POPULAR, INC.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 0-13818
POPULAR, INC.
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0667416
Principal Executive Offices:
209 Muñoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Telephone Number: (787) 765-9800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($6.00 par value)
Series A Participating Cumulative Preferred Stock Purchase Rights
6.375% Noncumulative Monthly Income Preferred Stock, 2003 Series A
6.70% Cumulative Monthly Income Trust Preferred Securities
6.125% Cumulative Monthly Income Trust Preferred Securities
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section (15d) of the Act. Yes o No þ.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer.
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
As of June 30, 2005, the aggregate market value of the common stock held by non-affiliates of the
Corporation was $6,724,043,000 based upon the reported closing price of $25.19 on the
NASDAQ National Market System on that date.
As of February 28, 2006, there were 278,141,020 shares of the Corporation’s common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Corporation’s Annual Report to Shareholders for the fiscal year ended
December 31, 2005 ( the “Annual Report”) are incorporated herein by reference in response to Item 1
of Part I, Items 5 through 8 of Part II and Item 15 (a)(1) of Part IV.
(2) Portions of the Corporation’s definitive proxy statement relating to the 2006 Annual
Meeting of Stockholders of the Corporation (the “Proxy Statement”) are incorporated herein by
reference in response to Items 10 through 14 of Part III. The Proxy Statement will be filed with
the Securities and Exchange Commission (the “SEC”) on or about March 14, 2006.
Forward-Looking Statements
Certain statements in this report are “forward-looking” statements within the meaning of the
U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate
to the Corporation’s financial condition, results of operations, plans, objectives, future
performance and business, including, but not limited to, statements with respect to the adequacy of
the allowance for loan losses, market risk and the impact of interest rate changes, capital
adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the
Corporation’s financial condition and results of operations. All statements contained herein that
are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,”
“continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or
conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar
expressions are generally intended to identify forward-looking statements.
These forward-looking statements involve certain risks, uncertainties, estimates and
assumptions by management. Various factors, some of which are beyond the Corporation’s control,
could cause actual results to differ materially from those contemplated by such forward-looking
statements. Factors that might cause such a difference include, but are not limited to:
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the rate of growth in the economy, as well as general business and economic conditions; |
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changes in interest rates, as well as the magnitude of such changes; |
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the fiscal and monetary policies of the federal government and its agencies; |
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the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets; |
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the performance of the stock and bond markets; |
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competition in the financial services industry; |
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possible legislative or regulatory changes; and |
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difficulties in combining the operations of acquired entities. |
Moreover, the outcome of legal proceedings, as discussed in “Part I, Item 3. Legal
Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the
findings of regulators, judges and juries.
All forward-looking statements included in this document are based upon information available
to the Corporation as of the date of this document, and we assume no obligation to update or revise
any such forward-looking statements.
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PART I
POPULAR, INC.
ITEM 1. BUSINESS
GENERAL
Popular, Inc. (the “Corporation”) is a diversified, publicly owned bank holding company,
registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and, accordingly,
subject to the supervision and regulation of the Board of Governors of the Federal Reserve System
(“the Federal Reserve Board”). The Corporation was incorporated in 1984 under the laws of the
Commonwealth of Puerto Rico and is the largest financial institution based in Puerto Rico, with
consolidated assets of $48.6 billion, total deposits of $22.6 billion and stockholders’ equity of
$3.4 billion at December 31, 2005. At December 31, 2005, the Corporation ranked 25th in
assets and 33rd in market value of its common stock among U.S. bank holding companies
based on public information gathered and published by SNL Securities.
The Corporation’s principal bank subsidiary, Banco Popular de Puerto Rico (“Banco Popular” or
the “Bank”), was organized in 1893 and is Puerto Rico’s largest bank with consolidated total assets
of $25.7 billion, deposits of $14.3 billion and stockholder’s equity of $1.6 billion at December
31, 2005. The Bank accounted for 53% of the total consolidated assets of the Corporation at
December 31, 2005. Banco Popular has the largest retail franchise in Puerto Rico, with 195 branches
and over 580 automated teller machines and has the largest trust operation in Puerto Rico.
The Bank also operates seven branches in the U.S. Virgin Islands, one branch in the British Virgin
Islands and one branch in New York. Banco Popular’s deposits are insured under the Bank Insurance
Fund (“BIF”) of the Federal Deposit Insurance Corporation (the “FDIC”). Banco Popular has three
subsidiaries, Popular Auto, Inc., Puerto Rico’s largest vehicle financing, leasing and daily rental
company, Popular Finance, Inc., a small personal loan and mortgage company with 42 offices and
seven mortgage centers in Puerto Rico, and Popular Mortgage, Inc., a mortgage loan company with 33
offices in Puerto Rico.
The Corporation has three other principal subsidiaries: Popular Securities, Inc., Popular
International Bank, Inc. (“PIB”) and EVERTEC, Inc. (formerly GM Group, Inc.). Popular Securities,
Inc. is a securities broker-dealer with operations in Puerto Rico and in the mainland United
States. Popular Securities, Inc. offers financial advisory, investment and security brokerage
services for institutional and retail customers. EVERTEC, Inc. provides electronic data processing
and consulting services, sale and rental of electronic data processing equipment, and sale and
maintenance of computer software to clients in the United States, the Caribbean and Latin America
through offices in Puerto Rico, Venezuela, Miami and the Dominican Republic. At December 31, 2005,
EVERTEC, Inc. had total assets of $208 million.
PIB is a wholly owned subsidiary of the Corporation organized in 1992 that operates as an
“international banking entity” under the International Banking Center Regulatory Act of Puerto Rico
(the “IBC Act”). PIB is a registered bank holding company under the BHC Act and is principally
engaged in providing managerial services to its subsidiaries.
PIB owns the outstanding stock of Popular North America, Inc. (“PNA”), ATH Costa Rica, CreST,
S.A and Popular Insurance V.I., Inc., an insurance agency. ATH Costa Rica and CreST, S.A. provide
ATM switching and driving services in San José, Costa Rica. In addition, PIB has equity investments
in Consorcio de Tarjetas Dominicanas (CONTADO), the largest payment network in the Dominican
Republic, in Banco Hipotecario Dominicano (BHD) also in the Dominican Republic and in Servicios
Financieros, S.A. (Serfinsa), the largest ATM network in El Salvador.
In addition, the Corporation has three other subsidiaries, Popular Life RE, a reinsurance
company, Popular Capital Trust I and Popular Capital Trust II, statutory business trusts.
PNA, a wholly owned subsidiary of PIB and an indirect wholly-owned subsidiary of the
Corporation, was organized in 1991 under the laws of the State of Delaware and is a registered bank
holding company under the BHC Act. PNA functions as a holding company for the Corporation’s
mainland U.S. operations. As of December 31, 2005, PNA had six direct subsidiaries, all of which
were wholly-owned: Banco Popular North America (“BPNA”), a full service commercial bank
incorporated in the state
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of New York; Popular Financial Holdings, Inc., a diversified consumer finance company;
Popular Cash Express, Inc., (“PCE”) a retail financial services company (see recent main
developments section below for further information of PCE); BanPonce Trust I and Popular North
America Capital Trust I, statutory business trusts; and Banco Popular, National Association (“Banco
Popular, N.A.”), a federally chartered national bank with its main office in Orlando, Florida,
which as of December 31, 2005, operated one branch, with assets of $34.4 million and deposits of
$13.8 million. Popular Insurance, Inc., a wholly-owned non-bank subsidiary of Banco Popular, N.A.
and an indirect subsidiary of PNA, is a general insurance agency that offers insurance products in
Puerto Rico. As of December 31, 2005, its assets amounted to $52.1 million.
The banking operations of BPNA in the mainland United States are based in six states. In New
York, BPNA operates 32 branches, which accounted for aggregate assets of $2.8 billion and total
deposits of $2.6 billion at December 31, 2005. BPNA also operates 19 branches in Illinois and 46 in
California with total assets of $2.0 billion and $3.4 billion, respectively, and deposits of $1.7
billion and $1.8 billion, respectively. In addition, BPNA has 14 branches in New Jersey with total
assets of $899 million and deposits of $864 million as of December 31, 2005, and 18 branches in
Florida with total assets of $1.8 billion and deposits of $1.3 billion. In Texas, BPNA operates
seven branches with aggregate assets of $1.1 billion and total deposits of $174 million at the same
date. The deposits of BPNA are insured under the BIF by the FDIC.
In addition, BPNA owns all of the outstanding stock of Popular Leasing, USA, a non-banking
subsidiary that offers small ticket equipment leasing with 14 offices in 12 states and total assets
of $387.3 million as of December 31, 2005. Popular FS, LLC, also a wholly owned subsidiary of BPNA,
is engaged in the business of purchasing mortgage loans and its assets totaled $496.7 million at
December 31, 2005. Popular Insurance Agency USA, Inc., a wholly owned subsidiary of BPNA, acts as
an agent or broker for issuing insurance with total assets of $2.5 million as of December 31, 2005.
Popular Financial Holdings, Inc, is the holding company of Equity One, Inc. Equity One, Inc.,
is engaged in the business of granting personal and mortgage loans and providing dealer financing
through 213 offices in 34 states. Popular Financial Services, LLC, a direct subsidiary of Equity
One, Inc., is the wholesale operation which both acquires pools of non-prime loans from mortgage
bankers and originates individual mortgage loans through a network of over 2,000 approved mortgage
brokers and bankers throughout the U.S. In addition, Popular Warehouse Lending, LLC, a direct
subsidiary of Equity One, Inc. provides revolving credit lines ranging from $2 to $15 million to
small and mid-size mortgage bankers. Popular Financial Holdings, Inc. had total assets of $9.2
billion as of December 31, 2005.
Recent Main Developments
ACQUISITION OF E-LOAN
In August 2005, the Corporation and E-LOAN, Inc., a California-based online consumer direct lender,
announced the signing of a definitive merger agreement under which the Corporation acquired 100% of
the issued and outstanding shares of common stock and common stock equivalents of E-LOAN, Inc. for
$4.25 per share in cash, or approximately $300 million. This transaction was completed effective
November 1, 2005. E-LOAN, Inc., which became a wholly-owned subsidiary of Popular Financial
Holdings, Inc., originated over $5 billion in mortgage, home equity, and auto loans in 2004.
ACQUISITION OF ASSETS OF INFINITY MORTGAGE CORPORATION
In September 2005, the Corporation announced a definitive merger agreement to acquire the assets of
Infinity Mortgage Corporation, based in New Jersey. Infinity Mortgage Corporation originated over
$220 million in mortgage loans during 2004 and operates in New Jersey, New York, Connecticut,
Maryland, Massachusetts and Pennsylvania. The transaction was completed on November 11, 2005 and
the operations of Infinity Mortgage became part of the mortgage business of Equity One, Inc.
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SALE OF ASSETS OF POPULAR CASH EXPRESS
In September 2005, the Corporation announced that ACE Cash Express, Inc. will acquire substantially
all of the assets of PCE, the Corporation’s wholly-owned check cashing business in the United
States. The transaction was completed in the fourth quarter of 2005. As of the end of 2005, PCE
continued to operate four offices in the states of Arizona and California.
The Corporation’s business is described in more detail on pages 1 through 36 of the Business
Review Section of the Annual Report to Shareholders for the year ended December 31, 2005, which is
incorporated herein by reference.
REGULATION AND SUPERVISION
General
The Corporation, PIB and PNA are bank holding companies subject to supervision and regulation
by the Federal Reserve Board under the BHC Act. Under the BHC Act, prior to the adoption of the
Gramm Leach Bliley Act in 1999, the activities of bank holding companies and their banking and
non-banking subsidiaries were limited to the business of banking and activities closely related to
banking, and no bank holding company could directly or indirectly acquire ownership or control of
more than 5% of any class of voting shares or substantially all of the assets of any company in the
United States, including a bank, without the prior approval of the Federal Reserve Board. In
addition, bank holding companies generally have been prohibited under the BHC Act from engaging in
non-banking activities, unless they were found by the Federal Reserve Board to be closely related
to banking. The Gramm Leach Bliley Act authorized bank holding companies that qualify as “financial
holding companies” to engage in a substantially broader range of non-banking activities, subject to
certain conditions. Effective April 30, 2002, the Corporation elected to be treated as a Financial
Holding Company. See “Financial Services
Modernization” below for information regarding changes to these rules.
Banco Popular, BPNA and Banco Popular, N.A. are subject to supervision and examination by
applicable federal and state banking agencies including, in the case of Banco Popular, the Federal
Reserve Board and the Office of the Commissioner of Financial Institutions of Puerto Rico, in the
case of BPNA, the Federal Reserve Board and the New York State Banking Department and in the case
of Banco Popular, N.A., the Office of the Comptroller of the Currency (“OCC”) and the Commissioner
of Financial Institutions of Puerto Rico. Banco Popular, BPNA and Banco Popular, N.A. are subject
to requirements and restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts of loans that may be granted and
the interest that may be charged thereon, and limitations on the other types of investments that
may be made and the types of services that may be offered. Various consumer laws and regulations
also affect the operations of Banco Popular, BPNA and Banco Popular, N.A. See “Financial Services
Modernization” below for information about changes made to these rules. In addition to the impact
of regulations, commercial banks are affected significantly by the actions of the Federal Reserve
Board as it attempts to control the money supply and credit availability in order to influence the
economy.
