UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2006

Commission File Number: 000-13818

POPULAR, INC.

(Exact name of registrant as specified in its charter)

Puerto Rico		66-0416582
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)
Popular Center Building 209 Muñoz Rivera Avenue, Hato Rey San Juan, Puerto Rico		00918
(Address of principal executive offices)		(Zip code)

(787) 765-9800
(Registrant’s telephone number, including area code)

NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report)

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

     þ Yes               o No

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

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

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

     o Yes               þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock $6.00 par value, 278,362,258 shares outstanding as of April 28, 2006.

 

 

POPULAR, INC.

INDEX

		Page
Part I — Financial Information
Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of March 31, 2006, December 31, 2005 and March 31, 2005			4
Unaudited Consolidated Statements of Income for the three-month periods ended March 31, 2006 and 2005			5
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the three-month periods ended March 31, 2006 and 2005			6
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three-month periods ended March 31, 2006 and 2005			7
Unaudited Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2006 and 2005			8
Notes to Unaudited Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
Item 3. Quantitative and Qualitative Disclosures about Market Risk			67
Item 4. Controls and Procedures			71
Part II — Other Information
Item 1. Legal Proceedings			71
Item 1A. Risk Factors			71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			72
Item 6. Exhibits			72
Signatures			73
EX-12.1 COMPUTATION OF THE RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

Forward-Looking Information

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

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

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

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

ITEM 1. FINANCIAL STATEMENTS

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)

		March 31,				December 31,				March 31,
(In thousands, except share information)		2006				2005				2005
ASSETS
Cash and due from banks		$	860,606			$	906,397			$	812,481
Money market investments:
Federal funds sold			488,200				186,000				85,983
Securities purchased under agreements to resell			491,710				554,770				629,606
Time deposits with other banks			10,005				8,653				7,686
			989,915				749,423				723,275
Investment securities available-for-sale, at fair value:
Pledged securities with creditors’ right to repledge			5,934,017				6,110,179				4,722,576
Other investment securities available-for-sale			5,576,651				5,606,407				6,549,304
Investment securities held-to-maturity, at amortized cost			344,385				153,104				179,073
Other investment securities, at lower of cost or realizable value			304,609				319,103				308,781
Trading account securities, at fair value:
Pledged securities with creditors’ right to repledge			365,096				343,659				259,153
Other trading securities			144,516				175,679				111,561
Loans held-for-sale, at lower of cost or market value			535,719				699,181				1,227,329
Loans held-in-portfolio:
Loans held-in-portfolio pledged with creditors’ right to repledge			21,210				208,774				624,701
Other loans held-in-portfolio			31,174,832				31,099,865				27,835,290
Less — Unearned income			301,376				297,613				259,294
Allowance for loan losses			468,321				461,707				448,222
			30,426,345				30,549,319				27,752,475
Premises and equipment, net			600,792				596,571				563,542
Other real estate			82,352				79,008				64,775
Accrued income receivable			274,620				245,646				247,169
Other assets			1,388,662				1,325,800				1,079,606
Goodwill			655,743				653,984				519,915
Other intangible assets			107,675				110,208				46,823
		$	48,591,703			$	48,623,668			$	45,167,838
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	4,453,965			$	3,958,392			$	4,257,121
Interest bearing			18,957,847				18,679,613				17,471,556
			23,411,812				22,638,005				21,728,677
Federal funds purchased and assets sold under agreements to repurchase			8,315,380				8,702,461				7,765,064
Other short-term borrowings			2,645,521				2,700,261				2,043,391
Notes payable			9,933,218				9,893,577				9,663,008
Subordinated notes			—				—				125,000
Other liabilities			798,102				1,240,002				777,596
			45,104,033				45,174,306				42,102,736
Commitments and contingencies (See Note 9)
Minority interest in consolidated subsidiaries			113				115				102
Stockholders’ equity:
Preferred stock, $25 liquidation value; 30,000,000 shares authorized; 7,475,000 shares issued and outstanding in all periods presented			186,875				186,875				186,875
Common stock, $6 par value; 470,000,000 shares authorized in all periods presented; 291,497,120 shares issued (December 31, 2005 — 289,407,190; March 31, 2005 — 280,200,216) and 278,072,323 shares outstanding (December 31, 2005 — 275,955,391; March 31, 2005 — 266,795,924)			1,748,983				1,736,443				1,681,201
Surplus			486,863				452,398				283,419
Retained earnings			1,526,634				1,456,612				1,246,999
Accumulated other comprehensive loss, net of tax of ($82,657) (December 31, 2005 — ($58,292); March 31, 2005 — ($37,665))			(255,265	)			(176,000	)			(127,644	)
Treasury stock — at cost, 13,424,797 shares (December 31, 2005 — 13,451,799; March 31, 2005 — 13,404,292)			(206,533	)			(207,081	)			(205,850	)
			3,487,557				3,449,247				3,065,000
		$	48,591,703			$	48,623,668			$	45,167,838

