.50%. Curtailment costs were considered for these plans and were included as part of the December 31, 2005 disclosures. In connection with the amendments to the plans, these employees received a base salary increase according to their age and years of service, effective January 1, 2006. Also, commencing January 1, 2006, BPPR no longer provides a deferred profit sharing plan to all its employees. The assets and liabilities of the profit sharing plan as of December 31, 2005 are being transferred to employee savings and stock plan accounts during 2006. In connection with this change, employees received a pre-determined increase in base salary effective January 1, 2006, and BPPR raised its matching contribution in the savings and stock plan. The net financial impact of the changes in the benefit plans described above for the quarter ended March 31, 2006 was not significant.
All other operating expenses for the quarter ended March 31, 2006, excluding personnel costs, increased $44.3 million, or 28%, compared with the first quarter of 2005. The increase in operating expenses incorporates the aforementioned $9.7 million pre-tax loss on the impact of the change in fiscal year of certain of the Corporation’s subsidiaries, as described in the Overview section of this MD&A. The largest cost increases for the quarter included business promotion, professional fees, net occupancy and equipment expenses, and were associated with higher advertising expenses mainly in E-LOAN, systems and application costs to support business processes, higher collection and other credit related costs to support the lending business, and increased external audit fees. E-LOAN accounted for approximately $24.4 million of the increase in operating expenses, excluding personnel costs, for the quarter ended March 31, 2006, while PCE represented a decline of approximately $5.1 million.
As presented in Table A, the Corporation’s efficiency ratio increased from 61.93% for the quarter ended March 31, 2005 to 66.51% in the same quarter in 2006. The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. As stated in the Glossary of Selected Financial Terms included in the 2005 Annual Report, in determining the efficiency ratio the Corporation includes recurring non-interest income items, thus isolating income items that may be considered volatile in nature. Management believes that the exclusion of those items would permit greater comparability for analytical purposes. Amounts within non-interest income not considered recurring in nature

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by the Corporation amounted to $12.3 million in the quarter ended March 31, 2006, compared with $51.3 million in the same quarter in the previous year, and corresponded principally to net gains (losses) on the sale of investment securities and unfavorable adjustments in the valuation of investment securities. The efficiency ratio was unfavorably impacted by the $9.7 million pre-tax loss described above on the change in fiscal year at certain subsidiaries. In 2006, the Corporation has taken corporate-wide steps to implement productivity improvements and expense management controls, which in the long-run should result in efficiency improvements.
INCOME TAX
The decrease in income tax expense for the quarter ended March 31, 2006, compared with the same quarter in the previous year, was primarily due to lower pre-tax earnings for the current period and to higher exempt interest income net of the disallowance of expenses attributed to such exempt income. This decrease was partially offset by a reduction in income subject to a lower preferential tax rate on capital gains and by an additional income tax of 2.5% due to the transitory provision approved by the Government of Puerto Rico which increased the statutory tax rate in P.R. from 39% to 41.5%. As stated in the Net Interest Income section of this MD&A, although this tax rate change was effective for the full-year 2005, its approval by the government did not take effect until the third quarter of 2005 and the impact of the first nine months of 2005 was accounted in the quarter when the amended law was enacted. A portion of the capital gains realized during the first quarter of 2005 was subject to the transitory provision effective until June 30, 2005 that reduced the preferential tax rate from 12.5% to 6.25%. The effective tax rate for the quarters ended March 31, 2006 and 2005 were 24.23% and 21.04%, respectively.
REPORTABLE SEGMENT RESULTS
The Corporation’s reportable segments for managerial reporting consist of Banco Popular de Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. Also, a Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by this latter group are not allocated to the four reportable segments.
For a more complete description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 17 to the consolidated financial statements. The Corporate group, which supports the four reportable segments, had a net loss of $0.3 million in the first quarter of 2006, compared with a net gain of $34.7 million in the same quarter of 2005. During the first quarter of 2005, the Corporation’s holding companies within the Corporate group realized gains on the sale of marketable equity securities approximating $50.5 million, compared with $13.5 million in the first quarter of 2006.
Highlights on the earnings results for the reportable segments are discussed below.
Banco Popular de Puerto Rico
The segment of Banco Popular de Puerto Rico reported a net income of $100.1 million for the quarter ended March 31, 2006, an increase of $8.8 million, or 10%, compared with the same quarter in the previous year. The main factors that contributed to the variance in results for 2006 when compared to the first quarter of 2005 included:
 Higher net interest income by $8.3 million, or 4%, which was primarily derived from the commercial banking business, which experienced a $9.4 million, or 13%, growth. This increase in commercial banking net interest income was primarily the result of a greater average volume of commercial loans, coupled with a higher yield. A substantial portion of Banco Popular de Puerto Rico’s commercial portfolio has adjustable or floating rate characteristics, thus was favorably impacted by the higher short-term interest rates experienced in 2005 and beginning of 2006. The net interest margin, however, was negatively impacted by the higher cost of funding in the rising rate scenario.
 Non-interest income grew by $20.9 million, or 22%, mainly due to higher mortgage banking revenues from the sale of loans and mortgage-backed securities. Also, there were higher credit card fees and discounts, debit card fees, revenues from the sale and administration of investment products, and service charges on deposit accounts.
 Operating expenses increased by $4.3 million, or 2%, in part associated with higher personnel costs, net occupancy, professional fees and equipment expenses, partially offset by lower business promotion expenses.
 Higher income taxes by $14.6 million, or 61%, primarily due to higher taxable income and the increase in the income tax from 39% to 41.5%, as described in the Net Interest Income section of this MD&A.

