POPULAR,INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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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)
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Puerto Rico
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66-0667416 |
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(State or other jurisdiction of
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(IRS Employer Identification Number) |
incorporation or organization) |
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Popular Center Building |
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209 Muñoz Rivera Avenue, Hato Rey |
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San Juan, Puerto Rico
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00918 |
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(Address of principal executive offices)
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(Zip code) |
(787) 765-9800
(Registrants 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 issuers 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.
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 Corporations 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 Corporations 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 Corporations control, could cause actual results to differ materially from
those expressed in, or implied by, such forward-looking statements. Factors that might cause such a
difference include, but are not limited to: the rate of growth in the economy, as well as general
business and economic conditions; changes in interest rates, as well as the magnitude of such
changes; the fiscal and monetary policies of the federal government and its agencies; the relative
strength or weakness of the consumer and commercial credit sectors and of the real estate markets;
the performance of the stock and bond markets; competition in the financial services industry;
possible legislative, tax or regulatory changes; and difficulties in combining the operations of
acquired entities.
Moreover, the outcome of legal proceedings, as discussed in Part II, Item I. Legal Proceedings,
is inherently uncertain and depends on judicial interpretations of law and the findings of
regulators, judges and juries.
All forward-looking statements included in this document are based upon information available to
the Corporation as of the date of this document, and we assume no obligation to update or revise
any such forward-looking statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
3
ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
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June 30, |
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December 31, |
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June 30, |
(In thousands, except share information) |
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2006 |
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2005 |
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2005 |
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ASSETS |
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Cash and due from banks |
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$ |
848,892 |
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$ |
906,397 |
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$ |
936,019 |
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Money market investments: |
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Federal funds sold |
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245,500 |
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186,000 |
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406,205 |
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Securities purchased under agreements to resell |
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366,143 |
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554,770 |
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613,659 |
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Time deposits with other banks |
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8,879 |
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8,653 |
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6,218 |
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620,522 |
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749,423 |
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1,026,082 |
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Investment securities available-for-sale, at fair value: |
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Pledged securities with creditors right to repledge |
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6,112,628 |
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6,110,179 |
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5,135,340 |
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Other investment securities available-for-sale |
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4,776,670 |
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5,606,407 |
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6,701,603 |
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Investment securities held-to-maturity, at amortized cost |
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420,398 |
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153,104 |
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177,987 |
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Other investment securities, at lower of cost or realizable value |
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312,042 |
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319,103 |
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330,350 |
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Trading account securities, at fair value: |
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Pledged securities with creditors right to repledge |
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212,637 |
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343,659 |
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314,263 |
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Other trading securities |
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163,633 |
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175,679 |
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142,023 |
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Loans held-for-sale, at lower of cost or market value |
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606,620 |
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699,181 |
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489,699 |
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Loans held-in-portfolio: |
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Loans held-in-portfolio pledged with creditors right to repledge |
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208,774 |
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662,823 |
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Other loans held-in-portfolio |
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31,915,006 |
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31,099,865 |
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28,280,396 |
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Less Unearned income |
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304,994 |
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297,613 |
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283,129 |
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Allowance for loan losses |
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483,815 |
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461,707 |
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456,954 |
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31,126,197 |
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30,549,319 |
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28,203,136 |
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Premises and equipment, net |
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592,704 |
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596,571 |
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580,031 |
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Other real estate |
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83,658 |
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79,008 |
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68,671 |
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Accrued income receivable |
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245,998 |
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245,646 |
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214,767 |
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Other assets |
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1,515,682 |
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1,325,800 |
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1,121,151 |
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Goodwill |
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656,189 |
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653,984 |
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527,633 |
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Other intangible assets |
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105,044 |
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110,208 |
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46,074 |
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$ |
48,399,514 |
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$ |
48,623,668 |
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$ |
46,014,829 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Deposits: |
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Non-interest bearing |
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$ |
4,370,437 |
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$ |
3,958,392 |
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$ |
4,932,560 |
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Interest bearing |
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19,079,083 |
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18,679,613 |
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18,086,939 |
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23,449,520 |
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22,638,005 |
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23,019,499 |
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Federal funds purchased and assets sold under agreements to repurchase |
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7,926,731 |
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8,702,461 |
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7,866,169 |
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Other short-term borrowings |
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2,656,936 |
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2,700,261 |
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1,998,981 |
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Notes payable |
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10,198,675 |
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9,893,577 |
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9,085,270 |
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Subordinated notes |
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125,000 |
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Other liabilities |
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704,547 |
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1,240,002 |
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649,501 |
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44,936,409 |
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45,174,306 |
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42,744,420 |
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Commitments and contingencies (See Note 11) |
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Minority interest in consolidated subsidiaries |
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112 |
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115 |
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101 |
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Stockholders equity: |
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Preferred stock, $25 liquidation value; 30,000,000 shares authorized;
7,475,000 shares issued and outstanding in all periods presented |
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186,875 |
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186,875 |
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186,875 |
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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) |
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1,750,310 |
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1,736,443 |
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1,682,368 |
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Surplus |
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490,631 |
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452,398 |
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287,628 |
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Retained earnings |
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1,576,499 |
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1,456,612 |
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1,333,655 |
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Accumulated other comprehensive loss, net of tax of ($110,267)
(December 31, 2005 ($58,292); June 30, 2005 $336) |
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(334,789 |
) |
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(176,000 |
) |
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(12,901 |
) |
Treasury stock at cost, 13,424,797 shares (December 31, 2005 13,451,799;
June 30, 2005 13,461,598) |
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(206,533 |
) |
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(207,081 |
) |
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(207,317 |
) |
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3,462,993 |
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3,449,247 |
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|
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3,270,308 |
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$ |
48,399,514 |
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$ |
48,623,668 |
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$ |
46,014,829 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Quarter ended |
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Six months ended |
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June 30, |
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June 30, |
(In thousands, except per share information) |
|
2006 |
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2005 |
|
2006 |
|
2005 |
|
INTEREST INCOME: |
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Loans |
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$ |
613,792 |
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$ |
510,184 |
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$ |
1,205,627 |
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$ |
1,015,505 |
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Money market investments |
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|
7,906 |
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7,906 |
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|
15,888 |
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|
15,440 |
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Investment securities |
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|
133,274 |
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|
|
120,689 |
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|
|
266,807 |
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|
|
235,056 |
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Trading account securities |
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7,065 |
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|
|
8,317 |
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|
|
15,925 |
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|
|
14,375 |
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|
762,037 |
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647,096 |
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1,504,247 |
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1,280,376 |
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INTEREST EXPENSE: |
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Deposits |
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135,961 |
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|
99,688 |
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|
260,372 |
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|
196,744 |
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Short-term borrowings |
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|
127,074 |
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|
77,376 |
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|
251,877 |
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|
143,179 |
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Long-term debt |
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|
133,223 |
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|
112,602 |
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|
266,455 |
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|
225,737 |
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|
396,258 |
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|
289,666 |
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|
778,704 |
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|
565,660 |
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Net interest income |
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|
365,779 |
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|
|
357,430 |
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|
|
725,543 |
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|
|
714,716 |
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Provision for loan losses |
|
|
67,096 |
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|
|
49,936 |
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|
|
116,043 |
|
|
|
94,272 |
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Net interest income after provision for loan losses |
|
|
298,683 |
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|
|
307,494 |
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|
|
609,500 |
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|
|
620,444 |
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Service charges on deposit accounts |
|
|
47,324 |
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|
|
45,132 |
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|
|
94,793 |
|
|
|
88,824 |
|
Other service fees (See Note 12) |
|
|
80,017 |
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|
|
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 |
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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 |
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|
1,022,319 |
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|
|
1,016,491 |
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OPERATING EXPENSES: |
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Personnel costs: |
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Salaries |
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|
126,700 |
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|
115,807 |
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|
|
262,232 |
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|
|
231,349 |
|
Pension, profit sharing and other benefits |
|
|
39,783 |
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|
|
38,445 |
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|
|
82,303 |
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|
|
78,819 |
|
|
|
|
|
166,483 |
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|
|
154,252 |
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|
|
344,535 |
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|
|
310,168 |
|
Net occupancy expenses |
|
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28,629 |
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|
|
25,881 |
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|
|
57,267 |
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|
50,695 |
|
Equipment expenses |
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|
33,973 |
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|
30,230 |
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|
|
67,170 |
|
|
|
58,844 |
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Other taxes |
|
|
10,929 |
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|
|
9,465 |
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|
|
21,170 |
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|
|
18,720 |
|
Professional fees |
|
|
38,488 |
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|
27,316 |
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|
|
75,566 |
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|
|
54,899 |
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Communications |
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|
17,293 |
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|
15,262 |
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|
|
34,593 |
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|
|
30,939 |
|
Business promotion |
|
|
31,991 |
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|
|
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 .
5
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.
6
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.
7
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.
8
Notes to Unaudited Consolidated Financial Statements
Note 1 Nature of operations and basis of presentation
Popular, Inc. (the Corporation or Popular) is a diversified, publicly owned financial holding
company subject to the supervision and regulation of the Board of Governors of the Federal Reserve
System. The Corporation is a full service financial services provider with operations in Puerto
Rico, the United States, the Caribbean and Latin America. As the leading financial institution 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 Corporations 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 Corporations 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
Corporations 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 Corporations 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
Corporations 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 Corporations 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
9
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 Corporations 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
countrys 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 Corporations 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 pesos 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.
10
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
entitys 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 Corporations 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.
11
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 entitys 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 entitys
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 servicers financial assets that meets the requirements for sale
accounting
b. A transfer of the servicers 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 methodAmortize 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 methodMeasure 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.
12
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
entitys 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. |
13
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 Corporations 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 Corporations 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.
14
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 |
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Corporations 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 |
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Moodys Investors Service to Ba1, one notch below investment grade, in May 2006. At
that time, Moodys commented that this action reflected the Governments strained financial
condition, the ongoing political conflict and lack of agreement regarding the measures necessary to
end the governments 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 Governments 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 Commonwealths fiscal agent, to cover operating deficits. Standard & Poors (S&P),
another nationally recognized credit rating agency, rated the Appropriation Bonds BBB-, which is
still
18
considered investment grade. As of June 30, 2006, the
appropriation bonds indicated above represented approximately
$4.5 million in net unrealized losses in
the Corporations 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 |
|
|
19
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 |
|
|
20
The following table shows the Corporations 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 |
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
23
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 Populars 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 Managements 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 Corporations
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. PFHs 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 PFHs 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.
24
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 PFHs 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 Corporations 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 |
% |
|
25
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 Corporations derivative activities. The following represents the major
changes that occurred in the Corporations 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
26
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.
27
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 |
|
|
28
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
Corporations 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-LOANs 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:
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
30
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 Corporations Form 10-K for the year ended December 31,
2005, for rates and maturity information corresponding to the borrowings
outstanding as of such date. |
31
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 Corporations Form 10-K
for the year ended December 31, 2005,
for rates and maturity information corresponding to the borrowings outstanding as
of such date. |
32
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 Corporations
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 Corporations 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 |
|
|
33
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 Corporations
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
Corporations 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 |
|
|
34
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 Corporations 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
35
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.
36
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.
37
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 Boards risk-based capital guidelines, the capital securities are
includable in the Corporations Tier I capital.
Note
16 Stockholders Equity
During the fourth quarter of 2005, existing shareholders of record of the Corporations 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
Corporations 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.
38
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 Corporations 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 Corporations 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 BPPRs 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. BPPRs 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
39
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 Corporations corporate structure consists of four reportable segments, which represent the
Corporations 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 Corporations
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 Corporations 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 |
40
|
|
|
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 Corporations 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 Corporations 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.
41
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 |
|
|
42
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 |
|
|
43
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 |
|
|
44
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 |
|
|
45
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. |
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Corporations 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, |
47
|
|
|
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.
48
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 availableforsale, at fair value |
|
|
11,407 |
|
|
|
67,810 |
|
|
|
9,559 |
|
|
|
10,806,922 |
|
|
|
(6,400 |
) |
|
|
10,889,298 |
|
Investment securities heldtomaturity, 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 heldforsale, at lower of cost or market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606,620 |
|
|
|
|
|
|
|
606,620 |
|
|
Loans heldinportfolio |
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest 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 shortterm 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 |
|
|
49
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 availableforsale, at fair value |
|
|
18,271 |
|
|
|
77,861 |
|
|
|
|
|
|
|
11,620,673 |
|
|
|
(219 |
) |
|
|
11,716,586 |
|
Investment securities heldtomaturity, 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 heldforsale, at lower of cost or market value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
699,181 |
|
|
|
|
|
|
|
699,181 |
|
|
Loans heldinportfolio |
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest 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 shortterm 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 |
|
|
50
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 |
|
|
51
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 |
52
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 |
|
|
53
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 |
|
|
54
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 |
|
|
55
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 |
|
|
56
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 |
|
|
57
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes managements 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 Corporations 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 Corporations 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
Corporations 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. |
58
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. |
59
|
|
|
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 Corporations 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 Corporations
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 Corporations 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 2006. For taxable years beginning after
December 31, 2006, the maximum statutory tax rate will be 39%. The additional tax
provision of 2% applicable to BPPR for the six months ended June 30, 2006 was fully
recorded in the second quarter of 2006 net of the impact in deferred taxes. The
additional transitory tax of 4.5% over the original maximum statutory tax rate of
39% resulted in additional income tax expense recorded in books for the six months
ended June 30, 2006 of approximately $4.8 million, net of the impact of the
measurement of deferred tax assets. |
|
|
|
|
Also, in May 2006, the Government of Puerto Rico enacted a law that imposes a tax of
5% over the 2005 taxable net income applicable to for-profit partnerships and
corporations with gross income over $10.0 million, which was required to be paid by
July 31, 2006. The Corporation could use the full payment as a tax credit in the
income tax return for future years. This prepayment of tax resulted in a disbursement
of approximately $18.2 million. No income tax expense will be recorded since such
prepayment will be used as a tax credit in future taxable years. |
|
|
|
|
The Corporation exercised certain Tag Along Rights granted under the Shareholders
Agreement 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. |
60
The Corporation, like other financial institutions, is subject to a number of risks, many of which
are outside of managements control. Among the risks assumed are: (1) market risk, which is the risk that changes
in market rates and prices will adversely affect the Corporations financial condition or results
of operations, (2) liquidity risk, which is the risk that the Corporation will have insufficient
cash or access to cash to meet operating needs and financial obligations, (3) credit risk, which is
the risk that loan customers or other counterparties will be unable to perform their contractual
obligations, and (4) operational risk, which is the risk of loss resulting from inadequate or
failed internal processes, people and systems, or from external events. As a financial services
company, the Corporations earnings are significantly affected by general business and economic
conditions. Lending and deposit activities and fee income generation are influenced by the level of
business spending and investment, consumer income, spending and savings, capital market activities,
competition, customer preferences, interest rate conditions and prevailing market rates on
competing products. The Corporation continuously monitors general business and economic conditions,
industry-related indicators and trends, competition, interest rate volatility, credit quality
indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and
changes in the regulation of financial services companies. The Corporation operates in a highly
regulated environment and may be adversely affected by changes in federal and local laws and
regulations. Also, competition with other financial institutions could adversely affect our
profitability.
The description of the Corporations business contained in Item 1 of the Corporations Form 10-K
for the year ended December 31, 2005, while not all inclusive, discusses additional information
about the business of the Corporation and risk factors many beyond the Corporations control
that, in addition to the other information in this report, readers should consider.
Further discussion of operating results, financial condition and credit, market and liquidity risks
is presented in the narrative and tables included herein.
