Popular Inc
Annual Report 2006

Plain-text annual report

annual report 06taking action Popular, Inc. is a full-service financial institution based in Puerto Rico with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, with over 300 branches and offices, the Corporation offers retail and commercial banking services through its franchise, Banco Popular de Puerto Rico, as well as auto and equipment leasing and financing, mortgage loans, consumer lending, investment banking and insurance. In the United States, the Corporation has established a community banking franchise providing complete financial solutions to all the communities it serves. Banco Popular North America operates over 140 branches in California, Texas, Illinois, New York, New Jersey and Florida. Popular Financial Holdings, with 135 retail lending locations, offers mortgage and personal loans, while E-LOAN provides online consumer direct lending to obtain mortgage, auto and home equity loans. The Corporation, through its financial transaction processing company, EVERTEC, continues to use its expertise in technology and electronic banking as a competitive advantage in its expansion throughout the United States, the Caribbean and Latin America. The Corporation is exporting its 113 years of experience through these regions, while continuing its commitment to meet the needs of retail and business clients through innovation, and to fostering growth in the communities it serves. 2 7 8 10 12 14 16 18 19 20 24 Letter to Shareholders Review of Operations Banco Popular de Puerto Rico Banco Popular North America Popular Financial Holdings EVERTEC Institutional Values Corporate Leadership Circle Board of Directors, Popular, Inc. Financial Summary Corporate Information 20 06 taking action what we must to be more taking action 06“We are taking action and doing efficient and deliver the results that are expected of us.” Richard L. Carrión, Chairman, President and Chief Executive Officer A N N U A L R E P O R T 1 Popular, Inc. P O P U L A R , I N C . RICHARD L. CARRIÓN Chairman President Chief Executive Officer Popular, Inc. “Parts of our business performed very well in spite of a challenging environment, but the interest rate scenario and the results of our mortgage operations in the United States significantly impacted our financial performance. We are not satisfied with these results and we have taken decisive steps to move things in the right direction.” Letter to Shareholders: Taking Action The year 2006 was very difficult for Popular. We had anticipated a challenging environment, but the situation deteriorated much more than we had projected on several fronts. We had expected to see some relief in the interest rate scenario, but the sustained inversion of the yield curve impacted our margins. In fact, our net interest margin in 2006 hit its lowest point in more than 25 years. This, coupled with the contraction of the mortgage origination market, estimated at 18% by the Mortgage Bankers Association of America, hurt the profitability of our mortgage businesses in the United States. Finally, we faced a sluggish economy in Puerto Rico, our largest market. The government’s fiscal situation and the ensuing shutdown in May led to a general feeling of uncertainty that manifested itself throughout the economy. Parts of our business performed very well in spite of a challenging environment, but the results of our mortgage operations in the United States significantly impacted our financial performance. Consolidated net income for 2006 totaled $357.7 million, 34% lower than the previous year. Results in 2006 reflect $22.2 million in gains in the sale of investment securities compared to $67.4 million in 2005. Basic earnings per common share (EPS) were $1.24, compared to $1.98 in the previous year. These results translate into a return on assets (ROA) of 0.74% and a return on equity (ROE) of 9.73%, compared to 1.17% and 17.12%, respectively, for 2005. 20 06 taking action The performance of our stock in 2006 was disappointing as well. It closed at $17.95 on December 29, 2006, compared to $21.15 at the end of 2005, for a drop of 15%. Undoubtedly, part of the decline is due to our financial results. I also believe that the aftershocks of the accounting problems of several financial institutions in Puerto Rico are still being felt and the market continues to have a negative outlook on Puerto Rico in general. In recent times, a lot of attention has been paid to the level of executive compen- sation and its linkage to a corporation’s financial performance. At Popular, we believe that a large part of executive compensation should be variable, and that there should be a strong correlation between executive compensation and the Company’s financial results. The Corporation’s net income in 2006 declined by 34%. The compensation earned by your executive management team during that period – including salaries, bonuses and short-term and long-term incentives – declined by 57%. I know there is little comfort in these numbers, but they demonstrate a clear linkage between compensation and results. We are not satisfied with these results, and we are taking action to move things in the right direction. In January of 2007, we announced the restructuring of our operations in the United States, particularly those related to Popular Financial Holdings (PFH), our consumer finance and mortgage subsidiary in the United States. A N N U A L R E P O R T 2 / 3 Popular, Inc. Letter to Shareholders: Taking Action PFH’s performance in 2006 was extremely poor. As volumes dropped and our net interest margin narrowed, our expense base – which had grown significantly during the mortgage boom years – proved unsustainable. We took measures early in the year, such as streamlining our retail office network and exiting some unprofitable businesses, but these measures were not timely or dramatic enough. This plan involved some very difficult decisions, particularly those that resulted in workforce reductions. We debated various alternatives, but in the end realized this was the right course to take. We tried to execute our decisions with the utmost respect for those affected. We estimate that the cost reduction initiatives will result in an expense reduction of approximately $39 million on an annualized basis. In the fall of last year, we began a thorough assessment of PFH’s lines of business, and in January of 2007 announced a restructuring plan. This plan, which will be implemented throughout the year, has four basic components: 1. Exiting the wholesale non-prime mortgage origination business during the first quarter of 2007, which entails shutting down the wholesale broker, retail and call center business divisions. 