Exhibit 13.1
compete create build discover inspire
[ evolve ]
2004 Annual Report
| | | | | |
| | 1 | | | Evolve |
| | 2 | | | Letter to Shareholders |
| | 7 | | | Corporate Organizational Structure |
| | 8 | | | Popular Puerto Rico |
| | 12 | | | Banco Popular North America |
| | 16 | | | Popular Financial Holdings |
| | 20 | | | EVERTEC |
| | 24 | | | Our Community |
| | 29 | | | Institutional Values |
| | 30 | | | Corporate Leadership Circle |
| | 31 | | | Board of Directors, Popular, Inc. |
| | 32 | | | Financial Summary |
| | 36 | | | Corporate Information |
Popular, Inc., a financial holding company with $44.4 billion in assets, is a complete 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 full retail and commercial banking services through its main subsidiary, Banco Popular, as well as brokerage and investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending, insurance and information processing through specialized subsidiaries. In the United States, the Corporation has established the largest Hispanic financial services franchise, providing complete financial solutions to all the communities it serves. The Corporation continues to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, and is exporting its 111 years of experience to the region. Popular, Inc. has always been committed to meeting the needs of retail and business clients through innovation, and to fostering growth in the communities it serves.
[ evolve ]
Great achievers — in the arts, sports, science and other fields — describe an effortlessness and ease that comes from using their skills to the maximum while being inspired to do even more. The challenge before any corporation, especially one driven by service and customer satisfaction, is gaining strength without becoming fixed in its ways. Popular continues to grow and evolve by expanding our franchise, investing in new technology and entering new markets. At the same time, we develop our capacity for change. Across the enterprise, Popular employees are rethinking, adapting and renewing their commitment. The result is a palpable curiosity and energy, melting resistance into cooperation, and transforming ideas and new initiatives into measurable change and lasting results.
compete / create / build / discover / inspire
[P1]
[ Letter to Shareholders ]
EVOLVE
Evolution is a necessity. Organizations evolve or become obsolete. Unlike nature, an organization’s evolution is not an automatic process. It requires a clear vision, will, commitment and a lot of work to keep the organization on the desired track.
Popular has been evolving since our foundation more than a century ago. However, the pace of change has accelerated dramatically in recent decades. Twenty-five years ago, our operations in Puerto Rico accounted for approximately 95% of our assets and all of our net income. Today, more than 40% of our assets and almost 25% of our net income comes from operations outside of Puerto Rico. In terms of our lines of business, banking operations account for approximately 76% of our net income, down from 86% in 2000. These numbers reflect Popular’s evolution from a commercial bank based in Puerto Rico to a diverse financial services institution with operations in Puerto Rico, 30 states in the United States, the Caribbean and Central America.
In 2004, we announced important changes that reflect this evolution and place us in a stronger position to continue growing and delivering solid results.
We reorganized our corporate structure to better reflect our business strategy and our working philosophy. We have done away with organizational charts full of rectangles which stress hierarchy and rigidity. Instead, our concept of the organization is based on the circle, emphasizing collaboration and flexibility. There are five principal circles in our new design: one for the corporate group and one for each of our four principal businesses.
| | |
 |
“Every well-thought change has a
reasoning behind it. This is the case
of the reorganization Popular has
undergone.”
Richard L. Carrión
Chairman
President
Chief Executive Officer
|
Popular/ 2004 / Annual Report
[P2]
The corporate group consists of the CEO, the presidents of the four business circles — Popular Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC — and the leaders of four administrative areas we identified as critical for the organization — Finance, Risk Management, Legal and People, Communications and Planning. The leaders of these four areas have the responsibility of establishing policy, setting up controls and coordinating the activities of their corresponding groups in each of the business circles. In effect, their role is to add value so that the business circles, in turn, can focus on their markets, clients and specific strategies. We believe that this design will result in stronger controls, greater efficiency and solid business growth.
Net income for 2004 totaled $489.9 million, 4% higher than the $470.9 million reported in 2003. The results for 2003 included $71.1 million in gain on sale of securities, compared with $15.3 million in 2004. Net income for 2004 represented a return on assets (ROA) of 1.23% and a return on common equity (ROE) of 17.60%, compared with 1.36% and 19.30%, respectively, in 2003. Earnings per common share (EPS), basic and diluted, for 2004 were $1.79, compared with $1.74 in 2003. Per share figures have been restated to reflect the two-for-one stock split that became effective on July of 2004.
In April of 2004, the Board of Directors declared an 18.5% increase in the quarterly cash dividend, from $0.135 to $0.16 per common share.
During the year, the Corporation issued junior subordinated debentures as part of two offerings of $250 million and $130 million of trust preferred securities. These funds were primarily used for our expansion in the United States, which included two acquisitions announced in 2004.
Popular’s stock, which increased 28.6% in 2004, was identified by American Banker as the best-performing stock in the large cap bank group. Even though we are focused on the long-term, on winning the marathon, it is good to win a gold medal in the 100-meter event.
Our financial results reflect the solid performance of each of our four main business areas: Popular Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC.
COMPETE:
POPULAR PUERTO RICO
Our business in Puerto Rico represents an interesting challenge for us. We have established a strong leadership position in most product categories and population segments, but we have seen increased competition from local and national niche players. We have addressed the challenge head on, emphasizing the advantages of doing business with the whole Popular organization: a complete spectrum of products, competitive pricing and superior service. Last year, we maintained our leadership position and grew at a faster rate than the market in specific businesses.
Banco Popular de Puerto Rico relaunched its credit card business, adjusting our product offering and introducing aggressive offers to compete more effectively, opening four times the number of accounts opened in the previous year.
We continued to offer competitive prices in personal, mortgage and auto loans; growing our portfolio while substantially improving asset quality. Our business in Popular Securities and Popular Insurance also grew at a healthy rate. Results in the commercial
compete / create / build / discover / inspire
[P3]
[ Letter to Shareholders ]
area also exceeded our expectations. The corporate area of our commercial business saw an increase in revenues due to new clients, the strengthening of existing relationships and business in our new corporate finance division. A comprehensive project designed to better serve small and middle businesses, tailoring products and streamlining processes, also started to yield results and should further strengthen our position in this segment in 2005 and beyond.
As part of the reorganization mentioned above, David H. Chafey Jr. was named President of Banco Popular de Puerto Rico and is now in charge of all financial services offered in Puerto Rico. I am confident that this new structure will allow us to better function as one organization for the benefit of our clients. Popular has all the necessary elements to compete and win in Puerto Rico.
CREATE:
BANCO POPULAR NORTH AMERICA
Our banking operations in the United States have grown and prospered since Banco Popular North America launched “A New Day” in 2002, a set of strategies designed to improve financial results through 2005. The focus on the first two years of this plan was on reengineering and laying the operational foundations for growth. Having executed the first phase of the plan, by 2004 BPNA was ready to turn its attention to revenue growth, and it did so with great success.
BPNA experienced outstanding organic growth in 2004 due to revenue-generating initiatives in the consumer and commercial loan markets, the implementation of a Customer Acquisition Program that has “free checking” products and viral marketing as the main attractors, as well as the continuation of a segmentation strategy to offer better service to business clients. Deposits, loans and fee income increased by 19%, 14% and 18%, respectively.
In 2004, BPNA announced two acquisitions that strengthen our presence in two of the markets we serve. In California, Quaker City Bancorp added 27 branches, $2.1 billion in assets and $1.2 billion in deposits, making California BPNA’s largest region. The acquisition became effective on September 1, 2004. Kislak National Bank in South Florida, which officially became a part of BPNA in January of 2005, added eight branches in the Miami area, $965 million in assets and $659 million in deposits, as well as an interesting portfolio of loans to condominium and homeowner associations. We have established a dedicated team focused on completing the integration of these two institutions.
These revenue-enhancing initiatives, coupled with continued attention to expenses, translated into strong financial results. Net income for BPNA grew 54% compared to the previous year. We are confident that BPNA has the right foundation, the correct vision and the leadership to create additional opportunities to improve financial performance and become the best community bank in each of the communities it serves.
IN 2004, BPNA ANNOUNCED TWO ACQUISITIONS THAT STRENGTHEN OUR PRESENCE IN TWO OF THE MARKETS WE SERVE. IN CALIFORNIA, QUAKER CITY BANCORP ADDED 27 BRANCHES, $2.1 BILLION IN ASSETS AND $1.2 BILLION IN DEPOSITS, MAKING CALIFORNIA BPNA’S LARGEST REGION.
BUILD:
POPULAR FINANCIAL HOLDINGS
Celebrating its 15th anniversary, Equity One, Popular’s non-prime mortgage lending and servicing company, took important steps in 2004 to build a strong foundation for future growth. Popular, Inc. formed Popular Financial Holdings, Inc. (PFH), a new holding company that allows it to pursue new business strategies while leveraging the strength of the Popular brand.
Popular Housing Services is one of these new business opportunities identified by PFH. This group provides
Popular/ 2004 / Annual Report
[P4]
consumer financing for manufactured housing through national dealer networks. PFH also constituted Popular Mortgage Servicing, which extends our servicing capabilities and will increase servicing-related revenues. Other initiatives designed to create new businesses and grow existing ones include a cross-selling project and the creation of a product development unit.
A lot of attention was devoted to the enhancement of systems and platforms to support the different businesses of PFH. In 2005, PFH will launch a new consumer finance origination and servicing platform that will expand the product line, increase efficiency and improve the level of service.
And last, but not least, PFH put together a team of employees from various areas and levels in the organization to clarify and articulate PFH’s mission, practices, promises and personality. The result, known as PFH’s Compass, will serve as a navigational tool guiding PFH as it continues to build and strengthen its business.
DISCOVER:EVERTEC
EVERTEC as a company was born on April of 2004, but it has been in the making for many years. Last year, I mentioned that we were in the process of reorganizing our technology and operations functions throughout the organization. As a result, we merged GM Group, our processing arm, with the operational and programming services of Popular Puerto Rico. This new company, presided by Félix M. Villamil, will allow us to strengthen our services through substantial growth in the transaction processing area and the development of new technological services in Puerto Rico, the Caribbean, Central America and the United States.
During 2004, EVERTEC integrated its people, systems, operations and facilities, while accomplishing important business goals. In Puerto Rico, we continued to expand our traditional processing activities. We strengthened the health care transaction processing business, completing the acquisition of one of the largest health care application providers and processing companies in Puerto Rico.
We continued expanding our presence in the Caribbean and Central America, including the acquisition of an additional equity stake in Consorcio de Tarjetas Dominicanas, the largest payment network in the Dominican Republic.
The processing business is extremely important for Popular’s future because it represents an area with great potential for growth, high margins and a source of recurring, non-interest income. Processing is something we have done very well for many years, initially for ourselves and more recently for others. Now we have gone a step further — forming a new company and giving them the mission to discover the endless opportunities for us in this field.
INSPIRE:COMMUNITY
I introduced and described our new corporate structure and talked about each of these circles, their strategies and their achievements. However, more important than each of these circles is the vision and the values that tie them together. An integral part of this vision is our commitment to the communities we serve.
In Puerto Rico, our companies provided more than $3,700,000 in donations and sponsorships to a wide variety of community-based projects. Our employees donated more than 11,000 hours of their personal time and contributed more than $300,000 to the Fundación Banco Popular through our payroll deduction program. The Fundación, which focuses on education and community development in Puerto Rico, granted more than $850,000 to 57 non-profit organizations.
In the United States, Banco Popular North America worked alongside national organizations, primarily in
compete / create / build / discover / inspire
[P5]
[ Letter to Shareholders ]
the area of education and assistance to minorities. Last year, we announced the creation of the Banco Popular Foundation in the United States. Its mission is to strengthen the social and economic well being of the communities we serve. Similar to the Fundación in Puerto Rico, it will support philanthropic initiatives in the areas of community development and education.
In all of our community endeavors we seek the active involvement of our employees, we focus our energy on ensuring that we place our resources where they will have the biggest impact and we strive to inspire our communities to dream and work for a brighter future.
CONCLUSION
The area of corporate governance has received much attention in recent years. Sarbanes-Oxley, enacted in the wake of large corporate scandals, is the most far-reaching legislation impacting public corporations in the last 50 years. It is still too early to tell the impact these changes will have, but my concern is that too much emphasis is being placed on legalistic form over organizational function. This, coupled with an often antagonistic regulatory environment, where discretion has been usurped from regulators and corporate conduct often is criminalized; can have a stifling, if not chilling, effect on innovation and risk-taking.
At Popular, like most public corporations, we have taken a careful look at our corporate governance policies and practices and are confident that we are conducting our business according to the highest ethical standards. In 2004, I announced some changes in our Board of Directors. In addition, I am happy to announce that William J. Teuber Jr., Chief Financial Officer of EMC Corporation, joined our Board on November of 2004. It is a privilege for me to count on the guidance of such an active, committed and prestigious Board of Directors. They have been tested in difficult moments and have always shown their mettle. This year, Félix J. Serrallés Nevares will retire from the Popular, Inc. Board upon reaching the mandatory retirement age, but we will continue to benefit from his guidance in the Banco Popular de Puerto Rico and Banco Popular North America Boards. Mr. Serrallés served as a member of the BanPonce/Popular Board for 20 years. We are grateful for his counsel and dedication.
Early in 2005, we learned that Popular was listed as one of FORTUNE magazine’s “100 Best Places to Work For.” This was the first time that a company of Hispanic-origin was included in this group. We are extremely proud of this acknowledgment, particularly since the most important factor in the decision by FORTUNE is an independent survey conducted among employees. Our future will continue to be shaped by our people, and we are committed to attract, develop, compensate and retain the best. This award is a tribute to that commitment.
Several years ago, we started including in our annual report a table with 25 years worth of financial and operational results. I have to admit it is my favorite part, because it describes our journey more eloquently than I ever could. It tells the story of an organization that has undergone changes, completed major acquisitions and experienced the ups and downs of several economic cycles. Through it all, we have remained faithful to our values, we have delivered solid results and we have continued to evolve, taking our franchise into new products and geographies. Some may say that past performance is not necessarily an indicator of future performance. That is undoubtedly true. It is no less true, however, that if I had to make a judgment about the future of an organization’s performance, I would rather have more information about its past, not less. As we look to the future, our horizon is also 25 years.
We are currently in the midst of that evolutionary process — proud of what we have accomplished thus far, but never content to rest. We are energized by what we have envisioned for Popular for 2005 and beyond.
Richard L. Carrión
Chairman
President
Chief Executive Officer
Popular /2004 / Annual Report
[P6]
[ evolve ]
We have reorganized the Popular business model with one clear objective — to evolve from a corporation that assigns value from above to one that acknowledges that value creation is in the hands of individuals, specifically our customers and employees. Our new structure enhances the ability of each Popular company to compete in broader markets. As we strive to improve each client interaction, we believe that excellence will create new opportunities. As we reward employee initiatives, we believe that individuals hold the power to discover new approaches, products and solutions. Moving forward, we maintain our core values and promote the idea that every Popular employee holds the potential to inspire — pushing the enterprise to new heights in support of all of our customers and shareholders.
compete / create / build / discover / inspire
[P7]
| | |
| Popular /2004 / Annual Report | | Anaheim Angels’ Vladimir Guerrero, a committed competitor. |
[P8]
No. 1
[ compete ]
All great athletes and competitors share an odd mix of confidence and humility: a sense of knowing one’s strengths, without assuming that ability or any other single advantage is enough. This explains why winning is not saved for the most athletic, but for those who maintain their positive focus. Popular challenges itself in this same way — to compete for and win every customer. We do it by focusing on the highest result we can achieve, not simply once or only when success appears within our grasp, but every day.
compete / create / build / discover / inspire
[P9]
[ Popular Puerto Rico ]
David H. Chafey Jr.
Senior Executive Vice President, Popular, Inc.
President, Banco Popular de Puerto Rico
Winning market share means anticipating customer needs.
Popular offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico, as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending and insurance through specialized subsidiaries.We are the leading financial institution in Puerto Rico, but we continue to build on opportunities to keep growing and improving our results.
During 2004, we focused on competing aggressively, enhancing the customer experience by emphasizing service and convenience. Clear objectives, coupled with effective execution, translated into significant achievements in an extremely competitive marketplace.
Banco Popular’s deposits reached $13.8 billion in 2004. Our loan portfolio, which totaled $13.0 billion at the end of 2004, grew by 18% when compared to 2003, reflecting aggressive efforts to grow our credit portfolios. We refreshed our credit card offering with the launch of Visa NovelSMand Amex UltraSM, resulting in a dramatic increase in new accounts in 2004.
Banco Popular has historically reached out to unbanked segments of the population, developing products and programs specific to their needs. We held more than 200 community banking activities in low-income communities to foster financial literacy. Acceso Popular, our deposit account
Popular /2004 / Annual Report
[P10]
tailored to this segment, grew by 32.1% in 2004. Given that approximately one-third of Puerto Ricans currently do not have a relationship with a financial institution, we will continue to look for ways to serve this segment in an effective, efficient and profitable manner.
Banco Popular continues to offer its clients the most complete distribution network in Puerto Rico. With 192 branches, more than 560 ATMs, a 24/7 customer contact center and a state of the art online banking system, Popular clients can conduct their transactions when and where it is more convenient for them. We continue to reward our customers for banking with us through PREMIA®, an innovative loyalty program. Enrollment in the program, as well as redemptions in exchange for prizes, continue to increase. In 2004, we further improved convenience by adding extended hours in branches and enhanced the branch experience by adding more tellers. We also introduced new elements in our online banking system, such as new payment features and account aggregation. The TicketpopSMnetwork, Banco Popular’s ticketing processing service, expanded its point-of-sale terminals to 30 throughout Puerto Rico, and processed more than 650,000 tickets in 2004.
POPULAR MORTGAGE originated $1.6 billion in mortgage loans. In addition to offering competitive pricing, we enhanced all delivery channels to increase convenience and improve customer service. We strengthened relationships with real estate developers and brokers to lay the foundation for future growth.
POPULAR SECURITIES is one of the leading securities and investment banking firms in Puerto Rico. Combined assets under management of the retail and institutional operations reached $4.2 billion in 2004 and we completed 54 deals totaling $17.7 billion in value. In 2004, we opened an office in New York to expand our institutional business.
POPULAR AUTO strengthened its leadership position in the Puerto Rico market, reaching $1.5 billion in its portfolio of loans and leases. Aggressive marketing programs and joint promotions with car dealers resulted in an increase in our market share.
POPULAR FINANCE, which offers small personal loans and mortgages through a network of 43 offices, is an important part of our effort to serve the low and moderate income segment. Its portfolio reached $197 million in 2004.
POPULAR INSURANCE continued its accelerated growth, capitalizing on Popular’s client base. By the end of 2004, it had subscribed $137.7 million in premiums, for an increase of 17%. In 2004, Popular Insurance acquired J. Argomaniz & Associates, Inc., a general agency specializing in life insurance.
Energized by our results in 2004, we will continue to compete aggressively in all products and segments to maintain and strengthen our market position and we will devote much attention and resources to initiatives that enhance the satisfaction of our customers.
BANCO POPULAR DE PUERTO RICO
| • | $23.1 billion in total assets |
| |
| • | 192 branches |
| |
| • | $13.8 billion in deposits |
| |
| • | $13.0 billion in loans |
| |
| • | 119,000 Internet Banking active clients |
| |
| • | 223,000 PREMIA®registered clients |
POPULAR MORTGAGE
| • | $1.6 billion in originations |
| |
| • | 30 offices |
POPULAR SECURITIES
| • | $4.2 billion in assets under management |
POPULAR AUTO
| • | $1.5 billion in auto loan and lease portfolio |
| |
| • | 8 sales and service centers |
| |
| • | 10 daily rental offices |
POPULAR FINANCE
| • | 36 offices and 7 mortgage centers |
| |
| • | $197 million in loan portfolio |
POPULAR INSURANCE
| • | Represents more than 80 insurance companies in Puerto Rico and in the U.S. Virgin Islands |
| |
| • | $137.7 million in premiums |
compete / create / build / discover / inspire
[P11]
| | |
| Popular /2004 / Annual Report | | Jorge Zeno, renowned Puerto Rican creator. |
[P12]
No. 2
[ create ]
Before the artist differentiates his or her work with color or brush stroke or subject matter, he or she first sees. It’s this simple act, of looking and then representing, that allows the artist to transform the familiar into something more powerful. Popular applies the same principle to entering new markets and developing products. Looking closely and seeing beyond preconception is an essential step to revealing truths and finding opportunities that others ignore.
compete / create / build / discover / inspire
[P13]
[ Banco Popular North America ]
Roberto R. Herencia
Executive Vice President, Popular, Inc.
President, Banco Popular North America
We continue to create new opportunities in the U.S. market.
Banco Popular North America, grounded in Popular’s rich history and strong institutional values, is committed to transforming and redefining community banking in the United States. We focus with hope and possibility on the needs of the people, communities and institutions we serve in California, Florida, Illinois, New York/New Jersey, and Texas. We resolve to create an extraordinary legacy in North America in partnership with our employees, better known as “DreamMakers”.
BPNA continues to execute with precision on our “New Day” — the strategic theme created in 2002 with initiatives to strengthen our competitive position within a four-year horizon through 2005. After two years of reorganizing, converting systems and preparing our platform for growth, BPNA began to execute the phase of sharp organic and acquired revenue growth. Net income increased by 54% in 2004.
BPNA announced the closing of two acquisitions: Quaker City Bancorp (QCB) in Whittier, California, effective September 1, 2004, and Kislak National Bank in Miami, Florida, effective in January 2005.
Popular /2004 / Annual Report
[P14]
BANCO POPULAR NORTH AMERICA’S organic growth (excluding acquisitions) in 2004 was outstanding, with deposits increasing by 19%; loans growing by 14%; and fee income up by 18%. Expenses, the focus of our efficiency efforts over the last three years, grew by less than 2% in 2004.
A new Customer Acquisition Program (CAP) was launched on October 22, 2004, with more than 14,000 new checking accounts opened, a 67% increase over our pre-CAP campaign. Over 18 months, our merchandising program gave our branches a fresh, consistent look that furthered our CAP success.
We extended our reach to customers with 163 ATMs. Our acquisition of QCB added 27 branches in the third quarter of 2004, with $2.1 billion in assets and $7.7 million in net income.
Small Business Association (SBA) lending efforts positioned BPNA among the top lenders in the country to this important business segment. BPNA loaned $183 million, placing us fifteenth in terms of loan value and nineteenth in number of loans.
In 2004, we created the structural underpinnings to execute as a passionately customer-driven organization. We offered a streamlined, competitive product line in conjunction with improved service delivery to our customers. Our business banking alignment initiative offered the highest level of service and attention. Centralized, upgraded credit support functions provided increased capabilities to lending units.
POPULAR CASH EXPRESS (PCE) operates 114 check-cashing stores in Arizona, California, Florida, New Jersey, New York, and Texas, serving the unbanked. Throughout 2004, PCE focused on restructuring its field operations and improving financial results, with store revenues increasing for 2004. Check cashing fees saw a 12.5% increase and money order fees experienced a 53% increase, while total fees generated a 9.5% increase. PCE added seven new products, resulting in $750,000 in additional revenue in 2004.
POPULAR INSURANCE AGENCY USA offers investment and insurance services across the BPNA branch network, achieving more than $100 million in sales from investment and insurance programs in 2004. In addition, the group increased revenues by 40% over 2003 and more than tripled net income for the same period. The sales force increased to 25 registered financial consultants and 54 licensed bankers. In 2004, we launched Popular Choice, a private label annuity program.
POPULAR LEASING, USA provides small- to mid-ticket commercial and medical equipment financing. In 2004, we reached $306 million in assets. We doubled headquarters capacity and are expanding our Capital Markets Group to attract both medical and commercial mid-ticket transactions by offering broader product availability to include municipal and federal government leases.
Bolstered by a journey of excellence in 2004, we continue our commitment to creating a strong financial performance for our shareholders and Popular.
BANCO POPULAR NORTH AMERICA
| • | 54% net income growth |
| |
| • | 128 branches |
| |
| • | 163 ATMs in NY, NJ, IL, CA, FL, TX |
| |
| • | 19% increase in deposits |
| |
| • | 14% increase in loans |
| |
| • | 18% increase in fee income |
POPULAR CASH EXPRESS (PCE)
| • | 114 check-cashing stores in AZ, CA, FL, NJ, NY, TX |
| |
| • | 12.5% increase in check cashing fees |
| |
| • | 53% increase in money order fees |
| |
| • | 9.5% increase in total fees |
POPULAR INSURANCE AGENCY USA
| • | $100 million in sales |
| |
| • | 40% increase in revenues |
| |
| • | 25 registered financial consultants |
| |
| • | 54 licensed bankers |
| |
| • | 18% increase in fee income |
POPULAR LEASING, USA
complete / create / build / discover / inspire
[P15]
| | |
| Popular /2004 / Annual Report | | Popular Financial Holdings, architects of solid financial landscapes. |
[P16]
No. 3
[ build ]
Before a house becomes a home, first there must be a foundation to build upon. Hard work and persistence create a framework for the future. The same can be said for the steadfast approach to growth of Popular Financial Holdings, part of Popular’s financial services operation in the United States. In less than 15 years, it already represents approximately 20 percent of the Corporation’s assets. We have begun to build on our solid foundation, offering a range of new and innovative mortgage products and services and venturing into new markets. U.S. borrowers have come to associate Popular Financial Holdings with a reputation for stability and financial strength to meet any financial need.
compete / create / build / discover / inspire
[P17]
[ Popular Financial Holdings ]
Bill Williams
Executive Vice President, Popular, Inc.
President, Popular Financial Holdings
Popular Financial Holdings continued to enjoy a steady growth in assets in 2004.
Popular Financial Holdings (formerly known as Equity One), Popular’s U.S.- based non-prime mortgage lending and servicing group, represented more than 12% of Popular’s net income in 2004. Popular, Inc. formed Popular Financial Holdings in 2004 to expand growth opportunities and pursue new business strategies. This new holding company better leverages the Popular brand, while opening the door for increased revenue and growth.
Popular Financial Holdings has assets of $9 billion. Steady organic growth has been the order of the day as assets have increased at a 42% compounded annual growth rate. Total originations have grown as well at a 31% annual rate. We improved the quality of our portfolio with investments in people and technology.
During 2004, we rolled out our mission and values: Our success is measured by being the employer of choice for employees, the lender of choice for our customers, and the investment of choice for our investors.
Popular /2004 / Annual Report
[P18]
POPULAR FINANCIAL HOLDINGS
| • | $9 billion in assets |
| |
| • | 183 offices in 28 states |
Today, Popular Financial Holdings serves retail customers, mortgage brokers, bankers, and investors through 183 offices in 28 states, while we are licensed to operate in more than 40. Seven new locations were opened in 2004. We have three primary business areas that are supported centrally.
EQUITY ONE serves our retail customers directly through 139 decentralized branches in 16 states. We provide prime and non-prime mortgage loans, unsecured loans and sales finance. In 2004, we launched Project Cross-Sell to offer additional products and services to current customers. More than $28 million in incremental business was generated in the first year.
POPULAR FINANCIAL SERVICES, LLC acquires pools of non-prime loans from mortgage bankers, and originates individual mortgage loans through a network of more than 2,000 approved mortgage brokers and bankers through-out the U.S. Wholesale origination volume has been growing more than 50% every year since 1999 as we expand our agency and broker network. New, web-based platforms efficiently support our broker network.
POPULAR WAREHOUSE LENDING, LLC provides revolving credit lines ranging from $2 to $15 million to small- and mid-size mortgage bankers throughout our markets. We expand the best relationships through cross-selling into our wholesale operation. Our intimate knowledge of this very localized clientele, as well as our consistent, effective execution, has turned this into our fastest growing source of mortgage originations, which today represents more than a quarter of our loan production.
Expansion of our retail product line, further expansion of our footprint into Texas, Ohio and Idaho, as well as the launch of two new businesses will both diversify and continue to organically grow our business in 2005 and beyond. Specifically, Popular Housing Services will provide consumer financing through national dealer networks in the manufactured housing market. Popular Mortgage Servicing will allow us to generate revenue through diverse fees related to mortgage servicing rights we acquire.
We look to continue to leverage our people and technology to aggressively build a nationwide network with a wide and loyal client base.
compete / create / build / discover / inspire
[P19]
| | |
| Popular /2004 / Annual Report | | At EVERTEC’s Network Control Center: the spirit of discovery in the service of financial transactions processing. |
[P20]
No. 4
[ discover ]
With complex systems, nothing is static — the flow of input and output is staggering. Still, life maintains a steady-state balance thanks to elaborate feedback mechanisms. Popular’s ongoing investment in corporate technology is guided by similar goals. Competing in a crowded marketplace requires monitoring, adjusting and responding on a minute-by-minute basis. Popular continues to invest in technology to increase the speed and quality of our services. These investments ensure our future as a company. With growth comes complexity, and the need to learn faster and respond more quickly.
compete / create / build / discover / inspire
[P21]
[ EVERTEC ]
Félix M. Villamil
Executive Vice President, Popular, Inc.
President, EVERTEC, Inc.
Staying ahead of the technology curve ensures future opportunity.
EVERTEC, Popular’s new processing company, is the result of a merger of our former processing company with Popular’s operational and technology resources in Puerto Rico. During 2004, we began and mostly completed a complex reorganization into a completely new management and business structure which entailed the integration of people, facilities and technological platforms.
EVERTEC provides processing and outsourcing services to third parties as well as Popular companies, representing a significant potential source of additional revenue and business growth. With a team of more than 1,600 professionals, EVERTEC operates in three geographic areas: Puerto Rico, the Greater Caribbean basin which includes Central America, and the United States.
EVERTEC currently offers a wide variety of transaction processing services to the financial services, government and health sectors. Services provided to financial institutions include the issuance and processing of credit and debit cards, support of merchant acquisition business and driving ATM networks, among others. For the government, we currently process electronic transactions related to Electronic Benefit Transfers (EBT).
Popular/ 2004 / Annual Report
[P22]
We also have ample experience in the area of outsourcing services, including application processing, business processes outsourcing, IT consulting and cash processing services.
In addition to the achievements related to the creation of EVERTEC and the integration processes it entailed, we reached important business goals. We continued to expand our traditional processing activities in Puerto Rico. The ATH network in Puerto Rico currently manages 1,334 ATMs and 47,358 point-of-sale (POS) terminals and processes more than 28 million trans- actions every month. We strengthened the health care transaction processing business, which we have grown through strategic acquisitions in recent years. We are now poised to become one of the main processors of health care- related transactions in Puerto Rico.
We strengthened our presence and our processing business in the Caribbean and Central America. In the Dominican Republic, we acquired an additional equity stake in Consorcio de Tarjetas Dominicanas (CONTADO), the largest payment network in that country with 1,224 ATMs and 23,605 POS terminals. ATH Costa Rica, S.A./ CreST, S.A. closed the year with 804 ATMs and 5,500 POS terminals, and with more than 36 financial institutions as clients. We also have a leadership position in El Salvador, where Servicios Financieros, S.A. has become a leading ATM/POS network with 772 ATMs, and 3,500 POS terminals. In Venezuela, we process credit card transactions for eight local institutions and provide debit card services through our local switch.
One of our main areas of focus is the redesign of Popular’s banking technology infrastructure in Puerto Rico, one of the most important long-term investments. The main objective of this project is to have a complete and consistent view of a customer’s multiple relationships while adapting our systems and infra- structure to an environment in which electronic transactions dominate. During 2004, we completed the design of one of the main components of the infrastructure, a transaction vault that will hold all customer information that currently resides in separate applications. Implementation of the vault, and the connection of several of our main delivery channels to it, is scheduled for 2005 — milestones that will result in tangible benefits in terms of efficiency and customer service.
Looking ahead, we will continue focusing on the consolidation of our new organization, strengthening our business in the various geographies where we operate and enhancing the quality of our products and services.
EVERTEC, INC.
| • | Over 749 million transactions |
| |
| • | 4,220 ATMs |
| |
| • | 80,463 POS terminals |
| |
| • | Serves clients in Puerto Rico, United States, Dominican Republic, Costa Rica, Venezuela, Haiti, El Salvador, Honduras, Bermuda, Belize, Nicaragua |
ATH COSTA RICA, S.A./CREST, S.A.
| • | Serve 36 financial institutions |
| |
| • | 804 ATMs |
| |
| • | 5,500 POS terminals |
CONSORCIO DE TARJETAS DOMINICANAS
| • | 1,224 ATMs |
| |
| • | 23,605 POS terminals |
SERVICIOS FINANCIEROS, S.A.
| • | 772 ATMs |
| |
| • | 3,500 POS terminals |
| |
| • | Serves 8 local financial institutions |
compete / create / build / discover / inspire
[P23]
| | |
| Popular /2004 / Annual Report | | “Algo de Valor” (Something of Value) exhibit at the Rafael Carrión Pacheco Exhibit Hall, San Juan, Puerto Rico, inspires learning in a creative manner. |
[P24]
No. 5
[ inspire ]
Anywhere you find community identity and involvement, people passionate about where and how they live, you will find the arts. The arts draw people together and help educate by opening people’s hearts and minds to new ideas and possibilities. Popular has recognized and supported that connection between self-expression, education and community for years. Our annual TV musical special, and countless community projects have established a bond with our customers. As we extend our reach into other markets, we continue to believe that education yields the greatest return on investment.
compete / create / build / discover / inspire
[P25]
[ Our Community ]
We have recognized and supported the connection between self-expression, education and community for years.
Achieving the growth of a high- performing company is directly tied to the vision that inspired the founding of our company 111 years ago: to build a profitable business while simultaneously being of service to our communities. Today, we remain just as true to our aspirations for social commitment and service.
PUERTO RICO:
INSPIRING OUR COMMUNITIES
The Fundación Banco Popular is the philanthropic arm of Popular. Its goal is to cultivate long-term relationships with community organizations, while inspiring the process of change through education and community development initiatives. The Fundación serves as a central resource for employees to support these initiatives both financially and with their time and knowledge. Specific initiatives include our Volunteers in Action program, a voluntary payroll deduction program, the Rafael Carrión Jr. Scholarship Fund for children of employees and retirees, our matching gift program and the Rafael Carrión Pacheco Exhibit Hall.
Strong links with the organizations receiving funds are made possible by encouraging active employee participation in their initiatives. These relationships are the “soul of outreach” to our communities, representing
Popular/ 2004 / Annual Report
[P26]
the depth and discipline of our commitment. In 2004, 36% of Fundación- funded initiatives enjoyed the added benefits of the engagement of our employees in their projects.
Our Fundación coordinated, for the second consecutive year, employees’ participation in Make a Difference Day. We participated in 145 community service projects, all proactively identified by our employee team leaders. With 2,500 employees and their families participating, a variety of organizations and projects received needed assistance that day.
In addition, our ongoing Volunteers in Action program attracted more than 3,000 employees who donated 11,150 hours of personal time to community service projects in 2004. Yet another instance of our employees’ strong relationships with community projects is the Asamblea Virgilio Dávila, an after-school program located in a low-income housing project. Volunteers in Action has helped to improve the program’s space planning and provided expertise regarding its financial administration.
We achieved 53% participation in our voluntary payroll deduction program, with $301,700 in contributions. Furthermore, 57 not-for-profit organizations received funding support of $850,000. In 2004, the Fundación granted 119 scholarships, representing a total of $174,400 to the Rafael Carrión Jr. Scholarship Fund. In addition a second fund was established with The Wharton School of the University of Pennsylvania in 1994 and, most recently, with Fairfield University.
During 2004, our traditional focus on projects related to education continued. Through the “Sister Schools Initiative,” branch managers are connecting to participating schools in their branch’s communities. Currently, there are 13 schools taking part in this initiative. The manager becomes an agent of change in the school’s transformation, participating beyond the distribution of funds.
Our exhibit, Algo de Valor (Something of Value), located in the Rafael Carrión Pacheco Exhibit Hall, educates both adults and children about the history of money. The exhibit furthers our educational focus by creating a fun and creative atmosphere for learning. To date, more than 13,300 visitors have viewed Algo de Valor. In keeping with our focus to create lasting alliances, the Fundación partnered with Puerto Rico’s Department of Education to create a teacher’s guide and student activities guide as part of the exhibit’s public program.
compete / create / build / discover / inspire
[P27]
[ Our Community ]
UNITED STATES:
MAKING DREAMS HAPPEN FOR THE COMMUNITIES WE SERVE
In North America, 2004 was a benchmark year with numerous community and leadership milestones, starting with the establishment of the Banco Popular Foundation in the United States. The new organization is entrusted with an ambitious task: to identify needs in the communities served by Banco Popular North America, and the resources within BPNA to best meet them. As is the philanthropic tradition within Popular, the Banco Popular Foundation will focus on education and community building projects.
We also announced three national strategic community partnerships. With a combined focus on education, financial literacy, and community development, BPNA joined forces with Junior Achievement and Operation Hope. Together, the team is dedicated to investing in targeted efforts to pro- vide a multiplier effect — encompassing education, empowerment and hope — for the youth of our communities. Inspired by one common philosophy of service, our DreamMakers — BPNA employees — across our regions participated in our annual Junior Achievement Bowl-A-Thon, raising $140,000.
A third national partnership, with Acción, supports the inspiration of minority entrepreneurs as they pursue their dreams of owning their own businesses. Acción, with its micro-loan program, is a synergistic partner with BPNA. Our loan referral program generated 240 referrals and $162,000 in loans to date in less than a year.
A BPNA initiative, “It’s In Our Hands,” translated into a powerful call to action to help make a difference in many people’s lives. Under this initiative, employees pledged their hearts and hands to serve more than 200 diverse community organizations and projects in need and delivered approximately 10,000 service hours that positively affected nearly 20,000 people from the most remote towns in Florida, New York, New Jersey, Illinois, Texas, and California.
Popular Financial Holdings also held a number of initiatives based on a collaboration recommended by employees with community organizations, many of them focused on health-related matters.
Both in Puerto Rico and the United States, our people honor Popular’s institutional value that refers to social commitment: We are committed to work actively in promoting the social and economic well-being of the communities we serve.
Popular/ 2004 / Annual Report
[P28]
OUR CREED
Banco Popular is a local institution dedicating its efforts exclusively to the enhancement of the social and economic conditions in Puerto Rico and inspired by the most sound principles and fundamental practices of good banking.
Banco Popular pledges its efforts and resources to the development of a banking service for Puerto Rico within strict commercial practices and so efficient that it could meet the requirement of the most progressive community of the world.
These words, written in 1928 by Don Rafael Carrión Pacheco, Executive Vice President and President (1927-1956), embody the philosophy of Popular, Inc.
OUR PEOPLE
The men and women who work for our institution, from the highest executive to the employees who handle the most routine tasks, feel a special pride in serving our customers with care and dedication. All of them feel the personal satisfaction of belonging to the “Banco Popular Family,” which fosters affection and understanding among its members, and which at the same time firmly complies with the highest ethical and moral standards of behavior.
These words by Don Rafael Carrión Jr., President and Chairman of the Board (1956-1991), were written in 1988 to commemorate the 95th anniversary of Banco Popular de Puerto Rico, and reflect our commitment to human resources.
INSTITUTIONAL VALUES
Social Commitment
We are committed to work actively in promoting the social and economic well-being of the communities we serve.
Customer
We achieve satisfaction for our customers and earn their loyalty by adding value to each interaction. Our relationship with the customer takes precedence over any particular transaction.
Integrity
We are guided by the highest standards of ethics, integrity and morality. Our customers’ trust is of utmost importance to our institution.
Excellence
We believe there is only one way to do things: the right way.
Innovation
We foster a constant search for new solutions as a strategy to enhance our competitive advantage.
Our People
We strive to attract, develop, compensate and retain the most qualified people in a work environment characterized by discipline and affection.
Shareholder Value
Our goal is to produce high and consistent financial returns for our shareholders, based on a long-term view.
STRATEGIC OBJECTIVES
Puerto Rico
Strengthen our competitive position in our main market by offering the best and most complete financial services in an efficient and convenient manner. Our services will respond to the needs of all segments of the market in order to earn their trust, satisfaction and loyalty.
United States
Expand our franchise in the United States by offering the most complete financial services to the communities we serve while capitalizing on our strengths in the Hispanic market.
Processing
Provide added value by offering integrated technological solutions and financial transaction processing.
compete / create / build / discover / inspire
[P29]
[ Corporate Leadership Circle ]
standing, from left to right
RICHARD L. CARRIÓN
Chairman
President
Chief Executive Officer
Popular, Inc.
BILL WILLIAMS
Executive Vice President, Popular, Inc.
President, Popular Financial Holdings
AMÍLCAR JORDÁN, ESQ.
Executive Vice President
Risk Management
Popular, Inc.
FÉLIX M. VILLAMIL
Executive Vice President, Popular, Inc.
President, EVERTEC, Inc.
seated, from left to right
ROBERTO R. HERENCIA
Executive Vice President, Popular, Inc.
President, Banco Popular North America
DAVID H. CHAFEY JR.
Senior Executive Vice President, Popular, Inc.
President, Banco Popular de Puerto Rico
TERE LOUBRIEL
Executive Vice President
People, Communications and Planning
Popular, Inc.
JORGE A. JUNQUERA
Senior Executive Vice President, Chief Financial Officer
Popular, Inc.
BRUNILDA SANTOS DE ÁLVAREZ, ESQ.
Executive Vice President, Chief Legal Counsel
Popular, Inc.
Popular/ 2004 / Annual Report
[P30]
[ Board of Directors, Popular, Inc. ]
standing, from left to right
MANUEL MORALES JR.
President, Parkview Realty, Inc.
JOSÉ B. CARRIÓN JR.
President, Collosa Corporation
FÉLIX J. SERRALLÉS NEVARES
President and Chief Executive Officer
Destilería Serrallés, Inc.
SAMUEL T. CÉSPEDES, ESQ.
Secretary of the Board of Directors
Popular, Inc.
WILLIAM J. TEUBER JR.
Chief Financial Officer, EMC Corporation
FRANCISCO M. REXACH JR.
President, Capital Assets, Inc.
seated, from left to right
JOSÉ R. VIZCARRONDO
Vice President and Chief Operating Officer
Desarrollos Metropolitanos, S.E.
FREDERIC V. SALERNO
Investor
RICHARD L. CARRIÓN
Chairman
President
Chief Executive Officer
Popular, Inc.