The shares of the Corporations common and preferred stock are traded on the National Association
of Securities Dealers Automated Quotation (NASDAQ) system under the symbols BPOP and BPOPO,
respectively.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies followed by the Corporation and its subsidiaries conform to
generally accepted accounting principles in the United States of America and general practices
within the financial services industry. Various elements of the Corporations accounting policies,
by their nature, are inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. These estimates are made under facts and circumstances at a point in time
and changes in those facts and circumstances could produce actual results that differ from those
estimates.
Management has discussed the development and selection of the critical accounting policies and
estimates with the Corporations Audit Committee. The Corporation has identified as critical
accounting policies those related to securities classification and related values, loans and
allowance for loan losses, retained interests on transfers of financial assets non-prime mortgage
loans securitizations (valuations of interest-only strips and mortgage servicing rights), income
taxes, goodwill and other intangible assets, and pension and postretirement benefit obligations.
For a summary of the Corporations critical accounting policies, refer to that particular section
in the MD&A included in Popular, Inc.s 2005 Financial Review and Supplementary Information to
Stockholders, incorporated by reference in Popular, Inc.s Annual Report on Form 10-K for the year
ended December 31, 2005 (the 2005 Annual Report). Also, refer to Note 1 to the consolidated
financial statements included in the 2005 Annual Report for a summary of the Corporations
significant accounting policies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND INTERPRETATIONS
The following is a list of recently issued accounting pronouncements and interpretations that are
applicable for adoption by the Corporation in 2006 or thereafter. Refer to Note 2 to the
consolidated financial statements for a description of each statement and managements assessment
as to the impact of the adoptions.
61
SFAS No. 123-R Share-Based Payments This Statement focuses primarily on transactions in which
an entity exchanges its equity instruments for employee services and generally establishes
standards for the accounting of transactions in which an entity obtains goods or services in
share-based payment transactions. The impact of the adoption of SFAS 123-R in January 2006 was not
significant for the results of the quarter and six months ended June 30, 2006. Refer to Note 13 to the consolidated financial statements for required disclosures and
further information on the impact of this accounting pronouncement.
SFAS No. 153 Exchanges of Nonmonetary Assets This Statement amends the principle that exchanges
of nonmonetary assets should be measured based on the fair value of the assets exchanged and more
broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have
commercial substance. The adoption of this Statement did not have a material impact on the
Corporations financial condition, results of operations, or cash flows for the quarter and six
months ended June 30, 2006.
SFAS No. 154 Accounting Changes and Error Corrections This Statement applies to all voluntary
changes in accounting principle, and changes the requirements for accounting and reporting of a
change in accounting principle. The Corporation adopted SFAS No. 154 in January 2006. The adoption
of SFAS No. 154 did not have a significant impact on the statement of condition or results of
operations for the quarter and six months ended June 30, 2006.
SFAS No. 155 Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements
No. 133 and 140 This Statement amends SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 155 resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets. SFAS No. 155 permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies
which interest-only strips and principal-only strips are not subject to the requirements of SFAS
No. 133; establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial instrument. The
Corporation elected to adopt SFAS No. 155 commencing in January 2007.
SFAS No. 156 Accounting for Servicing of Financial Assets an Amendment of FASB No. 140 This
Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, with respect to the accounting for separately
recognized servicing assets and servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes
an obligation to service a financial asset by entering into a servicing contract under specific
situations.
2. Requires all separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable.
3. Permits an entity to choose either of the following subsequent measurement methods for each
class of separately recognized servicing assets and servicing liabilities: amortization or fair
value measurement method.
4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to
trading securities by entities with recognized servicing rights, without calling into question the
treatment of other available-for-sale securities under SFAS No. 115, provided that the
available-for-sale securities are identified in some manner as offsetting the entitys 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.
62
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. 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.
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 this Interpretation
are classified as long-term, unless payment is expected within the next 12 months. |
|
|
|
|
Disclosures: The Interpretation requires qualitative and quantitative
disclosures, including discussion of reasonably possible changes that might occur in the
recognized tax benefits over the next 12 months; a description of open tax years by major
jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a
reconciliation of the beginning and ending balances of the unrecognized tax benefits on a
worldwide aggregated basis. |
A company should record the change in net assets that results from the application of the
Interpretation as an adjustment to retained earnings. 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.
NET INTEREST INCOME
Tables B and C present the different components of the Corporations net interest income, on a
taxable equivalent basis, for the quarter and six months ended June 30, 2006, as compared with the
same periods in 2005, segregated by major categories of interest earning assets and interest
bearing liabilities.
The interest earning assets include investment securities and loans which are exempt from income
tax, principally in Puerto Rico (P.R.). The main sources of tax-exempt interest income are
investments in obligations of some U.S. Government agencies and sponsored entities and of the P.R.
Commonwealth and its agencies, and assets held by the Corporations international banking entities,
which are tax-exempt under P.R. laws. To facilitate the comparison of all interest data related to
these assets, the interest income has been converted to a taxable equivalent basis, using the
applicable statutory income tax rates at each respective quarter end. The statutory income tax rate
considered for the
63
Corporations P.R. operations in the quarter and six months ended June 30, 2005
was 39%. During the third quarter of 2005, the Government of P.R. approved a temporary, two-year
additional tax of 2.5% for corporations, which increased the marginal tax rate from a 39% to 41.5%.
The impact of the additional tax, including the retroactive amounts corresponding to the first nine
months of 2005, was included in the Corporations results of operations in the third quarter of 2005. In addition, as indicated in the Overview section, during the second quarter of
2006 the Government of P.R. approved a temporary one-year additional tax of 2.0% for banking
entities. The statutory income tax rates considered for the Corporations P.R. operations in the
quarter ended June 30, 2006 were 43.5% for the bank subsidiary and 41.5% for the non-bank
subsidiaries. The taxable equivalent computation considers the interest expense disallowance
required by the P.R. tax law, also affected by the mentioned increases in tax rates. The statutory
income tax rate considered for the Corporations U.S. operations was 35%.
Average outstanding securities balances are based upon amortized cost excluding any unrealized
gains or losses on securities available-for-sale. Non-accrual loans have been included in the
respective average loans and leases categories. Loan fees collected and costs incurred in the
origination of loans are deferred and amortized over the term of the loan as an adjustment to
interest yield. Interest income for the quarter and six months ended June 30, 2006 included an
unfavorable impact of $4.6 million and $12.0 million, respectively, consisting principally of
amortization of net loan origination costs (net of fees), amortization of net premiums on loans
purchased, prepayment penalties and late payment charges. These
amounts approximated $8.8 million
and $17.5 million for the quarter and six months ended June 30, 2005, respectively.
As shown in Table B, the increase in net interest income on a taxable equivalent basis for the
quarter ended June 30, 2006, compared with the same quarter in the previous year, was mainly due to
the increase in average earning assets, primarily loans, partially offset by a decrease in the net
interest margin.
The increase in the average loan portfolio was led by growth in commercial, including construction,
and consumer loans. The increase in the average volume of the commercial loan portfolio for the
quarter was mainly reflected in P.R., our primary market, while the U.S. mainland operations
continued its growth. Also, contributing to the increase in the consumer loan portfolio was the
acquisition of E-LOAN during the last quarter of 2005, and greater volume of auto loans in the P.R.
auto and lease financing subsidiary. Refer to the Financial Condition section of this MD&A for
detailed factors that contributed to the growth in the loan portfolio.
The increase in average earning assets for the quarter was funded principally with a combination of
interest bearing deposits, primarily time deposits, and short and long-term borrowings. The
decrease in average non-interest bearing deposits for the quarter ended June 30, 2006, compared
with the same quarter in the previous year, resulted principally from the conversion of
non-interest bearing demand deposits of certain government entities in P.R. to interest bearing
demand deposits commencing during the third quarter of 2005 as agreed by the banking association
and certain financial institutions in P.R.
64
TABLE B
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Quarter ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
Average Volume |
|
Average Yields / Costs |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
Attributable to |
2006 |
|
2005 |
|
Variance |
|
2006 |
|
2005 |
|
Variance |
|
|
|
2006 |
|
2005 |
|
Variance |
|
Rate |
|
Volume |
|
|
|
|
|
($ in millions) |
|
| | | | | | | | | |
|
|
(In thousands) |
$ |
607 |
|
|
$ |
841 |
|
|
$ |
(234 |
) |
|
|
5.51 |
% |
|
|
3.77 |
% |
|
|
1.74 |
% |
|
Money market investments |
|
$ |
8,333 |
|
|
$ |
7,906 |
|
|
$ |
427 |
|
|
$ |
3,002 |
|
|
$ |
(2,575 |
) |
|
12,217 |
|
|
|
12,172 |
|
|
|
45 |
|
|
|
5.12 |
|
|
|
4.67 |
|
|
|
0.45 |
|
|
Investment securities |
|
|
156,481 |
|
|
|
142,224 |
|
|
|
14,257 |
|
|
|
14,612 |
|
|
|
(355 |
) |
|
431 |
|
|
|
548 |
|
|
|
(117 |
) |
|
|
6.90 |
|
|
|
6.11 |
|
|
|
0.79 |
|
|
Trading securities |
|
|
7,421 |
|
|
|
8,350 |
|
|
|
(929 |
) |
|
|
991 |
|
|
|
(1,920 |
) |
|
|
|
|
|
|
13,255 |
|
|
|
13,561 |
|
|
|
(306 |
) |
|
|
5.20 |
|
|
|
4.68 |
|
|
|
0.52 |
|
|
|
|
|
172,235 |
|
|
|
158,480 |
|
|
|
13,755 |
|
|
|
18,605 |
|
|
|
(4,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,428 |
|
|
|
11,452 |
|
|
|
1,976 |
|
|
|
7.57 |
|
|
|
6.55 |
|
|
|
1.02 |
|
|
Commercial |
|
|
253,358 |
|
|
|
187,083 |
|
|
|
66,275 |
|
|
|
31,350 |
|
|
|
34,925 |
|
|
1,304 |
|
|
|
1,312 |
|
|
|
(8 |
) |
|
|
7.47 |
|
|
|
7.59 |
|
|
|
(0.12 |
) |
|
Leasing |
|
|
24,352 |
|
|
|
24,884 |
|
|
|
(532 |
) |
|
|
(395 |
) |
|
|
(137 |
) |
|
12,192 |
|
|
|
11,999 |
|
|
|
193 |
|
|
|
6.86 |
|
|
|
6.50 |
|
|
|
0.36 |
|
|
Mortgage |
|
|
209,159 |
|
|
|
194,928 |
|
|
|
14,231 |
|
|
|
11,065 |
|
|
|
3,166 |
|
|
5,017 |
|
|
|
4,272 |
|
|
|
745 |
|
|
|
10.57 |
|
|
|
10.06 |
|
|
|
0.51 |
|
|
Consumer |
|
|
132,329 |
|
|
|
107,276 |
|
|
|
25,053 |
|
|
|
4,751 |
|
|
|
20,302 |
|
|
|
|
|
|
|
31,941 |
|
|
|
29,035 |
|
|
|
2,906 |
|
|
|
7.77 |
|
|
|
7.09 |
|
|
|
0.68 |
|
|
|
|
|
619,198 |
|
|
|
514,171 |
|
|
|
105,027 |
|
|
|
46,771 |
|
|
|
58,256 |
|
|
|
|
|
|
$ |
45,196 |
|
|
$ |
42,596 |
|
|
$ |
2,600 |
|
|
|
7.01 |
% |
|
|
6.32 |
% |
|
|
0.69 |
% |
|
Total earning assets |
|
$ |
791,433 |
|
|
$ |
672,651 |
|
|
$ |
118,782 |
|
|
$ |
65,376 |
|
|
$ |
53,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,892 |
|
|
$ |
3,721 |
|
|
$ |
171 |
|
|
|
1.95 |
% |
|
|
1.49 |
% |
|
|
0.46 |
% |
|
NOW and money market* |
|
$ |
18,872 |
|
|
$ |
13,832 |
|
|
$ |
5,040 |
|
|
$ |
3,909 |
|
|
$ |
1,131 |
|
|
5,375 |
|
|
|
5,629 |
|
|
|
(254 |
) |
|
|
1.35 |
|
|
|
1.18 |
|
|
|
0.17 |
|
|
Savings |
|
|
18,096 |
|
|
|
16,570 |
|
|
|
1,526 |
|
|
|
2,291 |
|
|
|
(765 |
) |
|
9,682 |
|
|
|
8,591 |
|
|
|
1,091 |
|
|
|
4.10 |
|
|
|
3.23 |
|
|
|
0.87 |
|
|
Time deposits |
|
|
98,993 |
|
|
|
69,286 |
|
|
|
29,707 |
|
|
|
20,199 |
|
|
|
9,508 |
|
|
|
|
|
|
|
18,949 |
|
|
|
17,941 |
|
|
|
1,008 |
|
|
|
2.88 |
|
|
|
2.23 |
|
|
|
0.65 |
|
|
|
|
|
135,961 |
|
|
|
99,688 |
|
|
|
36,273 |
|
|
|
26,399 |
|
|
|
9,874 |
|
|
|
|
|
|
|
10,977 |
|
|
|
9,778 |
|
|
|
1,199 |
|
|
|
4.64 |
|
|
|
3.17 |
|
|
|
1.47 |
|
|
Short-term borrowings |
|
|
127,074 |
|
|
|
77,376 |
|
|
|
49,698 |
|
|
|
38,910 |
|
|
|
10,788 |
|
|
10,168 |
|
|
|
9,596 |
|
|
|
572 |
|
|
|
5.25 |
|
|
|
4.70 |
|
|
|
0.55 |
|
|
Medium and long-term debt |
|
|
133,223 |
|
|
|
112,602 |
|
|
|
20,621 |
|
|
|
12,538 |
|
|
|
8,083 |
|
|
|
|
|
|
|
40,094 |
|
|
|
37,315 |
|
|
|
2,779 |
|
|
|
3.96 |
|
|
|
3.11 |
|
|
|
0.85 |
|
|
Total interest bearing liabilities |
|
|
396,258 |
|
|
|
289,666 |
|
|
|
106,592 |
|
|
|
77,847 |
|
|
|
28,745 |
|
|
4,027 |
|
|
|
4,398 |
|
|
|
(371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,075 |
|
|
|
883 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,196 |
|
|
$ |
42,596 |
|
|
$ |
2,600 |
|
|
|
3.52 |
% |
|
|
2.73 |
% |
|
|
0.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.49 |
% |
|
|
3.59 |
% |
|
|
(0.10 |
%) |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a taxable equivalent basis |
|
|
395,175 |
|
|
|
382,985 |
|
|
|
12,190 |
|
|
$ |
(12,471 |
) |
|
$ |
24,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.05 |
% |
|
|
3.21 |
% |
|
|
(0.16 |
%) |
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment |
|
|
29,396 |
|
|
|
25,555 |
|
|
|
3,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
365,779 |
|
|
$ |
357,430 |
|
|
$ |
8,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based
on the proportion of the change in each category.
|
|
|
* |
|
Includes interest bearing demand deposits corresponding to certain government entities in Puerto
Rico. |
The decrease in net interest margin, on a taxable equivalent basis, influenced by the
Corporations liability sensitive position (interest-sensitive liabilities repricing or maturing
faster than interest-sensitive assets), was mainly the result of the following factors:
|
|
|
Higher cost of short-term borrowings as the Federal Reserve (FED) continued its
tightening monetary policy. The FED raised the federal funds target rate 200 basis points
during 2005 and an additional 100 basis points during the six months ended June 30, 2006. |
65
|
|
|
Increased cost of interest bearing deposits since the growth in this category has been
attained principally in time deposits. This category carries a higher-cost in part
influenced by interest rate campaigns to attract deposits in a very competitive
environment, both in P.R. and the U.S. mainland. Also, the Corporation has experienced
higher costs in money market and savings accounts due to sustained marketing campaigns and
competition in the U.S. mainland. The Corporation strives to increase its deposit base,
primarily in the U.S. mainland, and reduce its reliance on short-term borrowings in the
rising interest rate scenario. |
|
|
|
|
Increased cost of long-term debt, principally resulting from secured debt derived from
mortgage loan securitization transactions done in 2005. |
Partially offsetting these unfavorable variances were the following contributors:
|
|
|
Higher yields in commercial loans, mainly the portfolio with short-term repricing terms,
which are favorably impacted by the rising interest rates. As of June 30, 2006,
approximately 59% of the commercial and construction loans portfolio had floating or
adjustable interest rates. |
|
|
|
|
Increased yield in the investment securities portfolios, partly due to the repricing of
collateralized mortgage obligations with floating rates. |
|
|
|
|
A positive impact resulting from favorable valuations of swap contracts acquired to
hedge the cost of financing certain mortgage and auto loan portfolios, in which the
Corporation is fixing the cost of funding these portfolios. |
|
|
|
|
Increase in the yield of consumer loans driven in part by home equity lines of credit
with floating rates and an increase in the average balance of credit cards, which carry a
higher rate. |
As shown in Table C, for the six-month period ended June 30, 2006, net interest income on a taxable
equivalent basis increased mainly as a result of a higher average balance of earning assets, and
was partially offset by the decrease in net interest margin, both influenced by the same factors
previously described in the quarterly results. The increase in the taxable equivalent adjustment
for the six months ended June 30, 2006, compared with the same period in the previous year, is
mainly the result of a higher statutory tax rate in Puerto Rico of 43.5% for the banking
corporations and 41.5% for all other corporations. Average tax-exempt earning assets approximated
$10.0 billion in the six-month period ended June 30, 2006, of which 89% represented tax-exempt
investment securities, compared with $7.4 billion and 90%, respectively, in the same period in
2005.