2. Retaining and focusing on two PFH businesses that are currently profitable, and that have good opportunities for growth and positive performance: the Equity One network of 135 consumer finance offices located in 14 states and the third-party mortgage servicing business. 3. Consolidating PFH’s commercial lending businesses – mortgage warehouse, mixed use and construction lending – into Banco Popular North America’s (BPNA) commercial lending groups. 4. Consolidating all support functions into BPNA to reduce expenses. Cameron E. Williams, after serving as PFH’s president for eight years, has decided to retire, effective March 31, 2007. All of Popular’s U.S. mainland operations (BPNA, PFH and E-LOAN) will now report to Roberto R. Herencia, currently president of BPNA. Banco Popular North America has improved its performance consistently since 2002. At that time, we delineated a three-year plan designed to create a solid foundation to position us for future growth. BPNA made good progress by any measure, but their financial results are not yet where we need them to be. In 2006, we launched the next phase of our strategic plan, which focuses on increasing the number of customers, revenues and earnings. Despite interest rate pressures and intense competition in its markets, BPNA made progress across many fronts. Loans and deposits grew by 10% and 16%, respectively, and the number of checking accounts increased by 13%. Niche businesses, such as construction lending, community association lending, non- conventional mortgages and the money service business had a great year, and P O P U L A R , I N C . Assets and Net Income Growth ROA and ROE $60 $50 $40 $30 $20 $10 $600 $500 $400 $300 $200 $100 1.5% 1.2% 0.9% 0.6% 0.3% 25% 20% 15% 10% 5% Total Return Including Dividend and Dividend Reinvestment 8 . 9 1 0 . 5 1 3 . 7 1 3 . 8 1 25% 20% 15% 10% 5% 02 03 04 05 06 ● Assets (dollars in billions) ● Net Income (dollars in millions) 02 03 04 05 06 25 20 15 10 ● ROA ● ROE YEARS 20 06 taking action the success of our Small Business Administration (SBA) lending strategy made Popular the fourth largest SBA lender in the nation. E-LOAN, the online consumer direct lender we acquired in 2005, also had a challenging year. E-LOAN’s business model, which requires high expenses in technology and marketing, is very sensitive to changes in volume and was also affected by the drop in the mortgage market. However, we are taking measures to manage that volatility. The auto loan and home equity line of credit (HELOC) businesses performed very well, and we further expanded and diversified E-LOAN’s product line by adding PFH products to its offering. In addition, we began to keep part of E-LOAN’s originations in our portfolio, which will generate a net interest income stream. One of the bright spots of 2006 was E-LOAN’s entrance in the deposit business, launched in September. In just three months, it was able to attract over $1.3 billion in deposits, demonstrating not only the strength, but the versatility, of the E-LOAN brand. Our businesses in Puerto Rico performed very well, in spite of a compli- cated economic environment. The local government’s fiscal situation, and the ensuing government shutdown in May of 2006, led to a general slowdown of the economy that impacted our businesses in different ways. Nevertheless, we acted swiftly and were able to mitigate the impact with new sources of revenue and disciplined spending. Banco Popular de Puerto Rico had to contend with tighter margins, a sluggish economy and a general instability in the financial services industry in Puerto Rico that translated into fierce price competition. We remained focused on strengthening our leadership position and increased our market share in practi- cally all categories. We continued initiatives related to customer satisfaction, which included efforts to reduce waiting times at the branch, offering continuous training to our employees and adding customer service metrics to managers’ incentives. While the emphasis on customer satisfaction will continue, we are pleased with the improvement we saw in 2006, with 66% of our clients describing our service better or much better than a year ago. One of our top priorities for 2006 was controlling expense growth and creating a tighter cost- management culture without impacting strategic investments. Total expenses, which had been growing at an average of 5% for the past five years, were below 2005 levels. We are aware that the difficult economic environment may persist during 2007, and will focus on credit quality, cross-selling to our large customer base, growing our loan and deposit portfolios and keeping expenses under control. We are confident that we are in an excellent position to continue differentiating ourselves from the competition to remain the leading financial institution on the island. A N N U A L R E P O R T 4 / 5 Popular, Inc. Letter to Shareholders: Taking Action EVERTEC, our processing and technology outsourcing company, had a solid year. To overcome the impact of the Puerto Rican Government’s fiscal situation, which impacted government contracting as well as economic activity in general, EVERTEC focused on expanding new businesses and attracting new clients. We made significant progress in offering our services to other financial institutions, thus leveraging the infrastructure used by Popular companies to bring in additional revenues. In 2003, we embarked on our Technology Infrastructure Project (TIP), which involves the redesign of our banking technology platform to provide online real-time processing as well as