MARÍA LUISA FERRÉ
Executive Vice President, Grupo Ferré Rangel
JUAN J. BERMÚDEZ
Partner, Bermúdez & Longo, S.E.
compete / create / build / discover / inspire
[P31]
[ Condensed Consolidated Statements of Condition ]
| | | | | | | | | | | |
| | | | At December 31, |
| (In thousands) | | | 2004 | | | 2003 |
| | | | | | | |
Assets | | | | | | | | | | |
| Cash and due from banks | | | $ | 716,459 | | | | $ | 688,090 | |
| Money market investments | | | | 879,640 | | | | | 772,893 | |
| Trading securities, at market value | | | | 385,139 | | | | | 605,119 | |
| Investment securities available-for-sale, at market value | | | | 11,162,145 | | | | | 10,051,579 | |
| Investment securities held-to-maturity, at amortized cost | | | | 340,850 | | | | | 186,821 | |
| Other investment securities, at lower of cost or realizable value | | | | 302,440 | | | | | 233,144 | |
| Loans held-for-sale, at lower of cost or market | | | | 750,728 | | | | | 271,592 | |
| | | | | | | |
| Loans held-in-portfolio | | | | 28,253,923 | | | | | 22,613,879 | |
| Less – Unearned income | | | | 262,390 | | | | | 283,279 | |
| Allowance for loan losses | | | | 437,081 | | | | | 408,542 | |
| | | | | | | |
| | | | | 27,554,452 | | | | | 21,922,058 | |
| | | | | | | |
| Premises and equipment | | | | 545,681 | | | | | 485,452 | |
| Other real estate | | | | 59,717 | | | | | 53,898 | |
| Accrued income receivable | | | | 207,542 | | | | | 176,152 | |
| Other assets | | | | 1,046,374 | | | | | 769,037 | |
| Goodwill | | | | 411,308 | | | | | 191,490 | |
| Other intangible assets | | | | 39,101 | | | | | 27,390 | |
| | | | | | | |
| | | | $ | 44,401,576 | | | | $ | 36,434,715 | |
| | | | | | | |
Liabilities and Stockholders’ equity | | | | | | | | | | |
Liabilities: | | | | | | | | | | |
| Deposits: | | | | | | | | | | |
| Non-interest bearing | | | $ | 4,173,268 | | | | $ | 3,726,707 | |
| Interest bearing | | | | 16,419,892 | | | | | 14,371,121 | |
| | | | | | | |
| | | | | 20,593,160 | | | | | 18,097,828 | |
| Federal funds purchased and assets sold under agreements to repurchase | | | | 6,436,853 | | | | | 5,835,587 | |
| Other short-term borrowings | | | | 3,139,639 | | | | | 1,996,624 | |
| Notes payable | | | | 10,180,710 | | | | | 6,992,025 | |
| Subordinated notes | | | | 125,000 | | | | | 125,000 | |
| Other liabilities | | | | 821,491 | | | | | 633,129 | |
| | | | | | | |
| | | | | 41,296,853 | | | | | 33,680,193 | |
| | | | | | | |
| Minority interest in consolidated subsidiaries | | | | 102 | | | | | 105 | |
| | | | | | | |
Stockholders’ equity: | | | | | | | | | | |
| Preferred stock | | | | 186,875 | | | | | 186,875 | |
| Common stock | | | | 1,680,096 | | | | | 837,566 | |
| Surplus | | | | 278,840 | | | | | 314,638 | |
| Retained earnings | | | | 1,129,793 | | | | | 1,601,851 | |
| Accumulated other comprehensive income, net of tax | | | | 35,454 | | | | | 19,014 | |
| Treasury stock – at cost | | | | (206,437 | ) | | | | (205,527 | ) |
| | | | | | | |
| | | | | 3,104,621 | | | | | 2,754,417 | |
| | | | | | | |
| | | | $ | 44,401,576 | | | | $ | 36,434,715 | |
| | | | | | | |
Popular/ 2004 / Annual Report
[P32]
[ Condensed Consolidated Statements of Income ]
| | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| (In thousands, except per share information) | | | 2004 | | | 2003 | | 2002 |
| | | | | | | |
Interest income | | | | | | | | | | | | | | |
| Loans | | | $ | 1,751,150 | | | | $ | 1,550,036 | | | $ | 1,528,903 | |
| Money market investments | | | | 25,660 | | | | | 25,881 | | | | 32,505 | |
| Investment securities | | | | 413,492 | | | | | 422,295 | | | | 445,925 | |
| Trading securities | | | | 25,963 | | | | | 36,026 | | | | 16,464 | |
| | | | | | | |
| | | | | 2,216,265 | | | | | 2,034,238 | | | | 2,023,797 | |
| | | | | | | |
Interest expense | | | | | | | | | | | | | | |
| Deposits | | | | 330,351 | | | | | 342,891 | | | | 432,415 | |
| Short-term borrowings | | | | 165,425 | | | | | 147,456 | | | | 185,343 | |
| Long-term debt | | | | 344,978 | | | | | 259,203 | | | | 245,795 | |
| | | | | | | |
| | | | | 840,754 | | | | | 749,550 | | | | 863,553 | |
| | | | | | | |
| Net interest income | | | | 1,375,511 | | | | | 1,284,688 | | | | 1,160,244 | |
| Provision for loan losses | | | | 178,657 | | | | | 195,939 | | | | 205,570 | |
| | | | | | | |
| Net interest income after provision for loan losses | | | | 1,196,854 | | | | | 1,088,749 | | | | 954,674 | |
| Service charges on deposit accounts | | | | 165,241 | | | | | 161,839 | | | | 157,713 | |
| Other service fees | | | | 295,551 | | | | | 284,392 | | | | 265,806 | |
| Gain (loss) on sale of investment securities | | | | 15,254 | | | | | 71,094 | | | | (3,342 | ) |
| Trading account loss | | | | (159 | ) | | | | (10,214 | ) | | | (804 | ) |
| Gain on sale of loans | | | | 44,168 | | | | | 53,572 | | | | 52,077 | |
| Other operating income | | | | 88,716 | | | | | 65,327 | | | | 72,313 | |
| | | | | | | |
| | | | | 1,805,625 | | | | | 1,714,759 | | | | 1,498,437 | |
| | | | | | | |
Operating expenses | | | | | | | | | | | | | | |
| Personnel costs | | | | 571,018 | | | | | 526,444 | | | | 488,741 | |
| Net occupancy expenses | | | | 89,821 | | | | | 83,630 | | | | 78,503 | |
| Equipment expenses | | | | 108,823 | | | | | 104,821 | | | | 99,099 | |
| Other taxes | | | | 40,260 | | | | | 37,904 | | | | 37,144 | |
| Professional fees | | | | 95,084 | | | | | 82,325 | | | | 84,660 | |
| Communications | | | | 60,965 | | | | | 58,038 | | | | 53,892 | |
| Business promotion | | | | 75,708 | | | | | 73,277 | | | | 61,451 | |
| Printing and supplies | | | | 17,938 | | | | | 19,111 | | | | 19,918 | |
| Other operating expenses | | | | 103,551 | | | | | 119,689 | | | | 96,490 | |
| Amortization of intangibles | | | | 7,844 | | | | | 7,844 | | | | 9,104 | |
| | | | | | | |
| | | | | 1,171,012 | | | | | 1,113,083 | | | | 1,029,002 | |
| | | | | | | |
| Income before income tax and minority interest | | | | 634,613 | | | | | 601,676 | | | | 469,435 | |
| Income tax | | | | 144,705 | | | | | 130,326 | | | | 117,255 | |
| Net gain of minority interest | | | | — | | | | | (435 | ) | | | (248 | ) |
| | | | | | | |
Net income | | | $ | 489,908 | | | | $ | 470,915 | | | $ | 351,932 | |
| | | | | | | |
Net income applicable to common stock | | | $ | 477,995 | | | | $ | 460,996 | | | $ | 349,422 | |
| | | | | | | |
Net income per common share (basic and diluted) | | | $ | 1.79 | | | | $ | 1.74 | | | $ | 1.31 | |
| | | | | | | |
Dividends declared per common share | | | $ | 0.62 | | | | $ | 0.51 | | | $ | 0.40 | |
| | | | | | | |
For a complete set of audited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, refer to Popular, Inc.’s 2004 Financial Review and Supplementary Information to Stockholders incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004.
[P33]
[ Historical Financial Summary — 25 Years ]
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions, | | | | | | | | | | | | | | | | | | | | | | |
| except per share data) | | 1980 | | 1981 | | 1982 | | 1983 | | 1984 | | 1985 | | 1986 | | 1987 | | 1988 | | 1989 | | 1990 |
Selected Financial Information | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Interest Income | | $ | 130.0 | | | $ | 135.9 | | | $ | 151.7 | | | $ | 144.9 | | | $ | 156.8 | | | $ | 174.9 | | | $ | 184.2 | | | $ | 207.7 | | | $ | 232.5 | | | $ | 260.9 | | | $ | 284.2 | |
| Non-Interest Income | | | 14.2 | | | | 15.8 | | | | 15.9 | | | | 19.6 | | | | 19.0 | | | | 26.8 | | | | 41.4 | | | | 41.0 | | | | 54.9 | | | | 63.3 | | | | 70.9 | |
| Operating Expenses | | | 101.3 | | | | 109.4 | | | | 121.2 | | | | 127.3 | | | | 137.2 | | | | 156.0 | | | | 168.4 | | | | 185.7 | | | | 195.6 | | | | 212.4 | | | | 229.6 | |
| Net Income | | | 23.5 | | | | 24.3 | | | | 27.3 | | | | 26.8 | | | | 29.8 | | | | 32.9 | | | | 38.3 | | | | 38.3 | | | | 47.4 | | | | 56.3 | | | | 63.4 | |
| |
| Assets | | | 2,630.1 | | | | 2,677.9 | | | | 2,727.0 | | | | 2,974.1 | | | | 3,526.7 | | | | 4,141.7 | | | | 4,531.8 | | | | 5,389.6 | | | | 5,706.5 | | | | 5,972.7 | | | | 8,983.6 | |
| Net Loans | | | 988.4 | | | | 1,007.6 | | | | 976.8 | | | | 1,075.7 | | | | 1,373.9 | | | | 1,715.7 | | | | 2,271.0 | | | | 2,768.5 | | | | 3,096.3 | | | | 3,320.6 | | | | 5,373.3 | |
| Deposits | | | 2,060.5 | | | | 2,111.7 | | | | 2,208.2 | | | | 2,347.5 | | | | 2,870.7 | | | | 3,365.3 | | | | 3,820.2 | | | | 4,491.6 | | | | 4,715.8 | | | | 4,926.3 | | | | 7,422.7 | |
| Stockholders’ Equity | | | 122.1 | | | | 142.3 | | | | 163.5 | | | | 182.2 | | | | 203.5 | | | | 226.4 | | | | 283.1 | | | | 308.2 | | | | 341.9 | | | | 383.0 | | | | 588.9 | |
| |
| Market Capitalization | | $ | 45.0 | | | $ | 66.4 | | | $ | 99.0 | | | $ | 119.3 | | | $ | 159.8 | | | $ | 216.0 | | | $ | 304.0 | | | $ | 260.0 | | | $ | 355.0 | | | $ | 430.1 | | | $ | 479.1 | |
| Return on Assets (ROA) | | | 0.92 | % | | | 0.90 | % | | | 0.96 | % | | | 0.95 | % | | | 0.94 | % | | | 0.89 | % | | | 0.88 | % | | | 0.76 | % | | | 0.85 | % | | | 0.99 | % | | | 1.09 | % |
| Return on Equity (ROE) | | | 19.96 | % | | | 18.36 | % | | | 17.99 | % | | | 15.86 | % | | | 15.83 | % | | | 15.59 | % | | | 15.12 | % | | | 13.09 | % | | | 14.87 | % | | | 15.87 | % | | | 15.55 | % |
Per Common Share1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | $ | 0.17 | | | $ | 0.17 | | | $ | 0.19 | | | $ | 0.19 | | | $ | 0.21 | | | $ | 0.23 | | | $ | 0.25 | | | $ | 0.24 | | | $ | 0.30 | | | $ | 0.35 | | | $ | 0.40 | |
| Dividends (Declared) | | | 0.04 | | | | 0.03 | | | | 0.04 | | | | 0.06 | | | | 0.06 | | | | 0.07 | | | | 0.08 | | | | 0.09 | | | | 0.09 | | | | 0.10 | | | | 0.10 | |
| Book Value | | | 0.83 | | | | 0.97 | | | | 1.11 | | | | 1.24 | | | | 1.38 | | | | 1.54 | | | | 1.73 | | | | 1.89 | | | | 2.10 | | | | 2.35 | | | | 2.46 | |
| Market Price | | $ | 0.51 | | | $ | 0.46 | | | $ | 0.69 | | | $ | 0.83 | | | $ | 1.11 | | | $ | 1.50 | | | $ | 2.00 | | | $ | 1.67 | | | $ | 2.22 | | | $ | 2.69 | | | $ | 2.00 | |
Assets by Geographical Area | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Puerto Rico | | | 95.53 | % | | | 94.65 | % | | | 94.63 | % | | | 93.70 | % | | | 91.31 | % | | | 92.42 | % | | | 91.67 | % | | | 94.22 | % | | | 93.45 | % | | | 92.18 | % | | | 88.59 | % |
| United States | | | 4.47 | % | | | 5.14 | % | | | 5.01 | % | | | 5.23 | % | | | 7.52 | % | | | 6.47 | % | | | 7.23 | % | | | 5.01 | % | | | 5.50 | % | | | 6.28 | % | | | 9.28 | % |
| Caribbean and Latin America | | | | | | | 0.21 | % | | | 0.36 | % | | | 1.07 | % | | | 1.17 | % | | | 1.11 | % | | | 1.10 | % | | | 0.77 | % | | | 1.05 | % | | | 1.54 | % | | | 2.13 | % |
| |
| Total | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
Traditional Delivery System | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Banking Branches | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Puerto Rico | | | 110 | | | | 110 | | | | 110 | | | | 112 | | | | 113 | | | | 115 | | | | 124 | | | | 126 | | | | 126 | | | | 128 | | | | 173 | |
| Virgin Islands | | | | | | | 1 | | | | 2 | | | | 3 | | | | 3 | | | | 3 | | | | 3 | | | | 3 | | | | 3 | | | | 3 | | | | 3 | |
| United States | | | 7 | | | | 7 | | | | 7 | | | | 6 | | | | 9 | | | | 9 | | | | 9 | | | | 9 | | | | 10 | | | | 10 | | | | 24 | |
| |
| Subtotal | | | 117 | | | | 118 | | | | 119 | | | | 121 | | | | 125 | | | | 127 | | | | 136 | | | | 138 | | | | 139 | | | | 141 | | | | 200 | |
| |
| Non-Banking Offices | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Popular Financial Holdings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Popular Cash Express | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Popular Finance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14 | | | | 17 | | | | 18 | | | | 26 | |
| Popular Auto | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4 | | | | 9 | |
| Popular Leasing,U.S.A. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Popular Mortgage | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Popular Securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Popular Insurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Popular Insurance Agency U.S.A | | | . | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Popular Insurance,V.I. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| EVERTEC | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Subtotal | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14 | | | | 17 | | | | 22 | | | | 35 | |
| |
| Total | | | 117 | | | | 118 | | | | 119 | | | | 121 | | | | 125 | | | | 127 | | | | 136 | | | | 152 | | | | 156 | | | | 163 | | | | 235 | |
Electronic Delivery System | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ATMs2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owned and Driven | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Puerto Rico | | | | | | | | | | | | | | | 30 | | | | 78 | | | | 94 | | | | 113 | | | | 136 | | | | 153 | | | | 151 | | | | 211 | |
| Caribbean | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3 | | | | 3 | | | | 3 | | | | 3 | |
| United States | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Subtotal | | | | | | | | | | | | | | | 30 | | | | 78 | | | | 94 | | | | 113 | | | | 139 | | | | 156 | | | | 154 | | | | 214 | |
| |
| Driven | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Puerto Rico | | | | | | | | | | | | | | | | | | | 6 | | | | 36 | | | | 51 | | | | 55 | | | | 68 | | | | 65 | | | | 54 | |
| Caribbean | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Subtotal | | | | | | | | | | | | | | | | | | | 6 | | | | 36 | | | | 51 | | | | 55 | | | | 68 | | | | 65 | | | | 54 | |
| |
| Total | | | | | | | | | | | | | | | 30 | | | | 84 | | | | 130 | | | | 164 | | | | 194 | | | | 224 | | | | 219 | | | | 268 | |
Transactions (in millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Electronic Transactions3 | | | | | | | | | | | | | | | 0.6 | | | | 4.4 | | | | 7.0 | | | | 8.3 | | | | 12.7 | | | | 14.9 | | | | 16.1 | | | | 18.0 | |
| Items Processed | | | 94.8 | | | | 96.9 | | | | 98.5 | | | | 102.1 | | | | 110.3 | | | | 123.8 | | | | 134.0 | | | | 139.1 | | | | 159.8 | | | | 161.9 | | | | 164.0 | |
Employees (full-time equivalent) | | | 3,838 | | | | 3,891 | | | | 3,816 | | | | 3,832 | | | | 4,110 | | | | 4,314 | | | | 4,400 | | | | 4,699 | | | | 5,131 | | | | 5,213 | | | | 7,023 | |
| 1 | | Per common share data adjusted for stock splits |
| 2 | | Does not include host-to-host ATMs (2,047 in 2004) which are neither owned nor driven, but are part of the ATH Network |
| 3 | | From 1980-2003, electronic transactions include ACH, Direct Payment, TelePago and Internet Banking and ATH Network transactions in Puerto Rico. 2004 was adjusted to reflect the entire processing business which includes ATH Network transactions in the Dominican Republic, Costa Rica, El Salvador and United States and health care transactions, in addition to those previously stated |
Popular/ 2004 / Annual Report
[P34]
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1991 | | 1992 | | 1993 | | 1994 | | 1995 | | 1996 | | 1997 | | 1998 | | 1999 | | 2000 | | 2001 | | 2002 | | 2003 | | 2004 |
| $ 407.8 | | $ | 440.2 | | | $ | 492.1 | | | $ | 535.5 | | | $ | 584.2 | | | $ | 681.3 | | | $ | 784.0 | | | $ | 873.0 | | | $ | 953.7 | | | $ | 982.8 | | | $ | 1,056.8 | | | $ | 1,160.2 | | | $ | 1,284.7 | | | $ | 1,375.5 | |
| 131.8 | | | 124.5 | | | | 125.2 | | | | 141.3 | | | | 173.3 | | | | 205.5 | | | | 247.6 | | | | 291.2 | | | | 372.9 | | | | 464.1 | | | | 491.8 | | | | 543.8 | | | | 626.0 | | | | 608.8 | |
| 345.7 | | | 366.9 | | | | 412.3 | | | | 447.8 | | | | 486.8 | | | | 541.9 | | | | 636.9 | | | | 720.4 | | | | 837.5 | | | | 876.4 | | | | 926.2 | | | | 1,029.0 | | | | 1,113.1 | | | | 1,171.0 | |
| 64.6 | | | 85.1 | | | | 109.4 | | | | 124.7 | | | | 146.4 | | | | 185.2 | | | | 209.6 | | | | 232.3 | | | | 257.6 | | | | 276.1 | | | | 304.5 | | | | 351.9 | | | | 470.9 | | | | 489.9 | |
| |
| 8,780.3 | | | 10,002.3 | | | | 11,513.4 | | | | 12,778.4 | | | | 15,675.5 | | | | 16,764.1 | | | | 19,300.5 | | | | 23,160.4 | | | | 25,460.5 | | | | 28,057.1 | | | | 30,744.7 | | | | 33,660.4 | | | | 36,434.7 | | | | 44,401.6 | |
| 5,195.6 | | | 5,252.1 | | | | 6,346.9 | | | | 7,781.3 | | | | 8,677.5 | | | | 9,779.0 | | | | 11,376.6 | | | | 13,078.8 | | | | 14,907.8 | | | | 16,057.1 | | | | 18,168.6 | | | | 19,582.1 | | | | 22,602.2 | | | | 28,742.3 | |
| 7,207.1 | | | 8,038.7 | | | | 8,522.7 | | | | 9,012.4 | | | | 9,876.7 | | | | 10,763.3 | | | | 11,749.6 | | | | 13,672.2 | | | | 14,173.7 | | | | 14,804.9 | | | | 16,370.0 | | | | 17,614.7 | | | | 18,097.8 | | | | 20,593.2 | |
| 631.8 | | | 752.1 | | | | 834.2 | | | | 1,002.4 | | | | 1,141.7 | | | | 1,262.5 | | | | 1,503.1 | | | | 1,709.1 | | | | 1,661.0 | | | | 1,993.6 | | | | 2,272.8 | | | | 2,410.9 | | | | 2,754.4 | | | | 3,104.6 | |
| |
| $ 579.0 | | $ | 987.8 | | | $ | 1,014.7 | | | $ | 923.7 | | | $ | 1,276.8 | | | $ | 2,230.5 | | | $ | 3,350.3 | | | $ | 4,611.7 | | | $ | 3,790.2 | | | $ | 3,578.1 | | | $ | 3,965.4 | | | $ | 4,476.4 | | | $ | 5,960.2 | | | $ | 7,685.6 | |
| 0.72 | % | | 0.89 | % | | | 1.02 | % | | | 1.02 | % | | | 1.04 | % | | | 1.14 | % | | | 1.14 | % | | | 1.14 | % | | | 1.08 | % | | | 1.04 | % | | | 1.09 | % | | | 1.11 | % | | | 1.36 | % | | | 1.23 | % |
| 10.57 | % | | 12.72 | % | | | 13.80 | % | | | 13.80 | % | | | 14.22 | % | | | 16.17 | % | | | 15.83 | % | | | 15.41 | % | | | 15.45 | % | | | 15.00 | % | | | 14.84 | % | | | 16.29 | % | | | 19.30 | % | | | 17.60 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ 0.27 | | $ | 0.35 | | | $ | 0.42 | | | $ | 0.46 | | | $ | 0.53 | | | $ | 0.67 | | | $ | 0.75 | | | $ | 0.83 | | | $ | 0.92 | | | $ | 0.99 | | | $ | 1.09 | | | $ | 1.31 | | | $ | 1.74 | | | $ | 1.79 | |
| 0.10 | | | 0.10 | | | | 0.12 | | | | 0.13 | | | | 0.15 | | | | 0.18 | | | | 0.20 | | | | 0.25 | | | | 0.30 | | | | 0.32 | | | | 0.38 | | | | 0.40 | | | | 0.51 | | | | 0.62 | |
| 2.63 | | | 2.88 | | | | 3.19 | | | | 3.44 | | | | 3.96 | | | | 4.40 | | | | 5.19 | | | | 5.93 | | | | 5.76 | | | | 6.96 | | | | 7.97 | | | | 9.10 | | | | 9.66 | | | | 10.95 | |
| $ 2.41 | | $ | 3.78 | | | $ | 3.88 | | | $ | 3.52 | | | $ | 4.85 | | | $ | 8.44 | | | $ | 12.38 | | | $ | 17.00 | | | $ | 13.97 | | | $ | 13.16 | | | $ | 14.54 | | | $ | 16.90 | | | $ | 22.43 | | | $ | 28.83 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 86.67 | % | | 87.33 | % | | | 79.42 | % | | | 75.86 | % | | | 75.49 | % | | | 73.88 | % | | | 74.10 | % | | | 71.32 | % | | | 70.95 | % | | | 71.80 | % | | | 67.66 | % | | | 66.27 | % | | | 61.84 | % | | | 54.56 | % |
| 10.92 | % | | 10.27 | % | | | 16.03 | % | | | 19.65 | % | | | 20.76 | % | | | 22.41 | % | | | 23.34 | % | | | 24.44 | % | | | 25.17 | % | | | 25.83 | % | | | 29.84 | % | | | 31.60 | % | | | 36.29 | % | | | 43.48 | % |
| 2.41 | % | | 2.40 | % | | | 4.55 | % | | | 4.49 | % | | | 3.75 | % | | | 3.71 | % | | | 2.56 | % | | | 4.24 | % | | | 3.88 | % | | | 2.37 | % | | | 2.50 | % | | | 2.13 | % | | | 1.87 | % | | | 1.96 | % |
| |
| 100.00 | % | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 161 | | | 162 | | | | 165 | | | | 166 | | | | 166 | | | | 178 | | | | 201 | | | | 198 | | | | 199 | | | | 199 | | | | 196 | | | | 195 | | | | 193 | | | | 192 | |
| 3 | | | 3 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 8 | |
| 24 | | | 30 | | | | 32 | | | | 34 | | | | 40 | | | | 44 | | | | 63 | | | | 89 | | | | 91 | | | | 95 | | | | 96 | | | | 96 | | | | 97 | | | | 128 | |
| |
| 188 | | | 195 | | | | 205 | | | | 208 | | | | 214 | | | | 230 | | | | 272 | | | | 295 | | | | 298 | | | | 302 | | | | 300 | | | | 299 | | | | 298 | | | | 328 | |
| |
| 27 | | | 41 | | | | 58 | | | | 73 | | | | 91 | | | | 102 | | | | 117 | | | | 128 | | | | 137 | | | | 136 | | | | 149 | | | | 153 | | | | 181 | | | | 183 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 51 | | | | 102 | | | | 132 | | | | 154 | | | | 195 | | | | 129 | | | | 114 | |
| 26 | | | 26 | | | | 26 | | | | 28 | | | | 31 | | | | 39 | | | | 44 | | | | 48 | | | | 47 | | | | 61 | | | | 55 | | | | 36 | | | | 43 | | | | 43 | |
| 9 | | | 9 | | | | 8 | | | | 10 | | | | 9 | | | | 8 | | | | 10 | | | | 10 | | | | 12 | | | | 12 | | | | 20 | | | | 18 | | | | 18 | | | | 18 | |
| | | | | | | | | | | | | | | | | | | | | | | | 7 | | | | 8 | | | | 10 | | | | 11 | | | | 13 | | | | 13 | | | | 11 | | | | 15 | |
| | | | | | | | | | | | | | | | 3 | | | | 3 | | | | 3 | | | | 11 | | | | 13 | | | | 21 | | | | 25 | | | | 29 | | | | 32 | | | | 30 | |
| | | | | | | | | | | | | | | | | | | | 1 | | | | 2 | | | | 2 | | | | 2 | | | | 3 | | | | 4 | | | | 7 | | | | 8 | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2 | | | | 2 | | | | 2 | | | | 2 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1 | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4 | | | | 4 | | | | 4 | | | | 5 | | | | 5 | | | | 7 | |
| |
| 62 | | | 76 | | | | 92 | | | | 111 | | | | 134 | | | | 153 | | | | 183 | | | | 258 | | | | 327 | | | | 382 | | | | 427 | | | | 460 | | | | 431 | | | | 423 | |
| |
| 250 | | | 271 | | | | 297 | | | | 319 | | | | 348 | | | | 383 | | | | 455 | | | | 553 | | | | 625 | | | | 684 | | | | 727 | | | | 759 | | | | 729 | | | | 751 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 206 | | | 211 | | | | 234 | | | | 262 | | | | 281 | | | | 327 | | | | 391 | | | | 421 | | | | 442 | | | | 478 | | | | 524 | | | | 539 | | | | 557 | | | | 568 | |
| 3 | | | 3 | | | | 8 | | | | 8 | | | | 8 | | | | 9 | | | | 17 | | | | 59 | | | | 68 | | | | 37 | | | | 39 | | | | 53 | | | | 57 | | | | 59 | |
| | | | 6 | | | | 11 | | | | 26 | | | | 38 | | | | 53 | | | | 71 | | | | 94 | | | | 99 | | | | 109 | | | | 118 | | | | 131 | | | | 129 | | | | 163 | |
| |
| 209 | | | 220 | | | | 253 | | | | 296 | | | | 327 | | | | 389 | | | | 479 | | | | 574 | | | | 609 | | | | 624 | | | | 681 | | | | 723 | | | | 743 | | | | 790 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 73 | | | 81 | | | | 86 | | | | 88 | | | | 120 | | | | 162 | | | | 170 | | | | 187 | | | | 102 | | | | 118 | | | | 155 | | | | 174 | | | | 176 | | | | 167 | |
| | | | | | | | | | | | | | | | | | | | 97 | | | | 192 | | | | 265 | | | | 851 | | | | 920 | | | | 823 | | | | 926 | | | | 1,110 | | | | 1,216 | |
| |
| 73 | | | 81 | | | | 86 | | | | 88 | | | | 120 | | | | 259 | | | | 362 | | | | 452 | | | | 953 | | | | 1,038 | | | | 978 | | | | 1,100 | | | | 1,286 | | | | 1,383 | |
| 282 | | | 301 | | | | 339 | | | | 384 | | | | 447 | | | | 648 | | | | 841 | | | | 1,026 | | | | 1,562 | | | | 1,662 | | | | 1,659 | | | | 1,823 | | | | 2,029 | | | | 2,173 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 23.9 | | | 28.6 | | | | 33.2 | | | | 43.0 | | | | 56.6 | | | | 78.0 | | | | 111.2 | | | | 130.5 | | | | 159.4 | | | | 199.5 | | | | 206.0 | | | | 236.6 | | | | 255.7 | | | | 615.1 | |
| 166.1 | | | 170.4 | | | | 171.8 | | | | 174.5 | | | | 175.0 | | | | 173.7 | | | | 171.9 | | | | 170.9 | | | | 171.0 | | | | 160.2 | | | | 149.9 | | | | 145.3 | | | | 138.5 | | | | 133.9 | |
7,006 | | | 7,024 | | | | 7,533 | | | | 7,606 | | | | 7,815 | | | | 7,996 | | | | 8,854 | | | | 10,549 | | | | 11,501 | | | | 10,651 | | | | 11,334 | | | | 11,037 | | | | 11,474 | | | | 12,142 | |
compete / create / build / discover / inspire
[P35]
SUBSIDIARIES
Banco Popular de Puerto Rico
Popular Mortgage, Inc.
Popular Auto, Inc.
Popular Finance, Inc.
Popular Securities, Inc.
Popular Insurance, Inc.
Popular Life Re
Popular Insurance V.I., Inc.
Banco Popular North America
Popular Cash Express
Popular Leasing, U.S.A.
Banco Popular, National Association
Popular North America, Inc.
Popular Insurance Agency U.S.A., Inc
Popular FS, LLC
Popular International Bank, Inc.
Popular Financial Holdings, Inc.
Equity One, Inc.
EVERTEC, Inc.
ATH Costa Rica, S.A./CreST, S.A.
EVERTEC de Venezuela, C.A.
Grupo Gen-Mult de la Republica Dominicana, S.A.
STOCKHOLDERS’ INFORMATION
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Annual Meeting
The 2005 Annual Stockholders’ Meeting of Popular, Inc. will be held on Wednesday, April 27, at 9:00 a.m. at Centro Europa Building in San Juan, Puerto Rico
Telephone: (787) 765-9800 ext. 5637, 5525
Fax: (787) 281-5193
E-mail: popular-stck-transfer@bppr.com
Additional Information
Copies of the Annual Report to the Securities and Exchange Commission on Form 10-K and any other financial information may be obtained by writing to:
Ileana Gonzalez Quevedo
Senior Vice President and Comptroller
Popular, Inc.
PO Box 362708
San Juan, PR 00936-2708
Telephone: (787) 765-9800 ext. 6102
Fax: (787) 759-7803
Or visit our web site www.popularinc.com
Design: BD&E Inc., Pittsburgh, Pennsylvania
Photography: Ernesto Robles, Tom Gigliotti
Printing: Hoechstetter Printing, an RR Donnelley Company
Popular/ 2004 / Annual Report
[P36]
Financial Review and Supplementary Information
| | | | | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 3 | |
| | | | | |
| Statistical Summaries | | | 41 | |
| | | | | |
| Financial Statements | | | | |
| | | | | |
| Management’s Report on Internal Control Over Financial Reporting | | | 46 | |
| | | | | |
| Report of Independent Registered Public Accounting Firm | | | 47 | |
| | | | | |
| Consolidated Statements of Condition as of December 31, 2004 and 2003 | | | 49 | |
| | | | | |
| Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 | | | 50 | |
| | | | | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 | | | 51 | |
| | | | | |
| Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002 | | | 52 | |
| | | | | |
| Consolidated Statements of Comprehensive Income for the years ended December 31, 2004, 2003 and 2002 | | | 53 | |
| | | | | |
| Notes to Consolidated Financial Statements | | | 54 | |
Popular/ 2004 / Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | | |
| Overview | | | 3 | |
| | | | | |
| Sarbanes-Oxley Section 404 Compliance | | | 8 | |
| | | | | |
| Forward-looking Statements | | | 8 | |
| | | | | |
| Critical Accounting Policies | | | 9 | |
| | | | | |
| Statement of Income Analysis | | | | |
| Net Interest Income | | | 11 | |
| Provision for Loan Losses | | | 15 | |
| Non-Interest Income | | | 15 | |
| Operating Expenses | | | 16 | |
| Income Tax Expense | | | 18 | |
| Fourth Quarter Results | | | 18 | |
| | | | | |
| Statement of Condition Analysis | | | | |
| Assets | | | 18 | |
| Deposits, Borrowings and Other Liabilities | | | 20 | |
| Stockholders’ Equity | | | 21 | |
| | | | | |
| Off-Balance Sheet Financing Entities | | | 23 | |
| | | | | |
| Risk Management | | | 23 | |
| Market Risk | | | 23 | |
| Liquidity Risk | | | 28 | |
| Credit Risk Management and Loan Quality | | | 32 | |
| Operational Risk Management | | | 37 | |
| | | | | |
| Glossary of Selected Financial Terms | | | 39 | |
| | | | | |
| Statistical Summaries | | | | |
| Statements of Condition | | | 41 | |
| Statements of Income | | | 42 | |
| Quarterly Financial Data | | | 43 | |
| Average Balance Sheet and Summary of Net Interest Income | | | 44 | |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P2] | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section provides a discussion and analysis of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the Corporation or Popular). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.
OVERVIEW
The Corporation is a financial holding company, which is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. Since its foundation more than a century ago, Popular has evolved from a commercial bank based in Puerto Rico to a diverse full 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, insurance and information processing through specialized subsidiaries. In the United States, the Corporation has established the largest Hispanic-owned financial services franchise, Banco Popular North America (BPNA), providing complete financial solutions to all the communities it serves. Also, in the United States, Popular Financial Holdings, Inc. (PFH), holding company of Equity One, Inc., offers mortgage and personal loans, and also maintains a substantial wholesale broker network, a warehouse lending division, and an asset acquisitions unit. The Corporation continues to use its expertise in technology and electronic banking as a competitive advantage in its Caribbean and Latin America expansion, and is exporting its 111 years of experience through the region.
Highlights of the Corporation’s performance for 2004 are listed below. These items and their financial impact are explained further in this Management’s Discussion and Analysis. Table A presents a five-year summary of the components of net income as a percentage of average total assets, whereas Table B presents the changes in net income applicable to common stock and earnings per common share. In addition, Table C provides selected financial data for the past 10 years. A glossary of financial terms has been included on pages 39 to 40.
Net income for the year ended December 31, 2004 reached $489.9 million, from $470.9 million in 2003. The results for the year 2003 included $71.1 million in gains on sale of securities, mainly marketable equity securities, compared with $15.3 million in 2004. Earnings per common share (EPS), basic and diluted, for the year 2004 were $1.79, compared with $1.74 in 2003, an increase of 3%. All references to the numbers of common shares and per share amounts have been restated to reflect the two-for-one stock split in the form of a stock dividend effective on July 8, 2004. Net income for 2004 represented a return on assets (ROA) of 1.23% and a return on common equity (ROE) of 17.60%. For the year 2003, the Corporation reported ROA and ROE of 1.36% and 19.30%, respectively.
The Corporation’s business mix continued to produce a balanced revenue stream in 2004. The main source of income for the Corporation continues to be its net interest income, which represented approximately 69% of the Corporation’s total revenues (defined as net interest income plus non-interest income). In recent years, the Corporation has continued to diversify its revenue stream by offering a wide array of services that provide a stable source of income that is not sensitive to interest-rate fluctuations, such as processing,
Table A
Components of Net Income as a Percentage of Average Total Assets
| | | | | | | | | | | | | | | | | | | | | |
| | For the Year |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 |
| |
| Net interest income | | | 3.45 | % | | | 3.71 | % | | | 3.65 | % | | | 3.78 | % | | | 3.70 | % |
| Provision for loan losses | | | (0.45 | ) | | | (0.57 | ) | | | (0.65 | ) | | | (0.76 | ) | | | (0.73 | ) |
| Securities and trading gains (losses) | | | 0.04 | | | | 0.18 | | | | (0.01 | ) | | | (0.01 | ) | | | 0.05 | |
| Operating income | | | 1.49 | | | | 1.63 | | | | 1.72 | | | | 1.76 | | | | 1.70 | |
| |
| | | | 4.53 | | | | 4.95 | | | | 4.71 | | | | 4.77 | | | | 4.72 | |
| Operating expenses | | | (2.94 | ) | | | (3.21 | ) | | | (3.23 | ) | | | (3.31 | ) | | | (3.30 | ) |
| |
| Net income before tax | | | 1.59 | | | | 1.74 | | | | 1.48 | | | | 1.46 | | | | 1.42 | |
| Income tax | | | (0.36 | ) | | | (0.38 | ) | | | (0.37 | ) | | | (0.37 | ) | | | (0.38 | ) |
| |
| Net income | | | 1.23 | % | | | 1.36 | % | | | 1.11 | % | | | 1.09 | % | | | 1.04 | % |
| |
[P3]
check cashing, insurance agency and credit and debit card related services and transactional fees.
Explanations for the main variances in the results for the year ended December 31, 2004, compared with the preceding year follow:
| | • | Higher net interest income by $90.8 million, or 7%, principally as a result of the growth in average earning assets, mainly loans, partially offset by a compression in the net interest margin. For further information refer to the Net Interest Income and Market Risk analysis sections of this report. |
| |
| | • | Lower provision for loan losses by $17.3 million, or 9%, as a result of improved credit quality trends and a continued shift in the mix of the loan portfolio towards a greater proportion of real estate secured loans. |
| |
| | • | Lower non-interest income by $17.2 million, or 3%, mainly due to lower gains on the sale of investment securities during 2004, partially offset by higher other service fees, service charges on deposit accounts, and other operating income, coupled with lower trading account losses. |
| |
| | • | Higher operating expenses by $57.9 million, or 5%, principally in the categories of personnel costs, professional fees, net occupancy and equipment expenses, partly compensated by lower other operating expenses. The increase in operating expenses is related to the continued growth in the Corporation’s operations, including Quaker City, acquired in the third quarter of 2004, which accounted for approximately $11 million of this increase. |
| |
| | • | Higher income tax expense by $14.4 million, or 11%, due to both higher pre-tax income and lower tax-exempt interest income. |
| |
| | • | An important aspect of a financial institution is that related to lending activities. Total loans at December 31, 2004 reflected a $6.1 billion, or 27% growth from December 31, 2003. The increase in loans was driven primarily by good results in mortgage, commercial and consumer lending, including approximately $1.7 billion in loans from Quaker City, mainly commercial and mortgage loans. For more detailed information on lending activities, refer to the Provision for Loan Losses, Assets and Credit Risk Management and Loan Quality sections of this report. |
| |
| | • | Deposits increased by $2.5 billion, or 14%, from December 31, 2003, mostly reflected in savings and time deposits. The Corporation’s extensive branch network in Puerto Rico and its expanding network in major U.S. markets have enabled it to maintain a stable base of deposits. The banking industry has been characterized by intense competition in recent years, to which the Corporation has reacted by designing attractive products and services, and by launching effective marketing campaigns to retain and attract customers and cross-sell products and services offered by the Corporation’s traditional banking and non-banking subsidiaries. Quaker City contributed approximately $1.2 billion in deposits at December 31, 2004. |
| |
| | • | Borrowings increased by $4.9 billion, or 33%, from December 31, 2003. Funding was principally used for earning asset growth and business expansion. |
| |
| | • | At December 31, 2004, stockholders’ equity amounted to $3.1 billion, compared with $2.8 billion at the same date in the preceding year. |
| |
| | • | Cash dividends per common share for 2004 increased to $0.62, and were 22% higher than the cash dividend of $0.51 per common share in 2003. |
| |
| | • | The Corporation’s common stock rose 28.5% in market value in 2004 closing at $28.83, and was identified by American Banker as the best performing stock in the large cap bank group. The Corporation’s market capitalization at December 31, 2004 was $7.7 billion, compared with $6.0 billion at December 31, 2003. |
Continuing with the expansion plans of the Corporation’s banking franchise in the United States, on August 31, 2004, BPNA completed the acquisition of Quaker City Bancorp (Quaker City), the savings and loan holding company for Quaker City Bank, based in Whittier, California. Quaker City Bank added 27 retail full-service branches in Southern California. Also, during 2004, the Corporation announced the acquisition of Kislak National Bank (Kislak) in South Florida. This financial institution, which officially became a part of BPNA in January of 2005, added 8 branches in the Miami area with approximately $965 million in assets, $590 million in loans, including a portfolio to condominium and homeowner associations, and $659 million in deposits.
Effective on April 1, 2004, GM Group, Inc., the Corporation’s processing subsidiary, was renamed EVERTEC, Inc. This company conducts the operations previously conducted by GM Group, as well as the former operational and programming services of BPPR. This initiative was part of Popular’s strategic objectives to provide added value to its customers by offering integrated technological solutions and financial transaction processing. This will also allow the Corporation to strengthen its services through substantial growth in the processing area and the development of new technological services in Puerto Rico, the Caribbean, Central America and the United States.
The Corporation also completed other small scale acquisitions, which are strategically very important for the attainment of its business segment strategic objectives and future earnings growth. During 2004, Popular acquired an additional equity stake in Consorcio de Tarjetas Dominicanas (CONTADO) in the Dominican Republic, the leading payment network in that country. In addition, Popular increased its equity stake in Banco Hipotecario Dominicano (BHD) in the Dominican Republic from 17.2% to approximately
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P4] | | |
Table B
Changes in Net Income and Earnings per Common Share
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| (In thousands, except per common share amounts) | | Dollars | | Per share | | Dollars | | Per share | | Dollars | | Per share |
| |
| Net income applicable to common stock for prior year | | $ | 460,996 | | | $ | 1.74 | | | $ | 349,422 | | | $ | 1.31 | | | $ | 296,188 | | | $ | 1.09 | |
| Increase (decrease) from changes in: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 90,823 | | | | 0.34 | | | | 124,444 | | | | 0.47 | | | | 103,487 | | | | 0.38 | |
| Provision for loan losses | | | 17,282 | | | | 0.06 | | | | 9,631 | | | | 0.04 | | | | 7,680 | | | | 0.03 | |
| Sales of investment securities | | | (55,840 | ) | | | (0.21 | ) | | | 74,436 | | | | 0.28 | | | | (3,369 | ) | | | (0.02 | ) |
| Trading account | | | 10,055 | | | | 0.04 | | | | (9,410 | ) | | | (0.04 | ) | | | 977 | | | | 0.01 | |
| Operating income | | | 28,546 | | | | 0.11 | | | | 17,221 | | | | 0.06 | | | | 54,339 | | | | 0.20 | |
| Operating expenses | | | (57,929 | ) | | | (0.22 | ) | | | (84,081 | ) | | | (0.32 | ) | | | (102,793 | ) | | | (0.38 | ) |
| Income tax | | | (14,379 | ) | | | (0.05 | ) | | | (13,071 | ) | | | (0.05 | ) | | | (11,975 | ) | | | (0.05 | ) |
| Minority interest | | | 435 | | | | — | | | | (187 | ) | | | — | | | | (266 | ) | | | — | |
| Cumulative effect of accounting change | | | — | | | | — | | | | — | | | | — | | | | (686 | ) | | | — | |
| |
| Net income before preferred stock dividends and change in average common shares | | | 479,989 | | | | 1.81 | | | | 468,405 | | | | 1.75 | | | | 343,582 | | | | 1.26 | |
| (Increase) decrease in preferred stock dividends | | | (1,994 | ) | | | (0.01 | ) | | | (7,409 | ) | | | (0.03 | ) | | | 5,840 | | | | 0.02 | |
| Change in average common shares* | | | — | | | | (0.01 | ) | | | — | | | | 0.02 | | | | — | | | | 0.03 | |
| |
| Net income applicable to common stock | | $ | 477,995 | | | $ | 1.79 | | | $ | 460,996 | | | $ | 1.74 | | | $ | 349,422 | | | $ | 1.31 | |
| |
*Reflects the effect of the shares repurchased, plus the shares issued through the Dividend Reinvestment Plan and the effect of stock options exercised in the years presented.
20%. In Puerto Rico, EVERTEC continued strengthening the health care transaction processing business by acquiring Advanced Data Support, in late 2003. Furthermore, EVERTEC acquired substantially all of the assets of Blas Menendez and Associates (Blas) in October 2004. Blas was a computer software and information technology consulting company principally engaged in the design, development and maintenance of office management software programs for the health care industry in Puerto Rico. Also, on December 1, 2004, Popular Insurance acquired Argomaniz & Associates, a general agency specializing in life insurance.
During 2004, Popular reorganized its corporate structure to better reflect its business strategy and working philosophy. Also, the changes strengthen its position for continuous growth and delivery of solid results. There are five principal areas (referred to by management as “circles”):
Popular Puerto Rico:The Corporation has established a strong leadership position in most product categories and population segments in Puerto Rico, but it faces the challenge of increased competition from local and national participants. The Corporation’s strategy to compete emphasizes on capitalizing on the Corporation’s broad delivery channels and client base and taking on the advantages of doing business with the whole Popular organization: a complete spectrum of products, competitive pricing and superior service.
United States Financial Services:Popular’s operations in the United States, which include retail and commercial banking, lease financing, retail financial and insurance services, have grown and prospered since the launching in 2002 of “A New Day”, a set of strategies designed to improve financial results through 2005. The focus on the first two years of this plan was on reengineering and laying the operational foundation for growth. Now the focus is centered in revenue-generating initiatives, including strategies towards the consumer and commercial loan markets and the implementation of a Customer Acquisition Program to attract and retain customers. Also, there is continued attention to control expenses. The integration of Quaker City and the recent acquisition of Kislak will become an integral part within the Corporation’ s strategies in the United States.
Popular Financial Holdings:Equity One, Popular’s U.S. non-prime mortgage lending and servicing company took important steps in 2004 by forming PFH, a new holding company that allows it to pursue new business strategies while leveraging the strength of the Popular brand. New business opportunities identified by PFH include consumer financing for manufactured housing through national dealer networks and extending its servicing capacity. Other initiatives include a cross-selling project and the creation of a product development unit.