66
TABLE C
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Six-month period ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
Average Volume |
|
Average Yields / Costs |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
Attributable to |
2006 |
|
2005 |
|
Variance |
|
2006 |
|
2005 |
|
Variance |
|
|
|
2006 |
|
2005 |
|
Variance |
|
Rate |
|
Volume |
|
|
|
|
|
($ in millions) |
| | | | | | | | | | |
|
|
(In thousands) |
$ |
626 |
|
|
$ |
853 |
|
|
$ |
(227 |
) |
|
|
5.40 |
% |
|
|
3.65 |
% |
|
|
1.75 |
% |
|
Money market investments |
|
$ |
16,748 |
|
|
$ |
15,440 |
|
|
$ |
1,308 |
|
|
$ |
6,109 |
|
|
$ |
(4,801 |
) |
|
12,324 |
|
|
|
12,069 |
|
|
|
255 |
|
|
|
5.08 |
|
|
|
4.59 |
|
|
|
0.49 |
|
|
Investment securities |
|
|
312,819 |
|
|
|
276,613 |
|
|
|
36,206 |
|
|
|
31,990 |
|
|
|
4,216 |
|
|
516 |
|
|
|
473 |
|
|
|
43 |
|
|
|
6.57 |
|
|
|
6.19 |
|
|
|
0.38 |
|
|
Trading securities |
|
|
16,795 |
|
|
|
14,534 |
|
|
|
2,261 |
|
|
|
907 |
|
|
|
1,354 |
|
|
|
|
|
|
|
13,466 |
|
|
|
13,395 |
|
|
|
71 |
|
|
|
5.15 |
|
|
|
4.58 |
|
|
|
0.57 |
|
|
|
|
|
346,362 |
|
|
|
306,587 |
|
|
|
39,775 |
|
|
|
39,006 |
|
|
|
769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,185 |
|
|
|
11,375 |
|
|
|
1,810 |
|
|
|
7.44 |
|
|
|
6.42 |
|
|
|
1.02 |
|
|
Commercial |
|
|
486,285 |
|
|
|
361,893 |
|
|
|
124,392 |
|
|
|
62,244 |
|
|
|
62,148 |
|
|
1,312 |
|
|
|
1,298 |
|
|
|
14 |
|
|
|
7.47 |
|
|
|
7.63 |
|
|
|
(0.16 |
) |
|
Leasing |
|
|
48,986 |
|
|
|
49,551 |
|
|
|
(565 |
) |
|
|
(1,081 |
) |
|
|
516 |
|
|
12,480 |
|
|
|
12,306 |
|
|
|
174 |
|
|
|
6.80 |
|
|
|
6.51 |
|
|
|
0.29 |
|
|
Mortgage |
|
|
424,260 |
|
|
|
400,262 |
|
|
|
23,998 |
|
|
|
18,249 |
|
|
|
5,749 |
|
|
4,956 |
|
|
|
4,192 |
|
|
|
764 |
|
|
|
10.40 |
|
|
|
10.15 |
|
|
|
0.25 |
|
|
Consumer |
|
|
256,380 |
|
|
|
211,635 |
|
|
|
44,745 |
|
|
|
5,511 |
|
|
|
39,234 |
|
|
|
|
|
|
|
31,933 |
|
|
|
29,171 |
|
|
|
2,762 |
|
|
|
7.65 |
|
|
|
7.04 |
|
|
|
0.61 |
|
|
|
|
|
1,215,911 |
|
|
|
1,023,341 |
|
|
|
192,570 |
|
|
|
84,923 |
|
|
|
107,647 |
|
|
|
|
|
|
$ |
45,399 |
|
|
$ |
42,566 |
|
|
$ |
2,833 |
|
|
|
6.91 |
% |
|
|
6.27 |
% |
|
|
0.64 |
% |
|
Total earning assets |
|
$ |
1,562,273 |
|
|
$ |
1,329,928 |
|
|
$ |
232,345 |
|
|
$ |
123,929 |
|
|
$ |
108,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,841 |
|
|
$ |
3,749 |
|
|
$ |
92 |
|
|
|
1.84 |
% |
|
|
1.44 |
% |
|
|
0.40 |
% |
|
NOW and money market* |
|
$ |
35,076 |
|
|
$ |
26,765 |
|
|
$ |
8,311 |
|
|
$ |
7,530 |
|
|
$ |
781 |
|
|
5,447 |
|
|
|
5,625 |
|
|
|
(178 |
) |
|
|
1.31 |
|
|
|
1.18 |
|
|
|
0.13 |
|
|
Savings |
|
|
35,476 |
|
|
|
33,020 |
|
|
|
2,456 |
|
|
|
3,449 |
|
|
|
(993 |
) |
|
9,578 |
|
|
|
8,289 |
|
|
|
1,289 |
|
|
|
4.00 |
|
|
|
3.33 |
|
|
|
0.67 |
|
|
Time deposits |
|
|
189,820 |
|
|
|
136,959 |
|
|
|
52,861 |
|
|
|
29,581 |
|
|
|
23,280 |
|
|
|
|
|
|
|
18,866 |
|
|
|
17,663 |
|
|
|
1,203 |
|
|
|
2.78 |
|
|
|
2.25 |
|
|
|
0.53 |
|
|
|
|
|
260,372 |
|
|
|
196,744 |
|
|
|
63,628 |
|
|
|
40,560 |
|
|
|
23,068 |
|
|
|
|
|
|
|
11,226 |
|
|
|
9,738 |
|
|
|
1,488 |
|
|
|
4.52 |
|
|
|
2.97 |
|
|
|
1.55 |
|
|
Short-term borrowings |
|
|
251,877 |
|
|
|
143,179 |
|
|
|
108,698 |
|
|
|
83,485 |
|
|
|
25,213 |
|
|
10,311 |
|
|
|
9,924 |
|
|
|
387 |
|
|
|
5.21 |
|
|
|
4.58 |
|
|
|
0.63 |
|
|
Medium and long-term debt |
|
|
266,455 |
|
|
|
225,737 |
|
|
|
40,718 |
|
|
|
33,606 |
|
|
|
7,112 |
|
|
|
|
|
|
|
40,403 |
|
|
|
37,325 |
|
|
|
3,078 |
|
|
|
3.89 |
|
|
|
3.05 |
|
|
|
0.84 |
|
|
Total
interest bearing liabilities |
|
|
778,704 |
|
|
|
565,660 |
|
|
|
213,044 |
|
|
|
157,651 |
|
|
|
55,393 |
|
|
3,944 |
|
|
|
4,304 |
|
|
|
(360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,052 |
|
|
|
937 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,399 |
|
|
$ |
42,566 |
|
|
$ |
2,833 |
|
|
|
3.46 |
% |
|
|
2.68 |
% |
|
|
0.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.45 |
% |
|
|
3.59 |
% |
|
|
(0.14 |
%) |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a
taxable equivalent basis |
|
|
783,569 |
|
|
|
764,268 |
|
|
|
19,301 |
|
|
$ |
(33,722 |
) |
|
$ |
53,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.02 |
% |
|
|
3.22 |
% |
|
|
(0.20 |
%) |
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment |
|
|
58,026 |
|
|
|
49,552 |
|
|
|
8,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
725,543 |
|
|
$ |
714,716 |
|
|
$ |
10,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME
Refer to Table D for a breakdown of non-interest income by major categories for the quarters and
six-month periods ended June 30, 2006 and 2005.
As indicated in the Overview section of this MD&A, the decrease in non-interest income for the
quarter ended June 30, 2006, compared with the same quarter in 2005, was driven mostly by lower
trading account profits and a net loss on sale and valuation adjustments of investment securities. The
decrease in trading account profits was the result of higher trading profits recognized in the
second quarter of 2005, primarily related with the pooling of $552 million in mortgage loans into
mortgage-backed securities by BPPR, which were subsequently sold in the secondary markets. Gains on
sale and valuation adjustment of investment securities were unfavorably impacted by the adjustment of
67
$15.0 million in the second quarter of 2006 for other-than-temporary impairments of interest-only
securities of PFH. Considering market trends for the sub-prime mortgage industry and benchmarking
procedures followed against industry and third-party valuation data, the Corporation adjusted
certain critical assumptions utilized in the valuation of its interest-only securities. Changes
considered this quarter included an increase in the discount rate from 15% to 17%, and certain
revisions in the discounted cash flow models for prepayment speeds and credit loss assumptions.
These decreases were partially offset by higher gains on sale of loans, resulting mostly from sales
by E-LOAN, acquired during the fourth quarter of 2005, which sold
approximately $943 million in
loans during the quarter ended June 30, 2006, primarily residential mortgage loans, contributing
with approximately $19.5 million in gains. Also, BPNA contributed with higher gains on sale of SBA
loans by $3.0 million. Offsetting these increases were lower gains on sale of loans at PFH mainly
because there were no off-balance sheet securitization transactions performed during the second
quarter of 2006, compared with two off-balance sheet securitization transactions in the second
quarter of 2005 involving $776 million, which contributed with approximately $11.4 million in
gains.
Also, there was higher other operating income mostly associated with an increase of $9.1 million in
dividend income derived from the Corporations investment in TelPRI, primarily associated with a
special dividend resulting from the sale of certain operations at that institution. Other factors
contributing to the increase in other operating income were a favorable fair value valuation
adjustment of the subordinated convertible note issued by ACE Cash Express, Inc. (ACE) as part of
PCEs sale transaction executed in the fourth quarter of 2005, higher bank-owned life insurance
income, higher income derived from securitization related invested funds and other revenues from
E-LOAN related in part to the mortgage escrow and loan closing services business.
The increase in service charges on deposit accounts for the second quarter of 2006, compared with
the same period in the previous year, was principally associated to higher volume of approvals on
checks paid in commercial accounts with non-sufficient funds.
The composition of other service fees by major categories is presented in Table D. The reduction in
quarterly results on other service fees was led by lower check cashing fees resulting from the sale
of the retail outlets of PCE. Mortgage servicing fees reflect a reduction mostly due to higher
amortization of mortgage servicing rights primarily from servicing rights recorded on on-balance
sheet securitizations. The associated income is accreted as part of interest income since the loans
remain in the Corporations records. Also, there were lower fees from the sale and administration
of investment products primarily in mutual funds commissions and revenues from the institutional
business. The other fees category was unfavorably impacted by lower revenues from PCE related to
money transfer and other services that are no longer offered. These unfavorable variances were
partially offset by higher credit card fees mostly associated with higher merchant business income
resulting from increased sales, and higher credit card late payment fees derived from higher volume
and a price change, partially offset by lower credit card membership fees that resulted from
promotional campaigns with no annual fee induced by business strategies and industry competition.
Debit card fees increased as a result of higher transactional volume at a higher average price.
68
TABLE D
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands) |
|
Quarter ended June 30, |
|
Six months ended June 30, |
|
|
2006 |
|
2005 |
|
$ Variance |
|
2006 |
|
2005 |
|
$ Variance |
|
Service charges on deposit accounts |
|
$ |
47,324 |
|
|
$ |
45,132 |
|
|
$ |
2,192 |
|
|
$ |
94,793 |
|
|
$ |
88,824 |
|
|
$ |
5,969 |
|
Other service fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card fees and discounts |
|
$ |
22,371 |
|
|
$ |
20,058 |
|
|
$ |
2,313 |
|
|
$ |
44,944 |
|
|
$ |
38,583 |
|
|
$ |
6,361 |
|
Debit card fees |
|
|
15,085 |
|
|
|
13,193 |
|
|
|
1,892 |
|
|
|
30,004 |
|
|
|
26,215 |
|
|
|
3,789 |
|
Insurance fees |
|
|
14,411 |
|
|
|
12,761 |
|
|
|
1,650 |
|
|
|
26,552 |
|
|
|
24,434 |
|
|
|
2,118 |
|
Processing fees |
|
|
10,939 |
|
|
|
10,470 |
|
|
|
469 |
|
|
|
21,218 |
|
|
|
20,577 |
|
|
|
641 |
|
Sale and administration of investment
products |
|
|
6,649 |
|
|
|
7,821 |
|
|
|
(1,172 |
) |
|
|
14,106 |
|
|
|
13,967 |
|
|
|
139 |
|
Trust fees |
|
|
2,313 |
|
|
|
2,018 |
|
|
|
295 |
|
|
|
4,644 |
|
|
|
4,133 |
|
|
|
511 |
|
Mortgage servicing fees, net of amortization |
|
|
1,088 |
|
|
|
3,792 |
|
|
|
(2,704 |
) |
|
|
4,040 |
|
|
|
6,535 |
|
|
|
(2,495 |
) |
Check cashing fees |
|
|
125 |
|
|
|
4,643 |
|
|
|
(4,518 |
) |
|
|
540 |
|
|
|
10,469 |
|
|
|
(9,929 |
) |
Other fees |
|
|
7,036 |
|
|
|
9,085 |
|
|
|
(2,049 |
) |
|
|
14,315 |
|
|
|
17,943 |
|
|
|
(3,628 |
) |
|
Total other service fees |
|
$ |
80,017 |
|
|
$ |
83,841 |
|
|
$ |
(3,824 |
) |
|
$ |
160,363 |
|
|
$ |
162,856 |
|
|
$ |
(2,493 |
) |
|
Net (loss) gain on sale and valuation adjustment
of investment securities |
|
$ |
(14,424 |
) |
|
$ |
561 |
|
|
$ |
(14,985 |
) |
|
$ |
(2,084 |
) |
|
$ |
51,811 |
|
|
$ |
(53,895 |
) |
Trading account profit |
|
|
1,830 |
|
|
|
19,668 |
|
|
|
(17,838 |
) |
|
|
13,305 |
|
|
|
23,431 |
|
|
|
(10,126 |
) |
Gain on sale of loans |
|
|
29,054 |
|
|
|
15,274 |
|
|
|
13,780 |
|
|
|
76,315 |
|
|
|
25,090 |
|
|
|
51,225 |
|
Other operating income |
|
|
40,185 |
|
|
|
25,982 |
|
|
|
14,203 |
|
|
|
70,127 |
|
|
|
44,035 |
|
|
|
26,092 |
|
|
Total non-interest income |
|
$ |
183,986 |
|
|
$ |
190,458 |
|
|
$ |
(6,472 |
) |
|
$ |
412,819 |
|
|
$ |
396,047 |
|
|
$ |
16,772 |
|
|
Non-interest income for the six months ended June 30, 2006 included higher gains on sales of
loans when compared with the same period in 2005. This increase resulted mostly from E-LOAN, which
contributed approximately $43 million in gains on the sale of over $2.0 billion in loans, primarily
residential mortgage loans. The financial results for the six-month period ended June 30, 2006 also
included higher other operating income related with the same events already mentioned for the
quarterly results. The principal variances were partially offset by lower gains on sale and
valuation adjustments of investment securities and lower trading account profits. The Corporation
recognized $51.8 million in gains on the sale and valuation adjustments of investment securities in
the six-month period ended June 30, 2005, principally associated with the sale of marketable equity
securities, compared with net losses of $2 million in the same period of 2006. The 2006 results
included gains of $14.9 million on the sale of investment securities, mainly marketable equity
securities, offset by unfavorable adjustments of $16.9 million for other-than-temporary impairment
of investment securities, particularly interest-only securities of PFH. The decrease in trading
account profits was also associated principally with lower gains realized on the pooling of
mortgage loans into mortgage-backed securities. The principal variances in other service fees and
in service charges on deposit accounts were also influenced by similar factors mentioned in the
quarterly results.