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		Quarter ended
		March 31,
(In thousands, except per share information)		2006				2005
INTEREST INCOME:
Loans		$	591,835			$	505,321
Money market investments			7,982				7,534
Investment securities			133,533				114,367
Trading account securities			8,860				6,058
			742,210				633,280
INTEREST EXPENSE:
Deposits			124,411				97,056
Short-term borrowings			124,803				65,803
Long-term debt			133,232				113,135
			382,446				275,994
Net interest income			359,764				357,286
Provision for loan losses			48,947				44,336
Net interest income after provision for loan losses			310,817				312,950
Service charges on deposit accounts			47,469				43,692
Other service fees (See Note 10)			80,346				79,015
Net gain on sale and valuation adjustment of investment securities			12,340				51,250
Trading account profit			11,475				3,763
Gain on sale of loans			47,261				9,816
Other operating income			29,942				18,053
			539,650				518,539
OPERATING EXPENSES:
Personnel costs:
Salaries			135,532				115,542
Pension, profit sharing and other benefits			42,520				40,374
			178,052				155,916
Net occupancy expenses			28,638				24,814
Equipment expenses			33,197				28,614
Other taxes			10,241				9,255
Professional fees			37,078				27,583
Communications			17,300				15,677
Business promotion			32,823				20,253
Printing and supplies			4,632				4,537
Other operating expenses			28,831				27,943
Impact of change in fiscal period of certain subsidiaries			9,741				—
Amortization of intangibles			2,721				2,242
			383,254				316,834
Income before income tax and cumulative effect of accounting change			156,396				201,705
Income tax			37,893				42,433
Income before cumulative effect of accounting change			118,503				159,272
Cumulative effect of accounting change, net of tax			—				3,607
NET INCOME		$	118,503			$	162,879
NET INCOME APPLICABLE TO COMMON STOCK		$	115,525			$	159,901
BASIC EARNINGS PER COMMON SHARE (EPS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		$	0.42			$	0.59
DILUTED EPS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		$	0.42			$	0.58
BASIC AND DILUTED EPS AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE		$	0.42			$	0.60
DIVIDENDS DECLARED PER COMMON SHARE		$	0.16			$	0.16

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)

		Quarter ended
		March 31,
(In thousands)		2006				2005
Preferred stock:
Balance at beginning and end of year		$	186,875			$	186,875
Common stock:
Balance at beginning of year			1,736,443				1,680,096
Common stock issued under the Dividend Reinvestment Plan			1,184				1,079
Issuance of common stock			11,312				—
Stock options exercised			44				26
Balance at end of period			1,748,983				1,681,201
Surplus:
Balance at beginning of year			452,398				278,840
Common stock issued under the Dividend Reinvestment Plan			2,789				3,775
Issuance of common stock			28,281				—
Issuance cost of common stock			1,527				—
Stock options expense on unexercised options			768				724
Stock options exercised			100				80
Transfer from retained earnings			1,000				—
Balance at end of period			486,863				283,419
Retained earnings:
Balance at beginning of year			1,456,612				1,129,793
Net income			118,503				162,879
Cash dividends declared on common stock			(44,503	)			(42,695	)
Cash dividends declared on preferred stock			(2,978	)			(2,978	)
Transfer to surplus			(1,000	)			—
Balance at end of period			1,526,634				1,246,999
Accumulated other comprehensive loss:
Balance at beginning of year			(176,000	)			35,454
Other comprehensive loss, net of tax			(79,265	)			(163,098	)
Balance at end of period			(255,265	)			(127,644	)
Treasury stock — at cost:
Balance at beginning of year			(207,081	)			(206,437	)
Reissuance of common stock			548				587
Balance at end of period			(206,533	)			(205,850	)
Total stockholders’ equity		$	3,487,557			$	3,065,000

Disclosure of changes in number of shares:

		March 31,				December 31,				March 31,
		2006				2005				2005
Preferred Stock:
Balance at beginning and end of period			7,475,000				7,475,000				7,475,000
Common Stock — Issued:
Balance at beginning of year			289,407,190				280,016,007				280,016,007
Issued under the Dividend Reinvestment Plan			197,196				728,705				179,867
Issuance of common stock			1,885,380				8,614,620				—
Stock options exercised			7,354				47,858				4,342
Balance at end of period			291,497,120				289,407,190				280,200,216
Treasury stock			(13,424,797	)			(13,451,799	)			(13,404,292	)
Common Stock — Outstanding			278,072,323				275,955,391				266,795,924

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

		Quarter ended
		March 31,
(In thousands)		2006				2005
Net income		$	118,503			$	162,879
Other comprehensive loss, before tax:
Foreign currency translation adjustment			(686	)			(246	)
Unrealized holding losses on securities available-for-sale arising during the period			(91,965	)			(159,719	)
Reclassification adjustment for gains included in net income			(12,340	)			(50,727	)
Net gain on cash flow hedges			1,200				2,538
Reclassification adjustment for losses included in net income			161				611
			(103,630	)			(207,543	)
Income tax benefit			24,365				44,445
Total other comprehensive loss, net of tax			(79,265	)			(163,098	)
Comprehensive income (loss)		$	39,238			($	219	)

Disclosure of accumulated other comprehensive loss:

		March 31,				December 31,				March 31,
(In thousands)		2006				2005				2005
Foreign currency translation adjustment		($	37,001	)		($	36,315	)		($	35,776	)
Minimum pension liability adjustment			(2,354	)			(2,354	)			—
Tax effect			918				918				—
Net of tax amount			(1,436	)			(1,436	)			—
Unrealized losses on securities available-for-sale			(299,995	)			(195,690	)			(131,941	)
Tax effect			82,162				57,297				38,373
Net of tax amount			(217,833	)			(138,393	)			(93,568	)
Unrealized gains (losses) on cash flows hedges			1,185				(176	)			2,042
Tax effect			(423	)			77				(708	)
Net of tax amount			762				(99	)			1,334
Cumulative effect of accounting change, net of tax			243				243				366
Accumulated other comprehensive loss, net of tax		($	255,265	)		($	176,000	)		($	127,644	)

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

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Quarter ended March 31,
(In thousands)		2006				2005
Cash flows from operating activities:
Net income		$	118,503			$	162,879
Less: Cumulative effect of accounting change, net of tax			—				3,607
Less: Impact of change in fiscal period of certain subsidiaries, net of tax			(6,129	)			—
Net income before cumulative effect of accounting change and change in fiscal period			124,632				159,272
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment			21,437				20,010
Provision for loan losses			48,947				44,336
Amortization of intangibles			2,721				2,242
Amortization of servicing assets			13,501				3,421
Net gain on sale and valuation adjustment of investment securities			(12,340	)			(51,250	)
Net gain on disposition of premises and equipment			(1,512	)			(1,663	)
Net gain on sale of loans			(47,261	)			(9,816	)
Net amortization of premiums and accretion of discounts on investments			7,012				10,597
Net amortization of premiums and deferred loan origination fees and costs			31,887				28,728
Earnings from investments under the equity method			(4,261	)			(1,969	)
Stock options expense			800				746
Net disbursements on loans held-for-sale			(2,046,227	)			(800,476	)
Acquisitions of loans held-for-sale			(166,540	)			(563,223	)
Proceeds from sale of loans held-for-sale			2,166,951				913,688
Net decrease in trading securities			677,764				19,097
Net increase in accrued income receivable			(30,589	)			(32,331	)
Net decrease in other assets			19,470				46,405
Net increase in interest payable			23,849				20,084
Net increase in deferred income tax			(1,751	)			(4,478	)
Net increase in postretirement benefit obligation			1,585				1,414
Net increase (decrease) in other liabilities			3,286				(44,652	)
Total adjustments			708,729				(399,090	)
Net cash provided by (used in) operating activities			833,361				(239,818	)
Cash flows from investing activities:
Net (increase) decrease in money market investments			(240,350	)			186,209
Purchases of investment securities:
Available-for-sale			(175,975	)			(674,022	)
Held-to-maturity			(7,747,198	)			(7,671,759	)
Other			(10,580	)			(28,204	)
Proceeds from calls, paydowns, maturities and redemptions of investment securities:
Available-for-sale			247,055				586,877
Held-to-maturity			7,556,192				7,851,301
Other			25,074				21,863
Proceeds from sale of investment securities available-for-sale			43,894				99,944
Net repayments on loans			193,009				842,978
Proceeds from sale of loans			73,038				80,246
Acquisition of loan portfolios			(141,658	)			(660,023	)
Assets acquired, net of cash			(218	)			(173,666	)
Acquisition of premises and equipment			(38,799	)			(38,770	)
Proceeds from sale of premises and equipment			14,452				10,505
Net cash (used in) provided investing activities			(202,064	)			433,479
Cash flows from financing activities:
Net increase in deposits			769,477				465,576
Net (decrease) increase in federal funds purchased and assets sold under agreements to repurchase			(500,232	)			1,290,492
Net decrease in other short-term borrowings			(161,597	)			(1,108,510	)
Payments of notes payable			(900,117	)			(844,936	)
Proceeds from issuance of notes payable			106,252				142,009
Dividends paid			(45,768	)			(45,636	)
Proceeds from issuance of common stock			42,983				4,938
Net cash used in financing activities			(689,002	)			(96,067	)
Cash effect of change in fiscal period of certain subsidiaries and change in accounting principle			11,914				(1,572	)
Net (decrease) increase in cash and due from banks			(45,791	)			96,022
Cash and due from banks at beginning of period			906,397				716,459
Cash and due from banks at end of period		$	860,606			$	812,481

