UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2006

Commission File Number: 000-13818

POPULAR, INC.

Puerto Rico		66-0667416
(State or other jurisdiction of		(IRS Employer Identification Number)
incorporation or organization)
Popular Center Building
209 Muñoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico		00918
(Address of principal executive offices)		(Zip code)

(787) 765-9800

NOT APPLICABLE

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

     þ Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     o Yes     þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value, 278,609,514 shares outstanding as of August 2, 2006.

 

 

POPULAR, INC.

		Page
Part I – Financial Information
Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of June 30, 2006, December 31, 2005 and June 30, 2005			4
Unaudited Consolidated Statements of Income for the quarters and six months ended June 30, 2006 and 2005			5
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2006 and 2005			6
Unaudited Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2006 and 2005			7
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005			8
Notes to Unaudited Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			58
Item 3. Quantitative and Qualitative Disclosures about Market Risk			84
Item 4. Controls and Procedures			88
Part II – Other Information
Item 1. Legal Proceedings			88
Item 1A. Risk Factors			88
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			89
Item 4. Submission of Matters to a Vote of Security Holders			89
Item 6. Exhibits			90
Signatures			91
EX-12.1 COMPUTATION OF THE RATIOS OF EARNINGS
EX-31.1 302 CERTIFICATION OF THE CEO
EX-31.2 302 CERTIFICATION OF THE CFO
EX-32.1 906 CERTIFICATION OF THE CEO
EX-32.2 906 CERTIFICATION OF THE CFO

Forward-Looking Information

The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the Corporation’s financial condition, results of operations, plans, objectives, future performance and business, including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, market risk and the impact of interest rate changes, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Corporation’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which are beyond the Corporation’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to: the rate of growth in the economy, as well as general business and economic conditions; changes in interest rates, as well as the magnitude of such changes; the fiscal and monetary policies of the federal government and its agencies; the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets; the performance of the stock and bond markets; competition in the financial services industry; possible legislative, tax or regulatory changes; and difficulties in combining the operations of acquired entities.

Moreover, the outcome of legal proceedings, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries.

All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, and we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

ITEM 1. FINANCIAL STATEMENTS

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)

		June 30,				December 31,				June 30,
(In thousands, except share information)		2006				2005				2005
ASSETS
Cash and due from banks		$	848,892			$	906,397			$	936,019
Money market investments:
Federal funds sold			245,500				186,000				406,205
Securities purchased under agreements to resell			366,143				554,770				613,659
Time deposits with other banks			8,879				8,653				6,218
			620,522				749,423				1,026,082
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge			6,112,628				6,110,179				5,135,340
Other investment securities available-for-sale			4,776,670				5,606,407				6,701,603
Investment securities held-to-maturity, at amortized cost			420,398				153,104				177,987
Other investment securities, at lower of cost or realizable value			312,042				319,103				330,350
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge			212,637				343,659				314,263
Other trading securities			163,633				175,679				142,023
Loans held-for-sale, at lower of cost or market value			606,620				699,181				489,699
Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge			—				208,774				662,823
Other loans held-in-portfolio			31,915,006				31,099,865				28,280,396
Less – Unearned income			304,994				297,613				283,129
Allowance for loan losses			483,815				461,707				456,954
			31,126,197				30,549,319				28,203,136
Premises and equipment, net			592,704				596,571				580,031
Other real estate			83,658				79,008				68,671
Accrued income receivable			245,998				245,646				214,767
Other assets			1,515,682				1,325,800				1,121,151
Goodwill			656,189				653,984				527,633
Other intangible assets			105,044				110,208				46,074
		$	48,399,514			$	48,623,668			$	46,014,829
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	4,370,437			$	3,958,392			$	4,932,560
Interest bearing			19,079,083				18,679,613				18,086,939
			23,449,520				22,638,005				23,019,499
Federal funds purchased and assets sold under agreements to repurchase			7,926,731				8,702,461				7,866,169
Other short-term borrowings			2,656,936				2,700,261				1,998,981
Notes payable			10,198,675				9,893,577				9,085,270
Subordinated notes			—				—				125,000
Other liabilities			704,547				1,240,002				649,501
			44,936,409				45,174,306				42,744,420
Commitments and contingencies (See Note 11)
Minority interest in consolidated subsidiaries			112				115				101
Stockholders’ equity:
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 shares issued and outstanding in all periods presented			186,875				186,875				186,875
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 291,718,358 shares issued (December 31, 2005 – 289,407,190; June 30, 2005 – 280,394,613) and 278,293,561 shares outstanding (December 31, 2005 – 275,955,391; June 30, 2005 – 266,933,015)			1,750,310				1,736,443				1,682,368
Surplus			490,631				452,398				287,628
Retained earnings			1,576,499				1,456,612				1,333,655
Accumulated other comprehensive loss, net of tax of ($110,267) (December 31, 2005 – ($58,292); June 30, 2005 – $336)			(334,789	)			(176,000	)			(12,901	)
Treasury stock – at cost, 13,424,797 shares (December 31, 2005 – 13,451,799; June 30, 2005 – 13,461,598)			(206,533	)			(207,081	)			(207,317	)
			3,462,993				3,449,247				3,270,308
		$	48,399,514			$	48,623,668			$	46,014,829