OPERATING EXPENSES
Refer to the consolidated statements of income included in this Form 10-Q for a breakdown of
operating expenses by major categories.
Operating expenses for the quarter ended June 30, 2006 increased 12% compared with the same period
in 2005, with E-LOAN representing substantially all of that increase.
Personnel costs for the quarter ended June 30, 2006 rose $12.2 million, or 8%, compared to the same
period in 2005. Full-time equivalent employees (FTEs) were 12,828 at June 30, 2006, an increase of
237 from the same date in 2005. E-LOANs acquisition added over 830 FTEs, and represented an
approximately $14.2 million increase in personnel costs for the second quarter of 2006. The sale of
PCE also impacted with a reduction in FTEs of over 360, or approximately $2.8 million in personnel
costs.
69
All other operating expenses for the quarter ended June 30, 2006, excluding personnel costs,
increased $26.6 million, or 16%, compared with the second quarter of 2005. The categories with the
largest increases were professional fees, business promotion, equipment and net occupancy expenses.
These cost increases were associated with higher credit related costs to support the lending
business, increased legal fees, higher advertising expenses mainly in E-LOAN, systems and
application costs to support business processes and business expansion related costs. For the
quarter ended June 30, 2006, E-LOAN accounted for approximately $24.6 million of the increase in
operating expenses, excluding personnel costs, while PCE represented a decline of approximately
$4.6 million.
As presented in Table A, the Corporations efficiency ratio increased from 60.15% for the quarter
ended June 30, 2005 to 64.34% for the same quarter in 2006. The efficiency ratio measures how much
of a companys revenue is used to pay operating expenses. As stated in the Glossary of Selected
Financial Terms included in the 2005 Annual Report, in determining the efficiency ratio the
Corporation includes recurring non-interest income items, thus isolating income items that may be
considered volatile in nature. Management believes that the exclusion of those items would permit
greater comparability for analytical purposes. Amounts within non-interest income not considered
recurring in nature by the Corporation amounted to ($14.4) million in the quarter ended June 30,
2006, compared with $8.9 million in the same quarter in the previous year, and corresponded
principally to net (losses) gains on the sale of investment securities and unfavorable adjustments
in the valuation of investment securities and capital gains on the sale of real estate. In 2006,
the Corporation has taken corporate-wide steps to implement productivity improvements and expense
management controls, which in the long-run should result in efficiency improvements.
For the six-month period ended June 30, 2006, operating expenses increased $105.2 million, or 16%,
compared with the same period in 2005. E-LOAN represented $77.2 million of that increase.
Categories with the major variances included personnel costs, professional fees, business
promotion, equipment and net occupancy expenses. The increase in personnel costs, besides the
impact of higher headcount and E-LOANs acquisition, was driven mostly by higher salaries, related
taxes, medical insurance and savings plan expenses, partially offset
by lower profit sharing and higher deferred costs associated with the
origination volume in the lending business. As described
in Note 14 to the consolidated financial statements, there were plan amendments in certain employee
benefits plans effective January 1, 2006.
Variances in all other operating expense categories for the six months ended June 30, 2006,
compared with the same period in 2005, were associated with the general factors previously
described for the quarterly results. Also, the increase in operating expenses incorporates a $9.7
million pre-tax loss ($6.1 million after-tax) on the impact of the change in fiscal year of certain
of the Corporations subsidiaries which was completed during the first quarter of 2006. As
previously described in the Corporations Form 10-K for the year ended December 31, 2005, in 2005,
the Corporation commenced a two-year plan to change the reporting period of its non-banking
subsidiaries to a December 31st calendar period, primarily as part of a strategic plan
to put in place a corporate-wide integrated financial system and to facilitate the consolidation
process. The financial results for the month of December 2005 of PFH (excluding E-LOAN which
already had a December 31st year-end closing), Popular FS, Popular Securities and
Popular North America (holding company only) are included in a separate line within operating
expenses for the six months ended June 30, 2006. As of the end of the first quarter of 2006, all
subsidiaries of the Corporation have aligned their year-end closings to December 31st,
similar to the parent holding company.
INCOME TAX
The decrease in income tax expense for the quarter ended June 30, 2006 compared to the same quarter
in 2005 was primarily due to lower pretax earnings and an increase in exempt interest income net of
the disallowance of expenses attributed to such exempt income. In addition, income tax expense
decreased due to a 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 an increase in
the Puerto Rico statutory income tax rate from 39% to 41.5% on regular corporations and 43.5% on
banks. Also, there was a decrease in income subject to a lower preferential capital gain tax rate.
The effective tax rate for the second quarter of 2006 and 2005 was 18.64% and 23.82%, respectively.
70
The decrease in income tax expense for the six-month period ended June 30, 2006 compared with the
same period in 2005 was primarily due to lower pretax earnings, and higher exempt interest income
net of disallowance of expenses attributed to such exempt income. This was partially offset by a
decrease in income subject to a lower preferential capital gain tax rate when compare to the same quarter last year. The effective tax rate for the six months ended
June 30, 2006 was 21.81%, compared with 22.33% for the same period in 2005.
REPORTABLE SEGMENT RESULTS
The Corporations reportable segments for managerial reporting consist of Banco Popular de
Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. Also, a Corporate
group has been defined to support the reportable segments. For managerial reporting purposes, the
costs incurred by this latter group are not allocated to the four reportable segments.
For a more complete description of the Corporations reportable segments, including additional
financial information and the underlying management accounting process, refer to Note 19 to the
consolidated financial statements. The Corporate group, which supports the four reportable
segments, had a net loss of $2.0 million in the second quarter of 2006, compared with a net loss of
$12.7 million in the same quarter of 2005. The favorable variance was primarily due to increased
dividend income from TelPRI. On a year-to-date basis, the Corporate group had a net loss of $2.3
million for the six months ended June 30, 2006, compared to net income of $22.0 million in the same
period of the previous year. During the semester ended June 30, 2005, the Corporations holding
companies within the Corporate group realized gains on the sale of securities, mainly marketable
equity securities, approximating $50.5 million, compared with $14.2 million in the same period of
2006. The variance in gain on sale of securities was partially offset by the aforementioned
increase in TelPRIs dividend income in 2006.
Highlights on the earnings results for the reportable segments are discussed below.
Banco Popular de Puerto Rico
The segment of Banco Popular de Puerto Rico reported net income of $90.3 million for the quarter
ended June 30, 2006, a decrease of $21.4 million, or 19%, compared with the same quarter in the
previous year. The main factors that contributed to the variance in results for the quarter ended
June 30, 2006 when compared to the second quarter of 2005 included:
|
|
|
Lower net interest income by $0.7 million, or less than 1%. The decrease was primarily
related to the consumer and retail banking business, the net interest income of which
declined by $9.7 million, or 6%. Although the volume of the consumer loan portfolio
increased in average, its yield declined as a result of new loans originated at low rates
due to competitive pressures and risk-based pricing models which lowered the interest
spread charged on certain loans. Also, the flattened yield curve has affected the ability
to raise interest rates on mortgage loans originated. This unfavorable variance in the
consumer and retail banking business was partially offset by higher net interest income
derived from the commercial banking business, which experienced a $10.7 million, or 14%,
growth. This increase in commercial banking net interest income was primarily the result of
a greater average volume of commercial loans, coupled with a higher yield. A substantial
portion of Banco Popular de Puerto Ricos commercial portfolio has adjustable or floating
rate characteristics, thus was favorably impacted by the higher short-term interest rates
experienced in 2005 and 2006. The net interest margin in Banco Popular de Puerto Ricos
reportable segment was negatively impacted by the higher cost of funding in the rising rate
scenario. |
|
|
|
|
Higher provision for loan losses by $9.7 million, or 41%, primarily associated with
growth in the commercial loan portfolio, higher non-performing loans,
mainly commercial and mortgage, and
higher net charge-offs, mostly in the consumer and lease financing portfolios. The
allowance for loans losses to loans held-in-portfolio for the Banco Popular de Puerto Rico
reportable segment was 2.01% at June 30, 2006, compared with 2.17% at June 30, 2005 and
1.99% at December 31, 2005. The provision for loan losses represented 139% of net
charge-offs for the second quarter of 2006, compared with 128% of net charge-offs in the
same period of 2005. The increase in provision levels for 2006 also considered probable
deterioration in the portfolio in P.R. due to the uncertainty in the local economy
associated with the governments fiscal crisis. |
|
|
|
|
Non-interest income declined by $21.4 million, or 17%, mainly due to lower mortgage
banking revenues from the sale of loans and mortgage-backed securities in the secondary
markets and lower gains on the sale |
71
|
|
|
of real estate properties. The unfavorable variances
were partially offset by higher credit card fees and discounts, debit card fees, and
insurance fees. |
|
|
|
|
Operating expenses decreased by $3.1 million, or 2%, primarily associated to lower
business promotion expenses. Personnel costs declined slightly. FTEs were 6,358 at June 30,
2006 compared with 6,470 at June 30, 2005. Populars expense management control efforts in
place during the first six-months of 2006 are being effective and management is committed
to continue fostering that initiative. |
|
|
|
|
Lower income taxes by $5.9 million, or 19%, primarily due to lower pretax earnings and
an increase in exempt interest income net of the disallowance of expenses attributed to
such exempt income. In addition, income tax expense decreased due to a reversal of certain
tax positions upon the completion during the second quarter of 2006 of certain Puerto Rico
tax audits. This was partially offset by an increase in the Puerto Rico statutory income
tax rate from 39% to 41.5% on regular corporations and 43.5% on banks. |
Net income for the six months ended June 30, 2006 totaled $190.4 million, a decrease of $12.6
million, or 6%, compared with the same period in the previous year. These results reflected:
|
|
|
higher net interest income by $9.1 million, or 2%; |
|
|
|
|
higher provision for loan losses by $8.1 million, or 16%; |
|
|
|
|
lower non-interest income by $0.5 million; |
|
|
|
|
higher operating expenses by $1.2 million, or less than 1%; |
|
|
|
|
lower cumulative effect of accounting change of $3.2 million; and |
|
|
|
|
higher income tax expense by $8.7 million. |
Banco Popular North America
For the quarter ended June 30, 2006, net income for the reportable segment of Banco Popular North
America totaled $22.9 million, an increase of $2.8 million, or 14%, compared with the financial
results for the second quarter of 2005. The main factors that contributed to this quarterly
variance included:
|
|
|
Net interest income grew by $3.7 million, or 4%, mostly due to an increase in the volume
of earning assets, primarily commercial loans. Earning assets growth was funded primarily
through time deposits, including retail certificates of deposits attracted by deposit
gathering campaigns at attractive rates, and brokered certificates of deposits, and
short-term borrowings. |
|
|
|
|
Provision for loan losses increased by $3.8 million, or 54%, primarily due to growth in
the commercial loan portfolio and higher net charge-offs in the consumer and lease
financing portfolios, partially offset by lower net charge-offs in commercial loans. |
|
|
|
|
Higher non-interest income by $0.9 million, or 3%, which was mainly due to higher
service charges on deposit accounts, mainly commercial account analyses fees, and higher
gains on the sale of SBA loans, partially offset by lower service fees as a result of lower
check cashing and money transfer fees due to the sale of PCE operations. |
|
|
|
|
Lower operating expenses by $2.9 million, or 4%, mainly due to the sale of PCE
operations, partially offset by higher expenses in business promotion, net occupancy and
professional fees. The latter included higher costs associated with the lending business,
such as appraisals and collection services, and computer service and processing fees. |
|
|
|
|
Higher income taxes by $0.9 million, or 8%, were mainly due to higher taxable income. |
Net income for the six months ended June 30, 2006 totaled $45.5 million, an increase of $5.5
million, or 14%, compared with the same period in the previous year. These results reflected:
|
|
|
higher net interest income by $8.1 million, or 5%; |
|
|
|
|
higher provision for loan losses by $5.9 million, or 42%; |
|
|
|
|
lower non-interest income by $2.4 million, or 4%; |
|
|
|
|
lower operating expenses by $7.3 million, or 5%; and |
|
|
|
|
higher income tax expense by $1.8 million, or 7%. |
72
Popular Financial Holdings
PFHs net loss for the quarter ended June 30, 2006, totaled $19.2 million, compared with a net
income of $5.7 million for the second quarter of 2005. Factors that contributed to the variance in
these financial results included:
|
|
|
Net interest income increased by $6.2 million, or 12%. This variance includes net
interest income from E-LOAN, primarily derived from the auto loan portfolio, and favorable
impact resulting from swap contracts used to economically hedge the cost of short-term
financing which have helped offset the impact of net interest margins compressing. On the
other hand, profit margins in the mortgage lending segment continued to tighten in 2006 as
short-term rates continued to rise while the rates on the mortgage loans originated
increased at a lesser rate. Also, the average cost of on-balance sheet securitizations rose
for the quarter ended June 30, 2006. This unfavorable variance due to a lower net interest
margin was partially offset by higher average volume of earning assets, primarily related
to the auto loan portfolio of E-LOAN. |
|
|
|
|
The provision for loan losses increased by $3.6 million, or 19%, primarily due to higher
net charge-offs and non-performing assets in the mortgage and consumer loan portfolios. |
|
|
|
|
Higher non-interest income by $0.8 million was mainly due to higher gains on the sale of
mortgage loans due to E-LOAN. This was partially offset by lower gains derived from
securitization deals since PFH did not execute any off-balance sheet securitizations in the
second quarter of 2006, compared with two in the same quarter of 2005. Also, there were
higher write-downs in the valuation of interest-only strips in the quarter ended June 30,
2006 as explained in the Non-Interest Income section of this MD&A. |
|
|
|
|
Operating expenses rose $41.5 million, mainly as a result of $38.9 million in operating
expenses of E-LOAN, which did not exist in the second quarter of 2005. |
|
|
|
|
Income tax benefit in the quarter ended June 30, 2006 of $9.7 million resulting from the
quarters taxable loss, compared to income tax expense of $3.4 million in the second
quarter of 2005. |
Net loss for the six months ended June 30, 2006 totaled $27.0 million, compared with a net income
of $16.2 million for the same period in the previous year. These results reflected:
|
|
|
lower net interest income by $2.4 million, or 2%; |
|
|
|
|
higher provision for loan losses by $7.8 million, or 25%; |
|
|
|
|
higher non-interest income by $38.8 million; |
|
|
|
|
higher operating expenses by $96.0 million, which included an unfavorable impact of the
change in fiscal year in the PFH reportable segment amounting to $6.2 million; and |
|
|
|
|
income tax benefit of $14.5 million in 2006, compared with income tax expense of $9.7
million in 2005. |
Mortgage banking profit margins have lowered as a result of interest rates rising faster than the
coupons on newly originated mortgage loans. The spreads between funding costs and loan coupons have
narrowed. Also, the origination market in the U.S. has begun to stabilize after a multiyear boom.