Prompt Corrective Action
The Federal Deposit Insurance Act (the “FDIA”) requires, among other things, the federal
banking agencies to take prompt corrective action in respect of depository institutions that do not
meet minimum capital requirements. The FDIA establishes five capital tiers: “well capitalized”,
“adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically
undercapitalized”. The relevant capital measures are the total risk-based capital ratio, the Tier 1
risk-based capital ratio and the leverage ratio.
Rules adopted by the federal banking agencies provide that a depository institution will be
deemed to be (1) well capitalized if it maintains a leverage ratio of at least 5%, a Tier 1
risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10% and is
not subject to any written agreement or
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directive to meet a specific capital level; (2) adequately capitalized, if it is not well
capitalized, but maintains a leverage ratio of at least 4% (or at least 3% if given the highest
regulatory rating and not experiencing or anticipating significant growth), a Tier 1 risk-based
capital ratio of at least 4% and a total risk-based capital ratio of at least 8%; (3)
undercapitalized if it fails to meet the standards for adequately capitalized institutions (unless
it is deemed significantly or critically undercapitalized); (4) significantly undercapitalized if
it has a leverage ratio of less than 3%, a Tier 1 risk-based capital ratio of less than 3% or a
total risk-based capital ratio of less than 6%; and (5) critically undercapitalized if it has
tangible equity equal to 2% or less of total assets.
At December 31, 2005, Banco Popular, BPNA and Banco Popular, N.A. were all well capitalized.
An institution’s capital category, as determined by applying the prompt corrective action
provisions of law, may not constitute an accurate representation of the overall financial condition
or prospects of the institution, and the capital condition of the Corporation’s banking
subsidiaries should be considered in conjunction with other available information regarding the
Corporation’s financial condition and results of operations.
The appropriate federal banking agency may, under certain circumstances, reclassify a well
capitalized insured depository institution as adequately capitalized. The appropriate agency is
also permitted to require an adequately capitalized or undercapitalized institution to comply with
the supervisory provisions as if the institution were in the next lower category (but not treat a
significantly undercapitalized institution as critically undercapitalized) based on supervisory
information other than the capital levels of the institution.
The FDIA provides that an institution may be reclassified if the appropriate federal banking
agency determines (after notice and opportunity for hearing) that the institution is in an unsafe
or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
The FDIA generally prohibits a depository institution from making any capital distribution
(including payment of a dividend) or paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized. Undercapitalized depository
institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and are required to
submit capital restoration plans. A depository institution’s holding company must guarantee the
capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at
the time it becomes undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions and is likely to
succeed in restoring the depository institution’s capital. If a depository institution fails to
submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment of a receiver or
conservator.
The capital-based prompt corrective action provisions of the FDIA apply to FDIC-insured
depository institutions such as Banco Popular, BPNA and Banco Popular, N.A., but they are not
directly applicable to holding companies such as the Corporation, PIB and PNA, which control such
institutions. However, the federal banking agencies have indicated that, in regulating holding
companies, they may take appropriate action at the holding company level based on their assessment
of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions
pursuant to such provisions and regulations.
Holding Company Structure
Banco Popular, BPNA and Banco Popular, N.A. are subject to restrictions under federal law that
limit the transfer of funds by any of them to the Corporation, PIB, PNA, or any of the
Corporation’s other non-banking subsidiaries, whether in the form of loans, other extensions of
credit, investments or asset
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purchases. Such transfers by Banco Popular, BPNA and Banco Popular, N.A. to any of the
Corporation, PIB, PNA, or any non-banking subsidiaries are limited in amount to 10% of the
transferring institution’s capital stock and surplus and, with respect to the Corporation and all
of its non-banking subsidiaries, to an aggregate of 20% of the transferring institution’s capital
stock and surplus. For these purposes an institution’s capital stock and surplus includes its total
risk-based capital plus (1) the balance of its allowance for loan losses not included therein and
(2) the amount of certain investments made by the institution in “financial subsidiaries” that is
required to be deducted from the institution’s capital for regulatory capital purposes.
Furthermore, any such loans and extensions of credit are required to be secured in specified
amounts. In addition, federal law requires that any transaction between Banco Popular, BPNA or
Banco Popular, N.A., on the one hand, and the Corporation, PIB, PNA or any of the Corporation’s
other non-banking subsidiaries, on the other hand, be carried out on an arm’s length basis.
Under the Federal Reserve Board policy, a bank holding company such as the Corporation, PIB or
PNA is expected to act as a source of financial strength to each of its subsidiary banks and to
commit resources to support each subsidiary bank. This support may be required at times when,
absent such policy, the bank holding company might not otherwise provide such support. In
addition, any capital loans by a bank holding company to any of its subsidiary depository
institutions are subordinated in right of payment to deposits and to certain other indebtedness of
such subsidiary depository institution. In the event of a bank holding company’s bankruptcy, any
commitment by the bank holding company to a federal banking agency to maintain the capital of a
subsidiary depository institution will be assumed by the bankruptcy trustee and entitled to a
priority of payment. Banco Popular, BPNA and Banco Popular, N.A. are currently the only depository
institution subsidiaries of the Corporation, PIB and PNA.
Because the Corporation, PIB and PNA are holding companies, their right to participate in the
assets of any subsidiary upon the latter’s liquidation or reorganization will be subject to the
prior claims of the subsidiary’s creditors (including depositors in the case of subsidiary
depository institutions) except to the extent that the Corporation, PIB or PNA, as the case may be,
may itself be a creditor with recognized claims against the subsidiary.
Under the FDIA, a depository institution, the deposits of which are insured by the FDIC, can
be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository institution or
(ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository
institution “in danger of default”. “Default” is defined generally as the appointment of a
conservator or a receiver, and “in danger of default” is defined generally as the existence of
certain conditions indicating that a default is likely to occur in the absence of regulatory
assistance. Banco Popular, BPNA and Banco Popular, N.A. are currently FDIC-insured depository
institution subsidiaries of the Corporation and are subject to this cross-guarantee liability. In
some circumstances (depending upon the amount of the loss or anticipated loss suffered by the
FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more
insured depository institutions in a holding company structure. Any obligation or liability owed by
a subsidiary depository institution to its parent company is subordinated to the subsidiary
depository institution’s cross-guarantee liability with respect to commonly controlled FDIC-insured
depository institutions.
Dividend Restrictions
The principal source of cash flow for the Corporation is dividends from Banco Popular. Various
statutory provisions limit the amount of dividends Banco Popular may pay to the Corporation without
regulatory approval. As a member bank subject to the regulation of the Federal Reserve Board,
Banco Popular must obtain the approval of the Federal Reserve Board for any dividend, if the total
of all dividends declared by the member bank during the calendar year would exceed the total of its
net income (as reportable in its Report of Condition and Income) for that year, combined with its
retained net income (as defined by regulation) for the preceding two years, less any required
transfers to surplus or to a fund for the retirement of any preferred stock. In addition, a member
bank may not declare or pay a dividend in an amount greater than its undivided profits as reported
in its Report of Condition and Income, unless the member bank has received the approval of the
Federal Reserve Board. A member bank also may not permit any portion of its permanent capital to be
withdrawn unless the withdrawal has been approved by the
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Federal Reserve Board. For this purpose, permanent capital means the total of the bank’s
perpetual preferred stock and related surplus, common stock and surplus and minority interests in
consolidated subsidiaries, as reportable in the Report of Condition and Income. At December 31,
2005, Banco Popular could have declared a dividend of approximately $231 million without the
approval of the Federal Reserve Board.
The payment of dividends by Banco Popular, BPNA and Banco Popular, N.A. may also be affected
by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in
the opinion of the applicable regulatory authority, a depository institution under its jurisdiction
is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the
financial condition of the depository institution, could include the payment of dividends), such
authority may require, after notice and hearing, that such depository institution cease and desist
from such practice. In addition, all FDIC-insured depository institutions are subject to the
capital-based limitations required by the FDIA. See “-Prompt Corrective Action” above.
See “–Puerto Rico Regulation-General” below for a description of certain restrictions on Banco
Popular’s ability to pay dividends under Puerto Rico law.
FDIC Insurance Assessments
Banco Popular, BPNA and Banco Popular, N.A. are subject to FDIC deposit insurance assessments.
Pursuant to the FDIA, the FDIC has adopted a risk-based assessment system, under which the
assessment rate for an insured depository institution varies according to the level of risk
incurred in its activities. An institution’s risk category is based partly upon whether the
institution is well capitalized, adequately capitalized or less than adequately capitalized. Each
FDIC-insured depository institution is currently assigned to one of the following “supervisory
subgroups”: “A”, “B” or “C”. Group “A” institutions are financially sound institutions with only a
few minor weaknesses; Group “B” institutions are institutions that demonstrate weaknesses that, if
not corrected, could result in significant deterioration; and Group “C” institutions are
institutions for which there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct the areas of weakness.
Currently, premiums related to deposits assessed by both the BIF and the Savings Association
Insurance Fund (“SAIF”) are to be assessed at an annual rate of between 0 cents and 27 cents per
$100.00 of deposits.
Because of favorable loss experience and a healthy reserve ratio in the BIF, well capitalized
and well managed banks, including the Corporation’s bank subsidiaries, have in recent years paid no
premiums for FDIC insurance.
On February 8, 2006 the President signed the Federal Deposit Insurance Reform Act of 2005 (the
“Act”). The Act provides for the merger of the BIF and SAIF into a single Deposit Insurance Fund,
and increase the maximum amount of the insurance coverage for certain retirement accounts, and
possible “inflation adjustments” in the maximum amount of coverage available with respect to other
insured accounts. The FDIC is expected to promulgate implementing regulations in the near future,
under which, even well capitalized and well managed banks may be required to pay premiums on
deposit insurance. It is not possible to determine when any such premiums will become assessable or
the level of such premiums.
The Deposit Insurance Funds Act of 1996 also separated the Financing Corporation (“FICO”)
assessment to service the interest on its bond obligations from the BIF and SAIF assessment. The
amount assessed on individual institutions by the FICO is in addition to the amount, if any, paid
for deposit insurance according to the FDIC’s risk-related assessment rate schedules. The current
FICO annual assessment rate is 1.32 cents per $100 of deposits. As of December 31, 2005, the Corporation
had a BIF deposit assessment base of approximately $21.9 billion.
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Brokered Deposits
FDIC regulations adopted under FDIA govern the receipt of brokered deposits. Under these
regulations, a bank cannot accept, roll over or renew brokered deposits (which term is defined also
to include any deposit with an interest rate more than 75 basis points above prevailing rates)
unless it is (i) well capitalized or (ii) adequately capitalized and receives a waiver from the
FDIC. A bank that is adequately capitalized may not pay an interest rate on any deposits in excess
of 75 basis points over certain prevailing market rates specified by regulation. There are no such
restrictions on a bank that is well capitalized. The Corporation does not believe the brokered
deposits regulation has had or will have a material effect on the funding or liquidity of Banco
Popular, BPNA or Banco Popular, N.A.
Capital Adequacy
Information about the capital composition of the Corporation as of December 31, 2005 and for
the four previous years is presented in Table I “Capital Adequacy Data” on page 28 in the
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”).
Under the Federal Reserve Board’s risk-based capital guidelines for bank holding companies and
member banks, the minimum ratio of qualifying total capital (“Total Capital”) to risk-weighted
assets (including certain off-balance sheet items, such as standby
letters of credit) is 8%. Under the capital guidelines, a banking
organization’s Total Capital is divided into tiers. “Tier
1 Capital” consists of common equity, retained earnings, minority
interest in equity accounts of consolidated subsidiaries, qualifying non-cumulative perpetual
preferred stock and a limited amount of cumulative perpetual preferred stock less goodwill and
certain other intangible assets. Not more than 25% of qualifying
Tier 1 Capital may consist of noncumulative perpetual preferred stock,
trust preferred securities or other “so-called” restricted
core capital elements. “Tier 2 Capital” consists of, among
other things, a limited amount
of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan
and lease loss reserves. “Tier 3 Capital” consists of
qualifying unsecured subordinated debt. The sum of Tier 2 and Tier 3
Capital may not exceed the amount of Tier 1 Capital.
In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for
bank holding companies and member banks. These guidelines provide for a minimum ratio of Tier 1
Capital to total assets, less goodwill and certain other intangible assets discussed below (the
“leverage ratio”) of 3% for bank holding companies and member banks that have the highest
regulatory rating or have implemented the Federal Reserve Board’s market risk capital measure. All
other bank holding companies and member banks are required to maintain a minimum leverage ratio of
4%. The guidelines also provide that banking organizations experiencing internal growth or making
acquisitions are expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines
indicate that the Federal Reserve Board will continue to consider a “tangible Tier 1 leverage
ratio” and other indicia of capital strength in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization’s Tier 1
Capital less all intangibles, to total assets less all intangibles.