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

Notes to Unaudited Consolidated Financial Statements

Note 1 — Nature of operations and basis of presentation

Popular, Inc. (the “Corporation” or “Popular”) is a diversified, publicly owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full service financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending and insurance services through specialized subsidiaries. In the United States, the Corporation provides complete financial solutions to all the communities it serves through branches of Banco Popular North America (“BPNA”) in California, Texas, Illinois, New York, New Jersey and Florida. The Corporation’s consumer finance subsidiary in the United States, Popular Financial Holdings, Inc. (“PFH”), offers mortgage and personal loans, and also maintains a substantial wholesale loan brokerage network, a warehouse lending division and a loan servicing unit. PFH, through its subsidiary E-LOAN, Inc. (“E-LOAN”), provides online consumer direct lending to obtain mortgage, auto and home equity loans. The Corporation strives to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, as well as internally servicing many of its subsidiaries’ system infrastructures and transactional processing businesses. EVERTEC, Inc. (“EVERTEC”), the Corporation’s main subsidiary in this business segment, is the leading provider of financial transaction processing and information technology solutions in Puerto Rico and the Caribbean. With offices in San Juan, Caracas, Santo Domingo, and Miami, EVERTEC has presence in 11 Latin American countries. Note 17 to the consolidated financial statements presents further information about the Corporation’s business segments.

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

In the normal course of business, except for the Corporation’s banks and the parent holding company, the Corporation utilized a one-month lag in the consolidation of the financial results of its other subsidiaries (the “non-banking subsidiaries”). As previously described in the Corporation’s 2005 Annual Report on Form 10-K (the “2005 Annual Report”) for the year ended December 31, 2005, in that year, the Corporation commenced a two-year plan to change the reporting period of its non-banking subsidiaries to a December 31^st calendar period, primarily as part of a strategic plan to put in place a corporate-wide integrated financial system and to facilitate the consolidation process. In 2005, the impact of this change in net income was included as a cumulative effect of accounting change in the Corporation’s consolidated financial results for the first quarter, and corresponded to the financial results for the month of December 2004 of the non-banking subsidiaries which implemented the change in the first reporting period of 2005. In the first quarter of 2006, the Corporation completed the second phase of the two-year plan, as such the financial results for the month of December 2005 of PFH (excluding E-LOAN which already had a December 31^st year-end closing), Popular FS, Popular Securities and Popular North America (holding company only) were included in a separate line within operating expenses in the consolidated statement of operations for the quarter ended March 31, 2006. The financial impact amounted to a loss of $9.7 million (before tax). After tax, this change resulted in a net loss of $6.1 million, which is included in the quarterly results for the period ended March 31, 2006. As of the end of the first quarter of 2006, all subsidiaries of the Corporation have aligned their year-end closings to December 31^st, similar to the parent holding company. There were no unadjusted significant intervening events resulting from the difference in fiscal periods, which management believed could have materially affected the financial position or results of operations of the Corporation for the periods presented.

The statement of condition data as of December 31, 2005 was derived from audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from the statements presented as of March 31, 2006, December 31, 2005 and March 31, 2005 pursuant to the rules and regulations of the

Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2005, included in the Corporation’s 2005 Annual Report.

