Popular Inc Annual Report 2006

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FY2006 Annual Report · Popular Inc

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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.

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

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.

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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%

Total Return Including Dividend
and Dividend Reinvestment

8
.
9
1

0
.
5
1

3
.
7
1

3
.
8
1

25%

20%

15%

10%

● Assets (dollars in billions)
● Net Income (dollars in millions)

● ROA
● ROE

YEARS

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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

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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

● 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

$2,000

$1,500

$1,000

$500

● Revenues
● Expenses
● Efficiency Ratio

● Assets
● Loans

● Deposits

● 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

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

“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

● 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

● 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

0.64

3,607

540,702

528,789

1.98

1.97

0.64

—

489,908

477,995

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

6
84

36
130

7.0
123.8

4,314

113

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
152

136
3

139

55
194

17
156

153
3

156

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
219

173
3
24
200

26
9

35
235

211
3

214

54
268

161
3
24
188

26
9

62
250

206
3

209

73
282

162
3
30
195

26
9

76
271

211
3
6
220

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

26
8

92
297

234
8
11
253

86
339

0.46
0.46
0.13
3.44
3.52

76%
20%
4%
100%

166
8
34
208

28
10

111
319

262
8
26
296

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%

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

31
9

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

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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