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 June 30, 2006
Commission File Number: 000-13818
POPULAR, INC.
(Exact name of registrant as specified in its charter)
     
Puerto Rico   66-0667416
     
(State or other jurisdiction of   (IRS Employer Identification Number)
incorporation or organization)    
     
Popular Center Building    
209 Muñoz Rivera Avenue, Hato Rey    
San Juan, Puerto Rico   00918
     
(Address of principal executive offices)   (Zip code)
(787) 765-9800
(Registrant’s telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     þ Yes     o No
Indicate by check mark whether the registrant is 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, 278,609,514 shares outstanding as of August 2, 2006.
 
 


 

POPULAR, INC.
INDEX
         
    Page
Part I – Financial Information
       
 
       
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    8  
 
       
    9  
 
       
    58  
 
       
    84  
 
       
    88  
 
       
       
 
       
    88  
 
       
    88  
 
       
    89  
 
       
    89  
 
       
    90  
 
       
    91  
 EX-12.1 COMPUTATION OF THE RATIOS OF EARNINGS
 EX-31.1 302 CERTIFICATION OF THE CEO
 EX-31.2 302 CERTIFICATION OF THE CFO
 EX-32.1 906 CERTIFICATION OF THE CEO
 EX-32.2 906 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)
                         
    June 30,   December 31,   June 30,
(In thousands, except share information)   2006   2005   2005
 
ASSETS
                       
Cash and due from banks
  $ 848,892     $ 906,397     $ 936,019  
 
Money market investments:
                       
Federal funds sold
    245,500       186,000       406,205  
Securities purchased under agreements to resell
    366,143       554,770       613,659  
Time deposits with other banks
    8,879       8,653       6,218  
 
 
    620,522       749,423       1,026,082  
 
Investment securities available-for-sale, at fair value:
                       
Pledged securities with creditors’ right to repledge
    6,112,628       6,110,179       5,135,340  
Other investment securities available-for-sale
    4,776,670       5,606,407       6,701,603  
Investment securities held-to-maturity, at amortized cost
    420,398       153,104       177,987  
Other investment securities, at lower of cost or realizable value
    312,042       319,103       330,350  
Trading account securities, at fair value:
                       
Pledged securities with creditors’ right to repledge
    212,637       343,659       314,263  
Other trading securities
    163,633       175,679       142,023  
Loans held-for-sale, at lower of cost or market value
    606,620       699,181       489,699  
 
Loans held-in-portfolio:
                       
Loans held-in-portfolio pledged with creditors’ right to repledge
          208,774       662,823  
Other loans held-in-portfolio
    31,915,006       31,099,865       28,280,396  
Less – Unearned income
    304,994       297,613       283,129  
Allowance for loan losses
    483,815       461,707       456,954  
 
 
    31,126,197       30,549,319       28,203,136  
 
Premises and equipment, net
    592,704       596,571       580,031  
Other real estate
    83,658       79,008       68,671  
Accrued income receivable
    245,998       245,646       214,767  
Other assets
    1,515,682       1,325,800       1,121,151  
Goodwill
    656,189       653,984       527,633  
Other intangible assets
    105,044       110,208       46,074  
 
 
  $ 48,399,514     $ 48,623,668     $ 46,014,829  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Non-interest bearing
  $ 4,370,437     $ 3,958,392     $ 4,932,560  
Interest bearing
    19,079,083       18,679,613       18,086,939  
 
 
    23,449,520       22,638,005       23,019,499  
Federal funds purchased and assets sold under agreements to repurchase
    7,926,731       8,702,461       7,866,169  
Other short-term borrowings
    2,656,936       2,700,261       1,998,981  
Notes payable
    10,198,675       9,893,577       9,085,270  
Subordinated notes
                125,000  
Other liabilities
    704,547       1,240,002       649,501  
 
 
    44,936,409       45,174,306       42,744,420  
 
Commitments and contingencies (See Note 11)
                       
 
Minority interest in consolidated subsidiaries
    112       115       101  
 
Stockholders’ equity:
                       
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 shares issued and outstanding in all periods presented
    186,875       186,875       186,875  
 
                       
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 291,718,358 shares issued (December 31, 2005 – 289,407,190; June 30, 2005 – 280,394,613) and 278,293,561 shares outstanding (December 31, 2005 – 275,955,391; June 30, 2005 – 266,933,015)
    1,750,310       1,736,443       1,682,368  
Surplus
    490,631       452,398       287,628  
Retained earnings
    1,576,499       1,456,612       1,333,655  
Accumulated other comprehensive loss, net of tax of ($110,267) (December 31, 2005 – ($58,292); June 30, 2005 – $336)
    (334,789 )     (176,000 )     (12,901 )
Treasury stock – at cost, 13,424,797 shares (December 31, 2005 – 13,451,799; June 30, 2005 – 13,461,598)
    (206,533 )     (207,081 )     (207,317 )
 
 
    3,462,993       3,449,247       3,270,308  
 
 
  $ 48,399,514     $ 48,623,668     $ 46,014,829  
 
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   Six months ended
    June 30,   June 30,
(In thousands, except per share information)   2006   2005   2006   2005
 
INTEREST INCOME:
                               
Loans
  $ 613,792     $ 510,184     $ 1,205,627     $ 1,015,505  
Money market investments
    7,906       7,906       15,888       15,440  
Investment securities
    133,274       120,689       266,807       235,056  
Trading account securities
    7,065       8,317       15,925       14,375  
 
 
    762,037       647,096       1,504,247       1,280,376  
 
INTEREST EXPENSE:
                               
Deposits
    135,961       99,688       260,372       196,744  
Short-term borrowings
    127,074       77,376       251,877       143,179  
Long-term debt
    133,223       112,602       266,455       225,737  
 
 
    396,258       289,666       778,704       565,660  
 
Net interest income
    365,779       357,430       725,543       714,716  
Provision for loan losses
    67,096       49,936       116,043       94,272  
 
Net interest income after provision for loan losses
    298,683       307,494       609,500       620,444  
Service charges on deposit accounts
    47,324       45,132       94,793       88,824  
Other service fees (See Note 12)
    80,017       83,841       160,363       162,856  
Net (loss) gain on sale and valuation adjustment of investment securities
    (14,424 )     561       (2,084 )     51,811  
Trading account profit
    1,830       19,668       13,305       23,431  
Gain on sale of loans
    29,054       15,274       76,315       25,090  
Other operating income
    40,185       25,982       70,127       44,035  
 
 
    482,669       497,952       1,022,319       1,016,491  
 
OPERATING EXPENSES:
                               
Personnel costs:
                               
Salaries
    126,700       115,807       262,232       231,349  
Pension, profit sharing and other benefits
    39,783       38,445       82,303       78,819  
 
 
    166,483       154,252       344,535       310,168  
Net occupancy expenses
    28,629       25,881       57,267       50,695  
Equipment expenses
    33,973       30,230       67,170       58,844  
Other taxes
    10,929       9,465       21,170       18,720  
Professional fees
    38,488       27,316       75,566       54,899  
Communications
    17,293       15,262       34,593       30,939  
Business promotion
    31,991       25,667       64,814       45,920  
Printing and supplies
    4,291       4,589       8,923       9,126  
Other operating expenses
    28,072       29,396       56,903       57,339  
Impact of change in fiscal period of certain subsidiaries
                9,741        
Amortization of intangibles
    2,831       2,141       5,552       4,383  
 
 
    362,980       324,199       746,234       641,033  
 
Income before income tax and cumulative effect of accounting change
    119,689       173,753       276,085       375,458  
Income tax
    22,308       41,393       60,201       83,826  
 
Income before cumulative effect of accounting change
    97,381       132,360       215,884       291,632  
Cumulative effect of accounting change, net of tax
                      3,607  
 
NET INCOME
  $ 97,381     $ 132,360     $ 215,884     $ 295,239  
 
NET INCOME APPLICABLE TO COMMON STOCK
  $ 94,403     $ 129,382     $ 209,928     $ 289,283  
 
BASIC EARNINGS PER COMMON SHARE (EPS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
  $ 0.34     $ 0.48     $ 0.75     $ 1.07  
 
DILUTED EPS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
  $ 0.34     $ 0.48     $ 0.75     $ 1.07  
 
BASIC EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE
  $ 0.34     $ 0.48     $ 0.75     $ 1.08  
 
DILUTED EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE
  $ 0.34     $ 0.48     $ 0.75     $ 1.08  
 
DIVIDENDS DECLARED PER COMMON SHARE
  $ 0.16     $ 0.16     $ 0.32     $ 0.32  
 
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)
                 
    Six months ended
    June 30,
(In thousands)   2006   2005
 
Preferred stock:
               
Balance at beginning and end of year
  $ 186,875     $ 186,875  
 
Common stock:
               
Balance at beginning of year
    1,736,443       1,680,096  
Common stock issued under the Dividend Reinvestment Plan
    2,475       2,241  
Issuance of common stock
    11,312        
Stock options exercised
    80       31  
 
Balance at end of period
    1,750,310       1,682,368  
 
Surplus:
               
Balance at beginning of year
    452,398       278,840  
Common stock issued under the Dividend Reinvestment Plan
    5,733       7,062  
Issuance of common stock
    28,281        
Issuance cost of common stock
    1,502        
Stock options expense on unexercised options
    1,525       1,639  
Stock options exercised
    192       87  
Transfer from retained earnings
    1,000        
 
Balance at end of period
    490,631       287,628  
 
Retained earnings:
               
Balance at beginning of year
    1,456,612       1,129,793  
Net income
    215,884       295,239  
Cash dividends declared on common stock
    (89,041 )     (85,421 )
Cash dividends declared on preferred stock
    (5,956 )     (5,956 )
Transfer to surplus
    (1,000 )      
 
Balance at end of period
    1,576,499       1,333,655  
 
Accumulated other comprehensive loss:
               
Balance at beginning of year
    (176,000 )     35,454  
Other comprehensive loss, net of tax
    (158,789 )     (48,355 )
 
Balance at end of period
    (334,789 )     (12,901 )
 
Treasury stock – at cost:
               
Balance at beginning of year
    (207,081 )     (206,437 )
Purchase or common stock
          (1,467 )
Reissuance of common stock
    548       587  
 
Balance at end of period
    (206,533 )     (207,317 )
 
Total stockholders’ equity
  $ 3,462,993     $ 3,270,308  
 
Disclosure of changes in number of shares:
                         
    June 30,   December 31,   June 30,
    2006   2005   2005
 
Preferred Stock:
                       
Balance at beginning and end of period
    7,475,000       7,475,000       7,475,000  
 
Common Stock – Issued:
                       
Balance at beginning of year
    289,407,190       280,016,007       280,016,007  
Issued under the Dividend Reinvestment Plan
    412,445       728,705       373,430  
Issuance of common stock
    1,885,380       8,614,620        
Stock options exercised
    13,343       47,858       5,176  
 
Balance at end of period
    291,718,358       289,407,190       280,394,613  
 
Treasury stock
    (13,424,797 )     (13,451,799 )     (13,461,598 )
 
Common Stock – Outstanding
    278,293,561       275,955,391       266,933,015  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands)   2006   2005   2006   2005
 
Net income
  $ 97,381     $ 132,360     $ 215,884     $ 295,239  
 
Other comprehensive (loss) income, before tax:
                               
Foreign currency translation adjustment
    369       (182 )     (317 )     (428 )
Unrealized holding (losses) gains on securities available-for-sale arising during the period
    (123,859 )     155,416       (215,824 )     (4,303 )
Reclassification adjustment for losses (gains) included in net income
    14,424       (561 )     2,084       (51,288 )
Net gain (loss) on cash flow hedges
    2,710       (4,317 )     3,910       (1,779 )
Reclassification adjustment for (gains) losses included in net income
    (778 )     2,388       (617 )     2,999  
 
 
    (107,134 )     152,744       (210,764 )     (54,799 )
Income tax benefit (expense)
    27,610       (38,001 )     51,975       6,444  
 
Total other comprehensive (loss) income, net of tax
    (79,524 )     114,743       (158,789 )     (48,355 )
 
Comprehensive income
  $ 17,857     $ 247,103     $ 57,095     $ 246,884  
 
Disclosure of accumulated other comprehensive loss:
                         
    June 30,   December 31,   June 30,
(In thousands)   2006   2005   2005
 
Foreign currency translation adjustment
    ($36,632 )     ($36,315 )     ($35,958 )
 
Minimum pension liability adjustment
    (2,354 )     (2,354 )      
Tax effect
    918       918        
 
Net of tax amount
    (1,436 )     (1,436 )      
 
Unrealized (losses) gains on securities available-for-sale
    (409,430 )     (195,690 )     22,914  
Tax effect
    110,440       57,297       (317 )
 
Net of tax amount
    (298,990 )     (138,393 )     22,597  
 
Unrealized gains (losses) on cash flows hedges
    3,117       (176 )     113  
Tax effect
    (1,091 )     77       (19 )
 
Net of tax amount
    2,026       (99 )     94  
 
Cumulative effect of accounting change, net of tax
    243       243       366  
 
Accumulated other comprehensive loss, net of tax
    ($334,789 )     ($176,000 )     ($12,901 )
 
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)
                 
    Six months ended
    June 30,
(In thousands)   2006   2005
 
Cash flows from operating activities:
               
Net income
  $ 215,884     $ 295,239  
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
    222,013       291,632  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of premises and equipment
    42,506       40,619  
Provision for loan losses
    116,043       94,272  
Amortization of intangibles
    5,552       4,383  
Amortization of servicing assets
    28,290       8,367  
Net loss (gain) on sale and valuation adjustment of investment securities
    2,084       (51,811 )
Net gain on disposition of premises and equipment
    (2,269 )     (10,870 )
Net gain on sale of loans
    (76,315 )     (25,090 )
Net amortization of premiums and accretion of discounts on investments
    14,358       20,847  
Net amortization of premiums and deferred loan origination fees and costs
    66,709       59,128  
Earnings from investments under the equity method
    (6,163 )     (4,570 )
Stock options expense
    1,585       1,661  
Net disbursements on loans held-for-sale
    (3,547,436 )     (1,978,319 )
Acquisitions of loans held-for-sale
    (846,117 )     (615,701 )
Proceeds from sale of loans held-for-sale
    3,834,624       1,902,684  
Net decrease in trading securities
    1,000,341       845,886  
Net (increase) decrease in accrued income receivable
    (1,966 )     71  
Net increase in other assets
    (21,991 )     (8,896 )
Net increase in interest payable
    9,886       8,080  
Net increase in deferred income tax
    (22,134 )     (7,027 )
Net increase in postretirement benefit obligation
    2,755       1,600  
Net decrease in other liabilities
    (63,653 )     (31,638 )
 
Total adjustments
    536,689       253,676  
 
Net cash provided by operating activities
    758,702       545,308  
 
Cash flows from investing activities:
               
Net decrease (increase) in money market investments
    129,048       (116,598 )
Purchases of investment securities:
               
Available-for-sale
    (211,139 )     (2,361,017 )
Held-to-maturity
    (16,847,432 )     (15,933,757 )
Other
    (32,202 )     (54,394 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
               
Available-for-sale
    761,858       1,755,912  
Held-to-maturity
    16,580,599       16,114,677  
Other
    39,263       26,484  
Proceeds from sale of investment securities available-for-sale
    44,474       139,455  
Net (disbursements) repayments on loans
    (490,550 )     860,387  
Proceeds from sale of loans
    212,791       63,740  
Acquisition of loan portfolios
    (175,856 )     (1,214,096 )
Assets acquired, net of cash
    (418 )     (180,744 )
Acquisition of premises and equipment
    (63,469 )     (81,142 )
Proceeds from sale of premises and equipment
    26,762       25,463  
 
Net cash used in investing activities
    (26,271 )     (955,630 )
 