a single and consistent customer view. Even though this is a project that spans several years, in 2006 we completed the centralized customer data integrator we call the transaction vault (TV), connected several delivery channels to it and began the redesign of our core deposit application. Challenging times can highlight an organization’s strengths. One of our greatest strengths is a team of highly dedicated employees, who remained focused and worked extremely hard to make the achievements I have mentioned possible. We are also fortunate to have a Board of Directors made up of knowledgeable and committed individuals. Their continuous guidance and support, particularly during the most difficult moments of the year, was invaluable. In 2006, we restructured our Boards of Directors, and consolidated all of the subsidiaries’ Boards into Popular Inc.’s. Our most sincere appreciation goes out to Juan A. Albors, José A. Bechara and Guillermo L. Martínez, who will retire from the Banco Popular de Puerto Rico Board as a result of this restructuring. We are extremely grateful for their countless contributions during the years they served on our Board. We share no illusions about the difficult year that lies ahead. Good organiza- tions learn from their mistakes and build on their successes. We plan to do just that as we remain focused on our long-term objectives. Richard L. Carrión Chairman, President and Chief Executive Officer P O P U L A R , I N C . Popular, Inc. At-A-Glance 20 06 taking action BANCO POPULAR DE PUERTO RICO BANCO POPULAR NORTH AMERICA • Over 1.3 million clients • 142 branches throughout • 200 branches and 114 offices throughout Puerto Rico and the Virgin Islands • 6,201 FTEs as of 12/31/06 • 610 ATMs and over 29,000 POS throughout Puerto Rico and the Virgin Islands • #1 market share in Total Deposits (33.50%) and Total Loans (22.74%) • $25.5 billion in assets, $15.4 billion in loans and $14.7 billion in deposits as of 12/31/06 POPULAR FINANCIAL HOLDINGS six states (Florida, California, New York, New Jersey, Texas, and Illinois) • 11 leasing offices with a presence in 11 states • 2,048 FTEs as of 12/31/06 • 4th SBA lender in the United States in terms of dollars of loans • $12.3 billion in assets, $8.8 billion in loans and $9.8 billion in deposits as of 12/31/06 EVERTEC • 12 offices throughout the United States and Latin America serving 15 countries • 159 offices in 24 states as • 1,732 FTEs as of 12/31/06 of 12/31/06 • Total originations amounted to $9.8 billion in 2006, including $4.5 billion originated by E-LOAN • Servicing Portfolio of $10.3 • Processed over 920 million transactions in 2006, of which more than 505 million corresponded to the ATH® Network billion as of 12/31/06 • 4,600 ATMs and over • 2,284 FTEs as of 12/31/06 • $9.3 billion in assets, $8.5 billion in loans, and $319 million in revenues as of 12/31/06 92,000 POS throughout the United States and Latin America taking action In the face of overwhelming challenges, we have not faltered. We are determined and taking action to rise above the difficult situation surrounding us, motivated by an unwavering commitment to our people, our customers and our shareholders. A N N U A L R E P O R T 6 / 7 Banco Popular de Puerto Rico BPPR “Banco Popular’s pledge to engage customers with high service standards was ignited by our Customer Care initiative.” DAVID H. CHAFEY JR. Senior Executive Vice President, Popular, Inc., President, Banco Popular de Puerto Rico • Increased and maintained market share in all key categories • Retail assets under management for our brokerage unit surpassed the $4 billion mark, an increase of over 12% • Expanded our credit card offering, exceeding the $1 billion mark early during the year • Internet transactions grew at a 42% CAGR from 2002-2006 • Increased mortgage market share in spite of industry downturn P O P U L A R , I N C . 56%increase in construction loans during 2006 53.9%efficiency ratio. Cost control efforts resulted in flat expense growth compared to 2005 BPPR Efficiency (dollars in millions) BPPR 2006 Transactions (in millions) BPPR Deposits (in millions) $1,600 $1,200 $800 $400 60% 45% 30% 15% $350 $300 $250 $200 $150 $100 $50 $15,000 $12,000 $9,000 $6,000 $3,000 04 05 06 02 03 04 05 06 04 05 06 ● Revenues ● Expenses ● Efficiency Ratio ● POS ● ATM ● Teller ● TelePago ● Internet ● Demand ● Savings ● Time 20 06 taking action Banco Popular de Puerto Rico remains strongly positioned as the leading financial institution on the island, holding 34% of the total retail deposit market share and a 37% share of commercial deposits. Our continued leadership is the result of our focus on leveraging such strengths as our comprehensive network of delivery channels, diversified offer of products and services, and profound knowledge of our customer base. The financial services sector in Puerto Rico faced a daunting environment, characterized by uncertainty about the government’s financial stability, increased tax rates, apprehension over the financial restatements of various local banks, and deteriorating consumer credit quality. We have responded with cost reduction initiatives that resulted in a reduction of total expenses, which are slightly below 2005 levels, compared to an average growth of 5% in the past years. Banco Popular’s pledge to engage customers with high service standards was ignited by our Customer Care initiative, an all-encompassing program to enhance the connection with our customers. Spearheaded by an outstanding year in commercial banking, our bottom line has been positively impacted by this renewed focus on customer service. Market share in the commercial loan segment grew to 23%, and our construction loan portfolio reached $1,007 million, a 56% increase over last year. Consumer lending also had a very good year, with our credit card portfolio breaking the $1 billion mark early in 2006. We upgraded our processing platform and successfully introduced new credit cards: MasterCard Edge, Visa Return, Visa Signature and American Express Black. Popular Mortgage and Popular Auto, meanwhile, bore the brunt of the economic environment, as both industries observed loan