Foreign Currency Translation

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

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

The Corporation has been monitoring the inflation levels in the Dominican Republic to evaluate whether it still meets the “highly inflationary economy” test prescribed by SFAS No. 52, “Foreign Currency Translation.” Such statement defines highly inflationary as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy are remeasured as if the functional currency were the reporting currency. Accordingly, since June 2004, the Corporation’s interests in the Dominican Republic have been remeasured into the U.S. dollar. Although as of March 31, 2006, the cumulative inflation rate in the Dominican Republic over a 3-year period was below 100 percent, approximating 86% at quarter-end, the Corporation continued to apply the remeasurement accounting as of March 31, 2006 based on the accounting guidance obtained. The International Practices Task Force (“IPTF”) of the SEC Regulations Committee of the American Institute of Certified Public Accountants had concluded that the Dominican Republic was considered highly inflationary as of December 31, 2005, and concluded that such country would not cease being regarded as highly inflationary for the first quarter of 2006. The Dominican peso’s exchange rate to the U.S. dollar was $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, compared with $33.14 at December 31, 2005 and $33.50 at March 31, 2006. During the quarter ended March 31, 2006, approximately $197 thousand in net remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive (loss) income. Net remeasurement gains totaled $864 thousand for the quarter ended March 31, 2005. These remeasurement gains / losses will continue to be reflected in earnings until the economy is no longer considered highly inflationary. The unfavorable cumulative translation adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $32 million.

Subsequent events

In April 2006, the Corporation issued $450 million in medium-term notes maturing in 2009. Of the total amount issued, $250 million bear interest at a fixed rate of 5.65% and $200 million bear interest at floating rates tied to the 3-month LIBOR plus a spread of 40 basis points, which reset quarterly. The Corporation simultaneously entered into an interest swap contract to convert the floating rate notes to fixed rate notes. The cash inflows were used to substitute short-term borrowings and finance operations. Under the swap arrangement, the Corporation pays a fixed rate equal to 5.58%.

On April 28, 2006, Popular, Inc. and Grupo Cuscatlán, through Corporación UBC International, S.A. (“UBCI”), announced that the agreement subscribed on April 24, 2005 for the acquisition by Popular, Inc. of a 19.99% equity participation in UBCI, Grupo Cuscatlán’s holding company, will not be completed. Due to the time lapsed and changes in economic conditions, both parties could not reach a final consensus before the deadline set in the original agreement.

On May 1, 2006, as a result of a lack of current budgetary funds and lack of legislative authorization for the Government of Puerto Rico to obtain a loan, the Government closed a number of government agencies for the remainder of its current fiscal year, which ends on June 30, 2006. Approximately 95,000 public sector employees have been placed on unpaid leave until the budgetary crisis is resolved. Furthermore, on May 8, 2006, a nationally recognized rating agency downgraded the Government of Puerto Rico’s debt obligations. Refer to Item 1A. Risk Factors included in Part II - Other Information on this Form 10-Q for further information on these events.

Note 2 — Recent Accounting Developments

SFAS No. 123-R “Share-Based Payments”

In December 2004, the FASB issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123-R, “Share-Based Payment.” SFAS No. 123-R focuses primarily on transactions in which an entity exchanges its equity instruments for employee services and generally establishes standards for the accounting of transactions in which an entity obtains goods or services in share-based payment transactions. SFAS No. 123-R requires companies to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting, which APB 25 allowed and resulted in no expense for many awards of stock options for which the exercise price of the option did not exceed the price of the underlying stock at the grant date. In addition, SFAS No. 123-R retains the modified grant date model from SFAS No. 123. Under that model, compensation cost is measured at the grant date fair value of the award and is adjusted to reflect anticipated forfeitures and the expected outcome of certain conditions. The fair value of an award is not remeasured after its initial estimation on the grant date, except in the case of a liability award or if the award is modified, based on specific criteria included in SFAS No. 123-R. Also, SFAS 123-R clarifies the financial impact of vesting and/or acceleration clauses due at retirement. Under the revised SFAS, the expense should be fully accrued for any employee that is eligible to retire regardless of the actual retirement experience of the employer. The Corporation prospectively applied SFAS No. 123-R to its financial statements as of January 1, 2006. The impact of this adoption was not significant for the results of the quarter. Refer to Note 11 to these consolidated financial statements for required disclosures and further information on the impact of the adoption of this accounting pronouncement.

SFAS No. 153 “Exchanges of Nonmonetary Assets”

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred; or b) the entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. A qualitative assessment will, in some cases, be conclusive in determining that the estimated cash flows of the entity are expected to significantly change as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this Statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows for the quarter ended March 31, 2006.