[P5]
Table C
Selected Financial Data
| | | | | | | | | | | | | |
| |
| (Dollars in thousands, except per share data) | | 2004 | | 2003 | | 2002 |
| |
| CONDENSED INCOME STATEMENTS | | | | | | | | | | | | |
| Interest income | | $ | 2,216,265 | | | $ | 2,034,238 | | | $ | 2,023,797 | |
| Interest expense | | | 840,754 | | | | 749,550 | | | | 863,553 | |
| |
| Net interest income | | | 1,375,511 | | | | 1,284,688 | | | | 1,160,244 | |
| |
| Provision for loan losses | | | 178,657 | | | | 195,939 | | | | 205,570 | |
| Securities and trading gains (losses) | | | 15,095 | | | | 60,880 | | | | (4,146 | ) |
| Operating income | | | 593,676 | | | | 565,130 | | | | 547,909 | |
| Operating expenses | | | 1,171,012 | | | | 1,113,083 | | | | 1,029,002 | |
| Income tax | | | 144,705 | | | | 130,326 | | | | 117,255 | |
| Net (gain) loss of minority interest | | | — | | | | (435 | ) | | | (248 | ) |
| Cumulative effect of accounting change | | | — | | | | — | | | | — | |
| |
| Net income | | $ | 489,908 | | | $ | 470,915 | | | $ | 351,932 | |
| |
| Net income applicable to common stock | | $ | 477,995 | | | $ | 460,996 | | | $ | 349,422 | |
| |
| | | | | | | | | | | | | |
| PER COMMON SHARE DATA* | | | | | | | | | | | | |
Net income (basic and diluted) (before and after cumulative
effect of accounting change) | | $ | 1.79 | | | $ | 1.74 | | | $ | 1.31 | |
| Dividends declared | | | 0.62 | | | | 0.51 | | | | 0.40 | |
| Book value | | | 10.95 | | | | 9.66 | | | | 9.10 | |
| Market price | | | 28.83 | | | | 22.43 | | | | 16.90 | |
| Outstanding shares: | | | | | | | | | | | | |
| Average | | | 266,302,105 | | | | 265,481,840 | | | | 267,830,164 | |
| End of period | | | 266,582,103 | | | | 265,783,892 | | | | 264,878,094 | |
| | | | | | | | | | | | | |
| AVERAGE BALANCES | | | | | | | | | | | | |
| Net loans** | | $ | 25,143,559 | | | $ | 20,730,041 | | | $ | 18,729,220 | |
| Earning assets | | | 37,621,648 | | | | 32,781,355 | | | | 30,194,914 | |
| Total assets | | | 39,898,775 | | | | 34,674,761 | | | | 31,822,390 | |
| Deposits | | | 19,409,055 | | | | 17,757,968 | | | | 16,984,646 | |
| Borrowings | | | 16,954,909 | | | | 13,835,437 | | | | 12,190,076 | |
| Total stockholders’ equity | | | 2,903,137 | | | | 2,545,113 | | | | 2,150,386 | |
| | | | | | | | | | | | | |
| PERIOD END BALANCES | | | | | | | | | | | | |
| Net loans** | | $ | 28,742,261 | | | $ | 22,602,192 | | | $ | 19,582,119 | |
| Allowance for loan losses | | | 437,081 | | | | 408,542 | | | | 372,797 | |
| Earning assets | | | 41,812,475 | | | | 34,451,748 | | | | 31,899,765 | |
| Total assets | | | 44,401,576 | | | | 36,434,715 | | | | 33,660,352 | |
| Deposits | | | 20,593,160 | | | | 18,097,828 | | | | 17,614,740 | |
| Borrowings | | | 19,882,202 | | | | 14,949,236 | | | | 12,955,966 | |
| Total stockholders’ equity | | | 3,104,621 | | | | 2,754,417 | | | | 2,410,879 | |
| | | | | | | | | | | | | |
| SELECTED RATIOS | | | | | | | | | | | | |
| Net interest yield (taxable equivalent basis) | | | 3.95 | % | | | 4.28 | % | | | 4.19 | % |
| Return on average total assets | | | 1.23 | | | | 1.36 | | | | 1.11 | |
| Return on average common stockholders’ equity | | | 17.60 | | | | 19.30 | | | | 16.29 | |
| Dividend payout ratio to common stockholders | | | 32.85 | | | | 27.05 | | | | 30.76 | |
| Efficiency ratio | | | 59.86 | | | | 60.17 | | | | 60.39 | |
| Overhead ratio | | | 40.88 | | | | 37.91 | | | | 41.82 | |
| Tier I capital to risk-adjusted assets | | | 11.82 | | | | 12.43 | | | | 9.85 | |
| Total capital to risk-adjusted assets | | | 13.21 | | | | 13.93 | | | | 11.52 | |
| * | Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information at the end of the periods. All per share data has been adjusted to reflect three stock splits effected in the form of dividends on July 8, 2004, July 1, 1998 and July 1, 1996. |
| |
| ** | Includes loans held-for-sale. |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P6] | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2001 | | 2000 | | 1999 | | 1998 | | 1997 | | 1996 | | 1995 |
| |
| $2,095,862 | | $ | 2,150,157 | | | $ | 1,851,670 | | | $ | 1,651,703 | | | $ | 1,491,303 | | | $ | 1,272,853 | | | $ | 1,105,807 | |
| 1,039,105 | | | 1,167,396 | | | | 897,932 | | | | 778,691 | | | | 707,348 | | | | 591,540 | | | | 521,624 | |
| |
| 1,056,757 | | | 982,761 | | | | 953,738 | | | | 873,012 | | | | 783,955 | | | | 681,313 | | | | 584,183 | |
| |
| 213,250 | | | 194,640 | | | | 148,948 | | | | 137,213 | | | | 110,607 | | | | 88,839 | | | | 64,558 | |
| (1,754) | | | 13,192 | | | | (944 | ) | | | 12,586 | | | | 6,202 | | | | 3,202 | | | | 7,153 | |
| 493,570 | | | 450,868 | | | | 373,860 | | | | 278,660 | | | | 241,396 | | | | 202,270 | | | | 166,185 | |
| 926,209 | | | 876,433 | | | | 837,482 | | | | 720,354 | | | | 636,920 | | | | 541,919 | | | | 486,833 | |
| 105,280 | | | 100,797 | | | | 85,120 | | | | 74,671 | | | | 74,461 | | | | 70,877 | | | | 59,769 | |
| 18 | | | 1,152 | | | | 2,454 | | | | 328 | | | | — | | | | — | | | | — | |
| 686 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| $304,538 | | $ | 276,103 | | | $ | 257,558 | | | $ | 232,348 | | | $ | 209,565 | | | $ | 185,150 | | | $ | 146,361 | |
| |
| $296,188 | | $ | 267,753 | | | $ | 249,208 | | | $ | 223,998 | | | $ | 201,215 | | | $ | 176,800 | | | $ | 138,011 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| $1.09 | | $ | 0.99 | | | $ | 0.92 | | | $ | 0.83 | | | $ | 0.75 | | | $ | 0.67 | | | $ | 0.53 | |
| 0.38 | | | 0.32 | | | | 0.30 | | | | 0.25 | | | | 0.20 | | | | 0.18 | | | | 0.15 | |
| 7.97 | | | 6.96 | | | | 5.76 | | | | 5.93 | | | | 5.19 | | | | 4.40 | | | | 3.96 | |
| 14.54 | | | 13.16 | | | | 13.97 | | | | 17.00 | | | | 12.38 | | | | 8.44 | | | | 4.85 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 272,476,576 | | | 271,814,952 | | | | 271,171,268 | | | | 271,064,172 | | | | 268,073,928 | | | | 264,089,248 | | | | 263,265,200 | |
| 272,724,728 | | | 271,997,234 | | | | 271,308,584 | | | | 271,274,654 | | | | 270,730,816 | | | | 264,354,024 | | | | 263,589,088 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| $17,045,257 | | $ | 15,801,887 | | | $ | 13,901,290 | | | $ | 11,930,621 | | | $ | 10,548,207 | | | $ | 9,210,964 | | | $ | 8,217,834 | |
| 26,414,204 | | | 24,893,366 | | | | 22,244,959 | | | | 19,261,949 | | | | 17,409,634 | | | | 15,306,311 | | | | 13,244,170 | |
| 27,957,107 | | | 26,569,755 | | | | 23,806,372 | | | | 20,432,382 | | | | 18,419,144 | | | | 16,301,082 | | | | 14,118,183 | |
| 15,575,791 | | | 14,508,482 | | | | 13,791,338 | | | | 12,270,101 | | | | 10,991,557 | | | | 10,461,796 | | | | 9,582,151 | |
| 9,805,000 | | | 9,674,547 | | | | 7,825,855 | | | | 6,268,921 | | | | 5,874,427 | | | | 4,370,447 | | | | 3,255,123 | |
| 2,096,534 | | | 1,884,525 | | | | 1,712,792 | | | | 1,553,258 | | | | 1,370,984 | | | | 1,193,506 | | | | 1,070,482 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| $18,168,551 | | $ | 16,057,085 | | | $ | 14,907,754 | | | $ | 13,078,795 | | | $ | 11,376,607 | | | $ | 9,779,028 | | | $ | 8,677,484 | |
| 336,632 | | | 290,653 | | | | 292,010 | | | | 267,249 | | | | 211,651 | | | | 185,574 | | | | 168,393 | |
| 29,139,288 | | | 26,339,431 | | | | 23,754,620 | | | | 21,591,950 | | | | 18,060,998 | | | | 15,484,454 | | | | 14,668,195 | |
| 30,744,676 | | | 28,057,051 | | | | 25,460,539 | | | | 23,160,357 | | | | 19,300,507 | | | | 16,764,103 | | | | 15,675,451 | |
| 16,370,042 | | | 14,804,907 | | | | 14,173,715 | | | | 13,672,214 | | | | 11,749,586 | | | | 10,763,275 | | | | 9,876,662 | |
| 11,588,221 | | | 10,785,239 | | | | 9,154,468 | | | | 7,297,742 | | | | 5,689,460 | | | | 4,421,184 | | | | 4,391,013 | |
| 2,272,818 | | | 1,993,644 | | | | 1,660,986 | | | | 1,709,113 | | | | 1,503,092 | | | | 1,262,532 | | | | 1,141,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 4.33% | | | 4.23 | % | | | 4.65 | % | | | 4.91 | % | | | 4.84 | % | | | 4.77 | % | | | 4.74 | % |
| 1.09 | | | 1.04 | | | | 1.08 | | | | 1.14 | | | | 1.14 | | | | 1.14 | | | | 1.04 | |
| 14.84 | | | 15.00 | | | | 15.45 | | | | 15.41 | | | | 15.83 | | | | 16.17 | | | | 14.22 | |
| 33.10 | | | 32.47 | | | | 31.56 | | | | 28.42 | | | | 25.19 | | | | 24.63 | | | | 26.21 | |
| 59.74 | | | 61.54 | | | | 63.08 | | | | 62.55 | | | | 62.12 | | | | 61.33 | | | | 64.88 | |
| 41.11 | | | 41.96 | | | | 48.71 | | | | 49.15 | | | | 49.66 | | | | 49.38 | | | | 53.66 | |
| 9.96 | | | 10.44 | | | | 10.17 | | | | 10.82 | | | | 12.17 | | | | 11.63 | | | | 11.91 | |
| 11.74 | | | 12.37 | | | | 12.29 | | | | 13.14 | | | | 14.56 | | | | 14.18 | | | | 14.65 | |
[P7]
Processing:During 2004, EVERTEC integrated its people, systems, operations and facilities, while accomplishing important business goals. In Puerto Rico, the Corporation continued to expand its traditional processing activities, including strengthening the health care transaction processing business as a result of the acquisition in 2003 of one of the largest health application providers and processing companies in Puerto Rico. Popular continued expanding its presence in the Caribbean and Central America, in part through the previously mentioned acquisition of an additional equity stake in CONTADO. The processing business is important for Popular’s future because it represents an area with a great potential for growth and a source of stable, non-interest income.
Corporate:The corporate group is made up by the CEO and the leaders of four administrative areas that were identified as critical for the organization — Finance, Risk Management, Legal and People, Planning and Communications. The role of the leaders of these administrative areas is to add value so that the business circles, in turn, can focus on their markets, clients and specific strategies.
As a result of this reorganization, the Corporation has changed its business segments for internal financial reporting purposes. Refer to Note 30 to the audited consolidated financial statements for detailed financial information on the Corporation’s business segments.
The Corporation, like other financial institutions, is subject to a number of risks, many of which are outside of management’s control. Among the risks assumed are: (1) market risk, which is the risk that changes in market rates and prices will adversely affect the Corporation’s financial condition or results of operation, (2) liquidity risk, which is the risk that the Corporation will have insufficient cash or access to cash to meet operating needs and financial obligations, (3) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their contractual obligations, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The description of the Corporation’s business contained in Item 1 of its Form 10-K for the year ended December 31, 2004, while not all inclusive, discusses additional information about the business of the Corporation that, in addition to the other information in this report, readers should consider.
Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products. The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies and revenue enhancements and changes in the regulation of financial services companies, among other factors.
Further discussion of operating results, financial condition and business risks is presented in the narrative and tables included herein.
SARBANES-OXLEY SECTION 404 COMPLIANCE
The area of corporate governance has received much attention in recent years. The Sarbanes-Oxley Act of 2002 (the Act), enacted in the wake of large corporate scandals, has made significant changes in many aspects of the financial reporting process of public corporations.
Popular’s management acknowledges its responsibility for establishing and maintaining adequate internal controls over financial reporting and strives to continually enhance those controls. In order to achieve compliance with Section 404 of the Act, throughout 2004, the Corporation has been conducting a process to document and evaluate its internal controls over financial reporting. In this regard, Popular has dedicated internal resources and adopted a detailed work plan to: (1) assess and document the adequacy of internal control over financial reporting; (2) take actions to improve control processes where required; (3) validate through testing that controls are functioning as documented; and (4) implement a continuous reporting and improvement process for internal control over financial reporting. Popular believes that the process followed for documenting, evaluating and monitoring its internal control over financial reporting is consistent with the objectives of Section 404 of the Act.
It should be noted that any system of controls, no matter how well designed and operated, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Popular’s management assessed the effectiveness of the Corporation’s internal controls over financial reporting as of December 31, 2004, and based on this assessment, Popular’s management believes that this internal control system was effective. Refer to Management’s Report on Internal Control over Financial Reporting included in page 46 of this Annual Report for the year ended December 31, 2004. Also, refer to page 47 for the report issued by the Corporation’s independent registered public accounting firm.
FORWARD-LOOKING STATEMENTS
The information included herein may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and involve certain risks and uncertainties that may cause actual results to differ materially from those expressed in forward-looking statements. Factors such as
| | | | |
| | �� | | | |
| Popular/ 2004 / Annual Report | | [P8] | | |
changes in interest rate environment as well as general changes in business and economic conditions, competition, fiscal and monetary policies and legislation may cause actual results to differ from those contemplated by such forward-looking statements. For a discussion of detailed forward-looking statements, refer to the Corporation’s Form 10-K for the year ended December 31, 2004 filed with the U.S. Securities and Exchange Commission. The Corporation assumes no obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies followed by the Corporation and its subsidiaries conform with generally accepted accounting principles in the United States and general practices within the financial services industry. These policies require management to make estimates and assumptions which involve significant judgment about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates. The following is a summary of what management considers to be the Corporation’s critical accounting policies due to the estimates and assumptions involved. These policies are described in detail in Note 1 to the consolidated financial statements and should be read in conjunction with this section.
Securities’ Classification and Related Values
Management determines the appropriate classification of debt and equity securities at the time of purchase. Debt securities are classified as held-to-maturity when the Corporation has the intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt and equity securities are classified as trading when they are bought and held principally for the purpose of selling them in the near term. Trading securities are reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as held-to-maturity or trading, which have a readily available fair value, are classified as available-for-sale. Securities available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of taxes in accumulated other comprehensive income (a component of stockholders’ equity). At December 31, 2004, unrealized gains on the available-for-sale securities, net of taxes, amounted to $71 million. Investments in debt, equity or other types of securities that do not have publicly and readily determinable fair values are classified as other investment securities in the statement of condition and carried at the lower of cost or realizable value.
The assessment of fair value applies to certain of the Corporation’s assets and liabilities, including the trading and investment portfolios. Fair values are volatile and are affected by factors such as market interest rates, prepayment speeds and discount rates.
Fair values for most of the Corporation’s trading and investment securities, including publicly-traded equity securities, are based on quoted market prices. If quoted market prices are not readily available, fair values are based on quoted prices of similar instruments. Tax-exempt Puerto Rico GNMA securities cannot be valued only by reference to market quotations for U.S. GNMA securities with similar characteristics, due to their preferential tax status in Puerto Rico. The Corporation determines the fair value of tax-exempt P.R. GNMA securities from quotations obtained from locally based brokerage firms. Significant changes in factors such as interest rates and accelerated prepayment rates could affect the value of the trading and investment securities, to be recognized in the results of operations, thereby adversely affecting results of operations. Management assesses the fair value of its portfolio at least on a quarterly basis. Any impairment that is considered other than temporary is recorded directly in the income statement.
Notwithstanding the judgment required in fair valuing the Corporation’s assets and liabilities, management believes that its estimates of fair value are reasonable given the process of obtaining external prices, periodic reviews of internal models and the consistent application of methodologies from period to period.
Loans and Allowance for Loan Losses
Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding.
Recognition of interest income on commercial and construction loans, lease financing, conventional mortgage loans and closed-end consumer loans is discontinued when loans are 90 days or more in arrears on payments of principal or interest or when other factors indicate that the collection of principal and interest is doubtful. Income is generally recognized on open-end (revolving credit) consumer loans until the loans are charged-off. The Corporation adopted the standard industry practice for commercial loans of ceasing the accrual of interest at 90 days or more instead of 60 days or more, its prior policy, effective for the quarter ended March 31, 2004. Closed-end consumer loans and leases are charged-off when 120 days in arrears. In the case of the Corporation’s non-bank consumer and mortgage lending subsidiaries, however, closed-end consumer loans are charged-off when payments are 180 days delinquent. Open-end (revolving credit) consumer loans are charged-off when 180 days in arrears. Refer to the Credit Risk Management and Loan Quality section of this report for further information.
One of the most critical and complex accounting estimates is associated with the determination of the allowance for loan losses. The provision for loan losses charged to current operations is based on this determination. The methodology used to establish the allowance for loan losses is based on SFAS No. 114 “Accounting by
[P9]
Creditors for Impairment of a Loan” (as amended by SFAS No. 118) and SFAS No. 5 “Accounting for Contingencies.” Under SFAS No. 114, commercial loans over a predefined amount ($250,000) are identified for impairment evaluation on an individual basis. The Corporation considers a loan to be impaired when interest and / or principal is past due 90 days or more, or, when based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate; the observable market price of the loan, if available; or the fair value of the collateral if the loan is collateral dependent. The allowance for impaired loans is part of the Corporation’s overall allowance for loan losses. SFAS No. 5 provides for the recognition of a loss allowance for groups of homogeneous loans. Under SFAS No. 5, the allowance for loan losses for the Corporation is based on historical net charge-off experience by loan type and legal entity.
The Corporation’s management evaluates the adequacy of the allowance for loan losses on a monthly basis following a systematic methodology in order to provide for known and inherent risks in the loan portfolio. In developing its assessment of the adequacy of the allowance for loan losses, the Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic and political developments affecting companies in specific industries and specific issues with respect to single borrowers. Other factors that can affect management’s estimates are the years of historical data to include when estimating losses, changes in underwriting standards, financial accounting standards and loan impairment measurement, among many others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold, may all affect the required level of the allowance for loan losses.
Income Taxes
The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Valuation allowances are established, when necessary, to reduce the deferred tax assets to the amount expected to be realized. Differences in the actual outcome of these future tax consequences could impact the Corporation’s financial position or its results of operations. In estimating taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance, and recognizes tax benefits only when deemed probable.
SFAS No. 109 “Accounting for Income Taxes” requires the recognition of income taxes on the unremitted earnings of subsidiaries, unless these can be remitted on a tax-free basis or are permanently invested. Certain of the Corporation’s United States subsidiaries (which are considered foreign under Puerto Rico income tax law) have never remitted retained earnings since these are necessary to carry out the Corporation’s expansion plans in the respective markets of those subsidiaries, thus considered to be permanently invested. In addition, the Corporation has no foreseeable need for the subsidiaries’ earnings given its ability to service its dividend program from the earnings of its domestic units. As of December 31, 2004, the Corporation has not accumulated deferred taxes on approximately $369 million of retained earnings held by the subsidiaries. Had the Corporation recorded a deferred tax liability on the unremitted earnings of its U.S. subsidiaries, it would have approximated $10.9 million for the year 2004 and $36.9 million on a cumulative basis at December 31, 2004.
On October 22, 2004, President George W. Bush signed into law theAmerican 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%. As described above, the Corporation’s United States 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.
Goodwill and Other Intangible Assets
The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested annually for impairment, as prescribed in SFAS No. 142 “Goodwill and Other Intangible Assets.” The test performed to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The Corporation uses the present value of future cash flows and market price multiples of comparable companies to determine the fair market value of the reporting units. The discount rate employed to estimate the present value of projected cash flows is calculated using the Capital Asset Pricing Model (CAPM). Projected income is adjusted to determine each reporting unit’s total cash flow.
The assumptions incorporated into the model are determined by analyzing the financial results of each reporting unit, following the same process employed when making operating decisions and measuring performance. Assumptions are based on historical financial results, market conditions and comparable companies, among other factors.
Refer to Notes 1 and 10 to the consolidated financial statements for further information on goodwill and other intangible assets.
Pension and Postretirement Benefit Obligations
The Corporation provides pension and restoration benefit plans for employees of certain subsidiaries. The Corporation also provides
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P10] | | |
certain health care benefits for retired employees of BPPR. The benefit costs and obligations of these plans are impacted by the use of subjective assumptions, which can materially affect recorded amounts, including expected returns on plan assets, discount rate, rate of compensation increase and health care trend rates. Management applies judgment in the determination of these factors, which normally undergo evaluation against industry assumptions. The Corporation uses an independent actuarial firm for assistance in the determination of the pension and postretirement benefit costs and obligations. Detailed information on the plans and related valuation assumptions are included in Note 22 to the consolidated financial statements.
The Corporation periodically reviews its assumption for long-term expected return on pension plan assets in the Banco Popular de Puerto Rico Retirement Plan, which is the Corporation’s largest pension plan with a market value of assets of $515 million at December 31, 2004. The expected return on plan assets is determined by considering a total fund return estimate based on a weighted average of estimated returns for each asset class in the plan. Asset class returns are estimated using current and projected economic and market factors such as real rates of return, inflation, credit spreads, equity risk premiums and excess return expectations.
As part of the review, the Corporation’s independent consulting actuaries performed an analysis of expected returns based on the plan’s asset allocation at January 1, 2005 to develop expected rates of return. This forecast reflects the actuarial firm’s expected long-term rates of return for each significant asset class or economic indicator, for example, 9.80% for U.S. equities, 4.70% for fixed income, and 2.80% inflation at January 1, 2005. The range of return developed relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class.
As a consequence of recent reviews, the Corporation left unchanged its expected return on plan assets for year 2005 at 8.0%, similar to the expected rate assumed in 2003 and 2004.
Pension expense for the Banco Popular de Puerto Rico Retirement Plan in 2004 amounted to $4.4 million. This included a credit of $37.1 million reflecting the expected return on assets for 2004.
Pension expense is sensitive to changes in the expected return on assets. For example, decreasing the expected rate of return for 2005 from 8.00% to 7.50% would increase the projected 2005 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $2.5 million.
The Corporation considers the Moody’s Long-term AA Corporate Bond yield prevailing at the end of the fiscal year, as well as other industry indexes such as the Citigroup Pension Liability Index, as a guide in the selection of the discount rate. Also, it uses bond matching analysis performed by the consulting actuaries as well as survey results from other clients prepared internally by the actuarial firm. The Corporation elected to use 5.75% as the discount rate to determine the benefit obligation at December 31, 2004, compared with 6.00% at December 31, 2003.
A 50 basis point increase / decrease in the assumed discount rate of 5.75% as of the beginning of 2005 would decrease / increase the projected 2005 expense for the Banco Popular de Puerto Rico Retirement Plan by approximately $1.3 million. The change would not affect the minimum required contribution to the Plan.
The Corporation also provides a postretirement health care benefit plan for certain employees of BPPR. This plan was unfunded (no assets were held by the plan) at December 31, 2004. The Corporation had an accrual for postretirement benefit costs of $117 million at December 31, 2004. Assumed health care trend rates may have significant effects on the amounts reported for the health care plan. Note 22 to the consolidated financial statements provides information on the assumed rates considered by the Corporation and on the sensitivity that a one-percentage point change in the assumed rate may have in the cost components and postretirement benefit obligation of the Corporation.
STATEMENT OF INCOME ANALYSIS
Net Interest Income
The principal source of earnings of the Corporation is net interest income. The variables that affect net interest income are various, including the interest rate scenario, changes in volumes and mix of earning assets and interest bearing liabilities, and the repricing characteristics of these assets and liabilities. As further discussed in the Risk Management section, the Corporation has comprehensive policies and procedures that are utilized to monitor and control the risk associated with the composition and repricing of its earning assets and interest bearing liabilities and to assist management in maintaining stability in the net interest margin under varying interest rate environments.
Table D presents the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the year ended December 31, 2004, as compared with the same period in 2003, segregated by major categories of earning assets and interest bearing liabilities. Also, this table provides net interest income results for 2003 compared with 2002. Some of the earning assets, mostly investments in obligations of the U.S. Government and Agencies and the Puerto Rico Commonwealth and its agencies, generate interest which is exempt from income tax, principally in Puerto Rico. Therefore, to facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates (in Puerto Rico the statutory tax rate is 39%).
Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Fees collected and costs incurred
[P11]
Table D
Net Interest Income - Taxable Equivalent Basis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (Dollars in millions) | | | | | | | | | | | | | | | | | | | | | | (In thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Variance |
| Average Volume | | Average Yields / Costs | | | | | | Interest | | | | | | Attributable to |
| 2004 | | 2003 | | Variance | | 2004 | | 2003 | | Variance | | | | | | 2004 | | 2003 | | Variance | | Rate | | Volume |
| |
$ | | | 835 | | | $ | 833 | | | $ | 2 | | | | 3.07 | % | | | 3.11 | % | | | (0.04 | %) | | Money market investments | | $ | 25,660 | | | $ | 25,881 | | | | ($221 | ) | | $ | 63 | | | | ($284 | ) |
| | | | 11,162 | | | | 10,594 | | | | 568 | | | | 4.54 | | | | 4.99 | | | | (0.45 | ) | | Investment securities | | | 506,785 | | | | 528,557 | | | | (21,772 | ) | | | (62,826 | ) | | | 41,054 | |
| | | | 481 | | | | 624 | | | | (143 | ) | | | 5.70 | | | | 6.08 | | | | (0.38 | ) | | Trading securities | | | 27,387 | | | | 37,887 | | | | (10,500 | ) | | | (2,254 | ) | | | (8,246 | ) |
| | | | | | | |
| | | | 12,478 | | | | 12,051 | | | | 427 | | | | 4.49 | | | | 4.92 | | | | (0.43 | ) | | | | | | | 559,832 | | | | 592,325 | | | | (32,493 | ) | | | (65,017 | ) | | | 32,524 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | | | | | | | |
| | | | 9,371 | | | | 8,233 | | | | 1,138 | | | | 5.85 | | | | 6.04 | | | | (0.19 | ) | | Commercial and construction | | | 548,318 | | | | 496,994 | | | | 51,324 | | | | (15,625 | ) | | | 66,949 | |
| | | | 1,125 | | | | 967 | | | | 158 | | | | 8.56 | | | | 9.90 | | | | (1.34 | ) | | Leasing | | | 96,233 | | | | 95,749 | | | | 484 | | | | (14,002 | ) | | | 14,486 | |
| | | | 10,999 | | | | 8,354 | | | | 2,645 | | | | 6.67 | | | | 7.21 | | | | (0.54 | ) | | Mortgage | | | 733,218 | | | | 602,430 | | | | 130,788 | | | | (48,276 | ) | | | 179,064 | |
| | | | 3,649 | | | | 3,176 | | | | 473 | | | | 10.62 | | | | 11.55 | | | | (0.93 | ) | | Consumer | | | 387,521 | | | | 366,910 | | | | 20,611 | | | | (25,103 | ) | | | 45,714 | |
| | | | | | | |
| | | | 25,144 | | | | 20,730 | | | | 4,414 | | | | 7.02 | | | | 7.54 | | | | (0.52 | ) | | | | | | | 1,765,290 | | | | 1,562,083 | | | | 203,207 | | | | (103,006 | ) | | | 306,213 | |
| | | | | | | |
$ | | | 37,622 | | | $ | 32,781 | | | $ | 4,841 | | | | 6.18 | % | | | 6.57 | % | | | (0.39 | %) | | Total earning assets | | $ | 2,325,122 | | | $ | 2,154,408 | | | $ | 170,714 | | | | ($168,023 | ) | | $ | 338,737 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing deposits: |
$ | | | 2,966 | | | $ | 2,550 | | | $ | 416 | | | | 1.17 | % | | | 1.35 | % | | | (0.18 | %) | | NOW and money market | | $ | 34,756 | | | $ | 34,317 | | | $ | 439 | | | | ($5,023 | ) | | $ | 5,462 | |
| | | | 5,408 | | | | 5,191 | | | | 217 | | | | 1.06 | | | | 1.31 | | | | (0.25 | ) | | Savings | | | 57,270 | | | | 67,976 | | | | (10,706 | ) | | | (13,647 | ) | | | 2,941 | |
| | | | 7,117 | | | | 6,522 | | | | 595 | | | | 3.35 | | | | 3.69 | | | | (0.34 | ) | | Time deposits | | | 238,325 | | | | 240,598 | | | | (2,273 | ) | | | (21,834 | ) | | | 19,561 | |
| | | | | | | |
| | | | 15,491 | | | | 14,263 | | | | 1,228 | | | | 2.13 | | | | 2.40 | | | | (0.27 | ) | | | | | | | 330,351 | | | | 342,891 | | | | (12,540 | ) | | | (40,504 | ) | | | 27,964 | |
| | | | | | | |
| | | | 8,782 | | | | 8,391 | | | | 391 | | | | 1.88 | | | | 1.76 | | | | 0.12 | | | Short-term borrowings | | | 165,425 | | | | 147,456 | | | | 17,969 | | | | 16,460 | | | | 1,509 | |
| | | | 8,173 | | | | 5,444 | | | | 2,729 | | | | 4.22 | | | | 4.76 | | | | (0.54 | ) | | Medium and long-term debt | | | 344,978 | | | | 259,203 | | | | 85,775 | | | | (37,157 | ) | | | 122,932 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest bearing | | | | | | | | | | | | | | | | | | | | |
| | | | 32,446 | | | | 28,098 | | | | 4,348 | | | | 2.59 | | | | 2.67 | | | | (0.08 | ) | | liabilities | | | 840,754 | | | | 749,550 | | | | 91,204 | | | | (61,201 | ) | | | 152,405 | |
| | | | 3,918 | | | | 3,495 | | | | 423 | | | | | | | | | | | | | | | Demand deposits |
| | | | 1,258 | | | | 1,188 | | | | 70 | | | | | | | | | | | | | | | Other sources of funds | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
$ | | | 37,622 | | | $ | 32,781 | | | $ | 4,841 | | | | 2.23 | % | | | 2.29 | % | | | (0.06 | %) |
| |
| | | | | | | | | | | | | | | | 3.95 | % | | | 4.28 | % | | | (0.33 | %) | | Net interest margin | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income on |
| | | | | | | | | | | | | | | | | | | | | | | | | | | a taxable equivalent basis | | | 1,484,368 | | | | 1,404,858 | | | | 79,510 | | | | ($106,822 | ) | | $ | 186,332 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | 3.59 | % | | | 3.90 | % | | | (0.31 | %) | | Net interest spread | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable equivalent |
| | | | | | | | | | | | | | | | | | | | | | | | | | | adjustment | | | 108,857 | | | | 120,170 | | | | (11,313 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 1,375,511 | | | $ | 1,284,688 | | | $ | 90,823 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | �� | | | | | | | | | | | | | | |
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.
in the origination of loans are deferred and amortized using the interest method over the term of the loan as an adjustment to interest yield. Interest income for the years ended December 31, 2004 and 2003 included $31 million and $20 million, respectively, of amortized origination costs, net of loans fees collected / amortized.
As shown in Table D, the increase in net interest income on a taxable equivalent basis for 2004, compared with 2003, was mainly due to considerable growth in average earning assets, mainly loans, partially offset by a decrease in the net interest margin.
The increase in average earning assets for the year ended December 31, 2004, compared with the previous year, was principally due to the 21% increase in the average loan portfolio, mainly mortgage, commercial and construction loans. The Corporation continues diversifying its asset base. All loan categories increased for the year 2004, compared with 2003. Mortgage loans accounted for 60% of the total increase in average loans, while commercial and consumer loans contributed with 26% and 11%, respectively. Contributing to the increase in interest income as a result of higher levels of average earning assets was also a greater
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P12] | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | | | (In thousands) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Variance |
| Average Volume | | Average Yields / Costs | | | | Interest | | | | | | Attributable to |
| 2003 | | 2002 | | Variance | | 2003 | | 2002 | | Variance | | | | 2003 | | 2002 | | Variance | | Rate | | Volume |
| |
| $ | 833 | | | $ | 1,012 | | | $ | (179 | ) | | | 3.11 | % | | | 3.21 | % | | | (0.10 | )% | | Money market investments | | $ | 25,881 | | | $ | 32,505 | | | $ | (6,624 | ) | | $ | (1,542 | ) | | $ | (5,082 | ) |
| | 10,594 | | | | 10,090 | | | | 504 | | | | 4.99 | | | | 5.34 | | | | (0.35 | ) | | Investment securities | | | 528,557 | | | | 538,916 | | | | (10,359 | ) | | | (51,842 | ) | | | 41,483 | |
| | 624 | | | | 364 | | | | 260 | | | | 6.08 | | | | 4.66 | | | | 1.42 | | | Trading securities | | | 37,887 | | | | 16,961 | | | | 20,926 | | | | 6,248 | | | | 14,678 | |
| | | | | |
| | 12,051 | | | | 11,466 | | | | 585 | | | | 4.92 | | | | 5.13 | | | | (0.21 | ) | | | | | 592,325 | | | | 588,382 | | | | 3,943 | | | | (47,136 | ) | | | 51,079 | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Loans: | | | | | | | | | | | | | | | | | | | | |
| | 8,233 | | | | 7,752 | | | | 481 | | | | 6.04 | | | | 6.68 | | | | (0.64 | ) | | Commercial and construction | | | 496,994 | | | | 517,899 | | | | (20,905 | ) | | | (51,840 | ) | | | 30,935 | |
| | 967 | | | | 875 | | | | 92 | | | | 9.90 | | | | 11.13 | | | | (1.23 | ) | | Leasing | | | 95,749 | | | | 97,367 | | | | (1,618 | ) | | | (11,272 | ) | | | 9,654 | |
| | 8,354 | | | | 6,987 | | | | 1,367 | | | | 7.21 | | | | 7.72 | | | | (0.51 | ) | | Mortgage | | | 602,430 | | | | 539,758 | | | | 62,672 | | | | (37,683 | ) | | | 100,355 | |
| | 3,176 | | | | 3,115 | | | | 61 | | | | 11.55 | | | | 12.33 | | | | (0.78 | ) | | Consumer | | | 366,910 | | | | 384,008 | | | | (17,098 | ) | | | (17,801 | ) | | | 703 | |
| | | | | |
| | 20,730 | | | | 18,729 | | | | 2,001 | | | | 7.54 | | | | 8.22 | | | | (0.68 | ) | | | | | 1,562,083 | | | | 1,539,032 | | | | 23,051 | | | | (118,596 | ) | | | 141,647 | |
| | | | | |
| $ | 32,781 | | | $ | 30,195 | | | $ | 2,586 | | | | 6.57 | % | | | 7.05 | % | | | (0.48 | )% | | Total earning assets | | $ | 2,154,408 | | | $ | 2,127,414 | | | $ | 26,994 | | | $ | (165,732 | ) | | $ | 192,726 | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Interest bearing deposits: | | | | | | | | | | | | | | | | | | | | |
| $ | 2,550 | | | $ | 2,502 | | | $ | 48 | | | | 1.35 | % | | | 2.15 | % | | | (0.80 | )% | | NOW and money market | | $ | 34,317 | | | $ | 53,776 | | | $ | (19,459 | ) | | $ | (20,365 | ) | | $ | 906 | |
| | 5,191 | | | | 4,775 | | | | 416 | | | | 1.31 | | | | 2.23 | | | | (0.92 | ) | | Savings | | | 67,976 | | | | 106,538 | | | | (38,562 | ) | | | (46,738 | ) | | | 8,176 | |
| | 6,522 | | | | 6,481 | | | | 41 | | | | 3.69 | | | | 4.20 | | | | (0.51 | ) | | Time deposits | | | 240,598 | | | | 272,101 | | | | (31,503 | ) | | | (37,605 | ) | | | 6,102 | |
| | | | | |
| | 14,263 | | | | 13,758 | | | | 505 | | | | 2.40 | | | | 3.14 | | | | (0.74 | ) | | | | | 342,891 | | | | 432,415 | | | | (89,524 | ) | | | (104,708 | ) | | | 15,184 | |
| | | | | |
| | 8,391 | | | | 7,787 | | | | 604 | | | | 1.76 | | | | 2.38 | | | | (0.62 | ) | | Short-term borrowings | | | 147,456 | | | | 185,343 | | | | (37,887 | ) | | | (52,113 | ) | | | 14,226 | |
| | 5,444 | | | | 4,403 | | | | 1,041 | | | | 4.76 | | | | 5.58 | | | | (0.82 | ) | | Medium and long-term debt | | | 259,203 | | | | 245,795 | | | | 13,408 | | | | (39,482 | ) | | | 52,890 | |
| | | | | |
| | 28,098 | | | | 25,948 | | | | 2,150 | | | | 2.67 | | | | 3.33 | | | | (0.66 | ) | | Total interest bearing liabilities | | | 749,550 | | | | 863,553 | | | | (114,003 | ) | | | (196,303 | ) | | | 82,300 | |
| | 3,495 | | | | 3,227 | | | | 268 | | | | | | | | | | | | | | | Demand deposits | | | | | | | | | | | | | | | | | | | | |
| | 1,188 | | | | 1,020 | | | | 168 | | | | | | | | | | | | | | | Other sources of funds | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| $ | 32,781 | | | $ | 30,195 | | | $ | 2,586 | | | | 2.29 | % | | | 2.86 | % | | | (0.57 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 4.28 | % | | | 4.19 | % | | | 0.09 | % | | Net interest margin | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Net interest income on a taxable equivalent basis | | | 1,404,858 | | | | 1,263,861 | | | | 140,997 | | | $ | 30,571 | | | $ | 110,426 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 3.90 | % | | | 3.72 | % | | | 0.18 | % | | Net interest spread | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Taxable equivalent adjustment | | | 120,170 | | | | 103,617 | | | | 16,553 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 1,284,688 | | | $ | 1,160,244 | | | $ | 124,444 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
proportion of mortgage-backed securities and obligations of the U.S. Government and Agencies in the investment securities portfolio, offset by the runoff and prepayment of collateralized mortgage obligations. The increase in the volume of earning assets was funded through a combination of borrowings, interest bearing deposits, and non-interest bearing sources of funds, including demand deposits and other funds. The most significant increase was in medium and long-term debt, which is debt with an original maturity of more than one year, principally due to the issuance of asset-backed securities supported by residential mortgage loans and junior subordinated debentures. The average balance of interest bearing deposits also rose in part due to successful marketing campaigns and sales efforts directed to money market accounts and certificates of deposit, principally in the U.S. mainland. See Table L for a complete detail of average deposits by category. Refer to the section Statement of Condition Analysis included in this Management Discussion and Analysis for particular factors contributing to the rise in the loan portfolios and funding sources.
[P13]
The decrease in the net interest margin and net interest spread for the year ended December 31, 2004, compared with the year 2003, was partly attributed to the following factors:
| | • | A reduction in the yield on investment securities due to the maturities of higher rate securities replaced by lower-yielding securities, and prepayments of higher rate mortgage related products along with higher levels of premium amortization. |
| |
| | • | The composition of the loan portfolio, which includes a higher proportion of mortgage loans that represent lower yielding assets. |
| |
| | • | Lower rates targeted at consumer loans as a result of promotional campaigns and the purchase of certain home equity loans, which had a lower average yield than that of most of the Corporation’s remaining consumer loan portfolio. |
| |
| | • | A decline in the lease financing yield which was associated in part with the rate scenario and with the purchase of medical and communications equipment leases by the Corporation, which had a lower average yield than that of the Corporation’s remaining lease financing portfolio. |
Partially offsetting the decrease in yields on earning assets was a reduction in the average cost of funds due to the following principal factors:
| | • | The repricing of some of the Corporation’s short-term borrowings and long-term debt issuances at lower rates in the low interest rate environment prevailing during 2003 and up to mid-year 2004. |
| |
| | • | The results of certain initiatives taken in 2003 to reduce the cost of certain interest-bearing liabilities, including revisions made to interest rates on interest-bearing deposits, which impacted fully 2004. |
Commencing in the third quarter of 2004, the average cost of short-term borrowings began to reflect an upward trend as a result of a rising rate scenario. In June 2004, the Federal Reserve (FED) raised the federal funds interest rate by 25 basis points, the first time in four years. Various increases followed in 2004, increasing this rate from 1.0% at December 31, 2003 to 2.25% at the end of 2004. Also, as part of its asset / liability management strategies, the Corporation evaluated its financing sources to support earning assets growth with long-term funding. This long-term funding, although at a higher cost than short-term financing, benefited from the still historically low long-term interest rates.
The average key index rates for the years 2002 through 2004 were as follows:
| | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| |
| Prime rate | | | 4.35 | % | | | 4.12 | % | | | 4.68 | % |
| Fed funds rate | | | 1.34 | | | | 1.13 | | | | 1.67 | |
| 3-month LIBOR | | | 1.62 | | | | 1.21 | | | | 1.79 | |
| 3-month Treasury Bill | | | 1.39 | | | | 1.02 | | | | 1.63 | |
| 2-year Treasury | | | 2.36 | | | | 1.63 | | | | 2.61 | |
| FNMA 30-year | | | 5.60 | | | | 5.47 | | | | 6.74 | |
| |
Following the guidance in EITF Issue No. 03-11, “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133 and Not Held for Trading Purposes,” and from the meetings held by the AICPA SEC Regulations Committee on September 16, 2003 and the AICPA Insurance Expert Panel, the Corporation included as part of interest expense, $0.1 million, $7.5 million and $20.1 million in derivative losses, for the years ended December 31, 2004, 2003 and 2002, respectively. These net derivative losses represent unrealized gains and losses on derivatives not designated as hedges, but that were considered “economic hedges”. The derivative losses for 2003 and 2002 related mostly to the interest-rate swaps with notional value of $500 million which were cancelled by the Corporation during the second quarter of 2003. Since SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (as amended), does not specify the income statement presentation of derivative gains and losses in the income statement, prior to the guidance in EITF 03-11, the Corporation’s cash settlements (representing realized gains / losses) on the derivatives contracts not designated as hedges were included as part of interest expense. On the other hand, the mark-to-market adjustments of such derivative contracts (representing unrealized gains / losses) was included in the line item “derivative gains / losses” within the non-interest income category. EITF 03-11 requires that both realized and unrealized results of such economic hedges be shown within the same financial statement caption.
The decrease in the taxable equivalent adjustment for the year ended December 31, 2004, compared with the same quarter in the previous year, was mostly related to lower tax-exempt interest income, partially offset by a decrease in the interest expense disallowance. The latter was associated with the 8 basis points decrease in the cost of interest bearing liabilities.