volumes decrease over 20%, while the interest rate environment affected the gains we realized on loans sold. Popular Mortgage made significant headway towards becoming the #1 mortgage lender on the island, with $1,497 million in mortgage loan originations, despite an overall slowdown in the mortgage market. Electronic banking experienced significant growth; an aggressive marketing campaign led to the addition of over 62,000 electronic bills. As a result, Internet banking users grew by 19% and the number of payments processed increased 27%. Meanwhile, our financial services business is growing strong. In just five years, our insurance agency Popular Insurance, has become the second largest in Puerto Rico, holding $140 million in premiums. Our brokerage operation, Popular Securities, strengthened its sales team and increased retail assets under manage- ment by 12%, to $4 billion. With strong 2006 results, Banco Popular de Puerto Rico is poised to remain the absolute leader in our market. A N N U A L R E P O R T 8 / 9 Banco Popular North America BPNA • Launched Popular Small Business Capital to better serve SBA lending niche • SBA origination volume increased by 40% to $358 million in 2006 • Non-conventional mortgage unit expanded to eight additional states and originated $530 million • Opened over 90,000 deposit accounts, an increase of 9% over 2005 • Total loans and deposits grew by 10% and 16%, respectively • Deposit fee income increased by 16% compared to 2005 • Expenses slightly lower than 2005 levels P O P U L A R , I N C . “27% of new checking account customers were referred by other customers.” ROBERTO R. HERENCIA Executive Vice President, Popular, Inc., President, Banco Popular North America 4thBecame fourth largest SBA lender in the United States, in terms of dollars of loans. BPNA Efficiency (dollars in millions) BPNA Financial Performance (in billions) BPNA Niche Lending Originations (in millions) $500 $400 $300 $200 $100 80% 60% 40% 20% $15 $12 $9 $6 $3 $2,000 $1,500 $1,000 $500 02 03 04 05 06 01 02 03 04 05 06 ● Revenues ● Expenses ● Efficiency Ratio ● Assets ● Loans ● Deposits 04 05 06 ● SBA ● Non-Conventional mortgages ● Construction ● Middle Market 20 06 taking action Banco Popular North America (BPNA) completed the first full year of Seize the Future, our 2006 – 2008 strategic plan to increase our customer base, expand our position in niche lending markets, and improve our ability to better serve customers. The flattening yield curve and strong competition were major challenges to our profitability, impacting revenue by more than $31 million from our original expectations. To counteract the impact, we achieved strong year-over-year growth of 16% in deposit fee income, 10% in loans, and 16% in deposits, while keeping expenses close to 2005 levels. During the year, we also exited two businesses – indirect auto and large ticket item leasing – that did not yield the desired results. Our strategic emphasis on checking account growth was a success: New customers were drawn to BPNA in 2006, opening 94,370 new business and retail accounts, a 9% increase over 2005. Reflecting our increasing ability to engage customers, 27% of new checking account customers were referred by other customers through our “Tell a Friend” program, up from 11% last year. Our business banking loan portfolio also grew significantly by $632 million or 20% vs. 2005. Popular Small Business Capital (Small Business Administration loans) – an important niche lending initiative – achieved significant growth, allowing us to become the fourth largest SBA lender in the United States in terms of dollars of loans. SBA loan originations increased 40%, from $253 million in 2005 to $358 million. We continue a measured expansion of our footprint across the United States. Our investment in new branches and a new regional headquarters in South Florida are paying off substantially, with an encouraging reception to Banco Popular’s value proposition in this high-growth market. South Florida boasts $1 billion in loans, up 54% from 2005 and, through Popular Association Banking, is one of the largest lenders to community associations in the nation. The Texas region, home to our non-conventional mortgage unit, entered eight additional states and originated $530 million of loans, exceeding its 2006 production goals by $71.5 million and its end-of-year portfolio target by $103.5 million. Our non-conventional mortgages feature low exposure per loan, attractive loan-to-value ratios, and boast excellent credit performance. Banco Popular North America continues to build on its strengths to reach its mission to become the premier community bank in the markets we serve. Encouraged by steady growth in 2006, we are ready to achieve the ambitious goals set forth in our Seize the Future strategic plan. A N N U A L R E P O R T 10 / 11 Popular Financial Holdings PFH • Consumer Services operation increased total production by 15% over their goal • After major restructuring, PFH will retain the Consumer Services, Loan Servicing, Customer Retention and E-LOAN divisions while closing our wholesale non-prime mortgage origination business • Current PFH support functions will be integrated into Banco Popular North America (BPNA) P O P U L A R , I N C . “During 2006, PFH consolidated operations.” BILL WILLIAMS Executive Vice President, Popular, Inc., President, Popular Financial Holdings Rating Upgrade During 2006, Fitch upgraded our mortgage servicer rating to above average $1.3B E-LOAN online deposit initiative yielded $1.3 billion during the last three months of the year PFH Origination Volume (in millions) E-LOAN Loan Volumes (in millions) PFH Servicing Portfolio (in billions) $10,000 $8,000 $6,000 $4,000 $2,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $12 $10 $8 $6 $4 $2 02 03 04 05 06 * 02 03 04 05 06 02 03 04 05 06 *includes E-LOAN ● Prime mortgages ● Home Equity ● Non-Prime mortgages ● Auto 20 06 taking action During 2006, Popular Financial Holdings, our consumer finance and mortgage subsidiary in the United States, took steps to reorganize and consolidate operations in an attempt to keep up with rapidly deteriorating