Banco Popular and BPNA are subject to the risk-based and leverage capital requirements adopted
by the Federal Reserve Board. Banco Popular, N.A. is subject to substantially similar requirements
of the OCC. See Consolidated Financial Statements, Note 19 “Regulatory Capital Requirements” on
page 92 and 93 for the capital ratios of the Corporation, Banco Popular and BPNA. Failure to meet
capital guidelines could subject the Corporation and its depository institution subsidiaries to a
variety of enforcement remedies, including the termination of deposit insurance by the FDIC and to
certain restrictions on its business. See “- Prompt Corrective Action”.
The U.S. federal bank regulatory agencies’ risk-capital guidelines are based upon the 1988
capital accord of the Basel Committee on Banking Supervision (the “BSC”). The BSC is a committee
comprised by central bank governors and bank supervisor authorities of the Group of Ten countries
(G10). The BSC is in charge of developing broad policy guidelines used by each country’s supervisor
to determine its own supervisory guidelines. In January 2001 the BSC released a proposal to replace
the 1988 capital accord with a new set of guidelines. The new Basel Accord (Basel II) would set for
the first time capital requirements for operational risk and refine the existing capital
requirements for credit risk and market risk exposures. The 1988 capital accord does not include a
separate capital requirement for operational risk,
10
which is defined under the proposed accord as the risk of direct or indirect loss resulting
from inadequate or failed internal processes, people and systems or from external events. The
federal regulatory agencies are expected to release the latest Notice for Proposed Rulemaking (NPR)
and related supervisory guidance by the first quarter of 2006. Under the current timeline, Basel II
is expected to be adopted by mandatory and opt-in banks beginning January 2008.
Basel II is still under revision in response to industry, national and regulatory
commentaries. Factors such as the capital charge for addressing operational risk are still
undergoing changes. In addition, in 2005 federal regulatory banking agencies proposed a revised
version of the current capital accord (Basel IA). This proposal is expected to correct material
differences between financial institutions adopting Basel II and those institutions remaining under
the current regulatory capital regime. The Corporation is closely monitoring the implementation
process of these regulatory proposals, and will assess their impact on minimum capital requirements
once finalized. The Corporation expects that a new capital accord will eventually be adopted by the
BSC and enforced by the federal banking agencies. In the meantime, the Corporation continues to
work towards the adoption of a new capital framework, and comply with requirements set by federal
regulatory agencies. At this time the Corporation cannot determine with certainty whether the
capital requirements that may arise out of a new Basel Accord will increase or decrease minimum
capital requirements applicable to the Corporation and its subsidiaries.
In January 2003, the Financial Accounting Standards Board (the “FASB”) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which addresses the
consolidation rules to be applied to “variable interest entities” as defined in FIN 46. In December
2003 the FASB amended FIN 46 in FASB interpretation No. 46 (revised December 2003) (“FIN 46R”). FIN
46R, applies to certain variable interest entities by no later than March 15, 2004. Under FIN 46R
issuer trusts may constitute variable interest entities.
Historically, issuer trusts that issued trust preferred securities have been consolidated by
their parent companies and the accounts of such issuer trusts have been included in the
consolidated financial statements of such parent companies. In addition, trust preferred securities
have been treated as eligible for Tier 1 capital treatment by bank holding companies under Federal
Reserve rules and regulations relating to minority interests in equity accounts of consolidated
subsidiaries. As of December 31, 2005, $824,000,000 in trust preferred securities that the
Corporation treated as Tier 1 capital under existing Federal Reserve Board guidelines were
outstanding. The Corporation has determined that the issuer trusts for its trust preferred
securities transactions are variable interest entities. The variable interest entities were
deconsolidated commencing with the Corporation’s December 31, 2003 financial statements.
On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued
limited inclusion of trust preferred securities in the Tier 1 capital of bank holding companies
(BHCs). Under the final rule, trust preferred securities and other restricted core capital elements
will be subject to stricter quantitative limits.
The Federal Reserve Board’s final rule limits restricted core capital elements to 25 percent
of all core capital elements, net of goodwill less any associated deferred tax liability.
Internationally active BHCs, defined as those with consolidated assets greater than $250 billion or
on-balance-sheet foreign exposure greater than $10 billion, will be subject to a 15 percent limit.
They may, however, include qualifying mandatory convertible preferred securities up to the
generally applicable 25 percent limit. Amounts of restricted core capital elements in excess of
these limits generally may be included in Tier 2 capital. The final rule provides a five-year
transition period, ending March 31, 2009, for application of the quantitative limits.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended the FDIA to
permit a bank holding company, with Federal Reserve Board approval, to acquire banks located in
states other than the holding company’s home state without regard to whether the transaction is
prohibited under state law. In addition, national and state banks with different home states are
permitted to merge across state lines, with approval of the appropriate federal banking agency.
States are also allowed to permit de
11
novo interstate branching. Once a bank has established branches in a state through an
interstate merger transaction, the bank may establish or acquire additional branches at any
location in the state where any bank involved in the interstate merger transaction could have
established or acquired branches under applicable federal or state law. A bank that has established
a branch in a state through de novo branching (if permitted under state laws) may establish and
acquire additional branches in such state in the same manner and to the same extent as a bank
having a branch in such state as a result of an interstate merger. If a state opted out of
interstate branching within the specified time period, no bank in any other state may establish a
branch in the state that has opted out, whether through an acquisition or de novo. A foreign bank,
like Banco Popular, may establish branches interstate, by merger or de novo, to the same extent as
a domestic bank in the foreign bank’s home state, which, in the case of Banco Popular, is New York.
Financial Services Modernization
The Gramm-Leach-Bliley Act was enacted on November 12, 1999. Among other things, the
Gramm-Leach-Bliley Act: (i) allows bank holding companies whose subsidiary depository institutions
meet management, capital and Community Reinvestment Act standards to engage in a substantially
broader range of nonbanking activities than was previously permissible, including insurance
underwriting and making merchant banking investments in commercial and financial companies; (ii)
allows insurers and other financial services companies to acquire banks; (iii) removes various
restrictions that previously applied to bank holding company ownership of securities firms and
mutual fund advisory companies; and (iv) establishes the overall regulatory structure applicable to
bank holding companies that also engage in insurance and securities operations. This part of the
Gramm-Leach-Bliley Act became effective on March 11, 2000.
In order for a bank holding company to engage in the broader range of activities that are
permitted by the Gramm-Leach-Bliley Act (i) all of its depository institution subsidiaries must be
well capitalized (as described above) and well managed and (ii) it must file a declaration with
the Federal Reserve that it elects to be a “financial holding company.” A depository institution is
deemed to be “well managed” if at its most recent inspection, examination or subsequent review by
the appropriate federal banking agency (or the appropriate state banking agency), the depository
institution received at least a “satisfactory” composite rating and at least a “satisfactory”
rating for management. In addition, to commence any new activity permitted by the
Gramm-Leach-Bliley Act and to acquire any company engaged in any new activities permitted by the
Gramm-Leach-Bliley Act, each insured depository institution subsidiary of the financial holding
company must have received at least a “satisfactory” rating in its most recent examination under
the Community Reinvestment Act.
The election by the Corporation, PIB and PNA to become financial holding companies became
effective April 30, 2002.
The Gramm-Leach-Bliley Act also modified other laws, including laws related to financial
privacy and community reinvestment. The new financial privacy provisions generally prohibit
financial institutions, including the Corporation’s bank subsidiaries, from disclosing nonpublic
personal financial information to third parties unless customers have the opportunity to “opt out”
of the disclosure.
Anti-Money
Laundering Initiative and the USA PATRIOT Act
On October 26, 2001, the President signed into law comprehensive anti-terrorism legislation
known as the USA PATRIOT Act of 2001 (the “USA PATRIOT Act”). Title III of the USA PATRIOT Act
substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing
significant new compliance and due diligence obligations, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States.
The U.S. Treasury Department (the “Treasury”) has issued a number of regulations implementing
the USA PATRIOT Act that apply certain of its requirements to financial institutions, including the
Corporation’s bank subsidiaries. The regulations impose new obligations on financial institutions
to maintain appropriate policies, procedures and controls to detect, prevent and report money
laundering and terrorist financing and to verify the identity of
customers.
12
Failure of a financial institution to comply with the USA PATRIOT Act’s requirements could
have serious legal and reputational consequences for the institution. The Corporation believes that
the cost of compliance with Title III of the USA PATRIOT Act is not likely to be material to the
Corporation.
Community Reinvestment Act
The Community Reinvestment Act requires banks to help serve the credit needs of their
communities, including credit to low and moderate income individuals and geographies. Should the
Corporation or its bank subsidiaries fail to serve adequately the community, potential penalties
may include regulatory denials of applications to expand branches, relocate, add subsidiaries and
affiliates, expand into new financial activities and merge with or purchase other financial
institutions.
Legislative Initiatives
Various other legislative proposals, including proposals to limit the investments that a
depository institution may make with FDIC insured funds, are from time to time introduced in
Congress. The Corporation cannot determine the ultimate effect that such potential legislation, if
enacted, or implementing regulations would have upon its financial condition or results of
operations.
On October 22, 2004, President George W. Bush signed into law the American Jobs Creation Act
of 2004, which lowers the withholding tax rate imposed on distributions of U.S. sourced dividends
to a corporation organized under the laws of the Commonwealth of Puerto Rico from 30% to 10%. The
Corporation’s foreign subsidiaries earnings are considered permanently invested. Accordingly, the
new law which lowered the withholding tax rate to 10% is not expected to have an impact in the
Corporation’s earnings in the foreseeable future.
Puerto Rico Regulation
General. As a commercial bank organized under the laws of Puerto Rico, Banco Popular is
subject to supervision, examination and regulation by the Office of the Commissioner of Financial
Institutions of Puerto Rico (the “Office of the Commissioner”), pursuant to the Puerto Rico
Banking Act of 1933, as amended (the “Banking Law”).
Section 27 of the Banking Law requires that at least ten percent (10%) of the yearly net
income of Banco Popular be credited annually to a reserve fund. This apportionment must be done
every year until the reserve fund is equal to the total of paid-in capital on common and preferred
stock. At the end of 2005 Banco Popular transferred $31 million to the reserve fund in order to
comply with this requirement.
Section 27 of the Banking Law also provides that when the expenditures of a bank are greater
than its receipts, the excess of the former over the latter must be charged against the
undistributed profits of the bank, and the balance, if any, must be charged against the reserve
fund. If the reserve fund is not sufficient to cover such balance in whole or in part, the
outstanding amount must be charged against the capital account and no dividend may be declared
until capital has been restored to its original amount and the reserve fund to 20% of the original
capital.
Section 16 of the Banking Law requires every bank to maintain a legal reserve that, except as
otherwise provided by the Office of the Commissioner, may not be less than 20% of its demand
liabilities, excluding government deposits (federal, state and municipal) which are secured by
collateral. If a bank is authorized to establish one or more bank branches in a state of the United
States or in a foreign country, where such branches are subject to the reserve requirements of that
state or country, the Office of the Commissioner may exempt said branch or branches from the
reserve requirements of Section 16. Pursuant to an order of the Federal Reserve Board dated
November 24, 1982, Banco Popular has been exempted from the reserve requirements of the Federal
Reserve System with respect to deposits payable in Puerto Rico. Accordingly, Banco Popular is
subject to the reserve requirements prescribed by the Banking Law.
Section 17 of the Banking Law permits a bank to make loans to any one person, firm,
partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the paid-in
capital and reserve fund
13
of the bank. As of December 31, 2005, the legal lending limit for the Bank under this provision was
approximately $110.7 million. The above limitations do not apply to loans which are secured by
collateral worth at least 25% more than the amount of the loan up to a maximum aggregate amount of
one third of the paid-in capital of the bank, plus its reserve fund. If the institution is well
capitalized and had been rated 1 in the last examination performed by the Office of the
Commissioner or any regulatory agency, its legal lending limit shall also include 15% of 50% of its
undivided profits and for loans secured by collateral worth at least 25% more than the amount of
the loan, the capital of the bank shall also include 33 1/3% of 50% of its undivided profits.
Institutions rated 2 in their last regulatory examination may include this additional component in
their legal lending limit only with the previous authorization of the Office of the Commissioner.
There are no restrictions under Section 17 on the amount of loans that are wholly secured by bonds,
securities and other evidence of indebtedness of the Government of the United States or Puerto
Rico, or by current debt bonds, not in default, of municipalities or instrumentalities of Puerto
Rico.
Section 14 of the Banking Law authorizes a bank to conduct certain financial and related
activities directly or through subsidiaries, including finance leasing of personal property,
originating and servicing mortgage loans and operating a small loan company. Banco Popular engages
in these activities through its wholly-owned subsidiaries, Popular Auto, Inc., Popular Mortgage,
Inc. and Popular Finance, Inc., respectively, all of which are organized and operate in Puerto
Rico.