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		Quarter ended								Six months ended
		June 30,								June 30,
(In thousands, except per share information)		2006				2005				2006				2005
INTEREST INCOME:
Loans		$	613,792			$	510,184			$	1,205,627			$	1,015,505
Money market investments			7,906				7,906				15,888				15,440
Investment securities			133,274				120,689				266,807				235,056
Trading account securities			7,065				8,317				15,925				14,375
			762,037				647,096				1,504,247				1,280,376
INTEREST EXPENSE:
Deposits			135,961				99,688				260,372				196,744
Short-term borrowings			127,074				77,376				251,877				143,179
Long-term debt			133,223				112,602				266,455				225,737
			396,258				289,666				778,704				565,660
Net interest income			365,779				357,430				725,543				714,716
Provision for loan losses			67,096				49,936				116,043				94,272
Net interest income after provision for loan losses			298,683				307,494				609,500				620,444
Service charges on deposit accounts			47,324				45,132				94,793				88,824
Other service fees (See Note 12)			80,017				83,841				160,363				162,856
Net (loss) gain on sale and valuation adjustment of investment securities			(14,424	)			561				(2,084	)			51,811
Trading account profit			1,830				19,668				13,305				23,431
Gain on sale of loans			29,054				15,274				76,315				25,090
Other operating income			40,185				25,982				70,127				44,035
			482,669				497,952				1,022,319				1,016,491
OPERATING EXPENSES:
Personnel costs:
Salaries			126,700				115,807				262,232				231,349
Pension, profit sharing and other benefits			39,783				38,445				82,303				78,819
			166,483				154,252				344,535				310,168
Net occupancy expenses			28,629				25,881				57,267				50,695
Equipment expenses			33,973				30,230				67,170				58,844
Other taxes			10,929				9,465				21,170				18,720
Professional fees			38,488				27,316				75,566				54,899
Communications			17,293				15,262				34,593				30,939
Business promotion			31,991				25,667				64,814				45,920
Printing and supplies			4,291				4,589				8,923				9,126
Other operating expenses			28,072				29,396				56,903				57,339
Impact of change in fiscal period of certain subsidiaries			—				—				9,741				—
Amortization of intangibles			2,831				2,141				5,552				4,383
			362,980				324,199				746,234				641,033
Income before income tax and cumulative effect of accounting change			119,689				173,753				276,085				375,458
Income tax			22,308				41,393				60,201				83,826
Income before cumulative effect of accounting change			97,381				132,360				215,884				291,632
Cumulative effect of accounting change, net of tax			—				—				—				3,607
NET INCOME		$	97,381			$	132,360			$	215,884			$	295,239
NET INCOME APPLICABLE TO COMMON STOCK		$	94,403			$	129,382			$	209,928			$	289,283
BASIC EARNINGS PER COMMON SHARE (EPS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		$	0.34			$	0.48			$	0.75			$	1.07
DILUTED EPS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		$	0.34			$	0.48			$	0.75			$	1.07
BASIC EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE		$	0.34			$	0.48			$	0.75			$	1.08
DILUTED EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE		$	0.34			$	0.48			$	0.75			$	1.08
DIVIDENDS DECLARED PER COMMON SHARE		$	0.16			$	0.16			$	0.32			$	0.32

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

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.

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.