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Banco Popular North America
For the quarter ended March 31, 2006, net income for the reportable segment of Banco Popular North America totaled $22.6 million, an increase of $2.7 million, or 14%, compared with the financial results for the first quarter of 2005. Main factors that contributed to this variance included:
 Net interest income grew by $4.3 million, or 5%, mostly due to an increase in the volume of earning assets, primarily investment securities and loans, mainly in the commercial portfolio. Earning assets growth was funded primarily through time deposits, including retail certificates of deposits attracted by deposit gathering campaigns at attractive rates, and brokered certificates of deposits, and short-term borrowings.
 Provision for loan losses increased by $2.1 million, or 29%, primarily due to higher net charge-offs in the consumer portfolio and growth in the commercial portfolio, partially offset by lower net charge-offs in the lease financing portfolio due to recoveries from a particular lending relationship that was originally charged-off in stages through 2004 and 2005.
 Lower non-interest income by $3.3 million, or 12%, which was mainly due to lower service fees as a result of lower check cashing and money transfer fees due to the sale of PCE operations, partially offset by higher charges on deposit accounts, mainly commercial account analyses fees, and higher gains on the sale of loans, primarily SBA loans.
 Lower operating expenses by $4.4 million, or 6%, mainly due to the sale of PCE operations, partially offset by higher expenses in business promotion and professional fees. The latter included higher costs associated with the lending business, such as appraisals and collection services, and computer service and processing fees.
 Higher income taxes by $0.9 million, or 7%, were mainly due to higher taxable income.
Popular Financial Holdings
PFH’s net loss for the quarter ended March 31, 2006, totaled $7.9 million, a decline compared with a net income of $10.5 million for the first quarter of 2005. Factors that contributed to the variance in these financial results included:
 Net interest income declined by $8.6 million, or 15%. Profit margins in the mortgage lending segment continued to tighten in the first quarter of 2006 as short-term rates continued to rise while the rates on the mortgage loans originated increased at a lesser rate. Also, the average cost of on-balance sheet securitizations rose for the quarter ended March 31, 2006 when compared to the same quarter in the previous year. This unfavorable variance due to a lower net interest margin was partially offset by higher average volume of earning assets, primarily related to the auto loan portfolio acquired from E-LOAN.
 The provision for loan losses increased by $4.2 million, or 36%, primarily due to higher net charge-offs in the mortgage and consumer loan portfolios and higher consumer non-performing assets.
 Higher non-interest income by $38.0 million was mainly due to higher gains on the sale of mortgage loans, and other revenues associated with securitizations transactions and broker loan origination services. As described in the Non-Interest Income section of this MD&A, both E-LOAN and PFH contributed to these gains through bulk loans sales and off-balance sheet securitization transactions. These favorable changes were partially offset by higher write-downs in the valuation of interest-only strips as also mentioned in the Non-Interest Income section of this MD&A.
 Operating expenses rose by $54.6 million, mainly as a result of $38.4 million in operating expenses of E-LOAN, which did not exist in the first quarter of 2005, and higher personnel costs, net occupancy and equipment expenses, among others. Also, included in operating expenses was an unfavorable impact of the change in fiscal year in the PFH reportable segment amounting to $6.2 million, as described in the Overview section of this MD&A.
 Income taxes decreased by $11.0 million mainly due to lower taxable income.
EVERTEC
EVERTEC’s net income for the quarter ended March 31, 2006 totaled $5.1 million, a decline of $1.7 million, compared with the results of the same quarter in the previous year. The principal factors that contributed to the variance in results for 2006 when compared with the first quarter of 2005 included:
 Slight growth in non-interest income of $0.2 million was the result of higher electronic transactions processing fees, in part due to business volume derived from Scandata, acquired in 2005. This favorable variance was offset by lower technology consulting fees, principally from internal projects within the Corporation. Also, the remeasurement adjustment of the Corporation’s investment in CONTADO in the Dominican Republic was lower in the first quarter of 2006 by approximately $0.4 million, compared with the first quarter of 2005. This figure is impacted by the currency exchange rate of the Dominican peso at the remeasurement date, and to the mix in the composition of monetary and non-monetary balance sheet components of the entity being remeasured. For further information on this subject, refer to Note 1 to the consolidated financial statements.