Cash flows from financing activities:
               
Net increase in deposits
    811,499       1,755,066  
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase
    (888,881 )     1,391,596  
Net decrease in other short-term borrowings
    (150,183 )     (1,150,607 )
Payments of notes payable
    (1,210,735 )     (1,399,363 )
Proceeds from issuance of notes payable
    682,406       118,139  
Dividends paid
    (93,249 )     (91,309 )
Proceeds from issuance of common stock
    47,293       9,399  
Treasury stock acquired
          (1,467 )
 
Net cash (used in) provided by financing activities
    (801,850 )     631,454  
 
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
    (57,505 )     219,560  
Cash and due from banks at beginning of period
    906,397       716,459  
 
Cash and due from banks at end of period
  $ 848,892     $ 936,019  
 
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. EVERTEC serves customers in 11 Latin American countries. Also, the Corporation recently incorporated EVERTEC USA, Inc. with plans to expand its service offerings in the U.S. mainland. Note 19 to the consolidated financial statements presents further information about the Corporation’s business segments.
The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain reclassifications have been made to the prior period unaudited consolidated financial statements to conform to the 2006 presentation.
In the normal course of business, except for the Corporation’s banks and the parent holding company, the Corporation utilized a one-month lag in the consolidation of the financial results of its other subsidiaries (the “non-banking subsidiaries”). As previously described in the Corporation’s 2005 Annual Report on Form 10-K (the “2005 Annual Report”) for the year ended December 31, 2005, in that year, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 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 six months ended June 30, 2006. The financial impact amounted to a loss of $9.7 million (before tax). After tax, this change resulted in a net loss of $6.1 million, which was included in the quarterly results for the period ended March 31, 2006 and thus, as part of the results of the six-month period ended June 30, 2006. As of the end of the first quarter of 2006, all subsidiaries of the Corporation had aligned their year-end closings to December 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

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accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of June 30, 2006, December 31, 2005 and June 30, 2005 pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2005, included in the Corporation’s 2005 Annual Report.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive (loss) income, except for highly inflationary environments in which the effects are included in other operating income, as described below.
The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. At June 30, 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; June 30, 2005 — $36 million).
The Corporation has been monitoring the inflation levels in the Dominican Republic to evaluate whether it still meets the “highly inflationary economy” test prescribed by SFAS No. 52, “Foreign Currency Translation.” Such statement defines highly inflationary as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy are remeasured as if the functional currency were the reporting currency. Accordingly, since June 2004, the Corporation’s interests in the Dominican Republic have been remeasured into the U.S. dollar. Although as of June 30, 2006, the cumulative inflation rate in the Dominican Republic over a 3-year period was below 100 percent, approximating 83% at quarter-end, the Corporation continued to apply the remeasurement accounting as of June 30, 2006 based on the accounting guidance obtained. The International Practices Task Force (“IPTF”) of the SEC Regulations Committee of the American Institute of Certified Public Accountants had concluded that the Dominican Republic was considered highly inflationary as of December 31, 2005, and concluded that such country would not cease being regarded as highly inflationary for the first six months of 2006. The Dominican peso’s exchange rate to the U.S. dollar was $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, compared with $33.14 at December 31, 2005 and $32.53 at June 30, 2006. During the quarter and six months ended June 30, 2006, approximately $391 thousand and $588 thousand, respectively, in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive loss. The net remeasurement (losses) gains totaled ($533) thousand and $331 thousand for quarter and six months ended June 30, 2005, respectively. These remeasurement gains (losses) will continue to be reflected in earnings until the economy is no longer considered highly inflationary. The unfavorable cumulative translation adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $32 million.
Other event
The Corporation exercised certain Tag Along Rights granted under the Shareholders Agreement dated as of March 2, 1999 by and among Telecomunicaciones de Puerto Rico, Inc. (“TelPRI”), GTE International Telecommunications Incorporated, GTE Holdings (Puerto Rico) LLC, Popular and Puerto Rico Telephone Authority and entered into a Joinder Agreement dated as of May 4, 2006 (the “Joinder Agreement”) by and among Popular, GTE Holdings and Sercotel S.A. de C.V. (“Sercotel”). Pursuant to the Joinder Agreement, Popular has agreed to sell to Sercotel all the shares of common stock of TelPRI owned by Popular under similar terms and conditions set forth in the Stock Purchase Agreement dated as of April 2, 2006, by and between Sercotel and GTE Holdings. The estimated gain net of taxes for Popular is approximately $86.0 million; however, such gain is subject to purchase price adjustments at the date of the closing. The transaction is expected to close early in 2007 subject to obtaining the necessary governmental and regulatory approvals.

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Note 2 – Recent Accounting Developments
SFAS No. 123-R “Share-Based Payments”
In December 2004, the Financial Accounting Standard Board (“FASB”) issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123-R, “Share-Based Payment.” SFAS No. 123-R focuses primarily on transactions in which an entity exchanges its equity instruments for employee services and generally establishes standards for the accounting of transactions in which an entity obtains goods or services in share-based payment transactions. SFAS No. 123-R requires companies to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting, which APB 25 allowed and resulted in no expense for many awards of stock options for which the exercise price of the option did not exceed the price of the underlying stock at the grant date. In addition, SFAS No. 123-R retains the modified grant date model from SFAS No. 123. Under that model, compensation cost is measured at the grant date fair value of the award and is adjusted to reflect anticipated forfeitures and the expected outcome of certain conditions. The fair value of an award is not remeasured after its initial estimation on the grant date, except in the case of a liability award or if the award is modified, based on specific criteria included in SFAS No. 123-R. Also, SFAS 123-R clarifies the financial impact of vesting and/or acceleration clauses due at retirement. Under the revised SFAS, the expense should be fully accrued for any employee that is eligible to retire regardless of the actual retirement experience of the employer. The Corporation prospectively applied SFAS No. 123-R to its financial statements as of January 1, 2006. The impact of this adoption was not significant for the results of the quarter and six months ended June 30, 2006. Refer to Note 13 to these consolidated financial statements for required disclosures and further information on the impact of the adoption of this accounting pronouncement.
SFAS No. 153 “Exchanges of Nonmonetary Assets”
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred; or b) the entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This Statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows upon adoption in 2006.
SFAS No. 154 “Accounting Changes and Error Corrections”
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Statement 154 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board toward development of a single set of high-quality accounting standards. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, 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. SFAS No. 154 did not have a significant impact on the statement of condition or results of operations upon adoption in 2006.

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SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155:
    Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
 
    Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133;
 
    Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;
 
    Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives;
 
    Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this SFAS 155 may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS No. 155. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings. An entity should separately disclose the gross gains and losses that make up the cumulative-effect adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated. The Corporation elected to adopt SFAS No. 155 commencing in January 2007.
SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140”
This Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations:
a. A transfer of the servicer’s financial assets that meets the requirements for sale accounting
b. A transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”
c. An acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates.
2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:
a. Amortization method—Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.
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.

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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.
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109” (FIN 48)
In June 2006, the FASB issued FIN 48, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under the Interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values.
FIN 48 is applicable to all uncertain positions for taxes accounted for under SFAS 109, “Accounting for Income Taxes,” and is not intended to be applied by analogy to other taxes, such as sales taxes, value-added taxes, or property taxes. Significant elements of the new guidance include the following:
    Recognition: A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.
 
    Measurement: The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.
 
    Change in judgment: The assessment of the recognition threshold and the measurement of the associated tax benefit might change as new information becomes available. Unrecognized tax benefits should be recognized in the period that the position reaches the recognition threshold, which might occur prior to absolute finality of the matter. Similarly, recognized tax benefits should be derecognized in the period in which the position falls below the threshold.
 
    Interest/Penalties: A taxpayer is required to accrue interest and penalties that, under relevant tax law, the taxpayer would be regarded as having incurred. Accordingly, under FIN 48, interest would start to accrue in the period that it would begin accruing under the relevant tax law, and penalties should be accrued in the first period for which a position is taken (or is expected to be taken) on a tax return that would give rise to the penalty. How a company classifies interest and penalties in the income statement is an accounting policy decision. The company should disclose that policy and the amounts recognized.
 
    Balance sheet classification: Liabilities resulting from FIN 48 are classified as long-term, unless payment is expected within the next 12 months.
 
    Disclosures: FIN 48 requires qualitative and quantitative disclosures, including discussion of reasonably possible changes that might occur in the recognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on a worldwide aggregated basis.

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After considering other applicable guidance (such as the guidance that the Emerging Issues Task Force specifies in Issue 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination)”, a company should record the change in net assets that results from the application of the Interpretation as an adjustment to retained earnings.
The accounting provisions of FIN 48 will be effective for the Corporation beginning January 1, 2007. The Corporation is in the process of determining the impact, if any, that the adoption of this accounting interpretation may have on its financial condition and results of operations.
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 $583 million at June 30, 2006 (December 31, 2005 — $584 million; June 30, 2005 — $586 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 June 30, 2006, the Corporation had securities with a market value of $443 thousand (December 31, 2005 — $549 thousand; June 30, 2005 — $692 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 June 30, 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally split for the two IBEs, which were considered restricted assets (December 31, 2005 — $600 thousand; June 30, 2005 — $600 thousand).
As part of a line of credit facility with a financial institution, at June 30, 2006, the Corporation maintained restricted cash of $1.9 million as collateral for the line of credit (December 31, 2005 — $2.4 million). The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.
Note 4 – Pledged Assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
                         
    June 30,   December 31,   June 30,
(In thousands)   2006   2005   2005
 
Investment securities available-for-sale
  $ 2,799,279     $ 2,566,668     $ 3,156,792  
Investment securities held-to-maturity
    808       953       1,257  
Loans
    11,100,286       11,835,842       10,411,283  
 
 
  $ 13,900,373     $ 14,403,463     $ 13,569,332  
 
Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.

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Note 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 June 30, 2006, December 31, 2005 and June 30, 2005 were as follows:
                                 
    AS OF JUNE 30, 2006
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 524,093           $ 46,330     $ 477,763  
Obligations of U.S. Government sponsored entities
    7,440,298             288,943       7,151,355  
Obligations of Puerto Rico, States and political subdivisions
    120,410     $ 70       5,801       114,679  
Collateralized mortgage obligations
    1,790,277       6,762       28,898       1,768,141  
Mortgage-backed securities
    1,285,786       2,464       50,331       1,237,919  
Equity securities
    68,294       2,748       925       70,117  
Others
    69,327       698       701       69,324  
 
 
  $ 11,298,485     $ 12,742     $ 421,929     $ 10,889,298  
 
                                 
    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  
 

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    AS OF JUNE 30, 2005
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
U.S. Treasury securities
  $ 553,267     $ 16     $ 8,634     $ 544,649  
Obligations of U.S. Government sponsored entities
    7,626,640       42,100       42,705       7,626,035  
Obligations of Puerto Rico, States and political subdivisions
    167,897       5,419       942       172,374  
Collateralized mortgage obligations
    1,692,703       6,683       7,970       1,691,416  
Mortgage-backed securities
    1,600,601       15,738       12,725       1,603,614  
Equity securities
    47,767       22,302       394       69,675  
Others
    124,788       5,045       653       129,180  
 
 
  $ 11,813,663     $ 97,303     $ 74,023     $ 11,836,943  
 
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 June 30, 2006, December 31, 2005 and June 30, 2005:
                         
    AS OF JUNE 30, 2006
    Less than 12 Months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 19,418     $ 342     $ 19,076  
Obligations of U.S. Government sponsored entities
    3,519,349       157,756       3,361,593  
Obligations of Puerto Rico, States and political subdivisions
    44,386       1,024       43,362  
Collateralized mortgage obligations
    732,872       16,340       716,532  
Mortgage-backed securities
    205,765       29,321       176,444  
Equity securities
    35,716       925       34,791  
Others
    14,261       701       13,560  
 
 
  $ 4,571,767     $ 206,409     $ 4,365,358  
 
                         
    12 months or more
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 504,675     $ 45,988     $ 458,687  
Obligations of U.S. Government sponsored entities
    3,920,947       131,187       3,789,760  
Obligations of Puerto Rico, States and political subdivisions
    55,232       4,777       50,455  
Collateralized mortgage obligations
    313,094       12,558       300,536  
Mortgage-backed securities
    957,443       21,010       936,433  
 
 
  $ 5,751,391     $ 215,520     $ 5,535,871  
 

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    Total
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 524,093     $ 46,330     $ 477,763  
Obligations of U.S. Government sponsored entities
    7,440,296       288,943       7,151,353  
Obligations of Puerto Rico, States and political subdivisions
    99,618       5,801       93,817  
Collateralized mortgage obligations
    1,045,966       28,898       1,017,068  
Mortgage-backed securities
    1,163,208       50,331       1,112,877  
Equity securities
    35,716       925       34,791  
Others
    14,261       701       13,560  
 
 
  $ 10,323,158     $ 421,929     $ 9,901,229  
 
                         
    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 JUNE 30, 2005
    Less than 12 Months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 54,942     $ 317     $ 54,625  
Obligations of U.S. Government sponsored entities
    3,249,909       30,400       3,219,509  
Obligations of Puerto Rico, States and political subdivisions
    19,197       141       19,056  
Collateralized mortgage obligations
    443,224       5,659       437,565  
Mortgage-backed securities
    809,680       8,455       801,225  
Equity securities
    7,641       394       7,247  
Others
    6,526       653       5,873  
 
 
  $ 4,591,119     $ 46,019     $ 4,545,100  
 
                         
    12 months or more
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 488,504     $ 8,317     $ 480,187  
Obligations of U.S. Government sponsored entities
    1,009,693       12,305       997,388  
Obligations of Puerto Rico, States and political subdivisions
    45,223       801       44,422  
Collateralized mortgage obligations
    92,450       2,311       90,139  
Mortgage-backed securities
    250,154       4,270       245,884  
 
 
  $ 1,886,024     $ 28,004     $ 1,858,020  
 
                         
    Total
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
U.S. Treasury securities
  $ 543,446     $ 8,634     $ 534,812  
Obligations of U.S. Government sponsored entities
    4,259,602       42,705       4,216,897  
Obligations of Puerto Rico, States and political subdivisions
    64,420       942       63,478  
Collateralized mortgage obligations
    535,674       7,970       527,704  
Mortgage-backed securities
    1,059,834       12,725       1,047,109  
Equity securities
    7,641       394       7,247  
Others
    6,526       653       5,873  
 
 
  $ 6,477,143     $ 74,023     $ 6,403,120  
 
At June 30, 2006, “Obligations of Puerto Rico, States and political subdivisions” include approximately $56 million in Commonwealth of Puerto Rico Appropriation Bonds which rating was downgraded by Moody’s Investors Service to Ba1, one notch below investment grade, in May 2006. At that time, Moody’s commented that this action reflected the Government’s strained financial condition, the ongoing political conflict and lack of agreement regarding the measures necessary to end the government’s multi-year trend of financial deterioration. In July 2006, this credit rating agency maintained the credit rating, but removed the Puerto Rico Government obligations from its watch list for further downgrades as the Government of Puerto Rico approved the 2007 fiscal year budget and established a new sales tax. A percentage of this sales tax is designated to be used as a revenue source to repay Puerto Rico Government Obligations. Future rating stability will be subject to the Government’s actions to reduce operating expenditures, improve managerial and budgetary controls, and eliminate the reliance on loans from the Government Development Bank for Puerto Rico, the Commonwealth’s fiscal agent, to cover operating deficits. Standard & Poor’s (S&P), another nationally recognized credit rating agency, rated the Appropriation Bonds BBB-, which is still