volumes and profits in the mortgage industry. Despite considerable and sustained efforts, these initiatives proved insuffi- cient, and our results reflected a loss of $81.6 million. Our 2006 efforts to streamline and reduce costs included various measures, such as reducing the Broker Group from four loan processing centers to two, achieving a $1.8 million cost reduction and a 15% produc- tivity increase. Also, the Retail Group’s forty-two offices were consolidated into five regional hubs, for a total annualized saving of $10.6 million and a 35% production-per-officer increase. The Manufactured Housing unit was consolidated from five locations to one, and the Private Label business office and eight underperforming Consumer Finance offices were closed. However, these measures were not enough. During the last quarter, in a continuously deteriorating marketplace, a special management committee recommended fundamental changes to the business to be implemented in 2007: These included, exiting a number of unprofitable businesses and consolidating support functions into sister company BPNA. Despite the difficult year, there were some encouraging highlights. We leveraged the power of the E-LOAN brand to attract online deposit customers. In fact, E-LOAN’s first deposit-gathering initiative surpassed all expectations, with $1.3 billion from approximately 30,000 online deposit accounts during the last quarter of 2006. This project also represented an important step towards integration with BPNA, which received the deposits and handled all the back- office operations. PFH’s Consumer Services operation achieved its major targets. Total produc- tion reached $918 million, for a portfolio growth of $178 million or 15% over the goal. The Mortgage Servicing group exceeded its growth target and earned a servicer rating upgrade from Fitch. While we continued making strides in the PFH/E-LOAN partnership in such areas as product distribution, servicing technology, and capital markets, difficult market conditions prevented us from achieving goals of increased volumes and customers, reduced costs, and improved service. However, the progress made in enabling the partnership is noteworthy and relevant to E-LOAN’s future value to the Popular franchise. A N N U A L R E P O R T 12 / 13 EVERTEC EVERTEC “Our flagship ATH® Network continued its expansion across Central America with the acquisition of TII Smart Solutions.” • Continued expansion in Central America with the acquisition of TII Smart Solutions • Launched NeoMED, which allows doctors to maintain electronic records for their patients • Strengthened its offering of payroll processing solutions with its Workforce Management Division • Added several new clients to the item processing business, including the Puerto Rico Treasury Department and Puerto Rico Clearing House • Expanded ticket processing business to the United States, obtaining its first client P O P U L A R , I N C . FÉLIX M. VILLAMIL Executive Vice President, Popular, Inc., President, EVERTEC, Inc. 7%growth in ATH® Network transactions over 2005 1.3MEntered alliance with NYCE Payment Networks allowing ATH® cardholders access to over 1.3 million POS throughout the U.S. Transaction Volume (in millions) ATMs and POS Terminals in the ATH® Network 1,000 800 600 400 200 04 05 06 ● ATH ● Item Processing ● ● Business Solution Transactions* ● Other** Payment Processing 5,000 4,000 3,000 2,000 1,000 100,000 80,000 60,000 40,000 20,000 02 03 04 05 06 ● ATMs ● POS EVERTEC Total Revenue (dollars in millions) IT Professional Services 49.5 Cash Processing 10.2 Business Process Outsourcing 78.4 Transaction Processing 72.8 Business Solutions 16.8 20 06 taking action EVERTEC continues making strides towards becoming the best processing option for its customers in Puerto Rico, the Caribbean, Latin America and the United States. During 2006, we focused on increasing our core earnings and achieving high levels of quality. The Company success- fully entered new ventures and markets to fuel future growth. A proposed agreement signed by Popular in 2005 to purchase a 19.99% equity in UBCI, the holding company of Grupo Cuscatlán, was not completed. Although a setback, plans for our expansion in Central America continue. In August, our flagship ATH® Network acquired Costa Rica-based TII Smart Solutions, a provider of switching, driving and online transaction processing that also develops financial processing applications. With this acquisition EVERTEC is now serving clients in 15 countries, including Guatemala, Peru and Panama, markets entered into this past year. At year end, our ATH® Network had processed over 505.9 million transactions through 4,600 ATMs and 92,072 POS terminals. The network was also reinforced through an agree- ment with NYCE, allowing all ATH® cardholders free access to NYCE’s network of more than 1.3 million POS locations throughout the United States. EVERTEC also obtained other significant new businesses this year, including processing all images for the Puerto Rico Clearing House, and the sales tax returns for the Puerto Rico Treasury Department and two municipalities on the island. This year, we signed several new clients in our Workforce Management unit, which provides payroll processing services as well as other creative solutions designed to enhance the administration of their labor force. In the Health Services area, we launched NeoMED, a system that provides a platform to store patients’ records in an electronic format, which will become compulsory in 2010, as required by the Health Insurance Portability and Accountability Act. EVERTEC successfully entered the United States ticket-processing market, landing its first client during this year. In Puerto Rico, over 800,000 ticket sales were processed in 2006, a 15.6% growth over 2005. Important advances in our Technology Infrastructure Project (TIP), which is on schedule for completion in 2010, were also made during this year. We achieved the initial objective of integrating several banking delivery channels to the Transaction Vault in order to provide BPPR customers and service representatives access to centralized, real-time information. We