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 Higher operating expenses by $1.5 million, primarily equipment expenses, personnel costs, and business promotion, partially offset by lower professional fees.
FINANCIAL CONDITION
Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of condition and to Table A for financial highlights on major line items of the statement of condition.
A breakdown of the Corporation’s loan portfolio, the principal category of earning assets, at period-end, is presented in Table D.
TABLE D
Loans Ending Balances
                                         
                    Variance           Variance
                    March 31, 2006           March 31, 2006
    March 31,   December 31,   vs.   March 31,   vs.
(In thousands)   2006   2005   December 31, 2005   2005   March 31, 2005
 
Commercial, industrial and agricultural *
  $ 12,130,325     $ 11,921,908     $ 208,417     $ 10,846,648     $ 1,283,677  
Construction
    1,062,659       835,978       226,681       546,610       516,049  
Lease financing
    1,324,867       1,308,091       16,776       1,280,729       44,138  
Mortgage *
    12,040,304       12,872,452       (832,148 )     12,579,729       (539,425 )
Consumer *
    4,872,230       4,771,778       100,452       4,174,310       697,920  
 
Total
  $ 31,430,385     $ 31,710,207     ($ 279,822 )   $ 29,428,026     $ 2,002,359  
 
*   Includes loans held-for-sale
The decline in period-end loans since December 31, 2005 was mostly associated with mortgage loans (including loans held-for-sale) and resulted principally from the pooling of $464 million in conforming mortgage loans at BPPR into Fannie Mae mortgage-backed securities that were subsequently sold to investors, and to the sale of $652 million in mortgage loans in off-balance sheet securitization transactions performed by PFH in the quarter ended March 31, 2006. The Corporation has implemented strategic changes at PFH in 2006 that should have the effect of decreasing growth of the non-prime loan portfolio at the Corporation, primarily by eliminating non-prime mortgage loan acquisitions and increasing origination and sale of prime mortgage loans as a result of the acquisition of E-LOAN. The decline in mortgage loans from December 31, 2005 was offset by growth in commercial, construction, and consumer loans as presented in Table D. The growth in commercial loans was mainly the result of new credit facilities granted during the quarter primarily to corporate clients and a higher volume on funds drawn under existing credit lines. Also, construction loans increased due to new loans granted and significant progress in construction phases at various large projects mainly in BPNA. As shown in Table E, the increase in consumer loans was mostly in auto loans, mainly from the auto loan financing subsidiary in BPPR’s reportable segment and from the retention of auto loans originated by PFH, through its subsidiary E-LOAN. The latter accounted for approximately $86 million of the increase in consumer loans from December 31, 2005. Similar factors influenced the increases (decreases) in the various loan categories when compared with March 31, 2005. In addition, within the consumer loans category, the portfolios of personal loans and credit cards experienced growth from March 31, 2005. This increase in personal loans was associated to favorable customer response to marketing efforts, primarily in BPPR. Credit cards also increased mostly as a result of higher sales volume and increased number of credit card holders attracted from novel campaigns, offers of no annual membership fees, tiered pricing and new products directed to increase Popular’s credit card market share in Puerto Rico.