The increase in net interest income from 2002 to 2003, as provided in Table D, was the effect of a favorable variance due to a 9% growth in average earning assets as compared to an 8% growth in interest bearing liabilities, and a higher net interest margin. Since November 2002, when the FED decreased the federal funds target rate by 50 basis points, this rate remained unchanged until June 2003, when the FED decreased it by 25 basis points to 1.00%. The FED’s actions, along with increased loan demand, and certain asset/ liability management strategies, including the extension in the maturity of investment securities, the termination of interest rate
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P14] | | |
Table E
Operating Income
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | | | | | | | | | | | | | | | | | | | | | | Five-Year |
| (Dollars in thousands) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | C.G.R.* |
| |
| Service charges on deposit accounts | | $ | 165,241 | | | $ | 161,839 | | | $ | 157,713 | | | $ | 146,994 | | | $ | 125,519 | | | | 6.93 | % |
| |
| Other service fees: | | | | | | | | | | | | | | | | | | | | | | | | |
| Credit card fees and discounts | | | 69,702 | | | | 60,432 | | | | 59,199 | | | | 55,776 | | | | 60,652 | | | | 7.20 | |
| Debit card fees | | | 51,256 | | | | 45,811 | | | | 42,461 | | | | 37,156 | | | | 30,513 | | | | 17.60 | |
| Processing fees | | | 40,169 | | | | 40,003 | | | | 36,545 | | | | 37,521 | | | | 28,528 | | | | 37.04 | |
| Insurance fees | | | 38,924 | | | | 29,855 | | | | 24,380 | | | | 18,718 | | | | 9,385 | | | | 41.33 | |
| Sale and administration of investment products | | | 22,386 | | | | 21,174 | | | | 21,590 | | | | 21,633 | | | | 17,298 | | | | 5.11 | |
| Check cashing fees | | | 21,680 | | | | 24,420 | | | | 21,128 | | | | 18,187 | | | | 14,505 | | | | 12.56 | |
| Trust fees | | | 8,872 | | | | 7,830 | | | | 9,071 | | | | 9,548 | | | | 9,481 | | | | (2.22 | ) |
| Mortgage servicing fees, net of amortization | | | 7,054 | | | | 6,853 | | | | 11,924 | | | | 12,183 | | | | 12,561 | | | | (8.99 | ) |
| Other fees | | | 35,508 | | | | 48,014 | | | | 39,508 | | | | 31,825 | | | | 33,072 | | | | 2.22 | |
| |
| Total other service fees | | | 295,551 | | | | 284,392 | | | | 265,806 | | | | 242,547 | | | | 215,995 | | | | 11.73 | |
| |
| Other income | | | 88,716 | | | | 65,327 | | | | 72,313 | | | | 58,396 | | | | 69,681 | | | | 11.68 | |
| Gain on sale of loans | | | 44,168 | | | | 53,572 | | | | 52,077 | | | | 45,633 | | | | 39,673 | | | | 4.83 | |
| |
| Total operating income | | $ | 593,676 | | | $ | 565,130 | | | $ | 547,909 | | | $ | 493,570 | | | $ | 450,868 | | | | 9.69 | % |
| |
| Operating income to average assets | | | 1.49 | % | | | 1.63 | % | | | 1.72 | % | | | 1.76 | % | | | 1.70 | % | | | | |
| Operating income to operating expenses | | | 50.70 | | | | 50.77 | | | | 53.25 | | | | 53.29 | | | | 51.44 | | | | | |
| |
* C.G.R. refers to compound growth rate.
Note: For purposes of this Management’s Discussion and Analysis, operating income excludes securities and trading gains or losses.
swaps, and the early cancellation of debt, helped the Corporation’s net interest margin improve from 2002 to 2003.
The taxable equivalent adjustment increased from 2002 to 2003 mostly due to a higher balance of investments whose interest income is exempt and to lower disallowance of the related interest expense, which is directly associated with the 66 basis points decrease in the cost of interest bearing liabilities due to the 2003 lower interest rate scenario.
Provision for Loan Losses
The Corporation’s provision for loan losses for the year ended December 31, 2004 declined $17.3 million, or 9%, compared with 2003. This decline was mainly attributed to the mix in the loan portfolio, and with improved net charge-offs and non-performing assets ratios and delinquency.
The provision for loan losses for the year ended December 31, 2003 decreased $9.6 million, or 5%, compared with 2002, mostly associated with the fact that the growth in the Corporation’s loan portfolio continued to be primarily in mortgage loans, which historically has represented a lower risk portfolio. Also, the reduction reflected lower net charge-offs in the commercial, lease financing and consumer loan portfolios.
Refer to the Credit Risk Management and Loan Quality section, including Tables M, N and O, for a more detailed analysis of the non-performing assets, allowance for loan losses and selected loan losses statistics and the allocation of the allowance for loan losses by loan type. Also, refer to Table G and Note 7 to the consolidated financial statements for the composition of the loan portfolio.
Non-Interest Income
For the year ended December 31, 2004, non-interest income totaled $608.8 million, an increase of $17.2 million, or 3%, compared with 2003. The results for the year 2003 included $71.1 million in gains on sale of securities, mainly marketable equity securities, compared with $15.3 million in 2004.
Table E provides categories of operating income for the past five years. For this analysis and the financial ratios presented in the table, operating income includes service charges on deposit accounts, other service fees, gain in sale of loans and other operating income. Due to the volatility of securities and trading transactions,
[P15]
management believes that their exclusion from operating income, permits greater comparability for analytical purposes.
Service charges on deposit accounts for 2004 increased $3.4 million, or 2%, from 2003, mostly derived from commercial accounts, particularly commercial account analysis fees, along with charges related to returned checks and ATM services, among the principal factors.
Other service fees, which grew $11.2 million, or 4%, from 2003 are broken down by major categories in Table E. Debit and credit card fees increased from 2003 mainly due to an increase in transactional volume, while insurance fees rose principally attributed to business initiatives and expanded services which intend to capitalize on the Corporation’s broad delivery channels and client base. These favorable variances were partially offset by lower check cashing fees due to the sale of Popular Cash Express’ mobile units in 2003 and various stores during 2004, and lower other fees, including fees for services provided to mortgage brokers and other loan fees being accounted since 2004 in the interest and fees category.
Trading account losses were $159,000 in 2004, compared with trading losses of $10.2 million in the previous year. The losses experienced during 2003 resulted mostly from mortgage-backed securities, whose market value was negatively impacted by fluctuations in the long-term interest rate scenario. Also, higher realized gains on the sale of trading securities during 2004 contributed to the favorable variance versus 2003.
Other income for 2004 increased $23.4 million, or 36%, compared with 2003 mainly as a result of capital gains derived from the sale of real estate properties in Puerto Rico and the U.S. mainland and higher daily rental revenues from the Corporation’s auto and lease financing operation in Puerto Rico. Also, 2004 results included higher bank owned life insurance income. BPNA owns and is the beneficiary on a bank owned life insurance policy insuring the lives of selected officers. Bank owned life insurance policy is carried at its cash surrender value provided by the insurance carrier that has issued the insurance policy. The Corporation recognizes tax-free income from the periodic increases in the cash surrender value of these policies and from death benefits. Such income is not taxable while the related insurance premiums are not deductible. Bank owned life insurance income amounted to $3.5 million in 2004, compared with $2.0 million in 2003.
The decrease in gain on sales of loans of $9.4 million, or 18%, when comparing 2004 yearly results with those of the preceding year, resulted mostly from lower volume of mortgage loan sales.
For the year ended December 31, 2003, non-interest income increased $82.2 million, or 15%, from 2002. The results for the year 2003 included $71.1 million in gains on sale of securities, mainly marketable equity securities, compared with $3.3 million in losses in 2002. Also, growth in 2003 was attributed to other service fees which grew by $18.6 million, or 7%, from the preceding year. Insurance fees rose due to new products and services and additional volume, while debit and credit card fees and processing income increased mainly due to higher transactional volume. Check cashing fees rose mostly derived from the operations of Popular Cash Express. Mortgage servicing fees, net of amortization, also increased partly due to a greater servicing portfolio. These favorable variances were partially offset by lower trust fees, mostly due to the sale of the Corporation’s trust operations in the United States during 2002. Partially offsetting the increase was lower other income which decreased by $7.0 million, or 10%, from 2002 mostly as a result of lower revenues derived from the Corporation’s investment in Telecomunicaciones de Puerto Rico, Inc. Also, the results for 2002 included the gains on the sale of the U.S. trust operations and some branches of Popular Finance, which totaled $3.7 million. Partially offsetting the decrease in other income was the income earned from the bank-owned life insurance program, initiated in 2003. Trading losses in 2003 were $9.4 million higher than those reported in the previous year, associated with the change in the long-term interest rate scenario referred to previously.
Operating Expenses
Table F presents a detail of operating expenses and various related ratios for the last five years. As a percentage of average assets, operating expenses decreased to 2.94% in 2004, compared with 3.21% in 2003 and 3.23% in 2002. The Corporation’s efficiency ratio decreased from 60.17% in 2003 to 59.86% in 2004. In 2002 this ratio was 60.39%. The efficiency ratio measures how much of a company’s revenue is used to pay operating expenses. The discussion below identifies significant events which took place during 2004, that had an impact on these performance indicators.
Personnel costs, the largest category of operating expenses, increased $44.6 million, or 8%, driven mostly by higher salaries and related taxes, due in part to normal merit increases and higher headcount including the acquisition in the U.S. mainland; incentive compensation; and performance and other bonuses, partially offset by higher deferred costs on the origination of loans. Full-time equivalent employees were 12,142 at December 31, 2004, an increase of 668 employees from December 31, 2003. Contributing to the increase in personnel costs were $2.4 million in early-retirement window costs and net curtailment gains associated with the realignment of the Corporation’s processing and technology operations. This realignment resulted in certain plan amendments and the transfer of employees from BPPR to EVERTEC. Also, at December 31, 2003, based on the prevailing conditions, the Corporation lowered the assumed discount rate for its employee benefit plans for 2004 from 6.50% to 6.00%. The increase in pension plan expense associated with this change was partially offset by an improvement in the fair value of the pension plan assets. Incentives and commissions increased as a result of performance and higher business production at various subsidiaries. Quaker City added approximately $6 million of personnel costs in 2004.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P16] | | |
Table F
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | | | | | | | | | | | | | | | | | | | | | | Five-Year |
| (Dollars in thousands) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | C.G.R. |
| |
| Salaries | | $ | 427,870 | | | $ | 388,527 | | | $ | 361,957 | | | $ | 321,386 | | | $ | 306,529 | | | | 8.09 | % |
| Pension and other benefits | | | 121,066 | | | | 117,270 | | | | 104,549 | | | | 87,505 | | | | 68,734 | | | | 10.70 | |
| Profit sharing | | | 22,082 | | | | 20,647 | | | | 22,235 | | | | 16,251 | | | | 18,913 | | | | (1.55 | ) |
| |
| Total personnel costs | | | 571,018 | | | | 526,444 | | | | 488,741 | | | | 425,142 | | | | 394,176 | | | | 8.11 | |
| |
| Equipment expenses | | | 108,823 | | | | 104,821 | | | | 99,099 | | | | 97,383 | | | | 98,022 | | | | 4.26 | |
| Professional fees | | | 95,084 | | | | 82,325 | | | | 84,660 | | | | 73,735 | | | | 64,851 | | | | 6.95 | |
| Net occupancy expenses | | | 89,821 | | | | 83,630 | | | | 78,503 | | | | 72,100 | | | | 67,720 | | | | 8.11 | |
| Business promotion | | | 75,708 | | | | 73,277 | | | | 61,451 | | | | 50,783 | | | | 46,791 | | | | 10.51 | |
| Communications | | | 60,965 | | | | 58,038 | | | | 53,892 | | | | 48,883 | | | | 45,689 | | | | 7.16 | |
| Other taxes | | | 40,260 | | | | 37,904 | | | | 37,144 | | | | 38,756 | | | | 34,125 | | | | 3.88 | |
| Printing and supplies | | | 17,938 | | | | 19,111 | | | | 19,918 | | | | 17,804 | | | | 20,828 | | | | (2.83 | ) |
| Amortization of intangibles | | | 7,844 | | | | 7,844 | | | | 9,104 | | | | 27,438 | | | | 34,558 | | | | (24.41 | ) |
| Other operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Credit card processing, volume
and interchange expenses | | | 26,965 | | | | 23,869 | | | | 18,033 | | | | 16,000 | | | | 13,365 | | | | 19.36 | |
| Transportation and travel | | | 14,968 | | | | 13,811 | | | | 13,896 | | | | 10,960 | | | | 10,112 | | | | 7.50 | |
| All other* | | | 61,618 | | | | 82,009 | | | | 64,561 | | | | 47,225 | | | | 46,196 | | | | 10.59 | |
| |
| Subtotal | | | 599,994 | | | | 586,639 | | | | 540,261 | | | | 501,067 | | | | 482,257 | | | | 5.89 | |
| |
| Total | | $ | 1,171,012 | | | $ | 1,113,083 | | | $ | 1,029,002 | | | $ | 926,209 | | | $ | 876,433 | | | | 6.93 | % |
| |
| Efficiency ratio** | | | 59.86 | % | | | 60.17 | % | | | 60.39 | % | | | 59.74 | % | | | 61.54 | % | | | | |
| Personnel costs to average assets | | | 1.43 | | | | 1.52 | | | | 1.54 | | | | 1.52 | | | | 1.48 | | | | | |
| Operating expenses to average assets | | | 2.94 | | | | 3.21 | | | | 3.23 | | | | 3.31 | | | | 3.30 | | | | | |
| Employees (full-time equivalent) | | | 12,142 | | | | 11,474 | | | | 11,037 | | | | 11,334 | | | | 10,651 | | | | | |
| Assets per employee (in millions) | | $ | 3.66 | | | $ | 3.18 | | | $ | 3.05 | | | $ | 2.71 | | | $ | 2.63 | | | | | |
| |
* Includes insurance, sundry losses, FDIC assessment and other real estate expenses, among others.
** Non-interest expense divided by net interest income plus recurring non-interest income.
Operating expenses for 2004, excluding personnel costs, increased $13.3 million, or 2%, compared with 2003. Quaker City accounted for approximately $5 million of this increase. Categories that reflected the most significant increases were net occupancy and equipment expenses resulting from continuing investments in systems technology and costs to support business initiatives and expansion. Also, professional fees rose in part due to higher computer service fees associated with system applications, consulting fees for business initiatives and collection expenses related to the lending business. On the other hand, other operating expenses, declined by $16.1 million, or 13%. The results for 2003 included a $12.1 million prepayment penalty on the early cancellation of certain long-term borrowings, and higher sundry losses by approximately $21 million, mostly associated with higher levels of unauthorized credit card transactions conducted on credit cards issued by BPPR.
In 2003, total operating expenses increased $84.1 million, or 8%, from 2002. Personnel costs increased $37.7 million, or 8%, over 2002, mainly due to higher salaries as a result of headcount, annual merit increases, pension, incentives compensation, commissions and other bonuses and health insurance costs. Other operating expenses, excluding personnel costs, totaled $586.6 million in 2003, an increase of $46.4 million, or 9%, compared with 2002. The increase in business promotion was mainly associated with higher advertising expenses, resulting mostly from the PREMIA rewards program, marketing campaigns, public relations, sponsorships and community involvement initiatives. The rise in equipment expenses was mainly due to higher amortization of software packages to support the technology infrastructure of the Corporation, and higher maintenance and repairs charges for data processing and other equipment. Net occupancy expenses increased as a result of the Corporation’s continuous business expansion and new headquarters
[P17]
in the United States, while communication expenses rose mostly associated with the electronic and data network which supports business applications, support for the debit card business and higher postage expenses. The increase in other operating expenses was impacted by the credit card losses and prepayment penalty previously discussed.
Income Tax Expense
The increase in income tax in 2004, compared with the previous year, was primarily due to higher pretax earnings for the current year and by lower net tax-exempt interest income.
The effective tax rate increased from 21.7% in 2003 to 22.8% in 2004 mostly due to lower tax-exempt income in Puerto Rico.
Note 25 to the consolidated financial statements provides a reconciliation of the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico, which is 39%. The difference in 2004 was primarily due to the interest income earned on certain investments and loans which was exempt from Puerto Rico income tax, net of the disallowance of related expenses attributable to the exempt income, as well as income subject to capital gains tax rate.
In 2003, income tax expense increased $13 million, or 11%, from $117.3 million in 2002. The effective tax rate was 25% in 2002. The decline from 2002 in the effective tax rate was mostly due to the increase in gains on the sale of securities subject to a lower tax rate on capital gains in Puerto Rico.
Refer to Note 25 to the consolidated financial statements for additional information on income taxes.
Fourth Quarter Results
Quarterly financial data is presented in the Statistical Summary Table included in page 43 of this Management’s Discussion and Analysis.
Net interest margin, on a taxable equivalent basis, declined to 3.76% for the fourth quarter of 2004, from 4.22% in the same period of 2003. The rise of $24.8 million or 7% in net interest income, on a taxable equivalent basis, over the fourth quarter of 2003 was mostly attributed to higher loan volume. The average volume of earning assets rose by $6.8 billion, primarily due to a $5.8 billion increase in average loans, mainly mortgage and commercial loans, and a $1.0 billion increase in money market, trading and investment securities. The increase in the volume of earning assets was funded mostly through borrowed funds, which on average rose by $4.2 billion, and by interest bearing deposits, which increased by $2.3 billion. Also, other sources of funds, which include demand deposits and capital, rose in average by $0.3 billion. The decrease in the net interest yield was mostly due to a lower yield in earning assets by 20 basis points, primarily related to a reduction in the yields of mortgage and consumer loans and an increase in the cost of interest bearing liabilities by 25 basis points. The latter was principally due to an increase in the cost of short-term borrowings reflecting the upward trend that resulted from revisions in the federal funds interest rate by the FED commencing in June 2004.
The provision for loan losses totaled $46.0 million in the quarter ended December 31, 2004, compared with $49.7 million in the fourth quarter of 2003. Net charge-offs for the last quarter of 2004 were $59.2 million or 0.86% of average loans held-in-portfolio, compared with $47.9 million or 0.88% for the same period in 2003. The increase in net charge-offs in the fourth quarter of 2004 was mainly reflected in the lease financing portfolio, which increased by $16.3 million, related principally to the Corporation’s operations in the U.S. mainland due to higher delinquency levels in the small ticket equipment leasing segment of the portfolio. These loan losses related principally to one vendor who filed bankruptcy during 2004.
Non-interest income reached $160.0 million for the quarter ended December 31, 2004, compared with $142.0 million for the same quarter in 2003, an increase of $18.0 million, or 13%. This growth was driven by higher daily rental revenues from the Corporation’s auto and lease financing subsidiary in Puerto Rico, gains on the sale of real estate properties in the U.S. mainland and foreign currency remeasurement gains. The latter approximated $1.6 million for the fourth quarter of 2004. For details on this latter topic refer to the Market Risk Analysis section of this Management Discussion and Analysis. Also, contributing to the increase in non-interest income were higher service charges on deposit accounts and higher service fees, mostly related with debit and credit card fees, sale and administration of investment products and insurance fees.
Operating expenses for the quarter ended December 31, 2004 increased $18.8 million, or 7%, compared with the same quarter in 2003. Personnel costs rose $14.1 million, or 11%, compared with the fourth quarter of 2003, primarily due to higher salaries resulting from merit increases and increased headcount, including Quaker City. Operating expenses, excluding personnel costs, rose $4.7 million, or 3%, mainly in the categories of other operating taxes and professional fees.
STATEMENT OF CONDITION ANALYSIS
Assets
Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of condition as of December 31, 2004 and 2003. Earning assets totaled $41.8 billion, an increase of $7.4 billion, or 21%, from December 31, 2003. At December 31, 2002, earning assets totaled $31.9 billion. Quaker City contributed with approximately $2.1 billion in assets at December 31, 2004.
The increase in earning assets was driven principally by the Corporation’s loan portfolio growth, including the impact of the Quaker City portfolio that is mainly composed of commercial and
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P18] | | |
Table G
Loans Ending Balances
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | | | | | | | | | | | | | | | | | | | | | | Five-Year |
| (Dollars in thousands) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | C.G.R. |
| |
| Commercial* | | $ | 10,396,732 | | | $ | 8,235,683 | | | $ | 7,883,381 | | | $ | 7,420,738 | | | $ | 7,013,834 | | | | 9.33 | % |
| Construction | | | 501,015 | | | | 335,482 | | | | 245,926 | | | | 258,453 | | | | 258,197 | | | | 15.17 | |
| Lease financing | | | 1,164,606 | | | | 1,053,821 | | | | 886,731 | | | | 859,119 | | | | 816,714 | | | | 9.83 | |
| Mortgage* | | | 12,641,329 | | | | 9,708,536 | | | | 7,466,531 | | | | 6,497,459 | | | | 4,643,646 | | | | 26.30 | |
| Consumer | | | 4,038,579 | | | | 3,268,670 | | | | 3,099,550 | | | | 3,132,782 | | | | 3,324,694 | | | | 3.86 | |
| |
| Total | | $ | 28,742,261 | | | $ | 22,602,192 | | | $ | 19,582,119 | | | $ | 18,168,551 | | | $ | 16,057,085 | | | | 14.03 | % |
| |
*Includes loans held-for-sale.
mortgage loans. Table G presents the portfolio composition and its growth trend for the past five years.
Mortgage loans accounted for 48% of the rise in the total loan portfolio from December 31, 2003 to December 31, 2004, with increases in both Puerto Rico and U.S. mainland operations. Mortgage loans rose 30%, from December 31, 2003 mainly driven by the volume of loan production. The increase includes loans originated and purchased by PFH that are structured as on-balance sheet securitization transactions, as further described below in the Deposits, Borrowings and Other Liabilities section of this Management’s Discussion and Analysis. Furthermore, residential mortgage loans include $815 million in beneficial interests in pools of loans purchased from and serviced by unaffiliated financial institutions. The Corporation receives interest on the loans at variable pass-through rate based on Libor subject to a cap, generally at a spread over the initial pass-through rate. The Corporation has received timely payment from the sellers / servicers, and in most instances, have partial or full guarantees under recourse agreements.
The commercial and construction loan portfolio increased 27% from December 31, 2003. The growth in the commercial loan portfolio was mostly associated with the acquisition of Quaker City’s commercial portfolio, mainly real estate secured loans, and sales efforts and business initiatives.
As reflected in the consolidated statements of condition, loans held-for-sale at December 31, 2004 increased $479 million from the end of 2003. These loans represent primarily mortgage loans that have been originated and are pending securitization or sale in the secondary market. It is the Corporation’s intention to structure securitizations to be performed by PFH in 2005 as sales under SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” As a result, all loans at December 31, 2004 intended for the securitizations have been identified as loans held-for-sale. As of the end of 2004, loans held-for-sale consisted primarily of conforming loans for which aggregate fair value exceeded their cost.
The increase in the lease financing portfolio since December 31, 2003 was reflected in both Puerto Rico, due to increased business volume, and U.S. mainland operations, mainly due to acquisitions of medical and communication equipment leasing portfolios approximating $98 million in 2004.
A breakdown of the Corporation’s consumer loan portfolio at December 31, 2004 and 2003 follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 | | Change | | % Change |
| |
| Personal | | $ | 1,816,949 | | | $ | 1,386,704 | | | $ | 430,245 | | | | 31.0 | % |
| Auto | | | 1,244,164 | | | | 986,123 | | | | 258,041 | | | | 26.2 | |
| Credit cards | | | 826,961 | | | | 743,558 | | | | 83,403 | | | | 11.2 | |
| Other | | | 150,505 | | | | 152,285 | | | | (1,780 | ) | | | (1.2 | ) |
| |
| Total | | $ | 4,038,579 | | | $ | 3,268,670 | | | $ | 769,909 | | | | 23.6 | % |
| |
The increase in personal and auto loans from 2003 was primarily due to favorable customer response to strong marketing efforts, the addition of Quaker City’s portfolio and other acquisitions of home equity loans in the U.S. mainland during 2004. Credit cards also increased mostly as a result of an innovative campaign and new products directed to increase Popular’s credit card market share in Puerto Rico. The “other” category of consumer loans includes marine loans and revolving credit lines.
The increase of $1.3 billion, or 13%, in investment securities, including other investment securities, when compared with December 31, 2003 was mainly reflected in the available-for-sale portfolio, mostly in the form of obligations of the U.S. Government and Agencies and mortgage-backed securities. For a breakdown of the Corporation’s available-for-sale and held-to-maturity investment portfolios, refer to Notes 4 and 5 to the consolidated financial statements. On the other hand, trading securities decreased $220 million compared with December 31, 2003. During the second quarter of 2004, the Corporation reassessed the appropriateness of the classification of certain mortgage-backed securities and transferred $351 million from trading to available-for-sale securities
[P19]
based on management’s intention and business purpose. The securities were transferred into the available-for-sale category at fair value.
The increase of $60 million, or 12%, in premises and equipment since December 31, 2003 was mostly associated with the Quaker City acquisition, buildings projects under construction, and with electronic equipment and furniture and fixtures related with premises under construction for business expansion and relocations.
At December 31, 2004, other assets showed a rise of $277 million since December 31, 2003. The following table reflects the categories with the most significant variances from the end of 2003:
| | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 | | Change |
| |
| Deferred tax assets | | $ | 231,892 | | | $ | 234,968 | | | $ | (3,076 | ) |
| Securitization advances and related assets | | | 240,304 | | | | 122,100 | | | | 118,204 | |
| Bank-owned life insurance program | | | 155,527 | | | | 77,036 | | | | 78,491 | |
| Prepaid expenses | | | 140,269 | | | | 92,639 | | | | 47,630 | |
| Investments under the equity method | | | 56,996 | | | | 39,123 | | | | 17,873 | |
| Derivative assets | | | 24,554 | | | | 7,613 | | | | 16,941 | |
| Servicing rights | | | 57,183 | | | | 56,792 | | | | 391 | |
| Others | | | 139,649 | | | | 138,766 | | | | 883 | |
| |
| Total | | $ | 1,046,374 | | | $ | 769,037 | | | $ | 277,337 | |
| |
Refer to Note 25 to the consolidated financial statements for the composition of deferred tax assets as of December 31, 2004 and 2003. Securitization advances and related assets at December 31, 2004 increased compared with 2003 principally as a result of the increased volume of securitization transactions during 2004, accounted for as secured borrowings. The advances represent payments received on loans held-in-trust available to pay down security holders under scheduled terms specified in the agreements. The increase in bank owned life insurance was related to additional funding. The increase in prepaid expenses was primarily related with software packages supporting new branch network and other specialized systems. The rise in investments under the equity method was associated with the increased participation in CONTADO and BHD. The increase in derivative assets relates mostly to the fair market value of interest rate caps purchased in conjunction with the securitization transactions performed by PFH. Refer to Note 28 to the consolidated financial statements for further details on these derivative contracts. For more information on servicing rights refer to Note 20 to the consolidated financial statements.
At December 31, 2004, goodwill and other intangible assets reflected an increase of $232 million from December 31, 2003, which was mostly associated with the acquisition of Quaker City. The Corporation acquired 100% of the outstanding common shares of Quaker City Bancorp for a total purchase price of $375 million. The purchase price consisted of (1) $55 per share amounting to $345 million, and (2) $30 million to cash out outstanding options and to payout compensation agreements. The purchase price resulted in a premium that was allocated principally to: (1) a core deposits intangible, and (2) goodwill. Refer to Note 10 to the consolidated financial statements for further information on goodwill and the composition of other intangible assets.
Deposits, Borrowings and Other Liabilities
Total deposits increased $2.5 billion, or 14%, from December 31, 2003 to the same date in 2004, mostly associated with time deposits which rose by $1.0 billion, or 16%, and savings deposits which rose by a similar amount, or 13%. Demand deposits rose $447 million, or 12%, from December 31, 2003, mainly in commercial accounts. Quaker City contributed approximately $1.2 billion in total deposits at December 31, 2004. Also, the increases were partly due to deposit campaigns by the Corporation’s banking subsidiary in the United States. Refer to Note 11 to the consolidated financial statements for a breakdown of interest bearing deposits as of December 31, 2004 and 2003.
Borrowed funds at December 31, 2004, increased $4.9 billion, or 33%, since December 31, 2003. This increase was mostly comprised of secured borrowings arising in securitization transactions and debt issuances in the form of junior subordinated debentures (trust preferred securities). During 2004, PFH issued approximately $3.6 billion of asset-backed securities. These transactions have been accounted for by the Corporation as secured borrowings since they did not qualify as sales under SFAS No. 140. The increase in borrowings was primarily used to support loan growth and investment activities and to fund corporate acquisitions.
At December 31, 2004, junior subordinated debentures, arising in transactions structured for trust preferred securities, amounted to $850 million, of which $392 million was issued in 2004.
The Corporation’s present business and financing strategy with respect to PFH, has been to securitize almost all of its mortgage loan production in transactions structured as secured financing transactions, as such the loans remain in the Corporation’s statement of condition and the securitization indebtedness replaces the warehouse debt associated with the securitized mortgage loans. The Corporation records interest income on the loans and interest expense on the borrowings issued in the securitization, and does not recognize a gain or loss upon completion of the securitization since the transactions do not meet the requirements for sale accounting under the provisions of SFAS No. 140. This has been the practice followed by PFH (formerly Equity One) since 2001; and has been the principal contributor to the Corporation’s growth in mortgage loans in recent years. Prior to 2001, the securitization transactions were structured as sales. PFH’s loan production derives mostly from loan originations directly performed through its retail branch network and from loans purchased from correspondent lenders.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P20] | | |
Table H
Capital Adequacy Data
| | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (Dollars in thousands) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 |
| |
| Risk-based capital: | | | | | | | | | | | | | | | | | | | | |
| Tier I capital | | $ | 3,316,009 | | | $ | 2,834,599 | | | $ | 2,054,027 | | | $ | 1,849,305 | | | $ | 1,741,004 | |
| Supplementary (Tier II) capital | | | 389,638 | | | | 341,840 | | | | 346,531 | | | | 330,213 | | | | 321,627 | |
| |
| Total capital | | $ | 3,705,647 | | | $ | 3,176,439 | | | $ | 2,400,558 | | | $ | 2,179,518 | | | $ | 2,062,631 | |
| |
| Risk-weighted assets: | | | | | | | | | | | | | | | | | | | | |
| Balance sheet items | | $ | 26,561,212 | | | $ | 21,384,288 | | | $ | 19,487,339 | | | $ | 18,087,672 | | | $ | 16,173,005 | |
| Off-balance sheet items | | | 1,495,948 | | | | 1,411,402 | | | | 1,355,430 | | | | 479,691 | | | | 496,735 | |
| |
| Total risk-weighted assets | | $ | 28,057,160 | | | $ | 22,795,690 | | | $ | 20,842,769 | | | $ | 18,567,363 | | | $ | 16,669,740 | |
| |
| Ratios: | | | | | | | | | | | | | | | | | | | | |
| Tier I capital (minimum required - 4.00%) | | | 11.82 | % | | | 12.43 | % | | | 9.85 | % | | | 9.96 | % | | | 10.44 | % |
| Total capital (minimum required - 8.00%) | | | 13.21 | | | | 13.93 | | | | 11.52 | | | | 11.74 | | | | 12.37 | |
| Leverage ratio* | | | 7.78 | | | | 8.00 | | | | 6.19 | | | | 6.46 | | | | 6.40 | |
| Equity to assets | | | 7.28 | | | | 7.34 | | | | 6.76 | | | | 7.50 | | | | 7.09 | |
| Tangible equity to assets | | | 6.59 | | | | 6.76 | | | | 6.12 | | | | 6.74 | | | | 6.18 | |
| Equity to loans | | | 11.55 | | | | 12.28 | | | | 11.48 | | | | 12.30 | | | | 11.93 | |
| Internal capital generation rate | | | 10.82 | | | | 12.84 | | | | 11.29 | | | | 9.19 | | | | 9.59 | |
| |
* All banks are required to have a minimum Tier I leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank’s classification.
PFH finances loans under several different secured and committed warehouse financing facilities. When the loans are later securitized, proceeds received from the borrowings issued by the securitization trust are used to pay off the related warehousing financing. The asset-backed securities issued by the securitization trust receive interest out of the interest collected on the securitized loans and generally pay down as the securitized loans pay off. The Corporation’s intent to continue accessing the asset-backed securitization market, through sale or financing transactions, to provide long-term funding for PFH’s mortgage loans will be subject to general demand for securities backed by non-conforming mortgages and risk management strategies. At December 31, 2004, asset-backed financing in the Corporation’s statement of condition was $5.4 billion, compared with $3.5 billion at December 31, 2003.
Refer to Notes 12 through 16 to the consolidated financial statements for additional information on the Corporation’s borrowings at December 31, 2004 and 2003.
Stockholders’ Equity
Total stockholders’ equity at December 31, 2004 was $3.1 billion, compared with $2.8 billion at the same date in 2003. Refer to the consolidated statements of condition and of stockholders’ equity included in the accompanying consolidated financial statements for further information. Also, the disclosures of accumulated other comprehensive income (loss), an integral component of stockholders’ equity, are included in the consolidated statements of comprehensive income. Other comprehensive income includes the Corporation’s unrealized gain (loss) position, net of tax, on securities available-for-sale at the end of each reporting period.
The Corporation offers a dividend reinvestment and stock purchase plan for its stockholders that allows them to reinvest dividends in shares of common stock at a 5% discount from the average market price at the time of the issuance. During 2004, $15.5 million in additional capital was issued under the plan, compared with $14.9 million in 2003.
The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. At December 31, 2004 and 2003, BPPR, BPNA and Banco Popular, National Association (BP, N.A.) were all well-capitalized. Table H presents the Corporation’s capital adequacy information for the years 2000 to 2004. As shown in this table, all capital ratios at December 31, 2004 reflected declines from December 31, 2003. These reductions were associated with the assets acquired and the goodwill and other intangible assets recorded as a result of the Quaker City acquisition. The public offering of $380 million of trust preferred securities through Popular North America Capital Trust I and Popular Capital Trust II during 2004 helped enhance the Corporation’s Tier I capital levels. Note 19 to the consolidated financial statements present further information on the Corporation’s regulatory capital requirements. Also, Note 16 provides information on the transactions associated with the issuance of trust preferred securities.
Included within surplus in stockholders’ equity at December 31, 2004 was $285 million corresponding to a statutory reserve fund applicable exclusively to Puerto Rico banking institutions. This
[P21]
Table I
Common Stock Performance
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Cash | | Book | | | | | | | | | | |
| | | Market Price | | Dividends | | Value | | Dividend | | | | | | Price/ | | Market/ |
| | | | | | | | | | | Declared | | Per | | Payout | | Dividend | | Earnings | | Book |
| | | High | | Low | | Per Share | | Share | | Ratio | | Yield * | | Ratio | | Ratio |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2004 | | | | | | | | | | | | | | $ | 10.95 | | | | 32.85 | % | | | 2.50 | % | | | 16.11 | x | | | 263.29 | % |
4th quarter | | $ | 28 | 7/8 | | $ | 24 | 1/2 | | $ | 0.16 | | | | | | | | | | | | | | | | | | | | | |
3rd quarter | | | 26 | 1/3 | | | 21 | 1/2 | | | 0.16 | | | | | | | | | | | | | | | | | | | | | |
2nd quarter | | | 22 | | | | 20 | | | | 0.16 | | | | | | | | | | | | | | | | | | | | | |
1st quarter | | | 24 | | | | 21 | 1/2 | | | 0.14 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2003 | | | | | | | | | | | | | | | 9.66 | | | | 27.05 | | | | 2.45 | | | | 12.93 | | | | 232.14 | |
| 4th quarter | | $ | 23 | 7/9 | | $ | 19 | 8/9 | | $ | 0.14 | | | | | | | | | | | | | | | | | | | | | |
| 3rd quarter | | | 20 | 3/5 | | | 18 | 1/3 | | | 0.13 | | | | | | | | | | | | | | | | | | | | | |
| 2nd quarter | | | 20 | 2/5 | | | 17 | | | | 0.14 | | | | | | | | | | | | | | | | | | | | | |
| 1st quarter | | | 17 | 1/2 | | | 16 | | | | 0.10 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2002 | | | | | | | | | | | | | | | 9.10 | | | | 30.76 | | | | 2.58 | | | | 12.95 | | | | 185.71 | |
| 4th quarter | | $ | 17 | 1/7 | | $ | 14 | 1/3 | | $ | 0.10 | | | | | | | | | | | | | | | | | | | | | |
| 3rd quarter | | | 18 | | | | 15 | | | | 0.10 | | | | | | | | | | | | | | | | | | | | | |
| 2nd quarter | | | 16 | 5/6 | | | 14 | 1/3 | | | 0.10 | | | | | | | | | | | | | | | | | | | | | |
| 1st quarter | | | 15 | | | | 13 | 3/4 | | | 0.10 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2001 | | | | | | | | | | | | | | | 7.97 | | | | 33.10 | | | | 2.43 | | | | 13.40 | | | | 182.60 | |
| 4th quarter | | $ | 15 | | | $ | 13 | 2/3 | | $ | 0.10 | | | | | | | | | | | | | | | | | | | | | |
| 3rd quarter | | | 18 | 1/8 | | | 13 | 5/7 | | | 0.10 | | | | | | | | | | | | | | | | | | | | | |
| 2nd quarter | | | 16 | 1/2 | | | 14 | 2/9 | | | 0.10 | | | | | | | | | | | | | | | | | | | | | |
| 1st quarter | | | 14 | 5/7 | | | 12 | 5/8 | | | 0.08 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2000 | | | | | | | | | | | | | | | 6.96 | | | | 32.47 | | | | 2.75 | | | | 13.36 | | | | 188.95 | |
| 4th quarter | | $ | 14 | | | $ | 11 | 3/4 | | $ | 0.08 | | | | | | | | | | | | | | | | | | | | | |
| 3rd quarter | | | 13 | 1/2 | | | 9 | 4/5 | | | 0.08 | | | | | | | | | | | | | | | | | | | | | |
| 2nd quarter | | | 11 | 7/9 | | | 9 | 1/2 | | | 0.08 | | | | | | | | | | | | | | | | | | | | | |
| 1st quarter | | | 13 | 4/9 | | | 9 | 1/3 | | | 0.08 | | | | | | | | | | | | | | | | | | | | | |
| |
* Based on the average high and low market price for the four quarters.
Note: All per share data has been adjusted to reflect the two-for-one stock split effected in the form of a dividend on July 8, 2004.
statutory reserve fund totaled $338 million at December 31, 2003. The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. At December 31, 2004 and 2003, BPPR was in compliance with the statutory reserve requirement. Refer to Note 18 to the consolidated financial statements for further information on the transfers from the reserve in 2004. The more relevant capital requirements applicable to the Corporation are the federal banking agencies capital requirements included in Table H.
The average tangible equity amounted to $2.6 billion and $2.3 billion for the years ended December 31, 2004 and 2003, respectively. Total tangible equity at December 31, 2004 was $2.7 billion compared with $2.5 billion at the end of the previous year. The average tangible equity to average tangible assets ratio for 2004 was 6.59%, compared with 6.76% in 2003.
The shares of Corporation’s common and preferred stock are traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbols BPOP and BPOPO, respectively. Table I shows the Corporation’s
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P22] | | |
common stock performance on a quarterly basis during the last five years, including market prices and cash dividends declared. As of February 28, 2005, the Corporation had 10,488 stockholders of record of its common stock, not including the beneficial owners whose shares are held in record names of brokers or other nominees.
OFF-BALANCE SHEET FINANCING ENTITIES
The Corporation conducts asset securitizations that involve the transfer of mortgage loans to a qualifying special purpose entity (QSPE), which in turn transfer these assets and their titles, to different trusts, thus isolating those loans from the Corporation’s assets. The transactions, conducted prior to 2001, qualified for sale accounting based on the provisions of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” and as such, these trusts are not consolidated in the Corporation’s financial statements. The investors and the securitization trusts have no recourse to the Corporation’s assets. At December 31, 2004, these trusts held approximately $95 million in assets in the form of mortgage loans. Their liabilities in the form of debt principal due to investors approximated $89 million at the end of 2004. The Corporation retained servicing responsibilities and certain subordinated interests in these securitizations in the form of interest-only securities. The servicing rights were fully amortized at December 31, 2004. Interest-only securities retained by the Corporation are recorded in the statement of condition at the lower of cost or fair value. During the year ended December 31, 2004 the Corporation recorded approximately $2.5 million of write-downs related to interest-only strips, in which the decline in the fair value was considered other than temporary, compared with $3.5 million in 2003.
RISK MANAGEMENT
The Corporation has specific policies and procedures which structure and delineate the management of risks, particularly those related to market risk, liquidity, credit and operational risk, all of which are discussed below.
Market Risk
The financial results and capital levels of Popular, Inc. are constantly exposed to market risk. This refers to the probability of variations in the net interest income or the market value of Popular’s assets and liabilities due to interest rate volatility. It is a primary responsibility of the Corporation’s Board of Directors (the Board) and management to ensure that the level of market risk assumed throughout all of the subsidiaries of Popular as well as on a consolidated basis, is within policy guidelines approved by the Board.
Despite the varied nature of market risks, the primary source of this risk to the Corporation is the impact of changes in interest rates. The stability and level of the Corporation’s net interest income, as well as its market value of equity, are subject to interest rate volatility. Since net interest income is the main source of earnings for the Corporation, the constant measurement and control of market risk is a major priority.
Management of market risk is the responsibility of the Board, which is responsible for establishing policies regarding the assumption and management of market risk. The Board delegates the monitoring of this risk to the Board’s Risk Management Committee, and its management to the Market Risk Committee (the Committee) of Popular, Inc. The Committee’s primary goal is to ensure that the market risk assumed by the Corporation remains within the parameters of the Board’s policies.
Interest Rate Risk
Interest rate risk (IRR) refers to the impact of changes in interest rates on the Corporation’s net interest income. Depending on the duration and repricing characteristics of the Corporation’s assets, liabilities and off-balance sheet items, changes in interest rates could either increase or decrease the level of net interest income. 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 Committee implements the market risk policies approved by the Board as well as the risk management strategies reviewed and adopted in Committee meetings. The Committee measures and monitors the level of short and long-term IRR assumed by the Corporation and its subsidiaries. It uses simulation analysis and static gap estimates for measuring short-term IRR. Duration analysis is used to quantify the level of long-term IRR assumed, and focuses on the estimated economic value of the Corporation, that is, the difference between the estimated market value of financial assets less the estimated value of financial liabilities.
Static gap analysis measures the volume of assets and liabilities maturing or repricing at a future point in time. The repricing volumes typically include adjustments for anticipated future asset prepayments and for differences in sensitivity to market rates. The volume of assets and liabilities repricing during future periods, particularly within one year, is used as one short-term indicator of IRR. Table J presents the static gap estimate for the Corporation as of December 31, 2004. These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate exposures.
The interest rate sensitivity gap is defined as the difference between earning assets and interest bearing liabilities maturing or repricing within a given time period. At December 31, 2004, the Corporation’s one-year cumulative gap was $1.3 billion or 3% of total earning assets.