The non-prime mortgage industry continues to pose challenges for 2006. Over the next few months
management will continue reengineering its mortgage business in the United States. Cost containment
and production efficiencies will be a major focus.
EVERTEC
EVERTECs net income for the quarter ended June 30, 2006 totaled $5.4 million, a decline of $1.8
million, compared with the results of the same quarter in the previous year.
The principal factors that contributed to the variance in results for 2006 when compared with the
second quarter of 2005 included:
|
|
|
Growth in non-interest income of $1.2 million, or 2%, was the result of higher
electronic transactions processing fees and other technology consulting fees, including
disaster recovery and network support, among other services. This was partially offset by a
lower remeasurement adjustment of the Corporations investment in CONTADO in the Dominican
Republic. This figure is impacted by the currency exchange rate of the Dominican peso at
the remeasurement date, and to the mix in the composition of monetary and non-monetary
balance sheet components of the entity being remeasured. For further information on this
subject, refer to Note 1 to the consolidated financial statements. |
|
|
|
|
Higher operating expenses by $2.5 million, primarily net occupancy expenses,
professional fees, personnel costs and equipment expenses. |
73
Net income for the six months ended June 30, 2006 totaled $10.5 million, compared with a net income
of $14.0 million for the same period in the previous year. These results reflected:
|
|
|
higher non-interest income by $1.4 million, or 1%; and |
|
|
|
|
higher operating expenses by $4.1 million. |
FINANCIAL CONDITION
Refer to the consolidated financial statements included in this report for the Corporations
consolidated statements of condition and to Table A for financial highlights on major line items of
the statement of condition.
A breakdown of the Corporations loan portfolio, the principal category of earning assets, is
presented in Table E.
TABLE E
Loans Ending Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
June 30, 2006 |
|
|
June 30, |
|
December 31, |
|
vs. |
|
June 30, |
|
vs. |
(In thousands) |
|
2006 |
|
2005 |
|
December 31, 2005 |
|
2005 |
|
June 30, 2005 |
|
Commercial * |
|
$ |
13,696,562 |
|
|
$ |
12,757,886 |
|
|
$ |
938,676 |
|
|
$ |
11,899,551 |
|
|
$ |
1,797,011 |
|
Lease financing |
|
|
1,294,966 |
|
|
|
1,308,091 |
|
|
|
(13,125 |
) |
|
|
1,317,561 |
|
|
|
(22,595 |
) |
Mortgage * |
|
|
12,209,940 |
|
|
|
12,872,452 |
|
|
|
(662,512 |
) |
|
|
11,569,040 |
|
|
|
640,900 |
|
Consumer * |
|
|
5,015,164 |
|
|
|
4,771,778 |
|
|
|
243,386 |
|
|
|
4,363,637 |
|
|
|
651,527 |
|
|
Total |
|
$ |
32,216,632 |
|
|
$ |
31,710,207 |
|
|
$ |
506,425 |
|
|
$ |
29,149,789 |
|
|
$ |
3,066,843 |
|
|
|
|
|
* |
|
Includes loans held-for-sale |
Commercial
loan growth since December 31, 2005 was the reflect of continued success of sales efforts, primarily towards new credit lines on the corporate,
construction and small business sectors. Also, there has been higher volume of funds drawn under
existing commercial lines of credit and significant progress in construction phases at various
large construction projects.
As shown in Table F, consumer loans also increased from the end of 2005 to June 30, 2006 in all
loan categories. The increase in auto loans was derived from the auto loan financing subsidiary in
BPPRs reportable segment, fostered by marketing campaigns, and from auto loans originated by PFH,
through its subsidiary E-LOAN. This increase in personal loans was associated to favorable
customer response to marketing efforts, primarily in BPPR, and competitive and tiered pricing.
Credit cards also increased mostly as a result of higher sales volume and increased number of
credit card holders attracted from novel campaigns, offers of no annual membership fees, tiered
pricing and new products directed to increase Populars credit card market share in Puerto Rico.
TABLE F
Breakdown of Consumer Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
June 30, 2006 |
|
|
June 30, |
|
December 31, |
|
vs. |
|
June 30, |
|
vs. |
(In thousands) |
|
2006 |
|
2005 |
|
December 31, 2005 |
|
2005 |
|
June 30, 2005 |
|
Personal |
|
$ |
2,169,673 |
|
|
$ |
2,053,175 |
|
|
$ |
116,498 |
|
|
$ |
1,956,288 |
|
|
$ |
213,385 |
|
Auto |
|
|
1,681,556 |
|
|
|
1,598,634 |
|
|
|
82,922 |
|
|
|
1,362,098 |
|
|
|
319,458 |
|
Credit cards |
|
|
1,010,340 |
|
|
|
968,550 |
|
|
|
41,790 |
|
|
|
896,273 |
|
|
|
114,067 |
|
Other |
|
|
153,595 |
|
|
|
151,419 |
|
|
|
2,176 |
|
|
|
148,978 |
|
|
|
4,617 |
|
|
Total |
|
$ |
5,015,164 |
|
|
$ |
4,771,778 |
|
|
$ |
243,386 |
|
|
$ |
4,363,637 |
|
|
$ |
651,527 |
|
|
Partially offsetting the increase in commercial and consumer loans from the end of 2005 to
June 30, 2006 was a decrease in mortgage loans. This decline was mostly associated to the pooling,
during the first quarter of 2006, of
74
$464 million in conforming mortgage loans at BPPR into Fannie Mae mortgage-backed securities that were
subsequently sold to investors, and to the sale of mortgage loans in two off-balance sheet
securitization transactions performed by PFH in the first quarter involving approximately $652
million in mortgage loans. The Corporation has implemented strategic changes at PFH in 2006
primarily reducing non-prime mortgage loan acquisitions and increasing origination and sale of
prime mortgage loans as a result of the acquisition of E-LOAN.
Similar factors influenced the increases (decreases) in the various loan categories as of June 30,
2006 when compared to June 30, 2005. E-LOAN, acquired in the fourth quarter of 2005, had $464
million and $245 million in loans at June 30, 2006 and December 31, 2005, respectively, mainly auto
loans. The increase in mortgage loans from June 30, 2005 to the same date in 2006 was the result of
PFHs mortgage portfolio retained in the Corporations books as some of the securitization
transactions done in 2005 and 2006 were structured as on-balance sheet securitizations (secured
borrowings).
At June 30, 2006 and December 31, 2005, investment securities, including trading and other
securities, totaled $12.0 billion and $12.7 billion, respectively, compared with $12.8 billion at
June 30, 2005. Notes 5 and 6 to the consolidated financial statements provide additional
information on the Corporations available-for-sale and held-to-maturity investment portfolios.
Commencing in the quarter ended March 31, 2006, the interest-only strips derived from newly-issued
PFHs off-balance sheet securitizations are being accounted for as trading securities. As such, any
valuation adjustment is being recorded as part of trading account profit (loss) in the consolidated
statements of income. Interest-only strips accounted for as trading securities from PFH
securitizations approximated $24 million at June 30, 2006.
The increase in goodwill and other intangible assets at June 30, 2006, compared with the same date
in the previous year, was mostly related with the acquisition of E-LOAN during the last quarter of
2005. Refer to Note 9 to the consolidated financial statements for further details on the
composition of intangible assets.
Table G provides a breakdown of the Other Assets caption presented in the consolidated statements
of condition. The principal variances from December 31, 2005 to June 30, 2006 were:
|
|
|
Increase in net deferred tax assets, primarily associated with higher unrealized losses
in the investment securities available-for-sale portfolio; |
|
|
|
|
Increase in derivative assets, primarily related to index options purchased by the
Corporation from major broker-dealer companies, which returns are tied to stock market
indexes. These were principally associated with customers deposits offered by the
Corporation whose returns are also tied to the performance of the index. Also, the increase
in derivative assets was associated with greater volume of interest rate swaps offered to
clients as an intermediary, and swaps contracted by the Corporation to economically hedge
certain short and long-term borrowings. Refer to Note 8 to the consolidated financial
statements for a detail of the Corporations derivatives as of June 30, 2006 and December
31, 2005; |
|
|
|
|
Increase in servicing rights, principally related to securitization transactions
performed by PFH after their fiscal year end 2005, which contributed with approximately $28
million in servicing rights at issuance date. Also, during the quarter ended March 31,
2006, PFH acquired approximately $7 million in rights to service $931 million in mortgage
loans from a third-party; |
|
|
|
|
Increase in securitization advances and related assets was associated with the
securitizations performed by PFH; |
|
|
|
|
Increase in other assets includes a dividend receivable from TelPRI for approximately
$11 million and other miscellaneous accounts receivables. |
75
TABLE G
Breakdown of Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Variance |
|
|
June 30, |
|
December 31, |
|
vs. December 31, |
|
June 30, |
|
June 30, 2006 |
(In thousands) |
|
2006 |
|
2005 |
|
2005 |
|
2005 |
|
vs. June 30, 2005 |
|
Net deferred tax assets |
|
$ |
376,726 |
|
|
$ |
305,723 |
|
|
$ |
71,003 |
|
|
$ |
237,109 |
|
|
$ |
139,617 |
|
Securitization advances and related assets |
|
|
251,482 |
|
|
|
236,719 |
|
|
|
14,763 |
|
|
|
222,406 |
|
|
|
29,076 |
|
Bank-owned life insurance program |
|
|
201,635 |
|
|
|
197,202 |
|
|
|
4,433 |
|
|
|
158,421 |
|
|
|
43,214 |
|
Prepaid expenses |
|
|
176,003 |
|
|
|
153,395 |
|
|
|
22,608 |
|
|
|
159,448 |
|
|
|
16,555 |
|
Servicing rights |
|
|
159,486 |
|
|
|
141,489 |
|
|
|
17,997 |
|
|
|
92,075 |
|
|
|
67,411 |
|
Derivative assets |
|
|
79,925 |
|
|
|
50,246 |
|
|
|
29,679 |
|
|
|
30,518 |
|
|
|
49,407 |
|
Investments under the equity method |
|
|
63,550 |
|
|
|
62,745 |
|
|
|
805 |
|
|
|
59,117 |
|
|
|
4,433 |
|
Others |
|
|
206,875 |
|
|
|
178,281 |
|
|
|
28,594 |
|
|
|
162,057 |
|
|
|
44,818 |
|
|
Total |
|
$ |
1,515,682 |
|
|
$ |
1,325,800 |
|
|
$ |
189,882 |
|
|
$ |
1,121,151 |
|
|
$ |
394,531 |
|
|
The variance in other assets from June 30, 2005 to the same date in 2006 was mainly the
result of the following:
|
|
|
Increase in net deferred tax assets associated with higher unrealized losses in the
investment securities available-for-sale portfolio and the deferred tax assets recorded
from the E-LOAN acquisition; |
|
|
|
|
Increase in servicing rights, primarily the result of securitization transactions
completed by PFH in 2005 and 2006; |
|
|
|
|
Rise in bank-owned life insurance was related to additional funding during 2005
permitted as a result of an increased salary base resulting from the acquired banking
institutions in 2004 and beginning of 2005; |
|
|
|
|
Increase in derivative assets was the result of higher volume of index options and
interest rate swaps as described in the variance above. Also, as part of the PCE sale
transaction in the fourth quarter of 2005, the Corporation obtained a subordinated
convertible note from ACE, the purchaser, in the amount of $19.4 million. Since the note is
convertible into ACEs common shares, the related embedded derivative was separated and
accounted for at fair market value. As of June 30, 2006, the fair market value of this
embedded derivative was approximately $14 million. |
|
|
|
|
Increase in securitization advances and related assets was associated with PFH
operations; and |
|
|
|
|
Increase in other assets includes the dividend receivable from TelPRI and other miscellaneous accounts receivables. |
Popular has accomplished deposit growth despite intense competitive pressures. A breakdown of the
Corporations deposits at period-end is included in Table H:
TABLE H
Deposits ending balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
June 30, |
|
December 31, |
|
June 30, 2006 vs. |
|
June 30, |
|
June 30, 2006 vs. |
(In thousands) |
|
2006 |
|
2005 |
|
December 31, 2005 |
|
2005 |
|
June 30, 2005 |
|
Demand deposits * |
|
$ |
4,940,362 |
|
|
$ |
4,415,972 |
|
|
$ |
524,390 |
|
|
$ |
4,932,560 |
|
|
$ |
7,802 |
|
Savings, NOW and
money market deposits |
|
|
8,644,295 |
|
|
|
8,800,047 |
|
|
|
(155,752 |
) |
|
|
9,142,186 |
|
|
|
(497,891 |
) |
Time deposits |
|
|
9,864,863 |
|
|
|
9,421,986 |
|
|
|
442,877 |
|
|
|
8,944,753 |
|
|
|
920,110 |
|
|
Total |
|
$ |
23,449,520 |
|
|
$ |
22,638,005 |
|
|
$ |
811,515 |
|
|
$ |
23,019,499 |
|
|
$ |
430,021 |
|
|
|
|
|
* |
|
Includes interest and non-interest bearing demand deposits. |
|
The increase in time deposits from June 30, 2005 was related to IRA deposits, interest rate
campaigns for retail certificates of deposit, and new products launched. Brokered certificates of
deposit, included in the category of time deposits, totaled $1.1 billion at June 30, 2006, compared
with $879 million at June 30, 2005 and $1.2 billion at December 31, 2005.
76
The decline in savings, NOW and money market deposits from December 31, 2005 and June 30, 2005 to
June 30, 2006 was in part due to a shift to time deposits, resulting from higher interest rates
offered in time deposits from competitive campaigns.
The increase in demand deposits from December 31, 2005 to June 30, 2006 was primarily associated
with commercial checking accounts and deposits in trust. The aggregate amount of overdrafts in
demand deposit accounts that were reclassified to loans was $96 million at June 30, 2006, $119
million as of December 31, 2005 and $63 million as of June 30, 2005.
At June 30, 2006, borrowed funds totaled $20.8 billion, compared with $21.3 billion at December 31,
2005 and $19.1 billion at June 30, 2005. Refer to Note 10 to the consolidated financial statements
for the composition of the Corporations borrowings as of such dates. The Federal Home Loan Banks
(FHLB) provide funding to the Corporations banking subsidiaries through advances. At June 30, 2006
and December 31, 2005, the Corporation had short-term and long-term borrowings under these credit
facilities totaling $1.3 billion and $1.6 billion, respectively. At June 30, 2005, these borrowings
totaled $1.9 billion. Such advances are collateralized by securities and mortgage loans, do not
have restrictive covenants and in the most part do not have any callable features.