SFAS No. 154 “Accounting Changes and Error Corrections”

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. Statement 154 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board toward development of a single set of high-quality accounting standards. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. APB Opinion No. 20 previously required that such a change be reported as a change in accounting principle. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. The adoption of SFAS No. 154 did not have a significant impact on the statement of condition or results of operations for the quarter ended March 31, 2006.

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

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

- Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;

- Clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133;

- Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;

- Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives;

- Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

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

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

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

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

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

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

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

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

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

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

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

4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as

offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.

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

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

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

The Corporation’s subsidiary banks are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank or with a correspondent bank. Those required average reserve balances were approximately $607 million at March 31, 2006 (December 31, 2005 — $584 million; March 31, 2005 — $555 million). Cash and due from banks as well as other short-term, highly liquid securities are used to cover the required average reserve balances.

In compliance with rules and regulations of the Securities and Exchange Commission, at March 31, 2006, the Corporation had securities with a market value of $446 thousand (December 31, 2005 — $549 thousand; March 31, 2005 — $699 thousand) segregated in a special reserve bank account for the benefit of brokerage customers of its broker-dealer subsidiary. These securities are classified in the consolidated statement of condition within the other trading securities category.

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

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

Note 4 — Pledged Assets

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

		March 31,				December 31,				March 31,
(In thousands)		2006				2005				2005
Investment securities available-for-sale		$	2,648,586			$	2,566,668			$	2,969,823
Investment securities held-to-maturity			810				953				1,258
Loans			11,368,056				11,835,842				10,464,104
		$	14,017,452			$	14,403,463			$	13,435,185

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

Note 5 — Investment Securities Available-For-Sale

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities available-for-sale as of March 31, 2006, December 31, 2005 and March 31, 2005 were as follows:

		AS OF MARCH 31, 2006
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	526,258				—			$	39,042			$	487,216
Obligations of U.S. Government sponsored entities			7,814,649				—				222,747				7,591,902
Obligations of Puerto Rico, States and political subdivisions			108,047			$	499				1,892				106,654
Collateralized mortgage obligations			1,868,088				6,944				19,374				1,855,658
Mortgage-backed securities			1,350,993				4,510				36,249				1,319,254
Equity securities			59,511				7,030				199				66,342
Others			82,874				1,109				341				83,642
		$	11,810,420			$	20,092			$	319,844			$	11,510,668

		AS OF DECEMBER 31, 2005
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	528,378			$	14			$	24,067			$	504,325
Obligations of U.S. Government sponsored entities			7,867,613				540				157,477				7,710,676
Obligations of Puerto Rico, States and political subdivisions			107,864				631				1,841				106,654
Collateralized mortgage obligations			1,854,843				8,209				14,289				1,848,763
Mortgage-backed securities			1,396,246				6,251				28,755				1,373,742
Equity securities			68,521				15,120				1,107				82,534
Others			88,568				1,324				—				89,892
		$	11,912,033			$	32,089			$	227,536			$	11,716,586

		AS OF MARCH 31, 2005
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
U.S. Treasury securities		$	555,338				—			$	31,359			$	523,979
Obligations of U.S. Government sponsored entities			7,098,780			$	3,938				121,827				6,980,891
Obligations of Puerto Rico, States and political subdivisions			172,781				4,419				1,367				175,833
Collateralized mortgage obligations			1,676,786				8,018				11,158				1,673,646
Mortgage-backed securities			1,746,559				15,828				21,131				1,741,256
Equity securities			20,460				20,304				306				40,458
Others			132,751				3,368				302				135,817
		$	11,403,455			$	55,875			$	187,450			$	11,271,880

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

		AS OF MARCH 31, 2006
		Less than 12 Months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	29,259			$	323			$	28,936
Obligations of U.S. Government sponsored entities			4,249,522				118,785				4,130,737
Obligations of Puerto Rico, States and political subdivisions			15,572				77				15,495
Collateralized mortgage obligations			651,405				7,333				644,072
Mortgage-backed securities			266,027				4,734				261,293
Equity securities			35				1				34
Others			14,104				341				13,763
		$	5,225,924			$	131,594			$	5,094,330

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	496,999			$	38,719			$	458,280
Obligations of U.S. Government sponsored entities			3,565,127				103,962				3,461,165
Obligations of Puerto Rico, States and political subdivisions			66,501				1,815				64,686
Collateralized mortgage obligations			367,529				12,041				355,488
Mortgage-backed securities			887,313				31,515				855,798
Equity securities			300				198				102
		$	5,383,769			$	188,250			$	5,195,519