The Finance Board, which includes as its members the Commissioner of Financial Institutions,
the Secretary of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs, the
President of the Planning Board, and the President of the Government Development Bank for Puerto
Rico, has the authority to regulate the maximum interest rates and finance charges that may be
charged on loans to individuals and unincorporated businesses in Puerto Rico. The current
regulations of the Finance Board provide that the applicable interest rate on loans to individuals
and unincorporated businesses (including real estate development loans but excluding certain other
personal and commercial loans secured by mortgages on real estate properties and finance charges on
retail installment sales and for credit card purchases) is to be determined by free competition.
IBC Act. Under the IBC Act, without the prior approval of the Office of the Commissioner, PIB
may not amend its articles of incorporation or issue additional shares of capital stock or other
securities convertible into additional shares of capital stock unless such shares are issued
directly to the shareholders of PIB previously identified in the application to organize the
international banking entity, in which case notification to the Office of the Commissioner must be
given within ten business days following the date of the issue. Pursuant to the IBC Act, without
the prior approval of the Office of the Commissioner, PIB may not initiate the sale, encumbrance,
assignment, merger or other transfer of shares if by such transaction a person or persons acting in
concert could acquire direct or indirect control of 10% or more of any class of PIB’s stock. Such
authorization must be requested at least 30 days prior to the transaction.
PIB must submit to the Office of the Commissioner a report of its condition and results of
operation on a quarterly basis and its annual audited financial statements at the close of its
fiscal year. Under the IBC Act, PIB may not deal with “domestic persons” as such term is defined
in the IBC Act. Also, it may only engage in those activities authorized in the IBC Act, the
regulations adopted thereunder and its license.
The IBC Act empowers the Office of the Commissioner to revoke or suspend, after a hearing, the
license of an international banking entity (“IBE”) if, among other things, it fails to comply with
the IBC Act, regulations issued by the Office of the Commissioner or the terms of its license or if
the Office of the Commissioner finds that the business of the IBE is conducted in a manner not
consistent with the public interest.
In January 2004, the Government of Puerto Rico approved a legislation that partially
eliminates the tax exempt status of IBE that operates as a division or branch of a bank in Puerto
Rico. In order to be subject to tax, the IBE’s net taxable income must exceed 40% in 2004, 30% in
2005, and 20% in 2006 and thereafter, of the net taxable income of the bank as a whole. Once these
thresholds are exceeded, the IBE will be taxed at regular tax rates on its net taxable income that
exceeds the applicable threshold. Currently,
14
management of the Corporation does not expect any financial impact from this new legislation since
the net taxable income of BPPR’s IBE has not exceeded and is not expected to exceed 20% of BPPR’s
net taxable income.
Employees
At December 31, 2005, the Corporation employed directly 13,210 persons. None of its employees
are represented by a collective bargaining group.
Segment Disclosure
Note 30 to the Financial Statements, “Segment Reporting” on pages 109 through 112 of the
Annual Report is herein incorporated by reference.
In connection with the reorganization of the Corporation’s corporate structure during 2004,
the corporation realigned its business segments to reflect its new business structure, referred to
by management as “business circles”. There is one circle for each of the Corporation’s four
principal businesses – Banco Popular Puerto Rico, Banco Popular North America, Popular Financial
Holdings and EVERTEC. Each business circle has been identified as a reportable segment. Also, a
corporate circle has been defined to support the business circles.
Management determined the reportable segments based on the internal reporting used to evaluate
performance and to assess where to allocate resources. The segments were determined based on the
new organizational structure which focuses primarily towards products and services as well as on
the markets the segments serve. Other factors, such as the credit risk characteristics of the loan
products, distribution channels and clientele, were also considered in the determination of
reportable segments.
The following table presents the Corporation’s long-lived assets by geographical area, other
than financial instruments, long-term customer relationships, mortgage and other servicing rights
and deferred tax assets. Long-lived assets located in foreign countries represent the investments
under the equity method in the Dominican Republic and El Salvador and other long-lived assets
located in Costa Rica.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
Puerto Rico |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
$ |
472,853,113 |
|
|
$ |
420,204,723 |
|
|
$ |
366,840,357 |
|
Goodwill |
|
|
94,650,541 |
|
|
|
89,821,933 |
|
|
|
86,771,141 |
|
Other intangible assets |
|
|
7,149,995 |
|
|
|
8,975,334 |
|
|
|
11,489,070 |
|
Investments under the equity method |
|
|
21,434,700 |
|
|
|
19,711,987 |
|
|
|
18,046,173 |
|
| |
|
|
|
|
$ |
596,088,349 |
|
|
$ |
538,713,977 |
|
|
$ |
483,146,741 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
$ |
119,529,381 |
|
|
$ |
121,121,536 |
|
|
$ |
114,400,824 |
|
Goodwill |
|
|
557,070,780 |
|
|
|
319,223,720 |
|
|
|
102,455,795 |
|
Other intangible assets |
|
|
95,390,011 |
|
|
|
29,458,696 |
|
|
|
15,355,660 |
|
Investments under the equity method |
|
|
812,183 |
|
|
|
389,198 |
|
|
|
376,234 |
|
| |
|
|
|
|
$ |
772,802,355 |
|
|
$ |
470,193,150 |
|
|
$ |
232,588,513 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Countries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
$ |
4,188,960 |
|
|
$ |
4,355,065 |
|
|
$ |
4,211,187 |
|
Goodwill |
|
|
2,262,444 |
|
|
|
2,262,444 |
|
|
|
2,262,444 |
|
Other intangible assets |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Investments under the equity method |
|
|
40,497,852 |
|
|
|
36,895,084 |
|
|
|
20,700,802 |
|
| |
|
|
|
|
$ |
46,949,256 |
|
|
$ |
43,512,593 |
|
|
$ |
27,174,433 |
|
| |
|
|
15
Availability on website
We make available free of charge, through our investor relations section at our website,
www.popular.com, our Form 10-K, Form 10-Q and Form 8-K reports and all amendments to those reports
as soon as reasonably practicable after such material is electronically filed with or furnished to
the SEC.
The public may read and copy any materials the Corporation files with the SEC at the SEC’s
Public Reference Room at 100 F Street, N.E., Room 1580, Washington, DC 20549. In addition, the public may
obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC at its
web site (www.sec.gov).
ITEM 1A. RISK FACTORS
Financial results are constantly exposed to market risk.
Market risk refers to the probability of variations in the net interest income or the market
value of assets and liabilities due to interest rate volatility. Despite the varied nature of
market risks, the primary source of this risk to the Corporation is the impact of changes in
interest rates on net interest income.
Net interest income is the difference between the revenue generated on earning assets and
the interest cost of funding those assets. Depending on the duration and repricing characteristics
of the assets, liabilities and off-balance sheet items, changes in interest rates could either
increase or decrease the level of net interest income. For any given period, the pricing structure
of the assets and liabilities is matched when an equal amount of such assets and liabilities mature
or reprice in that period. Any mismatch of interest-earning assets and interest-bearing liabilities
is known as a gap position. A positive gap denotes asset sensitivity, which means that an increase
in interest rates could have a positive effect on net interest income, while a decrease in interest
rates could have a negative effect on net interest income.
The Corporation is subject to interest rate risk because of the following factors:
| |
• |
|
Assets and liabilities may mature or reprice at
different times. For example, if assets reprice slower
than liabilities and interest rates are generally
rising, earnings may initially decline. |
| |
| |
• |
|
Assets and liabilities may reprice at the same time but by
different amounts. For example, when the general level of interest rates is
rising, we may increase rates charged on loans by an amount that is less than
the general increase in market interest rates because of intense pricing
competition. Also, basis risk occurs when assets and liabilities have similar
repricing frequencies but are tied to different market interest rate indices. |
| |
| |
• |
|
Short-term and long-term market interest rates may change by
different amounts, i.e., the shape of the yield curve may affect new loan
yields and funding costs differently. |
| |
| |
• |
|
The remaining maturity of various assets and liabilities
may shorten or lengthen as interest rates change. For example, if
long-term mortgage interest rates decline sharply, mortgage-backed
securities held in the securities available-for-sale portfolio may
prepay significantly earlier than anticipated, which could reduce
portfolio income. If prepayment rates increase, the Corporation
would be required to amortize net premiums into income over a
shorter period of time, thereby reducing the corresponding asset
yield and net interest income. Prepayment risk also has a
significant impact on mortgage-backed securities and collateralized
mortgage obligations, since prepayments could shorten the weighted
average life of these portfolios. |
| |
| |
• |
|
Interest rates may have an indirect impact on loan demand, credit
losses, loan origination volume, the value of securities holdings, including
interest-only strips, gains and losses on sales of securities and loans, the
value of mortgage servicing rights and other sources of earnings. |
In the Corporation’s liability sensitive position means that its short-term borrowings
and, to a lesser extent, interest-bearing deposits typically reprice faster that the adjustable
rate assets. As a result,
16
increases in short-term interest rates could reduce net interest income. Also, if the flattening
slope of the yield curve and current interest rate conditions persist, coupled with intense pricing
competition, the net interest margin could be negatively impacted.
In limiting interest rate risk to an acceptable level, management may alter the mix of
floating and fixed rate assets and liabilities, change pricing schedules, adjust maturities through
sales and purchases of investment securities, and enter into derivative contracts, among other
alternatives. The Corporation may suffer losses or experience lower spreads than anticipated in
initial projections as management implement strategies to reduce future interest rate exposure.
The hedging transactions that the Corporation enters into may not be effective in managing the
exposure to market risk, including interest rate risk.
The Corporation uses derivatives, to a limited extent, to manage part of the exposure to
market risk caused by changes in interest rates or basis risk. The derivative instruments that the
Corporation may utilize also have their own risks, which include: (1) basis risk, which is the risk
of loss associated with variations in the spread between the asset yield and funding and/or hedge
cost; (2) credit or default risk, which is the risk of insolvency or other inability of the
counterparty to a particular transaction to perform its obligations thereunder; and (3) legal risk,
which is the risk that the Corporation is unable to enforce certain terms of such instruments. All
or any of such risks could expose the Corporation to losses.
Reductions in the Corporation’s credit ratings or those of any of its subsidiaries would
increase the cost of borrowing funds and make the Corporation’s ability to raise new funds or renew
maturing debt more difficult.
Credit ratings are an important component of the Corporation’s liquidity profile. Among
other factors, credit ratings are based on the financial strength, the credit quality of and
concentrations in the Corporations’ loan portfolio, the level and volatility of earnings, capital
adequacy, the quality of management, the liquidity of the Corporation’s balance sheet, the
availability of a significant base of core retail and commercial deposits, and the ability to
access a broad array of wholesale funding sources. Changes in the Corporation’s credit ratings or
the credit ratings of any of its subsidiaries to a level below “investment grade” would adversely
affect the Corporation’s ability to raise funds in the capital markets. The Corporation’s
counterparties are also sensitive to the risk of a ratings downgrade. In the event of a downgrade,
the cost of borrowing funds would increase. In addition, the Corporation’s ability to raise new
funds in the capital markets or renew maturing debt may be more difficult.
The Corporation’s ability to compete successfully in the marketplace for deposits depends
on various factors, including service, convenience and financial stability as reflected by the
operating results and credit ratings by nationally recognized credit agencies. A downgrade in
credit ratings may impact the ability to raise deposits, but the Corporation believes that the
impact should not be material. Deposits at all of its banking subsidiaries are federally insured
(subject to limitations established by the Federal Deposit Insurance Corporation), which is
expected to mitigate the effect of a downgrade in the credit ratings.
Some of the Corporation’s borrowings and deposits are subject to “rating triggers”, which
are contractual provisions that accelerate the maturity of the underlying obligations in the case
of a change in the ratings. Therefore, the need to raise funds in the marketplace could increase in
the case of a ratings downgrade. As of December 31, 2005, the Corporation had outstanding $216
million of borrowings subject to rating triggers.
A failure to comply with financial covenants in contractual agreements could accelerate
payments of related borrowings.
In the course of borrowing from institutional lenders and other investors, the
Corporation has entered into contractual agreements to maintain certain levels of debt, capital and
asset quality, among other financial covenants. Failing to comply with those agreements may result
in an event of default, which could accelerate the repayment of the related borrowings. An event of
default would also affect the Corporation’s ability to raise new funds or renew maturing debt.
17
The Corporation is subject to default risk in its loan portfolio.
The Corporation is subject to the risk of loss from loan defaults and foreclosures with
respect to the loans originated or acquired. The Corporation establishes provisions for loan
losses, which lead to reductions in the income from operations, in order to maintain the allowance
for future loan losses at a level which is deemed appropriate by management based upon an
assessment of the quality of the loan portfolio in accordance with established procedures and
guidelines. There can be no assurance that management has accurately estimated the level of future
loan losses or that the Corporation will not have to increase the provision for loan losses in the
future as a result of future increases in non-performing loans or for other reasons beyond our
control.
A prolonged economic downturn or recession would likely result in an increase in
delinquencies, defaults and foreclosures and in a reduction of the loan origination activity which
would adversely affect the Corporation’s financial results.
A period of reduced economic growth or a recession has historically resulted in a
reduction in lending activity and an increase in the rate of defaults in commercial loans, consumer
loans and residential mortgages. A recession may have a significant adverse impact on the net
interest income and fee income. The Corporation may also experience significant losses on the loan
portfolio due to a higher level of defaults on commercial loans, consumer loans and residential
mortgages.