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considered investment grade. As of June 30, 2006, the appropriation bonds indicated above represented approximately $4.5 million in net unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island and evaluates the portfolio for any declines in value that management may consider being other-than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
The unrealized loss positions of available-for-sale securities at June 30, 2006, except for the obligations of the Puerto Rico government described above, are primarily associated with U.S. government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly liquid securities which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in these available-for-sale securities at June 30, 2006 are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
During the quarter and six months ended June 30, 2006, the Corporation recognized through earnings approximately $15.0 million and $16.9 million, respectively, in losses in interest-only securities available-for-sale that management considered to be other-than-temporarily impaired. For the six months ended June 30, 2005 the impairment adjustment amounted to $1.9 million and was associated with interest-only securities and equity securities.
The following table states the name of issuers, and the aggregate amortized cost and market value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.
                                                 
    June 30, 2006   December 31, 2005   June 30, 2005
(In thousands)   Amortized Cost   Market Value   Amortized Cost   Market Value   Amortized Cost   Market Value
 
FNMA
  $ 1,797,323     $ 1,758,590     $ 1,790,840     $ 1,776,604     $ 1,859,220     $ 1,866,276  
FHLB
    7,354,827       7,073,831       7,480,188       7,327,736       7,474,253       7,474,274  
Freddie Mac
    1,243,039       1,212,853       1,244,044       1,228,566       1,053,794       1,048,215  
 

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Note 6 — Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of June 30, 2006, December 31, 2005 and June 30, 2005 were as follows:
                                 
            AS OF JUNE 30, 2006    
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 314,408           $ 64     $ 314,344  
Obligations of Puerto Rico, States and political subdivisions
    73,043     $ 367       527       72,883  
Collateralized mortgage obligations
    433             24       409  
Others
    32,514       50       28       32,536  
 
 
  $ 420,398     $ 417     $ 643     $ 420,172  
 
                                 
    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 JUNE 30, 2005
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Market
(In thousands)   Cost   Gains   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 54,115     $ 154     $ 52     $ 54,217  
Obligations of Puerto Rico, States and political subdivisions
    75,252       4,640       118       79,774  
Collateralized mortgage obligations
    547             60       487  
Others
    48,073       684       10       48,747  
 
 
  $ 177,987     $ 5,478     $ 240     $ 183,225  
 

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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 June 30, 2006, December 31, 2005 and June 30, 2005:
                         
    AS OF JUNE 30, 2006
    Less than 12 months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 307,460     $ 61     $ 307,399  
Obligations of Puerto Rico, States and political subdivisions
    25,830       328       25,502  
Others
    7,636       28       7,608  
 
 
  $ 340,926     $ 417     $ 340,509  
 
                         
    12 months or more
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 6,948     $ 3     $ 6,945  
Obligations of Puerto Rico, States and political subdivisions
    25,993       199       25,794  
Collateralized mortgage obligations
    433       24       409  
Others
    250             250  
 
 
  $ 33,624     $ 226     $ 33,398  
 
                         
    Total
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 314,408     $ 64     $ 314,344  
Obligations of Puerto Rico, States and political subdivisions
    51,823       527       51,296  
Collateralized mortgage obligations
    433       24       409  
Others
    7,886       28       7,858  
 
 
  $ 374,550     $ 643     $ 373,907  
 

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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 JUNE 30, 2005
    Less than 12 months
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of U.S. Government sponsored entities
  $ 27,004     $ 52     $ 26,952  
Others
    750       10       740  
 
 
  $ 27,754     $ 62     $ 27,692  
 
                         
    12 months or more
    Amortized   Unrealized   Market
(In thousands)   Cost   Losses   Value
 
Obligations of Puerto Rico, States and political subdivisions
  $ 23,037     $ 118     $ 22,919  
Collateralized mortgage obligations
    547       60       487  
Others
    250             250  
 
 
  $ 23,834     $ 178     $ 23,656  
 
                         
    Total  
    Amortized     Unrealized     Market  
(In thousands)   Cost     Losses     Value  
 
Obligations of U.S. Government sponsored entities
  $ 27,004     $ 52     $ 26,952  
Obligations of Puerto Rico, States and political subdivisions
    23,037       118       22,919  
Collateralized mortgage obligations
    547       60       487  
Others
    1,000       10       990  
 
 
  $ 51,588     $ 240     $ 51,348  
 

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Note 7 – Retained Interests on Sales of Mortgage Loans
During the six months ended June 30, 2006, the Corporation retained servicing responsibilities and other residual interests on various securitization transactions and whole loan sales of residential mortgage loans performed by various subsidiaries. Refer to Note 1 to the audited consolidated financial statements included in Popular’s 2005 Annual Report for the accounting policies followed by the Corporation with respect to mortgage servicing rights (“MSRs”) and interest-only strips (“IOs”). Also, refer to the Critical Accounting Policies / Estimates section of the Management’s Discussion and Analysis included in the 2005 Annual Report for valuation methodologies used by the Corporation in determining the fair value of these retained interests.
Popular Financial Holdings
During the six-month period ended June 30, 2006, the Corporation, through its consumer lending subsidiary PFH, retained MSRs and IOs on mortgage loans securitizations.
During 2006, the Corporation has conducted two asset securitizations that involved the transfer of mortgage loans to qualifying special purpose entities (QSPE), which in turn transferred these assets and their titles, to different trusts, thus isolating those loans from the Corporation’s assets. Approximately, $652 million in adjustable (“ARM”) and fixed-rate loans were securitized and sold by PFH during 2006, with a gain on sale of approximately $11.5 million. As part of these transactions, the Corporation recognized MSRs of $12 million and IOs of $23 million.
When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria, the Corporation is not permitted to derecognize the transferred financial assets and the transaction is accounted for as a secured borrowing (“on-balance sheet securitization”). The loans transferred to the trusts are included on the statement of condition as loans pledged as collateral for secured borrowings.
During 2006, the Corporation has completed two on-balance sheet securitizations consisting of approximately $898 million in ARM and fixed-rate loans. As part of these transactions, the Corporation recognized mortgage servicing rights of $16 million.
IOs retained as part of off-balance sheet securitizations of non-prime mortgage loans prior to 2006 had been classified as investment securities available-for-sale and are presented at fair value in the unaudited consolidated statements of condition. PFH’s IOs classified as available-for-sale as of June 30, 2006 amounted to $48 million.
Commencing in January 2006, the IOs derived from newly-issued PFH’s off-balance sheet securitizations are being accounted for as trading securities. As such, any valuation adjustment related to these particular IOs is being recorded as part of trading account profit (loss) in the consolidated statements of income. Interest-only strips accounted for as trading securities from PFH securitizations approximated $24 million at June 30, 2006.
The Corporation reviews the IOs for potential impairment on a quarterly basis and records impairment in accordance with SFAS No. 115 and EITF 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” During the quarter and six months ended June 30, 2006, the Corporation recorded other-than-temporary impairment losses of $15.0 million and $16.9 million, respectively, related with the IOs derived from off-balance sheet securitizations.

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     Key economic assumptions used in measuring the retained interests at the date of the off-balance sheet and on-balance sheet securitizations performed during the six-month period ended June 30, 2006 were:
                         
            MSRs
            Fixed-rate   ARM
    IOs   loans   loans
 
Average prepayment speed
  28% (Fixed-rate loans)     28 %     35 %
    35% (ARM loans)                
Weighted average life of collateral (in years)
  2.4 to 2.5 years   3.5 years       2.4 to 2.6 years  
Expected credit losses (annual rate)
  1.7% to 2.7%            
Discount rate (annual rate)
  15%     14% - 16 %     14% - 16 %
 
As of June 30, 2006, key economic assumptions used to estimate the fair value of IOs and MSRs derived from PFH’s securitizations and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:
                         
            MSRs
(In thousands)   IOs   Fixed-rate loans   ARM loans
 
Carrying amount of retained interests
  $72,147   $46,404     $41,237  
Fair value of retained interests
  $72,147   $47,877     $45,985  
Weighted average life of collateral (in years)
  2.1 years   3.1 years     2.1 years  
Average prepayment speed (annual rate)
  28% (Fixed-rate loans)
    28 %     35 %
 
  35% (ARM loans)                
Impact on fair value of 10% adverse change
  $(4,565)   $129     $(509 )
Impact on fair value of 20% adverse change
  (7,712)   (21 )   (975 )
Weighted average discount rate (annual rate)
  17%     16 %     16 %
Impact on fair value of 10% adverse change
  $(3,431)   $(1,163 )   $(822 )
Impact on fair value of 20% adverse change
  (6,638)   (2,274 )   (1,625 )
Expected credit losses (annual rate)
  1.28% to 2.73%            
Impact on fair value of 10% adverse change
  $(3,862)            
Impact on fair value of 20% adverse change
  (7,717)            
 
PFH as servicer collects prepayment penalties on a substantial portion of the underlying serviced loans, as such, an adverse change in the prepayment assumptions with respect to the MSRs could be partially offset by the benefit derived from the prepayment penalties estimated to be collected.
Banking subsidiaries
In addition, the Corporation’s banking subsidiaries retain servicing responsibilities on the sale of wholesale mortgage loans. Also, servicing responsibilities are retained under pooling / selling arrangements of mortgage loans into mortgage-backed securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized have fixed rates. Under the servicing agreements, the banking subsidiaries do not earn significant prepayment penalties on the underlying loans serviced.
Key economic assumptions used in measuring the MSRs at the date of the securitizations and whole loan sales by the banking subsidiaries performed during the six months ended June 30, 2006 were:
         
    MSRs
 
Weighted average prepayment speed
    12.6 %
Weighted average life of collateral (in years)
  11.1 years  
Weighted average expected credit losses (annual rate)
     
Weighted average discount rate (annual rate)
    10.0 %
 

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As of June 30, 2006, key economic assumptions used to estimate the fair value of MSRs derived from transactions performed by the banking subsidiaries and the sensitivity of residual cash flows to immediate changes in those assumptions were as follows:
         
(In thousands)   MSRs
 
Carrying amount of retained interests
  $ 67,602  
Fair value of retained interests
  $ 78,786  
Weighted average life of collateral (in years)
  9.2 years
Weighted average prepayment speed (annual rate)
    12.0 %
Impact on fair value of 10% adverse change
  $ (2,212 )
Impact on fair value of 20% adverse change
    (4,321 )
Weighted average discount rate (annual rate)
    10.5 %
Impact on fair value of 10% adverse change
  $ (2,318 )
Impact on fair value of 20% adverse change
    (4,731 )
 
The sensitivity analyses presented above for IOs and MSRs are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
Note 8 – Derivative Instruments and Hedging Activities
Refer to Note 28 to the consolidated financial statements included in the 2005 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities in the second quarter of 2006:
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of June 30, 2006 and December 31, 2005 were as follows:
As of June 30, 2006
                                         
                    Derivative        
(In thousands)   Notional amount   Derivative assets   liabilities   Equity OCI   Ineffectiveness
 
Asset Hedges
                                       
Forward commitments
  $ 80,000     $ 177     $ 155     $ 13        
 
                                       
 
 
                                       
Liability Hedges
                                       
Interest rate swaps
  $ 390,000     $ 3,539           $ 2,301        
 
Year ended December 31, 2005
                                         
                    Derivative        
(In thousands)   Notional amount   Derivative assets   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

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forward contracts is expected to be reclassified to earnings in the next twelve months. The contracts outstanding at June 30, 2006 have a maximum remaining maturity of 75 days.
During 2006, the Corporation entered into interest rate swap contracts to convert floating rate debt to fixed rate debt with the objective of minimizing the exposure to changes in cash flows due to higher interest rates. These interest rate swaps have a maximum remaining maturity of 2.8 years.
Fair Value Hedges
Derivative financial instruments designated as fair value hedges outstanding as of June 30, 2006 and December 31, 2005 were as follows:
As of June 30, 2006
                                 
                    Derivative    
(In thousands)   Notional amount   Derivative assets   liabilities   Ineffectiveness
 
Asset Hedges
                               
Interest rate swaps
  $ 60,000     $ 43           $ 2  
 
Year ended December 31, 2005
                                 
                    Derivative    
(In thousands)   Notional amount   Derivative assets   liabilities   Ineffectiveness
 
Asset Hedges
                               
Interest rate swaps
  $ 534,623     $ 3,145             ($388 )
 
The interest rate swaps outstanding at June 30, 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.
At December 31, 2005, the Corporation had outstanding interest rate swaps designated as fair value hedges to protect its exposure to the changes in fair value resulting from movements in the benchmark interest rate of fixed rate assets, particularly loans and investment securities. These interest rate swaps were terminated during the first quarter of 2006.

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Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding at June 30, 2006 and December 31, 2005 were as follows:
June 30, 2006
                         
            Fair Values
(In thousands)   Notional amount   Derivative assets   Derivative liabilities
 
Forward contracts
  $ 439,116     $ 1,118     $ 307  
Futures contracts
    2,000             4  
Call options and put options
    16,500       78        
Interest rate swaps associated with:
                       
— short-term borrowings
    400,000       5,396        
— bond certificates issued in an on-balance sheet securitization
    301,281       930        
— financing of auto loan portfolio held-for-investment
    385,018       3,740        
— auto loans approvals locked interest rates
    28,461       39        
— swaps with corporate clients
    348,893             10,561  
— swaps offsetting position of corporate client swaps
    348,893       10,561        
— investment securities
    20,850       33       34  
Credit default swap
    33,463             105  
Foreign currency and exchange rate commitments with clients
    179             2  
Foreign currency and exchange rate commitments offsetting clients’ positions
    179       2        
Interest rate caps
    1,277,370       9,385        
Interest rate caps for benefit of corporate clients
    50,000             287  
Indexed options on deposits
    195,213       27,572        
Indexed options on S&P Notes
    31,152       3,745        
Embedded options
    240,930       14,471       32,789  
Mortgage rate lock commitments
    238,707       149       293  
 
Total
  $ 4,358,205     $ 77,219     $ 44,382  
 
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 certificates of deposit
    157,088             3,226  
— short-term borrowings
    400,000              
— financing of auto loan portfolio held-for-investment
    209,222       851        
— auto loans approvals locked interest rates
    26,297             13  
— swaps with corporate clients
    293,331             2,361  
— swaps offsetting position of corporate client swaps
    293,331       2,361        
— investment securities
    40,250       837        
Foreign currency and exchange rate commitments with clients
    252             32  
Foreign currency and exchange rate commitments offsetting clients’ positions
    252       32        
Interest rate caps
    1,650,907       12,215        
Indexed options on deposits
    122,711       17,715        
Indexed options on S&P Notes
    31,152       3,626        
Embedded options
    170,121       10,593       24,398  
Mortgage rate lock commitments
    234,938       330        
 
Total
  $ 4,175,309     $ 48,706     $ 31,721  
 

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Interest Rates Swaps
At December 31, 2005, the Corporation had outstanding interest rate swaps that economically hedged the exposure of certain brokered certificates of deposit to changes in fair value due to movements in the benchmark interest rate. The terms of the interest rate swaps were identical to the terms of the callable certificates of deposit. These interest rate swap agreements were terminated in the first quarter of 2006.
At the end of the second quarter of 2006, the Corporation entered into an interest rate swap to economically hedge the payments of the bonds certificates offered as part of an on-balance sheet securitization. This swap contract will be marked-to-market quarterly and recognized as part of interest expense.
Note 9 – Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2006 and 2005, allocated by reportable segment, and in the case of Banco Popular de Puerto Rico, as an additional disclosure, by business area, were as follows (refer to Note 19 for the definition of the Corporation’s reportable segments):
                                 
            Purchase            
    Balance at   accounting           Balance at
(In thousands)   January 1, 2006   adjustments   Other   June 30, 2006
 
Banco Popular de Puerto Rico:
                               