		Total
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	526,258			$	39,042			$	487,216
Obligations of U.S. Government sponsored entities			7,814,649				222,747				7,591,902
Obligations of Puerto Rico, States and political subdivisions			82,073				1,892				80,181
Collateralized mortgage obligations			1,018,934				19,374				999,560
Mortgage-backed securities			1,153,340				36,249				1,117,091
Equity securities			335				199				136
Others			14,104				341				13,763
		$	10,609,693			$	319,844			$	10,289,849

		AS OF DECEMBER 31, 2005
		Less than 12 Months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	9,854			$	136			$	9,718
Obligations of U.S. Government sponsored entities			4,401,412				69,250				4,332,162
Obligations of Puerto Rico, States and political subdivisions			18,070				33				18,037
Collateralized mortgage obligations			672,546				6,394				666,152
Mortgage-backed securities			486,266				9,406				476,860
Equity securities			22,168				915				21,253
		$	5,610,316			$	86,134			$	5,524,182

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	499,148			$	23,931			$	475,217
Obligations of U.S. Government sponsored entities			3,379,970				88,227				3,291,743
Obligations of Puerto Rico, States and political subdivisions			54,680				1,808				52,872
Collateralized mortgage obligations			238,254				7,895				230,359
Mortgage-backed securities			672,428				19,349				653,079
Equity securities			3,837				192				3,645
		$	4,848,317			$	141,402			$	4,706,915

		Total
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	509,002			$	24,067			$	484,935
Obligations of U.S. Government sponsored entities			7,781,382				157,477				7,623,905
Obligations of Puerto Rico, States and political subdivisions			72,750				1,841				70,909
Collateralized mortgage obligations			910,800				14,289				896,511
Mortgage-backed securities			1,158,694				28,755				1,129,939
Equity securities			26,005				1,107				24,898
		$	10,458,633			$	227,536			$	10,231,097

		AS OF MARCH 31, 2005
		Less than 12 Months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	64,719			$	565			$	64,154
Obligations of U.S. Government sponsored entities			5,407,359				90,117				5,317,242
Obligations of Puerto Rico, States and political subdivisions			64,282				103				64,179
Collateralized mortgage obligations			482,045				4,721				477,324
Mortgage-backed securities			860,946				16,112				844,834
Equity securities			8,308				306				8,002
Others			6,548				302				6,246
		$	6,894,207			$	112,226			$	6,781,981

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	490,619			$	30,794			$	459,825
Obligations of U.S. Government sponsored entities			1,035,381				31,710				1,003,671
Obligations of Puerto Rico, States and political subdivisions			45,226				1,264				43,962
Collateralized mortgage obligations			241,054				6,437				234,617
Mortgage-backed securities			261,857				5,019				256,838
		$	2,074,137			$	75,224			$	1,998,913

		Total
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
U.S. Treasury securities		$	555,338			$	31,359			$	523,979
Obligations of U.S. Government sponsored entities			6,442,740				121,827				6,320,913
Obligations of Puerto Rico, States and political subdivisions			109,508				1,367				108,141
Collateralized mortgage obligations			723,099				11,158				711,941
Mortgage-backed securities			1,122,803				21,131				1,101,672
Equity securities			8,308				306				8,002
Others			6,548				302				6,246
		$	8,968,344			$	187,450			$	8,780,894

The unrealized loss positions of available-for-sale securities at March 31, 2006 are primarily associated with U.S. government sponsored entities and Treasury obligations, and to a lesser extent, U.S. Agency and government sponsored-issued mortgage-backed securities and collateralized mortgage obligations. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly liquid securities which possess a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in the available-for-sale portfolio at March 31, 2006 are substantially related to market interest rate fluctuations and not to the deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

During the quarter ended March 31, 2006, the Corporation recognized through earnings approximately $1.9 million in

losses in the available-for-sale portfolio that management considered to be other than temporarily impaired. These realized losses were associated with interest only strips.