also made progress in attaining TIP’s second objective, the real-time processing of transactions. EVERTEC’s growth and performance is taking place in the framework of TRAVESÍA (Journey), a sweeping internal communications program that aims to engage our people, communicate goals, improve efficiency and effectively plan and execute technology projects. Our employees have responded positively to these challenges, as shown by a substantial improvement in their commitment to the Company that was reflected in an internal engagement survey. * Includes health care transactions, mail processing transactions, and workforce management ** Includes Cash Processing and Electronic Ticketing A N N U A L R E P O R T 14 / 15 Popular, Inc. Our Creed Our People Banco Popular is a local institution dedicating its The men and women who work for our institution, efforts exclusively to the enhancement of the social from the highest executive to the employees who handle and economic conditions in Puerto Rico and inspired the most routine tasks, feel a special pride in serving by the most sound principles and fundamental our customers with care and dedication. All of them feel practices of good banking. Banco Popular pledges its efforts and resources to the development of a banking service for Puerto Rico within strict commercial practices and so efficient that it could meet the requirement of the most progressive community of the world. These words, written in 1928 by Don Rafael Carrión Pacheco, Executive Vice President and President (1927–1956), embody the philosophy of Popular, Inc. the personal satisfaction of belonging to the “Banco Popular Family,” which fosters affection and understanding among its members, and which at the same time firmly complies with the highest ethical and moral standards of behavior. These words by Don Rafael Carrión Jr., President and Chairman of the Board (1956–1991), were written in 1988 to commemorate the 95th anniversary of Banco Popular de Puerto Rico, and reflect our commitment to human resources. P O P U L A R , I N C . Institutional Values Strategic Objectives 20 06 taking action Social Commitment We are committed to work actively in promoting the social and economic well-being of the communities we serve. Excellence We believe there is only one way to do things: the right way. Innovation We foster a constant search for new solutions as a strategy to enhance our competitive advantage. Puerto Rico Strengthen our competitive position in our main market by offering the best and most complete financial services in an efficient and convenient manner. Our services will respond to the needs of all segments of the market in order to earn their trust, satisfaction and loyalty. Customer We achieve satisfaction for our customers and earn their loyalty by adding value to each interac- tion. Our relationship with the customer takes precedence over any particular transaction. Integrity We are guided by the highest standards of ethics, integrity and morality. Our customers’ trust is of utmost importance to our institution. Our People We strive to attract, develop, compensate and retain the most qualified people in a work environment characterized by discipline and affection. United States Expand our franchise in the United States by offering the most complete financial services to the communities we serve while capitalizing on our strengths in the Hispanic market. Shareholder Value Our goal is to produce high and consistent financial returns for our shareholders, based on a long-term view. Processing Provide added value by offering integrated technological solutions and financial transaction processing. A N N U A L R E P O R T 16 / 17 Popular, Inc. Corporate Leadership Circle Richard L. Carrión Chairman, President Chief Executive Officer Popular, Inc. David H. Chafey Jr. Senior Executive Vice President Popular, Inc., President, Banco Popular de Puerto Rico Roberto R. Herencia Executive Vice President, Popular, Inc. President, Banco Popular North America Amílcar Jordán, Esq. Executive Vice President Risk Management, Popular, Inc. Jorge A. Junquera Senior Executive Vice President Chief Financial Officer, Popular, Inc. Tere Loubriel Executive Vice President People, Communications and Planning Popular, Inc. Brunilda Santos de Álvarez, Esq. Executive Vice President, Chief Legal Officer, Popular, Inc. Félix M. Villamil Executive Vice President, Popular, Inc. President, EVERTEC, Inc. Bill Williams Executive Vice President, Popular, Inc. President, Popular Financial Holdings P O P U L A R , I N C . Board of Directors, Popular, Inc. 20 06 taking action Richard L. Carrión Chairman, President Chief Executive Officer Popular, Inc. Juan J. Bermúdez Partner, Bermúdez & Longo, S.E. José B. Carrión Jr. President, Collosa Corporation María Luisa Ferré President, Grupo Ferré Rangel Manuel Morales Jr. President, Parkview Realty, Inc. Francisco M. Rexach Jr. President, Capital Assets, Inc. Frederic V. Salerno Investor William J. Teuber Jr. Vice Chairman, EMC Corporation José R. Vizcarrondo President and Chief Executive Officer Desarrollos Metropolitanos, S.E. Samuel T. Céspedes, Esq. Secretary of the Board of Directors Popular, Inc. A N N U A L R E P O R T 18 / 19 Condensed Consolidated Statements of Condition, in thousands At December 31, 2006 2005 At December 31, 2006 2005 Assets Cash and due from banks Money market investments Trading securities, at fair value Investment securities available-for-sale, $ 950,158 301,708 382,325 $ 906,397 749,423 519,338 at fair value 9,850,862 11,716,586 Investment securities held-to-maturity, at amortized cost Other investment securities, at lower of cost or realizable value Loans held-for-sale, at lower of cost or market value Loans held-in-portfolio Less – Unearned income Allowance for loan losses Premises and equipment, net Other real estate Accrued income receivable Other assets Goodwill Other intangible assets 91,340 153,104 297,394 319,103 719,922 699,181 32,325,364 308,347 522,232 31,308,639 297,613 461,707 31,494,785 30,549,319 595,140 84,816 248,240 1,611,890 667,853 107,554 596,571 79,008 245,646 1,325,800 653,984 110,208 $ 47,403,987 $ 