P.R. Commercial Banking
  $ 14,674                 $ 14,674  
P.R. Consumer and Retail Banking
    34,999                   34,999  
P.R. Other Financial Services
    4,110                   4,110  
Banco Popular North America
    404,447             ($210 )     404,237  
Popular Financial Holdings
    152,623     $ 2,415             155,038  
EVERTEC
    43,131                   43,131  
 
Total Popular, Inc.
  $ 653,984     $ 2,415       ($210 )   $ 656,189  
 
                                 
                    Purchase    
    Balance at   Goodwill   accounting   Balance at
(In thousands)   January 1, 2005   acquired   adjustments   June 30, 2005
 
Banco Popular de Puerto Rico:
                               
P.R. Commercial Banking
  $ 14,674                 $ 14,674  
P.R. Consumer and Retail Banking
    34,999                   34,999  
P.R. Other Financial Services
    3,322     $ 513             3,835  
Banco Popular North America
    309,709       112,965       ($1,270 )     421,404  
Popular Financial Holdings
    9,514                   9,514  
EVERTEC
    39,090       3,914       203       43,207  
 
Total Popular, Inc.
  $ 411,308     $ 117,392       ($1,067 )   $ 527,633  
 
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 during 2006 for Banco Popular North America reportable segment is related to the sale of the remaining retail outlets of Popular Cash Express (“PCE”) operations to PLS Financial during the first quarter of 2006. The increase in goodwill during the six months ended June 30, 2005 was mostly related to the Kislak acquisition.
No goodwill was written-down during the six months ended June 30, 2006 and 2005.
At June 30, 2006 and December 31, 2005, other than goodwill, the Corporation had $59 million of identifiable intangibles with indefinite useful lives, mostly associated with E-LOAN’s trademark. At June 30, 2005, the Corporation had $65 thousand of identifiable intangibles with an indefinite useful life related to a trademark. The following table reflects the components of other intangible assets subject to amortization:

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    June 30, 2006   December 31, 2005   June 30, 2005
    Gross   Accumulated   Gross   Accumulated   Gross   Accumulated
(In thousands)   Amount   Amortization   Amount   Amortization   Amount   Amortization
 
Core deposits
  $ 76,956     $ 44,741     $ 76,956     $ 40,848     $ 95,898     $ 54,490  
Other customer relationships
    8,593       1,273       8,175       507       2,400       144  
Other intangibles
    9,320       2,729       9,320       1,807       3,443       1,098  
 
Total
  $ 94,869     $ 48,743     $ 94,451     $ 43,162     $ 101,741     $ 55,732  
 
During the quarter and six months ended June 30, 2006, the Corporation recognized $2.8 million and $5.6 million, respectively, in amortization expense related to other intangible assets with definite lives (June 30, 2005 — $2.1 million and $4.4 million, respectively).
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
  $ 11,203  
2007
    9,126  
2008
    7,455  
2009
    6,594  
2010
    5,739  
No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.
Note 10 – Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as follows:
                         
    June 30,   December 31,   June 30,
(In thousands)   2006   2005   2005
 
Federal funds purchased
  $ 1,164,177     $ 1,500,575     $ 1,179,570  
Assets sold under agreements to repurchase
    6,762,554       7,201,886       6,686,599  
 
 
  $ 7,926,731     $ 8,702,461     $ 7,866,169  
 

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Other short-term borrowings consisted of:
                         
    June 30,   December 31,   June 30,
(Dollars in thousands)   2006   2005   2005
 
Advances with FHLB paying interest monthly at:
                       
—fixed rates ranging from 5.24% to 5.39% (June 30, 2005 – 2.31% to 3.56%)
  $ 400,000     $ 475,000     $ 427,500  
—floating rate with a spread of 0.06% over the fed funds rate (Fed Funds rate at June 30, 2006 was 5.00%; June 30, 2005 – 3.38%)
    105,000               100,000  
 
                       
Advances under credit facilities with other institutions at:
                       
—fixed rates ranging from 5.33% to 5.35% (June 30, 2005 – 2.80% to 3.77%)
    60,000       282,734       125,335  
—floating rates ranging from 0.45% to 2.00% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2006 was 5.33%)
    87,872       29,274          
—a floating rate of 0.20% (June 30, 2005 – 0.16% to 1.75%) over the 3-month LIBOR rate (3-month LIBOR rate at June 30, 2006 was 5.48%; June 30, 2005 – 3.52%)
    10,000       20,000       21,144  
 
                       
Commercial paper at rates ranging from 4.75% to 5.37% (June 30, 2005 – 2.71% to 3.18%)
    62,224       419,423       148,650  
 
                       
Term funds purchased at:
                       
—fixed rates ranging from 5.02% to 5.36% (June 30, 2005 – 3.07% to 3.33%)
    1,275,000       1,122,000       1,176,000  
—floating rate with a spread over the 1-month LIBOR rate
            350,000          
—floating rates with a spread ranging from 0.06% to 0.08% over the fed funds rate (Fed Funds rate at June 30, 2006 was 5.00%; June 30, 2005 – 3.38%)
    647,200                  
 
                       
Others
    9,640       1,830       352  
 
 
  $ 2,656,936     $ 2,700,261     $ 1,998,981  
 
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2005, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Notes payable and subordinated notes outstanding consisted of:
                         
    June 30,   December 31,   June 30,
(In thousands)   2006   2005   2005
 
Advances with FHLB:
                       
—maturing from 2006 through 2028 paying interest at fixed rates ranging from 2.51% to 6.98% (June 30, 2005 - 1.77% to 6.98%)
  $ 527,625     $ 906,623     $ 973,700  
—maturing in 2008 paying interest at a floating rate of 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2006 was 5.33%; June 30, 2005 – 3.34%)
    250,000       250,000       250,000  
—maturing from 2006 through 2007 paying interest at floating rates tied to 1 and 3-month LIBOR rates
    11,000       12,250       165,250  
 
                       
Advances under revolving lines of credit with maturities until 2007 paying interest monthly at a floating rate of 0.90% over the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2006 was 5.33%)
    347,178       195,008          
 
                       
Term notes with maturities ranging from 2006 through 2010 paying interest semiannually at fixed rates ranging from 3.25% to 6.39% (June 30, 2005 – 2.40% to 7.29%)
    2,712,601       2,427,113       2,426,095  
 
                       
Term notes with maturities until 2009 paying interest quarterly at floating rates ranging from 0.35% to 0.40% (June 30, 2005 – 0.35% to 0.45%) over the 3-month LIBOR rate (3-month LIBOR rate at June 30, 2006 was 5.48%; June 30, 2005 – 3.52%)
    469,074       54,988       60,450  
 
                       
Term notes with maturities ranging from 2013 through 2030 paying interest monthly at fixed rates ranging from 3.00% to 7.54% (June 30, 2005 – 3.00% to 7.14%)
    14,689       15,883       17,132  
 
                       
Secured borrowings with maturities until 2014 paying interest monthly at fixed rates ranging from 3.05% to 7.12% (June 30, 2005 – 2.83% to 7.12%)
    3,093,397       3,241,677       2,531,347  
 
                       
Secured borrowings with maturities until 2014 paying interest monthly at rates ranging from 5.34% to 10.99% (June 30, 2005 – 4.23% to 7.54%) which are tied to the 1-month LIBOR rate (1-month LIBOR rate at June 30, 2006 was 5.33%; June 30, 2005 – 3.34%)
    1,888,914       1,905,953       1,773,364  
 
                       
Notes linked to the S&P500 Index maturing in 2008
    34,014       33,703       32,383  
 
                       
Junior subordinated deferrable interest debentures with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.13% to 8.33% (Refer to Note 15)
    849,672       849,672       849,672  
 
                       
Subordinated notes maturing on December 2005 paying interest semi-annually at 6.75%
                    125,000  
 
                       
Mortgage notes and other debt
    511       707       5,877  
 
 
  $ 10,198,675     $ 9,893,577     $ 9,210,270  
 
 
Note: Refer to the Corporation’s Form 10-K for the year ended December 31, 2005, for rates and maturity information corresponding to the borrowings outstanding as of such date.

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Note 11 – Commitments and Contingencies
In the normal course of business, the Corporation has outstanding commercial letters of credit and stand-by letters of credit, which contract amounts at June 30, 2006 were $18 million and $161 million, respectively (December 31, 2005 — $22 million and $177 million; June 30, 2005 — $27 million and $215 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 June 30, 2006, the Corporation recorded a liability of $696 thousand (December 31, 2005 — $548 thousand; June 30, 2005 — $385 thousand), which represents the fair value of the obligations undertaken in issuing the guarantees under standby letters of credit issued or modified after December 31, 2002. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The liability was included as part of “other liabilities” in the consolidated statements of condition. The standby letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in standby letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.
The Corporation fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries which aggregated to $4.2 billion at June 30, 2006 (December 31, 2005 — $4.0 billion; June 30, 2005 — $3.8 billion). In addition, at June 30, 2006, the Corporation fully and unconditionally guaranteed $824 million of capital securities (December 31, 2005 and June 30, 2005 — $824 million) issued by four wholly-owned issuing trust entities that have been deconsolidated pursuant to FIN No. 46R. During the first quarter of 2005, Popular North America, Inc. concluded its full and unconditional guarantee of certain borrowing obligations issued by one of its non-banking subsidiaries.
The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.
Note 12 – Other Service Fees
The caption of other service fees in the consolidated statements of income consists of the following major categories:
                                 
    Quarter ended June 30,     Six months ended June 30,  
(In thousands)   2006     2005     2006     2005  
 
Credit card fees and discounts
  $ 22,371     $ 20,058     $ 44,944     $ 38,583  
Debit card fees
    15,085       13,193       30,004       26,215  
Insurance fees
    14,411       12,761       26,552       24,434  
Processing fees
    10,939       10,470       21,218       20,577  
Other
    17,211       27,359       37,645       53,047  
 
Total
  $ 80,017     $ 83,841     $ 160,363     $ 162,856  
 

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Note 13 – Stock Option and Other Incentive Plans
Since 2001, the Corporation maintained a Stock Option Plan (the “Stock Option Plan”), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. All outstanding award grants under the Stock Option Plan continue to remain outstanding at June 30, 2006 under the original terms of the Stock Option Plan. The aggregate number of shares of common stock which may be issued under the Incentive Plan is limited to 10,000,000 shares, subject to adjustments for stock splits, recapitalizations and similar events.
In 2002, the Corporation opted to use the fair value method of recording stock-based compensation as described in SFAS No. 123 “Accounting for Stock Based Compensation”. The Corporation adopted SFAS No. 123-R “Share-Based Payment” on January 1, 2006 using the modified prospective transition method. Under the modified prospective transition method, results for prior periods have not been restated to reflect the effects of implementing SFAS No. 123-R. Accounting and reporting under SFAS No. 123-R is generally similar to the SFAS No. 123 approach since fair value accounting has been used by the Corporation to recognize the stock-based compensation expense since 2002.
Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provides for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.
Under SFAS No. 123-R, the compensation cost related to the Stock Option Plan is being recognized in full for those employees that, as of quarter-end, had attained their minimum required eligible age for retirement, since the vesting is accelerated at retirement. The impact of SFAS No. 123-R related to the Stock Option Plan resulted in additional expense of $187 thousand for the six months ended June 30, 2006.
The following table presents information on stock options at June 30, 2006:
(Not in thousands)
                                         
            Weighted Average   Weighted Average           Weighted Average
Exercise Price   Options   Exercise Price of   Remaining Life of   Options   Exercise Price of
Range per Share   Outstanding   Options Outstanding   Options Outstanding   Exercisable   Options Exercisable
                    (in years)   (fully vested)        
 
$14.39 - $18.50
    1,569,650     $ 15.81       6.23       1,190,638     $ 15.69  
$19.25 - $27.20
    1,640,710     $ 25.29       8.01       783,348     $ 24.97  
 
$14.39 - $27.20
    3,210,360     $ 20.65       7.14       1,973,986     $ 19.37  
 

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The following table summarizes the stock option activity and related information:
                 
    Options   Weighted-Average
(Not in thousands)   Outstanding   Exercise Price
 
Outstanding at January 1, 2005
    2,584,620     $ 18.76  
Granted
    707,342       27.20  
Exercised
    (47,858 )     16.14  
Forfeited
    (20,401 )     22.18  
 
Outstanding at December 31, 2005
    3,223,703     $ 20.63  
Granted
           
Exercised
    (13,343 )     15.93  
Forfeited
           
 
Outstanding at June 30, 2006
    3,210,360     $ 20.65  
 
The stock options exercisable at June 30, 2006 totaled 1,973,986 (June 30, 2005 — 1,099,164).
The fair value of the options was estimated on the date of the grants using the Black-Scholes Option Pricing Model. The weighted average assumptions used for the grants issued during 2005 were:
         
    2005
 
Expected dividend yield
    2.56 %
Expected life of options
  10 years
Expected volatility
    17.54 %
Risk-free interest rate
    4.16 %
Weighted average fair value of options granted (per option)
  $ 5.95  
 
There were no new grants issued by the Corporation under the Stock Option Plan during 2006.
The cash received from the stock options exercised during the quarter ended June 30, 2006 amounted to $100 thousand. For the six months ended June 30, 2006, the cash received from stock options exercised amounted to $213 thousand.
The Corporation recognized $0.8 million in stock option expense for the quarter ended June 30, 2006, with a tax benefit of $0.3 million (June 30, 2005 — $0.9 million, with a tax benefit of $0.3 million). For the six months ended June 30, 2006, the Corporation recognized $1.6 million in stock option expense, with a tax benefit of $0.6 million (June 30, 2005 — $1.7 million, with a tax benefit of $0.6 million). The total unrecognized compensation cost at June 30, 2006 related to non-vested stock option awards was $5.2 million, and is expected to be recognized over a weighted-average period of 1.8 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

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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 and six-month period ended June 30, 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       20.54  
Exercised
           
Forfeited
    (1,010 )     19.95  
 
Outstanding at June 30, 2006
    615,648     $ 22.54  
 
During the quarters ended June 30, 2006 and 2005, no shares of restricted stock were awarded under the Incentive Plan for corporate executive officers. During the six-month period ended June 30, 2006, the Corporation granted 444,036 shares of restricted stock for corporate executive officers (June 30, 2005 — 172,622). 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 June 30, 2006, the Corporation recognized $0.8 million (June 30, 2005 - $0.4 million) of restricted stock expense related to the executive officers’ incentive awards, with an income tax benefit of $0.3 million (June 30, 2005 — $0.2 million). For the six-month period ended June 30, 2006, the Corporation recognized $2.1 million (June 30, 2005 — $1.2 million) of restricted stock expense related to the executive officers’ incentive awards, with an income tax benefit of $0.8 million (June 30, 2005 — $0.5 million). The total unrecognized compensation cost related to non-vested restricted stock awards was $14 million and is expected to be recognized over a weighted-average period of 2.7 years.
During the quarter ended June 30, 2006, the Corporation granted 28,583 (June 30, 2005 – 25,658) 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 $0.1 million (June 30, 2005 - $0.1 million) of restricted stock expense related to these restricted stock grants. For the six-month period ended June 30, 2006, the Corporation granted 29,859 (June 30, 2005 — 26,843) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR. During this period, the Corporation recognized $0.3 million (June 30, 2005 — $0.3 million) of restricted stock expense related to these restricted stock grants.