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.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Nature of operations and basis of presentation

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending and insurance services through specialized subsidiaries. In the United States, the Corporation provides complete financial solutions to all the communities it serves through branches of Banco Popular North America (“BPNA”) in California, Texas, Illinois, New York, New Jersey and Florida. The Corporation’s consumer finance subsidiary in the United States, Popular Financial Holdings, Inc. (“PFH”), offers mortgage and personal loans, and also maintains a substantial wholesale loan brokerage network, a warehouse lending division and a loan servicing unit. PFH, through its subsidiary E-LOAN, Inc. (“E-LOAN”), provides online consumer direct lending to obtain mortgage, auto and home equity loans. The Corporation strives to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. EVERTEC, Inc. (“EVERTEC”), the Corporation’s main subsidiary in this business segment, is the leading provider of financial transaction processing and information technology solutions in Puerto Rico and the Caribbean. EVERTEC serves customers in 11 Latin American countries. Also, the Corporation recently incorporated EVERTEC USA, Inc. with plans to expand its service offerings in the U.S. mainland. Note 19 to the consolidated financial statements presents further information about the Corporation’s business segments.

The unaudited consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results. Certain reclassifications have been made to the prior period unaudited consolidated financial statements to conform to the 2006 presentation.

In the normal course of business, except for the Corporation’s banks and the parent holding company, the Corporation utilized a one-month lag in the consolidation of the financial results of its other subsidiaries (the “non-banking subsidiaries”). As previously described in the Corporation’s 2005 Annual Report on Form 10-K (the “2005 Annual Report”) for the year ended December 31, 2005, in that year, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31^st calendar period, primarily as part of a strategic plan to put in place a corporate-wide integrated financial system and to facilitate the consolidation process. In 2005, the impact of this change in net income was included as a cumulative effect of accounting change in the Corporation’s consolidated financial results for the first quarter, and corresponded to the financial results for the month of December 2004 of the non-banking subsidiaries which implemented the change in the first reporting period of 2005. In the first quarter of 2006, the Corporation completed the second phase of the two-year plan, as such the financial results for the month of December 2005 of PFH (excluding E-LOAN which already had a December 31^st 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 31^st, similar to the parent holding company. There were no unadjusted significant intervening events resulting from the difference in fiscal periods, which management believed could have materially affected the financial position or results of operations of the Corporation for the periods presented.

The statement of condition data as of December 31, 2005 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally

accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of June 30, 2006, December 31, 2005 and June 30, 2005 pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2005, included in the Corporation’s 2005 Annual Report.

Foreign Currency Translation

Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange at the end of the period. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S. dollar is reported in accumulated other comprehensive (loss) income, except for highly inflationary environments in which the effects are included in other operating income, as described below.

The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. At June 30, 2006, the Corporation had approximately $37 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive (loss) income (December 31, 2005 — $36 million; June 30, 2005 — $36 million).

The Corporation has been monitoring the inflation levels in the Dominican Republic to evaluate whether it still meets the “highly inflationary economy” test prescribed by SFAS No. 52, “Foreign Currency Translation.” Such statement defines highly inflationary as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy are remeasured as if the functional currency were the reporting currency. Accordingly, since June 2004, the Corporation’s interests in the Dominican Republic have been remeasured into the U.S. dollar. Although as of June 30, 2006, the cumulative inflation rate in the Dominican Republic over a 3-year period was below 100 percent, approximating 83% at quarter-end, the Corporation continued to apply the remeasurement accounting as of June 30, 2006 based on the accounting guidance obtained. The International Practices Task Force (“IPTF”) of the SEC Regulations Committee of the American Institute of Certified Public Accountants had concluded that the Dominican Republic was considered highly inflationary as of December 31, 2005, and concluded that such country would not cease being regarded as highly inflationary for the first six months of 2006. The Dominican peso’s exchange rate to the U.S. dollar was $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, compared with $33.14 at December 31, 2005 and $32.53 at June 30, 2006. During the quarter and six months ended June 30, 2006, approximately $391 thousand and $588 thousand, respectively, in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive loss. The net remeasurement (losses) gains totaled ($533) thousand and $331 thousand for quarter and six months ended June 30, 2005, respectively. These remeasurement gains (losses) will continue to be reflected in earnings until the economy is no longer considered highly inflationary. The unfavorable cumulative translation adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $32 million.

Other event

The Corporation exercised certain Tag Along Rights granted under the Shareholders Agreement dated as of March 2, 1999 by and among Telecomunicaciones de Puerto Rico, Inc. (“TelPRI”), GTE International Telecommunications Incorporated, GTE Holdings (Puerto Rico) LLC, Popular and Puerto Rico Telephone Authority and entered into a Joinder Agreement dated as of May 4, 2006 (the “Joinder Agreement”) by and among Popular, GTE Holdings and Sercotel S.A. de C.V. (“Sercotel”). Pursuant to the Joinder Agreement, Popular has agreed to sell to Sercotel all the shares of common stock of TelPRI owned by Popular under similar terms and conditions set forth in the Stock Purchase Agreement dated as of April 2, 2006, by and between Sercotel and GTE Holdings. The estimated gain net of taxes for Popular is approximately $86.0 million; however, such gain is subject to purchase price adjustments at the date of the closing. The transaction is expected to close early in 2007 subject to obtaining the necessary governmental and regulatory approvals.