[P23]
Table J
Interest Rate Sensitivity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2004 |
| By Repricing Dates |
| | | | | | | | | | | After | | After | | After | | | | | | | | |
| | | | | | | Within | | three months | | six months | | nine months | | | | | | Non-interest | | |
| | | 0-30 | | 31-90 | | but within | | but within | | but within | | After one | | bearing | | |
| (Dollars in thousands) | | days | | days | | six months | | nine months | | one year | | year | | funds | | Total |
| |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market investments | | $ | 354,962 | | | $ | 140,278 | | | $ | 137,000 | | | $ | 1,200 | | | | | | | $ | 246,200 | | | | | | | $ | 879,640 | |
| Investment and trading securities | | | 1,898,838 | | | | 332,680 | | | | 232,565 | | | | 357,482 | | | $ | 201,110 | | | | 9,167,899 | | | | | | | | 12,190,574 | |
| Loans | | | 8,507,581 | | | | 1,860,902 | | | | 1,564,889 | | | | 1,398,597 | | | | 1,178,278 | | | | 14,232,014 | | | | | | | | 28,742,261 | |
| Other assets | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,589,101 | | | | 2,589,101 | |
| |
| Total | | | 10,761,381 | | | | 2,333,860 | | | | 1,934,454 | | | | 1,757,279 | | | | 1,379,388 | | | | 23,646,113 | | | | 2,589,101 | | | | 44,401,576 | |
| |
| Liabilities and stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings, NOW and money market accounts | | | 660,685 | | | | | | | | | | | | | | | | | | | | 8,205,146 | | | | | | | | 8,865,831 | |
| Other time deposits | | | 1,013,658 | | | | 1,141,099 | | | | 1,195,412 | | | | 540,455 | | | | 354,471 | | | | 3,308,966 | | | | | | | | 7,554,061 | |
| Federal funds purchased and assets sold under agreements to repurchase | | | 2,707,499 | | | | 1,368,920 | | | | 580,344 | | | | 341,662 | | | | 355,778 | | | | 1,082,650 | | | | | | | | 6,436,853 | |
| Other short-term borrowings | | | 2,435,170 | | | | 672,469 | | | | 32,000 | | | | | | | | | | | | | | | | | | | | 3,139,639 | |
| Notes payable | | | 1,550,906 | | | | 521,546 | | | | 471,457 | | | | 476,323 | | | | 304,626 | | | | 6,855,852 | | | | | | | | 10,180,710 | |
| Subordinated notes | | | | | | | | | | | | | | | | | | | 125,000 | | | | | | | | | | | | 125,000 | |
| Non-interest bearing deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,173,268 | | | | 4,173,268 | |
| Other non-interest bearing liabilities and minority interest | | | | | | | | | | | | | | | | | | | | | | | | | | | 821,593 | | | | 821,593 | |
| Stockholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,104,621 | | | | 3,104,621 | |
| |
| Total | | $ | 8,367,918 | | | $ | 3,704,034 | | | $ | 2,279,213 | | | $ | 1,358,440 | | | $ | 1,139,875 | | | $ | 19,452,614 | | | $ | 8,099,482 | | | $ | 44,401,576 | |
| |
| Interest rate swaps | | | | | | | 25,000 | | | | | | | | | | | | (25,000 | ) | | | | | | | | | | | | |
| Interest rate sensitive gap | | | 2,393,463 | | | | (1,345,174 | ) | | | (344,759 | ) | | | 398,839 | | | | 214,513 | | | | 4,193,499 | | | | | | | | | |
| Cumulative interest rate sensitive gap | | | 2,393,463 | | | | 1,048,289 | | | | 703,530 | | | | 1,102,369 | | | | 1,316,882 | | | | 5,510,381 | | | | | | | | | |
| Cumulative interest rate sensitive gap to earning assets | | | 5.72 | % | | | 2.51 | % | | | 1.68 | % | | | 2.64 | % | | | 3.15 | % | | | 13.18 | % | | | | | | | | |
| |
An interest rate sensitivity analysis performed at the Corporation level is another tool used by the Corporation in expressing the potential loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model, which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation.
Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, interest rate spreads, loan prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what actually may occur in the future.
Based on the results of the sensitivity analyses as of December 31, 2004, the Corporation’s net interest income for the next twelve months, on a hypothetical 200 basis points rising rate scenario, is estimated to increase by $0.5 million, and the change for the same period, utilizing a similar hypothetical decline in the rate scenario, is an estimated decrease of $4.6 million. Both hypothetical rate scenarios consider the gradual change to be achieved during a twelvemonth period from the prevailing rates at December 31, 2004. These estimated changes are within the policy guidelines established by the Board of Directors. These sensitivity analyses under all interest rate scenarios do not include the estimated effect on net interest income of the net assets purchased from Kislak. As previously discussed, this acquisition was completed in January 2005.
The Corporation’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a third party to pay a debt obligation prior to maturity. Generally, in a declining rate
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P24] | | |
Table K
Maturity Distribution of Earning Assets
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2004 |
| | | Maturities |
| | | | | | | After one year | | | | |
| | | | | | | through five years | | After five years | | |
| | | | | | | Fixed | | Variable | | Fixed | | Variable | | |
| | | One year | | interest | | interest | | interest | | interest | | |
| (In thousands) | | or less | | rates | | rates | | rates | | rates | | Total |
| |
| Money market securities | | $ | 398,440 | | | $ | 406,200 | | | | | | | $ | 75,000 | | | | | | | $ | 879,640 | |
| Investment and trading securities | | | 2,291,878 | | | | 3,457,781 | | | $ | 867,241 | | | | 4,669,139 | | | $ | 507,543 | | | | 11,793,582 | |
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 3,312,512 | | | | 1,726,129 | | | | 1,964,474 | | | | 1,132,967 | | | | 2,260,650 | | | | 10,396,732 | |
| Construction | | | 289,928 | | | | 5,449 | | | | 189,646 | | | | 11,234 | | | | 4,758 | | | | 501,015 | |
| Lease financing | | | 379,559 | | | | 771,087 | | | | | | | | 13,960 | | | | | | | | 1,164,606 | |
| Consumer | | | 937,818 | | | | 1,745,480 | | | | 37,811 | | | | 965,684 | | | | 351,786 | | | | 4,038,579 | |
| Mortgage | | | 1,510,266 | | | | 2,275,577 | | | | 558,826 | | | | 6,025,638 | | | | 2,271,022 | | | | 12,641,329 | |
| |
| Total | | $ | 9,120,401 | | | $ | 10,387,703 | | | $ | 3,617,998 | | | $ | 12,893,622 | | | $ | 5,395,759 | | | $ | 41,415,483 | |
| |
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity securities held by the Corporation are not included in this table.
scenario, prepayment activity should increase, reducing the weighted average lives of the earning asset. Accordingly, 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. Conversely, the opposite would occur in a rising rate scenario. At December 31, 2004, premiums associated with loans acquired represented less than 1% of the total loan portfolio and approximately 2% of the investment and trading securities. 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. Table K includes mortgage-related investment securities based on expected maturities, which take into consideration prepayment assumptions as determined by management based on the expected interest rate scenario.
Duration analysis measures longer-term IRR, in particular the duration of market value of equity. It expresses in general terms the sensitivity of the market value of equity to changes in interest rates. The estimated market value of equity is obtained from the market value of the cash flows from the Corporation’s financial assets and liabilities, which are primarily payments of interest and repayments of principal. Thus, the market value of equity incorporates future cash flows from net interest income as well as principal repayments, whereas other measures of IRR focus primarily on short-term net interest income.
The duration of the market value of portfolio equity (“MVPE”) is a measure of its riskiness. The MVPE is equal to the estimated market value of the Corporation’s assets minus the estimated market value of the liabilities. The duration of MVPE is equal to the product of the market value of assets times its duration, minus the product of the market value of liabilities times its duration, divided by the market value of equity. In general, the longer the duration of MVPE, the more sensitive is its market value to changes in interest rates.
Duration measures the average length of a financial asset or liability. In particular it equals the weighted average maturity of all the cash flows of a financial asset or liability where the weights are equal to the present value of each cash flow. The present value of cash flows occurring in the future is the estimated market value as of a certain date. The sensitivity of the market value of a financial asset or liability to changes in interest rates is primarily a function of its duration. In general terms, the longer the duration of an asset or liability, the greater is the sensitivity of its market value to interest rate changes. Since duration measures the length of a financial asset or liability, it is usually expressed in terms of years or months.
Duration of equity is evaluated by management on a monthly basis. The duration of equity at December 31, 2004 was in compliance with the Corporation’s established MVPE policy limits both in a most likely interest rate scenario and under rate shocks interest rate scenarios. The interest rate shock scenarios consider 200 basis points sudden increases / decreases in the current interest rate scenario at December 31, 2004.
Trading
The Corporation’s trading activities are another source of market risk and are subject to sound policies and risk guidelines approved by the Board of Directors. Most of the Corporation’s trading activities are limited to mortgage banking activities, the purchase of debt
[P25]
securities for the purpose of selling them in the near term and positioning securities for resale to retail customers. In anticipation of customer demand, the Corporation carries an inventory of capital market instruments and maintains market liquidity by quoting bid and offer prices to and trading with other market makers. Positions are also taken in interest rate sensitive instruments, based on expectations of future market conditions. These activities constitute the proprietary trading business and are conducted by the Corporation to provide customers with financial products at competitive prices. As the trading instruments are recognized at market value, the changes resulting from fluctuations in market prices, interest rates or exchange rates directly affect reported income. Further information on the Corporation’s risk management and trading activities is included in Note 28 to the consolidated financial statements.
In the opinion of management, the size and composition of the trading portfolio does not represent a potentially significant source of market risk for the Corporation.
At December 31, 2004 the trading portfolio of the Corporation amounted to $385 million and represented 0.9% of total assets, compared with $605 million and 1.7% a year earlier. Mortgage-backed securities represented 86% of the trading portfolio at the end of 2004, compared with 92% in 2003. A significant portion of the trading portfolio is hedged against market risk by positions that offset the risk assumed. This portfolio was composed of the following at December 31, 2004:
| | | | | | | | | |
| | | | | | | Weighted |
| (Dollars in thousands) | | Amount | | Average Yield* |
| |
| Mortgage-backed securities | | $ | 329,316 | | | | 5.88 | % |
| Commercial paper | | | 4,675 | | | | 5.92 | |
| U.S. Treasury and agencies | | | 2,065 | | | | 1.32 | |
| Puerto Rico Government obligations | | | 46,468 | | | | 3.46 | |
| Other | | | 2,615 | | | | — | |
| |
| | | $ | 385,139 | | | | 5.52 | % |
| |
*Not on a taxable equivalent basis.
At December 31, 2004, the trading portfolio of the Corporation had an estimated duration of 2.66 years and a one-month value at risk (VAR) of approximately $2.4 million, assuming a confidence level of 95%. VAR is a key measure of market risk for the Corporation. VAR represents the maximum amount that the Corporation has placed at risk of loss with a 95% degree of confidence, in the course of its risk taking activities. Its purpose is to describe the amount of capital requirement to absorb potential losses from adverse market movements. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates.
At December 31, 2004, the Corporation had forward contracts to sell mortgage-backed securities which were accounted for as trading derivatives. These contracts are recognized at fair market value with changes directly reported in income. At December 31, 2004, the fair market value of these forward contracts was not significant. These contracts are entered into in order to optimize the gain on sales of mortgage loans and/or mortgage-backed securities and net interest income, given levels of interest rate risk consistent with the Corporation’s business strategies. Also, during 2004, the Corporation entered into mortgage-backed securities (TBA’s) for trading purposes. Refer to Note 28 to the consolidated financial statements for further information.
The Corporation does not participate in any trading activities involving commodity contracts.
Derivatives
The Corporation’s interest rate risk management strategy incorporates, to a limited extent, the use of derivative instruments to minimize significant unplanned fluctuations in net interest income and cash flows, including interest rate swaps, interest rate forwards and future contracts, equity options, foreign exchange contracts, and interest rate caps, floors and put options embedded in interest rate contracts. The Corporation does not use highly leveraged derivative instruments for interest rate risk management. Refer to Note 28 to the consolidated financial statements for further information on the Corporation’s limited involvement in derivative instruments and hedging activities.
Derivative activities are monitored by the Committee which is responsible for approving hedging strategies that are developed through the analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Corporation’s overall interest rate risk management and trading strategies.
The Corporation’s derivatives activities are entered primarily to offset the impact of market volatility on the economic value of assets or liabilities. The effectiveness of these hedges is monitored continuously to ascertain that the Corporation is reducing market risk as expected. Usually, derivatives transactions are executed with instruments with a high correlation to the hedged asset or liability. The underlying index or instrument of the derivatives used by the Corporation is selected based on its similarity to the asset or liability being hedged.
In the hypothetical event that the correlation between price changes of the derivatives and the hedged asset or liability is substantially reduced, management would assess if the circumstances warrant liquidating the derivatives position and replacing it with another instrument. Based on the relatively small scale of derivatives transactions outstanding at the Corporation, it is not anticipated that such a scenario would have a material impact on its financial condition.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P26] | | |
Trading activity with derivatives is minimal at the Corporation, as most of the activity with derivatives is done to protect the economic value of assets or liabilities from market volatility.
Cash Flow Hedges
During 2004, the Corporation purchased interest rate caps in conjunction with a series of securitizations in order to limit the interest rate payable to the security holders. These contracts are designated as cash flow hedges and considered highly effective at inception. As of December 31, 2004, the fair market value of these interest rate caps was $13.8 million. As part of these contracts, during 2004, the Corporation reclassified $300,000 from other comprehensive income into earnings pertaining to the ineffective portion of changes in fair value of the cash flow hedge and $864,000 pertaining to the caplets expiration; both amounts are included as an increase to interest expense. Assuming no change in interest rates, $4.8 million, net of tax, of accumulated other comprehensive loss is expected to be reclassified to earnings over the next twelve months as contractual payments are made.
During 2004, the Corporation discontinued the hedge accounting for certain caps that ceased to be highly effective and as a result reclassified a net loss of $1.4 million into earnings. At December 31, 2004, the fair value of the interest rate caps that were no longer considered highly effective was $527,000 and the related unrealized loss in accumulated other comprehensive income amounted to $637,000, net of tax. The unrealized loss accumulated in other comprehensive income will be amortized to earnings over the term of the contract as contractual payments are made. The changes in fair value of the caps after the discontinuance of the hedging relationship amounted to a gain of $277,000 and were recorded in interest expense.
At December 31, 2004, the Corporation also had a $25 million notional amount interest rate swap to convert floating rate debt to fixed rate debt in order to fix the cost of short-term borrowings. Furthermore, it participated in futures and forwards contracts for the delayed delivery of securities in which the seller agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. As of the end of 2004, these contracts qualified for cash flow hedge accounting in accordance with SFAS No. 133, as amended and therefore, changes in the fair value of the derivatives were recorded in other comprehensive income. The Corporation’s involvement in this type of activities was not significant at December 31, 2004. Refer to Note 28 to the consolidated financial statements for financial information on these contracts.
Other Non-Hedging Activities
At December 31, 2004, there were several derivative contracts that the Corporation entered into, which did not qualify for hedge accounting as defined in SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (as amended), or were not designated as accounting hedges and their changes in market value were recognized in current earnings. These included an option related with the issuance of notes linked to the S&P 500 Index, which impact is not deemed significant for further discussion in this analysis, and over-the-counter option contracts which are utilized in order to limit the Corporation’s exposure on customer deposits whose returns are tied to the S&P 500 stock market index.
The Corporation, through its Puerto Rico banking subsidiary, BPPR, offers certificates of deposit with returns linked to the S&P 500 index to its retail customers, principally in connection with IRA accounts. At December 31, 2004, these deposits amounted to $115 million, or less than 1% of the Corporation’s total deposits. These certificates have a maturity of five years, and the customer’s principal is guaranteed by BPPR and insured by the FDIC to the maximum extent permitted by law. Instead of paying a fixed rate of interest, the instruments pay a return based on the increase of the S&P 500 index, if any, during the term of the instrument. Accordingly, this product gives customers the opportunity to invest in a product that protects the principal invested, but allows the customer the potential to earn a return based on the performance of the U.S. stock market.
The risk of issuing certificates of deposit with returns tied to a stock market index is hedged by BPPR. BPPR purchases S&P 500 index options from financial institutions with strong credit standings, whose return is designed to match the return payable on the certificates of deposits issued. By hedging the risk in this manner, the effective cost of the deposits raised by this product is fixed. These options are contracts that are traded in the over the counter market (OTC). OTC options are not listed on an options exchange and do not have standardized terms. The contracts have a maturity and an index equal to the terms of the pool of client deposits they are economically hedging.
The purchased option contracts are initially accounted for at cost (i.e. amount of premium paid) and recorded as a derivative asset. The derivative asset is marked to market on a monthly basis with changes in fair value charged to operations. The deposits are hybrid instruments containing embedded options that must be bifurcated in accordance with SFAS No. 133. The initial value of the embedded option (component of the deposit contract that pays return based on changes in the S&P 500 index) is bifurcated from the related certificate of deposit and is initially recorded as a derivative liability and a corresponding discount on the certificate of deposit is recorded. Subsequently, the discount on the deposit is accreted and is included as part of interest expense and the bifurcated option is marked to market with changes in fair value charged to operations. Both the purchased option contracts and the bifurcated option are marked to market based on valuations received from an independent third party on a quarterly basis.
The purchased index options are used to economically hedge the bifurcated embedded option. These option contracts do not qualify
[P27]
for hedge accounting in accordance with the provision of SFAS No. 133 and therefore cannot be designated as accounting hedges.
Foreign Exchange
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 CONTADO and BHD in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s foreign currency. At December 31, 2004, the Corporation had $36 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive income. The Corporation had been monitoring the inflation levels in the Dominican Republic to evaluate whether it met 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.” The cumulative inflation in the Dominican Republic for the 36 months ended December 31, 2004 exceeded the 100 percent threshold. In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy shall be remeasured as if the functional currency was the reporting currency. Accordingly, the Corporation’s interests in the Dominican Republic were remeasured into the U.S. dollar. During 2004, approximately $1.8 million in remeasurement gains were reflected in other operating income instead of accumulated other comprehensive income. These gains relate to improvement in the Dominican peso’s exchange rate to the U.S. dollar from $45.50 at June 30, 2004, when the economy reached the “highly inflationary” threshold, to $30.85 at December 31, 2004. These remeasurement gains / losses will continue to be reflected in earnings until the economy is no longer 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.
Liquidity Risk
Liquidity risk may arise whenever the Corporation’s ability to raise cash and the runoff of its assets are substantially less than the runoff of its liabilities. The Corporation has established policies and procedures to assist Popular in remaining sufficiently liquid to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for unexpected events.
The Board of Directors, through the Risk Management Committee, is also responsible for approving policies regarding liquidity risk management as well as approving operating and contingency procedures, and supervising their implementation. The Market Risk Committee and the Corporate Treasury Division are responsible for planning and executing the Corporation’s funding activities and strategy, and for implementing the policies and procedures approved by the Risk Management Committee.
Liquidity is managed at the level of the holding companies that own the banking and non-banking subsidiaries. Also, it is managed at the level of the banking and non-banking subsidiaries. The management of liquidity at both levels is essential because the parent companies and banking and non-banking subsidiaries each have different funding needs and sources, and each are subject to certain regulatory guidelines and requirements. Diversification of funding sources is a major priority, as it helps protect the liquidity of the Corporation from market disruptions.
The principal sources of funding for the banking subsidiaries include retail and commercial deposits, institutional borrowings, and to a lesser extent, loan sales. The principal uses of funds for the banking subsidiaries include loan and investment portfolio growth, repayment of obligations as they become due, dividend payments to the holding company, and operational needs. In addition, the Corporation’s banking subsidiaries maintain borrowing facilities at the discount window of the Federal Reserve Bank of New York and with the Federal Home Loan Bank of New York, and have a considerable amount of collateral that can be used to raise funds under these facilities.
Primary sources of funding for the holding companies include dividends received from its banking and non-banking subsidiaries and proceeds from the issuance of medium-term notes, commercial paper, junior subordinated debentures and equity. The principal uses of these funds include the repayment of maturing debt, dividend payments to shareholders and subsidiary funding through capital or debt.
The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, borrowed funds from the holding companies, wholesale funding and asset securitizations, loan sales and repurchase agreements. The principal uses of funds for the non-banking subsidiaries include loan portfolio growth, repayment of maturing debt and operational needs.
The Corporation’s non-banking subsidiaries may be subject to a higher degree of liquidity risk than the banking subsidiaries, due to the latter’s access to federally insured deposits and the Federal Reserve Discount Window. In the event of a downgrade in the credit ratings of the Corporation, the non-banking subsidiaries may experience an increase in their cost of funds and reduced availability of financing. Management does not anticipate such a scenario developing in the foreseeable future.
The importance of the Puerto Rico market for the Corporation is an additional risk factor that could affect its financing activities. In the case of an extended economic slowdown in Puerto Rico, the credit quality of the Corporation could be affected, and as a result of higher credit costs, profitability may decrease. The substantial integration of Puerto Rico with the U.S. economy should limit the
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P28] | | |
probability of a prolonged recession in Puerto Rico (except if there is a U.S. national recession) and its related risks to the Corporation.
Factors that the Corporation does not control, such as the economic outlook of its principal markets and regulatory changes, could affect its ability to obtain funding. In order to prepare for the possibility of such a scenario, management has adopted contingency plans for raising financing under stress scenarios, where important sources of funds that are usually fully available are temporarily not willing to lend to the Corporation. These plans call for using alternate funding mechanisms such as the pledging or securitization of certain asset classes, committed credit lines, and loan facilities implemented with the Federal Home Loan Bank of New York and the Federal Reserve Bank of New York. The Corporation has a substantial amount of assets available for raising funds through non-traditional channels and is confident that it has adequate alternatives to rely on, under a scenario where some primary funding sources are temporarily unavailable.
Credit ratings by the major credit rating agencies are an important component of the Corporation’s liquidity profile. Among other factors, the credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the company’s ability to access a broad array of wholesale funding sources. Changes in the credit rating of the Corporation or any of its subsidiaries to a level below “investment grade” may affect the Corporation’s ability to raise funds in the capital markets. The Corporation’s counterparties are sensitive to the risk of a rating downgrade. In the event of a downgrade, it may be expected that the cost of borrowing funds in the institutional market would increase. In addition, the ability of the Corporation to raise new funds or renew maturing debt may be more difficult.
The Corporation and BPPR’s debt ratings at December 31, 2004 were as follows:
| | | | | | | | | |
| | | Popular, Inc. | | BPPR |
| | | Short-term | | Long-term | | Short-term | | Long-term |
| | | debt | | debt | | debt | | debt |
| |
| Fitch | | F-1 | | A | | F-1 | | A |
| Moody’s | | P-2 | | A-3 | | P-1 | | A-2 |
| S&P | | A-2 | | BBB+ | | A-2 | | A- |
| |
The ratings above are subject to revisions or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
The Corporation’s liquidity position is closely monitored on an ongoing basis. Management believes that available sources of liquidity are adequate to meet the funding needs in the normal course of business.
The Consolidated Statements of Cash Flows can be used to assess the Corporation’s ability to generate positive future net cash flows from operations and its ability to meet future obligations. Net cash provided by operating activities totaled $143 million in 2004. Cash provided by financing activities totaled $5.4 billion, resulting mostly from the increase in deposits of $1.3 billion and net proceeds from borrowings of $4.2 billion, partially offset by dividend payments of $169 million. These activities were partially offset by net cash used in investing activities of $5.5 billion, primarily resulting from a net increase in loans of $4.4 billion and net inflows related to investment securities and money market investments of $798 million.
The composition of the Corporation’s financing to total assets at December 31, 2004 and 2003 were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | % increase | | |
| | | | | | | | | | | (decrease) | | |
| | | | | | | | | | | from 2003 | | % of total assets |
| (Dollars in millions) | | 2004 | | 2003 | | to 2004 | | 2004 | | 2003 |
| |
| Non-interest bearing deposits | | $ | 4,173 | | | $ | 3,727 | | | | 12.0 | % | | | 9.4 | % | | | 10.2 | % |
| Interest-bearing core deposits | | | 12,835 | | | | 11,117 | | | | 15.5 | | | | 28.9 | | | | 30.5 | |
| Other interest-bearing deposits | | | 3,585 | | | | 3,254 | | | | 10.2 | | | | 8.1 | | | | 8.9 | |
| Federal funds and repurchase agreements | | | 6,437 | | | | 5,836 | | | | 10.3 | | | | 14.5 | | | | 16.0 | |
| Other short-term borrowings | | | 3,140 | | | | 1,997 | | | | 57.2 | | | | 7.1 | | | | 5.5 | |
| Notes payable and subordinated notes | | | 10,306 | | | | 7,117 | | | | 44.8 | | | | 23.2 | | | | 19.5 | |
| Others | | | 821 | | | | 633 | | | | 29.7 | | | | 1.8 | | | | 1.8 | |
| Stockholders’ equity | | | 3,105 | | | | 2,754 | | | | 12.7 | | | | 7.0 | | | | 7.6 | |
| |
The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities.
Deposits
Deposits are a key source of funding. Deposits tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. The extensive branch network of the Corporation in the Puerto Rico market and its expanding network in major U.S. markets have enabled it to maintain a significant and stable base of deposits. Total deposits increased 14% from December 31, 2003 to the same date in 2004, including the impact of the Quaker City acquisition. Core deposits are an important stable, low-cost funding source and typically react more slowly to interest rate changes. Core deposits were up 15% from December 31, 2003, totaling $17.0 billion at December 31, 2004. Certificates of deposits with denominations of $100,000 and over as of December 31, 2004 totaled $3.6 billion, or 17% of total deposits. Their distribution by maturity was as follows:
[P29]
Table L
Average Total Deposits
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Year |
| | | | | | | | | | | | | | | | | | | | | | | Five-Year |
| (Dollars in thousands) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | C.G.R. |
| |
| Demand | | $ | 3,918,452 | | | $ | 3,495,099 | | | $ | 3,226,758 | | | $ | 3,052,270 | | | $ | 3,030,307 | | | | 5.26 | % |
| Other non-interest bearing accounts | | | — | | | | — | | | | — | | | | 4,277 | | | | 4,976 | | | | — | |
| |
| Non-interest bearing | | | 3,918,452 | | | | 3,495,099 | | | | 3,226,758 | | | | 3,056,547 | | | | 3,035,283 | | | | 5.22 | |
| |
| Savings accounts | | | 5,407,600 | | | | 5,190,527 | | | | 4,775,115 | | | | 4,170,202 | | | | 4,113,338 | | | | 5.53 | |
| NOW and money market accounts | | | 2,965,941 | | | | 2,550,480 | | | | 2,502,272 | | | | 2,101,892 | | | | 1,811,352 | | | | 11.18 | |
| |
| Savings deposits | | | 8,373,541 | | | | 7,741,007 | | | | 7,277,387 | | | | 6,272,094 | | | | 5,924,690 | | | | 7.33 | |
| |
| Certificates of deposit: | | | | | | | | | | | | | | | | | | | | | | | | |
| Under $100,000 | | | 3,067,220 | | | | 2,877,946 | | | | 2,809,305 | | | | 2,751,490 | | | | 2,766,905 | | | | 2.86 | |
| $100,000 and over | | | 3,087,061 | | | | 2,784,708 | | | | 2,797,085 | | | | 2,721,716 | | | | 2,030,067 | | | | 14.02 | |
| 936 | | | 57,112 | | | | 97,128 | | | | 121,290 | | | | 111,251 | | | | 259,203 | | | | (28.10 | ) |
| |
| Certificates of deposit | | | 6,211,393 | | | | 5,759,782 | | | | 5,727,680 | | | | 5,584,457 | | | | 5,056,175 | | | | 6.36 | |
| |
| Other time deposits | | | 905,669 | | | | 762,080 | | | | 752,821 | | | | 662,693 | | | | 492,334 | | | | 23.81 | |
| |
| Interest bearing | | | 15,490,603 | | | | 14,262,869 | | | | 13,757,888 | | | | 12,519,244 | | | | 11,473,199 | | | | 7.58 | |
| |
| Total | | $ | 19,409,055 | | | $ | 17,757,968 | | | $ | 16,984,646 | | | $ | 15,575,791 | | | $ | 14,508,482 | | | | 7.07 | % |
| |
| | | | | |
| (In thousands) | | | | |
| |
| 3 months or less | | $ | 1,388,399 | |
| 3 to 6 months | | | 472,548 | |
| 6 to 12 months | | | 408,618 | |
| over 12 months | | | 1,315,344 | |
| |
| | | $ | 3,584,909 | |
| |
The Corporation had $559 million in brokered certificates of deposit at December 31, 2004, which represented less than 3% of its total deposits. Although the utilization of these wholesale deposits is an alternative funding source, the Corporation does not anticipate placing undue reliance in this source of liquidity in the foreseeable future.
Average deposits for the year ended December 31, 2004 represented 52% of average earning assets, compared with 54% for the year ended December 31, 2003. Table L summarizes average deposits for the past five years.
Segregated in Table L are 936 deposits, which represent funds of 936 corporations that are reinvested by the Corporation in eligible assets, which are tax-exempt for U.S. and Puerto Rico’s Industrial Incentive Act purposes. A legislation that repealed federal tax exemption on these funds, was approved for taxable years beginning after December 31, 1995, as such, 936 deposits have substantially decreased in volume since that date.
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 operating results and credit ratings (by nationally recognized credit rating agencies). Although a downgrade in the credit rating of the Corporation may impact its ability to raise deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured and this is expected to mitigate the effect of a downgrade in credit ratings.
Borrowings
Various forms of both short and long-term borrowings provide additional funding sources.
The Corporation diversifies the sources and the maturities of these borrowings in order to avoid undue reliance on any single source and maintain an orderly volume of borrowings maturing in the future.
Institutional lenders tend to be sensitive to the perceived credit risk of the entities to which they lend, and this exposes the Corporation to the possibility of having its access to funding affected by how the market perceives its credit quality; this, in part, may be due to factors beyond its control.
Sources of wholesale funding include, but are not limited to federal funds purchased, securities sold under repurchase agreements, brokered certificates of deposit, FHLB advances, and short and long-term debt.
The Federal Home Loan Banks provide funding to the banking subsidiaries through advances. At December 31, 2004, Popular had short-term and long-term credit facilities authorized with the FHLB aggregating $2.0 billion based on assets pledged with the FHLB at that date. Outstanding borrowings under these credit facilities totaled $1.9 billion at December 31, 2004. Such advances are collateralized
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P30] | | |
by securities and mortgages loans, do not have restrictive covenants and do not have any callable features.
At December 31, 2004, the Corporation’s banking subsidiaries had approved, but uncommitted, federal funds lines with authorized counterparties totaling $5.4 billion. As of that date, $2.8 billion of these lines was used. These lines are uncommitted and are available at the option of the counterparty. Also, the Corporation had aproximately $22 billion in unpledged securities and loans that are available to raise funds through repurchase agreements or other collateralized borrowings. The availability of the repurchase transactions would be subject to the available unpledge collateral at the time the transaction is to be consumated.
In addition, BPPR and BPNA have established a borrowing facility at the discount window of the Federal Reserve Bank of New York. At December 31, 2004, BPPR and BPNA had a borrowing capacity at the discount window of approximately $2.5 billion, which remained unused. These facilities are collateralized sources of credit that are highly reliable even under difficult market conditions. The amount available under this line is dependent upon the balance of loans and securities pledged as collateral.
At December 31, 2004, the Corporation had outstanding $165 million in commercial paper. At that date, the Corporation had a committed liquidity facility in the amount of $450 million, which also serves as a back-up for the commercial paper program. The facility has never been drawn upon and management does not anticipate doing so in the future.
To provide further liquidity, BPPR has a $1 billion bank note program with the full amount available for future issuance at December 31, 2004. Under this program, BPPR has the requisite agreements in place to issue and sell its bank notes to institutional investors. Moreover, in 2003, the Corporation filed a shelf registration with the Securities and Exchange Commission (SEC), allowing Popular, Inc., Popular North America, Inc. and Popular International Bank, Inc. to issue medium-term notes, debt securities and preferred stock in an aggregate amount of up to $2.5 billion. At December 31, 2004, the Corporation had available approximately $2.1 billion under this shelf registration. This shelf registration is intended to permit the Corporation to raise funds with a relatively short lead-time.
Also, as previously described, the Corporation issues junior subordinated debentures in offerings of trust preferred securities as a funding mechanism. Refer to Note 16 to the consolidated financial statements for further information. At December 31, 2004, the Corporation had available $170 million for the issuance of trust preferred securities under a shelf registration statement filed with the SEC during 2004.
A more detailed description of borrowings is included in the Statement of Condition analysis in this Management’s Discussion and Analysis and in Notes 12 through 16 to the consolidated financial statements.
Total lines of credit outstanding are not necessarily a measure of the total credit available on a continuing basis. Certain of these lines could be subject to collateral requirements, standards of credit worthiness, leverage ratios and other regulatory requirements, among other factors.
Some of the Corporation’s borrowings and deposits are subject to “rating triggers”, contractual provisions that accelerate the maturity of the underlying obligations in the case of a change in rating. Therefore, the need for the Corporation to raise funding in the marketplace could increase more than usual in the case of a rating downgrade. The amount of obligations subject to rating triggers that could accelerate the maturity of the underlying obligations was $232 million at December 31, 2004.
In the course of borrowing from institutional lenders, the Corporation has entered into contractual agreements to maintain certain levels of debt, capital and asset quality, among other financial covenants. If the Corporation were to fail to comply with those agreements, it may result in an event of default. Such failure may accelerate the repayment of the related borrowings. An event of default could also affect the ability of the Corporation to raise new funds or renew maturing borrowings. The Corporation is currently in full compliance with all financial covenants in effect and expects to remain so in the future. At December 31, 2004, the Corporation had $705 million in outstanding obligations subject to covenants, including those which are subject to rating triggers and those outstanding under the commercial paper program.
Other Funding Sources
Another important liquidity source for the Corporation is its assets, particularly the investment portfolio. This portfolio consists primarily of liquid U.S. Treasury and Agency securities that can be used to raise funds in the repo markets. At December 31, 2004, the entire investment portfolio, excluding trading securities, totaled $11.8 billion, of which $1.9 billion, or 16%, had maturities of one year or less. The maturity distribution of the investment and trading portfolio is presented in Table K. Mortgage-related investments in Table K are presented based on expected maturities, which may differ from contractual maturities, since they could be subject to prepayments.
The Corporation’s loan portfolio is another important source of liquidity since it generates substantial cash flow resulting from principal and interest payments and principal prepayments. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, and to a lesser extent commercial loans, have highly developed secondary markets, which the Corporation uses on a regular basis. The maturity distribution of the loan portfolio as of December 31, 2004 is presented in Table K. As of that date $6.4 billion or 22% of the loan portfolio is expected to mature within one year. The contractual
[P31]
maturities of loans have been adjusted to include prepayments based on historical data and prepayment trends.
Another component of liquidity and an important source of funding is the Corporation’s capital. For example, during 2003, the Corporation issued $187 million in preferred stock in order to raise funds for operations and to strengthen its regulatory capital position.
Contractual Obligations and Commercial Commitments
The Corporation has contractual obligations to make future payments on debt and lease agreements. Also, in the normal course of business, Popular enters into contractual arrangements whereby it commits to future purchases of products or services from third parties. Obligations that are legally binding agreements whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as purchase obligations.
At December 31, 2004, the aggregate contractual cash obligations including purchase obligations and borrowings maturities were:
| | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | | Less than | | 1 to 3 | | 3 to 5 | | After 5 | | |
| (In millions) | | 1 year | | years | | years | | years | | Total |
| |
| Certificates of deposit | | $ | 4,244 | | | $ | 2,216 | | | $ | 1,010 | | | $ | 84 | | | $ | 7,554 | |
| Fed funds and repurchase agreements | | | 5,210 | | | | 634 | | | | 518 | | | | 75 | | | | 6,437 | |
| Other short-term borrowings | | | 3,140 | | | | — | | | | — | | | | — | | | | 3,140 | |
| Long-term debt | | | 2,055 | | | | 3,116 | | | | 2,893 | | | | 2,242 | | | | 10,306 | |
| Purchase obligations | | | 49 | | | | 67 | | | | 36 | | | | 18 | | | | 170 | |
| Annual rental commitments under operating leases | | | 47 | | | | 76 | | | | 49 | | | | 86 | | | | 258 | |
| Capital leases | | | 6 | | | | 6 | | | | 3 | | | | — | | | | 15 | |
| |
| Total contractual cash obligations | | $ | 14,751 | | | $ | 6,115 | | | $ | 4,509 | | | $ | 2,505 | | | $ | 27,880 | |
| |
Purchase obligations include major legal and binding contractual obligations outstanding at the end of 2004, primarily for services, equipment and real estate construction projects.
The Corporation’s operating lease agreements do not impose any restrictions on its ability to pay dividends or engage in debt or equity financing transactions.
Additionally, during 2005, the Corporation expects to contribute $1.2 million to the pension and benefit restoration plans. Also, during 2005, it expects to contribute $6.7 million to the postretirement benefit plan to fund current benefit payment requirements. Obligations to these plans are based on current and projected obligations of the plans, performance of the plan assets, if applicable, and any participant contributions. Refer to Note 22 to the consolidated financial statements for further information on these plans. Management believes the effect of the plans on liquidity is not significant to the Corporation’s overall financial condition.
Popular also utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments and conditional obligations as it does in extending loans to customers. Since many of the commitments may expire without being drawn upon, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments. At December 31, 2004 the contractual amounts related to the Corporation’s off-balance sheet lending activities were:
| | | | | | | | | | | | | | | | | | | | | |
| | Amount of Commitment - Expiration Period |
| | | Less than | | 1 to 3 | | 3 to 5 | | After 5 | | |
| (In millions) | | 1 year | | years | | years | | years | | Total |
| |
| Commitments to extend credit | | $ | 5,239 | | | $ | 660 | | | $ | 104 | | | $ | 208 | | | $ | 6,211 | |
| Commercial letters of credit | | | 19 | | | | — | | | | — | | | | — | | | | 19 | |
| Standby letters of credit | | | 130 | | | | 49 | | | | 6 | | | | 2 | | | | 187 | |
| Commitments to originate mortgage loans | | | 245 | | | | 16 | | | | 7 | | | | 162 | | | | 430 | |
| |
| Total | | $ | 5,633 | | | $ | 725 | | | $ | 117 | | | $ | 372 | | | $ | 6,847 | |
| |
Refer to the notes to the consolidated financial statements for further information on the Corporation’s contractual obligations and commercial commitments.
Credit Risk Management and Loan Quality
The Corporation manages credit risk by maintaining sound underwriting standards, monitoring and evaluating the quality of the loan portfolio, its trends and collectibility, assessing reserves and loan concentrations, recruiting qualified and highly skilled credit officers, implementing and monitoring lending policies and collateral requirements, and instituting procedures to ensure appropriate actions to comply with laws and regulations. Included in the policies, primarily determined by the amount, type of loan and risk characteristics of the credit facility, are various approval levels, ranging from the branch or department level to those that are more centralized. When considered necessary, the Corporation requires collateral to support credit extensions and commitments, which is generally in the form of real and personal property, cash on deposit and other highly liquid instruments.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P32] | | |
The Corporation has a Credit Strategy Committee (CRESCO) that oversees all credit-related activities. It is CRESCO’s responsibility to manage the Corporation’s overall credit exposure and to develop credit policies, standards and guidelines that define, quantify, and monitor credit risk. Through the CRESCO, management reviews asset quality ratios, trends and forecasts, problem loans, establishes the provision for loan losses and assesses the methodology and adequacy of the allowance for loan losses on a monthly basis. The analysis of the allowance adequacy is presented to the Board of Directors for review, consideration and ratification on a quarterly basis.
The Corporation also has a Credit Risk Management Division (CRMD), which is centralized and independent of the lending function. It oversees the credit risk rating system and reviews the adequacy of the allowance for loan losses in accordance with generally accepted accounting principles (GAAP) and regulatory standards. To manage and control the Corporation’s credit risk the CRMD utilizes various techniques through the different stages of the credit process. A CRMD representative, who is a permanent non-voting member of the Executive Credit Committee, oversees adherence to policies and procedures established for the initial underwriting of the credit portfolio. Also, the CRMD performs ongoing monitoring of the portfolio, including potential areas of concern for specific borrowers and/or geographic regions. Specialized workout officers, who are independent of the originating unit, handle substantially all commercial loans which are past due over 90 days, have filed bankruptcy, or are considered problem loans based on their risk profile.
The Corporation also has a Credit Process Review Group within the CRMD, which performs annual comprehensive credit process reviews of several middle market, construction, asset-based and corporate banking lending groups. It also reviews the work performed by an outside loan review firm providing services to the Corporation in the U.S. mainland. This group evaluates the credit risk profile of each originating unit along with each unit’s credit administration effectiveness, the quality of the credit and collateral documentation.
At December 31, 2004, the Corporation’s credit exposure was centered in its $28.7 billion loan portfolio, which represented 69% of its earning assets. The portfolio composition for the last five years is presented in Table G.
The Corporation issues certain credit-related off-balance sheet financial instruments, including commitments to extend credit, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. For these financial instruments, the contract amount represents the credit risk associated with failure of the counterparty to perform in accordance with the terms and conditions of the contract, and the decline in value of the underlying collateral. The credit risk associated with these financial instruments varies depending on the counterparty’s creditworthiness and the value of any collateral held. Since many of these commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Refer to Note 26 to the consolidated financial statements and to the Contractual Obligations and Commercial Commitments section of this Management’s Discussion and Analysis for the Corporation’s involvement in these credit-related activities.
The Corporation is also exposed to credit risk by using derivative instruments, but manages the level of risk by only dealing with counterparties of good credit standing, entering into master netting agreements whenever possible and, when appropriate, obtaining collateral. Refer to Note 28 to the consolidated financial statements for further information on the Corporation’s limited involvement in derivative instruments and hedging activities.
The Corporation also manages exposures to a single borrower, industry or product type through participations and loan sales. The Corporation maintains a diversified portfolio intended to spread its risk and reduce its exposure to economic downturns, which may occur in different segments of the economy or in particular industries. Industry and loan type diversification is reviewed quarterly.
The Corporation’s credit risk exposure is spread among individual consumers, small commercial loans and a diverse base of borrowers engaged in a wide variety of businesses. The Corporation has approximately 753,000 consumer loans and 37,600 commercial lending relationships. Only 183 of these commercial borrowers have credit relations with an aggregate exposure of $10 million or more. Highly leveraged transactions and credit facilities to finance speculative real estate ventures are minimal, and there are no loans to less developed countries. The Corporation limits its exposure to concentrations of credit risk by the nature of its lending limits. Approximately 34% of total commercial loans outstanding, including construction, are secured by real estate or cash collateral. In addition, the secured consumer loan portfolio was $2.0 billion or 48% of the total consumer portfolio at December 31, 2004.
The Corporation continues diversifying its geographical risk as a result of its growth strategy in the United States and the Caribbean. Puerto Rico’s share of the Corporation’s total loan portfolio has decreased from 59% in 1999, to 51% in 2002 and 44% in 2004. The Corporation’s assets and revenue composition by geographical area and by business segment reporting is further presented in Note 30 to the consolidated financial statements.
The Corporation is also exposed to government risk. As further detailed in Notes 4 and 5 to the consolidated financial statements, a substantial portion of the Corporation’s investment securities represented exposure to the U.S. Government in the form of U.S. Treasury securities and obligations of U.S. Government agencies and corporations. In addition, $88 million of residential mortgages and $288 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at December 31, 2004. The Corporation continues to be one of the largest Small Business
[P33]
Table M
Non-Performing Assets
| | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (Dollars in thousands) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 |
| |
| Non-accrual loans: | | | | | | | | | | | | | | | | | | | | |
| Commercial, industrial and agricultural | | $ | 116,969 | | | $ | 166,421 | | | $ | 170,039 | | | $ | 195,169 | | | $ | 169,535 | |
| Construction | | | 5,624 | | | | 1,845 | | | | — | | | | 3,387 | | | | 2,867 | |
| Lease financing | | | 3,665 | | | | 7,494 | | | | 10,648 | | | | 10,297 | | | | 7,152 | |
| Mortgage | | | 395,749 | | | | 344,916 | | | | 279,150 | | | | 176,967 | | | | 99,861 | |
| Consumer | | | 32,010 | | | | 36,350 | | | | 40,019 | | | | 40,946 | | | | 43,814 | |
| |
| Total non-performing loans | | | 554,017 | | | | 557,026 | | | | 499,856 | | | | 426,766 | | | | 323,229 | |
| Other real estate | | | 59,717 | | | | 53,898 | | | | 39,399 | | | | 31,532 | | | | 23,518 | |
| |
| Total non-performing assets | | $ | 613,734 | | | $ | 610,924 | | | $ | 539,255 | | | $ | 458,298 | | | $ | 346,747 | |
| |
| Accruing loans past-due 90 days or more | | $ | 77,378 | | | $ | 75,557 | | | $ | 67,828 | | | $ | 62,709 | | | $ | 49,585 | |
| |
| Non-performing assets to loans held-in-portfolio | | | 2.19 | % | | | 2.74 | % | | | 2.92 | % | | | 2.66 | % | | | 2.28 | % |
| Non-performing loans to loans held-in-portfolio | | | 1.98 | | | | 2.49 | | | | 2.70 | | | | 2.48 | | | | 2.12 | |
| Non-performing assets to assets | | | 1.38 | | | | 1.68 | | | | 1.60 | | | | 1.49 | | | | 1.24 | |
| Interest lost | | $ | 49,120 | | | $ | 45,541 | | | $ | 35,820 | | | $ | 27,866 | | | $ | 23,129 | |
| |
Administration lenders in the United States. Furthermore, there were $447 million of loans issued to or guaranteed by the Puerto Rico Government and its political subdivisions and $41 million of loans issued to or guaranteed by the U.S. Virgin Islands Government. Puerto Rico’s economic outlook is generally similar to that of the U.S. mainland, and its Government and many of its instrumentalities are investment-grade rated borrowers in the U.S. capital markets.