Among the principal borrowing activities of the Corporation that were effected during the six
months ended June 30, 2006 were:
|
|
|
In April 2006, the Corporation issued $450 million in medium-term notes maturing in
2009. Of the total amount issued, $250 million bear interest at a fixed rate of 5.65% and
$200 million bear interest at floating rates tied to the 3-month LIBOR plus a spread of 40
basis points, which reset quarterly. The Corporation simultaneously entered into an
interest swap contract to convert the floating rate notes to fixed rate notes in the rising
interest rate scenario. Under the swap arrangement, the Corporation pays a fixed rate equal
to 5.58%. The cash inflows were used to substitute short-term borrowings and finance
operations. |
|
|
|
|
The Corporation executed two on-balance sheet securitizations of mortgage loans. These
transactions are further described in the Off-Balance Sheet Activities section of this
MD&A. |
Other liabilities declined from December 31, 2005 to June 30, 2006 as reflected in the consolidated
statements of condition included in the consolidated financial statements. As explained in the 2005
Annual Report and the Overview section of this MD&A, in 2005, certain of the Corporations
non-banking subsidiaries continued to have a fiscal year ended on November 30, 2005. In preparing
the consolidated statement of condition as of December 31, 2005, management had to reverse an
intercompany elimination in order to reinstall loans outstanding to third parties. The impact of
this reversal resulted in an increase of $429 million in the caption of other liabilities at
year-end 2005. This intercompany transaction was not outstanding at June 30, 2006. As explained in
the Overview section of this MD&A, all of the Corporations subsidiaries have aligned their closing
periods to that of the Corporation; as such, timing differences no longer exist.
Refer to the consolidated statements of condition and of stockholders equity included in this Form
10-Q for information on the composition of stockholders equity at June 30, 2006, December 31, 2005
and June 30, 2005. Also, the disclosures of accumulated other comprehensive loss, an integral
component of stockholders equity, are included in the consolidated statements of comprehensive
income. The increase in stockholders equity since June 30, 2005 was due in part to earnings
retention and from approximately $216 million in capital derived from the issuance of new shares of
common stock under the subscription rights offering that took effect in the fourth quarter of 2005.
These favorable variances were partially offset by a higher net unrealized loss position in the
valuation of the available-for-sale securities portfolio by $322 million.
The Corporation offers a dividend reinvestment and stock purchase plan for stockholders that allows
them to reinvest dividends in shares of common stock at a 5% discount from the average market price
at the time of the issuance, as well as purchase shares of common stock directly from the
Corporation by making optional cash payments.
The Corporation continues to exceed the well-capitalized guidelines under the federal banking
regulations. Ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1
leverage at June 30, 2006 and 2005, and December 31, 2005 are presented on Table I. At June 30,
2006, December 31, 2005 and June 30, 2005, BPPR, BPNA and Banco Popular, National Association were
all well-capitalized.
77
The average tangible equity amounted to $2.9 billion at June 30, 2006, compared to $2.7 billion at
December 31, 2005 and $2.6 billion at June 30, 2005. Total tangible equity was $2.7 billion at June 30, 2006,
December 31, 2005, and at June 30, 2005. The average tangible equity to average tangible assets
ratio was 6.10% at June 30, 2006, and 5.86% at December 31, 2005 and June 30, 2005.
TABLE I
Capital Adequacy Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
2005 |
|
Risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital |
|
$ |
3,722,664 |
|
|
$ |
3,540,270 |
|
|
$ |
3,422,642 |
|
Supplementary (Tier II) capital |
|
|
415,032 |
|
|
|
403,355 |
|
|
|
383,568 |
|
|
Total capital |
|
$ |
4,137,696 |
|
|
$ |
3,943,625 |
|
|
$ |
3,806,210 |
|
|
Risk-weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items |
|
$ |
30,665,611 |
|
|
$ |
29,557,342 |
|
|
$ |
27,815,458 |
|
Off-balance sheet items |
|
|
2,401,700 |
|
|
|
2,141,922 |
|
|
|
1,998,119 |
|
|
Total risk-weighted assets |
|
$ |
33,067,311 |
|
|
$ |
31,699,264 |
|
|
$ |
29,813,577 |
|
|
Average assets |
|
$ |
47,676,953 |
|
|
$ |
47,415,254 |
|
|
$ |
44,899,811 |
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (minimum required 4.00%) |
|
|
11.26 |
% |
|
|
11.17 |
% |
|
|
11.48 |
% |
Total capital (minimum required 8.00%) |
|
|
12.51 |
% |
|
|
12.44 |
% |
|
|
12.77 |
% |
Leverage ratio * |
|
|
7.81 |
% |
|
|
7.47 |
% |
|
|
7.62 |
% |
|
|
|
|
* |
|
All banks are required to have a minimum Tier I leverage ratio of 3% or 4% of adjusted quarterly
average assets, depending on the banks classification. |
At June 30, 2006, the capital adequacy minimum requirement for Popular, Inc. was (in thousands):
Total Capital of $2,645,385, Tier I Capital of $1,322,692,
and a Tier I Leverage of $1,430,309 based on a 3% ratio or $1,907,078 based on a 4% ratio
according to the Banks classification.
OFF-BALANCE SHEET AND ON-BALANCE SHEET SECURITIZATION ACTIVITIES
In connection with PFHs securitization transactions, the Corporation is party to pooling and
servicing agreements pursuant to each of which the Corporation transfers (on a servicing retained
basis) certain of the Corporations loans to a special purpose entity, which in turn transfers the
loans to a securitization trust fund that has elected to be treated as one or more Real Estate
Mortgage Investment Conduits (REMICs). The two-step transfer of loans by the Corporation to a
securitization trust fund, in which the Company surrenders control over the loans, is accounted for
as a sale to the extent that consideration other than beneficial interests is received in exchange.
SFAS No. 140 Accounting Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities sets forth the criteria that must be met for control over transferred assets to be
considered to have been surrendered. When the Corporation transfers financial assets and the
transfer fails any one of the SFAS No. 140 criteria the Corporation is then prevented from
derecognizing the transferred financial assets and the transaction is accounted for as a secured
borrowing.
During 2006, the Corporation has conducted 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 Corporations
assets. Approximately, $652 million in adjustable 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 mortgage servicing rights of $12 million and interest-only strips of $23
million. Key economic assumptions used in measuring the retained interests at the date of these
securitizations were: discount rate of 15% for IOs and 14% for MSRs, average conditional prepayment
rates of 35% in adjustable rate loans and 28% in fixed-rate loans; and loss rates ranging from 1.7%
to 2.7%.
The trusts created as part of off-balance sheet mortgage loans securitizations conducted prior to
2001, in 2005 and in 2006, are not consolidated in the Corporations financial statements since the
transactions qualified for sale
78
accounting based on the provisions of SFAS No. 140. The investors
and the securitization trusts have no recourse to the Corporations assets or revenues. The
Corporations creditors have no recourse to any assets or revenues of the special purpose entity, or the securitization trust funds. At June 30, 2006 and 2005, these trusts held
approximately $2.4 billion and $1.4 billion, respectively, in assets in the form of mortgage loans.
Their liabilities in the form of debt principal due to investors approximated $2.3 billion and $1.4
billion at June 30, 2006 and 2005, respectively. The Corporation retained servicing
responsibilities and certain subordinated interests in these securitizations in the form of
interest-only strips. Their value is subject to credit, prepayment and interest rate risks on the
transferred financial assets. The servicing rights retained by the Corporation are recorded in the
statements of condition at the lower of cost or market value, while the interest-only strips are
recorded at fair value.
In the securitization transactions accounted for as secured borrowings (on-balance sheet
securitizations) under the SFAS No. 140 criteria, the loans transferred are included on the
balance sheet as loans pledged as collateral for secured borrowings. The proceeds from the sale of
the securities to investors are included on the balance sheet as secured borrowings. During 2006,
the Corporation has completed two on-balance sheet securitizations consisting of approximately $898
million in adjustable and fixed-rate loans. As part of these transactions, the Corporation
recognized mortgage servicing rights of $16 million. Key economic assumptions used in measuring the
servicing rights at the date of the securitizations were: discount rate of 14% to 16%, average
conditional prepayment rates of 35% in adjustable rate loans and 28% in fixed-rate loans; and loss
rates ranging from 1.5% to 2.7%.
As of June 30, 2006, interest-only strips and mortgage servicing rights related to the
securitization transactions performed by PFH amounted to $72 million and $88 million, respectively.
As previously explained in the Non-Interest Income section of this MD&A, during the six-months
ended June 30, 2006, the Corporation recorded certain write-downs in the value of interest-only
strips classified as available-for-sale securities since their decline in fair value was considered
other-than-temporary.
Refer to Note 7 to the consolidated financial statements in this Form 10-Q for further information
on these securitizations transactions and the related retained beneficial interests.
79
\
CREDIT RISK MANAGEMENT AND LOAN QUALITY
Table J summarizes the movement in the allowance for loan losses and presents several loan loss
statistics for the quarters and six months ended June 30, 2006 and 2005.
TABLE J
Allowance for Loan Losses and Selected Loan Losses Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six months ended June 30, |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
Variance |
|
2006 |
|
2005 |
|
Variance |
|
Balance at beginning of period |
|
$ |
468,321 |
|
|
$ |
448,222 |
|
|
$ |
20,099 |
|
|
$ |
461,707 |
|
|
$ |
437,081 |
|
|
$ |
24,626 |
|
Allowance purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,685 |
|
|
|
(3,685 |
) |
Provision for loan losses |
|
|
67,096 |
|
|
|
49,936 |
|
|
|
17,160 |
|
|
|
116,043 |
|
|
|
94,272 |
|
|
|
21,771 |
|
Impact of change in reporting period * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,510 |
|
|
|
1,586 |
|
|
|
924 |
|
|
|
|
|
535,417 |
|
|
|
498,158 |
|
|
|
37,259 |
|
|
|
580,260 |
|
|
|
536,624 |
|
|
|
43,636 |
|
|
Losses charged to the allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
12,972 |
|
|
|
18,041 |
|
|
|
(5,069 |
) |
|
|
25,425 |
|
|
|
33,700 |
|
|
|
(8,275 |
) |
Lease financing |
|
|
7,007 |
|
|
|
4,094 |
|
|
|
2,913 |
|
|
|
12,023 |
|
|
|
9,217 |
|
|
|
2,806 |
|
Mortgage |
|
|
14,066 |
|
|
|
11,964 |
|
|
|
2,102 |
|
|
|
25,383 |
|
|
|
22,107 |
|
|
|
3,276 |
|
Consumer |
|
|
33,047 |
|
|
|
24,472 |
|
|
|
8,575 |
|
|
|
64,279 |
|
|
|
48,005 |
|
|
|
16,274 |
|
|
Subtotal |
|
|
67,092 |
|
|
|
58,571 |
|
|
|
8,521 |
|
|
|
127,110 |
|
|
|
113,029 |
|
|
|
14,081 |
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
4,369 |
|
|
|
7,379 |
|
|
|
(3,010 |
) |
|
|
8,728 |
|
|
|
13,122 |
|
|
|
(4,394 |
) |
Lease financing |
|
|
2,287 |
|
|
|
2,003 |
|
|
|
284 |
|
|
|
6,073 |
|
|
|
4,797 |
|
|
|
1,276 |
|
Mortgage |
|
|
295 |
|
|
|
288 |
|
|
|
7 |
|
|
|
426 |
|
|
|
421 |
|
|
|
5 |
|
Consumer |
|
|
8,539 |
|
|
|
7,697 |
|
|
|
842 |
|
|
|
15,438 |
|
|
|
15,019 |
|
|
|
419 |
|
|
Subtotal |
|
|
15,490 |
|
|
|
17,367 |
|
|
|
(1,877 |
) |
|
|
30,665 |
|
|
|
33,359 |
|
|
|
(2,694 |
) |
|
Net loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
8,603 |
|
|
|
10,662 |
|
|
|
(2,059 |
) |
|
|
16,697 |
|
|
|
20,578 |
|
|
|
(3,881 |
) |
Lease financing |
|
|
4,720 |
|
|
|
2,091 |
|
|
|
2,629 |
|
|
|
5,950 |
|
|
|
4,420 |
|
|
|
1,530 |
|
Mortgage |
|
|
13,771 |
|
|
|
11,676 |
|
|
|
2,095 |
|
|
|
24,957 |
|
|
|
21,686 |
|
|
|
3,271 |
|
Consumer |
|
|
24,508 |
|
|
|
16,775 |
|
|
|
7,733 |
|
|
|
48,841 |
|
|
|
32,986 |
|
|
|
15,855 |
|
|
Subtotal |
|
|
51,602 |
|
|
|
41,204 |
|
|
|
10,398 |
|
|
|
96,445 |
|
|
|
79,670 |
|
|
|
16,775 |
|
|
Balance at end of period |
|
$ |
483,815 |
|
|
$ |
456,954 |
|
|
$ |
26,861 |
|
|
$ |
483,815 |
|
|
$ |
456,954 |
|
|
$ |
26,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans
held-in-portfolio |
|
|
0.66 |
% |
|
|
0.59 |
% |
|
|
|
|
|
|
0.62 |
% |
|
|
0.57 |
% |
|
|
|
|
Provision to net charge-offs |
|
|
1.30 |
x |
|
|
1.21 |
x |
|
|
|
|
|
|
1.20 |
x |
|
|
1.18 |
x |
|
|
|
|
|
|
|
* |
|
Represents the net effect of provision for loan losses, less net charge-offs corresponding to
the impact of the change in fiscal period at certain subsidiaries (as described in the Overview
section and in the 2005 Annual Report). |
80
Also, Table K presents annualized net charge-offs to average loans by loan category for the
quarters and six months ended June 30, 2006 and 2005.
TABLE K
Annualized Net Charge-offs to Average Loans Held-in-Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
Six months ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Commercial |
|
|
0.26 |
% |
|
|
0.37 |
% |
|
|
0.25 |
% |
|
|
0.36 |
% |
Lease financing |
|
|
1.45 |
|
|
|
0.64 |
|
|
|
0.91 |
|
|
|
0.68 |
|
Mortgage |
|
|
0.48 |
|
|
|
0.43 |
|
|
|
0.42 |
|
|
|
0.39 |
|
Consumer |
|
|
2.00 |
|
|
|
1.57 |
|
|
|
2.01 |
|
|
|
1.57 |
|
|
|
|
|
0.66 |
% |
|
|
0.59 |
% |
|
|
0.62 |
% |
|
|
0.57 |
% |
|
The decline in commercial loans net charge-offs to average loans held-in-portfolio ratio was
mostly associated with portfolio growth and the mix of the commercial loan portfolio, which
includes a higher proportion of real estate secured loans. The improved credit quality trend was
also the result of the continuing identification and monitoring of potential problem loans.
The increase in lease financing net charge-offs to average loans held-in-portfolio for the quarter
ended June 30, 2006, compared with the same quarter in 2005, was the result of higher delinquencies
in Puerto Rico and increased charge-offs in the U.S. leasing subsidiary related to a particular
customer lending relationship.
Mortgage loans net charge-offs as a percentage of average mortgage loans held-in-portfolio
increased slightly. The increase in delinquency levels has been experienced in both the BPPR and
PFH reportable segments. Deteriorating economic conditions have impacted the mortgage delinquency
rates, primarily in Puerto Rico.
Consumer loans net charge-offs as a percentage of average consumer loans held-in-portfolio rose
primarily due to growth in the unsecured portfolio, mainly in credit cards and personal loans,
higher net charge-offs in the auto loan portfolio and deteriorating economic conditions which have
led to higher delinquencies, particularly in Puerto Rico businesses.