Note 2 – Recent Accounting Developments

SFAS No. 123-R “Share-Based Payments”

In December 2004, the Financial Accounting Standard Board (“FASB”) issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123-R, “Share-Based Payment.” SFAS No. 123-R focuses primarily on transactions in which an entity exchanges its equity instruments for employee services and generally establishes standards for the accounting of transactions in which an entity obtains goods or services in share-based payment transactions. SFAS No. 123-R requires companies to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting, which APB 25 allowed and resulted in no expense for many awards of stock options for which the exercise price of the option did not exceed the price of the underlying stock at the grant date. In addition, SFAS No. 123-R retains the modified grant date model from SFAS No. 123. Under that model, compensation cost is measured at the grant date fair value of the award and is adjusted to reflect anticipated forfeitures and the expected outcome of certain conditions. The fair value of an award is not remeasured after its initial estimation on the grant date, except in the case of a liability award or if the award is modified, based on specific criteria included in SFAS No. 123-R. Also, SFAS 123-R clarifies the financial impact of vesting and/or acceleration clauses due at retirement. Under the revised SFAS, the expense should be fully accrued for any employee that is eligible to retire regardless of the actual retirement experience of the employer. The Corporation prospectively applied SFAS No. 123-R to its financial statements as of January 1, 2006. The impact of this adoption was not significant for the results of the quarter and six months ended June 30, 2006. Refer to Note 13 to these consolidated financial statements for required disclosures and further information on the impact of the adoption of this accounting pronouncement.

SFAS No. 153 “Exchanges of Nonmonetary Assets”

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred; or b) the entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This Statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows upon adoption in 2006.

SFAS No. 154 “Accounting Changes and Error Corrections”

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Statement 154 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board toward development of a single set of high-quality accounting standards. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. APB Opinion No. 20 previously required that such a change be reported as a change in accounting principle. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. SFAS No. 154 did not have a significant impact on the statement of condition or results of operations upon adoption in 2006.

SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155:

	•		Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
	•		Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133;
	•		Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;
	•		Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives;
	•		Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this SFAS 155 may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS No. 155. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative-effect adjustment to beginning retained earnings. An entity should separately disclose the gross gains and losses that make up the cumulative-effect adjustment, determined on an instrument-by-instrument basis. Prior periods should not be restated. The Corporation elected to adopt SFAS No. 155 commencing in January 2007.

SFAS No. 156 “Accounting for Servicing of Financial Assets — an amendment of FASB No. 140”

This Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:

1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations:

a. A transfer of the servicer’s financial assets that meets the requirements for sale accounting

b. A transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”

c. An acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates.

2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.

3. Permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:

a. Amortization method—Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.

b. Fair value measurement method—Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur.

4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.

5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.

The Corporation elected to adopt SFAS No. 156 commencing in January 2007. The Corporation is currently evaluating the impact that this accounting pronouncement may have in its financial condition and results of operations, subject to the measurement methods, class definitions and other determinations that need to be made upon adoption.

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109” (FIN 48)

In June 2006, the FASB issued FIN 48, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under the Interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values.

FIN 48 is applicable to all uncertain positions for taxes accounted for under SFAS 109, “Accounting for Income Taxes,” and is not intended to be applied by analogy to other taxes, such as sales taxes, value-added taxes, or property taxes. Significant elements of the new guidance include the following:

	•		Recognition: A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.
	•		Measurement: The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.
	•		Change in judgment: The assessment of the recognition threshold and the measurement of the associated tax benefit might change as new information becomes available. Unrecognized tax benefits should be recognized in the period that the position reaches the recognition threshold, which might occur prior to absolute finality of the matter. Similarly, recognized tax benefits should be derecognized in the period in which the position falls below the threshold.
	•		Interest/Penalties: A taxpayer is required to accrue interest and penalties that, under relevant tax law, the taxpayer would be regarded as having incurred. Accordingly, under FIN 48, interest would start to accrue in the period that it would begin accruing under the relevant tax law, and penalties should be accrued in the first period for which a position is taken (or is expected to be taken) on a tax return that would give rise to the penalty. How a company classifies interest and penalties in the income statement is an accounting policy decision. The company should disclose that policy and the amounts recognized.
	•		Balance sheet classification: Liabilities resulting from FIN 48 are classified as long-term, unless payment is expected within the next 12 months.
	•		Disclosures: FIN 48 requires qualitative and quantitative disclosures, including discussion of reasonably possible changes that might occur in the recognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on a worldwide aggregated basis.