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Note 14 – Pension and Other Benefits
The Corporation has noncontributory defined benefit pension plans and supplementary pension plans for regular employees of certain of its subsidiaries.
The components of net periodic pension cost for the quarters and six months ended June 30, 2006 and 2005 were as follows:
                                                                 
    Pension Plans   Benefit Restoration Plans
    Quarters ended   Six months ended   Quarters ended   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2006   2005   2006   2005   2006   2005   2006   2005
 
Service cost
  $ 3,135     $ 3,940     $ 6,270     $ 7,831     $ 262     $ 240     $ 524     $ 480  
Interest cost
    7,641       7,438       15,282       14,876       400       313       800       626  
Expected return on plan assets
    (9,931 )     (10,281 )     (19,909 )     (20,181 )     (264 )     (203 )     (528 )     (406 )
Amortization of asset obligation
          (215 )           (430 )                        
Amortization of prior service cost
    44       100       88       200       (13 )     (27 )     (26 )     (54 )
Amortization of net loss
    488       17       976       34       276       147       552       294  
 
Total net periodic cost
  $ 1,377     $ 999     $ 2,707     $ 2,330     $ 661       470     $ 1,322       940  
 
During the quarter ended June 30, 2006, contributions made to the pension and restoration plans approximated $1.4 million.
In October 2005, the Board of Directors of BPPR adopted an amendment to the Puerto Rico Retirement and Tax Qualified Retirement Restoration Plans to freeze benefits for all employees under age 30 or who had less than 10 years of credited service effective January 1, 2006 and providing 100% vesting to all employees in their accrued benefit as of December 31, 2005. The expense for these plans was remeasured as of September 30, 2005 to consider this change using a discount rate of 5.50%. Curtailment costs were considered for these plans and are included as part of the December 31, 2005 disclosures. In connection with the amendments to the plans, these employees received a base salary increase according to their age and years of service, effective January 1, 2006.
The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and six months ended June 30, 2006 and 2005 were as follows:
                                 
    Quarters ended   Six months ended
    June 30,   June 30,
(In thousands)   2006   2005   2006   2005
 
Service cost
  $ 687     $ 679     $ 1,399     $ 1,353  
Interest cost
    1,927       2,067       3,854       4,134  
Amortization of prior service cost
    (262 )     (262 )     (524 )     (524 )
Amortization of net loss
    240       423       480       846  
 
Total net periodic cost
  $ 2,592     $ 2,907     $ 5,209     $ 5,809  
 
As of June 30, 2006, contributions made to the postretirement benefit plan approximated $3.6 million.
Note 15 – Trust Preferred Securities
At June 30, 2006, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under the provisions of FIN No. 46-R.

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The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition. The Corporation also recorded in the caption of other investment securities in the consolidated statements of condition, the common securities issued by the issuer trusts. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.
(In thousands, including reference notes)
                                 
                    Popular North        
    BanPonce     Popular Capital     America Capital     Popular Capital  
Issuer   Trust I     Trust I     Trust I     Trust II  
 
Issuance date
  February 1997     October 2003     September 2004     November 2004  
Capital securities
  $ 144,000     $ 300,000     $ 250,000     $ 130,000  
Distribution rate
    8.327 %     6.700 %     6.564 %     6.125 %
Common securities
  $ 4,640     $ 9,279     $ 7,732     $ 4,021  
Junior subordinated debentures aggregate liquidation amount
  $ 148,640     $ 309,279     $ 257,732     $ 134,021  
Stated maturity date
  February 2027     November 2033     September 2034     December 2034
Reference notes
    (a),(c),(e),(f),(g )     (b),(d),(f )     (a),(c),(f )     (b),(d),(f )
 
(a)   Statutory business trust that is wholly-owned by Popular North America (PNA) and indirectly wholly-owned by the Corporation.
 
(b)   Statutory business trust that is wholly-owned by the Corporation.
 
(c)   The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
 
(d)   These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
 
(e)   The original issuance was for $150,000. In 2003, the Corporation reacquired $6,000 of the 8.327% capital securities.
 
(f)   The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. A capital treatment event would include a change in the regulatory capital treatment of the capital securities as a result of the recent accounting changes affecting the criteria for consolidation of variable interest entities such as the trust under FIN 46R.
 
(g)   Same as (f) above, except that the investment company event does not apply for early redemption.
The Capital Securities of Popular Capital Trust I and Popular Capital Trust II are traded on the NASDAQ under the symbols “BPOPN” and “BPOPM”, respectively.
Under the Federal Reserve Board’s risk-based capital guidelines, the capital securities are includable in the Corporation’s Tier I capital.
Note 16 – Stockholders’ Equity
During the fourth quarter of 2005, existing shareholders of record of the Corporation’s common stock at November 7, 2005 fully subscribed to an offering of 10,500,000 newly issued shares of Popular, Inc.’s common stock at a price of $21.00 per share under a subscription rights offering. This 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.

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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 June 30, 2006 (December 31, 2005 — $316 million; June 30, 2005 — $285 million). During the six months ended June 30, 2006, BPPR transferred $1 million to the statutory reserve account. There were no transfers between the statutory reserve account and the retained earnings account during the six months ended June 30, 2005.
Note 17 – Earnings per Common Share
The computation of earnings per common share and diluted earnings per common share follows:
                                 
    Quarter ended   Six months ended
    June 30,   June 30,
(In thousands, except share information)   2006   2005   2006   2005
 
Net income
  $ 97,381     $ 132,360     $ 215,884     $ 295,239  
Less: Preferred stock dividends
    2,978       2,978       5,956       5,956  
 
Net income applicable to common stock after cumulative effect of accounting change
  $ 94,403     $ 129,382     $ 209,928     $ 289,283  
 
Net income applicable to common stock before cumulative effect of accounting change
  $ 94,403     $ 129,382     $ 209,928     $ 285,676  
 
 
                               
Average common shares outstanding
    278,354,043       267,038,028       278,220,693       266,940,776  
Average potential common shares
    282,176       442,529       305,794       514,134  
 
Average common shares outstanding – assuming dilution
    278,636,219       267,480,557       278,526,487       267,454,910  
 
 
                               
Basic earnings per common share before cumulative effect of accounting change
  $ 0.34     $ 0.48     $ 0.75 *   $ 1.07  
 
Diluted earnings per common share before cumulative effect of accounting change
  $ 0.34     $ 0.48     $ 0.75 *   $ 1.07 *
 
Basic and diluted earnings per common share after cumulative effect of accounting change
  $ 0.34     $ 0.48     $ 0.75 *   $ 1.08  
 
*   Quarterly amounts do not add to the year-to-date total due to rounding.
Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter and six month periods ended June 30 2006, there

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were 667,154 and 652,224 weighted average antidilutive stock options outstanding, respectively (June 30, 2005 — 407,865 and 713,850, respectively). All shares of restricted stock are treated as outstanding for purposes of this computation.
Note 18 — Supplemental Disclosure on the Consolidated Statements of Cash Flows
As previously mentioned in Note 1, the Corporation commenced in 2005 a two-year plan to change the reporting period of its non-banking subsidiaries to a December 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.
                 
    Six months ended
    June 30,
(In thousands)   2006   2005
 
Net cash used in operating activities
  $ (80,906 )   $ (26,648 )
Net cash (used in) provided by investing activities
    (104,732 )     19,503  
Net cash provided by financing activities
    197,552       5,573  
 
Net increase (decrease) in cash and due from banks
  $ 11,914     $ (1,572 )
 
Loans receivable transferred to other real estate and other property for the six months ended June 30, 2006, amounted to $75 million and $15 million, respectively (June 30, 2005 — $61 million and $12 million, respectively).
During the six months ended June 30, 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 statements of cash flows. In addition, the consolidated statements of cash flows exclude the effect of $354 million and $399 million in non-cash reclassification of loans held-for-sale to trading securities for the six months ended June 30, 2006 and 2005, respectively.
Note 19 — Segment Reporting
The Corporation’s corporate structure consists of four reportable segments, which represent the Corporation’s four principal businesses — Banco Popular de Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. Also, a corporate group has been defined to support the reportable segments.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily towards products and services, as well as on the markets the segments serve. Other factors, such as the credit risk characteristics of the loan products, distribution channels and clientele, were also considered in the determination of reportable segments.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes approximately 93% and 88% of the Corporation’s net income for the quarter and six months ended June 30, 2006, respectively, 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

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      related with the investment of excess funds as well as a proportionate share of the investment function of BPPR.
 
    Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, small personal loans and mortgage loan originations. This area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.
 
    Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I. and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.
Banco Popular North America:
This reportable segment includes principally the activities of BPNA, including its subsidiaries Popular Leasing, U.S.A and Popular Insurance Agency, U.S.A. BPNA operates through a branch network of over 135 branches in six states. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Leasing, U.S.A. provides mainly small to mid-ticket commercial and medical equipment financing. The BPNA segment also included in the quarter and six months ended June 30, 2005, the financial results of PCE, a fee driven business that served the unbanked, retail customer. As stated in the 2005 Annual Report, PCE sold most of its branch operations during the fourth quarter of 2005. The remaining four retail outlets that existed as of year-end 2005, were sold during the first quarter of 2006.
Popular Financial Holdings:
This reportable segment corresponds to the Corporation’s consumer lending subsidiaries in the United States, principally Popular Financial Holdings, Inc. and its wholly-owned subsidiaries Equity One, Inc., E-LOAN, Popular Financial Management, LLC, Popular Mortgage Servicing, Inc. and Popular Housing Services, Inc., and Popular FS, LLC. These subsidiaries are primarily engaged in the business of originating mortgage and personal loans, acquiring retail installment contracts and providing warehouse lines to small and medium-sized mortgage companies. This segment also maintains a wholesale broker network as well as a loan servicing unit.
EVERTEC:
This reportable segment includes the financial transaction processing and technology functions of the Corporation, including EVERTEC with offices in Puerto Rico, Florida, the Dominican Republic and Venezuela; EVERTEC USA, Inc. incorporated in the United States, and ATH Costa Rica, S.A. 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.

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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 June 30, 2006
                                                 
                    Popular                   Total
    Banco Popular   Banco Popular   Financial           Intersegment   Reportable
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   Eliminations   Segments
 
Net interest income (loss)
  $ 228,498     $ 90,899     $ 57,584     $ (640 )         $ 376,341  
Provision for loan losses
    33,676       10,892       22,528                   67,096  
Non-interest income
    101,639       28,605       17,986       57,154     $ (36,537 )     168,847  
Amortization of intangibles
    633       1,515       566       117             2,831  
Depreciation expense
    11,014       3,174       2,193       4,132       (16 )     20,497  
Other operating expenses
    169,451       68,469       79,205       43,265       (36,555 )     323,835  
Impact of change in fiscal period
                                   
Income tax
    25,071       12,508       (9,742 )     3,555       13       31,405  
 
Net income (loss)
  $ 90,292     $ 22,946     $ (19,180 )   $ 5,445     $ 21     $ 99,524  
 
Segment Assets
  $ 26,383,022     $ 12,191,088     $ 9,202,376     $ 217,579     $ (175,547 )   $ 47,818,518  
 
For the quarter ended June 30, 2006
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (loss)
  $ 376,341     $ (10,792 )   $ 230     $ 365,779  
Provision for loan losses
    67,096                   67,096  
Non-interest income
    168,847       15,842       (703 )     183,986  
Amortization of intangibles
    2,831                   2,831  
Depreciation expense
    20,497       574             21,071  
Other operating expenses
    323,835       15,523       (280 )     339,078  
Impact of change in fiscal period
                       
Income tax
    31,405       (9,009 )     (88 )     22,308  
 
Net income (loss)
  $ 99,524     $ (2,038 )   $ (105 )   $ 97,381  
 
Segment Assets
  $ 47,818,518     $ 6,576,522     $ (5,995,526 )   $ 48,399,514  
 

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For the six months ended June 30, 2006
                                                 
                    Popular                   Total
    Banco Popular   Banco Popular   Financial           Intersegment   Reportable
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   Eliminations   Segments
 
Net interest income (loss)
  $ 454,801     $ 184,658     $ 107,004     $ (1,067 )         $ 745,396  
Provision for loan losses
    57,465       20,237       38,341                   116,043  
Non-interest income
    216,724       54,078       66,630       112,042     $ (70,467 )     379,007  
Amortization of intangibles
    1,266       3,030       1,034       222             5,552  
Depreciation expense
    22,044       6,558       4,567       8,238       (35 )     41,372  
Other operating expenses
    338,676       137,214       165,007       85,722       (70,499 )     656,120  
Impact of change in fiscal period
    (2,072 )           6,181                   4,109  
Income tax
    63,724       26,195       (14,461 )     6,273       26       81,757  
 
 
                                               
Net income (loss)
  $ 190,422     $ 45,502     $ (27,035 )   $ 10,520     $ 41     $ 219,450  
 
For the six months ended June 30, 2006
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (loss)
  $ 745,396     $ (20,383 )   $ 530     $ 725,543  
Provision for loan losses
    116,043                   116,043  
Non-interest income
    379,007       34,831       (1,019 )     412,819  
Amortization of intangibles
    5,552                     5,552  
Depreciation expense
    41,372       1,138               42,510  
Other operating expenses
    656,120       32,748       (437 )     688,431  
Impact of change in fiscal period
    4,109       3,495       2,137       9,741  
Income tax
    81,757       (20,601 )     (955 )     60,201  
 
Net income (loss)
  $ 219,450     $ (2,332 )   $ (1,234 )   $ 215,884  
 
2005
For the quarter ended June 30, 2005
                                                 
                    Popular                   Total
    Banco Popular   Banco Popular   Financial           Intersegment   Reportable
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   Eliminations   Segments
 
Net interest income (loss)
  $ 227,768     $ 87,178     $ 51,350     $ (120 )         $ 366,176  
Provision for loan losses
    23,947       7,052       18,937                   49,936  
Non-interest income
    123,046       27,708       17,227       55,964     $ (36,603 )     187,342  
Amortization of intangibles
    633       1,455             53             2,141  
Depreciation expense
    10,736       3,789       1,195       4,528       (17 )     20,231  
Other operating expenses
    172,803       70,772       39,307       40,388       (36,485 )     286,785  
Income tax
    30,974       11,635       3,426       3,860       47       49,942  
 
Net income before cumulative effect of accounting change
    111,721       20,183       5,712       7,015       (148 )     144,483  
Cumulative effect of accounting change
                      260             260  
 
Net income after cumulative effect of accounting change
  $ 111,721     $ 20,183     $ 5,712     $ 7,275     $ (148 )   $ 144,743  
 
Segment Assets
  $ 25,915,476     $ 11,596,622     $ 8,185,711     $ 247,228     $ (392,054 )   $ 45,552,983  
 

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For the quarter ended June 30, 2005
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (loss)
  $ 366,176     $ (9,091 )   $ 345     $ 357,430  
Provision for loan losses
    49,936                   49,936  
Non-interest income
    187,342       3,136       (20 )     190,458  
Amortization of intangibles
    2,141                   2,141  
Depreciation expense
    20,231       378             20,609  
Other operating expenses
    286,785       14,683       (19 )     301,449  
Income tax
    49,942       (8,584 )     35       41,393  
 
Net income (loss) before cumulative effect of accounting change
    144,483       (12,432 )     309       132,360  
Cumulative effect of accounting change
    260       (260 )            
 
Net income (loss) after cumulative effect of accounting change
  $ 144,743     $ (12,692 )   $ 309     $ 132,360  
 
Segment Assets
  $ 45,552,983     $ 5,873,751     $ (5,411,905 )   $ 46,014,829  
 
For the six months ended June 30, 2005
                                                 
                    Popular                   Total
    Banco Popular   Banco Popular   Financial           Intersegment   Reportable
(In thousands)   Puerto Rico   North America   Holdings   EVERTEC   Eliminations   Segments
 
Net interest income (loss)
  $ 445,728     $ 176,603     $ 109,404     $ (302 )         $ 731,433  
Provision for loan losses
    49,411       14,295       30,566                   94,272  
Non-interest income
    217,251       56,504       27,849       110,657     $ (70,561 )     341,700  
Amortization of intangibles
    1,256       3,056             71             4,383  
Depreciation expense
    21,238       7,700       2,242       8,719       (36 )     39,863  
Other operating expenses
    336,241       143,353       78,529       81,335       (70,024 )     569,434  
Income tax
    55,020       24,443       9,711       6,628       (113 )     95,689  
 
Net income before cumulative effect of accounting change
    199,813       40,260       16,205       13,602       (388 )     269,492  
Cumulative effect of accounting change
    3,221       (209 )           412       (247 )     3,177  
 
Net income after cumulative effect of accounting change
  $ 203,034     $ 40,051     $ 16,205     $ 14,014     $ (635 )   $ 272,669  
 
For the six months ended June 30, 2005
                                 
    Total Reportable                   Total
(In thousands)   Segments   Corporate   Eliminations   Popular, Inc.
 