NON-PERFORMING ASSETS
A summary of non-performing assets, which include past-due loans that are no longer accruing
interest, renegotiated loans and real estate property acquired through foreclosure, is presented in
Table L, along with certain credit quality metrics. For a summary of the Corporations policy for
placing loans on non-accrual status, refer to the sections of Loans and Allowance for Loan Losses
included in Note 1 to the audited consolidated financial statements included in Popular, Inc.s
2005 Annual Report.
81
TABLE L
Non-Performing Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Variance |
|
|
|
|
|
|
|
|
|
$ Variance |
|
|
|
|
|
|
As a percentage |
|
|
|
|
|
As a percentage |
|
June 30, 2006 |
|
|
|
|
|
As a percentage |
|
June 30, 2006 |
|
|
June 30, |
|
of loans HIP |
|
December 31, |
|
of loans HIP |
|
vs. |
|
June 30, |
|
of loans HIP |
|
vs. |
(Dollars in thousands) |
|
2006 |
|
by category |
|
2005 |
|
by category |
|
December 31, 2005 |
|
2005 |
|
by category |
|
June 30, 2005 |
|
Commercial |
|
$ |
147,753 |
|
|
|
1.1 |
% |
|
$ |
133,746 |
|
|
|
1.1 |
% |
|
$ |
14,007 |
|
|
$ |
135,767 |
|
|
|
1.1 |
% |
|
$ |
11,986 |
|
Lease financing |
|
|
3,038 |
|
|
|
0.2 |
|
|
|
2,562 |
|
|
|
0.2 |
|
|
|
476 |
|
|
|
2,629 |
|
|
|
0.2 |
|
|
|
409 |
|
Mortgage |
|
|
409,689 |
|
|
|
3.5 |
|
|
|
371,885 |
|
|
|
3.0 |
|
|
|
37,804 |
|
|
|
376,712 |
|
|
|
3.4 |
|
|
|
32,977 |
|
Consumer |
|
|
37,823 |
|
|
|
0.8 |
|
|
|
39,316 |
|
|
|
0.8 |
|
|
|
(1,493 |
) |
|
|
27,595 |
|
|
|
0.6 |
|
|
|
10,228 |
|
|
Total
non-performing
loans |
|
|
598,303 |
|
|
|
1.9 |
% |
|
|
547,509 |
|
|
|
1.8 |
% |
|
|
50,794 |
|
|
|
542,703 |
|
|
|
1.9 |
% |
|
|
55,600 |
|
Other real estate |
|
|
83,658 |
|
|
|
|
|
|
|
79,008 |
|
|
|
|
|
|
|
4,650 |
|
|
|
68,671 |
|
|
|
|
|
|
|
14,987 |
|
|
Total
non-performing
assets |
|
$ |
681,961 |
|
|
|
|
|
|
$ |
626,517 |
|
|
|
|
|
|
$ |
55,444 |
|
|
$ |
611,374 |
|
|
|
|
|
|
$ |
70,587 |
|
|
Accruing loans past
due 90 days or more |
|
$ |
94,183 |
|
|
|
|
|
|
$ |
86,662 |
|
|
|
|
|
|
$ |
7,521 |
|
|
$ |
85,520 |
|
|
|
|
|
|
$ |
8,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets
to loans
held-in-portfolio |
|
|
2.16 |
% |
|
|
|
|
|
|
2.02 |
% |
|
|
|
|
|
|
|
|
|
|
2.13 |
% |
|
|
|
|
|
|
|
|
Non-performing assets
to total assets |
|
|
1.41 |
|
|
|
|
|
|
|
1.29 |
|
|
|
|
|
|
|
|
|
|
|
1.33 |
|
|
|
|
|
|
|
|
|
Allowance for loan
losses to loans
held-in-portfolio |
|
|
1.53 |
|
|
|
|
|
|
|
1.49 |
|
|
|
|
|
|
|
|
|
|
|
1.59 |
|
|
|
|
|
|
|
|
|
Allowance for loan
losses to
non-performing assets |
|
|
70.94 |
|
|
|
|
|
|
|
73.69 |
|
|
|
|
|
|
|
|
|
|
|
74.74 |
|
|
|
|
|
|
|
|
|
Allowance for loan
losses to
non-performing loans |
|
|
80.86 |
|
|
|
|
|
|
|
84.33 |
|
|
|
|
|
|
|
|
|
|
|
84.20 |
|
|
|
|
|
|
|
|
|
|
The increase in the ratio of allowance for loan losses to loans held-in-portfolio as of June
30, 2006 compared with December 31, 2005 was influenced in part by the growth in non-performing
assets, which has led management to increase the reserve levels. The increase in non-performing
assets since December 31, 2005 was primarily in mortgage loans due to higher delinquencies in
Puerto Rico resulting from deteriorating economic conditions and also in the U.S. mainland
portfolio, primarily in the non-prime market. Also, non-performing commercial and construction
loans increased from December 31, 2005, led in part by the growth in the commercial loan portfolio.
Accruing loans past due 90 days or more are composed primarily of credit cards, FHA/VA and other
insured mortgage loans, and delinquent mortgage loans included in the Corporations financial
statements pursuant to the GNMAs buy-back option program. Under SFAS No. 140, servicers of loans
underlying Ginnie Mae mortgage-backed securities must report as their own assets defaulted loans
that they have the option to purchase, even when they elect not to exercise the option. Also,
accruing loans ninety days or more include residential conventional loans purchased from other
financial institutions that although delinquent, the Corporation has received timely payment from
the sellers / servicers, and in some instances have partial guarantees under recourse agreements.
The allowance for loan losses, which represents managements estimate of credit losses inherent in
the loan portfolio, is maintained at a sufficient level to provide for these estimated loan losses
based on evaluations of the risks in the loan portfolios. In evaluating the adequacy of the
allowance for loan losses, the Corporations management considers current economic conditions, loan
portfolio composition and risk characteristics, historical loss experience, results of periodic
credit reviews of individual loans, regulatory requirements and loan impairment measurement, among
other factors. The methodology used to establish the allowance for loan losses is based on SFAS No.
114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 5, Accounting for
Contingencies. Under SFAS No. 114, certain commercial loans are identified for evaluation on an
individual basis, and specific reserves are calculated based on impairment analyses. SFAS No. 5
provides for the recognition of a loss allowance for a group of homogeneous loans when it is
probable that a loss has been incurred and the amount can be reasonably estimated. As of June 30,
2006, there have been no significant changes in evaluation methods or assumptions from December 31,
2005 that had an effect on the Corporations methodology for assessing the adequacy of the
allowance for loan losses.
82
The Corporation considers a commercial loan to be impaired when interest and/or principal are past
due 90 days or more, or, when based on current information and events, it is probable that the
debtor will be unable to pay all amounts due according to the contractual terms of the loan
agreement. The Corporations recorded investment in impaired commercial loans and the related valuation allowance calculated under SFAS No. 114 at June 30, 2006, December
31, 2005 and June 30, 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
December 31, 2005 |
|
June 30, 2005 |
|
|
Recorded |
|
Valuation |
|
Recorded |
|
Valuation |
|
Recorded |
|
Valuation |
(In millions) |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
|
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance required |
|
$ |
68.6 |
|
|
$ |
21.3 |
|
|
$ |
69.6 |
|
|
$ |
20.4 |
|
|
$ |
84.0 |
|
|
$ |
24.8 |
|
No valuation allowance required |
|
|
58.9 |
|
|
|
|
|
|
|
46.3 |
|
|
|
|
|
|
|
49.6 |
|
|
|
|
|
|
Total impaired loans |
|
$ |
127.5 |
|
|
$ |
21.3 |
|
|
$ |
115.9 |
|
|
$ |
20.4 |
|
|
$ |
133.6 |
|
|
$ |
24.8 |
|
|
Average impaired loans during the second quarter of 2006 and 2005 were $122 million and $138
million, respectively. The Corporation recognized interest income on impaired loans of $0.7 million
and $1.4 million for the quarters ended June 30, 2006 and June 30, 2005, respectively, and $1.7
million and $2.1 million for the six months ended on those same dates, respectively.
In addition to the non-performing loans included in Table L, there were $32 million of loans at
June 30, 2006, which in managements opinion are currently subject to potential future
classification as non-performing, and are considered impaired under SFAS No. 114. At December 31,
2005 and June 30, 2005, these potential problem loans approximated $30 million and $44 million,
respectively.
Under the standard industry practice, closed-end consumer loans are not customarily placed on
non-accrual status prior to being charged-off. Excluding the closed-end consumer loans from
non-accruing at June 30, 2006, adjusted non-performing assets
would have been $644 million or 2.04%
of loans held-in-portfolio and the allowance to non-performing loans
ratio would have been 86.32%.
At December 31, 2005, adjusted non-performing assets would have been $587 million or 1.89% of loans
held-in-portfolio and the allowance to non-performing loans ratio would have been 90.85%. At June
30, 2005, adjusted non-performing assets would have been $584 million or 2.04% of loans
held-in-portfolio and the allowance to non-performing loans would have been 88.71%.
The Corporations management considers the allowance for loan losses to be at a level sufficient to
provide for estimated losses based on current economic conditions, the level of net loan losses,
the loan portfolio mix which includes a high proportion of real estate secured loans, and the
methodology established to evaluate the adequacy of the allowance for loan losses.
As explained in the 2005 Annual Report, the Corporation is exposed to geographical and government
risk. Popular, Inc. has diversified its geographical risk as a result of its growth strategy in
the United States and the Caribbean. Puerto Ricos share of the Corporations total loan portfolio
has decreased from 59% at the end of 1999 to approximately 45% at June 30, 2006. The Corporations
assets and revenue composition by geographical area and by business segment reporting is presented
in Note 19 to the consolidated financial statements.
Even though Puerto Ricos economy is closely integrated to that of the U.S. mainland and its
Government and many of its instrumentalities are investment-grade rated borrowers in the U.S.
capital markets, the current fiscal situation of the Commonwealths government (P.R. Government)
has led nationally recognized rating agencies to downgrade the credit rating of the P.R. Government
debt obligations. Refer to Part II Other Information, Item 1A. Risk Factors, included in this
Form 10-Q for further information on Puerto Ricos current economic condition and government debt
ratings.
After the approval in July 2006 of the P.R. Governments fiscal year 2006-2007 budget and the
adoption of a sales tax, the rating agencies removed the P.R. Government obligations from their
respective watch lists, thus reducing the possibility of an immediate additional downgrade. Both
rating agencies maintained the negative outlook for the Puerto Rico obligation bonds. Factors such
as the governments ability to implement meaningful steps to curb
83
operating expenditures, improve
managerial and budgetary controls, and eliminate the governments reliance on loans from the
Government Development Bank of Puerto Rico to cover budget deficits will be key determinants of
future rating stability and restoration of the long-term outlook.
At June 30, 2006, the Corporation had $790 million of credit facilities granted to or guaranteed by
the P.R. Government and its political subdivisions, of which $22.5 million are uncommitted lines of
credit. Of this total, $739 million in loans were outstanding at June 30, 2006. A substantial
portion of the credit exposure to the Government of Puerto Rico has an identified repayment stream,
which includes in some cases the good faith, credit and unlimited taxation of certain
municipalities, an assignment of basic property taxes and other revenues.
Furthermore, as of June 30, 2006, the Corporation had outstanding $188 million in Obligations of
Puerto Rico, States and Political Subdivisions as part of its investment portfolio (refer to Notes
5 and 6 to the consolidated financial statements). Of that total, $163 million is exposed to the
creditworthiness of the P.R. Government and its municipalities. Of
that portfolio, $56 million are
in the form of Puerto Rico Commonwealths Appropriation Bonds which are currently rated Ba1, one
notch below investment grade, by Moodys and BBB-, the lowest investment grade rating, by Standard
& Poors Rating Services (S&P), another nationally recognized credit rating agency. As of June
30, 2006, the Appropriation Bonds indicated above represented approximately $4.5 million in
unrealized losses in the Corporations available-for-sale investment securities portfolio. The
Corporation is closely monitoring the political and economic situation of the Island and evaluates
the portfolio for any declines in value that management may consider being other-than-temporary.
Management has the intent and ability to hold these investments for a reasonable period of time or
up to maturity for a forecasted recovery of fair value up to (or beyond) the cost of these
investments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial
instruments or other assets due to changes in interest rates, currency exchange rates or equity
prices. Interest rate risk, a component of market risk, is the exposure to adverse changes in net
interest income due to changes in interest rates. Management considers interest rate risk a
prominent market risk in terms of its potential impact on earnings. Interest rate risk may occur
for one or more reasons, such as the maturity or repricing of assets and liabilities at different
times, changes in short and long-term market interest rates, or the maturity of assets or
liabilities may be shortened or lengthened as interest rates change. Depending on the duration and
repricing characteristics of the Corporations assets, liabilities and off-balance sheet items,
changes in interest rates could either increase or decrease the level of net interest income.
The techniques for measuring the potential impact of the Corporations exposure to market risk from
changing interest rates, which were described in the 2005 Annual Report, have remained
substantially constant from the end of 2005. Due to the importance of critical assumptions in
measuring market risk, the risk models currently incorporate third-party developed data for
critical assumptions such as prepayment speeds on mortgage-related products and estimates on the
duration of the Corporations deposits. Potential interest rate scenarios continue to be modified
in response to economic developments and their impact on interest rate outlooks.
The Corporation maintains a formal asset and liability management process to quantify, monitor and
control interest rate risk and to assist management in maintaining stability in the net interest
margin under varying interest rate environments. Management employs a variety of measurement
techniques including the use of an earnings simulation model to analyze the net interest income
sensitivity to changing interest rates. Sensitivity analysis is calculated on a monthly basis using
a simulation model, which incorporates actual balance sheet figures detailed by maturity and
interest yields or costs, the expected balance sheet dynamics, reinvestments, and other
non-interest related data. Simulations are processed using various interest rate scenarios to
determine potential changes to the future earnings of the Corporation.
Computations of the prospective effects of hypothetical interest rate changes are based on many
assumptions, including relative levels of market interest rates, interest rate spreads, loan
prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual
results. Furthermore, the computations do not contemplate
84
actions that management could take to
respond to changes in interest rates. By their nature, these forward-looking computations are only
estimates and may be different from what actually may occur in the future.
Based on the results of the sensitivity analyses as of June 30, 2006, the Corporations net
interest income for the next twelve months is estimated to decrease by $24.3 million in a
hypothetical 200 basis points rising rate scenario, and the change for the same period, utilizing a
similar hypothetical decline in the rate scenario, is an estimated increase of $13.7 million. Both hypothetical rate scenarios consider the gradual change to be achieved during a
twelve-month period from the prevailing rates at June 30, 2006. These estimated changes are within
the policy guidelines established by the Board of Directors.
The Corporation maintains an overall interest rate risk management strategy that incorporates the
use of derivative instruments to minimize significant unplanned fluctuations in net interest income
that are caused by interest rate volatility. The Corporations involvement in derivative activities
since December 31, 2005 has not resulted in significant changes to its statement of condition or
results of operations for the period ended June 30, 2006. Refer to Note 8 to the consolidated
financial statements for further information on the Corporations derivative instruments.
The Corporation conducts business in certain Latin American markets through several of its
processing and information technology services and products subsidiaries. Also, it holds interests
in Consorcio de Tarjetas Dominicanas, S.A. (CONTADO) and Centro Financiero BHD, S.A (BHD) in the
Dominican Republic. Although not significant, some of these businesses are conducted in the
countrys foreign currency. The resulting foreign currency translation adjustment from operations
for which the functional currency is other than the U.S. dollar is reported in accumulated other
comprehensive loss in the consolidated statements of condition, except for highly inflationary
environments in which the effects are included in other operating income in the consolidated
statements of income, as described below.