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

		March 31, 2006								December 31, 2005								March 31, 2005
(In thousands)		Amortized Cost				Market Value				Amortized Cost				Market Value				Amortized Cost				Market Value
FNMA		$	1,715,490			$	1,691,774			$	1,790,840			$	1,776,604			$	1,832,411			$	1,830,563
FHLB			7,652,208				7,435,051				7,480,188				7,327,736				6,855,704				6,741,377
Freddie Mac			1,291,314				1,271,426				1,244,044				1,228,566				1,217,131				1,206,597

Note 6 — Investment Securities Held-to-Maturity

The amortized cost, gross unrealized gains and losses and approximate market value (or fair value for certain investment securities where no market quotations are available) of investment securities held-to-maturity as of March 31, 2006, December 31, 2005 and March 31, 2005 were as follows:

		AS OF MARCH 31, 2006
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
Obligations of U.S. Government sponsored entities		$	238,520			$	57			$	2			$	238,575
Obligations of Puerto Rico, States and political subdivisions			73,045				925				216				73,754
Collateralized mortgage obligations			456				—				25				431
Others			32,364				108				15				32,457
		$	344,385			$	1,090			$	258			$	345,217

		AS OF DECEMBER 31, 2005
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
Obligations of other U.S. Government sponsored entities		$	42,011				—			$	25			$	41,986
Obligations of Puerto Rico, States and political subdivisions			78,248			$	2,845				134				80,959
Collateralized mortgage obligations			497				—				27				470
Others			32,348				315				10				32,653
		$	153,104			$	3,160			$	196			$	156,068

		AS OF MARCH 31, 2005
						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(In thousands)		Cost				Gains				Losses				Value
Obligations of U.S. Government sponsored entities		$	52,725				—			$	32			$	52,693
Obligations of Puerto Rico, States and political subdivisions			77,253			$	2,231				235				79,249
Collateralized mortgage obligations			575				—				52				523
Others			48,520				851				6				49,365
		$	179,073			$	3,082			$	325			$	181,830

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

		AS OF MARCH 31, 2006
		Less than 12 months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	13,577			$	2			$	13,575
Obligations of Puerto Rico, States and political subdivisions			11,255				102				11,153
Others			1,250				15				1,235
		$	26,082			$	119			$	25,963

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	22,389			$	114			$	22,275
Collateralized mortgage obligations			456				25				431
Others			250				—				250
		$	23,095			$	139			$	22,956

		Total
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	13,577			$	2			$	13,575
Obligations of Puerto Rico, States and political subdivisions			33,644				216				33,428
Collateralized mortgage obligations			456				25				431
Others			1,500				15				1,485
		$	49,177			$	258			$	48,919

		AS OF DECEMBER 31, 2005
		Less than 12 months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	42,011			$	25			$	41,986
Obligations of Puerto Rico, States and political subdivisions			3,605				20				3,585
Others			1,000				10				990
		$	46,616			$	55			$	46,561

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	22,533			$	114			$	22,419
Collateralized mortgage obligations			497				27				470
Others			250				—				250
		$	23,280			$	141			$	23,139

		Total
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	42,011			$	25			$	41,986
Obligations of Puerto Rico, States and political subdivisions			26,138				134				26,004
Collateralized mortgage obligations			497				27				470
Others			1,250				10				1,240
		$	69,896			$	196			$	69,700

		AS OF MARCH 31, 2005
		Less than 12 months
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	47,732			$	32			$	47,700
Obligations of Puerto Rico, States and political subdivisions			24,325				227				24,098
Collateralized mortgage obligations			575				52				523
Others			750				6				744
		$	73,382			$	317			$	73,065

		12 months or more
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of Puerto Rico, States and political subdivisions		$	958			$	8			$	950
Others			250				—				250
		$	1,208			$	8			$	1,200

		Total
		Amortized				Unrealized				Market
(In thousands)		Cost				Losses				Value
Obligations of U.S. Government sponsored entities		$	47,732			$	32			$	47,700
Obligations of Puerto Rico, States and political subdivisions			25,283				235				25,048
Collateralized mortgage obligations			575				52				523
Others			1,000				6				994
		$	74,590			$	325			$	74,265

Management believes that the unrealized losses in the held-to-maturity portfolio at March 31, 2006 are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers.

Note 7 — Derivative Instruments and Hedging Activities

Refer to Note 28 to the consolidated financial statements included in the 2005 Annual Report for a complete description of the Corporation’s derivative activities. The following represents the major changes that occurred in the Corporation’s derivative activities in the first quarter of 2006:

Cash Flow Hedges

Derivative financial instruments designated as cash flow hedges outstanding as of March 31, 2006 and December 31, 2005 were as follows:

Quarter ended March 31, 2006
(In thousands)		Notional amount				Derivative assets				Derivative liabilities				Equity OCI				Ineffectiveness
Asset Hedges
Forward commitments		$	75,000			$	422				—			$	257				—
Liability Hedges
Interest rate swaps		$	190,000			$	1,200				—			$	780				—