The Corporation operates in a highly regulated environment and may be adversely affected by
changes in federal and local laws and regulations.
The Corporation is subject to extensive regulation, supervision and examination by
federal and Puerto Rico banking authorities. Any change in applicable federal or Puerto Rico laws
or regulations could have a substantial impact on its operations. Additional laws and regulations
may be enacted or adopted in the future that could significantly affect the Corporation’s powers,
authority and operations, which could have a material adverse effect on the Corporation’s financial
condition and results of operations. Further, regulators, in the performance of their supervisory
and enforcement duties, have significant discretion and power to prevent or remedy unsafe and
unsound practices or violations of laws by banks and bank holding companies. The exercise of this
regulatory discretion and power may have a negative impact on the Corporation.
Competition with other financial institutions could adversely affect the Corporation’s
profitability.
The Corporation faces substantial competition in originating loans and in attracting
deposits. The competition in originating loans comes principally from other U.S., Puerto Rico and
foreign banks, mortgage banking companies, consumer finance companies, insurance companies and
other institutional lenders and purchasers of loans. Certain of the Corporation’s competitors are
not subject to the same extensive regulation that governs the Corporation’s business.
The Corporation anticipates that it will encounter greater competition with the expansion
of its operations on the U.S. mainland. Many institutions with which the Corporation competes on
the U.S. mainland have significantly greater assets, capital, name recognition, customer loyalty
and other resources. As a result, certain of its competitors may have advantages in conducting
certain businesses and providing certain services.
Increased competition could require that the Corporation increase the rates offered on
deposits or lower the rates charged on loans, which could adversely affect our profitability.
The Corporation is exposed to greater risk because a significant portion of the business is
concentrated in Puerto Rico.
A significant portion of the Corporation’s financial activities and credit exposure are
concentrated in Puerto Rico. Consequently, the financial condition and results of operations are
highly dependent on economic conditions in Puerto Rico. An extended economic slowdown in Puerto
Rico, adverse political or economic developments in Puerto Rico or natural disasters, such as
hurricanes, affecting Puerto Rico could result in a downturn in loan originations, an increase in
the level of nonperforming assets, an increase in the
18
rate of foreclosure loss on mortgage loans and a reduction in the value of the Corporation’s loans
and loan servicing portfolio, all of which would adversely affect the Corporation’s profitability.
Certain of the provisions contained in the Corporation’s Certificate of Incorporation have the
effect of making it more difficult to change the Board of Directors, and may make the Board of
Directors less responsive to stockholder control.
The Corporation’s certificate of incorporation provides that the members of the Board of
Directors are divided into three classes as nearly equal as possible. At each annual meeting of
stockholders, one-third of the members of the Board of Directors will be elected for a three-year
term, and the other directors will remain in office until their three-year terms expire. Therefore,
control of the Board of Directors cannot be changed in one year, and at least two annual meetings
must be held before a majority of the members of the Board of Directors can be changed. The
Corporation’s certificate of incorporation also provides that a director, or the entire Board of
Directors, may be removed by the stockholders only for cause by a vote of at least two-thirds of
the combined voting power of the outstanding capital stock entitled to vote for the election of
directors. These provisions have the effect of making it more difficult to change the Board of
Directors, and may make the Board of Directors less responsive to stockholder control. These
provisions also may tend to discourage attempts by third parties to acquire the Corporation because
of the additional time and expense involved and a greater possibility of failure, and, as a result,
may adversely affect the price that a potential purchaser would be willing to pay for the capital
stock, thereby reducing the amount a stockholder might realize in, for example, a tender offer for
the Corporation’s capital stock.
Preferred rights issued under the Corporation’s Stockholder Protection Rights Agreement may
have an anti-takeover effect.
Holders of shares of our common stock are entitled to a preferred right to purchase the
Corporation’s Series A Participating Cumulative Preferred Stock in certain circumstances. Preferred
rights become exercisable if a person or group has acquired 10% or more of the shares of common
stock or a tender or exchange offer is commenced which, if consummated, would result in a person
becoming the beneficial owner of 10% or more of the common stock. The preferred rights may be
deemed to have an anti-takeover effect and generally may cause substantial dilution to a person or
group that attempts to acquire the Corporation under circumstances not approved by the Board of
Directors.
For further information of other risks faced by the Corporation please refer to the MD&A
section of the Annual Report.
The Corporation is unable to predict what adverse consequences, if any, or other effects
transactions with Doral Financial Corporation or R&G Financial Corporation, the civil litigation
related to Doral or R&G matters or the related investigations could have on the Corporation.
As described in the Annual Report on Form 10-K for the year ended December 31, 2005 under
the “MD&A—Transactions with Doral Financial Corporation” and “—Transactions with R&G Financial
Corporation”, Doral Financial Corporation (“Doral”) has announced investigations by the SEC and the
U.S. Attorney’s Office for the Southern District of New York and R&G Financial Corporation (“R&G”)
has announced an investigation by the Securities and Exchange Commission. The Corporation has had
dealings with both Doral and R&G and has provided information in connection with, and is continuing
to cooperate with, certain of the investigations of these matters. The Corporation is unable to
predict what adverse consequences, if any, or other effects dealings with Doral or R&G, the civil
litigation related to Doral or R&G matters or the related investigations could have on the
Corporation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
As of December 31, 2005, Banco Popular owned and wholly or partially occupied approximately 91
branch premises and other facilities throughout Puerto Rico. It also owned 4 parking garage
buildings
19
and approximately 30 lots held for future development or for parking facilities also in Puerto
Rico, one building in the U.S. Virgin Islands and one in the British Virgin Islands. In addition,
as of such date, Banco Popular leased properties mainly for branch operations in approximately 120
locations in Puerto Rico and 6 locations in the U.S. Virgin Islands. At December 31, 2005, BPNA had
166 offices (principally bank branches) of which 57 were owned and 109 were leased. These offices
were located throughout New York, Illinois, New Jersey, California, Texas and Florida. In addition,
BPNA leased a six story office building in Rosemont, Illinois. This building houses the
headquarters of BPNA. The Corporation’s management believes that each of its facilities is well
maintained and suitable for its purpose. The principal properties owned by the Corporation for
banking operations and other services are described below:
Popular Center, the San Juan metropolitan area headquarters, located at 209 Muñoz
Rivera Avenue, Hato Rey, Puerto Rico, a twenty-story office building. Approximately 48% of the
office space is leased to outside tenants. In addition, it has an adjacent parking garage with
capacity for approximately 1,000 cars. As of December 31, 2005, a major re-development at the
ground and promenade levels was underway to establish retail business including sit-down
restaurants and other food vendors.
Also, construction of a new five-story building was underway in the same block, north of Popular
Center. The new facilities will provide additional office space and six movie theatres with
stadium type seating for approximately 600 persons. Parking for 100 cars will also be available.
New Popular Building, a new parking and office building located at Ponce de León
Avenue, Hato Rey, Puerto Rico, undergoing interior construction. The building provides
approximately 81,200 square feet of space to be occupied mostly by Banco Popular units and parking
for 1,135 cars.
Cupey Center Complex, one building, three stories high, and three buildings, two
stories high each, located in Cupey, Río Piedras, Puerto Rico. The computer center operations and
other operational and support services are some of the main activities housed at these facilities.
The facilities are almost fully occupied by EVERTEC’s personnel. Banco Popular maintains a full
service branch and some support services in these facilities. The Complex also includes a parking
garage building with capacity for 1,000 cars and houses a recreational center for employees.
Stop 22 Building, a twelve story structure located in Santurce, Puerto Rico. A
branch, the Accounting Department, the People Division and the Auditing Division are the main
occupants of this facility, which is fully occupied by Banco Popular personnel.
Centro Europa Building – a seven-story office and retail building in Santurce, Puerto
Rico. The Bank’s training center occupies approximately 26% of this building. The remaining space
is rented to outside tenants. The building also includes a parking garage with capacity for
approximately 600 cars.
Old San Juan Building, a twelve-story structure located at Old San Juan, Puerto Rico.
Banco Popular occupies approximately 44% of the building for a branch operation, a regional office,
an exhibit room and other facilities. The rest of the building is rented or available for rent to
outside tenants.
Guaynabo Corporate Office Park Building, a two-story building located in Guaynabo,
Puerto Rico. Formerly occupied by the Bank’s mortgage servicing division, as of December 31, 2005,
it was vacant and being evaluated for future relocation of Popular Insurance, Inc.’s headquarters.
Altamira Building, a new nine-story office building located in Guaynabo, Puerto Rico.
A seven-level parking garage is also part of this property that houses the centralized offices of
Popular Mortgage, Inc. and Popular Auto, Inc. It also includes a full service branch and the
mortgage servicing division of Banco Popular.
Banco Popular Virgin Islands Center, a three-story building housing a Banco Popular
branch and centralized offices. The building is fully occupied by Banco Popular personnel.
20
Popular Center -Tortola, a new, four-story, 20,000 square feet building located in
Tortola, British Virgin Islands. A Banco Popular branch is located in the first story while the
commercial credit department occupies the second story. The third and fourth floors are available
for outside tenants.
New York Building, a nine-story owned structure with two underground levels located at
7 West 51st Street, New York City. BPNA occupies approximately 48% of the office space. The
remaining 52% of the building is leased.
ITEM 3. LEGAL PROCEEDINGS
On January 18, 2005, the Corporation announced that it had been informed by the Antitrust
Division of the U.S. Department of Justice that the Department of Justice was conducting an
investigation concerning the participation by its subsidiary, GM Group, Inc. (which after a
reorganization in 2004 became part of EVERTEC), in the E-rate program, which is administered by the
Federal Communications Commission (FCC) and pays for telecommunications services and related
equipment for schools and libraries.
On October 13, 2005, the Corporation entered into a Settlement Agreement with the Department
of Justice and the Federal Communications Commission in connection with this matter. Pursuant to
the Settlement Agreement, EVERTEC, without admitting liability and denying any allegations of
misconduct, agreed to make a $4.8 million payment to the United States and agreed to voluntarily
disqualify itself from bidding on or performing any work related to contracts funded by the Federal
Communications Commission for a three year period. EVERTEC also agreed to cooperate with U.S.
governmental authorities in any investigation or litigation related to its participation in the
E-rate program. The Settlement Agreement did not have an impact on the Corporation’s third or
fourth quarter results of operations or the Corporation’s financial condition because the full
amount of the settlement payment had been previously accrued and because EVERTEC is not engaged in
work related to Federal Communications Commission contracts.
The Corporation and its subsidiaries are defendants in various lawsuits arising in the
ordinary course of business. Management believes, based on the opinion of legal counsel, that the
aggregate liabilities, if any, arising from such actions would not have a material adverse effect
on the financial position and results of operations of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
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| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Corporation’s common stock (the “Common Stock”) is traded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) National Market System under the symbol
“BPOP”. Information concerning the range of high and low sales prices for the Corporation’s common
shares for each quarterly period during 2005 and the previous four years, as well as cash dividends
declared is contained under Table J, “Common Stock Performance”, on page 30 and under the caption
“Stockholders’ Equity” on page 27 in the MD&A in the Annual Report, and is incorporated herein by
reference.
As of February 28, 2006, the Corporation had 10,820 stockholders of record of its Common
Stock, not including beneficial owners whose shares are held in record names of brokers or other
nominees. The last sales price for the Corporation’s Common Stock on such date, as quoted on the
NASDAQ was $20.43 per share.
21
On November 23, 2005, the Corporation announced a subscription offering of up to 10,500,000
shares of common stock to holders of record at the close of business on November 7, 2005, which was
the record date for the subscription offering. Each holder of record was entitled to a basic
subscription right to purchase one share of common stock for every 26 shares of common stock held
by that holder as of the close of business on the record date. The subscription rights offering
expired at 5:00 p.m. on December 19, 2005. On December 21, 2005 the Corporation announced that the
subscription rights offering was fully subscribed for approximately $220 million in newly issued
shares of common stock of the Corporation. This represented approximately $175 million in
additional capital at December 31, 2005. The remainder will impact the Corporation’s stockholders’
equity in early 2006 when certain of the individual subscription transactions fully settled.
On May 12, 2004, the Corporation’s Board of Directors authorized a stock split in the form of
a stock dividend of one additional share of common stock for each common stock share held as of the
record date of June 18, 2004. The new shares were distributed on July 8, 2004.
Effective April 30, 2004, the Corporation’s Restated Certificate of Incorporation was amended
to increase the number of authorized shares of Common Stock from 180,000,000 to 470,000,000 and the
number of authorized shares of Preferred Stock from 10,000,000 to 30,000,000 shares.
On February 26, 2003 and March 24, 2003, the Corporation issued 6,500,000 shares and 975,000
shares, respectively, of its 6.375% Noncumulative Monthly Income Preferred Stock, 2003 Series A
(the “Series A Preferred Stock”) having a liquidation preference value of $25 per share. The Series
A Preferred Stock ranks senior to the Corporation’s outstanding Series A Participating Cumulative
Preferred Stock, with respect to dividend rights and rights on liquidation. The terms of the Series
A Preferred Stock do not permit the Corporation to declare or pay any dividends on the Common Stock
(1) unless all accrued and unpaid dividends on the Series A Preferred Stock for the 12 dividend
periods preceding the dividend payment have been paid and the full dividend on the Series A
Preferred Stock for the current monthly dividend period is contemporaneously declared and paid or
set aside for payment or (2) if the Corporation has defaulted in the payment of the redemption
price of any shares of Series A Preferred Stock called for redemption.