Net interest income (loss)
  $ 731,433     $ (17,406 )   $ 689     $ 714,716  
Provision for loan losses
    94,272                   94,272  
Non-interest income
    341,700       54,386       (39 )     396,047  
Amortization of intangibles
    4,383                   4,383  
Depreciation expense
    39,863       756             40,619  
Other operating expenses
    569,434       26,636       (39 )     596,031  
Income tax
    95,689       (12,031 )     168       83,826  
 
Net income before cumulative effect of accounting change
    269,492       21,619       521       291,632  
Cumulative effect of accounting change
    3,177       430             3,607  
 
Net income after cumulative effect of accounting change
  $ 272,669     $ 22,049     $ 521     $ 295,239  
 

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During the six months ended June 30, 2006, the holding companies realized net gains on sale of securities, mainly marketable equity securities, (before tax) of approximately $14.2 million, compared with net gains (before tax) of approximately $50.5 million in the six months ended June 30, 2005. These net gains are included in “non-interest income” within the “Corporate” circle.
Additional disclosures with respect to Banco Popular de Puerto Rico reportable segment are as follows:
2006
For the quarter ended June 30, 2006
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular Puerto
(In thousands)   Banking   Retail Banking   Services   Eliminations   Rico
 
Net interest income
  $ 85,052     $ 140,308     $ 2,332     $ 806     $ 228,498  
Provision for loan losses
    9,548       24,128                   33,676  
Non-interest income
    37,140       43,927       20,661       (89 )     101,639  
Amortization of intangibles
    224       332       77             633  
Depreciation expense
    4,104       6,628       282             11,014  
Other operating expenses
    56,382       98,534       14,744       (209 )     169,451  
Income tax
    12,552       9,664       2,752       103       25,071  
 
Net income
  $ 39,382     $ 44,949     $ 5,138     $ 823     $ 90,292  
 
Segment Assets
  $ 10,915,314     $ 18,028,944     $ 1,035,550     $ (3,596,786 )   $ 26,383,022  
 
For the six months ended June 30, 2006
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular Puerto
(In thousands)   Banking   Retail Banking   Services   Eliminations   Rico
 
Net interest income
  $ 166,195     $ 283,264     $ 5,055     $ 287     $ 454,801  
Provision for loan losses
    15,203       42,262                   57,465  
Non-interest income
    74,923       100,770       42,641       (1,610 )     216,724  
Amortization of intangibles
    445       667       154             1,266  
Depreciation expense
    8,054       13,433       557             22,044  
Other operating expenses
    112,863       195,942       30,373       (502 )     338,676  
Impact of change in fiscal period
                (2,072 )           (2,072 )
Income tax
    29,260       28,382       6,464       (382 )     63,724  
 
Net income (loss)
  $ 75,293     $ 103,348     $ 12,220     $ (439 )   $ 190,422  
 

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2005
For the quarter ended June 30, 2005
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular Puerto
(In thousands)   Banking   Retail Banking   Services   Eliminations   Rico
 
Net interest income
  $ 74,370     $ 149,961     $ 3,437           $ 227,768  
Provision for loan losses
    7,043       16,904                   23,947  
Non-interest income
    44,951       57,818       19,440     $ 837       123,046  
Amortization of intangibles
    440       115       78             633  
Depreciation expense
    3,491       6,885       360             10,736  
Other operating expenses
    54,870       103,658       14,650       (375 )     172,803  
Income tax
    12,188       15,710       2,608       468       30,974  
 
Net income before cumulative effect of accounting change
    41,289       64,507       5,181       744       111,721  
Cumulative effect of accounting change
                             
 
Net income after cumulative effect of accounting change
  $ 41,289     $ 64,507     $ 5,181     $ 744     $ 111,721  
 
 
                                       
Segment Assets
  $ 9,874,810     $ 17,515,075     $ 1,460,483     $ (2,934,892 )   $ 25,915,476  
 
For the six months ended June 30, 2005
                                         
                                    Total Banco
    Commercial   Consumer and   Other Financial           Popular Puerto
(In thousands)   Banking   Retail Banking   Services   Eliminations   Rico
 
Net interest income
  $ 146,068     $ 292,839     $ 6,821           $ 445,728  
Provision for loan losses
    14,505       34,906                   49,411  
Non-interest income
    83,398       96,642       36,433     $ 778       217,251  
Amortization of intangibles
    440       661       155             1,256  
Depreciation expense
    7,358       13,142       738             21,238  
Other operating expenses
    109,519       199,624       27,830       (732 )     336,241  
Income tax
    22,095       27,585       4,754       586       55,020  
 
Net income before cumulative effect of accounting change
  $ 75,549       113,563       9,777       924     $ 199,813  
Cumulative effect of accounting change
          3,797       755       (1,331 )     3,221  
 
Net income after cumulative effect of accounting change
  $ 75,549     $ 117,360     $ 10,532     $ (407 )   $ 203,034  
 
                                 
INTERSEGMENT REVENUES*   Quarter ended   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2006   2005   2006   2005
 
Banco Popular Puerto Rico:
                               
P.R. Commercial Banking
  $ (311 )   $ (346 )   $ (615 )   $ (684 )
P.R. Consumer and Retail Banking
    (683 )     (716 )     (1,351 )     (1,477 )
P.R. Other Financial Services
    (77 )     (129 )     (155 )     (241 )
Banco Popular North America
    188       94       352       310  
Popular Financial Holdings
    770       905       1,540       1,747  
EVERTEC
    (36,424 )     (36,411 )     (70,238 )     (70,216 )
 
Total reportable segments
  $ (36,537 )   $ (36,603 )   $ (70,467 )   $ (70,561 )
 
 
*   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   Six months ended
    June 30,   June 30,   June 30,   June 30,
(In thousands)   2006   2005   2006   2005
 
Revenues**
                               
Puerto Rico
  $ 346,625     $ 353,059     $ 708,207     $ 717,990  
United States
    185,091       177,014       391,893       358,455  
Other
    18,049       17,815       38,262       34,318  
 
Total consolidated revenues
  $ 549,765     $ 547,888     $ 1,138,362     $ 1,110,763  
 
 
**   Total revenues include net interest income, service charges on deposit accounts, other service fees, net (loss) gain on sale and valuation adjustments of investment securities, trading account profit, gain on sale of loans and other operating income.
                         
    June 30,   December 31,   June 30,
(In thousands)   2006   2005   2005
 
Selected Balance Sheet Information:
                       
Puerto Rico
                       
Total assets
  $ 25,696,083     $ 25,759,437     $ 25,273,095  
Loans
    14,583,979       14,130,645       13,023,119  
Deposits
    13,741,481       13,093,540       13,716,272  
Mainland United States
                       
Total assets
  $ 21,529,730     $ 21,780,226     $ 19,811,482  
Loans
    17,015,808       17,023,443       15,636,835  
Deposits
    8,494,076       8,370,150       8,218,341  
Other
                       
Total assets
  $ 1,173,701     $ 1,084,005     $ 930,252  
Loans
    616,845       556,119       489,835  
Deposits *
    1,213,963       1,174,315       1,084,886  
 
*   Represents deposits from BPPR operations located in the U.S. and British Virgin Islands
Note 20 — Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities:
The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (“PIHC”) (parent only), Popular International Bank, Inc. (“PIBI”), Popular North America, Inc. (“PNA”), and all other subsidiaries of the Corporation as of June 30, 2006, December 31, 2005 and June 30, 2005, and the results of their operations and cash flows for the periods ended June 30, 2006 and 2005.
In 2005, the Corporation commenced a two-year plan to change its non-banking subsidiaries to a calendar reporting year-end. As of June 30, 2005 and December 31, 2005, Popular Securities, Inc., Popular North America (holding company), Popular FS, LLC and Popular Financial Holdings, Inc. (“PFH”), including its wholly-owned subsidiaries (except E-LOAN, which already had a December 31st year-end since its acquisition), continued to have a fiscal year that ended on November 30. Accordingly, their financial information as of May 31, 2005 and November 30, 2005 corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of June 30, 2005 and December 31, 2005. As of June 30, 2006, all subsidiaries have aligned their year-end closing to that of the Corporation’s calendar year.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica S.A., CreST, S.A., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries:
    PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial Management, LLC,

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      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;
 
    Banco Popular, National Association (“BP, N.A.”), including its wholly-owned subsidiary Popular Insurance, Inc.; and
 
    EVERTEC USA, Inc.
PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under a shelf registration filed with the Securities and Exchange Commission.
PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA.
The principal source of income for PIHC consists of dividends from Banco Popular de Puerto Rico (“BPPR”). As a member of the Federal Reserve System, BPPR is subject to the regulations of the Federal Reserve Board. BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. At June 30, 2006, BPPR could have declared a dividend of approximately $177 million without the approval of the Federal Reserve Board (June 30, 2005 — $167 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
JUNE 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 954     $ 1,486     $ 395     $ 905,522     $ (59,465 )   $ 848,892  
Money market investments
            300       411       861,021       (241,210 )     620,522  
Investment securities available—for—sale, at fair value
    11,407       67,810       9,559       10,806,922       (6,400 )     10,889,298  
Investment securities held—to—maturity, at amortized cost
    629,692       2,164               218,542       (430,000 )     420,398  
Other investment securities, at lower of cost or realizable value
    144,994       5,001       13,392       148,655               312,042  
Trading account securities, at fair value
                            376,757       (487 )     376,270  
Investment in subsidiaries
    3,005,963       1,147,170       2,054,174       795,977       (7,003,284 )        
Loans held—for—sale, at lower of cost or market
                            606,620               606,620  
 
Loans held—in—portfolio
    169,755               2,847,908       34,746,847       (5,849,504 )     31,915,006  
Less — Unearned income
                            304,994               304,994  
Allowance for loan losses
    40                       483,775               483,815  
 
 
    169,715               2,847,908       33,958,078       (5,849,504 )     31,126,197  
 
Premises and equipment, net
    26,244               136       566,528       (204 )     592,704  
Other real estate
                            83,658               83,658  
Accrued income receivable
    408       10       11,319       257,335       (23,074 )     245,998  
Other assets
    66,786       39,522       47,817       1,367,976       (6,419 )     1,515,682  
Goodwill
                            656,189               656,189  
Other intangible assets
    554                       104,490               105,044  
 
 
  $ 4,056,717     $ 1,263,463     $ 4,985,111     $ 51,714,270     $ (13,620,047 )   $ 48,399,514  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non—interest bearing
                          $ 4,429,844     $ (59,407 )   $ 4,370,437  
Interest bearing
                            19,223,844       (144,761 )     19,079,083  
 
 
                            23,653,688       (204,168 )     23,449,520  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 119,400       7,892,780       (85,449 )     7,926,731  
Other short—term borrowings
          $ 30,378       132,224       3,683,448       (1,189,114 )     2,656,936  
Notes payable
  $ 532,305               3,533,056       10,753,352       (4,620,038 )     10,198,675  
Subordinated notes
                            430,000       (430,000 )        
Other liabilities
    61,419       138       62,929       622,096       (42,035 )     704,547  
 
 
    593,724       30,516       3,847,609       47,035,364       (6,570,804 )     44,936,409  
 
Minority interest in consolidated subsidiaries
                            112               112  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,750,310       3,961       2       70,385       (74,348 )     1,750,310  
Surplus
    485,630       815,193       734,964       3,098,740       (4,643,896 )     490,631  
Retained earnings
    1,581,500       493,693       446,943       1,826,634       (2,772,271 )     1,576,499  
Accumulated other comprehensive loss, net of tax
    (334,789 )     (79,900 )     (44,407 )     (315,151 )     439,458       (334,789 )
Treasury stock, at cost
    (206,533 )                     (1,814 )     1,814       (206,533 )
 
 
    3,462,993       1,232,947       1,137,502       4,678,794       (7,049,243 )     3,462,993  
 
 
  $ 4,056,717     $ 1,263,463     $ 4,985,111     $ 51,714,270     $ (13,620,047 )   $ 48,399,514  
 

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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
JUNE 30, 2005
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
ASSETS
                                               
Cash and due from banks
  $ 2,153     $ 54     $ 7,609     $ 979,601     $ (53,398 )   $ 936,019  
Money market investments
    164,900       300       204       1,349,717       (489,039 )     1,026,082  
Investment securities available-for-sale, at fair value
    17,626       63,436       7,261       11,754,028       (5,408 )     11,836,943  
Investment securities held-to-maturity, at amortized cost
    430,000       2,177               175,810       (430,000 )     177,987  
Other investment securities, at lower of cost or realizable value
    145,785       5,001       12,642       166,922               330,350  
Trading account securities, at fair value
                            456,721       (435 )     456,286  
Investment in subsidiaries
    3,119,461       1,153,674       1,503,180       458,384       (6,234,699 )        
Loans held-for-sale, at lower of cost or market value
                            489,699               489,699  
 
Loans held-in-portfolio
    25,918               2,789,557       31,687,868       (5,560,124 )     28,943,219  
Less – Unearned income
                            283,129               283,129  
Allowance for loan losses
    40                       456,914               456,954  
 
 
    25,878               2,789,557       30,947,825       (5,560,124 )     28,203,136  
 
Premises and equipment, net
    23,782                       556,525       (276 )     580,031  
Other real estate
    18                       68,653               68,671  
Accrued income receivable
    415       28       11,783       222,356       (19,815 )     214,767  
Other assets
    49,585       37,406       118,969       1,177,042       (261,851 )     1,121,151  
Goodwill
                            527,633               527,633  
Other intangible assets
                            46,074               46,074  
     
 
  $ 3,979,603     $ 1,262,076     $ 4,451,205     $ 49,376,990     $ (13,055,045 )   $ 46,014,829  
 
 
                                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
Liabilities:
                                               
Deposits:
                                               
Non-interest bearing
                          $ 4,985,881     $ (53,321 )   $ 4,932,560  
Interest bearing
                            18,255,058       (168,119 )     18,086,939  
       
 
                            23,240,939       (221,440 )     23,019,499  
Federal funds purchased and assets sold under agreements to repurchase
                  $ 132,510       8,048,584       (314,925 )     7,866,169  
Other short-term borrowings
          $ 32,387       293,985       3,068,123       (1,395,514 )     1,998,981  
Notes payable
  $ 536,133               2,837,444       9,854,889       (4,143,196 )     9,085,270  
Subordinated notes
    125,000                       430,000       (430,000 )     125,000  
Other liabilities
    48,161       770       42,476       827,452       (269,358 )     649,501  
             
 
    709,294       33,157       3,306,415       45,469,987       (6,774,433 )     42,744,420  
 
Minority interest in consolidated subsidiaries
                            101               101  
 
Stockholders’ equity:
                                               
Preferred stock
    186,875                                       186,875  
Common stock
    1,682,368       3,962       2       70,384       (74,348 )     1,682,368  
Surplus
    285,017       815,193       734,964       2,140,696       (3,688,242 )     287,628  
Retained earnings
    1,336,267       429,742       413,667       1,698,632       (2,544,653 )     1,333,655  
Accumulated other comprehensive loss, net of tax
    (12,901 )     (19,978 )     (3,843 )     (240 )     24,061       (12,901 )
Treasury stock, at cost
    (207,317 )                     (2,570 )     2,570       (207,317 )
 