48,623,668 Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing Interest bearing Federal funds purchased and assets sold under agreements to repurchase Other short-term borrowings Notes payable Other liabilities $ 4,222,133 20,216,198 $ 3,958,392 18,679,613 24,438,331 22,638,005 5,762,445 4,034,125 8,737,246 811,424 8,702,461 2,700,261 9,893,577 1,240,002 43,783,571 45,174,306 Minority interest in consolidated subsidiaries 110 115 Stockholders’ Equity: Preferred stock Common stock Surplus Retained earnings Treasury stock – at cost Accumulated other comprehensive loss, net of tax 186,875 1,753,146 526,856 1,594,144 (206,987) 186,875 1,736,443 452,398 1,456,612 (207,081) (233,728) (176,000) 3,620,306 3,449,247 $ 47,403,987 $ 48,623,668 P O P U L A R , I N C . Condensed Consolidated Statements of Income, in thousands, except per share information 20 06 taking action Year ended December 31, 2006 2005 2004 Year ended December 31, 2006 2005 2004 Interest income Loans Money market investments Investment securities Trading securities Interest expense Deposits Short-term borrowings Long-term debt $ 2,486,453 29,626 516,237 32,125 $ 2,116,299 30,736 488,814 30,010 $ 1,751,150 25,660 413,492 25,963 3,064,441 2,665,859 2,216,265 580,094 518,960 537,477 430,813 349,203 461,636 1,636,531 1,241,652 330,351 165,425 344,978 840,754 Net interest income Provision for loan losses 1,427,910 287,760 1,424,207 195,272 1,375,511 178,657 Net interest income after provision for loan losses Service charges on deposit accounts Other service fees Net gain on sale and valuation adjustment of investment securities Trading account profit (loss) Gain on sale of loans Other operating income 1,140,150 190,079 320,875 1,228,935 181,749 331,501 1,196,854 165,241 295,551 4,359 35,288 117,421 141,463 52,113 30,051 83,297 106,564 15,254 (159) 44,168 88,716 $ 1,949,635 $ 2,014,210 $ 1,805,625 For a complete set of audited financial statements in conformity with generally accepted accounting principles in the United States of America, refer to Popular, Inc.’s 2006 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, 2006. Operating expenses Personnel costs Net occupancy expenses Equipment expenses Other taxes Professional fees Communications Business promotion Printing and supplies Impairment losses on long-lived assets Other operating expenses Impact of change in fiscal period $ 668,671 116,742 135,877 44,543 141,534 68,283 129,965 17,741 7,232 118,128 $ 622,689 108,386 124,276 39,197 119,281 63,395 100,434 18,378 $ 571,018 89,821 108,823 40,260 95,084 60,965 75,708 17,938 — 122,585 — 103,551 at certain subsidiaries 9,741 — — Amortization of intangibles and goodwill impairment losses Income before income tax and cumulative effect of accounting change Income tax Income before cumulative effect 26,616 9,579 7,844 1,485,073 1,328,200 1,171,012 464,562 106,886 686,010 148,915 634,613 144,705 of accounting change 357,676 537,095 489,908 Cumulative effect of accounting change, net of tax Net income Net income applicable to common stock Net income per common share – basic, after cumulative effect of accounting change Net income per common share – diluted, after cumulative effect of accounting change Dividends declared per common share — 357,676 345,763 1.24 1.24 0.64 3,607 540,702 528,789 1.98 1.97 0.64 $ $ $ $ $ — 489,908 477,995 1.79 1.79 0.62 $ $ $ $ $ $ $ $ $ $ A N N U A L R E P O R T 20 / 21 Historical Financial Summary – 25 Years dollars in millions, except per share data 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Selected Financial Information Net Interest Income Non-Interest Income Operating Expenses Net Income Assets Net Loans Deposits Stockholders’ Equity Market Capitalization Return on Assets (ROA) Return on Equity (ROE) Per Common Share 1 Net Income – Basic Net Income – Diluted Dividends (Declared) Book Value Market Price Assets by Geographical Area Puerto Rico United States Caribbean and Latin America Total Traditional Delivery System Banking Branches Puerto Rico Virgin Islands United States Subtotal Non-Banking Offices Popular Financial Holdings Popular Cash Express Popular Finance Popular Auto Popular Leasing, U.S.A. Popular Mortgage Popular Securities Popular Insurance Popular Insurance Agency U.S.A. Popular Insurance, V.I. EVERTEC Subtotal Total Electronic Delivery System ATMs 2 Owned and Driven Puerto Rico Caribbean United States Subtotal Driven Puerto Rico Caribbean Subtotal Total $ $ $ $ $ 151.7 15.9 121.2 27.3 2,727.0 976.8 2,208.2 163.5 99.0 0.96% 17.99% 0.19 0.19 0.04 1.11 0.69 95% 5% 100% 110 2 7 119 $ $ $ $ $ 144.9 19.6 127.3 26.8 2,974.1 1,075.7 2,347.5 182.2 119.3 0.95% 15.86% 0.19 0.19 0.06 1.24 0.83 94% 5% 1% 100% 112 3 6 121 $ $ $ $ $ 156.8 19.0 137.2 29.8 3,526.7 1,373.9 2,870.7 203.5 159.8 0.94% 15.83% 0.21 0.21 0.06 1.38 1.11 91% 8% 1% 100% 113 3 9 125 $ $ $ $ $ 174.9 26.8 156.0 32.9 4,141.7 1,715.7 3,365.3 226.4 216.0 0.89% 15.59% 0.23 0.23 0.07 1.54 1.50 92% 7% 1% 100% 115 3 9 127 $ $ $ $ $ 184.2 41.4 168.4 38.3 4,531.8 2,271.0 3,820.2 283.1 304.0 0.88% 15.12% 0.25 0.25 0.08 1.73 2.00 92% 7% 1% 100% 124 3 9 136 119 121 125 127 136 30 30 30 78 78 6 6 84 94 94 36 36 130 7.0 123.8 4,314 113 113 51 51 164 8.3 134.0 4,400 $ $ $ $ $ 207.7 41.0 185.7 38.3 5,389.6 2,768.5 4,491.6 308.2 260.0 0.76% 13.09% 0.24 0.24 0.09 1.89 1.67 94% 5% 1% 100% 126 3 9 138 $ $ $ $ $ 232.5 54.9 195.6 47.4 5,706.5 3,096.3 4,715.8 341.9 355.0 0.85% 14.87% 0.30 0.30 0.09 2.10 2.22 93% 6% 1% 100% 126 3 10 139 14 17 14 152 136 3 139 55 55 194 17 156 153 3 156 68 68 224 $ $ $ $ $ 260.9 63.3 212.4 56.3 5,972.7 3,320.6 4,926.3 383.0 430.1 0.99% 15.87% 0.35 0.35 0.10 2.35 2.69 92% 6% 2% 100% $ $ $ $ $ 284.2 70.9 229.6 63.4 8,983.6 5,373.3 7,422.7 588.9 479.1 1.09% 15.55% 0.40 0.40 0.10 2.46 2.00 89% 9% 2% 100% $ $ $ $ $ 407.8 131.8 345.7 64.6 8,780.3 5,195.6 7,207.1 631.8 579.0 0.72% 10.57% 0.27 0.27 0.10 2.63 2.41 87% 11% 2% 100% $ $ $ $ $ 440.2 124.5 366.9 85.1 10,002.3 5,252.1 8,038.7 752.1 987.8 0.89% 12.72% 0.35 0.35 0.10 2.88 3.78 87% 10% 3% 100% 128 3 10 141 18 4 22 163 151 3 154 65 65 219 173 3 24 200 26 9 35 235 211 3 214 54 54 268 161 3 24 188 27 26 9 62 250 206 3 209 73 73 282 162 3 30 195 41 26 9 76 271 211 3 6 220 81 81 301 12.7 139.1 4,699 14.9 159.8 5,131 16.1 161.9 5,213 18.0 164.0 7,023 23.9 166.1 7,006 28.6 170.4 7,024 Transactions (in millions) Electronic Transactions 3 Items Processed Employees (full-time equivalent) 98.5 3,816 0.6 102.1 3,832 4.4 110.3 4,110 1 Per common share data adjusted for stock splits. 