Additional information concerning legal or regulatory restrictions on the payment of dividends
by the Corporation and Banco Popular is contained under the caption “Regulation and Supervision” in
Item 1 herein.
The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes a withholding tax
on the amount of any dividends paid by corporations to individuals, whether residents of Puerto
Rico or not, trusts, estates and foreign corporations or partnerships not engaged in trade or
business within Puerto Rico at a preferential 10% withholding tax rate. If the recipient is a
foreign corporation or partnership engaged in trade or business within Puerto Rico or a domestic
corporation the dividend will be taxed at regular rates but will be allowed an 85% dividend
received deduction.
Prior to the first dividend distribution for the taxable year, individuals who are residents
of Puerto Rico may elect to be taxed on the dividends at the regular rates, in which case the
preferential 10% tax will not be withheld from such year’s distributions.
A United States citizen who is a non-resident of Puerto Rico will not be subject to Puerto
Rico tax on dividends if said individual’s gross income from sources within Puerto Rico during the
taxable year does not exceed $1,300 if single, or $3,000 if married, and Form AS 2732 of the Puerto
Rico Treasury Department, “Withholding Tax Exemption Certificate for the Purpose of Section 1147”,
is filed with the withholding agent.
U.S. income tax law permits a credit against U.S. income tax liability, subject to certain
limitations, for certain foreign income taxes paid or deemed paid with respect to such dividends.
The information under the caption “Executive Compensation Program” in the Proxy Statement is
incorporated herein by reference.
22
The following table sets forth the details of purchases of Common Stock during the quarter
ended December 31, 2005 by the Corporation in the open market to satisfy awards made under its 2004
Omnibus Incentive Plan.
Issuer Purchases of Equity Securities
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| Not in thousands |
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Total Number of |
|
|
| |
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|
|
|
|
|
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|
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Shares Purchased as |
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Maximum Number of |
| |
|
Total Number of |
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Average |
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Part of Publicly |
|
Shares that May Yet |
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|
Shares |
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Price Paid per |
|
Announced Plans or |
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be Purchased Under |
| Period |
|
Purchased |
|
Share |
|
Programs |
|
the Plans or Programs |
| |
October 1 – October 31 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
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November 1 – November 30 |
|
|
1,615 |
|
|
$ |
20.15 |
|
|
|
1,615 |
|
|
|
9,053,465 |
|
December 1 – December 31 |
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|
— |
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|
|
— |
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|
|
— |
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|
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— |
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Total December 31, 2005 |
|
|
1,615 |
|
|
$ |
20.15 |
|
|
|
1,615 |
|
|
|
9,053,465 |
|
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ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears in Table C, “Selected Financial Data”, on pages
6 and 7 and the text under the caption “Statement of Income Analysis” on page 14 in the MD&A in the
Annual Report, and is incorporated herein by reference.
The Corporation’s ratio of earnings to fixed charges and of earnings to fixed charges and
preferred stock dividends on a consolidated basis for each of the last five years is as follows:
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Year ended December 31, |
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|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
Ratio of Earnings to Fixed Charges: |
|
|
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|
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|
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|
|
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|
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|
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Excluding Interest on Deposits |
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|
1.8 |
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2.2 |
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2.4 |
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2.0 |
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1.8 |
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Including Interest on Deposits |
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1.5 |
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1.7 |
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1.8 |
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1.5 |
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1.4 |
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Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends: |
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Excluding Interest on Deposits |
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1.8 |
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2.1 |
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2.3 |
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2.0 |
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|
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1.7 |
|
Including Interest on Deposits |
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1.5 |
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1.7 |
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|
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1.7 |
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1.5 |
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1.4 |
|
For purposes of computing these consolidated ratios, earnings represent income before income
taxes, plus fixed charges. Fixed charges represent all interest expense (ratios are presented both
excluding and including interest on deposits), the portion of net rental expense, which is deemed
representative of the interest factor and the amortization of debt issuance expense. The interest
expense for the years 2005 thru 2002 include changes in the fair value of the non-hedging
derivatives.
23
The Corporation’s long-term senior debt and preferred stock on a consolidated basis as of
December 31 of each of the last five years is:
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|
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Year ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
|
|
Long-term obligations |
|
$ |
9,893,577 |
|
|
$ |
10,305,710 |
|
|
$ |
7,117,025 |
|
|
$ |
4,567,853 |
|
|
$ |
4,009,211 |
|
Non-cumulative Preferred
Stock of the Corporation |
|
|
186,875 |
|
|
|
186,875 |
|
|
|
186,875 |
|
|
|
-0- |
|
|
|
100,000 |
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|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |
The information required by this item appears on page 3 through 57 under the caption MD&A, and
is incorporated herein by reference.
Table L, “Maturity Distribution of Earning Assets”, on page 33 in the MD&A in the Annual
Report, takes into consideration prepayment assumptions as determined by management based on the
expected interest rate scenario. The Corporation does not have a policy with respect to rolling
over maturing loans, but rolls over loans only on a case-by-case basis after review of such loans
in accordance with the Corporation’s lending criteria.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the market risk of the Corporation’s investments appears on page 29
through 41 under the caption MD&A in the Annual Report, and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages 58 through 124, and on page 56 and 57
under the caption “Statistical Summary – 2004-2005 Quarterly Financial Data” in the Annual Report
and is incorporated herein by reference.
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| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Introduction
Under the direction of the Corporation’s Audit Committee, management conducted a review of the
accounting treatment related to the transactions (“the transactions”) between the Corporation and
its subsidiaries, and Doral and R-G. This review was performed given the announcements by these
companies of their intention to restate their financial statements. As mentioned elsewhere in the
MD&A included in the Annual Report, after conducting the assessment of the Doral and R-G
transactions, the Corporation concluded that its previously filed audited consolidated annual
financial statements are fairly stated and no restatement is necessary.
24
Management’s Report
The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the
Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the
end of such period, the Corporation’s disclosure controls and procedures were not effective, at the
reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Corporation in the reports that it files or submits
under the Exchange Act, solely because of the material weakness described in the management’s
assessment included in Management’s Report to Stockholders filed in our Annual Report, which
relates to the presentation and classification of certain cash flows in the Consolidated Statement
of Cash Flows as further described below.
During the preparation of the Annual Report, management became aware that disbursements on mortgage
loans originated or acquired by Popular Financial Holdings, Inc., our U.S. mortgage and consumer
lending subsidiary, with the intent to sell in the secondary market or securitized in transactions
structured as sales, were incorrectly presented as cash flows related with investing activities,
instead of operating activities, which is the presentation required by SFAS No. 102 “Statement of
Cash Flows — Exemption of Certain Enterprises and Classification of Cash Flows from Certain
Securities Acquired for Resale.” This reclassification impacted solely the year-to-date
Consolidated Statement of Cash Flows included in the quarterly reports on Form 10-Q for the
quarters ended March 31, June 30, and September 30, 2005. In recent speeches, members of the staff
of the SEC have expressed the view that reclassifications within the statement of cash flows should
be treated as a restatement of the information previously presented and not as reclassifications.
The correction of the quarterly information contained in this Annual Report does not change total
cash reflected in the Consolidated Statement of Cash Flows. Furthermore, the correction has no
effect on the Corporation’s Consolidated Statements of Income (including, but not limited to net
income and earnings per share), Consolidated Statements of Condition or Consolidated Statements of
Changes in Stockholders’ Equity. The annual cash flows on the aforementioned disbursements on
mortgage loans have been properly classified as “cash flows used in operating activities” in the
Corporation’s Consolidated Statement of Cash Flows for the year ended December 31, 2005.
Changes in Internal Control over Financial Reporting
There have been no changes in the Corporation’s internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
quarter ended on December 31, 2005, that have materially affected, or are reasonably likely to
materially affect, the Corporation’s internal control over financial reporting.
Subsequent to the date of the end of the period covered by this report, the Corporation has
remediated the design of the control associated with the material weakness and will test the
operating effectiveness of such control in 2006.
ITEM 9B. OTHER INFORMATION
Not Applicable.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions “Shares Beneficially Owned by Directors and
Executive Officers of the Corporation”, “Beneficial Ownership Reporting Compliance”, “Board of
Directors and Committees” including the “Nominees for Election as Directors” and “Executive
Officers” of the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption “Executive Compensation Program” and under the caption
“Popular, Inc. Performance Graph” of the Proxy Statement is incorporated herein by reference.
|
|
|
| ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS |
The information under the captions “Principal Stockholders”, “Shares Beneficially Owned by
Directors and Executive Officers of the Corporation” and “Equity Compensation Plan Information” of
the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption “Family Relationships” and “Other Relationships,
Transactions and Events” of the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accounting fees and services is set forth under “Disclosure of
Auditors Fees” in the Proxy Statement, which information is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| A. |
|
The following financial statements and reports included on pages 58 through 124 of the
financial review section of the Corporation’s Annual Report to Shareholders are incorporated
herein by reference: |
| |
(1) |
|
Financial Statements: |
| |
Report of Independent Registered Public Accounting Firm |
Consolidated Statements of Condition as of December 31, 2005 and 2004 |
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 2005 |
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2005 |
Consolidated Statements of Changes in Stockholders’ Equity for each of the years in the
three-year period ended December 31, 2005 |
Consolidated Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2005 |
Notes to Consolidated Financial Statements |
26
| |
(2) |
|
Financial Statement Schedules: No schedules are presented because the
information is not applicable or is included in the Consolidated Financial Statements
described in A.1 above or in the notes thereto. |
| |
| |
(3) |
|
Exhibits |
| |
| |
|
|
The exhibits listed on the Exhibits Index on page 28 of this report
are filed herewith or are incorporated herein by reference. |
27
EXHIBIT INDEX
| |
|
|
| Exhibit No. |
|
Description |
3.1
|
|
Composite Articles of Incorporation of the Corporation, as currently in effect
(incorporated by reference to Exhibit 3.1 of the Corporation’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2005). |
|
|
|
3.2
|
|
Bylaws of the Corporation, as amended (incorporated by reference to Exhibit 4.2 of
the Corporation’s Registration Statement on Form S-8 (No. 333-80169) filed with the
SEC on June 8, 1999). |
|
|
|
4.1
|
|
Form of Certificate representing the Corporation’s common stock, par value $6
(incorporated by reference to Exhibit 4.1 of the Corporation’s Annual report on Form
10-K for the fiscal year ended December 31, 1998 (File No. 033-61601). |
|
|
|
4.2
|
|
Stockholder Protection Rights Agreement, dated as of August 13, 1998, between the
Corporation and Banco Popular de Puerto Rico as Rights Agent, including Form of
Rights Certificate attached as Exhibit B thereto (incorporated by reference to
Exhibit 4.1 of the Corporation’s Current Report on Form 8-K (File No. 000-13818),
dated August 13, 1998 and filed on August 21, 1998). |
|
|
|
4.3
|
|
Senior Indenture of the Corporation, dated as of February 15, 1995, as supplemented
by the First Supplemental Indenture thereto, dated as of May 8, 1997, each between
the Corporation and JP Morgan Chase Bank (formerly known as The First National Bank
of Chicago), as trustee (incorporated by reference to Exhibit 4(d) to the
Registration Statement No. 333-26941 of the Corporation, Popular International Bank,
Inc, and Popular North America, Inc., as filed with the SEC on May 12, 1997). |
|
|
|
4.4
|
|
Second Supplemental Indenture of the Corporation, dated as of August 5, 1999,
between the Corporation and JP Morgan Chase Bank (formerly known as The First
National Bank of Chicago), as trustee (incorporated by reference to Exhibit 4(e) to
the Corporation’s Current Report on Form 8-K (File No. 002-96018), dated August 5,
1999, as filed with the SEC on August 17, 1999). |
|
|
|
4.5
|
|
Subordinated Indenture dated as of November 30, 1995, between the Corporation and JP
Morgan Chase Bank (formerly known as The First National Bank of Chicago), as trustee
(incorporated by reference to Exhibit 4(e) of the Corporation’s Registration
Statement No. 333-26941, dated May 12, 1997). |
|
|
|
4.6
|
|
Senior Indenture of Popular North America, Inc., dated as of October 1, 1991, as
supplemented by the First Supplemental Indenture thereto, dated as of February 28,
1995, and the Second Supplemental Indenture thereto, dated as of May 8, 1997, each
among Popular North America, Inc., the Corporation, as guarantor, and JP Morgan
Chase Bank (formerly known as The First National Bank of Chicago), as trustee,
(incorporated by reference to Exhibit 4(f) to the Registration Statement No.