At June 30, 2006, the Corporation had approximately $37 million in an unfavorable foreign currency
translation adjustment as part of accumulated other comprehensive loss, compared with $36 million
at December 31, 2005 and June 30, 2005. The Corporation has been monitoring the inflation levels in
the Dominican Republic to evaluate whether it still meets the highly inflationary economy test
prescribed by SFAS No. 52, Foreign Currency Translation. Such statement defines highly
inflationary as a cumulative inflation of approximately 100 percent or more over a 3-year period.
In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a
highly inflationary economy are remeasured as if the functional currency were the reporting
currency. Accordingly, since June 2004, the Corporations 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 six
months ended June 30, 2006. The Dominican pesos 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.
85
LIQUIDITY
Liquidity risk may arise whenever the Corporations ability to raise cash and the runoff of its
assets are substantially less than the runoff of its liabilities and its commitments to fund loans,
meet customer deposit withdrawals and other cash commitments. The Corporation has established
policies and procedures to assist it in remaining sufficiently liquid to meet all of its financial
obligations, finance expected future growth and maintain a reasonable safety margin for cash
commitments under both normal operating conditions and under unpredictable circumstances of
industry or market stress.
The Corporation has adopted contingency plans for raising financing under stress scenarios, where
important sources of funds that are usually fully available are temporarily not willing to lend to
the Corporation. These plans call for using alternate funding mechanisms such as the pledging or
securitization of certain asset classes, committed credit lines, and loan facilities put in place
with the FHLB and the FED. The Corporation has a substantial amount of assets available for raising
funds through non-traditional channels and is confident that it has adequate alternatives to rely
on under a scenario where some primary funding sources are temporarily unavailable.
The Corporations liquidity position is closely monitored on an ongoing basis. Management believes
that available sources of liquidity are adequate to meet the funding needs in the normal course of
business.
The composition of the Corporations financing to total assets at June 30, 2006 and December 31,
2005 follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% increase (decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
from |
|
% of total assets |
|
|
June 30, |
|
December 31, |
|
December 31, 2005 to |
|
June 30, |
|
December 31, |
(Dollars in millions) |
|
2006 |
|
2005 |
|
June 30, 2006 |
|
2006 |
|
2005 |
|
Non-interest bearing
deposits |
|
$ |
4,370 |
|
|
$ |
3,958 |
|
|
|
10.4 |
% |
|
|
9.0 |
% |
|
|
8.1 |
% |
Interest-bearing
core deposits |
|
|
13,936 |
|
|
|
13,699 |
|
|
|
1.7 |
|
|
|
28.8 |
|
|
|
28.2 |
|
Other
interest-bearing
deposits |
|
|
5,143 |
|
|
|
4,981 |
|
|
|
3.3 |
|
|
|
10.6 |
|
|
|
10.2 |
|
Federal funds and
repurchase
agreements
|
|
|
7,927 |
|
|
|
8,702 |
|
|
|
(8.9 |
) |
|
|
16.4 |
|
|
|
17.9 |
|
Other short-term
borrowings |
|
|
2,657 |
|
|
|
2,700 |
|
|
|
(1.6 |
) |
|
|
5.5 |
|
|
|
5.6 |
|
Notes payable |
|
|
10,199 |
|
|
|
9,894 |
|
|
|
3.1 |
|
|
|
21.1 |
|
|
|
20.3 |
|
Others |
|
|
705 |
|
|
|
1,241 |
|
|
|
(43.2 |
) |
|
|
1.5 |
|
|
|
2.6 |
|
Stockholders equity |
|
|
3,463 |
|
|
|
3,449 |
|
|
|
0.4 |
|
|
|
7.1 |
|
|
|
7.1 |
|
|
The Corporations core deposits, which consist of demand, savings, money markets, and time
deposits under $100 thousand, constituted 78% of total deposits at June 30, 2006. Certificates
of deposit with denominations of $100 thousand and over at June 30, 2006 represented 22% of
total deposits. Their distribution by maturity was as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
3 months or less |
|
$ |
1,927,338 |
|
3 to 6 months |
|
|
910,162 |
|
6 to 12 months |
|
|
854,061 |
|
Over 12 months |
|
|
1,451,338 |
|
|
|
|
$ |
5,142,899 |
|
|
As of June 30, 2006, there have been no significant changes in the Corporations funding
activities and strategy disclosed in the MD&A included in Popular, Inc.s 2005 Annual Report for
the year ended December 31, 2005. Also, there have been no significant changes in the Corporations
aggregate contractual obligations since the end of 2005. Refer to Note 11 to the consolidated
financial statements for the Corporations involvement in certain commitments at June 30, 2006.
86
Risks to Liquidity
Maintaining adequate credit ratings on Populars debt issues is an important factor for liquidity,
because credit ratings affect the ability of the Corporation to attract funds from various sources
on a cost competitive basis. Credit ratings by the major credit rating agencies are an important
component of the Corporations liquidity profile. Among other factors, the credit ratings are based
on the financial strength, credit quality and concentrations in the loan portfolio, the level and
volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance
sheet, the availability of a significant base of core retail and commercial deposits, and the
Corporations ability to access a broad array of wholesale funding sources. Changes in the credit
rating of the Corporation or any of its subsidiaries to a level below investment grade may affect
the Corporations ability to raise funds in the capital markets. The Corporations counterparties
are sensitive to the risk of a rating downgrade. In the event of a downgrade, it may be expected
that the cost of borrowing funds in the institutional market would increase. In addition, the
ability of the Corporation to raise new funds or renew maturing debt may be more difficult.
In early August 2005, Fitch, a nationally recognized credit rating agency, changed the
Corporations rating outlook from stable to negative. This rating outlook continued to be in
effect as of June 30, 2006. In the opinion of management, this does not necessarily imply that a
change in the actual rating of the Corporation is imminent, but does suggest that the agency has
identified financial and / or business trends, which if left unchanged, may result in a rating
change. The Corporation is also rated by two other nationally recognized credit rating agencies.
Management has not been advised by these agencies of any potential changes to either the
Corporations ratings or rating outlook. Following the announcement by the Corporation of the
acquisition of E-LOAN, Fitch expressed concerns indicating that, while the Corporations capital
profile is acceptable for current ratings, the level of tangible common equity would fall following
the E-LOAN acquisition as a result of the intangibles recorded, primarily goodwill and trademark.
Also, the outlook change considered the risk of greater exposure to the non-prime lending business.
Management evaluated such concerns and has taken actions to address them. As described in the 2005
Annual Report, in the fourth quarter of 2005, the Corporation issued additional shares of common
stock to strengthen the level of tangible equity capital. Furthermore, strategic changes have been
implemented at PFH that should have the effect of decreasing the growth of the non-prime loan
portfolio at the Corporation.
The Corporation and BPPRs debt ratings at June 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Popular, Inc. |
|
BPPR |
|
|
Short-term |
|
Long-term |
|
Short-term |
|
Long-term |
|
|
debt |
|
debt |
|
debt |
|
debt |
|
Fitch |
|
|
F-1 |
|
|
|
A |
|
|
|
F-1 |
|
|
|
A |
|
Moodys |
|
|
P-2 |
|
|
|
A3 |
|
|
|
P-1 |
|
|
|
A2 |
|
S&P |
|
|
A-2 |
|
|
BBB+ |
|
|
A-2 |
|
|
|
A- |
|
|
The ratings above are subject to revisions or withdrawal at any time by the assigning rating
agency. Each rating should be evaluated independently of any other rating.
Some of
the Corporations deposits and swap contracts are subject to rating triggers, contractual
provisions that accelerate the maturity of the underlying obligations in the case of a change in
rating. Therefore, the need for the Corporation to raise funding in the marketplace could increase
more than usual in the case of a rating downgrade. The amount of obligations subject to rating
triggers that could accelerate the maturity of the underlying
obligations was $22 million at June
30, 2006.
In the course of borrowing from institutional lenders, the Corporation has entered into contractual
agreements to maintain certain levels of debt, capital and asset quality, among other financial
covenants. If the Corporation were to fail to comply with those agreements, it may result in an
event of default. Such failure may accelerate the repayment of the related obligations. An event of
default could also affect the ability of the Corporation to raise new funds or renew maturing
borrowings. At June 30, 2006, the Corporation had $647 million in outstanding obligations subject
to covenants, including those which are subject to rating triggers and those outstanding under the
commercial paper program.
Management believes that there have been no significant changes in liquidity risk compared with the
disclosures in Popular, Inc.s 2005 Annual Report for the year ended December 31, 2005.
87
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Corporations management, with the participation of the Corporations Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Corporations disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the
Corporations Chief Executive Officer and Chief Financial Officer have concluded that, as of the
end of such period, the Corporations disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by the Corporation in the reports that it files or submits under the Exchange Act and
such information is accumulated and communicated to management as appropriate, to allow timely
decisions regarding required disclosures.
Internal Control Over Financial Reporting
There have been no changes in the Corporations internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
quarter ended on June 30, 2006 that have materially affected, or are reasonably likely to
materially affect, the Corporations internal control over financial reporting, except that, as
previously stated in Managements Report to Stockholders included in Popular, Inc.s Form 10-K
for the year ended December 31, 2005, the Corporation remediated the design of the control
associated with the presentation and classification of certain cash flows. The consolidated
statement of cash flows for the year ended December 31, 2005 was fairly stated, in all material
respects, in conformity with accounting principles generally accepted in the United States of
America.
Part II Other Information
Item 1. Legal Proceedings
The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary
course of business. Management believes, based on the opinion of legal counsel, that the aggregate
liabilities, if any, arising from such actions will not have a material adverse effect on the
financial position and results of operations of the Corporation.
Item 1A. Risk Factors
Except as noted below, there have been no material changes to the risk factors as previously
disclosed under Item 1A. in the Corporations Annual Report on Form 10-K for the year ended
December 31, 2005.
Puerto Rico Current Economic Condition
The economic uncertainty that exists in Puerto Rico, the Corporations primary market, caused in
part by the disagreements of the legislative and executive branches of the Government regarding the
tax and fiscal reform and the budget approval, has resulted in an economic slowdown in the Island.
Also, increases in the price of petroleum and other consumer goods and services, coupled with a
recently approved sales tax of 7%, are additional concerns impacting the Islands economic
situation. Puerto Rico economic growth remains subdued, with an apparent reduction in private
sector employment. Tax and fiscal reforms were recently signed into law by the Puerto Rico
Government, including the governments budget for fiscal year 2007.
The above economic concerns and uncertainty in the private and public sectors may also have an
adverse effect in the credit quality of the Corporations loan portfolios, as delinquency rates are
expected to increase in the short-term, until the economy stabilizes. Also, potential reduction in
consumer spending may also impact growth in other interest and non-interest revenue sources of the
Corporation.
Rating Downgrades on the Government of Puerto Ricos debt obligations
88
Even though Puerto Ricos economy is closely integrated to that of the U.S. mainland and its
government and many of its instrumentalities are investment-grade rated borrowers in the U.S.
capital markets, the current fiscal situation of the Government of Puerto Rico has led nationally
recognized rating agencies to downgrade its debt obligations.
In the midst of the budgetary crisis and economic uncertainty experienced in Puerto Rico caused by
the disagreements of the legislative and executive branches of the Government regarding the tax and
fiscal reform and the budget approval, in May 2006, Moodys Investors Service downgraded the
Governments general obligation bond rating to Baa3 from Baa2, and kept the rating on watch list
for possible further downgrade. The Commonwealths appropriation bonds and some of the subordinated
revenue bonds were also downgraded by one notch and are now rated just below investment grade at
Ba1. Moodys commented that this action reflects the Governments strained financial condition, the
ongoing political conflict and lack of agreement regarding the measures necessary to end the
governments multi-year trend of financial deterioration. Standard & Poors Rating Services (S&P)
still rates the Governments general obligations two notches above junk at BBB, and the
Commonwealths appropriation bonds and some of the subordinated revenue bonds BBB-, a category that
continues to be investment-grade rated.
In July 2006, S&P and Moodys affirmed their credit ratings on the Commonwealth debt, but removed
the debt from their respective watch lists, thus reducing the possibility of an immediate
additional downgrade. These actions resulted after the Government approved the budget for the
fiscal year 2007, which runs from July 2006 through June 2007, and adopted a new sales tax. Funds
collected from the sales tax will be in part dedicated to repay government debt and fund government
at local municipalities.
Both rating agencies maintained the negative outlook for the Puerto Rico obligation bonds. Factors
such as the governments ability to implement meaningful steps to curb operating expenditures,
improve managerial and budgetary controls, and eliminate the governments reliance on operating
budget loans from the Government Development Bank of Puerto Rico will be key determinants of future
rating stability and restoration of the long-term outlook. Also, political disagreements with
respect to the budget or contest of the tax reform in the courts could result in further credit
downgrades of the government obligations by the credit rating agencies.
It is uncertain how the financial markets may react to any potential future ratings downgrade in
Puerto Ricos debt obligations. However, the current budgetary crisis and ratings downgrade could
adversely affect the value of Puerto Ricos Government obligations. A substantial portion of the
Corporations credit exposure to the Government of Puerto Rico has an identified repayment stream,
which includes in some cases the good faith, credit and unlimited taxation of certain
municipalities, an assignment of basic property taxes and other revenues.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the details of purchases of Common Stock during the quarter ended
June 30, 2006 under the 2004 Omnibus Incentive Plan.
Issuer Purchases of Equity Securities
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Not in thousands |
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Total Number of Shares |
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Maximum Number of Shares |
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Total Number of Shares |
|
Average Price Paid |
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Purchased as Part of Publicly |
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that May Yet be Purchased |
Period |
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Purchased |
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per Share |
|
Announced Plans or Programs |
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Under the Plans or Programs |
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April 1 April 30 |
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|
|
|
|
|
|
|
|
|
|
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8,613,936 |
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May 1 May 31 |
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|
28,583 |
|
|
$ |
19.93 |
|
|
|
28,583 |
|
|
|
8,585,353 |
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June 1 June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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8,585,353 |
|
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Total June 30, 2006 |
|
|
28,583 |
|
|
$ |
19.93 |
|
|
|
28,583 |
|
|
|
8,585,353 |
|
|
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Shareholders Meeting of Popular, Inc. was held on April 28, 2006. A quorum was obtained
with 232,405,191 shares represented in person or by proxy, which represented approximately 83.56%
of all votes eligible to be cast at the meeting. Three Directors of the Corporation, Juan J.
Bermúdez, Richard L. Carrión and Francisco M. Rexach Jr., were elected for a three-year term. The
following directors were not up for reelection and continued to hold office after the meeting: Jose
B. Carrión Jr., María Luisa Ferré, Manuel Morales Jr., Frederic V. Salerno,
89
William J. Teuber Jr. and José R. Vizcarrondo. The result of the voting for the election of three (3) Class 1
Directors is set forth below:
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Nominees for |
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|
|
|
|
Votes |
Three-year term |
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Votes For |
|
Withheld |
|
Juan J. Bermúdez |
|
|
220,710,146 |
|
|
|
11,695,046 |
|
Richard L. Carrión |
|
|
216,239,640 |
|
|
|
16,165,552 |
|
Francisco M. Rexach Jr. |
|
|
210,766,706 |
|
|
|
21,638,486 |
|
Item 6. Exhibits
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Exhibit No. |
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Exhibit Description |
12.1
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Computation of the ratios of earnings to fixed charges and preferred stock dividends. |
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31.1
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
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32.2
|
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
90
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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POPULAR, INC. |
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(Registrant) |
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Date: August 9, 2006 |
By: |
/s/ Jorge A. Junquera
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Jorge A. Junquera |
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Senior Executive Vice President &
Chief Financial Officer |
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Date: August 9, 2006 |
By: |
/s/ Ileana González Quevedo
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Ileana González Quevedo |
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Senior Vice President & Corporate Comptroller |
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91