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TABLE E
Breakdown of Consumer Loans
                                         
                    Variance           Variance
                    March 31, 2006           March 31, 2006
    March 31,   December 31,   vs.   March 31,   vs.
(In thousands)   2006   2005   December 31, 2005   2005   March 31, 2005
 
Personal
  $ 2,067,366     $ 2,053,175     $ 14,191     $ 1,863,277     $ 204,089  
Auto
    1,667,839       1,598,634       69,205       1,328,029       339,810  
Credit cards
    987,480       968,550       18,930       834,202       153,278  
Other
    149,545       151,419       (1,874 )     148,802       743  
 
Total
  $ 4,872,230     $ 4,771,778     $ 100,452     $ 4,174,310     $ 697,920  
 
At March 31, 2006 and December 31, 2005, investment securities, including trading and other securities, totaled $12.7 billion, compared with $12.1 billion at March 31, 2005. Notes 5 and 6 to the consolidated financial statements provides additional information of the Corporation’s available-for-sale and held-to-maturity investment portfolios. Commencing in the quarter ended March 31, 2006, the interest-only strips derived from newly-issued PFH’s off-balance sheet securitizations are being accounted for as trading securities. As such, any valuation adjustment is being recorded as part of trading account profit (loss) in the consolidated statements of income. Interest-only strips accounted for as trading securities from PFH securitizations approximated $24 million at March 31, 2006.
The increase in goodwill and other intangible assets at March 31, 2006, compared with the same date in the previous year was mostly related with the acquisition of E-LOAN during the last quarter of 2005. Refer to Note 8 to the consolidated financial statements for further details on the composition of intangible assets.
Table F provides a breakdown of the “Other Assets” caption presented in the consolidated statements of condition. The principal variances from December 31, 2005 to March 31, 2006 were:
    Increase in net deferred tax assets, which was primarily associated with higher unrealized losses in the investment securities available-for-sale portfolio.
 
    Increase in servicing rights, which was principally related to one on-balance sheet and two off-balance sheet securitization transactions performed by PFH during the quarter ended March 31, 2006, which contributed with approximately $23 million in servicing rights at issuance date. Also, during the quarter ended March 31, 2006, PFH acquired approximately $7 million in rights to service $931 million in mortgage loans from a third-party.
 
    Increase in derivative assets was primarily related to index options purchased by the Corporation from major broker-dealer companies, which returns are tied to the same stock market indexes. These were principally associated with customers deposits offered by the Corporation whose returns are tied to the performance of the Standard and Poor’s 500 (S&P 500).
The fluctuation in other assets from March 31, 2005 to the same date in 2006 was mainly the result of the following:
    Increase in servicing rights primarily the result of securitization transactions completed by PFH in 2005 and 2006.
 
    Increase in net deferred tax assets was also associated with higher unrealized losses in the investment securities available-for-sale portfolio and the deferred tax assets from E-LOAN.
 
    Rise in bank-owned life insurance was related to additional funding during 2005 permitted as a result of an increased salary base resulting from the acquired banking institutions in 2004 and beginning of 2005.
 
    Increase in derivative assets was the result of higher volume of index options as described in the variance above. Also, as part of the PCE sale transaction in the fourth quarter of 2005, the Corporation obtained a subordinated convertible note from ACE, the purchaser, in the amount of $19.4 million. Since the note is convertible into ACE’s common shares, the related embedded derivative was separated and accounted for at

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      fair market value. As of March 31, 2006, the fair market value of this embedded derivative was approximately $12 million.
 
    Increase in securitization advances and related assets was associated with PFH operations.
TABLE F
Breakdown of Other Assets
                                         
                    Variance           Variance
                    March 31, 2006           March 31, 2006
    March 31,   December 31,   vs. December 31,   March 31,   vs. March 31,
(In thousands)   2006   2005   2005   2005   2005
 
Net deferred tax assets
  $ 332,761     $ 305,723     $ 27,038     $ 272,192     $ 60,569  
Securitization advances and related assets
    231,435       236,719       (5,284 )     195,466       35,969  
Bank-owned life insurance program
    199,362       197,202       2,160       156,915       42,447  
Servicing rights
    164,384       141,489       22,895       70,041       94,343  
Prepaid expenses
    151,564       153,395       (1,831 )     158,474       (6,910 )
Derivative assets
    69,990       50,246       19,744       33,287       36,703  
Investments under the equity method
    66,623       62,745       3,878       59,771       6,852  
Others
    172,543       178,281       (5,738 )     133,460       39,083  
 