After considering other applicable guidance (such as the guidance that the Emerging Issues Task Force specifies in Issue 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination)”, a company should record the change in net assets that results from the application of the Interpretation as an adjustment to retained earnings.

The accounting provisions of FIN 48 will be effective for the Corporation beginning January 1, 2007. The Corporation is in the process of determining the impact, if any, that the adoption of this accounting interpretation may have on its financial condition and results of operations.

Note 3 — Restrictions on cash and due from banks and highly liquid securities

The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or with a correspondent bank. Those required average reserve balances were approximately $583 million at June 30, 2006 (December 31, 2005 — $584 million; June 30, 2005 — $586 million). Cash and due from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances.

In compliance with rules and regulations of the Securities and Exchange Commission, at June 30, 2006, the Corporation had securities with a market value of $443 thousand (December 31, 2005 — $549 thousand; June 30, 2005 — $692 thousand) segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.

As required by the Puerto Rico International Banking Center Law, at June 30, 2006, the Corporation maintained separately for its two international banking entities (“IBEs”), $600 thousand in time deposits, equally split for the two IBEs, which were considered restricted assets (December 31, 2005 — $600 thousand; June 30, 2005 — $600 thousand).

As part of a line of credit facility with a financial institution, at June 30, 2006, the Corporation maintained restricted cash of $1.9 million as collateral for the line of credit (December 31, 2005 — $2.4 million). The cash is being held in certificates of deposits which mature in less than 90 days. The line of credit is used to support letters of credit.

Note 4 – Pledged Assets

Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:

		June 30,				December 31,				June 30,
(In thousands)		2006				2005				2005
Investment securities available-for-sale		$	2,799,279			$	2,566,668			$	3,156,792
Investment securities held-to-maturity			808				953				1,257
Loans			11,100,286				11,835,842				10,411,283
		$	13,900,373			$	14,403,463			$	13,569,332

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

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

		AS OF JUNE 30, 2005
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	553,267			$	16			$	8,634			$	544,649
Obligations of U.S. Government sponsored entities			7,626,640				42,100				42,705				7,626,035
Obligations of Puerto Rico, States and political subdivisions			167,897				5,419				942				172,374
Collateralized mortgage obligations			1,692,703				6,683				7,970				1,691,416
Mortgage-backed securities			1,600,601				15,738				12,725				1,603,614
Equity securities			47,767				22,302				394				69,675
Others			124,788				5,045				653				129,180
		$	11,813,663			$	97,303			$	74,023			$	11,836,943

The following table shows the Corporation’s gross unrealized losses and market value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2006, December 31, 2005 and June 30, 2005:

		AS OF JUNE 30, 2006
		Less than 12 Months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	19,418			$	342			$	19,076
Obligations of U.S. Government sponsored entities			3,519,349				157,756				3,361,593
Obligations of Puerto Rico, States and political subdivisions			44,386				1,024				43,362
Collateralized mortgage obligations			732,872				16,340				716,532
Mortgage-backed securities			205,765				29,321				176,444
Equity securities			35,716				925				34,791
Others			14,261				701				13,560
		$	4,571,767			$	206,409			$	4,365,358

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	504,675			$	45,988			$	458,687
Obligations of U.S. Government sponsored entities			3,920,947				131,187				3,789,760
Obligations of Puerto Rico, States and political subdivisions			55,232				4,777				50,455
Collateralized mortgage obligations			313,094				12,558				300,536
Mortgage-backed securities			957,443				21,010				936,433
		$	5,751,391			$	215,520			$	5,535,871

		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

		AS OF JUNE 30, 2005
		Less than 12 Months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	54,942			$	317			$	54,625
Obligations of U.S. Government sponsored entities			3,249,909				30,400				3,219,509
Obligations of Puerto Rico, States and political subdivisions			19,197				141				19,056
Collateralized mortgage obligations			443,224				5,659				437,565
Mortgage-backed securities			809,680				8,455				801,225
Equity securities			7,641				394				7,247
Others			6,526				653				5,873
		$	4,591,119			$	46,019			$	4,545,100