2 Does not include host-to-host ATMs (2,152 in 2006) which are neither owned nor driven, but are part of the ATH Network. P O P U L A R , I N C . $ $ $ $ $ $ $ $ $ $ 492.1 125.2 412.3 109.4 11,513.4 6,346.9 8,522.7 834.2 1,014.7 1.02% 13.80% 0.42 0.42 0.12 3.19 3.88 79% 16% 5% 100% 165 8 32 205 58 26 8 92 297 234 8 11 253 86 86 339 0.46 0.46 0.13 3.44 3.52 76% 20% 4% 100% 166 8 34 208 73 28 10 111 319 262 8 26 296 88 88 384 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 535.5 141.3 447.8 124.7 12,778.4 7,781.3 9,012.4 1,002.4 923.7 $ 584.2 173.3 486.8 146.4 15,675.5 8,677.5 9,876.7 1,141.7 $ 1,276.8 $ 681.3 205.5 541.9 185.2 16,764.1 9,779.0 10,763.3 1,262.5 $ 2,230.5 $ 784.0 247.6 636.9 209.6 19,300.5 11,376.6 11,749.6 1,503.1 $ 3,350.3 $ 873.0 291.2 720.4 232.3 23,160.4 13,078.8 13,672.2 1,709.1 $ 4,611.7 $ 953.7 372.9 837.5 257.6 25,460.5 14,907.8 14,173.7 1,661.0 $ 3,790.2 $ 982.8 464.1 876.4 276.1 28,057.1 16,057.1 14,804.9 1,993.6 $ 3,578.1 $ 1,056.8 491.8 926.2 304.5 30,744.7 18,168.6 16,370.0 2,272.8 $ 3,965.4 $ 1,160.2 543.8 1,029.0 351.9 33,660.4 19,582.1 17,614.7 2,410.9 $ 4,476.4 $ 1,284.7 626.0 1,113.1 470.9 36,434.7 22,602.2 18,097.8 2,754.4 $ 5,960.2 $ 1,375.5 608.8 1,171.0 489.9 44,401.6 28,742.3 20,593.2 3,104.6 $ 7,685.6 $ 1,424.2 785.3 1,328.2 540.7 48,623.7 31,710.2 22,638.0 3,449.2 $ 5,836.5 $ 1,427.9 809.5 1,485.1 357.7 47,404.0 32,736.9 24,438.3 3,620.3 $ 5,003.4 1.02% 13.80% 1.04% 14.22% 1.14% 16.17% 1.14% 15.83% 1.14% 15.41% 1.08% 15.45% 1.04% 15.00% 1.09% 14.84% 1.11% 16.29% 1.36% 19.30% 1.23% 17.60% 1.17% 17.12% 0.74% 9.73% $ $ $ 0.53 0.53 0.15 3.96 4.85 $ $ $ 0.67 0.67 0.18 4.40 8.44 $ $ $ 0.75 0.75 0.20 5.19 12.38 $ $ $ 0.83 0.83 0.25 5.93 17.00 $ $ $ 0.92 0.92 0.30 5.76 13.97 $ $ $ 0.99 0.99 0.32 6.96 13.16 $ $ $ 1.09 1.09 0.38 7.97 14.54 $ $ $ 1.31 1.31 0.40 9.10 16.90 $ $ $ 1.74 1.74 0.51 9.66 22.43 $ $ $ 1.79 1.79 0.62 10.95 28.83 $ $ $ 1.98 1.97 0.64 11.82 21.15 $ $ $ 1.24 1.24 0.64 12.32 17.95 75% 21% 4% 100% 74% 22% 4% 100% 74% 23% 3% 100% 71% 25% 4% 100% 71% 25% 4% 100% 72% 26% 2% 100% 68% 30% 2% 100% 66% 32% 2% 100% 62% 36% 2% 100% 55% 43% 2% 100% 53% 45% 2% 100% 52% 45% 3% 100% 166 8 40 214 91 31 9 3 134 348 281 8 38 327 120 120 447 178 8 44 230 102 39 8 3 1 153 383 327 9 53 389 162 97 259 648 201 8 63 272 117 44 10 7 3 2 183 455 391 17 71 479 170 192 362 841 198 8 89 295 128 51 48 10 8 11 2 258 553 421 59 94 574 187 265 452 1,026 130.5 170.9 10,549 199 8 91 298 137 102 47 12 10 13 2 4 327 625 442 68 99 609 102 851 953 1,562 159.4 171.0 11,501 199 8 95 302 136 132 61 12 11 21 3 2 4 382 684 478 37 109 624 118 920 1,038 1,662 199.5 160.2 10,651 196 8 96 300 149 154 55 20 13 25 4 2 1 4 427 727 524 39 118 681 155 823 978 1,659 206.0 149.9 11,334 195 8 96 299 153 195 36 18 13 29 7 2 1 1 5 460 759 539 53 131 723 174 926 1,100 1,823 236.6 145.3 11,037 193 8 97 298 181 129 43 18 11 32 8 2 1 1 5 431 729 557 57 129 743 176 1,110 1,286 2,029 255.7 138.5 11,474 192 8 128 328 183 114 43 18 15 30 9 2 1 1 7 423 751 568 59 163 790 167 1,216 1,383 2,173 568.5 133.9 12,139 194 8 136 338 213 4 49 17 14 33 12 2 1 1 8 354 692 583 61 181 825 212 1,726 1,938 2,763 625.9 140.3 13,210 191 8 142 341 159 — 52 15 11 32 12 2 1 1 12 297 638 605 65 192 862 226 1,360 1,586 2,448 690.2 150.0 12,508 33.2 171.8 7,533 43.0 174.5 7,606 56.6 175.0 7,815 78.0 173.7 7,996 111.2 171.9 8,854 3 From 1981 to 2003, electronic transactions include ACH, Direct Payment, TelePago, Internet Banking and ATH Network transactions in Puerto Rico. Since 2004, these numbers were adjusted to include ATH Network transactions in the Dominican Republic, Costa Rica, El Salvador and United States, health care transactions, wire transfers, and other electronic payment transactions in addition to those previously stated. A N N U A L R E P O R T 22 / 23 Corporate Information Subsidiaries Stockholders’ Information Popular Financial Holdings, Inc. Equity One, Inc. (DE Corp.) E-LOAN Auto Fund Two, LLC Popular ABS, Inc. Popular Warehouse Lending, LLC Equity One, Incorporate Equity One of West Virginia, Inc. Equity One Consumer Funding, LLC Equity One, Inc. (MN Corp.) Equity One Consumer Loan Company, Inc. Equity One Holding Company Equity One Funding Company Popular Financial Services, LLC Popular Housing Services, Inc. Popular Mortgage Servicing, Inc. E-LOAN Insurance Services, Inc. EVERTEC, Inc. EVERTEC Dominicana, S.A. EVERTEC de Venezuela, C.A. ScanData Puerto Rico, Inc. Sense Software International Corp. Popular Life Re Popular Securities, Inc. Banco Popular de Puerto Rico Popular Auto, Inc. Popular Finance, Inc. Popular Mortgage, Inc. Popular International Bank, Inc. TII Smart Solutions, Inc. Tarjetas Inteligentes Internacionales, S.A. TII Smart Solutions (Costa Rica), S.A. Payment Technologies, S.A. Technological Ventures, Inc., S.A. TII Smart Solutions (Guatemala), S.A. Servicios EFT, S.A. Popular Insurance, V.I., Inc. ATH Costa Rica, S.A. CreST, S.A. Popular North America, Inc. Banco Popular, National Association EVERTEC USA, Inc. Banco Popular North America E-LOAN, Inc. Escrow Closing Services, Inc. Equity Real Estate Solutions, LLC Popular FS, LLC BPNA Real Estate, Inc. Popular Leasing, USA Popular Insurance Agency USA, Inc. Popular Insurance, Inc. P O P U L A R , I N C . Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Annual Meeting The 2007 Annual Stockholders’ Meeting of Popular, Inc. will be held on Tuesday, May 1, at 9:00 a.m. at Centro Europa Building in San Juan, Puerto Rico. Additional Information The Annual Report to the Securities and Exchange Commission on Form 10-K and any other financial information may also be viewed by visiting our website: www.popular.com Design: BD&E Inc., Pittsburgh, Pennsylvania Photography: Felix Rivera Printing: Hoechstetter Printing, an RR Donnelley Company 

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