Total
  $ 1,388,662     $ 1,325,800     $ 62,862     $ 1,079,606     $ 309,056  
 
A breakdown of the Corporation’s deposits at period-end is included in Table G:
TABLE G
Deposits ending balances
                                         
                    Variance           Variance
    March 31,   December 31,   March 31, 2006 vs.   March 31,   March 31, 2006 vs.
(In thousands)   2006   2005   December 31, 2005   2005   March 31, 2005
 
Demand deposits *
  $ 4,938,702     $ 4,415,972     $ 522,730     $ 4,257,121     $ 681,581  
Savings, NOW and money market deposits
    8,837,151       8,800,047       37,104       9,213,693       (376,542 )
Time deposits
    9,635,959       9,421,986       213,973       8,257,863       1,378,096  
 
Total
  $ 23,411,812     $ 22,638,005     $ 773,807     $ 21,728,677     $ 1,683,135  
 
*   Includes interest and non-interest bearing demand deposits.
The increase in demand deposits at March 31, 2006 from December 31, 2005 and March 31, 2005 was primarily associated with commercial checking accounts and deposits in trust. The increase in time deposits from March 31, 2005 was related to IRA deposits, interest rate campaigns for retail certificates of deposit, and new products launched, including BPPR’s World Equity Index CDs, which contributed with $86 million in deposits at the offering date. Brokered certificates of deposit, included in the category of time deposits, totaled $1.0 billion at March 31, 2006, compared with $842 million at March 31, 2005 and $1.2 billion at December 31, 2005.
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $137 million at March 31, 2006, $119 million as of December 31, 2005 and $64 million as of March 31, 2005.
At March 31, 2006, borrowed funds totaled $20.9 billion, compared with $21.3 billion at December 31, 2005 and $19.6 billion at March 31, 2005. The Federal Home Loan Banks (FHLB) provide funding to the Corporation’s banking subsidiaries through advances. At March 31, 2006 and December 31, 2005, the Corporation had short-term and long-term borrowings under these credit facilities totaling $1.3 billion and $1.7 billion, respectively. At March 31, 2005, these borrowings totaled $2.1 billion. Such advances are collateralized by securities and mortgages loans, do not have restrictive covenants and in the most part do not have any callable features.
Other liabilities declined from December 31, 2005 to March 31, 2006 as reflected in the consolidated statements of condition included in the consolidated financial statements. As explained in the 2005 Annual Report and the Overview section of this MD&A, in 2005, certain of the Corporation’s non-banking subsidiaries continued to have a fiscal year ended on November 30, 2005. In preparing the consolidated statement of condition as of December 31, 2005, management had to reverse an intercompany elimination in order to reinstall loans outstanding to third parties. The impact of this reversal resulted in an increase of $429 million in the caption of other liabilities at year-end 2005.

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This intercompany transaction was not outstanding at March 31, 2006. As explained in the Overview section of this MD&A, all of the Corporation’s subsidiaries have aligned their closing periods to that of the Corporation; as such timing differences no longer exist.
Refer to the consolidated statements of condition and of stockholders’ equity included in this Form 10-Q for information on the composition of stockholders’ equity at March 31, 2006, December 31, 2005 and March 31, 2005. Also, the disclosures of accumulated other comprehensive loss, an integral component of stockholders’ equity, are included in the consolidated statements of comprehensive income (loss). The increase in stockholders’ equity since March 31, 2005 was due in part to earnings retention and from approximately $216 million in capital derived from the issuance of new shares of common stock under the subscription rights offering that took effect in the fourth quarter of 2005. These favorable variances were partially offset by a higher unrealized loss position in the valuation of the available-for-sale securities portfolio by $124 million.
The Corporation offers a dividend reinvestment and stock purchase plan for stockholders that allows them to reinvest dividends in shares of common stock at a 5% discount from the average market price at the time of the issuance, as well as purchase shares of common stock directly from the Corporation by making optional cash payments.
The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage at March 31, 2006 and 2005, and December 31, 2005 are presented on Table H. At March 31, 2006, December 31, 2005 and March 31, 2005, BPPR, BPNA and Banco Popular, National Association were all well-capitalized.
The average tangible equity amounted to $2.9 billion at March 31, 2006, compared to $2.7 billion at December 31, 2005 and $2.6 billion at March 31, 2005. Total tangible equity was $2.7 billion at March 31, 2006 and December 31, 2005, and $2.5 billion at March 31, 2005. The average tangible equity to average tangible assets ratio was 6.01% at March 31, 2006, 5.86% at December 31, 2005 and 5.81% at March 31, 2005.
TABLE H
Capital Adequacy Data
                         