333-26941 of the Corporation, Popular International Bank, Inc. and Popular North
America, Inc., as filed with the SEC on May 12, 1997). |
|
|
|
4.7
|
|
Third Supplemental Indenture of Popular North America, Inc., dated as of August 5,
1999, among Popular North America, Inc., the Corporation, as guarantor, and JP
Morgan Chase Bank (formerly known as The First National Bank of Chicago), as trustee
(incorporated by reference to Exhibit 4(h) to the Corporation’s Current Report on
Form 8-K (File No. 002-96018), dated August 5, 1999, as filed with the SEC on August
17, 1999). |
|
|
|
4.8
|
|
Form of Fixed Rate Medium-Term Note, Series 4, of the Corporation (incorporated by
reference to Exhibit 4(o) of the Corporation’s Current Report on Form 8-K (File No.
002-96018), dated August 5, 1999 and filed on August 17, 1999). |
|
|
|
4.9
|
|
Form of Floating Rate Medium-Term Note, Series 4, of the Corporation (incorporated
by reference to Exhibit (4)(p) of the Corporation’s Current Report on Form 8-K (File
No. 002-96018), dated August 5, 1999 and filed August 17, 1999). |
|
|
|
4.10
|
|
Form of Fixed Rate Medium-Term Note, Series E, of Popular North America, Inc.,
endorsed with the guarantee of the Corporation (incorporated by reference to Exhibit
4(q) of the Corporation’s Current Report on Form 8-K (File No. 002-96018), dated
August 5, 1999 and filed on August 17, 1999). |
|
|
|
4.11
|
|
Form of Floating Rate Medium-Term Note, Series E, of Popular North America, Inc.,
endorsed with the guarantee of the Corporation (incorporated by reference to Exhibit
4(r) of the Corporation’s Current Report on Form 8-K (File No. 002-96018), dated
August 5, 1999 and filed on August 17, 1999). |
28
| |
|
|
| Exhibit No. |
|
Description |
4.12
|
|
Administrative Procedures governing Medium-Term Notes, Series 4, of the Corporation
(incorporated by reference to Exhibit 10(a) of the Corporation’s Current Report on
Form 8-K (File No. 002-96018), dated August 5, 1999 and filed on August 17, 1999). |
|
|
|
4.13
|
|
Administrative Procedures governing Medium-Term Notes, Series E, of Popular North
America, Inc., guaranteed by the Corporation (incorporated by reference to Exhibit
10(b) of the Corporation’s Current Report on Form 8-K (File No. 002-96018), dated
August 5, 1999 and filed on August 17, 1999). |
|
|
|
4.14
|
|
Form of Fixed Rate Medium-Term Note, Series 5, of the Corporation (incorporated by
reference to Exhibit 4(e) of the Corporation’s Current Report on Form 8-K (File No.
000-13818), dated June 23, 2004 and filed on July 2, 2004). |
|
|
|
4.15
|
|
Form of Floating Rate Medium-Term Note, Series 5, of the Corporation (incorporated
by reference to Exhibit 4(f) of the Corporation’s Current Report on Form 8-K (File
No. 000-13818), dated June 23, 2004 and filed on July 2, 2004). |
|
|
|
4.16
|
|
Form of Fixed Rate Medium-Term Note, Series F, of Popular North America, Inc.,
endorsed with the guarantee of the Corporation (incorporated by reference to Exhibit
4(g) of the Corporation’s Current Report on Form 8-K (File No. 000-13818), dated
June 23, 2004 and filed on July 2, 2004). |
|
|
|
4.17
|
|
Form of Floating Rate Medium-Term Note, Series F, of Popular North America, Inc.,
endorsed with the guarantee of the Corporation (incorporated by reference to Exhibit
4(h) of the Corporation’s Current Report on Form 8-K (File No. 000-13818), dated
June 23, 2004 and filed on July 2, 2004). |
|
|
|
4.18
|
|
Administrative Procedures governing Medium-Term Notes, Series 5, of the Corporation
(incorporated by reference to Exhibit 10(a) of the Corporation’s Current Report on
Form 8-K (File No. 000-13818), dated June 23, 2004 and filed on July 2, 2004). |
|
|
|
4.19
|
|
Administrative Procedures governing Medium-Term Notes, Series F, of Popular North
America, Inc., guaranteed by the Corporation (incorporated by reference to Exhibit
10(b) of the Corporation’s Current Report on Form 8-K (File No. 000-13818), dated
June 23, 2004 and filed on July 2, 2004). |
|
|
|
4.20
|
|
Junior Subordinated Indenture, among BanPonce Financial Corp., (Popular North
America, Inc.) BanPonce Corporation (Popular, Inc.) and JP Morgan Chase Bank
(formerly known as The First National Bank of Chicago), as Debenture Trustee
(incorporated by reference to Exhibit (4)(a) of the Corporation’s Current Report on
Form 8-K (File No. 000-13818), dated and filed on February 19, 1997). |
|
|
|
4.21
|
|
Amended and Restated Trust Agreement of BanPonce Trust I, among BanPonce Financial
Corp., (Popular North America, Inc.) as Depositor, BanPonce Corporation, (Popular,
Inc.) as Guarantor, JP Morgan Chase Bank (formerly known as The First National Bank
of Chicago), as Property Trustee, First Chicago Delaware, Inc., as Delaware Trustee,
and the Administrative Trustee named therein (incorporated by reference to Exhibit
(4)(f) of the Corporation’s Current Report on Form 8-K (File No. 000-13818) dated
and filed on February 19, 1997). |
|
|
|
4.22
|
|
Form of Capital Security Certificate for BanPonce Trust I (incorporated by reference
to Exhibit (4)(g) of the Corporation’s Current Report on Form 8-K (File No.
000-13818), dated and filed on February 19, 1997). |
|
|
|
4.23
|
|
Guarantee Agreement relating to BanPonce Trust I, by and among BanPonce Financial
Corp., (Popular North America, Inc.) as Guarantor, BanPonce Corporation, (Popular,
Inc.) as Additional Guarantor, and the First National Bank of Chicago, as Guarantee
Trustee (incorporated by reference to Exhibit (4)(h) of the Corporation’s Current
Report on Form 8-K (File No. 000-13818), dated and filed on February 19, 1997). |
|
|
|
4.24
|
|
Form of Junior Subordinated Deferrable Interest Debenture for BanPonce Financial
Corp. (Popular North America, Inc.) (incorporated by reference to Exhibit (4)(i) of
the Corporation’s Current Report on Form 8-K (File No. 000-13818), dated and filed
on February 19, 1997). |
|
|
|
4.25
|
|
Form of Subordinated Note of the Corporation (incorporated by reference to Exhibit
4.10 of the Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 000-13818). |
|
|
|
4.26
|
|
Form of Certificate representing the Corporation’s 6.375% Non-Cumulative Monthly
Income Preferred Stock, 2003 Series A. (incorporated by reference to Exhibit 99.1 of
the Corporation’s Current Report on Form 8-K dated and filed on February 26, 2003). |
29
| |
|
|
| Exhibit No. |
|
Description |
4.27
|
|
Certificate of Designation, Preference and Rights of the Corporation’s 6.375%
Non-Cumulative Monthly Income Preferred Stock, 2003 Series A (incorporated by
reference to Exhibit 99.1 of the Corporation’s Current Report on Form 8-K dated and
filed on February 26, 2003). |
|
|
|
4.28
|
|
Form of Note Linked to the S&P 500® Index due September 30, 2008,
(incorporated by reference to Exhibit (4)(e) of the Corporation’s Current Report on
Form 8-K dated September 30, 2003, as filed with the SEC on October 1, 2003). |
|
|
|
4.29
|
|
Form of Certificate of Trust of each of Popular Capital Trust I, Popular Capital
Trust II, Popular Capital Trust III, and Popular Capital Trust IV dated September 5,
2003 (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form
S-3 (Registration Nos. 333-108559 and 333-108559-04) filed with the SEC on September
5, 2003). |
|
|
|
4.30
|
|
Amended and Restated Declaration of Trust and Trust Agreement of Popular Capital
Trust I, dated as of October 31, 2003, among the Corporation, JP Morgan Chase
Institutional Services (formerly Bank One Trust Company, N.A.), JP Morgan Chase Bank
(formerly known as The First National Bank of Chicago), the Administrative Trustees
named therein and the holders from time to time, of the undivided beneficial
ownership interests in the assets of the Trust (incorporated by reference to Exhibit
4.1 of the Corporation’s Current Report on Form 8-K dated October 31, 2003, as filed
with the SEC on November 4, 2003). |
|
|
|
4.31
|
|
Guarantee Agreement relating to Popular Capital Trust I, dated as of October 31,
2003, between the Corporation and JP Morgan Chase Institutional Services
(incorporated by reference to Exhibit 4.4 of the Corporation’s Current Report on
Form 8-K dated October 31, 2003, as filed with the SEC on November 4, 2003). |
|
|
|
4.32
|
|
Certificate of Junior Subordinated Debenture relating to the Corporation’s 6.70%
Junior Subordinated Debentures, Series A Due November 1, 2033 (incorporated by
reference to Exhibit 4.6 of the Corporation’s Current Report on Form 8-K dated
October 31, 2003, as filed with the SEC on November 4, 2003). |
|
|
|
4.33
|
|
Indenture dated as of October 31, 2003, between the Corporation and JP Morgan Chase
Institutional Services (formerly Bank One Trust Company, N.A.) Debenture
(incorporated by reference to Exhibit 4.2 of the Corporation’s Current Report on
Form 8-K dated October 31, 2003, as filed with the SEC on November 4, 2003). |
|
|
|
4.34
|
|
First Supplemental Indenture, dated as of October 31, 2003, between the Corporation
and JP Morgan Chase Institutional Services (formerly Bank One Trust Company, N.A.)
(incorporated by reference to Exhibit 4.3 of the Corporation’s Current Report on
Form 8-K dated October 31, 2003, as filed with the SEC on November 4, 2003). |
|
|
|
4.35
|
|
Global Capital Securities Certificate for Popular Capital Trust I (incorporated by
reference to Exhibit 4.5 of the Corporation’s Current Report on Form 8-K dated
October 31, 2003, as filed with the SEC on November 4, 2003). |
|
|
|
4.36
|
|
Form of Junior Subordinated Indenture between Popular North America, Inc., the
Corporation and J.P. Morgan Trust Company, National Association (incorporated by
reference to Exhibit 4(a) to the Registration Statement on Form S-3/A (Registration
No. 333-118197) filed with the SEC on September 9, 2004). |
|
|
|
4.37
|
|
Certificate of Trust of Popular North America Capital Trust I (incorporated by
reference to Exhibit 4(b) to the Registration Statement on Form S-3/A (Registration
No. 333-118197) filed with the SEC on September 9, 2004). |
|
|
|
4.38
|
|
Trust Agreement of Popular North America Capital Trust I (incorporated by reference
to Exhibit 4(c) to the Registration Statement on Form S-3/A (Registration No.
333-118197) filed with the SEC on September 9, 2004). |
|
|
|
4.39
|
|
Form of Amended and Restated Trust Agreement of Popular North America Capital Trust
I (incorporated by reference to Exhibit 4(d) to the Registration Statement on Form
S-3/A (Registration No. 333-118197) filed with the SEC on September 9, 2004). |
|
|
|
4.40
|
|
Form of Capital Security Certificate for Popular North America Capital Trust I
(incorporated by reference to Exhibit 4(e) to the Registration Statement on Form
S-3/A (Registration No. 333-118197) filed with the SEC on September 9, 2004). |
|
|
|
4.41
|
|
Form of Guarantee Agreement for Popular North America Capital Trust I (incorporated
by reference to Exhibit 4(f) to the Registration Statement on Form S-3/A
(Registration No. 333-118197) filed with the SEC on September 9, 2004). |
30
| |
|
|
| Exhibit No. |
|
Description |
4.42
|
|
Amended and Restated Declaration of Trust and Trust Agreement of Popular Capital
Trust II, dated as of November 30, 2004, among the Corporation, JP Morgan Trust
Company, National Association (formerly Bank One Trust Company, N.A.), Chase
Manhattan Bank USA, National Association (as successor to Bank One Delaware, Inc.),
the Administrative Trustees named therein and the holders from time to time, of the
undivided beneficial ownership interests in the assets of the Trust (incorporated by
reference to Exhibit 4.1 of the Corporation’s Current Report on Form 8-K dated
December 3, 2004, as filed with the SEC on December 3, 2004). |
|
|
|
4.43
|
|
Form of Guarantee Agreement relating to Popular Capital Trust II (incorporated by
reference to Exhibit 4.7 to the Registration Statement on Form S-3 (Registration No.
333-120340) filed with the SEC on November 10, 2004). |
|
|
|
4.44
|
|
Certificate of Junior Subordinated Debenture relating to the Corporation’s 6.125%
Junior Subordinated Debentures, Series A Due December 1, 2034 (incorporated by
reference to Exhibit 4.6 of the Corporation’s Current Report on Form 8-K dated
December 3, 2004, as filed with the SEC on December 3, 2004). |
|
|
|
4.45
|
|
Second Supplemental Indenture, dated as of November 30, 2004, between the
Corporation and JP Morgan Trust Company, National Association (formerly Bank One
Trust Company, N.A.) (incorporated by reference to Exhibit 4.3 of the Corporation’s
Current Report on Form 8-K dated December 3, 2004, as filed with the SEC on December
3, 2004). |
|
|
|
4.46
|
|
Global Capital Securities Certificate for Popular Capital Trust I (incorporated by
reference to Exhibit 4.5 of the Corporation’s Current Report on Form 8-K dated
December 3, 2004, as filed with the SEC on December 3, 2004). |
|
|
|
10.1
|
|
Amendment to Popular, Inc. Senior Executive Long-Term Incentive Plan, dated April
23, 1998 (incorporated by reference to Exhibit 10.8.2. of the Corporation’s Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (File No.