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	488,504			$	8,317			$	480,187
Obligations of U.S. Government sponsored entities			1,009,693				12,305				997,388
Obligations of Puerto Rico, States and political subdivisions			45,223				801				44,422
Collateralized mortgage obligations			92,450				2,311				90,139
Mortgage-backed securities			250,154				4,270				245,884
		$	1,886,024			$	28,004			$	1,858,020

		Total
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	543,446			$	8,634			$	534,812
Obligations of U.S. Government sponsored entities			4,259,602				42,705				4,216,897
Obligations of Puerto Rico, States and political subdivisions			64,420				942				63,478
Collateralized mortgage obligations			535,674				7,970				527,704
Mortgage-backed securities			1,059,834				12,725				1,047,109
Equity securities			7,641				394				7,247
Others			6,526				653				5,873
		$	6,477,143			$	74,023			$	6,403,120

At June 30, 2006, “Obligations of Puerto Rico, States and political subdivisions” include approximately $56 million in Commonwealth of Puerto Rico Appropriation Bonds which rating was downgraded by Moody’s Investors Service to Ba1, one notch below investment grade, in May 2006. At that time, Moody’s commented that this action reflected the Government’s strained financial condition, the ongoing political conflict and lack of agreement regarding the measures necessary to end the government’s multi-year trend of financial deterioration. In July 2006, this credit rating agency maintained the credit rating, but removed the Puerto Rico Government obligations from its watch list for further downgrades as the Government of Puerto Rico approved the 2007 fiscal year budget and established a new sales tax. A percentage of this sales tax is designated to be used as a revenue source to repay Puerto Rico Government Obligations. Future rating stability will be subject to the Government’s actions to reduce operating expenditures, improve managerial and budgetary controls, and eliminate the reliance on loans from the Government Development Bank for Puerto Rico, the Commonwealth’s fiscal agent, to cover operating deficits. Standard & Poor’s (S&P), another nationally recognized credit rating agency, rated the Appropriation Bonds BBB-, which is still

considered investment grade. As of June 30, 2006, the appropriation bonds indicated above represented approximately $4.5 million in net unrealized losses in the Corporation’s available-for-sale investment securities portfolio. The Corporation is closely monitoring the political and economic situation of the Island and evaluates the portfolio for any declines in value that management may consider being other-than-temporary. Management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

The unrealized loss positions of available-for-sale securities at June 30, 2006, except for the obligations of the Puerto Rico government described above, are primarily associated with U.S. government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly liquid securities which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in these available-for-sale securities at June 30, 2006 are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

During the quarter and six months ended June 30, 2006, the Corporation recognized through earnings approximately $15.0 million and $16.9 million, respectively, in losses in interest-only securities available-for-sale that management considered to be other-than-temporarily impaired. For the six months ended June 30, 2005 the impairment adjustment amounted to $1.9 million and was associated with interest-only securities and equity securities.

The following table states the name of issuers, and the aggregate amortized cost and market value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), when the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities of the U.S. Government agencies and corporations. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.

		June 30, 2006								December 31, 2005								June 30, 2005
(In thousands)		Amortized Cost				Market Value				Amortized Cost				Market Value				Amortized Cost				Market Value
FNMA		$	1,797,323			$	1,758,590			$	1,790,840			$	1,776,604			$	1,859,220			$	1,866,276
FHLB			7,354,827				7,073,831				7,480,188				7,327,736				7,474,253				7,474,274
Freddie Mac			1,243,039				1,212,853				1,244,044				1,228,566				1,053,794				1,048,215

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

The following table shows the Corporation’s gross unrealized losses and fair value of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2006, December 31, 2005 and June 30, 2005:

		AS OF JUNE 30, 2006
		Less than 12 months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	307,460			$	61			$	307,399
Obligations of Puerto Rico, States and political subdivisions			25,830				328				25,502
Others			7,636				28				7,608
		$	340,926			$	417			$	340,509

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	6,948			$	3			$	6,945
Obligations of Puerto Rico, States and political subdivisions			25,993				199				25,794
Collateralized mortgage obligations			433				24				409
Others			250				—				250
		$	33,624			$	226			$	33,398

		Total
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	314,408			$	64			$	314,344
Obligations of Puerto Rico, States and political subdivisions			51,823				527				51,296
Collateralized mortgage obligations			433				24				409
Others			7,886				28				7,858
		$	374,550			$	643			$	373,907

		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