    March 31,     December 31,     March 31,  
(Dollars in thousands)   2006     2005     2005  
 
Risk-based capital
                       
Tier I capital
  $ 3,660,551     $ 3,540,270     $ 3,337,612  
Supplementary (Tier II) capital
    407,638       403,355       372,923  
 
Total capital
  $ 4,068,189     $ 3,943,625     $ 3,710,535  
 
Risk-weighted assets
                       
Balance sheet items
  $ 29,963,042     $ 29,557,342     $ 27,406,208  
Off-balance sheet items
    2,338,272       2,141,922       1,639,509  
 
Total risk-weighted assets
  $ 32,301,314     $ 31,699,264     $ 29,045,717  
 
Average assets
  $ 48,045,828     $ 47,415,254     $ 44,748,930  
 
Ratios:
                       
Tier I capital (minimum required — 4.00%)
    11.33 %     11.17 %     11.49 %
Total capital (minimum required — 8.00%)
    12.59 %     12.44 %     12.77 %
Leverage ratio *
    7.62 %     7.47 %     7.46 %
 
*   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, 2006, the capital adequacy minimum requirement for Popular, Inc. was: Total Capital of $2,584,105, Tier I Capital of $1,292,053, and a Tier I Leverage of $1,441,375 based on a 3% ratio or $1,921,833 based on a 4% ratio according to the Bank’s classification.

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OFF-BALANCE SHEET ACTIVITIES
The Corporation conducts asset securitizations that involve the transfer of mortgage loans to qualifying special purpose entities (QSPE), which in turn transfer these assets and their titles, to different trusts, thus isolating those loans from the Corporation’s assets. The off-balance sheet mortgage loans securitizations conducted prior to 2001 and in 2005 and 2006, qualified for sale accounting based on the provisions of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” 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 or revenues. The Corporation’s creditors have no recourse to any assets or revenues of the special purpose entity, or the securitization trust funds. At March 31, 2006 and 2005, these trusts held approximately $2.3 billion and $0.7 billion, respectively, in assets in the form of mortgage loans. Their liabilities in the form of debt principal due to investors approximated $2.2 billion and $0.7 billion at March 31, 2006 and 2005, respectively. The Corporation retained servicing responsibilities and certain subordinated interests in these securitizations in the form of interest-only strips. Their value is subject to credit, prepayment and interest rate risks on the transferred financial assets. The servicing rights retained by the Corporation are recorded in the statements of condition at the lower of cost or market value, while the interest-only strips are recorded at fair value. Refer to the Critical Accounting Policies / Estimates section in the 2005 Annual Report for further information.

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CREDIT RISK MANAGEMENT AND LOAN QUALITY
Table I summarizes the movement in the allowance for loan losses and presents several loan loss statistics for the quarters ended March 31, 2006 and 2005.
TABLE I
Allowance for Loan Losses and Selected Loan Losses Statistics
                         
    First Quarter
(Dollars in thousands)   2006   2005   Variance
 
Balance at beginning of period
  $ 461,707     $ 437,081     $ 24,626  
Allowance purchased
          3,685       (3,685 )
Provision for loan losses
    48,947       44,336       4,611  
Impact of change in reporting period *
    2,510       1,586       924  
 
 
    513,164       486,688       26,476  
 
Losses charged to the allowance:
                       
Commercial
    12,453       15,659       (3,206 )
Lease financing
    5,016       5,123       (107 )
Mortgage
    11,317       10,143       1,174  
Consumer
    31,232       23,533       7,699  
 
Subtotal
    60,018       54,458       5,560  
 
Recoveries:
                       
Commercial
    4,359       5,743       (1,384 )
Lease financing
    3,786       2,794       992  
Mortgage
    131       133       (2 )
Consumer
    6,899       7,322       (423 )
 
Subtotal
    15,175       15,992       (817 )
 
Net loans charged-off:
                       
Commercial
    8,094       9,916       (1,822 )
Lease financing
    1,230       2,329       (1,099 )
Mortgage
    11,186       10,010       1,176  
Consumer
    24,333       16,211       8,122  
 
Subtotal
    44,843       38,466       6,377  
 
Balance at end of period
  $ 468,321     $ 448,222     $ 20,099  
 
Ratios:
                       
Net charge-offs to average loans held-in-portfolio
    0.58       0.55          
Provision to net charge-offs
    1.09 x     1.15 x        
 
                       
 
*   Represents the net effect of provision for loan losses, less net charge-offs corresponding to the impact of the change in fiscal period at certain subsidiaries (as described in the Overview section and in the 2005 Annual Report).
 