 
    3,270,309       1,228,919       1,144,790       3,906,902       (6,280,612 )     3,270,308  
 
 
  $ 3,979,603     $ 1,262,076     $ 4,451,205     $ 49,376,990     $ (13,055,045 )   $ 46,014,829  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 2,761             $ 36,267     $ 643,505     $ (68,741 )   $ 613,792  
Money market investments
    450     $ 52       399       9,740       (2,735 )     7,906  
Investment securities
    8,759       351       223       130,874       (6,933 )     133,274  
Trading account securities
                            7,065               7,065  
 
 
    11,970       403       36,889       791,184       (78,409 )     762,037  
 
INTEREST EXPENSE:
                                               
Deposits
                            137,034       (1,073 )     135,961  
Short-term borrowings
    49       395       3,625       137,142       (14,137 )     127,074  
Long-term debt
    9,067               47,370       142,116       (65,330 )     133,223  
 
 
    9,116       395       50,995       416,292       (80,540 )     396,258  
 
Net interest income (loss)
    2,854       8       (14,106 )     374,892       2,131       365,779  
Provision for loan losses
                            67,096               67,096  
 
Net interest income (loss) after provision for loan losses
    2,854       8       (14,106 )     307,796       2,131       298,683  
Service charges on deposit accounts
                            47,324               47,324  
Other service fees
                            106,949       (26,932 )     80,017  
Net gain (loss) on sale and valuation adjustment of investment securities
    580                       (15,004 )             (14,424 )
Trading account profit
                            1,830               1,830  
Gain on sale of loans
                            37,178       (8,124 )     29,054  
Other operating income
    11,629       608       2,819       35,675       (10,546 )     40,185  
 
 
    15,063       616       (11,287 )     521,748       (43,471 )     482,669  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    4,766       95               123,113       (1,274 )     126,700  
Pension, profit sharing and other benefits
    1,392       16               38,749       (374 )     39,783  
 
 
    6,158       111               161,862       (1,648 )     166,483  
Net occupancy expenses
    525       4               28,100               28,629  
Equipment expenses
    405       3       3       33,578       (16 )     33,973  
Other taxes
    234                       10,695               10,929  
Professional fees
    5,731       12       38       67,721       (35,014 )     38,488  
Communications
    182                       17,128       (17 )     17,293  
Business promotion
    624                       31,507       (140 )     31,991  
Printing and supplies
    10                       4,281               4,291  
Other operating expenses
    (15,279 )     (96 )     111       43,719       (383 )     28,072  
Amortization of intangibles
                            2,831               2,831  
 
 
    (1,410 )     34       152       401,422       (37,218 )     362,980  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    16,473       582       (11,439 )     120,326       (6,253 )     119,689  
Income tax
    1,939               (3,586 )     25,796       (1,841 )     22,308  
 
Income (loss) before equity in earnings of subsidiaries
    14,534       582       (7,853 )     94,530       (4,412 )     97,381  
Equity in earnings of subsidiaries
    82,847       (5,712 )     1,935       (18,402 )     (60,668 )        
 
NET INCOME
  $ 97,381     $ (5,130 )   $ (5,918 )   $ 76,128     $ (65,080 )   $ 97,381  
 x

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2005
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 492             $ 34,058     $ 531,511       ($55,877 )   $ 510,184  
Money market investments
    934     $ 2       12       10,417       (3,459 )     7,906  
Investment securities
    7,486       33       316       119,729       (6,875 )     120,689  
Trading account securities
                            8,317               8,317  
 
 
    8,912       35       34,386       669,974       (66,211 )     647,096  
 
INTEREST EXPENSE:
                                               
Deposits
                            100,843       (1,155 )     99,688  
Short-term borrowings
    56       75       3,048       86,419       (12,222 )     77,376  
Long-term debt
    10,973               38,642       118,336       (55,349 )     112,602  
 
 
    11,029       75       41,690       305,598       (68,726 )     289,666  
 
Net interest (loss) income
    (2,117 )     (40 )     (7,304 )     364,376       2,515       357,430  
Provision for loan losses
                            49,936               49,936  
 
Net interest (loss) income after provision for loan losses
    (2,117 )     (40 )     (7,304 )     314,440       2,515       307,494  
Service charges on deposit accounts
                            45,132               45,132  
Other service fees
                            110,275       (26,434 )     83,841  
Net gain on sale and valuation adjustment of investment securities
                            561               561  
Trading account profit
                            7,025       12,643       19,668  
Gain on sale of loans
                            21,358       (6,084 )     15,274  
Other operating income
    2,621       1,060               33,678       (11,377 )     25,982  
 
 
    504       1,020       (7,304 )     532,469       (28,737 )     497,952  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
            92               116,871       (1,156 )     115,807  
Pension, profit sharing and other benefits
            14               38,768       (337 )     38,445  
 
 
            106               155,639       (1,493 )     154,252  
Net occupancy expenses
            4               25,877               25,881  
Equipment expenses
    8               2       30,235       (15 )     30,230  
Other taxes
    274                       9,191               9,465  
Professional fees
    823       3       7       61,385       (34,902 )     27,316  
Communications
    8                       15,272       (18 )     15,262  
Business promotion
    1,875                       23,792               25,667  
Printing and supplies
                            4,589               4,589  
Other operating expenses
    (3,383 )     5       113       33,023       (362 )     29,396  
Amortization of intangibles
                            2,141               2,141  
 
 
    (395 )     118       122       361,144       (36,790 )     324,199  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    899       902       (7,426 )     171,325       8,053       173,753  
Income tax
                    (2,613 )     41,985       2,021       41,393  
 
Income (loss) before equity in earnings of subsidiaries
    899       902       (4,813 )     129,340       6,032       132,360  
Equity in earnings of subsidiaries
    131,461       19,934       24,517       28,102       (204,014 )        
 
NET INCOME
  $ 132,360     $ 20,836     $ 19,704     $ 157,442       ($197,982 )   $ 132,360  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 5,425             $ 73,168     $ 1,263,556       ($136,522 )   $ 1,205,627  
Money market investments
    1,522     $ 118       437       20,156       (6,345 )     15,888  
Investment securities
    16,367       664       447       263,242       (13,913 )     266,807  
Trading account securities
                            15,925               15,925  
 
 
    23,314       782       74,052       1,562,879       (156,780 )     1,504,247  
 
INTEREST EXPENSE:
                                               
Deposits
                            262,472       (2,100 )     260,372  
Short-term borrowings
    103       841       10,103       269,480       (28,650 )     251,877  
Long-term debt
    18,049               90,337       288,276       (130,207 )     266,455  
 
 
    18,152       841       100,440       820,228       (160,957 )     778,704  
 
Net interest income (loss)
    5,162       (59 )     (26,388 )     742,651       4,177       725,543  
Provision for loan losses
                            116,043               116,043  
 
Net interest income (loss) after provision for loan losses
    5,162       (59 )     (26,388 )     626,608       4,177       609,500  
Service charges on deposit accounts
                            94,793               94,793  
Other service fees
                            215,013       (54,650 )     160,363  
Net gain (loss) on sale and valuation adjustment of investment securities
    732       13,490               (16,717 )     411       (2,084 )
Trading account profit
                            1,183       12,122       13,305  
Gain on sale of loans
                            84,231       (7,916 )     76,315  
Other operating income
    14,472       3,501       2,819       68,529       (19,194 )     70,127  
 
 
    20,366       16,932       (23,569 )     1,073,640       (65,050 )     1,022,319  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
    10,658       188               252,932       (1,546 )     262,232  
Pension, profit sharing and other benefits
    3,020       36               79,700       (453 )     82,303  
 
 
    13,678       224               332,632       (1,999 )     344,535  
Net occupancy expenses
    1,128       8               56,131               57,267  
Equipment expenses
    800       3       7       66,391       (31 )     67,170  
Other taxes
    500                       20,670               21,170  
Professional fees
    10,160       23       76       134,054       (68,747 )     75,566  
Communications
    319                       34,310       (36 )     34,593  
Business promotion
    3,087                       61,867       (140 )     64,814  
Printing and supplies
    36                       8,887               8,923  
Other operating expenses
    (30,199 )     (200 )     218       87,790       (706 )     56,903  
Impact of change in fiscal period
                    3,495       4,109       2,137       9,741  
Amortization of intangibles
                            5,552               5,552  
 
 
    (491 )     58       3,796       812,393       (69,522 )     746,234  
 
Income (loss) before income tax and equity in earnings of subsidiaries
    20,857       16,874       (27,365 )     261,247       4,472       276,085  
Income tax
    2,717               (9,160 )     66,413       231       60,201  
 
Income (loss) before equity in earnings of subsidiaries
    18,140       16,874       (18,205 )     194,834       4,241       215,884  
Equity in earnings of subsidiaries
    197,744       (3,721 )     13,877       (10,634 )     (197,266 )        
 
NET INCOME
  $ 215,884     $ 13,153       ($4,328 )   $ 184,200       ($193,025 )   $ 215,884  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Popular, Inc.
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Consolidated
 
INTEREST INCOME:
                                               
Loans
  $ 1,030             $ 69,259     $ 1,056,040       ($110,824 )   $ 1,015,505  
Money market investments
    1,520     $ 3       18       20,529       (6,630 )     15,440  
Investment securities
    15,013       33       632       233,143       (13,765 )     235,056  
Trading account securities
                            14,375               14,375  
 
 
    17,563       36       69,909       1,324,087       (131,219 )     1,280,376  
 
INTEREST EXPENSE:
                                               
Deposits
                            199,111       (2,367 )     196,744  
Short-term borrowings
    117       108       6,305       159,426       (22,777 )     143,179  
Long-term debt
    21,894               77,232       237,441       (110,830 )     225,737  
 
 
    22,011       108       83,537       595,978       (135,974 )     565,660  
 
Net interest (loss) income
    (4,448 )     (72 )     (13,628 )     728,109       4,755       714,716  
Provision for loan losses
                            94,272               94,272  
 
Net interest (loss) income after provision for loan losses
    (4,448 )     (72 )     (13,628 )     633,837       4,755       620,444  
Service charges on deposit accounts
                            88,824               88,824  
Other service fees
                            214,004       (51,148 )     162,856  
Net gain on sale and valuation adjustment of investment securities
    50,469                       1,342               51,811  
Trading account profit
                            10,440       12,991       23,431  
Gain on sale of loans
                            36,403       (11,313 )     25,090  
Other operating income
    3,976       2,313               58,555       (20,809 )     44,035  
 
 
    49,997       2,241       (13,628 )     1,043,405       (65,524 )     1,016,491  
 
OPERATING EXPENSES:
                                               
Personnel costs:
                                               
Salaries
            181               232,973       (1,805 )     231,349  
Pension, profit sharing and other benefits
            32               79,311       (524 )     78,819  
 
 
            213               312,284       (2,329 )     310,168  
Net occupancy expenses
            7               50,688               50,695  
Equipment expenses
    16       1       5       58,852       (30 )     58,844  
Other taxes
    547                       18,173               18,720  
Professional fees
    1,395       6       13       121,603       (68,118 )     54,899  
Communications
    24                       30,951       (36 )     30,939  
Business promotion
    2,500                       43,420               45,920  
Printing and supplies
                            9,126               9,126  
Other operating expenses
    (3,839 )     22       233       61,675       (752 )     57,339  
Amortization of intangibles
                            4,383               4,383  
 
 
    643       249       251       711,155       (71,265 )     641,033  
 
Income (loss) before income tax, cumulative effect of accounting change and equity in earnings of subsidiaries
    49,354       1,992       (13,879 )     332,250       5,741       375,458  
Income tax
    3,155               (4,886 )     83,850       1,707       83,826  
 
Income (loss) before cumulative effect of accounting change and equity in earnings of subsidiaries
    46,199       1,992       (8,993 )     248,400       4,034       291,632  
Cumulative effect of accounting change, net of tax
            691               4,494       (1,578 )     3,607  
 
Income (loss) before equity in earnings of subsidiaries
    46,199       2,683       (8,993 )     252,894       2,456       295,239  
Equity in earnings of subsidiaries
    249,040       45,563       53,999       50,729       (399,331 )        
 
NET INCOME
  $ 295,239     $ 48,246     $ 45,006     $ 303,623       ($396,875 )   $ 295,239  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Cash flows from operating activities:
                                               
Net income
  $ 215,884     $ 13,153       ($4,328 )   $ 184,200       ($193,025 )   $ 215,884  
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
    215,884       13,153       (2,057 )     186,838       (191,805 )     222,013  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (197,744 )     3,721       (13,877 )     10,634       197,266          
Depreciation and amortization of premises and equipment
    1,138                       41,404       (36 )     42,506  
Provision for loan losses
                            116,043               116,043  
Amortization of intangibles
                            5,552               5,552  
Amortization of servicing assets
                            28,307       (17 )     28,290  
Net (gain) loss on sale and valuation adjustment of investment securities
    (732 )     (13,490 )             16,717       (411 )     2,084  
Net gain on disposition of premises and equipment
                            (2,269 )             (2,269 )
Net gain on sale of loans
                            (84,231 )     7,916       (76,315 )
Net amortization of premiums and accretion of discounts on investments
    (261 )     7               14,763       (151 )     14,358  
Net amortization of premiums and deferred loan origination fees and costs
    (46 )                     70,055       (3,300 )     66,709  
Earnings from investments under the equity method
    (1,419 )     (3,490 )             (508 )     (746 )     (6,163 )
Stock options expense
    387                       1,198               1,585  
Net disbursements on loans held-for-sale
                            (3,547,436 )             (3,547,436 )
Acquisitions of loans held-for-sale
                            (846,117 )             (846,117 )
Proceeds from sale of loans held-for-sale
                            3,834,624               3,834,624  
Net decrease in trading securities
                            1,000,341               1,000,341  
Net decrease (increase) in accrued income receivable
    123       24       1,225       (2,326 )     (1,012 )     (1,966 )
Net (increase) decrease in other assets
    (20,820 )     4,492       (1,949 )     (5,149 )     1,435       (21,991 )
Net increase in interest payable
    535       75       1,154       7,168       954       9,886  
Net increase in deferred income tax
                    (6,896 )     (16,760 )     1,522       (22,134 )
Net increase in postretirement benefit obligation
                            2,755               2,755  
Net increase (decrease) in other liabilities
    11,318       (15 )     16,503       (91,725 )     266       (63,653 )
 
Total adjustments
    (207,521 )     (8,676 )     (3,840 )     553,040       203,686       536,689  
 
Net cash provided by (used in) operating activities
    8,363       4,477       (5,897 )     739,878       11,881       758,702  
 
Cash flows from investing activities:
                                               
Net decrease (increase) in money market investments
    230,000               (260 )     199,108       (299,800 )     129,048  
Purchases of investment securities:
                                               
Available-for-sale
            (17,284 )             (315,246 )     121,391       (211,139 )
Held-to-maturity
    (199,692 )                     (16,647,740 )             (16,847,432 )
Other
                    (250 )     (31,952 )             (32,202 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
                            876,918       (115,060 )     761,858  
Held-to-maturity
                            16,580,599               16,580,599  
Other
    541                       38,722               39,263  
Proceeds from sale of investment securities available-for-sale
    7,235       27,924               9,315               44,474  
Net disbursements on loans
    (144,056 )             (16,432 )     (519,368 )     189,306       (490,550 )
Proceeds from sale of loans
                            212,791               212,791  
Acquisition of loan portfolios
                            (175,856 )             (175,856 )
Capital contribution to subsidiary
                    (4,127 )     (29,891 )     34,018          
Assets acquired, net of cash
                            (418 )             (418 )
Acquisition of premises and equipment
    (4,356 )                     (59,113 )             (63,469 )
Proceeds from sale of premises and equipment
                            26,762               26,762  
Dividends received from subsidiary
    148,600                       60,763       (209,363 )        
 
Net cash provided by (used in) investing activities
    38,272       10,640       (21,069 )     225,394       (279,508 )     (26,271 )
 
Cash flows from financing activities:
                                               
Net increase in deposits
                            817,232       (5,733 )     811,499  
Net decrease in federal funds purchased and assets sold under agreements to repurchase
                    (22,300 )     (1,175,629 )     309,048       (888,881 )
Net (decrease) increase in other short-term borrowings
            (15,734 )     (226,879 )     28,135       64,295       (150,183 )
Payments of notes payable
    (450 )             (205,462 )     (1,615,920 )     611,097       (1,210,735 )
Proceeds from issuance of notes payable
    196               481,476       1,079,305       (878,571 )     682,406  
Dividends paid to parent company
                            (209,362 )     209,362          
Dividends paid
    (93,249 )                                     (93,249 )
Proceeds from issuance of common stock
    47,126                               167       47,293  
Capital contribution from parent
                            34,524       (34,524 )        
 
Net cash (used in) provided by financing activities
    (46,377 )     (15,734 )     26,835       (1,041,715 )     275,141       (801,850 )
 
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
    258       (617 )     (53 )     (56,873 )     (220 )     (57,505 )
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
  $ 954     $ 1,486     $ 395     $ 905,522       ($59,465 )   $ 848,892  
 

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POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
                                                 
    Popular, Inc.   PIBI   PNA   All other   Elimination   Consolidated
(In thousands)   Holding Co.   Holding Co.   Holding Co.   Subsidiaries   Entries   Popular, Inc.
 
