Popular (BPOP) Q4 2006 earnings summary

Executive summary

• 2006 net income fell 34% YoY to $357.7M from $540.7M; weak U.S. mortgage results and tighter margins outweighed growth in Puerto Rico banking and other businesses.

• Fourth-quarter net income was $59.6M and diluted EPS was $0.20, versus $130.2M and $0.47 in Q4 2005.

Financial highlights

• FY revenue was $2.237B versus $2.209B in 2005; net interest income was $1.428B versus $1.424B, while provision for loan losses rose to $287.8M from $195.3M.

• Net income applicable to common stock was $345.8M; basic EPS was $1.24 versus $1.98 in 2005. Common dividends were $0.64/share in both years.

• Operating expenses rose 12% to $1.485B; excluding E-LOAN and Popular Cash Express effects, expenses increased $52M, or 4%, YoY.

• Q4 provision for loan losses increased $57M YoY to $108.3M; Q4 operating expenses were $378.9M, including $21.4M in PFH restructuring-related impairment charges.

Outlook and guidance

• PFH restructuring is expected to reduce annualized expenses by ~$39M; estimated restructuring and impairment charges total $40.4M, with 2007 estimates preliminary.

• Management planned to prioritize credit quality, cross-selling, loan and deposit growth, and expense control in 2007 amid a difficult economic environment.

• Simulation estimated next-12-month net interest income would fall $15.7M under a gradual +200 bps rate scenario and rise $7.5M under a gradual -200 bps scenario.