Also, Table J presents annualized net charge-offs to average loans by loan category for the quarters ended March 31, 2006 and 2005.

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TABLE J
Annualized Net Charge-offs to Average Loans Held-in-Portfolio
                 
    Quarter ended March 31,
    2006   2005
 
Commercial and construction
    0.25 %     0.35 %
Lease financing
    0.37       0.72  
Mortgage
    0.37       0.35  
Consumer
    2.02       1.58  
 
 
    0.58 %     0.55 %
 
The decline in commercial and construction loans net charge-offs to average loans held-in-portfolio ratio in the first quarter of 2006 compared with the same quarter in the previous year was mostly associated with portfolio growth and to the mix of the commercial loan portfolio to include a higher proportion of real estate secured loans. The improved credit quality trend was also the result of the continuing identification and monitoring of potential problem loans.
The decrease in lease financing net charge-offs to average loans held-in-portfolio in the quarter ended March 31, 2006, compared with the quarter ended March 31, 2005 was related principally to lower net charge-offs in a grown portfolio at Popular Auto in Puerto Rico, coupled with the favorable impact of net recoveries in the first quarter of 2006 at the Corporation’s leasing subsidiary in the U.S. mainland. The recoveries were primarily associated to a particular customer lending relationship which was substantially charged-off during 2004 and 2005. This lending relationship is related to a vendor who had filed bankruptcy in 2004.
Mortgage loans net charge-offs as a percentage of average mortgage loans held-in-portfolio for the quarter ended March 31, 2006 remained relatively stable when compared with the same quarter in the previous year. Although non-performing mortgage loans have increased since December 31, 2005, as shown in Table K, historically, the Corporation has experienced low level of losses in its mortgage portfolio as a result of adequate collateral securing the loans. The increase in delinquency levels has been experienced in both BPPR and PFH reportable segments. Deteriorating economic conditions have impacted the mortgage delinquency rates, primarily in P.R.
Consumer loans net charge-offs as a percentage of average consumer loans held-in-portfolio for the first quarter of 2006 rose when compared with the similar quarter in 2005, primarily due to a growth in the unsecured portfolio, mainly in credit cards and personal loans, higher net charge-offs in the auto loan portfolio and deteriorating economic conditions.
NON-PERFORMING ASSETS
A summary of non-performing assets, which include past-due loans that are no longer accruing interest, renegotiated loans and real estate property acquired through foreclosure, is presented in Table K, along with certain credit quality ratios. For a summary of the Corporation’s policy for placing loans on non-accrual status, refer to the sections of Loans and Allowance for Loan Losses included in Note 1 to the audited consolidated financial statements included in Popular, Inc.’s 2005 Annual Report.

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TABLE K
Non-Performing Assets
                                                                 
                                    $Variance                   $Variance
            As a percentage           As a percentage   March 31, 2006           As a percentage   March 31, 2006
    March 31,   of loans HIP   December 31,   of loans HIP   vs.   March 31,   of loans HIP   vs.
(Dollars in thousands)   2006   by category   2005   by category   December 31, 2005   2005   by category   March 31, 2005
 
Commercial and construction
  $ 138,602       1.1 %   $ 133,746       1.1 %   $ 4,856     $ 141,132       1.2 %     ($2,530 )
Lease financing
    3,455       0.3       2,562       0.2       893       3,034       0.2       421  
Mortgage
    407,433       3.5       371,885       3.0       35,548       401,775       3.5       5,658  
Consumer
    36,170       0.7       39,316       0.8       (3,146 )     28,872       0.7       7,298  
 
Total non-performing loans
    585,660       1.9       547,509       1.8       38,151       574,813       2.0       10,847  
Other real estate
    82,352               79,008               3,344       64,775               17,577  
 
Total non-performing assets
  $ 668,012             $ 626,517             $ 41,495     $ 639,588             $ 28,424  
 