Non-Performing Assets
A summary of non-performing assets by loan categories and related ratios is presented in Table M.
As previously mentioned in the critical accounting policies section of this report, during 2004 the Corporation adopted the standard industry practice of placing commercial and construction loans on non-accrual status if payments of principal or interest are delinquent 90 days or more. Had the Corporation continued reporting commercial and construction loans in non-performing status when delinquent 60 days or more, non-performing assets would have amounted to $641 million at December 31, 2004, or 2.29% of loans held-in-portfolio, and 1.44% of total assets. The allowance as a percentage of non-performing loans would have amounted to 75.14%.
Non-performing mortgage loans represented 64% of total non-performing assets and 3% of total mortgage loans held-in-portfolio at December 31, 2004, compared with 56% and 4%, respectively, at December 31, 2003, and 52% and 4%, respectively at December 31, 2002. The increase in non-performing mortgage loans was mostly reflected in PFH. Results for 2004 showed a slight improvement in credit quality trends at this subsidiary. Non-performing mortgage loans at this subsidiary represented 4.0% of its mortgage loans held-in-portfolio at December 31, 2004, down from 4.1% at December 31, 2003 and 4.5% at December 31, 2002. This decrease at PFH was related in part to more dynamic foreclosure procedures and improved credit quality supported in part by improved credit scoring, partially offset by the impact of a growing portfolio. Historically, the Corporation has experienced a low level of losses in its mortgage portfolio, both in Puerto Rico and the U.S. mainland. Ratios of mortgage loans net charge-offs as a percentage of the average mortgage loans held-in-portfolio for the Corporation and PFH are presented later in the Allowance for Loan Losses section of this Management Discussion and Analysis.
Non-performing commercial and construction loans represented 1.13% of that loan portfolio at December 31, 2004, compared with 1.96% at December 31, 2003, and 2.09% at December 31, 2002. Had the Corporation continued reporting commercial and construction loans in non-performing status when delinquent 60 days or more, the Corporation’s non-performing commercial and construction loans at December 31, 2004 would have been $150 million or 1.38% of that type of loans held-in-portfolio. The decrease in non-performing commercial and construction loans since December 31, 2003 was mostly due to the change in the Corporation’s non-accrual policy for commercial and construction loans and intensified credit management efforts.
Non-performing consumer loans represented 0.79%, 1.11% and 1.29% of consumer loans held-in-portfolio at December 31, 2004, 2003 and 2002, respectively. The decline in the non-performing consumer loans ratio reflects a better credit quality mix, coupled
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P34] | | |
with improved delinquency levels and a growing portfolio with more rigorous underwriting procedures.
Non-performing financing leases represented 0.31% of the lease financing portfolio at December 31, 2004, compared with 0.71% at the end of 2003 and 1.20% in 2002. The decline was principally due to lower delinquency levels.
Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing at December 31, 2003 adjusted non-performing assets would have been $547 million or 2.45% of loans held-in-portfolio, compared with $478 million or 2.59%, respectively, at December 31, 2002. The allowance to non-performing loans ratio would have been 74.73% and 78.00% at December 31, 2003 and 2002, respectively. Excluding the closed-end consumer loans from non-accruing at December 31, 2004, adjusted non-performing assets would have been $582 million or 2.08% of loans held-in-portfolio and the allowance to non-performing loans ratio would have been 83.73%. Under the standard industry practice, closed-end consumer loans are not customarily placed on non-accrual status prior to being charged-off.
Once a loan is placed in non-accrual status, the interest previously accrued and uncollected is charged against current earnings. Refer to Table M for information on the interest income that would have been realized had these loans been performing in accordance with their original terms.
In addition to the non-performing loans discussed earlier, there were $32 million of loans at December 31, 2004, which in management’s opinion are currently subject to potential future classification as non-performing, and therefore are considered impaired for our analysis of SFAS No. 114. At December 31, 2003 and 2002, these potential problem loans approximated $34 million and $36 million, respectively.
Another key measure used to evaluate and monitor the Corporation’s asset quality is the level of loan delinquencies. Loans delinquent 30 days or more and delinquencies as a percentage of their related portfolio category at December 31, 2004 and 2003 are presented below.
| | | | | | | | | |
| (Dollars in millions) | | 2004 | | 2003 |
| |
| Loans delinquent 30 days or more | | $ | 1,401 | | | $ | 1,205 | |
| |
| Total delinquencies as a percentage of total loans: | | | | | | | | |
| Commercial | | | 3.24 | % | | | 4.37 | % |
| Construction | | | 3.77 | | | | 1.95 | |
| Lease financing | | | 2.88 | | | | 4.29 | |
| Mortgage | | | 6.99 | | | | 6.70 | |
| Consumer | | | 3.15 | | | | 4.39 | |
| |
| Total | | | 4.87 | % | | | 5.33 | % |
| |
Accruing loans ninety days or more at December 31, 2004 are composed primarily by credit cards, FHA/VA and other insured mortgage loans, and mortgage loans delinquent included in the Corporation’s financial statements pursuant to the GNMA’s buy-back option program. Under SFAS No. 140, servicers of loans underlying Ginnie Mae mortgage-backed securities must report as their own assets defaulted loans that they have the option to purchase, even when they elect not to exercise the option. Also, accruing loans ninety days or more include residential conventional loans purchased from other financial institutions that although delinquent, the Corporation has received timely payment from the sellers / servicers, and in most instances have partial or full guarantees under recourse agreements.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluations of inherent risks in the loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a monthly basis. In determining the allowance, management considers current economic conditions, loan portfolio risk characteristics, prior loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors.
The methodology used to establish the allowance for loan losses is based on SFAS No. 114 (as amended by SFAS No. 118) and SFAS No. 5. Under SFAS No. 114, commercial loans over a predefined amount are identified for impairment evaluation on an individual basis and specific impairment reserves are calculated. SFAS No. 5 provides for the recognition of a loss contingency for a group of homogenous loans, which are not individually evaluated under SFAS No. 114, when it is probable that a loss has been incurred and the amount can be reasonably estimated. To determine the allowance for loan losses under SFAS No. 5, the Credit Risk Management Division calculates the Corporation’s loan losses based on historical net charge-off experience segregated by loan type and legal entity.
The result of the exercise described above is compared to stress-related levels of historic losses over a period of time, recent tendencies of losses and industry trends. Management considers all indicators derived from the process described herein, along with qualitative factors that may cause estimated credit losses associated with the loan portfolios to differ from historical loss experience. The final outcome of the provision for loan losses and the appropriate level of the allowance for loan losses for each subsidiary and the Corporation is a determination made by the CRESCO, which actively reviews the Corporation’s allowance for loan losses.
Management’s judgment of the quantitative factors (historical net charge-offs, statistical loss estimates, etc.) as well as qualitative factors (current economic conditions, portfolio composition, delinquency trends, etc.) results in the final determination of the
[P35]
Table N
Allowance for Loan Losses and Selected Loan Losses Statistics
| | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 |
| |
| Balance at beginning of year | | $ | 408,542 | | | $ | 372,797 | | | $ | 336,632 | | | $ | 290,653 | | | $ | 292,010 | |
| Allowances acquired (sold) | | | 27,185 | | | | 13,697 | | | | 2,327 | | | | 1,675 | | | | (15,869 | ) |
| Provision for loan losses | | | 178,657 | | | | 195,939 | | | | 205,570 | | | | 213,250 | | | | 194,640 | |
| |
| | | | 614,384 | | | | 582,433 | | | | 544,529 | | | | 505,578 | | | | 470,781 | |
| |
| Losses charged to the allowance: | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 63,937 | | | | 79,934 | | | | 85,588 | | | | 76,140 | | | | 73,585 | |
| Construction | | | 994 | | | | 135 | | | | 3,838 | | | | 6,394 | | | | 145 | |
| Lease financing | | | 37,125 | | | | 22,995 | | | | 32,037 | | | | 41,702 | | | | 32,256 | |
| Mortgage | | | 33,032 | | | | 29,495 | | | | 14,701 | | | | 8,577 | | | | 5,615 | |
| Consumer | | | 103,393 | | | | 100,040 | | | | 103,056 | | | | 102,236 | | | | 129,430 | |
| |
| | | | 238,481 | | | | 232,599 | | | | 239,220 | | | | 235,049 | | | | 241,031 | |
| |
| Recoveries: | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 19,778 | | | | 20,567 | | | | 18,515 | | | | 14,636 | | | | 17,352 | |
| Construction | | | — | | | | 27 | | | | 5,376 | | | | 960 | | | | 9 | |
| Lease financing | | | 11,385 | | | | 11,477 | | | | 18,084 | | | | 26,008 | | | | 17,797 | |
| Mortgage | | | 1,440 | | | | 467 | | | | 714 | | | | 500 | | | | 717 | |
| Consumer | | | 28,575 | | | | 26,170 | | | | 24,799 | | | | 23,999 | | | | 25,028 | |
| |
| | | | 61,178 | | | | 58,708 | | | | 67,488 | | | | 66,103 | | | | 60,903 | |
| |
| Net loans charged-off (recovered): | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 44,159 | | | | 59,367 | | | | 67,073 | | | | 61,504 | | | | 56,233 | |
| Construction | | | 994 | | | | 108 | | | | (1,538 | ) | | | 5,434 | | | | 136 | |
| Lease financing | | | 25,740 | | | | 11,518 | | | | 13,953 | | | | 15,694 | | | | 14,459 | |
| Mortgage | | | 31,592 | | | | 29,028 | | | | 13,987 | | | | 8,077 | | | | 4,898 | |
| Consumer | | | 74,818 | | | | 73,870 | | | | 78,257 | | | | 78,237 | | | | 104,402 | |
| |
| | | | 177,303 | | | | 173,891 | | | | 171,732 | | | | 168,946 | | | | 180,128 | |
| |
| Balance at end of year | | $ | 437,081 | | | $ | 408,542 | | | $ | 372,797 | | | $ | 336,632 | | | $ | 290,653 | |
| |
| Loans held-in-portfolio: | | | | | | | | | | | | | | | | | | | | |
| Outstanding at year end | | $ | 27,991,533 | | | $ | 22,330,600 | | | $ | 18,489,192 | | | $ | 17,229,063 | | | $ | 15,233,184 | |
| Average | | | 24,881,341 | | | | 20,258,913 | | | | 17,861,152 | | | | 16,227,897 | | | | 15,570,407 | |
| Ratios: | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses to year end loans held-in-portfolio | | | 1.56 | % | | | 1.83 | % | | | 2.02 | % | | | 1.95 | % | | | 1.91 | % |
| Recoveries to charge-offs | | | 25.65 | | | | 25.24 | | | | 28.21 | | | | 28.12 | | | | 25.27 | |
| Net charge-offs to average loans held-in-portfolio | | | 0.71 | | | | 0.86 | | | | 0.96 | | | | 1.04 | | | | 1.16 | |
| Net charge-offs earnings coverage | | | 4.59 | x | | | 4.59 | x | | | 3.93 | x | | | 3.68 | x | | | 3.17 | x |
| Allowance for loan losses to net charge-offs | | | 2.47 | | | | 2.35 | | | | 2.17 | | | | 1.99 | | | | 1.61 | |
| Provision for loan losses to: | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs | | | 1.01 | | | | 1.13 | | | | 1.20 | | | | 1.26 | | | | 1.08 | |
| Average loans held-in-portfolio | | | 0.72 | % | | | 0.97 | % | | | 1.15 | % | | | 1.31 | % | | | 1.25 | % |
| Allowance to non-performing assets | | | 71.22 | | | | 66.87 | | | | 69.13 | | | | 73.45 | | | | 83.82 | |
| Allowance to non-performing loans | | | 78.89 | | | | 73.34 | | | | 74.58 | | | | 78.88 | | | | 89.92 | |
| |
provision for loan losses to maintain a level of allowance for loan losses which is deemed to be adequate.
The reduction in the ratio of allowance for loan losses to loans continued to reflect improvement in credit quality trends and a shift in the loan portfolio mix to include a greater proportion of real estate secured loans. The Corporation’s management considers the allowance for loan losses to be at a level sufficient to provide for estimated losses based on current economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P36] | | |
Table O details the breakdown of the allowance for loan losses by loan categories. The breakdown is made for analytical purposes, and it is not necessarily indicative of the categories in which future loan losses may occur.
Table N summarizes the movement in the allowance for loan losses and presents selected loan losses statistics for the past five years.
Also, the table below presents net charge-offs to average loans held-in-portfolio by loan category for the years ended December 31, 2004, 2003 and 2002:
| | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| |
| Commercial and construction | | | 0.48 | % | | | 0.72 | % | | | 0.85 | % |
| Lease financing | | | 2.29 | | | | 1.19 | | | | 1.59 | |
| Mortgage | | | 0.29 | | | | 0.37 | | | | 0.23 | |
| Consumer | | | 2.05 | | | | 2.33 | | | | 2.51 | |
| |
| Total | | | 0.71 | % | | | 0.86 | % | | | 0.96 | % |
| |
The net decline in commercial and construction loans net charge-offs for the year ended December 31, 2004, compared with 2003, was mainly due to the charge-off during 2003 of one large commercial relationship. Also, the decrease was partly associated with better portfolio credit quality, coupled with collection efforts. The decrease in the net charge-offs to average loan ratio was also influenced by the continuing identification and monitoring of potential problem loans. The allowance for loan losses corresponding to commercial and construction loans held-in-portfolio represented 1.64% of that portfolio at December 31, 2004, compared with 2.00% in 2003 and 2.02% in 2002. The ratio of allowance to non-performing loans in the commercial and construction loan category was 146.0% at the end of 2004, compared with 101.9% in 2003 and 96.4% in 2002. The increase in the latter ratio from 2003 to 2004 was the result of the general reduction in commercial non-performing assets coupled with the impact of the change in the non-performing commercial loan policy from 60 to 90 days. At December 31, 2004, 2003 and 2002, the portion of the allowance for loan losses related to impaired loans was $31 million, $44 million and $35 million, respectively. Further disclosures with respect to impaired loans are included in Note 7 to the consolidated financial statements.
The increase in lease financing net charge-offs was related principally to the Corporation’s operations in the U.S. mainland due to higher delinquency levels in the small ticket equipment leasing segment of the portfolio. The increase was mainly related to one vendor who filed bankruptcy during the third quarter of 2004 which has required increased collection and litigation activity. The allowance for loan losses for the lease financing portfolio was 2.46% at December 31, 2004, from 2.83% at the same date in 2003 and 3.33% in 2002.
The Corporation experienced an increase in mortgage loans net charge-offs for the year ended December 31, 2004, compared with the previous year, mostly as a result of portfolio growth. As a percentage of average mortgage loans held-in-portfolio, the corresponding net charge-offs reflected improved trends since December 31, 2003, principally at PFH. The ratio of net charge-offs as a percentage of the average mortgage loans held-in-portfolio for PFH was 0.38% in 2004, 0.45% in 2003 and 0.31% in 2002. The Corporation’s mortgage loans net charge-offs for 2003 included $3.8 million in net charge-offs associated with the sale of approximately $32 million in non-performing and other historically delinquent mortgage loans. The allowance for loan losses assigned to the mortgage loan portfolio has remained at relatively low levels due to the historically low level of losses in this portfolio. Based on historical experience and current economic conditions, the Corporation does not foresee significant losses in the mortgage portfolio. Also, measures have been taken to improve collections and recovery processes with enhanced initiatives to expedite foreclosures. The allowance for loan losses for mortgage loans held-in-portfolio represented 0.57% of that portfolio at December 31, 2004, compared with 0.59% in 2003 and 0.54% in 2002.
Although consumer loans net charge-offs for 2004 showed a slight increase from 2003, they declined as a percentage of the average consumer loan portfolio. The allowance for loan losses for consumer loans represented 4.00% of that portfolio at December 31, 2004, compared with 4.64% in 2003 and 4.67% in 2002. The decline reflected better credit quality mix in the portfolio and a growing portfolio with more rigorous underwriting procedures. Also, this decline was due to the fact that part of the Corporation’s growth in consumer loans has been in auto loans, a secured portfolio.
Operational Risk Management
Operational risk can manifest itself in various ways, including errors, fraud, business interruptions, inappropriate behavior of employees, and failure to perform in a timely manner, among others. These events can potentially result in financial losses and other damages to the Corporation, including reputational harm. The successful management of operational risk is particularly important to a diversified financial services company like Popular because of the nature, volume and complexity of its various businesses.
To monitor and control operational risk and mitigate related losses, the Corporation maintains a system of comprehensive policies and controls. The Corporate Operational Risk Management Division within the Corporation’s Risk Management Group provides oversight to facilitate consistency of effective policies, best practices, controls and monitoring tools for managing and assessing all types of operational risks across the Corporation. Also, it is responsible for establishing baseline processes to measure, monitor, limit and manage operational risk. In addition, the Internal Audit Division provides oversight about policy compliance and ensures adequate attention is paid to correct issues identified.
[P37]
Table O
Allocation of the Allowance for Loan Losses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December, |
| (Dollars in millions) | | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 |
| | | | | | | Percentage of | | | | | | Percentage of | | | | | | Percentage of | | | | | | Percentage of | | | | | | Percentage of |
| | | Allowance | | Loans in Each | | Allowance | | Loans in Each | | Allowance | | Loans in Each | | Allowance | | Loans in Each | | Allowance | | Loans in Each |
| | | for | | Category to | | for | | Category to | | for | | Category to | | for | | Category to | | for | | Category to |
| | | Loan Losses | | Total Loans* | | Loan Losses | | Total Loans* | | Loan Losses | | Total Loans* | | Loan Losses | | Total Loans* | | Loan Losses | | Total Loans* |
| |
| Commercial | | $ | 169.4 | | | | 37.1 | % | | $ | 163.1 | | | | 36.9 | % | | $ | 155.5 | | | | 42.6 | % | | $ | 140.3 | | | | 43.1 | % | | $ | 120.6 | | | | 46.0 | % |
| Construction | | | 9.6 | | | | 1.8 | | | | 8.4 | | | | 1.5 | | | | 8.4 | | | | 1.3 | | | | 8.2 | | | | 1.5 | | | | 8.1 | | | | 1.7 | |
| Lease financing | | | 28.7 | | | | 4.2 | | | | 29.8 | | | | 4.7 | | | | 29.6 | | | | 4.8 | | | | 22.7 | | | | 5.0 | | | | 18.6 | | | | 5.4 | |
| Mortgage | | | 67.7 | | | | 42.5 | | | | 55.5 | | | | 42.3 | | | | 34.6 | | | | 34.5 | | | | 19.9 | | | | 32.2 | | | | 12.0 | | | | 25.1 | |
| Consumer | | | 161.7 | | | | 14.4 | | | | 151.7 | | | | 14.6 | | | | 144.7 | | | | 16.8 | | | | 145.5 | | | | 18.2 | | | | 131.4 | | | | 21.8 | |
| |
| Total | | $ | 437.1 | | | | 100.0 | % | | $ | 408.5 | | | | 100.0 | % | | $ | 372.8 | | | | 100.0 | % | | $ | 336.6 | | | | 100.0 | % | | $ | 290.7 | | | | 100.0 | % |
| |
*Note: For purposes of this table the term loans refers to loans held-in-portfolio (excludes loans held-for-sale).
Operational risks fall into two major categories, business specific and corporate-wide affecting all business lines. The primary responsibility for the day-to-day management of business specific risks relies on business unit managers. Accordingly, business unit managers are responsible to ensure that appropriate risk containment measures, including corporate-wide or business segment specific policies and procedures, controls and monitoring tools are in place to minimize risk occurrence and loss exposures. Examples of these include personnel management practices, data reconciliation processes, transaction processing monitoring and analysis and contingency plans for systems interruptions. To manage corporate-wide risks, specialized groups such as Legal, Information Security, Business Continuity, Finance and Compliance, assist the business units in the development and implementation of risk management practices specific to the needs of the individual businesses.
Operational risk management plays a different role in each category. For business specific risks, the Operational Risk Management Group works with the segments to ensure consistency in policies, processes, and assessments. With respect to corporate-wide risks, such as information security, business continuity, legal and compliance, the risks are assessesed and a consolidated corporate view is developed and communicated to the business level.
Department of Justice Investigation Concerning Participation by the Corporation’s Subsidiary, EVERTEC, Inc., in the E-Rate Program
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 is conducting an investigation concerning participation by its subsidiary, GM Group, Inc. (which after a reorganization in 2004 is part of EVERTEC, Inc.), in the E-rate program, which is administered by the Federal Communications Commission and pays for telecommunications services and related equipment for schools and libraries. GM Group learned of the investigation in June 2003. The Corporation does not know the full scope of the Department of Justice investigation and cannot predict at this time the impact of the investigation on the Corporation or its subsidiaries, or when or on what basis the investigation will be resolved. The Corporation is cooperating fully with the investigation.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P38] | | |
Glossary of Selected Financial Terms
Allowance for Loan Losses- The reserve established to cover credit losses inherent in loans held-in-portfolio.
Basis Point- Equals to one-hundredth of one percent. Used to express changes or differences in interest yields and rates.
Book Value Per Common Share- Total common shareholders’ equity divided by the total number of common shares outstanding.
Common Shares Outstanding- Total number of shares of common stock issued less common shares held in treasury.
Core Deposits- A deposit category that includes all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000. These deposits are considered a stable source of funds.
Derivative- A contractual agreement between two parties to exchange cash or other assets in response to changes in an external factor, such as an interest rate or a foreign exchange rate.
Dividend Payout Ratio- Dividends paid on common shares divided by net income applicable to shares of common stock.
Earning Assets- Assets that earn interest, such as loans, investment securities, money market investments and trading account securities.
Earnings per Common Share- Net income less dividends on preferred stock of the Corporation, divided by the average number of common shares outstanding during the periods presented.
Effective Tax Rate- Income tax expense divided by income before taxes.
Efficiency Ratio- Non-interest expense divided by net interest income plus recurring non-interest income.
Gap- The difference that exists at a specific period of time between the maturities or repricing terms of interest-sensitive assets and interest-sensitive liabilities.
Goodwill- The excess of the purchase price of net assets over the fair value of net assets acquired in a business combination.
Interest-Sensitive Assets / Liabilities- Interest-earning assets /liabilities for which interest rates are adjustable within a specified time period due to maturity or contractual arrangements.
Net Charge-Offs- The amount of loans written-off as uncollectible, net of the recovery of loans previously written-off.
Net Income Applicable to Common Stock- Net income less dividends paid on the Corporation’s preferred stock.
Net Income Per Common Share-Basic- Net income divided by the number of weighted-average common shares outstanding.
Net Income Per Common Share-Diluted- Net income divided by the sum of weighted-average common shares outstanding plus the effect of common stock equivalents that have the potential to be converted into common shares.
Net Interest Income-The difference between the revenue generated on earning assets, less the interest cost of funding those assets.
Net Interest Margin- Net interest income on a fully taxable equivalent basis divided by total average earning assets.
Net Interest Spread- Difference between the average yield on earning assets and the average rate paid on interest bearing liabilities, and the contribution of non-interest bearing funds supporting earning assets (primarily demand deposits and stockholders’ equity).
Non-Interest Income- Includes service charges on deposit accounts, other service fees, gains or losses on sale of securities, trading account profit or loss, gains or losses on sale of loans and other operating income.
Non-Performing Assets- Includes loans on which the accrual of interest income has been discontinued due to default on interest and/or principal payments or other factors indicative of doubtful collection, loans for which the interest rates or terms of repayment have been renegotiated, and real estate which has been acquired through foreclosure.
Operating Income- Represents non-interest income, excluding gains or losses on sale of securities and trading account profit or loss.
Provision For Loan Losses- The periodic expense needed to maintain the level of the allowance for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends, and taking into account loan impairment and net charge-offs.
Return on Assets- Net income as a percent of average total assets.
Return on Equity- Net income applicable to common stock as a percent of average common stockholders’ equity.
Servicing Right- A contractual agreement to provide certain billing, bookkeeping and collection services with respect to a pool of loans.
Tangible Equity- Consists of stockholders’ equity less intangible assets.
Tier 1 Leverage Ratio- Tier 1 Risk-Based Capital divided by average adjusted quarterly total assets. Average adjusted quarterly assets are adjusted to exclude non-qualifying intangible assets.
[P39]
Tier 1 Risk-Based Capital- Consists of common stockholders’equity (including the related surplus, retained earnings and capital reserves), qualifying noncumulative perpetual preferred stock, qualifying trust preferred securities and minority interest in the equity accounts of consolidated subsidiaries, less goodwill and other disallowed intangible assets, disallowed portion of deferred tax assets and the deduction for nonfinancial equity investments.
Total Risk-Adjusted Assets- The sum of assets and credit equivalent off-balance sheet amounts that have been adjusted according to assigned regulatory risk weights, excluding the non-qualifying portion of allowance for loan and lease losses, goodwill and other intangible assets.
Total Risk-Based Capital- Consists of Tier 1 Capital plus the allowance for loan losses, qualifying subordinated debt and the allowed portion of the net unrealized gains on available-for-sale equity securities.
Treasury Stock- Common stock repurchased and held by the issuing corporation for possible future issuance.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P40] | | |
Statistical Summary 2000-2004
Statements of Condition
| | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (In thousands) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 |
| |
Assets | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 716,459 | | | $ | 688,090 | | | $ | 652,556 | | | $ | 606,142 | | | $ | 726,051 | |
| |
| Money market investments: | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold and securities purchased under agreements to resell | | | 879,321 | | | | 764,780 | | | | 1,091,435 | | | | 820,332 | | | | 1,057,320 | |
| Time deposits with other banks | | | 319 | | | | 8,046 | | | | 3,057 | | | | 3,056 | | | | 10,908 | |
| Bankers’ acceptances | | | — | | | | 67 | | | | 154 | | | | 402 | | | | 390 | |
| |
| | | | 879,640 | | | | 772,893 | | | | 1,094,646 | | | | 823,790 | | | | 1,068,618 | |
| |
| Trading securities, at market value | | | 385,139 | | | | 605,119 | | | | 510,346 | | | | 270,186 | | | | 153,073 | |
| Investment securities available-for-sale, at market value | | | 11,162,145 | | | | 10,051,579 | | | | 10,310,656 | | | | 9,091,933 | | | | 8,605,401 | |
| Investment securities held-to-maturity, at amortized cost | | | 340,850 | | | | 186,821 | | | | 180,751 | | | | 592,360 | | | | 264,731 | |
| Other investment securities, at lower of cost or realizable value | | | 302,440 | | | | 233,144 | | | | 221,247 | | | | 192,468 | | | | 190,523 | |
| Loans held-for-sale, at lower of cost or market | | | 750,728 | | | | 271,592 | | | | 1,092,927 | | | | 939,488 | | | | 823,901 | |
| |
| Loans held-in-portfolio | | | 28,253,923 | | | | 22,613,879 | | | | 18,775,847 | | | | 17,556,029 | | | | 15,580,379 | |
| Less -Unearned income | | | 262,390 | | | | 283,279 | | | | 286,655 | | | | 326,966 | | | | 347,195 | |
| Allowance for loan losses | | | 437,081 | | | | 408,542 | | | | 372,797 | | | | 336,632 | | | | 290,653 | |
| |
| | | | 27,554,452 | | | | 21,922,058 | | | | 18,116,395 | | | | 16,892,431 | | | | 14,942,531 | |
| |
| Premises and equipment | | | 545,681 | | | | 485,452 | | | | 461,177 | | | | 405,705 | | | | 405,772 | |
| Other real estate | | | 59,717 | | | | 53,898 | | | | 39,399 | | | | 31,533 | | | | 23,518 | |
| Accrued income receivable | | | 207,542 | | | | 176,152 | | | | 184,549 | | | | 186,143 | | | | 202,540 | |
| Other assets | | | 1,046,374 | | | | 769,037 | | | | 578,091 | | | | 496,855 | | | | 368,797 | |
| Goodwill | | | 411,308 | | | | 191,490 | | | | 182,965 | | | | 177,842 | | | | 212,756 | |
| Other intangible assets | | | 39,101 | | | | 27,390 | | | | 34,647 | | | | 37,800 | | | | 68,839 | |
| |
| | | $ | 44,401,576 | | | $ | 36,434,715 | | | $ | 33,660,352 | | | $ | 30,744,676 | | | $ | 28,057,051 | |
| |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | |
| Non-interest bearing | | $ | 4,173,268 | | | $ | 3,726,707 | | | $ | 3,367,385 | | | $ | 3,281,841 | | | $ | 3,109,885 | |
| Interest bearing | | | 16,419,892 | | | | 14,371,121 | | | | 14,247,355 | | | | 13,088,201 | | | | 11,695,022 | |
| |
| | | | 20,593,160 | | | | 18,097,828 | | | | 17,614,740 | | | | 16,370,042 | | | | 14,804,907 | |
| Federal funds purchased and assets sold under agreements to repurchase | | | 6,436,853 | | | | 5,835,587 | | | | 6,684,551 | | | | 5,751,768 | | | | 4,964,115 | |
| Other short-term borrowings | | | 3,139,639 | | | | 1,996,624 | | | | 1,703,562 | | | | 1,827,242 | | | | 4,369,212 | |
| Notes payable | | | 10,180,710 | | | | 6,992,025 | | | | 4,298,853 | | | | 3,735,131 | | | | 1,176,912 | |
| Subordinated notes | | | 125,000 | | | | 125,000 | | | | 125,000 | | | | 125,000 | | | | 125,000 | |
| Preferred beneficial interest in Popular North America’s junior subordinated deferrable interest debentures guaranteed by the Corporation | | | — | | | | — | | | | 144,000 | | | | 149,080 | | | | 150,000 | |
| Other liabilities | | | 821,491 | | | | 633,129 | | | | 677,605 | | | | 512,686 | | | | 472,334 | |
| |
| | | | 41,296,853 | | | | 33,680,193 | | | | 31,248,311 | | | | 28,470,949 | | | | 26,062,480 | |
| |
| Minority interest in consolidated subsidiaries | | | 102 | | | | 105 | | | | 1,162 | | | | 909 | | | | 927 | |
| |
Stockholders’ equity: | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | | 186,875 | | | | 186,875 | | | | — | | | | 100,000 | | | | 100,000 | |
| Common stock | | | 1,680,096 | | | | 837,566 | | | | 834,799 | | | | 832,498 | | | | 830,356 | |
| Surplus | | | 278,840 | | | | 314,638 | | | | 278,366 | | | | 268,544 | | | | 260,984 | |
| Retained earnings | | | 1,129,793 | | | | 1,601,851 | | | | 1,300,437 | | | | 1,057,724 | | | | 865,082 | |
| Treasury stock — at cost | | | (206,437 | ) | | | (205,527 | ) | | | (205,210 | ) | | | (66,136 | ) | | | (66,214 | ) |
| Accumulated other comprehensive income, net of tax | | | 35,454 | | | | 19,014 | | | | 202,487 | | | | 80,188 | | | | 3,436 | |
| |
| | | | 3,104,621 | | | | 2,754,417 | | | | 2,410,879 | | | | 2,272,818 | | | | 1,993,644 | |
| |
| | | $ | 44,401,576 | | | $ | 36,434,715 | | | $ | 33,660,352 | | | $ | 30,744,676 | | | $ | 28,057,051 | |
| |
[P41]
Statistical Summary 2000-2004
Statements of Income
| | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
| (In thousands, except per | | | | | | | | | | |
| common share information) | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 |
| |
Interest Income: | | | | | | | | | | | | | | | | | | | | |
| Loans | | $ | 1,751,150 | | | $ | 1,550,036 | | | $ | 1,528,903 | | | $ | 1,559,890 | | | $ | 1,586,832 | |
| Money market investments | | | 25,660 | | | | 25,881 | | | | 32,505 | | | | 47,610 | | | | 62,356 | |
| Investment securities | | | 413,492 | | | | 422,295 | | | | 445,925 | | | | 473,344 | | | | 486,198 | |
| Trading securities | | | 25,963 | | | | 36,026 | | | | 16,464 | | | | 15,018 | | | | 14,771 | |
| |
| Total interest income | | | 2,216,265 | | | | 2,034,238 | | | | 2,023,797 | | | | 2,095,862 | | | | 2,150,157 | |
| Less - Interest expense | | | 840,754 | | | | 749,550 | | | | 863,553 | | | | 1,039,105 | | | | 1,167,396 | |
| |
| Net interest income | | | 1,375,511 | | | | 1,284,688 | | | | 1,160,244 | | | | 1,056,757 | | | | 982,761 | |
| Provision for loan losses | | | 178,657 | | | | 195,939 | | | | 205,570 | | | | 213,250 | | | | 194,640 | |
| |
| Net interest income after provision for loan losses | | | 1,196,854 | | | | 1,088,749 | | | | 954,674 | | | | 843,507 | | | | 788,121 | |
| Gain (loss) on sale of investment securities | | | 15,254 | | | | 71,094 | | | | (3,342 | ) | | | 27 | | | | 11,201 | |
| Trading account (loss) profit | | | (159 | ) | | | (10,214 | ) | | | (804 | ) | | | (1,781 | ) | | | 1,991 | |
| Gain on sale of loans | | | 44,168 | | | | 53,572 | | | | 52,077 | | | | 45,633 | | | | 39,673 | |
| All other operating income | | | 549,508 | | | | 511,558 | | | | 495,832 | | | | 447,937 | | | | 411,195 | |
| |
| | | | 1,805,625 | | | | 1,714,759 | | | | 1,498,437 | | | | 1,335,323 | | | | 1,252,181 | |
| |
Operating Expenses: | | | | | | | | | | | | | | | | | | | | |
| Personnel costs | | | 571,018 | | | | 526,444 | | | | 488,741 | | | | 425,142 | | | | 394,176 | |
| All other operating expenses | | | 599,994 | | | | 586,639 | | | | 540,261 | | | | 501,067 | | | | 482,257 | |
| |
| | | | 1,171,012 | | | | 1,113,083 | | | | 1,029,002 | | | | 926,209 | | | | 876,433 | |
| |
| Income before tax, minority interest and cumulative effect of accounting change | | | 634,613 | | | | 601,676 | | | | 469,435 | | | | 409,114 | | | | 375,748 | |
| Income tax | | | 144,705 | | | | 130,326 | | | | 117,255 | | | | 105,280 | | | | 100,797 | |
| Net (gain) loss of minority interest | | | — | | | | (435 | ) | | | (248 | ) | | | 18 | | | | 1,152 | |
| |
| Income before cumulative effect of accounting change | | | 489,908 | | | | 470,915 | | | | 351,932 | | | | 303,852 | | | | 276,103 | |
| Cumulative effect of accounting change, net of tax | | | — | | | | — | | | | — | | | | 686 | | | | — | |
| |
Net Income | | $ | 489,908 | | | $ | 470,915 | | | $ | 351,932 | | | $ | 304,538 | | | $ | 276,103 | |
| |
Net Income Applicable to Common Stock | | $ | 477,995 | | | $ | 460,996 | | | $ | 349,422 | | | $ | 296,188 | | | $ | 267,753 | |
| |
Net Income per Common Share (basic and diluted) (before and after cumulative effect of accounting change)* | | $ | 1.79 | | | $ | 1.74 | | | $ | 1.31 | | | $ | 1.09 | | | $ | 0.99 | |
| |
Dividends Declared per Common Share | | $ | 0.62 | | | $ | 0.51 | | | $ | 0.40 | | | $ | 0.38 | | | $ | 0.32 | |
| |
*The average common shares used in the computation of basic earnings per common share were 266,302,105 for 2004; 265,481,840 for 2003; 267,830,164 for 2002; 272,476,576 for 2001and 271,814,952 for 2000. The average common shares used in the computation of diluted earnings per common share were 266,674,856 for 2004; 265,595,832 for 2003; 267,830,550 for 2002 and 272,476,938 for 2001. There were no dilutive common shares in 2000.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P42] | | |
Statistical Summary 2003-2004
Quarterly Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 |
| (In thousands, except per | | Fourth | | Third | | Second | | First | | Fourth | | Third | | Second | | First |
| common share information) | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter | | Quarter |
| |
Summary of Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 601,486 | | | $ | 563,767 | | | $ | 532,270 | | | $ | 518,742 | | | $ | 509,898 | | | $ | 509,399 | | | $ | 511,659 | | | $ | 503,282 | |
| Interest expense | | | 245,584 | | | | 215,575 | | | | 191,567 | | | | 188,028 | | | | 183,310 | | | | 180,100 | | | | 181,964 | | | | 204,176 | |
| |
| Net interest income | | | 355,902 | | | | 348,192 | | | | 340,703 | | | | 330,714 | | | | 326,588 | | | | 329,299 | | | | 329,695 | | | | 299,106 | |
| Provision for loan losses | | | 46,016 | | | | 46,614 | | | | 41,349 | | | | 44,678 | | | | 49,737 | | | | 48,668 | | | | 49,325 | | | | 48,209 | |
| Operating income | | | 157,602 | | | | 143,753 | | | | 157,952 | | | | 134,369 | | | | 141,757 | | | | 137,043 | | | | 143,992 | | | | 142,338 | |
| Gain on sale of investment securities | | | 1,819 | | | | — | | | | 402 | | | | 13,033 | | | | 696 | | | | 39,109 | | | | 29,875 | | | | 1,414 | |
| Trading account profit (loss) | | | 589 | | | | 803 | | | | 615 | | | | (2,166 | ) | | | (435 | ) | | | (4,599 | ) | | | (4,243 | ) | | | (937 | ) |
| Non-interest expense | | | 301,741 | | | | 297,873 | | | | 291,660 | | | | 279,738 | | | | 282,907 | | | | 287,256 | | | | 279,278 | | | | 263,642 | |
| |
| Income before tax and minority interest | | | 168,155 | | | | 148,261 | | | | 166,663 | | | | 151,534 | | | | 135,962 | | | | 164,928 | | | | 170,716 | | | | 130,070 | |
| Income tax | | | 39,931 | | | | 32,880 | | | | 38,864 | | | | 33,030 | | | | 29,659 | | | | 33,818 | | | | 35,946 | | | | 30,903 | |
| Net gain of minority interest | | | — | | | | — | | | | — | | | | — | | | | (10 | ) | | | (184 | ) | | | (163 | ) | | | (78 | ) |
| |
| Net income | | $ | 128,224 | | | $ | 115,381 | | | $ | 127,799 | | | $ | 118,504 | | | $ | 106,293 | | | $ | 130,926 | | | $ | 134,607 | | | $ | 99,089 | |
| |
| Net income applicable to common stock | | $ | 125,246 | | | $ | 112,402 | | | $ | 124,821 | | | $ | 115,526 | | | $ | 103,315 | | | $ | 127,947 | | | $ | 131,594 | | | $ | 98,140 | |
| |
| Net income per common share* | | $ | 0.47 | | | $ | 0.42 | | | $ | 0.47 | | | $ | 0.43 | | | $ | 0.39 | | | $ | 0.48 | | | $ | 0.50 | | | $ | 0.37 | |
| |
Selected Average Balances
(In millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 43,190 | | | $ | 40,783 | | | $ | 38,660 | | | $ | 36,916 | | | $ | 35,816 | | | $ | 35,426 | | | $ | 34,279 | | | $ | 33,159 | |
| Loans | | | 27,886 | | | | 25,752 | | | | 23,921 | | | | 22,979 | | | | 22,112 | | | | 21,114 | | | | 20,141 | | | | 19,538 | |
| Interest earning assets | | | 40,586 | | | | 38,551 | | | | 36,475 | | | | 34,832 | | | | 33,822 | | | | 33,485 | | | | 32,382 | | | | 31,420 | |
| Deposits | | | 20,745 | | | | 19,588 | | | | 19,041 | | | | 18,246 | | | | 17,948 | | | | 17,824 | | | | 17,811 | | | | 17,527 | |
| Interest bearing liabilities | | | 35,350 | | | | 33,281 | | | | 31,217 | | | | 29,892 | | | | 28,933 | | | | 28,694 | | | | 27,699 | | | | 27,059 | |
| |
Selected Ratios | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Return on assets | | | 1.18 | % | | | 1.13 | % | | | 1.33 | % | | | 1.29 | % | | | 1.18 | % | | | 1.47 | % | | | 1.58 | % | | | 1.21 | % |
| Return on equity | | | 17.52 | | | | 16.22 | | | | 18.79 | | | | 17.95 | | | | 16.38 | | | | 20.85 | | | | 22.63 | | | | 17.39 | |
| |
*Per common share data has been adjusted to reflect the two-for-one stock split effected in the form of a stock dividend on July 8, 2004.
[P43]
Statistical Summary 2000-2004
Average Balance Sheet and Summary of Net Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| On a Taxable Equivalent Basis* |
| (Dollars in thousands) | | 2004 | | | 2003 |
| | | Average | | | | | | Average | | | Average | | | | | | Average |
| | | Balance | | Interest | | Rate | | | Balance | | Interest | | Rate |
| | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Money market investments | | $ | 835,139 | | | $ | 25,660 | | | | 3.07 | % | | | $ | 833,237 | | | $ | 25,881 | | | | 3.11 | % |
| | | | |
| U.S. Treasury securities | | | 550,997 | | | | 26,600 | | | | 4.83 | | | | | 472,114 | | | | 24,615 | | | | 5.21 | |
| Obligations of other U.S. Government agencies and corporations | | | 6,720,329 | | | | 322,854 | | | | 4.80 | | | | | 6,451,157 | | | | 356,008 | | | | 5.52 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 255,244 | | | | 13,504 | | | | 5.29 | | | | | 201,505 | | | | 13,570 | | | | 6.73 | |
| Collateralized mortgage obligations and mortgage-backed securities | | | 3,233,378 | | | | 128,421 | | | | 3.97 | | | | | 3,062,564 | | | | 118,097 | | | | 3.86 | |
| Other | | | 402,112 | | | | 15,406 | | | | 3.83 | | | | | 407,105 | | | | 16,267 | | | | 4.00 | |
| | | | |
| Total investment securities | | | 11,162,060 | | | | 506,785 | | | | 4.54 | | | | | 10,594,445 | | | | 528,557 | | | | 4.99 | |
| | | | |
| Trading account securities | | | 480,890 | | | | 27,387 | | | | 5.70 | | | | | 623,632 | | | | 37,887 | | | | 6.08 | |
| | | | |
| Loans (net of unearned income) | | | 25,143,559 | | | | 1,765,290 | | | | 7.02 | | | | | 20,730,041 | | | | 1,562,083 | | | | 7.54 | |
| | | | |
| Total interest earning assets/ Interest income | | | 37,621,648 | | | $ | 2,325,122 | | | | 6.18 | % | | | | 32,781,355 | | | $ | 2,154,408 | | | | 6.57 | % |
| | | | |
| Total non-interest earning assets | | | 2,277,127 | | | | | | | | | | | | | 1,893,406 | | | | | | | | | |
| | | | |
| Total assets | | $ | 39,898,775 | | | | | | | | | | | | $ | 34,674,761 | | | | | | | | | |
| | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings, NOW and money market accounts | | $ | 8,373,541 | | | $ | 92,026 | | | | 1.10 | % | | | $ | 7,741,007 | | | $ | 102,293 | | | | 1.32 | % |
| Time deposits | | | 7,117,062 | | | | 238,325 | | | | 3.35 | | | | | 6,521,861 | | | | 240,598 | | | | 3.69 | |
| Short-term borrowings | | | 8,782,042 | | | | 165,425 | | | | 1.88 | | | | | 8,390,874 | | | | 147,456 | | | | 1.76 | |
| Notes payable | | | 8,047,867 | | | | 336,415 | | | | 4.18 | | | | | 5,124,604 | | | | 234,776 | | | | 4.58 | |
| Subordinated notes | | | 125,000 | | | | 8,563 | | | | 6.85 | | | | | 125,000 | | | | 8,539 | | | | 6.83 | |
| Preferred beneficial interest in junior subordinated deferrable interest debentures guaranteed by the Corporation | | | | | | | | | | | | | | | | 194,959 | | | | 15,888 | | | | 8.15 | |
| | | | |
| Total interest bearing liabilities/ Interest expense | | | 32,445,512 | | | | 840,754 | | | | 2.59 | | | | | 28,098,305 | | | | 749,550 | | | | 2.67 | |
| | | | |
| Total non-interest bearing liabilities | | | 4,550,126 | | | | | | | | | | | | | 4,031,343 | | | | | | | | | |
| | | | |
| Total liabilities | | | 36,995,638 | | | | | | | | | | | | | 32,129,648 | | | | | | | | | |
| | | | |
| Stockholders’ equity | | | 2,903,137 | | | | | | | | | | | | | 2,545,113 | | | | | | | | | |
| | | | |
| Total liabilities and stockholders’ equity | | $ | 39,898,775 | | | | | | | | | | | | $ | 34,674,761 | | | | | | | | | |
| | | | |
| Net interest income on a taxable equivalent basis | | | | | | $ | 1,484,368 | | | | | | | | | | | | $ | 1,404,858 | | | | | |
| | | | |
| Cost of funding earning assets | | | | | | | | | | | 2.23 | % | | | | | | | | | | | | 2.29 | % |
| | | | |
| Net interest yield | | | | | | | | | | | 3.95 | % | | | | | | | | | | | | 4.28 | % |
| | | | |
| Effect of the taxable equivalent adjustment | | | | | | | 108,857 | | | | | | | | | | | | | 120,170 | | | | | |
| | | | |
| Net interest income per books | | | | | | $ | 1,375,511 | | | | | | | | | | | | $ | 1,284,688 | | | | | |
| | | | |
*Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.
Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P44] | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| 2002 | | | 2001 | | | 2000 |
| Average | | | | | | Average | | | Average | | | | | | Average | | | Average | | | | | | Average |
| Balance | | Interest | | Rate | | | Balance | | Interest | | Rate | | | Balance | | Interest | | Rate |
| | | | | | | |
| $1,012,357 | | $ | 32,505 | | | | 3.21 | % | | | $ | 932,422 | | | $ | 47,610 | | | | 5.11 | % | | | $ | 932,886 | | | $ | 62,356 | | | | 6.68 | % |
| | | | | | | |
| 467,517 | | | 34,055 | | | | 7.28 | | | | | 748,337 | | | | 51,637 | | | | 6.90 | | | | | 1,762,129 | | | | 115,801 | | | | 6.57 | |
| 5,971,610 | | | 354,035 | | | | 5.93 | | | | | 4,750,786 | | | | 349,750 | | | | 7.36 | | | | | 3,958,406 | | | | 288,214 | | | | 7.28 | |
| 188,883 | | | 11,911 | | | | 6.31 | | | | | 131,797 | | | | 8,416 | | | | 6.39 | | | | | 126,768 | | | | 8,398 | | | | 6.62 | |
| 3,021,564 | | | 119,887 | | | | 3.97 | | | | | 2,060,685 | | | | 115,333 | | | | 5.60 | | | | | 1,838,016 | | | | 107,959 | | | | 5.87 | |
| 439,800 | | | 19,028 | | | | 4.33 | | | | | 478,043 | | | | 25,114 | | | | 5.25 | | | | | 260,143 | | | | 24,236 | | | | 9.32 | |
| | | | | | | |
| 10,089,374 | | | 538,916 | | | | 5.34 | | | | | 8,169,648 | | | | 550,250 | | | | 6.74 | | | | | 7,945,462 | | | | 544,608 | | | | 6.85 | |
| | | | | | | |
| 363,963 | | | 16,961 | | | | 4.66 | | | | | 266,877 | | | | 15,358 | | | | 5.75 | | | | | 213,131 | | | | 15,624 | | | | 7.33 | |
| | | | | | | |
| 18,729,220 | | | 1,539,032 | | | | 8.22 | | | | | 17,045,257 | | | | 1,567,382 | | | | 9.20 | | | | | 15,801,887 | | | | 1,597,116 | | | | 10.11 | |
| | | | | | | |
| 30,194,914 | | $ | 2,127,414 | | | | 7.05 | % | | | | 26,414,204 | | | $ | 2,180,600 | | | | 8.26 | % | | | | 24,893,366 | | | $ | 2,219,704 | | | | 8.92 | % |
| | | | | | | |
| 1,627,476 | | | | | | | | | | | | 1,542,903 | | | | | | | | | | | | | 1,676,389 | | | | | | | | | |
| | | | | | | |
| $31,822,390 | | | | | | | | | | | $ | 27,957,107 | | | | | | | | | | | | $ | 26,569,755 | | | | | | | | | |
| | | | | | | |
| $7,277,387 | | $ | 160,314 | | | | 2.20 | % | | | $ | 6,272,094 | | | $ | 180,863 | | | | 2.88 | % | | | $ | 5,924,690 | | | $ | 184,018 | | | | 3.11 | % |
| 6,480,501 | | | 272,101 | | | | 4.20 | | | | | 6,247,150 | | | | 337,018 | | | | 5.39 | | | | | 5,548,509 | | | | 345,355 | | | | 6.22 | |
| 7,787,011 | | | 185,343 | | | | 2.38 | | | | | 7,136,358 | | | | 329,648 | | | | 4.62 | | | | | 7,781,030 | | | | 508,029 | | | | 6.53 | |
| 4,132,811 | | | 224,800 | | | | 5.44 | | | | | 2,393,642 | | | | 170,172 | | | | 7.11 | | | | | 1,618,517 | | | | 108,572 | | | | 6.71 | |
| 125,000 | | | 8,536 | | | | 6.83 | | | | | 125,000 | | | | 8,527 | | | | 6.82 | | | | | 125,000 | | | | 8,545 | | | | 6.84 | |
| 145,254 | | | 12,459 | | | | 8.58 | | | | | 150,000 | | | | 12,877 | | | | 8.58 | | | | | 150,000 | | | | 12,877 | | | | 8.58 | |
| | | | | | | |
| 25,947,964 | | | 863,553 | | | | 3.33 | | | | | 22,324,244 | | | | 1,039,105 | | | | 4.65 | | | | | 21,147,746 | | | | 1,167,396 | | | | 5.52 | |
| | | | | | | |
| 3,724,040 | | | | | | | | | | | | 3,536,329 | | | | | | | | | | | | | 3,537,484 | | | | | | | | | |
| | | | | | | |
| 29,672,004 | | | | | | | | | | | | 25,860,573 | | | | | | | | | | | | | 24,685,230 | | | | | | | | | |
| | | | | | | |
| 2,150,386 | | | | | | | | | | | | 2,096,534 | | | | | | | | | | | | | 1,884,525 | | | | | | | | | |
| | | | | | | |
| $31,822,390 | | | | | | | | | | | $ | 27,957,107 | | | | | | | | | | | | $ | 26,569,755 | | | | | | | | | |
| | | | | | | |
| | | $ | 1,263,861 | | | | | | | | | | | | $ | 1,141,495 | | | | | | | | | | | | $ | 1,052,308 | | | | | |
| | | | | | | |
| | | | | | | | 2.86 | % | | | | | | | | | | | | 3.93 | % | | | | | | | | | | | | 4.69 | % |
| | | | | | | |
| | | | | | | | 4.19 | % | | | | | | | | | | | | 4.33 | % | | | | | | | | | | | | 4.23 | % |
| | | | | | | |
| | | | 103,617 | | | | | | | | | | | | | 84,738 | | | | | | | | | | | | | 69,547 | | | | | |
| | | | | | | |
| | | $ | 1,160,244 | | | | | | | | | | | | $ | 1,056,757 | | | | | | | | | | | | $ | 982,761 | | | | | |
| | | | | | | |
[P45]
Management’s Report on Internal Control Over
Financial Reporting
To Our Stockholders:
The management of Popular, Inc. (the Corporation) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a — 15(f) and 15d — 15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The Corporation’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of Popular, Inc. has assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
We have excluded Quaker City Bank from our assessment of internal control over financial reporting as of December 31, 2004 because it was acquired by the Corporation in a purchase business combination during 2004. Quaker City Bank operates as a division of Banco Popular North America, a wholly-owned subsidiary of Popular, Inc. Quaker City Bank’s total assets and total revenues represent 4.7% and 1.2%, respectively, of the related financial statement amounts as of and for the year ended December 31, 2004.
Based on our assessment, management has concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2004 based on the criteria referred to above.
The Corporation’s independent registered public accounting firm has audited management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2004 as stated in their report which appears on page 47.
| | |
 | |  |
Richard L. Carrión
Chairman of the Board,
President and Chief Executive Officer | | Jorge A. Junquera
Senior Executive Vice President
and Chief Financial Officer |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P46] | | |
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and
Stockholders of Popular, Inc.:
We have completed an integrated audit of Popular, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Corporation maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Corporation’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Popular, Inc.’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting
[P47]
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Quaker City Bank from its assessment of internal control over financial reporting as of December 31, 2004 because it was acquired by the Corporation in a purchase business combination during 2004. We have also excluded Quaker City Bank from our audit of internal control over financial reporting. Quaker City Bank operates as a division of Banco Popular North America, a wholly-owned subsidiary of Popular, Inc. Quaker City Bank’s total assets and total revenues represent 4.7% and 1.2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004.
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
February 24, 2005
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires December 1, 2006
Stamp 2008680 of the P.R.
Society of Certified Public
Accountants has been affixed
to the file copy of this report.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P48] | | |
Consolidated Statements of Condition
| | | | | | | | | |
| | | December 31, |
| (In thousands, except share information) | | 2004 | | 2003 |
Assets | | | | | | | | |
| Cash and due from banks | | $ | 716,459 | | | $ | 688,090 | |
| |
| Money market investments: | | | | | | | | |
| Federal funds sold and securities purchased under agreements to resell | | | 879,321 | | | | 764,780 | |
| Time deposits with other banks | | | 319 | | | | 8,046 | |
| Bankers’ acceptances | | | — | | | | 67 | |
| |
| | | | 879,640 | | | | 772,893 | |
| |
| Trading securities, at market value: | | | | | | | | |
| Pledged securities with creditors’ right to repledge | | | 257,857 | | | | 490,536 | |
| Other trading securities | | | 127,282 | | | | 114,583 | |
| Investment securities available-for-sale, at market value: | | | | | | | | |
| Pledged securities with creditors’ right to repledge | | | 4,828,716 | | | | 3,523,505 | |
| Other securities available-for-sale | | | 6,333,429 | | | | 6,528,074 | |
| Investment securities held-to-maturity, at amortized cost (market value 2004 - $344,899; 2003 - $188,074) | | | 340,850 | | | | 186,821 | |
| Other investment securities, at lower of cost or realizable value (fair value $308,489; 2003 - $238,162) | | | 302,440 | | | | 233,144 | |
| Loans held-for-sale, at lower of cost or market | | | 750,728 | | | | 271,592 | |
| |
| Loans held-in-portfolio: | | | | | | | | |
| Loans held-in-portfolio pledged with creditors’ right to repledge | | | 318,409 | | | | 411,358 | |
| Other loans held-in-portfolio | | | 27,935,514 | | | | 22,202,521 | |
| Less — Unearned income | | | 262,390 | | | | 283,279 | |
| Allowance for loan losses | | | 437,081 | | | | 408,542 | |
| |
| | | | 27,554,452 | | | | 21,922,058 | |
| |
| Premises and equipment | | | 545,681 | | | | 485,452 | |
| Other real estate | | | 59,717 | | | | 53,898 | |
| Accrued income receivable | | | 207,542 | | | | 176,152 | |
| Other assets | | | 1,046,374 | | | | 769,037 | |
| Goodwill | | | 411,308 | | | | 191,490 | |
| Other intangible assets | | | 39,101 | | | | 27,390 | |
| |
| | | $ | 44,401,576 | | | $ | 36,434,715 | |
| |
Liabilities and Stockholders’ Equity | | | | | | | | |
Liabilities: | | | | | | | | |
| Deposits: | | | | | | | | |
| Non-interest bearing | | $ | 4,173,268 | | | $ | 3,726,707 | |
| Interest bearing | | | 16,419,892 | | | | 14,371,121 | |
| |
| | | | 20,593,160 | | | | 18,097,828 | |
| Federal funds purchased and assets sold under agreements to repurchase | | | 6,436,853 | | | | 5,835,587 | |
| Other short-term borrowings | | | 3,139,639 | | | | 1,996,624 | |
| Notes payable | | | 10,180,710 | | | | 6,992,025 | |
| Subordinated notes | | | 125,000 | | | | 125,000 | |
| Other liabilities | | | 821,491 | | | | 633,129 | |
| |
| | | | 41,296,853 | | | | 33,680,193 | |
| |
| Commitments and contingencies (See Note 31) | | | | | | | | |
| |
| Minority interest in consolidated subsidiaries | | | 102 | | | | 105 | |
| |
Stockholders’ Equity: | | | | | | | | |
| Preferred stock, $25 liquidation value; 30,000,000 shares authorized (2003 - 10,000,000); 7,475,000 issued and outstanding in both periods presented | | | 186,875 | | | | 186,875 | |
| Common stock, $6 par value; 470,000,000 shares authorized (2003 - 180,000,000); 280,016,007 shares issued (2003 - 139,594,296) and 266,582,103 shares outstanding (2003 - 132,891,946) | | | 1,680,096 | | | | 837,566 | |
| Surplus | | | 278,840 | | | | 314,638 | |
| Retained earnings | | | 1,129,793 | | | | 1,601,851 | |
| Accumulated other comprehensive income, net of tax of $6,780 (2003 - $2,913) | | | 35,454 | | | | 19,014 | |
| Treasury stock-at cost 13,433,904 shares (2003 - 6,702,350) | | | (206,437 | ) | | | (205,527 | ) |
| |
| | | | 3,104,621 | | | | 2,754,417 | |
| |
| | | $ | 44,401,576 | | | $ | 36,434,715 | |
| |
The accompanying notes are an integral part of the consolidated financial statements.
[P49]
Consolidated Statements of Income
| | | | | | | | | | | | | |
| | | Year ended December 31, |
| (In thousands, except per share information) | | 2004 | | 2003 | | 2002 |
Interest Income: | | | | | | | | | | | | |
| Loans | | $ | 1,751,150 | | | $ | 1,550,036 | | | $ | 1,528,903 | |
| Money market investments | | | 25,660 | | | | 25,881 | | | | 32,505 | |
| Investment securities | | | 413,492 | | | | 422,295 | | | | 445,925 | |
| Trading securities | | | 25,963 | | | | 36,026 | | | | 16,464 | |
| |
| | | | 2,216,265 | | | | 2,034,238 | | | | 2,023,797 | |
| |
Interest Expense: | | | | | | | | | | | | |
| Deposits | | | 330,351 | | | | 342,891 | | | | 432,415 | |
| Short-term borrowings | | | 165,425 | | | | 147,456 | | | | 185,343 | |
| Long-term debt | | | 344,978 | | | | 259,203 | | | | 245,795 | |
| |
| | | | 840,754 | | | | 749,550 | | | | 863,553 | |
| |
| Net interest income | | | 1,375,511 | | | | 1,284,688 | | | | 1,160,244 | |
| Provision for loan losses | | | 178,657 | | | | 195,939 | | | | 205,570 | |
| |
| Net interest income after provision for loan losses | | | 1,196,854 | | | | 1,088,749 | | | | 954,674 | |
| Service charges on deposit accounts | | | 165,241 | | | | 161,839 | | | | 157,713 | |
| Other service fees | | | 295,551 | | | | 284,392 | | | | 265,806 | |
| Gain (loss) on sale of investment securities | | | 15,254 | | | | 71,094 | | | | (3,342 | ) |
| Trading account loss | | | (159 | ) | | | (10,214 | ) | | | (804 | ) |
| Gain on sale of loans | | | 44,168 | | | | 53,572 | | | | 52,077 | |
| Other operating income | | | 88,716 | | | | 65,327 | | | | 72,313 | |
| |
| | | | 1,805,625 | | | | 1,714,759 | | | | 1,498,437 | |
| |
Operating Expenses: | | | | | | | | | | | | |
| Personnel costs: | | | | | | | | | | | | |
| Salaries | | | 427,870 | | | | 388,527 | | | | 361,957 | |
| Profit sharing | | | 22,082 | | | | 20,647 | | | | 22,235 | |
| Pension and other benefits | | | 121,066 | | | | 117,270 | | | | 104,549 | |
| |
| | | | 571,018 | | | | 526,444 | | | | 488,741 | |
| Net occupancy expenses | | | 89,821 | | | | 83,630 | | | | 78,503 | |
| Equipment expenses | | | 108,823 | | | | 104,821 | | | | 99,099 | |
| Other taxes | | | 40,260 | | | | 37,904 | | | | 37,144 | |
| Professional fees | | | 95,084 | | | | 82,325 | | | | 84,660 | |
| Communications | | | 60,965 | | | | 58,038 | | | | 53,892 | |
| Business promotion | | | 75,708 | | | | 73,277 | | | | 61,451 | |
| Printing and supplies | | | 17,938 | | | | 19,111 | | | | 19,918 | |
| Other operating expenses | | | 103,551 | | | | 119,689 | | | | 96,490 | |
| Amortization of intangibles | | | 7,844 | | | | 7,844 | | | | 9,104 | |
| |
| | | | 1,171,012 | | | | 1,113,083 | | | | 1,029,002 | |
| |
| Income before income tax and minority interest | | | 634,613 | | | | 601,676 | | | | 469,435 | |
| Income tax | | | 144,705 | | | | 130,326 | | | | 117,255 | |
| Net gain of minority interest | | | — | | | | (435 | ) | | | (248 | ) |
| |
Net Income | | $ | 489,908 | | | $ | 470,915 | | | $ | 351,932 | |
| |
Net Income Applicable to Common Stock | | $ | 477,995 | | | $ | 460,996 | | | $ | 349,422 | |
| |
Net Income per Common Share (basic and diluted) | | $ | 1.79 | | | $ | 1.74 | | | $ | 1.31 | |
| |
Dividends Declared per Common Share | | $ | 0.62 | | | $ | 0.51 | | | $ | 0.40 | |
| |
The accompanying notes are an integral part of the consolidated financial statements.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P50] | | |
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | |
| | | |
| | | Year ended December 31, |
| (In thousands) | | 2004 | | 2003 | | 2002 |
Cash Flows from Operating Activities: | | | | | | | | | | | | |
| Net income | | $ | 489,908 | | | $ | 470,915 | | | $ | 351,932 | |
| |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization of premises and equipment | | | 74,270 | | | | 73,007 | | | | 74,167 | |
| Provision for loan losses | | | 178,657 | | | | 195,939 | | | | 205,570 | |
| Amortization of intangibles | | | 7,844 | | | | 7,844 | | | | 9,104 | |
| Net (gain) loss on sale of investment securities | | | (15,254 | ) | | | (71,094 | ) | | | 3,342 | |
| Net gain on disposition of premises and equipment | | | (15,804 | ) | | | (3,369 | ) | | | (1,765 | ) |
| Net gain on sale of loans, excluding loans held-for-sale | | | (21,472 | ) | | | (12,550 | ) | | | (6,718 | ) |
| Net amortization of premiums and accretion of discounts on investments | | | 41,061 | | | | 28,296 | | | | 15,980 | |
| Net amortization of premiums and deferred loan origination fees and costs | | | 118,087 | | | | 73,264 | | | | 48,236 | |
| Earnings from investments under the equity method | | | (8,271 | ) | | | (5,294 | ) | | | (6,128 | ) |
| Stock options expense | | | 3,223 | | | | 1,490 | | | | 957 | |
| Net (increase) decrease in loans held-for-sale | | | (543,892 | ) | | | 77,638 | | | | (153,439 | ) |
| Net increase in trading securities | | | (137,209 | ) | | | (138,811 | ) | | | (240,160 | ) |
| Net (increase) decrease in accrued income receivable | | | (24,214 | ) | | | 8,397 | | | | 1,594 | |
| Net increase in other assets | | | (102,740 | ) | | | (80,771 | ) | | | (4,530 | ) |
| Net increase (decrease) in interest payable | | | 30,085 | | | | (1,602 | ) | | | 21,416 | |
| Net increase (decrease) in current and deferred taxes | | | 23,914 | | | | (4,131 | ) | | | (22,766 | ) |
| Net increase in postretirement benefit obligation | | | 5,679 | | | | 7,391 | | | | 7,479 | |
| Net increase (decrease) in other liabilities | | | 39,068 | | | | (89,991 | ) | | | 96,401 | |
| |
| Total adjustments | | | (346,968 | ) | | | 65,653 | | | | 48,740 | |
| |
| Net cash provided by operating activities | | | 142,940 | | | | 536,568 | | | | 400,672 | |
| |
Cash Flows from Investing Activities: | | | | | | | | | | | | |
| Net (increase) decrease in money market investments | | | (106,548 | ) | | | 321,753 | | | | (265,080 | ) |
| Purchases of investment securities: | | | | | | | | | | | | |
| Available-for-sale | | | (5,620,097 | ) | | | (6,721,439 | ) | | | (9,338,636 | ) |
| Held-to-maturity | | | (1,347,588 | ) | | | (667,127 | ) | | | (26,588,518 | ) |
| Other | | | (79,857 | ) | | | (36,943 | ) | | | (51,763 | ) |
| Proceeds from calls, paydowns, maturities and redemptions of investment securities: | | | | | | | | | | | | |
| Available-for-sale | | | 4,628,051 | | | | 6,164,498 | | | | 7,426,932 | |
| Held-to-maturity | | | 1,085,175 | | | | 661,555 | | | | 27,000,127 | |
| Other | | | 10,561 | | | | 43,353 | | | | 22,246 | |
| Proceeds from sales of investment securities available-for-sale | | | 632,151 | | | | 810,540 | | | | 1,266,504 | |
| Net disbursements on loans | | | (1,297,588 | ) | | | (900,093 | ) | | | (1,371,182 | ) |
| Proceeds from sale of loans | | | 555,071 | | | | 370,755 | | | | 592,992 | |
| Acquisition of loan portfolios | | | (3,672,093 | ) | | | (2,970,276 | ) | | | (1,220,139 | ) |
| Assets acquired, net of cash | | | (169,036 | ) | | | (1,079 | ) | | | (1,500 | ) |
| Acquisition of premises and equipment | | | (146,472 | ) | | | (109,664 | ) | | | (143,724 | ) |
| Proceeds from sale of premises and equipment | | | 34,846 | | | | 15,785 | | | | 15,850 | |
| |
| Net cash used in investing activities | | | (5,493,424 | ) | | | (3,018,382 | ) | | | (2,655,891 | ) |
| |
Cash Flows from Financing Activities: | | | | | | | | | | | | |
| Net increase in deposits | | | 1,330,903 | | | | 476,307 | | | | 1,271,967 | |
| Net increase (decrease) in federal funds purchased and assets sold under agreements to repurchase | | | 577,612 | | | | (848,964 | ) | | | 932,783 | |
| Net increase (decrease) in other short-term borrowings | | | 1,103,515 | | | | 293,062 | | | | (123,680 | ) |
| Net proceeds from notes payable and capital securities | | | 2,519,766 | | | | 2,533,203 | | | | 558,642 | |
| Dividends paid | | | (168,927 | ) | | | (134,603 | ) | | | (108,003 | ) |
| Proceeds from issuance of common stock | | | 17,243 | | | | 15,765 | | | | 11,166 | |
| Proceeds from issuance of preferred stock | | | — | | | | 183,159 | | | | — | |
| Redemption of preferred stock | | | — | | | | — | | | | (102,000 | ) |
| Treasury stock acquired | | | (1,259 | ) | | | (581 | ) | | | (139,242 | ) |
| |
| Net cash provided by financing activities | | | 5,378,853 | | | | 2,517,348 | | | | 2,301,633 | |
| |
| Net increase in cash and due from banks | | | 28,369 | | | | 35,534 | | | | 46,414 | |
| Cash and due from banks at beginning of period | | | 688,090 | | | | 652,556 | | | | 606,142 | |
| |
| Cash and due from banks at end of period | | $ | 716,459 | | | $ | 688,090 | | | $ | 652,556 | |
| |
The accompanying notes are an integral part of the consolidated financial statements.
[P51]
Consolidated Statements of Changes in Stockholders’
Equity
| | | | | | | | | | | | | |
| | | Year ended December 31, |
| (In thousands except share information) | | 2004 | | 2003 | | 2002 |
Preferred Stock: | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 186,875 | | | | — | | | $ | 100,000 | |
| Issuance (redemption) of preferred stock | | | — | | | $ | 186,875 | | | | (100,000 | ) |
| |
| Balance at end of year | | | 186,875 | | | | 186,875 | | | | — | |
| |
Common Stock: | | | | | | | | | | | | |
| Balance at beginning of year | | | 837,566 | | | | 834,799 | | | | 832,498 | |
| Common Stock issued under Dividend Reinvestment Plan | | | 2,683 | | | | 2,591 | | | | 2,300 | |
| Transfer from retained earnings resulting from stock split | | | 839,266 | | | | — | | | | — | |
| Options exercised | | | 581 | | | | 176 | | | | 1 | |
| |
| Balance at end of year | | | 1,680,096 | | | | 837,566 | | | | 834,799 | |
| |
Surplus: | | | | | | | | | | | | |
| Balance at beginning of year | | | 314,638 | | | | 278,366 | | | | 268,544 | |
| Common stock issued under Dividend Reinvestment Plan | | | 12,810 | | | | 12,326 | | | | 8,857 | |
| Issuance cost of preferred stock | | | — | | | | (3,716 | ) | | | — | |
| Options granted | | | 2,703 | | | | 1,235 | | | | 957 | |
| Options exercised | | | 1,689 | | | | 927 | | | | 8 | |
| Transfer (to) from retained earnings | | | (53,000 | ) | | | 25,500 | | | | — | |
| |
| Balance at end of year | | | 278,840 | | | | 314,638 | | | | 278,366 | |
| |
Retained Earnings: | | | | | | | | | | | | |
| Balance at beginning of year | | | 1,601,851 | | | | 1,300,437 | | | | 1,057,724 | |
| Net income | | | 489,908 | | | | 470,915 | | | | 351,932 | |
| Cash dividends declared on common stock | | | (163,787 | ) | | | (134,082 | ) | | | (106,709 | ) |
| Cash dividends declared on preferred stock | | | (11,913 | ) | | | (9,919 | ) | | | (510 | ) |
| Redemption of preferred stock | | | — | | | | — | | | | (2,000 | ) |
| Transfer to common stock resulting from stock split | | | (839,266 | ) | | | — | | | | — | |
| Transfer from (to) surplus | | | 53,000 | | | | (25,500 | ) | | | — | |
| |
| Balance at end of year | | | 1,129,793 | | | | 1,601,851 | | | | 1,300,437 | |
| |
Accumulated Other Comprehensive Income: | | | | | | | | | | | | |
| Balance at beginning of year | | | 19,014 | | | | 202,487 | | | | 80,188 | |
| Other comprehensive income (loss), net of tax | | | 16,440 | | | | (183,473 | ) | | | 122,299 | |
| |
| Balance at end of year | | | 35,454 | | | | 19,014 | | | | 202,487 | |
| |
Treasury Stock — At Cost: | | | | | | | | | | | | |
| Balance at beginning of year | | | (205,527 | ) | | | (205,210 | ) | | | (66,136 | ) |
| Purchase of common stock | | | (1,259 | ) | | | (581 | ) | | | (139,242 | ) |
| Reissuance of common stock | | | 349 | | | | 264 | | | | 168 | |
| |
| Balance at end of year | | | (206,437 | ) | | | (205,527 | ) | | | (205,210 | ) |
| |
| Total stockholders’ equity | | $ | 3,104,621 | | | $ | 2,754,417 | | | $ | 2,410,879 | |
| |
Disclosure of changes in number of shares:
| | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2004 | | 2003 | | 2002 |
Preferred Stock: | | | | | | | | | | | | |
| Balance at beginning of year | | | 7,475,000 | | | | — | | | | 4,000,000 | |
| Issuance (redemption) of preferred stock | | | — | | | | 7,475,000 | | | | (4,000,000 | ) |
| |
| Balance at end of year | | | 7,475,000 | | | | 7,475,000 | | | | — | |
| |
Common Stock — Issued: | | | | | | | | | | | | |
| Balance at beginning of year | | | 139,594,296 | | | | 139,133,156 | | | | 138,749,647 | |
| Issued under the Dividend Reinvestment Plan | | | 447,138 | | | | 431,846 | | | | 383,310 | |
| Stock split | | | 139,877,770 | | | | — | | | | — | |
| Options exercised | | | 96,803 | | | | 29,294 | | | | 199 | |
| |
| Balance at end of year | | | 280,016,007 | | | | 139,594,296 | | | | 139,133,156 | |
| |
| Treasury stock | | | (13,433,904 | ) | | | (6,702,350 | ) | | | (6,694,109 | ) |
| |
Common Stock — Outstanding | | | 266,582,103 | | | | 132,891,946 | | | | 132,439,047 | |
| |
The accompanying notes are an integral part of the consolidated financial statements.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P52] | | |
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | |
| | | Year ended December 31, |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Net income | | $ | 489,908 | | | $ | 470,915 | | | $ | 351,932 | |
| |
| Other comprehensive (loss) income, before tax: | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | (11,033 | ) | | | (22,261 | ) | | | (780 | ) |
| Unrealized holding gains (losses) arising during the period | | | 40,985 | | | | (144,887 | ) | | | 151,929 | |
| Reclassification adjustment for gains (losses) included in net income | | | (12,738 | ) | | | (67,465 | ) | | | 1,643 | |
| Net loss on cash flow hedges | | | (4,604 | ) | | | (8,208 | ) | | | (11,281 | ) |
| Reclassification adjustment for losses included in net income | | | 7,696 | | | | 9,209 | | | | 5,946 | |
| Cumulative effect of accounting change | | | — | | | | — | | | | — | |
| Reclassification adjustment for gains included in net income | | | — | | | | (18 | ) | | | (6 | ) |
| |
| | | | 20,306 | | | | (233,630 | ) | | | 147,451 | |
| Income tax (expense) benefit | | | (3,866 | ) | | | 50,157 | | | | (25,152 | ) |
| |
| Total other comprehensive income (loss), net of tax | | | 16,440 | | | | (183,473 | ) | | | 122,299 | |
| |
| Comprehensive income, net of tax | | $ | 506,348 | | | $ | 287,442 | | | $ | 474,231 | |
| |
Disclosure of accumulated other comprehensive income:
| | | | | | | | | | | | | |
| | | Year ended December 31, |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Foreign currency translation adjustment | | | ($35,530 | ) | | | ($24,497 | ) | | | ($2,236 | ) |
| |
| Unrealized gains on securities | | | 78,505 | | | | 50,258 | | | | 262,610 | |
| Tax effect | | | (7,198 | ) | | | (4,464 | ) | | | (54,985 | ) |
| |
| Net of tax amount | | | 71,307 | | | | 45,794 | | | | 207,625 | |
| |
| Unrealized losses on cash flow hedges | | | (1,107 | ) | | | (4,199 | ) | | | (5,200 | ) |
| Tax effect | | | 418 | | | | 1,550 | | | | 1,914 | |
| |
| Net of tax amount | | | (689 | ) | | | (2,649 | ) | | | (3,286 | ) |
| |
| Cumulative effect of accounting change | | | 366 | | | | 366 | | | | 384 | |
| |
| Accumulated other comprehensive income | | $ | 35,454 | | | $ | 19,014 | | | $ | 202,487 | |
| |
The accompanying notes are an integral part of the consolidated financial statements.
[P53]
Notes to Consolidated Financial Statements
| | | | | | | | | |
| Note 1 | | - | | Nature of operations and summary of significant accounting policies | | | 55 | |
| Note 2 | | - | | Restrictions on cash and due from banks and highly liquid securities | | | 63 | |
| Note 3 | | - | | Securities purchased under agreements to resell | | | 63 | |
| Note 4 | | - | | Investment securities available-for-sale | | | 64 | |
| Note 5 | | - | | Investment securities held-to-maturity | | | 66 | |
| Note 6 | | - | | Pledged assets | | | 67 | |
| Note 7 | | - | | Loans and allowance for loan losses | | | 68 | |
| Note 8 | | - | | Related party transactions | | | 68 | |
| Note 9 | | - | | Premises and equipment | | | 69 | |
| Note 10 | | - | | Goodwill and other intangible assets | | | 69 | |
| Note 11 | | - | | Deposits | | | 70 | |
| Note 12 | | - | | Federal funds purchased and assets sold under agreements to repurchase | | | 70 | |
| Note 13 | | - | | Other short-term borrowings | | | 72 | |
| Note 14 | | - | | Notes payable and subordinated notes | | | 72 | |
| Note 15 | | - | | Unused lines of credit and other funding sources | | | 73 | |
| Note 16 | | - | | Trust preferred securities | | | 73 | |
| Note 17 | | - | | Earnings per common share | | | 74 | |
| Note 18 | | - | | Stockholders’ equity | | | 74 | |
| Note 19 | | - | | Regulatory capital requirements | | | 75 | |
| Note 20 | | - | | Servicing assets | | | 76 | |
| Note 21 | | - | | Sales of receivables | | | 76 | |
| Note 22 | | - | | Employee benefits | | | 77 | |
| Note 23 | | - | | Stock option and other incentive plans | | | 81 | |
| Note 24 | | - | | Rental expense and commitments | | | 82 | |
| Note 25 | | - | | Income tax | | | 82 | |
| Note 26 | | - | | Off-balance sheet lending activities and concentration of credit risk | | | 84 | |
| Note 27 | | - | | Disclosures about fair value of financial instruments | | | 84 | |
| Note 28 | | - | | Derivative instruments and hedging activities | | | 86 | |
| Note 29 | | - | | Supplemental disclosure on the consolidated statements of cash flows | | | 89 | |
| Note 30 | | - | | Segment reporting | | | 89 | |
| Note 31 | | - | | Contingent liabilities | | | 92 | |
| Note 32 | | - | | Guarantees | | | 92 | |
| Note 33 | | - | | Popular, Inc. (Holding Company only) financial information | | | 93 | |
| Note 34 | | - | | Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities | | | 95 | |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P54] | | |
Note 1 — Nature of Operations and Summary of Significant Accounting Policies:
The accounting and financial reporting policies of Popular, Inc. and its subsidiaries (the Corporation) conform with accounting principles generally accepted in the United States of America and with prevailing practices within the financial services industry. The following is a description of the most significant of these policies:
Nature of operations
Popular, Inc. (the Corporation) is a financial holding company, which is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation is a full 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, insurance and information processing through specialized subsidiaries. In the United States, the Corporation has established the largest Hispanic-owned financial services franchise, Banco Popular North America (BPNA). The Corporation’s finance subsidiary in the United States, Popular Financial Holdings, offers mortgage and personal loans, and also maintains a substantial wholesale broker network, a warehouse lending division, and an asset acquisitions unit. Note 30 to the consolidated financial statements presents further information about the Corporation’s business segments.
Recent main acquisitions
On August 31, 2004, the Corporation, through its subsidiary BPNA, completed the acquisition of 100% of the outstanding common shares of Quaker City Bancorp, Inc., the holding company of Quaker City Bank (Quaker City), based in Whittier, California. As of that date, excluding the effect of purchase accounting entries, Quaker City had approximately $2.1 billion in assets, $1.5 billion in loans and $1.2 billion in deposits. The purchase price of $375 million consisted of $55 per share amounting to $345 million and $30 million to cash out outstanding options and to payout compensation agreements. The purchase price resulted in a premium that was allocated principally to a core deposits intangible for approximately $19 million and goodwill for approximately $216 million.
The above acquisition was accounted for as a purchase and its results are included in the consolidated statement of income from the date of acquisition.
In August 2004, the Corporation announced a definitive agreement to acquire 100% of the outstanding common shares of Kislak Financial Corporation and its wholly owned subdiary, Kislak National Bank, a Miami, Florida-based commercial bank. In January 2005, the Corporation, through BPNA, completed this acquisition. As of the end of 2004, excluding the effect of purchase accounting entries, Kislak had approximately $965 million in assets, $590 million in loans and $659 million in deposits. The purchase price was approximately $172 million in cash. Goodwill, subject to revision of purchase accounting entries and an independent valuation analysis of intangibles acquired, approximates $97 million based on the most recent available information.
Principles of consolidation
The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the consolidated statements of condition.
Certain of the Corporation’s non-banking subsidiaries have fiscal years ending on November 30th. Accordingly, their financial information as of that date corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of December 31st. There are no significant intervening events resulting from the difference in fiscal periods, which management believes may materially affect the financial position or results of operations of the Corporation for the years ended December 31, 2004, 2003 and 2002.
Unconsolidated investments in which there is at least 20% ownership, are generally accounted for by the equity method, with earnings recorded in other operating income; those in which there is less than 20% ownership, are generally carried under the cost method of accounting, unless significant influence is exercised. Under the cost method, the Corporation recognizes income when dividends are received.
There are currently no “variable interest entities” that would require consolidation under FIN No. 46 “Consolidation of Variable Interest Entities.” Variable interest entities include entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 requires an enterprise to consolidate a variable interest entity (as defined in FIN No. 46) if that enterprise has a variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected returns if they occur, or both.
Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements in accordance with the provisions of FIN No. 46R.
[P55]
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock split
All references to the numbers of common shares and per share amounts in the financial statements and notes to the financial statements, except for the number of shares authorized in 2003 and the number of shares issued, outstanding and held in treasury at December 31, 2003 presented in the consolidated statements of condition, have been restated to reflect the two-for-one common stock split effected in the form of a dividend on July 8, 2004.
Investment securities
Investment securities are classified in four categories and accounted for as follows:
| • | Debt securities that the Corporation has the intent and ability to hold to maturity are classified as securities held-to-maturity and reported at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred. |
| |
| • | Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. |
| |
| • | Debt and equity securities not classified as either securities held-to-maturity or trading securities, and which have a readily available fair value, are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, in accumulated other comprehensive income. The specific identification method is used to determine realized gains and losses on securities available-for-sale, which are included in gains (losses) on sale of investment securities in the consolidated statements of income. |
| |
| • | Investment in debt, equity or other securities that do not have readily available fair values, are classified as other investment securities in the consolidated statements of condition. These securities are stated at the lower of cost or realizable value. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank (FHLB) stock, is included in this category. |
The amortization of premiums is deducted and the accretion of discounts is added to net interest income based on a method which approximates the interest method over the outstanding period of the related securities. The cost of securities sold is determined by specific identification. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities available-for-sale, held-to-maturity and other investment securities are determined using the specific identification method and are reported separately in the consolidated statements of income. Purchases and sales of securities are recognized on a trade-date basis.
Derivative financial instruments
The Corporation uses derivative financial instruments as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility.
When the Corporation enters into a derivative contract, the derivative instrument is designated as either a fair value hedge, cash flow hedge or as a free-standing derivative instrument. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk are recorded in current period net income. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded net of taxes in accumulated other comprehensive income and subsequently reclassified to net income in the same period(s) that the hedged transaction impacts net income. The ineffective portions of cash flow hedges are immediately recognized in current earnings. For free-standing derivative instruments, changes in the fair values are reported in current period net income.
Prior to entering a hedge transaction, the Corporation formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the statement of condition or to specific forecasted transactions or firm commitments along with a formal assessment, at both inception of the hedge and on an ongoing basis, as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in current period earnings.
Following the guidance in EITF Issue No. 03-11, “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133 and Not Held for Trading Purposes,” and from the AICPA SEC Regulations Committee meeting held on
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P56] | | |
September 16, 2003 and a separate meeting with the AICPA Insurance Expert Panel, the Corporation included as part of interest expense, $100,000, $7,477,000 and $20,085,000 in derivative losses, for the years ended December 31, 2004, 2003 and 2002, respectively. These net derivative losses represent unrealized gains and losses on derivatives not designated as hedges, but that were considered “economic hedges”. The derivative losses for 2003 and 2002 related mostly to the interest-rate swaps with a notional value of $500 million which were cancelled by the Corporation during the second quarter of 2003. SFAS No. 133 does not specify the income statement presentation of derivative gains and losses in the income statement. Prior to the guidance in EITF 03-11, the Corporation’s cash settlements (representing realized gains / losses) on the derivative contracts not designated as hedges were included as part of interest expense, while the mark-to-market adjustment of such derivative contracts (representing unrealized gains / losses) was included in non-interest income.
Loans held-for-sale
Loans held-for-sale are stated at the lower of cost or market, cost being determined based on the outstanding loan balance less unearned income, and fair market value determined on an aggregate basis according to secondary market prices. The amount, by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes therein included in the determination of net income for the period in which the change occurs.
Loans
Loans are stated at the outstanding balance less unearned income, allowance for loan losses, and any net deferred loan origination fees/costs. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method over the term of the loan as an adjustment to interest yield.
Nonaccrual loans are those loans on which the accrual of interest is discontinued. Recognition of interest income on commercial, construction loans, lease financing, conventional mortgage loans and closed-end consumer loans is discontinued when loans are 90 days or more in arrears on payments of principal or interest or when other factors indicate that the collection of principal and interest is doubtful. Income is generally recognized on open-end (revolving credit) consumer loans until the loans are charged-off. The Corporation adopted the standard industry practice for commercial loans of ceasing the accrual of interest at 90 days or more instead of 60 days or more, its prior policy, effective for the quarter ended March 31, 2004. Closed-end consumer loans and leases are charged-off when 120 days in arrears. In the case of the Corporation’s non-bank consumer and mortgage lending subsidiaries, however, closed-end consumer loans are charged-off when payments are 180 days delinquent. Open-end (revolving credit) consumer loans are charged-off when 180 days in arrears.
Lease financing
The Corporation leases passenger and commercial vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in SFAS No. 13, “Accounting for Leases,” as amended. Aggregate rentals due over the term of the leases less unearned income are included in finance lease contracts receivable. Unearned income is amortized using a method which results in approximate level rates of return on the principal amounts outstanding. Finance lease origination fees and costs are deferred and amortized over the average life of the portfolio as an adjustment to the yield.
Revenue for other leases is recognized as it becomes due under the terms of the agreement.
Allowance for loan losses
The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on such methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.
The methodology used to establish the allowance for loan losses is based on SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” (as amended by SFAS No. 118) and SFAS No. 5 “Accounting for Contingencies.” Under SFAS No. 114, commercial loans over a predefined amount are identified for impairment evaluation on an individual basis. The Corporation considers a loan to be impaired when interest and/or principal is past due 90 days or more, or, when based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate; the observable market price of the loan; or the fair value of the collateral if the loan is collateral dependent. The allowance for impaired loans is part of the Corporation’s overall allowance for loan losses. Meanwhile, SFAS No. 5 provides for the recognition of a loss allowance for groups of homogeneous loans. Under SFAS No. 5, the allowance for loan losses calculation for the Corporation is based on historical net charge-off experience by loan type and legal entity.
Cash payments received on impaired loans are recorded in accordance with the contractual terms of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income.
[P57]
However, when management believes the ultimate collectibility of principal is in doubt, the interest portion is applied to principal.
Transfers and servicing of financial assets and extinguishment of liabilities
After a transfer of financial assets, the Corporation recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.
The transfer of financial assets in which the Corporation surrenders control over the assets, is accounted for as a sale to the extent that consideration other than beneficial interests is received in exchange. SFAS No. 140 “Accounting for Transfer and Servicing of Financial Assets and Liabilities — a Replacement of SFAS No. 125” sets forth the criteria that must be met for control over transferred assets to be considered to have been surrendered, which includes: (1) the assets must be isolated from the Corporation, (2) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140 criteria then the Corporation is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto Rico income tax purposes, the Corporation treats the transfers of loans which do not qualify as “true sales” under SFAS No. 140, as sales, recognizing a deferred tax asset on the transaction.
Where the derecognition criteria are met and the transfer is accounted for as a sale, interests in the assets sold may be retained in the form of interest-only strips and servicing rights. Gains or losses on sale depend in part on the previous carrying amount of the loans involved in the transfer which is allocated between the loans sold and the retained interests, based on their relative fair value at the date of the sale.
The Corporation sells mortgage loans to the Government National Mortgage Association (GNMA) in the normal course of business and retains the servicing rights. The GNMA programs under which the loans are sold allow the Corporation to repurchase individual delinquent loans that meet certain criteria. At the Corporation’s option, and without GNMA’s prior authorization, the Corporation may repurchase the delinquent loan for an amount equal to 100% of the remaining principal balance of the loan. Under SFAS No. 140, once the Corporation has the unconditional ability to repurchase the delinquent loan, the Corporation is deemed to have regained effective control over the loan and recognizes the loan on its balance sheet as well as an offsetting liability, regardless of the Corporation’s intent to repurchase the loan.
Servicing assets
Servicing assets represent the costs of acquiring the contractual right to service loans for others. Servicing assets are included as part of other assets in the consolidated statements of condition. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected.
The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing assets are originated or purchased. The total cost of loans to be sold with servicing assets retained is allocated to the servicing assets and the loans (without the servicing assets), based on their relative fair values. Servicing assets are amortized in proportion to and over the period of estimated net servicing income. In addition, the Corporation assesses capitalized servicing assets for impairment based on the fair value of those assets.