Cash flows from operating activities:
                                               
Net income
  $ 295,239     $ 48,246     $ 45,006     $ 303,623       ($396,875 )   $ 295,239  
Less: Cumulative effect of accounting change, net of tax
            691               4,494       (1,578 )     3,607  
 
Net income before cumulative effect of accounting change
    295,239       47,555       45,006       299,129       (395,297 )     291,632  
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                                               
Equity in undistributed earnings of subsidiaries
    (249,040 )     (45,563 )     (53,999 )     (50,729 )     399,331          
Depreciation and amortization of premises and equipment
    756                       39,900       (37 )     40,619  
Provision for loan losses
                            94,272               94,272  
Amortization of intangibles
                            4,383               4,383  
Amortization of servicing assets
                            8,392       (25 )     8,367  
Net gain on sale and valuation of investment securities
    (50,469 )                     (1,342 )             (51,811 )
Net gain on disposition of premises and equipment
                            (10,870 )             (10,870 )
Net gain on sale of loans
                            (36,403 )     11,313       (25,090 )
Net amortization of premiums and accretion of discounts on investments
    (218 )     3               21,466       (404 )     20,847  
Net amortization of premiums and deferred loan origination fees and costs
    (47 )                     62,834       (3,659 )     59,128  
Earnings from investments under the equity method
    (1,313 )     (2,103 )             (309 )     (845 )     (4,570 )
Stock options expense
    200                       1,463       (2 )     1,661  
Net disbursements on loans held-for-sale
                            (1,978,319 )             (1,978,319 )
Acquisitions of loans held-for-sale
                            (615,701 )             (615,701 )
Proceeds from sale of loans held-for-sale
                            1,902,684               1,902,684  
Net decrease in trading securities
                            847,325       (1,439 )     845,886  
Net increase in accrued income receivable
    (230 )     (28 )     (947 )     (700 )     1,976       71  
Net (increase) decrease in other assets
    (1,592 )     2,317       1,511       1,613       (12,745 )     (8,896 )
Net increase (decrease) in interest payable
    1,217       (14 )     429       8,423       (1,975 )     8,080  
Net increase in deferred income tax
    (182 )             (4,886 )     (3,507 )     1,548       (7,027 )
Net increase in postretirement benefit obligation
                            1,600               1,600  
Net increase (decrease) in other liabilities
    1,606       690       6,999       (71,474 )     30,541       (31,638 )
 
Total adjustments
    (299,312 )     (44,698 )     (50,893 )     225,001       423,578       253,676  
 
Net cash (used in) provided by operating activities
    (4,073 )     2,857       (5,887 )     524,130       28,281       545,308  
 
Cash flows from investing activities:
                                               
 
Net (increase) decrease in money market investments
    (116,400 )             10       (92,009 )     91,801       (116,598 )
Purchases of investment securities:
                                               
Available-for-sale
    (127,628 )     (28,210 )             (2,619,167 )     413,988       (2,361,017 )
Held-to-maturity
            (2,181 )             (15,931,576 )             (15,933,757 )
Other
    (195 )             (270 )     (53,929 )             (54,394 )
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
                                               
Available-for-sale
    110,432                       2,057,268       (411,788 )     1,755,912  
Held-to-maturity
    150,000                       15,964,677               16,114,677  
Other
                            26,484               26,484  
Proceeds from sale of investment securities available for sale
    57,417                       82,038               139,455  
Net repayments on loans
    15,581               47,144       620,157       177,505       860,387  
Proceeds from sale of loans
                            63,740               63,740  
Acquisition of loan portfolios
                            (1,214,096 )             (1,214,096 )
Capital contribution to subsidiary
    (75,000 )     (75,000 )     (176,433 )     (2,500 )     328,933          
Assets acquired, net of cash
                            (180,744 )             (180,744 )
Acquisition of premises and equipment
    (3 )                     (81,139 )             (81,142 )
Proceeds from sale of premises and equipment
                            25,463               25,463  
Dividends received from subsidiary
    85,400               50,000       52,500       (187,900 )        
 
Net cash provided by (used in) investing activities
    99,604       (105,391 )     (79,549 )     (1,282,833 )     412,539       (955,630 )
 
Cash flows from financing activities:
                                               
 
Net increase in deposits
                            1,668,336       86,730       1,755,066  
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase
    (6,690 )             61,210       1,518,699       (181,623 )     1,391,596  
Net (decrease) increase in other short-term borrowings
    (4,501 )     27,562       (45,668 )     (947,036 )     (180,964 )     (1,150,607 )
Payments of notes payable
    (750 )             (10,830 )     (1,952,473 )     564,690       (1,399,363 )
Proceeds from issuance of notes payable
    190               12,949       696,423       (591,423 )     118,139  
Dividends paid to parent company
                            (187,900 )     187,900          
Dividends paid
    (91,309 )                                     (91,309 )
Proceeds from issuance of common stock
    9,399                                       9,399  
Treasury stock acquired
                            (1,467 )             (1,467 )
Capital contribution from parent
            75,000       75,000       178,174       (328,174 )        
 
Net cash (used in) provided by financing activities
    (93,661 )     102,562       92,661       972,756       (442,864 )     631,454  
 
Cash effect of accounting change
            (28 )             (1,544 )             (1,572 )
 
Net increase (decrease) in cash and due from banks
    1,870               7,225       212,509       (2,044 )     219,560  
Cash and due from banks at beginning of period
    283       54       384       767,092       (51,354 )     716,459  
 
Cash and due from banks at end of period
  $ 2,153     $ 54     $ 7,609     $ 979,601       ($53,398 )   $ 936,019  
 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.
OVERVIEW
As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending, reinsurance and insurance agency services through specialized subsidiaries. In the United States, the Corporation has established the largest Hispanic-owned financial services franchise, Banco Popular North America (“BPNA”), providing complete financial solutions to all the communities it serves. Also, in the United States, Popular Financial Holdings, Inc. (“PFH”), holding company of Equity One, Inc., offers mortgage and personal loans, and 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. EVERTEC serves customers in 11 Latin American countries. Also, the Corporation recently incorporated EVERTEC USA, Inc. with plans to expand its service offerings in the U.S. mainland.
Financial highlights for the quarter ended June 30, 2006, compared with the same quarter in 2005, are included below. Also, Table A provides selected financial data for those quarters.
    Favorable impact in net interest income resulting from sound growth in the loan portfolio, primarily in commercial and consumer loans, was partially offset by a decline in the Corporation’s net interest margin, which was influenced in part by the inversion of the yield curve, tighter Federal Reserve monetary policy, and competitive pricing pressures. Tables B and C provide information on the Corporation’s net interest income on a taxable equivalent basis for the quarter and six months ended June 30, 2006 and 2005.
 
    Higher provision for loan losses, primarily associated with growth in the loan portfolio, higher non-performing loans and higher net charge-offs. Refer to the Credit Risk Management and Loan Quality section, including Tables J, K and L, for a more detailed analysis of the allowance for loan losses, net charge-offs, non-performing assets and credit quality metrics.
 
    Lower non-interest income, impacted by:
  o   Lower trading account profit as a result of higher profits recognized in the second quarter of 2005, primarily resulting from a higher volume of mortgage loans pooled and sold as mortgage-backed securities in the secondary markets;
 
  o   Unfavorable valuation adjustments in the second quarter of 2006 for other-than-temporary impairment of investment securities available-for-sale, particularly interest-only securities of PFH;
 
  o   Partially offset by a favorable net variance in the remainder non-interest income categories, which was mainly the result of greater gains on sales of loans and other revenues derived from mortgage banking activities resulting from securitization transactions and bulk sales of loans, and higher revenues derived from an investment carried at cost. Refer to the Non-Interest Income section of the MD&A for further explanations, including Table D for a breakdown of other service fees by major categories.

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TABLE A
Financial Highlights
                                                 
Financial Condition Highlights   At June 30,   Average for the six months
(In thousands)   2006   2005   Variance   2006   2005   Variance
 
Money market investments
  $ 620,522     $ 1,026,082       ($405,560 )   $ 625,784     $ 853,048       ($227,264 )
Investment and trading securities
    11,998,008       12,801,566       (803,558 )     12,839,939       12,542,027       297,912  
Loans*
    32,216,632       29,149,789       3,066,843       31,932,840       29,171,266       2,761,574  
Total earning assets
    44,835,162       42,977,437       1,857,725       45,398,563       42,566,341       2,832,222  
Total assets
    48,399,514       46,014,829       2,384,685       48,759,631       45,522,153       3,237,478  
Deposits
    23,449,520       23,019,499       430,021       22,810,528       21,967,594       842,934  
Borrowings
    20,782,342       19,075,420       1,706,922       21,536,404       19,661,403       1,875,001  
Stockholders’ equity
    3,462,993       3,270,308       192,685       3,689,641       3,182,884       506,757  
 
                                                 
Operating Highlights   Second Quarter   Six months ended June 30,
(In thousands, except per share information)   2006   2005   Variance   2006   2005   Variance
 
Net interest income
  $ 365,779     $ 357,430     $ 8,349     $ 725,543     $ 714,716     $ 10,827  
Provision for loan losses
    67,096       49,936       17,160       116,043       94,272       21,771  
Non-interest income
    183,986       190,458       (6,472 )     412,819       396,047       16,772  
Operating expenses
    362,980       324,199       38,781       746,234       641,033       105,201  
Income tax
    22,308       41,393       (19,085 )     60,201       83,826       (23,625 )
Cumulative effect of accounting change, net of tax
                            3,607       (3,607 )
Net income
  $ 97,381     $ 132,360     $ (34,979 )   $ 215,884     $ 295,239     $ (79,355 )
Net income applicable to common stock
  $ 94,403     $ 129,382     $ (34,979 )   $ 209,928     $ 289,283     $ (79,355 )
Basic EPS before cumulative effect of accounting change
  $ 0.34     $ 0.48     $ (0.14 )   $ 0.75  (a)   $ 1.07     $ (0.32 )
Diluted EPS before cumulative effect of accounting change
  $ 0.34     $ 0.48     $ (0.14 )   $ 0.75  (a)   $ 1.07  (a)   $ (0.32 )
Basic and diluted EPS after cumulative effect of accounting change
  $ 0.34     $ 0.48     $ (0.14 )   $ 0.75  (a)   $ 1.08     $ (0.33 )
 
                                 
    Second Quarter   Six months ended June 30,
Selected Statistical Information   2006   2005   2006   2005
 
Common Stock Data — Market price
                               
High
  $ 21.98     $ 25.65     $ 21.98     $ 28.03  
Low
    18.53       22.94       18.53       22.94  
End
    19.20       25.19       19.20       25.19  
Book value per share at period end
    11.77       11.55       11.77       11.55  
Dividends declared per share
    0.16       0.16       0.32       0.32  
Dividend payout ratio
    47.14 %     33.00 %     40.98 %     29.69 %
Price/earnings ratio
    11.64 x     12.79 x     11.64 x     12.79 x
 
                               
 
 
                               
Profitability Ratios — Return on assets
    0.80 %     1.16 %     0.91 %     1.30 %
Return on common equity
    10.72       17.06       12.27       19.35  
Net interest spread (taxable equivalent)
    3.05       3.21       3.02       3.22  
Net interest margin (taxable equivalent)
    3.49       3.59       3.45       3.59  
Effective tax rate
    18.64       23.82       21.81       22.33  
Overhead ratio**
    48.94       37.42       45.95       34.28  
Efficiency ratio ***
    64.34       60.15       65.44       61.01  
 
                               
 
 
                               
Capitalization Ratios — Equity to assets
    7.66 %     7.08 %     7.57 %     6.99 %
Tangible equity to assets
    6.19       5.90       6.10       5.86  
Equity to loans
    11.65       11.12       11.55       10.91  
Internal capital generation
    5.36       10.73       6.72       12.70  
Tier I capital to risk – adjusted assets
    11.26       11.48       11.26       11.48  
Total capital to risk – adjusted assets
    12.51       12.77       12.51       12.77  
Leverage ratio
    7.81       7.62       7.81       7.62  
 
*   Includes loans held-for-sale.
 
**   Non-interest expense less non-interest income divided by net interest income.
 
***   Non-interest expense divided by net interest income plus recurring non-interest income (refer to the “Operating expenses” section of this MD&A for a description of items not considered “recurring”).
 
(a)   Quarterly amounts do not add to the year-to-date total due to rounding.

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    Higher operating expenses, principally personnel costs, professional fees, business promotion, equipment and net occupancy expenses. E-LOAN, our online consumer direct lending operation acquired during the fourth quarter of 2005, represented $38.9 million of the Corporation’s increase in operating expenses. Excluding E-LOAN, operating expenses for the second quarter of 2006 remained stable when compared with the same period in 2005.
 
    Lower income tax expense primarily as a result of lower taxable income, coupled with the impact of the reversal of certain tax positions upon the completion during the second quarter of 2006 of various federal and Puerto Rico tax audits. This was partially offset by a retroactive increase in the income tax rate for Banco Popular de Puerto Rico from 41.5% to 43.5% effective January 1, 2006, which resulted from budgetary measures undertaken by the Government of Puerto Rico in this quarter.
 
    Total earning assets at June 30, 2006 decreased slightly by less than 1% compared with December 31, 2005, in part due to strategies to reduce the Corporation’s financial leverage. When compared to June 30, 2005, earning assets rose 4%. Refer to the Financial Condition section of this MD&A for descriptive information on the composition of assets, deposits, borrowings and capital of the Corporation.
 
    In August 2005, the Government of Puerto Rico approved an increase in the maximum statutory tax rate from 39.0% to 41.5% to corporations and partnerships for a two-year period. The tax rate was applied retroactively effective January 1, 2005 to all of the Corporation’s subsidiaries doing business in Puerto Rico with fiscal years ended December 31, 2005. The additional tax related to the income earned from January 1 to the date of enactment of the law was fully recorded in the third quarter of 2005 net of the impact in the deferred taxes. In addition, in May 2006, the Government of Puerto Rico approved an additional transitory tax applicable only to the banking industry that raised the maximum statutory tax rate to 43.5% for taxable years commenced during calendar year 200