Accruing loans past due 90 days or more
  $ 90,770             $ 86,662             $ 4,108     $ 61,294             $ 29,476  
 
Non-performing assets to loans held-in-portfolio
    2.16 %             2.02 %                     2.27 %                
Non-performing assets to total assets
    1.37               1.29                       1.42                  
Allowance for loan losses to loans held-in-portfolio
    1.52               1.49                       1.59                  
Allowance for loan losses to non-performing assets
    70.11               73.69                       70.08                  
Allowance for loan losses to non-performing loans
    79.96               84.33                       77.98                  
 
The increase in non-performing assets since December 31, 2005 was primarily in mortgage loans as a result of higher delinquencies in both the Puerto Rico and the U.S. mainland portfolios, mainly reflected in BPPR and PFH’s mortgage loan portfolios resulting from economic conditions.
Accruing loans past due 90 days or more are composed primarily of credit cards, FHA/VA and other insured mortgage loans, and mortgage loans delinquent included in the Corporation’s financial statements pursuant to the GNMA’s buy-back option program. Under SFAS No. 140, servicers of loans underlying Ginnie Mae mortgage-backed securities must report as their own assets defaulted loans that they have the option to purchase, even when they elect not to exercise the option. Also, accruing loans ninety days or more include residential conventional loans purchased from other financial institutions that although delinquent, the Corporation has received timely payment from the sellers / servicers, and in most instances have partial guarantees under recourse agreements.
The allowance for loan losses, which represents management’s estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for these estimated loan losses based on evaluations of the risks in the loan portfolios. In evaluating the adequacy of the allowance for loan losses, the Corporation’s management considers current economic conditions, loan portfolio composition and risk characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors. The methodology used to establish the allowance for loan losses is based on SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 5, “Accounting for Contingencies.” Under SFAS No. 114, certain commercial loans are identified for evaluation on an individual basis, and specific reserves are calculated based on impairment analyses. SFAS No. 5 provides for the recognition of a loss allowance for a group of homogeneous loans when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of March 31, 2006, there have been no significant changes in evaluation methods or assumptions from December 31, 2005 that had an effect on the Corporation’s methodology for assessing the adequacy of the allowance for loan losses.
The Corporation considers a commercial loan to be impaired when interest and/or principal are past due 90 days or more, or, when based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. The following table shows the Corporation’s recorded investment in impaired commercial loans and the related valuation allowance calculated under SFAS No. 114 at March 31, 2006, December 31, 2005 and March 31, 2005.

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    March 31, 2006   December 31, 2005   March 31, 2005
    Recorded   Valuation   Recorded   Valuation   Recorded   Valuation
(In millions)   Investment   Allowance   Investment   Allowance   Investment   Allowance
 
Impaired loans:
                                               
Valuation allowance required
  $ 70.9     $ 20.7     $ 69.6     $ 20.4     $ 83.8     $ 28.3  
No valuation allowance required
    46.7             46.3             59.5        
 
Total impaired loans
  $ 117.6     $ 20.7     $ 115.9     $ 20.4     $ 143.3     $ 28.3  
 
Average impaired loans during the first quarter of 2006 and 2005 were $120 million and $128 million, respectively. The Corporation recognized interest income on impaired loans of $0.9 million and $0.7 million for the quarters ended March 31, 2006 and March 31, 2005, respectively.
In addition to the non-performing loans included in Table K, there were $28 million of loans at March 31, 2006, which in management’s opinion are currently subject to potential future classification as non-performing, and are considered impaired under SFAS No. 114. At December 31, 2005 and March 31, 2005, these potential problem loans approximated $30 million and $49 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, 2006, adjusted non-performing assets would have been $632 million or 2.05% of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 85.23%. At December 31, 2005, adjusted non-performing assets would have been $587 million or 1.89% of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 90.85%. At 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 would have been 82.10%.
The Corporation’s management considers the allowance for loan losses to be at a level sufficient to provide for estimated losses based on current economic conditions, the level of net loan losses, the loan portfolio mix which includes a high proportion of real estate secured loans, and the methodology established to evaluate the adequacy of the allowance for loan losses.
As explained in the 2005 Annual Report, the Corporation is exposed to geographical and government risk. Popular, Inc. has diversified its geographical risk as a result of its growth strategy in the United States and the Caribbean. Puerto Rico’s share of the Corporation’s total loan po