033-61601). |
|
|
|
10.2
|
|
Popular, Inc. 2001 Stock Option Plan (incorporated by reference to Exhibit 4.4 of
the Corporation’s Registration Statement on Form S-8, dated May 10, 2001). |
|
|
|
10.3
|
|
Interest Calculation Agency Agreement, dated as of August 6, 1999, between the
Corporation and JP Morgan Chase Bank (formerly known as The First National Bank of
Chicago) (incorporated by reference to Exhibit 10(c) of the Corporation’s Current
Report on Form 8-K (File No. 002-96018), dated August 5, 1999 and filed on August
17, 1999). |
|
|
|
10.4
|
|
Interest Calculation Agency Agreement, dated as of August 6, 1999, between Popular
North America, Inc. and JP Morgan Chase Bank (formerly known as The First National
Bank of Chicago) (incorporated by reference to Exhibit 10(d) of the Corporation’s
Current Report on Form 8-K (File No. 002-96018), dated August 5, 1999 and filed on
August 17, 1999). |
|
|
|
10.5
|
|
Distribution Agreement, dated March 21, 2003, among the Corporation, Credit Suisse
First Boston LLC, J.P. Morgan Securities Inc., Keefe, Bruyette & Woods, Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Popular Securities, Inc. and UBS
Warburg LLC, (incorporated by reference to Exhibit 1(A) of the Corporation’s Current
Report on Form 8-K (File No. 000-13818), dated March 21, 2003 and filed on March 26,
2003). |
|
|
|
10.6
|
|
Distribution Agreement, dated March 21, 2003, among Popular North America, Inc., the
Corporation, Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., Keefe,
Bruyette & Woods, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Popular
Securities, Inc. and UBS Warburg LLC(incorporated by reference to Exhibit 1(B) of
the Corporation’s Current Report on Form 8-K (File No. 000-13818), dated March 21,
2003 and filed on March 26, 2003). |
|
|
|
10.7
|
|
Banco Popular de Puerto Rico Employees’ Stock Plan (Puerto Rico) (incorporated by
reference to Exhibit 4.4(a) the Corporation’s Registration Statement on Form S-8
(333-80169), dated June 8, 1999) (incorporated by reference to Exhibit 10.15 of the
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31,
2000). |
|
|
|
10.7(a)
|
|
Certificate of Resolution of the Board of Directors of Banco Popular de Puerto Rico,
authorizing Amendments to the Banco Popular de Puerto Rico Employees’ Stock Plan
(Puerto Rico) (incorporated by reference to Exhibit 10.15a of the Corporation’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No.
002-96018)). |
|
|
|
10.8
|
|
Distribution Agreement of the Banco Popular de Puerto Rico Bank Notes, dated
September 24, 1996, among Banco Popular de Puerto Rico, Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns & Co. Inc. and Credit
Suisse First Boston Corporation (incorporated by reference to Exhibit 10.16 of the
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000
(File No. 002-96018)). |
31
| |
|
|
| Exhibit No. |
|
Description |
10.9
|
|
Amendment, dated May 12, 2000, to The Distribution Agreement, dated September 24,
1996, among Banco Popular de Puerto Rico, Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear Stearns & Co., Inc. and Credit Suisse
First Boston Corporation (incorporated by reference to Exhibit 10.17 of the
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000
(File No. 002-96018)). |
|
|
|
10.10
|
|
Issuing and Paying Agency Agreement of the Banco Popular de Puerto Rico Bank Notes,
dated September 24, 1996, among Banco Popular de Puerto Rico and JP Morgan Chase
Bank (formerly The Chase Manhattan Bank) (incorporated by reference to Exhibit 10.18
of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December
31, 2000 (File No. 002-96018)). |
|
|
|
10.11
|
|
Amendment No. 1, dated May 12, 2000 to Issuing and Paying Agency Agreement, dated
September 24, 1996, among Banco Popular de Puerto Rico and JP Morgan Chase Bank
(formerly The Chase Manhattan Bank) (incorporated by reference to Exhibit 10.19 of
the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31,
2000 (File No. 002-96018)). |
|
|
|
10.12
|
|
Interest Calculation Agreement of the Banco Popular de Puerto Rico Notes, dated
September 24, 1996, among Banco Popular de Puerto Rico and JP Morgan Chase Bank
(formerly The Chase Manhattan Bank) (incorporated by reference to Exhibit 10.20 of
the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31,
2000 (File No. 002-96018)). |
|
|
|
10.13
|
|
Amendment No. 1, dated May 12, 2000 to the Interest Calculation Agreement, dated
September 24, 1996, among Banco Popular de Puerto Rico and JP Morgan Chase Bank
(formerly The Chase Manhattan Bank) (incorporated by reference to Exhibit 10.21 of
the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31,
2000 (File No. 002-96018)). |
|
|
|
10.14
|
|
Amended Administrative Procedures for Fixed and Floating Rate Bank Notes, dated May
12, 2000 to Exhibit G of The Distribution Agreement, dated September 24, 1996, among
Banco Popular de Puerto Rico, Merrill Lynch & Co., Merrill Lynch Pierce, Fenner &
Smith Incorporated, Bear Stearns & Co., Inc. and Credit Suisse First Boston
Corporation (incorporated by reference to Exhibit 10.22 of the Corporation’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 (File No.
002-96018)). |
|
|
|
10.15
|
|
Form of Global Fixed and Floating Rate Bank Note of the Banco Popular de Puerto Rico
Bank Notes, dated September 24, 1996 and amended through Administrative Procedures,
dated May 12, 2000 (incorporated by reference to Exhibit 10.23 of the Corporation’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No.
002-96018)). |
|
|
|
10.16
|
|
Deferred Prosecution Agreement dated as of January 16, 2003, among Banco Popular de
Puerto Rico, the U.S. Department of Justice, the Board of Governors of the Federal
Reserve Bank System and the Financial Crimes Enforcement Network of the U.S.
Department of the Treasury (incorporated by reference to Exhibit 10.25 of the
Corporation’s Current Report on Form 8-K, filed on February 6, 2003). |
|
|
|
10.17
|
|
Equity One Inc. Savings and Retirement Plan (incorporated by reference to Exhibit
4.4 of the Corporation’s Registration Statement on Form S-8, dated November 1,
2002). |
|
|
|
10.18
|
|
Popular, Inc. 2004 Omnibus Incentive Plan (incorporated by reference to Exhibit
10.21 of the Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2005). |
|
|
|
10.19
|
|
Form of Compensation Agreement for Directors Elected Chairman of a Committee
(incorporated by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004). |
|
|
|
10.20
|
|
Form of Compensation Agreement for Directors not Elected Chairman of a Committee
(incorporated by reference to Exhibit 10.2 of the Corporation’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004). |
|
|
|
10.21
|
|
Compensation Agreement for Federic V. Salerno as director of Popular, Inc.
(incorporated by reference to Exhibit 10.3 of the Corporation’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004). |
|
|
|
10.22
|
|
Compensation Agreement for William J. Teuber as director of Popular, Inc.
(incorporated by reference to Exhibit 10.4 of the Corporation’s Quarterly Report on
Form 10-Q for the year ended September 30, 2004). |
|
|
|
10.23
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as of
February 22, 2005, between the Corporation and Richard L. Carrión. |
32
| |
|
|
| Exhibit No. |
|
Description |
10.24
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as of
February 22, 2005, between the Corporation and Jorge A. Junquera. |
|
|
|
10.25
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as of
February 22, 2005, between the Corporation and David H. Chafey, Jr. |
|
|
|
10.26
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as
February 22, 2005, between the Corporation and Brunilda Santos de Álvarez. |
|
|
|
10.27
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as of
February 22, 2005, between the Corporation and Amílcar L. Jordán. |
|
|
|
10.28
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as of
February 22, 2005, between the Corporation and Tere Loubriel. |
|
|
|
10.29
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as of
February 22, 2005, between the Corporation and Roberto R. Herencia. |
|
|
|
10.30
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as of
February 22, 2005, between the Corporation and Félix M. Villamil. |
|
|
|
10.31
|
|
Amended and Restated Popular, Inc. 2005 Incentive Award and Agreement , dated as of
February 22, 2005, between the Corporation and Cameron E. Williams. |
|
|
|
10.32
|
|
Popular, Inc. 2006 Incentive Award
and Agreement, dated as of March 13, 2006, between
the Corporation and Richard L. Carrión. |
|
|
|
10.33
|
|
Popular, Inc. 2006 Incentive Award
and Agreement, dated as of March 13, 2006, between
the Corporation and Jorge A. Junquera. |
|
|
|
10.34
|
|
Popular, Inc. 2006 Incentive Award and Agreement, dated as of March 13, 2006,
between the Corporation and David H. Chafey, Jr. |
|
|
|
10.35
|
|
Popular, Inc. 2006 Incentive Award and Agreement, dated as of March 13, 2006,
between the Corporation and Brunilda Santos de Álvarez. |
|
|
|
10.36
|
|
Popular, Inc. 2006 Incentive Award and Agreement, dated as of March 13, 2006,
between the Corporation and Amílcar L. Jordán. |
|
|
|
10.37
|
|
Popular, Inc. 2006 Incentive Award and Agreement, dated as of March 13, 2006,
between the Corporation and Tere Loubriel. |
|
|
|
10.38
|
|
Popular, Inc. 2006 Incentive Award and Agreement, dated as of March 13, 2006,
between the Corporation and Roberto R. Herencia. |
|
|
|
10.39
|
|
Popular, Inc. 2006 Incentive Award and Agreement, dated as of March 13, 2006,
between the Corporation and Félix M. Villamil. |
|
|
|
10.40
|
|
Popular, Inc. 2006 Incentive Award and Agreement, dated as of March 13, 2006,
between the Corporation and Cameron E. Williams. |
|
|
|
12.1
|
|
The Corporation’s Computation of Ratio of Earnings to Fixed Charges. |
|
|
|
13.1
|
|
The Corporation’s Annual Report to Shareholders for the year ended December 31, 2005. |
|
|
|
21.1
|
|
Schedule of Subsidiaries of the
Corporation. |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
Popular, Inc. has not filed as exhibits certain instruments defining the rights of holders of debt
of Popular, Inc. not exceeding 10% of the total assets of Popular, Inc. and its consolidated
subsidiaries. Popular, Inc. hereby agrees to furnish upon request to the Commission a copy of each
instrument defining the rights of holders of senior and subordinated debt of Popular, Inc., or of
any of its consolidated subsidiaries.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
|
|
|
|
| |
POPULAR, INC.
(Registrant)
|
|
| |
By: |
S\ RICHARD L. CARRIÓN
|
|
| |
|
Richard L. Carrión |
|
| Dated: 03-14-06 |
|
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer) |
|
| |
| |
|
|
|
|
| |
|
|
| |
By: |
S\ JORGE A. JUNQUERA
|
|
| |
|
Jorge A. Junquera |
|
| Dated: 03-14-06 |
|
Senior Executive Vice President
(Principal Financial Officer) |
|
| |
| |
|
|
|
|
| |
|
|
| |
By: |
S\ ILEANA GONZÁLEZ
|
|
| |
|
Ileana González |
|
| Dated: 03-14-06 |
|
Senior Vice President
(Principal Accounting Officer) |
|
| |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
S\ RICHARD L. CARRIÓN
Richard L. Carrión
|
|
Chairman of the Board,
President and Chief
Executive Officer
|
|
03-14-06 |
|
|
|
|
|
S\ JUAN J. BERMÚDEZ
Juan J. Bermúdez
|
|
Director
|
|
03-14-06 |
|
|
|
|
|
S/ JOSÉ B. CARRIÓN
José B. Carrión Jr.
|
|
Director
|
|
03-14-06 |
|
|
|
|
|
S\ MARÍA LUISA FERRÉ
María Luisa Ferré
|
|
Director
|
|
03-14-06 |
|
|
|
|
|
S\ MANUEL MORALES
Manuel Morales Jr.
|
|
Director
|
|
03-14-06 |
|
|
|
|
|
S\ FRANCISCO M. REXACH
Francisco M. Rexach Jr.
|
|
Director
|
|
03-14-06 |
|
|
|
|
|
S\ FREDERIC V. SALERNO
Frederic V. Salerno
|
|
Director
|
|
03-14-06 |
|
|
|
|
|
S\ WILLIAM J. TEUBER
William J. Teuber Jr.
|
|
Director
|
|
03-14-06 |
|
|
|
|
|
S\ JOSÉ R. VIZCARRONDO
José R. Vizcarrondo
|
|
Director
|
|
03-14-06 |
34