To estimate the fair value of servicing assets the Corporation considers prices for similar assets and the present value of expected future cash flows associated with the servicing assets calculated using assumptions that market participants would use in estimating future servicing income and expense, including discount rates, anticipated prepayment and credit loss rates. For purposes of evaluating and measuring impairment of capitalized servicing assets, the Corporation stratifies such assets based on predominant risk characteristics of underlying loans, such as loan type, rate and term. The amount of impairment recognized, if any, is the amount by which the capitalized servicing assets per stratum exceed their estimated fair value. Temporary impairment is recognized through a valuation allowance with changes included in net income for the period in which the change occurs. If it is later determined that all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced through a recovery of income.
Servicing rights are also reviewed for other-than-temporary impairment. When the recoverability of an impaired servicing asset is determined to be remote, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the servicing rights, precluding subsequent recoveries.
Interest-only securities
In past years, the Corporation sold residential mortgage loans to qualifying special-purpose entities (QSPEs), which in turn issued asset-backed securities to investors. The Corporation retained an interest in the loans sold in the form of a residual or interest-only security. The residual or interest-only security represents the present value of future excess cash flows resulting from the difference between the interest received from the obligors on the loans and the interest paid to the investors on the asset-backed securities, net of credit losses, servicing fees and other expenses. The assets and liabilities of the QSPEs are not included in the Corporation’s
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P58] | | |
consolidated statements of condition, except for the retained interests previously described. In the normal course of business the Corporation also acquires interest-only securities in the secondary market. The interest-only securities are classified as available-for-sale securities and are measured at fair value. Factors considered in the valuation model for calculating the fair value of these subordinated interests are market discount rates, anticipated prepayment and loss rates on the underlying assets. The interest-only securities are subject to other-than-temporary impairment evaluations on a quarterly basis.
Premises and equipment and other long-lived assets
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings as realized or incurred, respectively.
The Corporation evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
In the event of an asset retirement, the Corporation recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.
Other real estate
Other real estate, received in satisfaction of debt, is recorded at the lower of cost (carrying value of the loan) or the appraised value less estimated costs of disposal of the real estate acquired, by charging the allowance for loan losses. Subsequent to foreclosure, any losses in the carrying value arising from periodic reevaluations of the properties, and any gains or losses on the sale of these properties are credited or charged to expense in the period incurred and are included as a component of other operating expenses. The cost of maintaining and operating such properties is expensed as incurred.
Goodwill and other intangible assets
Other identifiable intangible assets with a finite useful life, mainly core deposits and customer relationships, are amortized using various methods over the periods benefited, which range from 4 to 15 years.
Goodwill and other identifiable intangibles that have been determined to have an indefinite useful life are not amortized, but are subject to periodic test for impairment.
The Corporation annually tests goodwill for impairment using a two-step process. The first step identifies if potential impairment exists, while the second step measures the amount of impairment, if any, based on fair value. Other intangible assets deemed to have an indefinite life are tested for impairment using a one-step process which compares the fair value with the carrying amount of the asset.
The Corporation performed the impairment tests during 2003 and 2004, and determined that there were no impairment losses to be recognized in those periods.
For further disclosures required by SFAS No. 142, refer to Note 10 to the consolidated financial statements.
Bank Owned Life Insurance
Bank owned life insurance represents life insurance on the lives of certain employees who have provided positive consent allowing the Corporation to be the beneficiary of the policy. Bank owned life insurance policies are carried at their cash surrender value. The Corporation recognizes income from the periodic increases in the cash surrender value of the policy, as well as insurance proceeds received, which are recorded as other operating income, and are not subject to income taxes.
Assets sold/purchased under agreements to repurchase/resell
Repurchase and resell agreements are treated as collateralized financing transactions and are carried at the amounts at which the assets will be subsequently reacquired or resold as specified in the respective agreements.
It is the Corporation’s policy to take possession of securities purchased under resells agreements. However, the counterparties to such agreements maintain effective control over such securities, and accordingly those are not reflected in the Corporation’s consolidated statements of condition. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral where deemed appropriate.
It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of condition.
Guarantees, including indirect guarantees of indebtness of others
The Corporation as a guarantor recognizes at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.
Treasury stock
Treasury stock is recorded at cost and is carried as a reduction of stockholders’ equity in the consolidated statements of condition. At the date of retirement or subsequent reissue, the treasury stock
[P59]
account is reduced by the cost of such stock. The difference between the consideration received upon issuance and the specific cost is charged or credited to surplus.
Income and expense recognition — Processing business
Revenue from information processing and other services is recognized at the time services are rendered. Rental and maintenance service revenue is recognized ratably over the corresponding contractual periods. Revenue from software and hardware sales is recognized at the time software and equipment is installed or delivered depending on the contractual requirements to the Corporation. Revenue from contracts to create data processing centers and the related cost is recognized as project phases are completed and accepted. Operating expenses are recognized as incurred. Project expenses are deferred and recognized when the related income is earned.
Income Recognition — Insurance agency business
Commissions and fees are recorded when billed. Contingent commissions are recorded on the accrual basis when the amount to be received is notified by the insurance company. Commission income from advance business is deferred. An allowance is created for expected adjustments to commissions earned relating to policy cancellations.
Foreign exchange
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 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 December 31, 2004, the Corporation had approximately $35,530,000 in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive income.
The Corporation had been monitoring the inflation levels in the Dominican Republic to evaluate whether it met 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.” The cumulative inflation in the Dominican Republic for the 36 months ended June 30, 2004 exceeded the 100 percent threshold. In accordance with the provisions of SFAS No. 52, the financial statements of a foreign entity in a highly inflationary economy shall be remeasured as if the functional currency were the reporting currency. Accordingly, the Corporation’s interests in the Dominican Republic were remeasured into the U.S. dollar. During 2004, approximately $1,825,000 in remeasurement gains on the investments held by the Corporation in the Dominican Republic were reflected in other operating income instead of accumulated other comprehensive income. These remeasurement gains / losses will continue to be reflected in earnings until the economy is no longer highly inflationary. The unfavorable cumulative translation adjustment associated with these interests at the reporting date in which the economy became highly inflationary approximated $31,787,000.
Income taxes
The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. A deferred tax valuation allowance is established if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized.
Employees’ retirement and other postretirement benefit plans
Banco Popular de Puerto Rico (BPPR) and Banco Popular North America (BPNA) have trusteed, noncontributory retirement and other benefit plans. Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute to the plan as necessary to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year.
BPPR also provides certain health and life insurance benefits for eligible retirees and their dependents. The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P60] | | |
Stock-based compensation
The Corporation accounts for stock options based on the fair value method of recording stock awards under SFAS No. 123 “Accounting for Stock-Based Compensation.” All stock option grants are expensed over the stock option vesting period based on their fair value at the date the options are granted.
Compensation expense for restricted stock awards is recognized ratably over the vesting period, which extends up to each participant attaining 55 years of age. The Corporation begins recognizing the deferred compensation based on the performance of the year under evaluation based on established goals and eligible salaries. Subject to the attainment of the established performance goals, shares of restricted stock are awarded based upon the fair value of the stock on the date of grant.
Comprehensive income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. The presentation of comprehensive income is included in separate consolidated statements of comprehensive income.
Earnings per common share
Basic earnings per common share are computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares of the Corporation outstanding during the year. Diluted earnings per common share take into consideration the weighted average common shares adjusted for the effect of stock options and restricted stock, using the treasury stock method.
Statement of cash flows
For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks.
Reclassifications
Certain reclassifications have been made to the 2003 and 2002 consolidated financial statements to conform with the 2004 presentation.
Recently issued accounting pronouncements and interpretations
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 Payments.” 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 for 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 equaled 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 adjusted to reflect actual forfeitures and the 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. This Statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Management is currently evaluating the effect of adoption of SFAS No. 123-R, but does not expect the adoption to have a material effect on the Corporation’s financial condition, results of operations or cash flows due to the fact that in 2002, the Corporation voluntarily adopted the fair value recognition method under SFAS No. 123.
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. 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 is not expected to have a material impact on the Corporation’s financial condition, results of operations, or cashflows.
[P61]
Issue 03-1 “Meaning of Other Than Temporary Impairment"
In March 2004, the Emerging Issues Task Force reached a consensus on EITF Issue 03-1, “Meaning of Other Than Temporary Impairment” (Issue 03-1). The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired is as follows: Step 1: Determine whether the investment is impaired. An investment is impaired if its fair value is less than its cost. Step 2: Evaluate whether the impairment is other-than-temporary. Step 3: If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value. The three-step model used to determine other-than-temporary impairments was required to be applied prospectively to all current and future investments in interim or annual reporting periods beginning after June 15, 2004.
On September 15, 2004, the FASB issued proposed FSP EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1” (Issue 03-1-a) to address the application of Issue 03-1 to debt securities that are impaired solely because of interest-rates and / or sector-spread increases and that are analyzed for impairment under paragraph 16 of Issue 03-1. On September 30, 2004, the FASB issued FSP EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1,” (Issue 03-1-1) which delayed the effective date of paragraphs 10-20 of Issue 03-1. Paragraphs 10-20 of Issue 03-1 give guidance on how to evaluate and recognize an impairment loss that is other than temporary (i.e., steps 2 and 3 of the impairment model). Issue 03-1-1 expands the scope of the deferral to include all securities covered by Issue 03-1. The delay of the effective date for paragraphs 10-20 of Issue 03-1 will be superseded concurrent with the final issuance of Issue 03-1-a.
The Corporation is currently evaluating the effects that this proposed statement may have on its financial condition and results of operations.
FASB Staff Position No. FAS 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”
On December 8, 2003, The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law, authorizing Medicare to provide prescription drug benefits to retirees. To encourage employers to retain or provide postretirement drug benefits for their Medicare-eligible retirees, the federal government will begin in 2006 to make subsidy payments to employers that sponsor postretirement benefit plans under which retirees receive prescription drug benefits that are “actuarially equivalent” to the prescription drug benefits provided under Medicare. FASB Staff Position (FSP) No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the FSP 106-2), was issued on May 19, 2004. This FSP supersedes FSP No. FAS 106-1 of the same title issued in January 2004. The FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D. It also contains basic guidance on related income tax accounting, and complex rules for transition that permit various alternative prospective and retroactive transition approaches.
Management has concluded that benefits provided under the Corporation’s plan meet the “actuarially equivalent” standard set forth in the Medicare Act. As permitted, Popular, Inc. elected to adopt the provisions of FSP 106-2 on a prospective basis in the third quarter of 2004 with remeasurement as of July 1, 2004. Refer to Note 22, Employee benefits, for disclosures on effects of the subsidy in the measurement of the net periodic postretirement benefit costs and the accumulated postretirement benefit obligation.
SAB 105 “Application of Accounting Principles to Loan Commitments”
On March 9, 2004, the SEC issued Staff Accounting Bulletin 105, “Application of Accounting Principles to Loan Commitments,” (SAB 105) stating that the fair value of recorded loan commitments is to be accounted for as a derivative instrument under SFAS No. 133, but the valuation of such commitment should not consider the expected future cash flows related to servicing of the future loan. The provisions of SAB 105 were adopted by the Corporation for transactions entered into after March 31, 2004. The adoption of SAB 105 did not have a material impact on the Corporation’s financial condition, results of operations or cashflows.
Statement of Position 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”
In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3). This statement addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P62] | | |
allowance. SOP 03-3 prohibits investors from displaying accretable securities, yield and nonaccretable difference in the balance sheet. Subsequent substantially increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over held by the Corporation its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment.
SOP 03-3 prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this statement. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. SOP 03-3 is effective for loans underlying securities for acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged. The Corporation elected to adopt SOP 03- 3 for the year ending December 31, 2005. The Corporation does not anticipate that the adoption of SOP 03-3 will have a material impact on its financial condition or results of operations.
Note 2 — 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. The amount of those required average reserve balances was approximately $595,053,000 at December 31, 2004 (2003 — $496,979,000). 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 December 31, 2004, the Corporation had securities with a market value of $899,000 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. At December 31, 2003, there were approximately $222,000 of cash funds held in segregation to meet this requirement.
As required by the Puerto Rico International Banking Center Law, at December 31, 2004 and 2003, the Corporation maintained separately for its two international banking entities (IBEs), $600,000 in time deposits, equally split for the two IBEs, which were considered restricted assets.
Note 3 — Securities purchased under agreements to resell:
The securities purchased underlying the agreements to resell were delivered to, and are held by, the Corporation. The counterparties to such agreements maintain effective control over such securities.
The Corporation is permitted by contract to repledge the and has agreed to resell to the counterparties the same or similar securities at the maturity of the agreements.
The fair value of the collateral securities on these transactions at December 31, was as follows:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| Repledged | | $ | 612,860 | | | $ | 707,797 | |
| Not repledged | | | 46,927 | | | | 33,935 | |
| |
| Total | | $ | 659,787 | | | $ | 741,732 | |
| |
The repledged securities were used as repurchase agreement transactions.
[P63]
Note 4 — Investment securities available-for-sale:
The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and contractual maturities of investment securities available-for-sale at December 31, 2004 and 2003 (2002 — only market value is presented) were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 |
| | | | | | | Gross | | Gross | | | | | | Weighted |
| | | Amortized | | unrealized | | unrealized | | Market | | average |
| | | cost | | gains | | losses | | value | | yield |
| | | (Dollars in thousands) |
| U.S. Treasury securities | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | $ | 39,926 | | | | | | | $ | 282 | | | $ | 39,644 | | | | 1.85 | % |
| After 1 to 5 years | | | 14,963 | | | | | | | | 10 | | | | 14,953 | | | | 3.01 | |
| After 10 years | | | 492,692 | | | | | | | | 23,304 | | | | 469,388 | | | | 3.82 | |
| |
| | | | 547,581 | | | | | | | | 23,596 | | | | 523,985 | | | | 3.65 | |
| |
| Obligations of other U.S. Government agencies and corporations | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | 40,168 | | | | | | | | 128 | | | | 40,040 | | | | 1.87 | |
| After 1 to 5 years | | | 3,674,149 | | | $ | 9,557 | | | | 16,723 | | | | 3,666,983 | | | | 3.35 | |
| After 5 to 10 years | | | 3,162,158 | | | | 18,194 | | | | 15,140 | | | | 3,165,212 | | | | 4.26 | |
| After 10 years | | | 6,187 | | | | 445 | | | | 4 | | | | 6,628 | | | | 5.73 | |
| |
| | | | 6,882,662 | | | | 28,196 | | | | 31,995 | | | | 6,878,863 | | | | 3.76 | |
| |
| Obligations of P.R., States and political subdivisions | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | 3,851 | | | | 6 | | | | | | | | 3,857 | | | | 4.57 | |
| After 1 to 5 years | | | 29,362 | | | | 1,077 | | | | 129 | | | | 30,310 | | | | 5.38 | |
| After 5 to 10 years | | | 17,063 | | | | 798 | | | | | | | | 17,861 | | | | 5.09 | |
| After 10 years | | | 78,624 | | | | 2,735 | | | | 1,429 | | | | 79,930 | | | | 5.69 | |
| |
| | | | 128,900 | | | | 4,616 | | | | 1,558 | | | | 131,958 | | | | 5.50 | |
| |
Collateralized mortgage obligations
After 1 to 5 years | | | 2,796 | | | | 22 | | | | | | | | 2,818 | | | | 3.81 | |
| After 10 years | | | 1,603,925 | | | | 6,576 | | | | 7,365 | | | | 1,603,136 | | | | 2.48 | |
| |
| | | | 1,606,721 | | | | 6,598 | | | | 7,365 | | | | 1,605,954 | | | | 2.48 | |
| |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | |
| After 1 to 5 years | | | 155,972 | | | | 1,310 | | | | 356 | | | | 156,926 | | | | 4.15 | |
| After 5 to 10 years | | | 256,166 | | | | 923 | | | | 1,166 | | | | 255,923 | | | | 4.00 | |
| After 10 years | | | 1,416,781 | | | | 23,243 | | | | 5,104 | | | | 1,434,920 | | | | 5.37 | |
| |
| | | | 1,828,919 | | | | 25,476 | | | | 6,626 | | | | 1,847,769 | | | | 5.07 | |
| |
| Equity securities (without contractual maturity) | | | 22,796 | | | | 84,425 | | | | 298 | | | | 106,923 | | | | 3.87 | |
| |
| Other | | | | | | | | | | | | | | | | | | | | |
| After 1 to 5 years | | | 1,470 | | | | 69 | | | | 33 | | | | 1,506 | | | | 0.08 | |
| After 5 to 10 years | | | 4,741 | | | | 625 | | | | 132 | | | | 5,234 | | | | 0.08 | |
| After 10 years | | | 59,484 | | | | 549 | | | | 80 | | | | 59,953 | | | | 6.87 | |
| |
| | | | 65,695 | | | | 1,243 | | | | 245 | | | | 66,693 | | | | 6.23 | |
| |
| | | $ | 11,083,274 | | | $ | 150,554 | | | $ | 71,683 | | | $ | 11,162,145 | | | | 3.82 | % |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2003 | | 2002 |
| | | | | | | Gross | | Gross | | | | | | Weighted | | |
| | | Amortized | | unrealized | | unrealized | | Market | | average | | Market |
| | | cost | | gains | | losses | | value | | value | | value |
| | | (Dollars in thousands) |
| U.S. Treasury securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | | | | | | | | | | | | | | | | | | | | $ | 304,453 | |
| After 1 to 5 years | | $ | 54,862 | | | $ | 115 | | | | | | | $ | 54,977 | | | | 1.59 | % | | | 55,766 | |
| After 10 years | | | 500,902 | | | | | | | $ | 32,855 | | | | 468,047 | | | | 3.82 | | | | | |
| |
| | | | 555,764 | | | | 115 | | | | 32,855 | | | | 523,024 | | | | 3.60 | | | | 360,219 | |
| |
| Obligations of other U.S. Government agencies and corporations | | | | | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | 609,614 | | | | 8,048 | | | | | | | | 617,662 | | | | 3.32 | | | | 152,530 | |
| After 1 to 5 years | | | 2,073,990 | | | | 24,705 | | | | 3,413 | | | | 2,095,282 | | | | 3.79 | | | | 3,484,418 | |
| After 5 to 10 years | | | 3,549,232 | | | | 5,390 | | | | 50,767 | | | | 3,503,855 | | | | 3.96 | | | | 2,321,505 | |
| After 10 years | | | 50,000 | | | | | | | | 270 | | | | 49,730 | | | | 2.09 | | | | 359,705 | |
| |
| | | | 6,282,836 | | | | 38,143 | | | | 54,450 | | | | 6,266,529 | | | | 3.83 | | | | 6,318,158 | |
| |
| Obligations of P.R., States and political subdivisions | | | | | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | 1,095 | | | | 24 | | | | | | | | 1,119 | | | | 6.40 | | | | 6,591 | |
| After 1 to 5 years | | | 18,061 | | | | 1,108 | | | | | | | | 19,169 | | | | 5.96 | | | | 24,986 | |
| After 5 to 10 years | | | 29,804 | | | | 1,748 | | | | 4 | | | | 31,548 | | | | 5.37 | | | | 27,660 | |
| After 10 years | | | 79,971 | | | | 3,184 | | | | 1,799 | | | | 81,356 | | | | 5.68 | | | | 24,668 | |
| |
| | | | 128,931 | | | | 6,064 | | | | 1,803 | | | | 133,192 | | | | 5.65 | | | | 83,905 | |
| |
| Collateralized mortgage obligations | | | | | | | | | | | | | | | | | | | | | | | | |
| After 1 to 5 years | | | 5,869 | | | | 118 | | | | | | | | 5,987 | | | | 4.50 | | | | 13,305 | |
| After 5 to 10 years | | | 4,526 | | | | | | | | | | | | 4,526 | | | | 8.52 | | | | 22,621 | |
| After 10 years | | | 1,805,854 | | | | 6,509 | | | | 8,651 | | | | 1,803,712 | | | | 2.43 | | | | 2,147,883 | |
| |
| | | | 1,816,249 | | | | 6,627 | | | | 8,651 | | | | 1,814,225 | | | | 2.45 | | | | 2,183,809 | |
| |
| Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | | | | | | | | | | | | | | | | | | | | | 1 | |
| After 1 to 5 years | | | 103,131 | | | | 216 | | | | 985 | | | | 102,362 | | | | 3.32 | | | | 9,550 | |
| After 5 to 10 years | | | 210,328 | | | | 1,225 | | | | 624 | | | | 210,929 | | | | 4.28 | | | | 110,911 | |
| After 10 years | | | 793,880 | | | | 30,753 | | | | 342 | | | | 824,291 | | | | 5.85 | | | | 1,010,214 | |
| |
| | | | 1,107,339 | | | | 32,194 | | | | 1,951 | | | | 1,137,582 | | | | 5.32 | | | | 1,130,676 | |
| |
| Equity securities (without contractual maturity) | | | 26,010 | | | | 67,721 | | | | 235 | | | | 93,496 | | | | 4.35 | | | | 119,750 | |
| |
Other
After 1 to 5 years | | | 2,627 | | | | 88 | | | | 206 | | | | 2,509 | | | | 3.63 | | | | 1,046 | |
| After 5 to 10 years | | | 3,750 | | | | 585 | | | | 291 | | | | 4,044 | | | | 0.89 | | | | 397 | |
| After 10 years | | | 77,449 | | | | 454 | | | | 925 | | | | 76,978 | | | | 7.13 | | | | 112,696 | |
| |
| | | | 83,826 | | | | 1,127 | | | | 1,422 | | | | 83,531 | | | | 6.74 | | | | 114,139 | |
| |
| | | $ | 10,000,955 | | | $ | 151,991 | | | $ | 101,367 | | | $ | 10,051,579 | | | | 3.78 | % | | $ | 10,310,656 | |
| |
The weighted average yield on investment securities available-for-sale is based on amortized cost, therefore it does not give effect to changes in fair value.
Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P64] | | |
During 2004, the Corporation reassessed the appropriateness of the classification of certain mortgage-backed securities and transferred $351,000,000 from trading to available-for-sale securities based on management’s intention and business purpose. The securities were transferred into the available-for-sale category at fair value.
The aggregate amortized cost and approximate market value of investment securities available-for-sale at December 31, 2004, by contractual maturity are shown below:
| | | | | | | | | |
| (In thousands) | | Amortized cost | | Market value |
| Within 1 year | | $ | 83,945 | | | $ | 83,541 | |
| After 1 to 5 years | | | 3,878,712 | | | | 3,873,496 | |
| After 5 to 10 years | | | 3,440,128 | | | | 3,444,230 | |
| After 10 years | | | 3,657,693 | | | | 3,653,955 | |
| |
| Total | | $ | 11,060,478 | | | $ | 11,055,222 | |
| Without contractual maturity | | | 22,796 | | | | 106,923 | |
| |
| Total investment securities available-for-sale | | $ | 11,083,274 | | | $ | 11,162,145 | |
| |
Proceeds from the sale of investment securities available-for- sale during 2004 were $632,151,000 (2003 - $810,540,000; 2002 - $1,266,504,000). Gross realized gains and losses on these securities during the year were $15,497,000 and $243,000, respectively (2003 - - $71,290,000 and $196,000; 2002 - $3,717,000 and $7,059,000).
The following table shows the Corporation’s gross unrealized losses and fair 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 December 31, 2004 and 2003:
December 31, 2004
| | | | | | | | | | | | | |
| | | Less than 12 months |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| U.S. Treasury securities | | $ | 54,889 | | | $ | 292 | | | $ | 54,597 | |
| Obligations of other U.S. Government agencies and corporations | | | 3,371,503 | | | | 19,038 | | | | 3,352,465 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 10,957 | | | | 129 | | | | 10,828 | |
| Collateralized mortgage obligations | | | 434,001 | | | | 4,690 | | | | 429,311 | |
| Mortgage-backed securities | | | 921,534 | | | | 6,581 | | | | 914,953 | |
| Equity securities | | | 300 | | | | 298 | | | | 2 | |
| Other | | | 6,553 | | | | 245 | | | | 6,308 | |
| |
| | | $ | 4,799,737 | | | $ | 31,273 | | | $ | 4,768,464 | |
| |
| | | | | | | | | | | | | |
| | | 12 months of more |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| U.S. Treasury securities | | $ | 492,692 | | | $ | 23,304 | | | $ | 469,388 | |
| Obligations of other U.S. Government agencies and corporations | | | 492,816 | | | | 12,957 | | | | 479,859 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 43,700 | | | | 1,429 | | | | 42,271 | |
| Collateralized mortgage obligations | | | 136,923 | | | | 2,675 | | | | 134,248 | |
| Mortgage-backed securities | | | 1,217 | | | | 45 | | | | 1,172 | |
| |
| | | $ | 1,167,348 | | | $ | 40,410 | | | $ | 1,126,938 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Total | | |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| U.S. Treasury securities | | $ | 547,581 | | | $ | 23,596 | | | $ | 523,985 | |
| Obligations of other U.S. Government agencies and corporations | | | 3,864,319 | | | | 31,995 | | | | 3,832,324 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 54,657 | | | | 1,558 | | | | 53,099 | |
| Collateralized mortgage obligations | | | 570,924 | | | | 7,365 | | | | 563,559 | |
| Mortgage-backed securities | | | 922,751 | | | | 6,626 | | | | 916,125 | |
| Equity securities | | | 300 | | | | 298 | | | | 2 | |
| Other | | | 6,553 | | | | 245 | | | | 6,308 | |
| |
| | | $ | 5,967,085 | | | $ | 71,683 | | | $ | 5,895,402 | |
| |
December 31, 2003
| | | | | | | | | | | | | |
| | | Less than 12 months |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| U.S. Treasury securities | | $ | 500,902 | | | $ | 32,855 | | | $ | 468,047 | |
| Obligations of other U.S. Government agencies and corporations | | | 3,264,856 | | | | 54,450 | | | | 3,210,406 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 44,174 | | | | 1,803 | | | | 42,371 | |
| Collateralized mortgage obligations | | | 803,585 | | | | 8,651 | | | | 794,934 | |
| Mortgage-backed securities | | | 251,825 | | | | 1,938 | | | | 249,887 | |
| Equity securities | | | 4,002 | | | | 194 | | | | 3,808 | |
| Other | | | 14,017 | | | | 1,419 | | | | 12,598 | |
| |
| | | $ | 4,883,361 | | | $ | 101,310 | | | $ | 4,782,051 | |
| |
| | | | | | | | | | | | | |
| | | 12 months of more |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| Mortgage-backed securities | | $ | 203 | | | $ | 13 | | | $ | 190 | |
| Equity securities | | | 527 | | | | 41 | | | | 486 | |
| Other | | | 1,003 | | | | 3 | | | | 1,000 | |
| |
| | | $ | 1,733 | | | $ | 57 | | | $ | 1,676 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Total | | |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| U.S. Treasury securities | | $ | 500,902 | | | $ | 32,855 | | | $ | 468,047 | |
| Obligations of other U.S. Government agencies and corporations | | | 3,264,856 | | | | 54,450 | | | | 3,210,406 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 44,174 | | | | 1,803 | | | | 42,371 | |
| Collateralized mortgage obligations | | | 803,585 | | | | 8,651 | | | | 794,934 | |
| Mortgage-backed securities | | | 252,028 | | | | 1,951 | | | | 250,077 | |
| Equity securities | | | 4,529 | | | | 235 | | | | 4,294 | |
| Other | | | 15,020 | | | | 1,422 | | | | 13,598 | |
| |
| | | $ | 4,885,094 | | | $ | 101,367 | | | $ | 4,783,727 | |
| |
The unrealized loss positions of available-for-sale securities at December 31, 2004 are primarily associated with U.S. Agency and Treasury obligations, and to a lesser extent, U.S. Agency-issued collateralized mortgage obligations, and mortgage-backed securities. The vast majority of these securities are rated the equivalent of AAA by the major rating agencies. The investmentportfolio is structured primarily with highly liquid securities which possess a large and efficient secondary market. Valuationsare performed at least on a quarterly basis using third party providers and dealer
[P65]
quotes. Management believes that the unrealized losses in the available-for-sale portfolio at December 31, 2004 are substantially related to market interest rate fluctuations and not to a 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.
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.
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 |
| | | Amortized | | Market | | Amortized | | Market |
| (In thousands) | | cost | | Value | | cost | | Value |
| |
| FNMA | | $ | 1,915,392 | | | $ | 1,931,026 | | | $ | 1,415,867 | | | $ | 1,434,296 | |
| FHLB | | | 6,669,002 | | | | 6,671,910 | | | | 5,896,998 | | | | 5,878,565 | |
| Freddie Mac | | | 1,322,095 | | | | 1,318,525 | | | | 1,190,684 | | | | 1,185,378 | |
| |
Note 5 — Investment securities held-to-maturity:
The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and contractual maturities of investment securities held-to-maturity at December 31, 2004 and 2003 (2002 — only amortized cost is presented) were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 |
| | | | | | | Gross | | Gross | | | | Weighted |
| | | Amortized | | unrealized | | unrealized | | Market | | average |
| | | cost | | gains | | losses | | value | | yield |
| | | (Dollars in thousands) |
| Obligations of other U.S. Government agencies and corporations | |
| Within 1 year | | $ | 176,954 | | | $ | 9 | | | $ | 1 | | | $ | 176,962 | | | | 1.90 | % |
| |
| Obligations of P.R., States and political subdivisions | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | 42,005 | | | | 2 | | | | | | | | 42,007 | | | | 2.20 | |
| After 1 to 5 years | | | 6,688 | | | | 135 | | | | 9 | | | | 6,814 | | | | 5.38 | |
| After 5 to 10 years | | | 9,265 | | | | 473 | | | | | | | | 9,738 | | | | 5.70 | |
| After 10 years | | | 58,920 | | | | 2,294 | | | | 110 | | | | 61,104 | | | | 4.77 | |
| |
| | | | 116,878 | | | | 2,904 | | | | 119 | | | | 119,663 | | | | 3.95 | |
| |
| Collateralized mortgage obligations | | | | | | | | | | | | | | | | | | | | |
| After 10 years | | | 623 | | | | | | | | 65 | | | | 558 | | | | 5.45 | |
| |
| Other | |
| Within 1 year | | | 17,337 | | | | 251 | | | | | | | | 17,588 | | | | 5.37 | |
| After 1 to 5 years | | | 28,558 | | | | 1,074 | | | | 4 | | | | 29,628 | | | | 5.29 | |
| After 5 to 10 years | | | 500 | | | | | | | | | | | | 500 | | | | 3.51 | |
| |
| | | | 46,395 | | | | 1,325 | | | | 4 | | | | 47,716 | | | | 5.30 | |
| |
| | | $ | 340,850 | | | $ | 4,238 | | | $ | 189 | | | $ | 344,899 | | | | 3.07 | % |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2003 | | 2002 |
| | | | | | | Gross | | Gross | | | | | | Weighted | | |
| | | Amortized | | unrealized | | unrealized | | Market | | average | | Amortized |
| | | cost | | gains | | losses | | value | | yield | | cost |
| | | (Dollars in thousands) |
| Obligations of other U.S. Government agencies and corporations | |
| Within 1 year | | $ | 34,698 | | | | | | | $ | 1 | | | $ | 34,697 | | | | 1.05 | % | | $ | 28,618 | |
| |
| Obligations of P.R., States and political subdivisions | | | | | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | 15,656 | | | | | | | | 1 | | | | 15,655 | | | | 0.87 | | | | 24,047 | |
| After 1 to 5 years | | | 6,577 | | | $ | 187 | | | | 2 | | | | 6,762 | | | | 5.33 | | | | 5,736 | |
| After 5 to 10 years | | | 8,710 | | | | 92 | | | | 76 | | | | 8,726 | | | | 5.56 | | | | 9,496 | |
| After 10 years | | | 61,485 | | | | 5 | | | | 2,138 | | | | 59,352 | | | | 4.49 | | | | 40,895 | |
| |
| | | | 92,428 | | | | 284 | | | | 2,217 | | | | 90,495 | | | | 4.04 | | | | 80,174 | |
| |
| Collateralized mortgage obligations | | | | | | | | | | | | | | | | | | | | | | | | |
| After 10 years | | | 863 | | | | | | | | 112 | | | | 751 | | | | 5.45 | | | | 1,126 | |
| |
| Other | | | | | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | 13,688 | | | | 289 | | | | | | | | 13,977 | | | | 5.22 | | | | 12,748 | |
| After 1 to 5 years | | | 41,448 | | | | 2,734 | | | | | | | | 44,182 | | | | 5.26 | | | | 51,203 | |
| After 5 to 10 years | | | 3,696 | | | | 276 | | | | | | | | 3,972 | | | | 5.18 | | | | 6,882 | |
| |
| | | | 58,832 | | | | 3,299 | | | | | | | | 62,131 | | | | 5.25 | | | | 70,833 | |
| |
| | | $ | 186,821 | | | $ | 3,583 | | | $ | 2,330 | | | $ | 188,074 | | | | 3.87 | % | | $ | 180,751 | |
| |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P66] | | |
Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.
The aggregate amortized cost and approximate market value of investment securities held-to-maturity at December 31, 2004, by contractual maturity are shown below:
| | | | | | | | | |
| (In thousands) | | Amortized cost | | Market value |
| |
| Within 1 year | | $ | 236,296 | | | $ | 236,557 | |
| After 1 to 5 years | | | 35,246 | | | | 36,442 | |
| After 5 to 10 years | | | 9,765 | | | | 10,238 | |
| After 10 years | | | 59,543 | | | | 61,662 | |
| |
| Total investment securities held-to-maturity | | $ | 340,850 | | | $ | 344,899 | |
| |
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 December 31, 2004 and 2003:
December 31, 2004
| | | | | | | | | | | | | |
| | | Less than 12 months |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| Obligations of other U.S. Government agencies and corporations | | $ | 21,983 | | | $ | 1 | | | $ | 21,982 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 1,078 | | | | 9 | | | | 1,069 | |
| Other | | | 750 | | | | 4 | | | | 746 | |
| |
| | | $ | 23,811 | | | $ | 14 | | | $ | 23,797 | |
| |
| | | | | | | | | | | | | |
| | | 12 months of more |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| Obligations of Puerto Rico, States and political subdivisions | | $ | 22,080 | | | $ | 110 | | | $ | 21,970 | |
| Collateralized mortgage obligations | | | 623 | | | | 65 | | | | 558 | |
| Other | | | 250 | | | | — | | | | 250 | |
| |
| | | $ | 22,953 | | | $ | 175 | | | $ | 22,778 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Total | | |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| Obligations of other U.S. Government agencies and corporations | | $ | 21,983 | | | $ | 1 | | | $ | 21,982 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 23,158 | | | | 119 | | | | 23,039 | |
| Collateralized mortgage obligations | | | 623 | | | | 65 | | | | 558 | |
| Other | | | 1,000 | | | | 4 | | | | 996 | |
| |
| | | $ | 46,764 | | | $ | 189 | | | $ | 46,575 | |
| |
December 31, 2004
| | | | | | | | | | | | | |
| | | Less than 12 months |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| Obligations of other U.S. Government agencies and corporations | | $ | 34,698 | | | $ | 1 | | | $ | 34,697 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 66,220 | | | | 2,216 | | | | 64,004 | |
| |
| | $ | 100,918 | | | $ | 2,217 | | | $ | 98,701 | |
| |
| | | | | | | | | | | | | |
| | | 12 months of more |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| Obligations of Puerto Rico, States and political subdivisions | | $ | 221 | | | $ | 1 | | | $ | 220 | |
| Collateralized mortgage obligations | | | 863 | | | | 112 | | | | 751 | |
| |
| | | $ | 1,084 | | | $ | 113 | | | $ | 971 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Total | | |
| | | Amortized | | Unrealized | | Market |
| (In thousands) | | Cost | | Losses | | Value |
| |
| Obligations of other U.S. Government agencies and corporations | | $ | 34,698 | | | $ | 1 | | | $ | 34,697 | |
| Obligations of Puerto Rico, States and political subdivisions | | | 66,441 | | | | 2,217 | | | | 64,224 | |
| Collateralized mortgage obligations | | | 863 | | | | 112 | | | | 751 | |
| |
| | | $ | 102,002 | | | $ | 2,330 | | | $ | 99,672 | |
| |
Management believes that the unrealized losses in the held-to-maturity portfolio at December 31, 2004 are substantially related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments until maturity.
Note 6 — Pledged assets:
At December 31, 2004 and 2003, 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 pledged assets, which the secured parties are not permitted to sell or repledge the collateral at December 31, were as follows:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| |
| Investment securities available-for-sale | | $ | 2,802,647 | | | $ | 2,431,198 | |
| Investment securities held-to-maturity | | | 1,378 | | | | 1,597 | |
| Loans | | | 10,749,244 | | | | 8,257,830 | |
| |
| | | $ | 13,553,269 | | | $ | 10,690,625 | |
| |
Pledged securities and loans that the creditor has the right by custom or contract to repledge are presented separately on the consolidated statements of condition.
[P67]
Note 7 — Loans and allowance for loan losses:
The composition of loans held-in-portfolio at December 31, was as follows:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| |
| Loans secured by real estate: | | | | | | | | |
| Insured or guaranteed by the U.S. Government or its agencies | | $ | 87,792 | | | $ | 62,411 | |
| Guaranteed by the Commonwealth of Puerto Rico | | | 75,304 | | | | 49,501 | |
| Commercial loans secured by real estate | | | 3,069,337 | | | | 1,801,176 | |
| Residential conventional mortgages | | | 11,701,526 | | | | 9,307,287 | |
| Construction and land development | | | 515,851 | | | | 395,959 | |
| Consumer | | | 601,993 | | | | 330,265 | |
| |
| | | | 16,051,803 | | | | 11,946,599 | |
| Financial institutions | | | 350 | | | | 9,351 | |
| Commercial, industrial and agricultural | | | 7,143,060 | | | | 6,298,415 | |
| Lease financing | | | 1,326,523 | | | | 1,219,029 | |
| Consumer for household, credit cards and other consumer expenditures | | | 3,528,787 | | | | 3,037,521 | |
| Other | | | 203,400 | | | | 102,964 | |
| |
| | | $ | 28,253,923 | | | $ | 22,613,879 | |
| |
As of December 31, 2004, loans on which the accrual of interest income had been discontinued amounted to $554,017,000 (2003 -$557,026,000; 2002 - $499,856,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $49,120,000 (2003 - $45,541,000; 2002 -$35,820,000). Non-accruing loans as of December 31, 2004 include $32,010,000 (2003 - $36,350,000; 2002 - $40,019,000) in consumer loans.
The recorded investment in loans that were considered impaired at December 31, and the related disclosures follow:
| | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2004 | | 2003 |
| |
| Impaired loans with a related allowance | | $ | 69,172 | | | $ | 88,246 | |
| Impaired loans that do not require allowance | | | 44,084 | | | | 48,366 | |
| |
| Total impaired loans | | $ | 113,256 | | | $ | 136,612 | |
| |
| Allowance for impaired loans | | $ | 30,689 | | | $ | 44,033 | |
| |
| Average balance of impaired loans during the year | | $ | 122,493 | | | $ | 159,795 | |
| |
| Interest income recognized on impaired loans during the year | | $ | 2,967 | | | $ | 3,655 | |
| |
The changes in the allowance for loan losses for the year ended December 31, were as follows:
| | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| |
| Balance at beginning of year | | $ | 408,542 | | | $ | 372,797 | | | $ | 336,632 | |
| Net allowances acquired | | | 27,185 | | | | 13,697 | | | | 2,327 | |
| Provision for loan losses | | | 178,657 | | | | 195,939 | | | | 205,570 | |
| Recoveries | | | 61,178 | | | | 58,708 | | | | 67,488 | |
| Loans charged-off | | | (238,481 | ) | | | (232,599 | ) | | | (239,220 | ) |
| |
| Balance at end of year | | $ | 437,081 | | | $ | 408,542 | | | $ | 372,797 | |
| |
The components of the net financing leases receivable at December 31, were:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| |
| Total minimum lease payments | | $ | 1,112,414 | | | $ | 1,024,251 | |
| Estimated residual value of leased property | | | 210,461 | | | | 190,885 | |
| Deferred origination costs | | | 3,648 | | | | 3,893 | |
| Less — Unearned financing income | | | (161,917 | ) | | | (165,208 | ) |
| |
| Net minimum lease payments | | | 1,164,606 | | | | 1,053,821 | |
| Less — Allowance for loan losses | | | (28,666 | ) | | | (29,802 | ) |
| |
| | | $ | 1,135,940 | | | $ | 1,024,019 | |
| |
At December 31, 2004, future minimum lease payments are expected to be received as follows:
| | | | | |
| (In thousands) | | | | |
| |
| 2005 | | $ | 332,967 | |
| 2006 | | | 280,783 | |
| 2007 | | | 227,787 | |
| 2008 | | | 159,705 | |
| 2009 and thereafter | | | 111,172 | |
| |
| | | $ | 1,112,414 | |
| |
Note 8 — Related party transactions:
The Corporation grants loans to its directors, executive officers and certain related individuals or organizations in the ordinary course of business. The movement and balance of these loans were as follows:
| | | | | | | | | | | | | |
| | | | | | | Executive | | |
| (In thousands) | | Officers | | Directors | | Total |
| |
| Balance at December 31, 2002 | | $ | 5,676 | | | $ | 93,615 | | | $ | 99,291 | |
| New loans | | | 3,095 | | | | 59,876 | | | | 62,971 | |
| Payments | | | (1,029 | ) | | | (60,868 | ) | | | (61,897 | ) |
| Other changes | | | (9 | ) | | | (6,710 | ) | | | (6,719 | ) |
| |
| Balance at December 31, 2003 | | $ | 7,733 | | | $ | 85,913 | | | $ | 93,646 | |
| New loans | | | 2,895 | | | | 18,227 | | | | 21,122 | |
| Payments | | | (764 | ) | | | (5,059 | ) | | | (5,823 | ) |
| Other changes | | | (3,845 | ) | | | (12,984 | ) | | | (16,829 | ) |
| |
| Balance at December 31, 2004 | | $ | 6,019 | | | $ | 86,097 | | | $ | 92,116 | |
| |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P68] | | |
These loans have been consummated on terms no more favorable than those that would have been obtained if the transactions had been with unrelated parties and do not involve more than the normal risk of collectibility.
The amounts reported as “other changes” include changes in the status of those who are considered related parties.
Note 9 — Premises and equipment:
Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:
| | | | | | | | | | | | | |
| | | Useful life | | | | |
| (In thousands) | | in years | | 2004 | | 2003 |
| |
| Land | | | | | | $ | 74,606 | | | $ | 69,641 | |
| |
| Buildings | | | 10-50 | | | | 292,462 | | | | 292,098 | |
| Equipment | | | 1-15 | | | | 600,568 | | | | 536,413 | |
| Leasehold improvements | | Various | | | 93,106 | | | | 87,737 | |
| |
| | | | | | | | 986,136 | | | | 916,248 | |
| Less — Accumulated depreciation and amortization | | | | | | | 607,747 | | | | 557,620 | |
| |
| | | | | | | | 378,389 | | | | 358,628 | |
| |
| Construction in progress | | | | | | | 92,686 | | | | 57,183 | |
| |
| | | | | | | $ | 545,681 | | | $ | 485,452 | |
| |
Depreciation and amortization of premises and equipment for the year 2004 was $74,270,000 (2003 - $73,007,000; 2002 - $74,167,000) of which $21,224,000 (2003 - $20,214,000; 2002 - $19,674,000) was charged to occupancy expense and $53,046,000 (2003 - $52,793,000; 2002 - $54,493,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $19,396,000 (2003 - $15,398,000; 2002 - $12,423,000).
Note 10 — Goodwill and other intangible assets:
Goodwill and other indefinite-life intangible assets be tested for impairment at least annually using a two-step process at each reporting unit level. Refer to Note 30 for a discussion of the Corporation’s segment reporting. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, thus the second step of the impairment test is unnecessary. If needed, the second step consists of comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The Corporation uses the expected present value of future cash flows and market price multiples of comparable companies to determine the fair value of each reporting unit. The cost of equity used to discount the cash flows was calculated using the Capital Asset Pricing Model.
The Corporation completed the impairment tests during 2004 and 2003, and determined that there are no impairment losses to be recognized in those periods.
The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2004 were as follows:
| | | | | | | | | | | | | | | | | |
| | 2003 |
| | | Balance at | | | | | | | | | | Balance at |
| | | January 1, | | Goodwill | | Goodwill | | December 31, |
| (In thousands) | | 2003 | | acquired | | written-of | | 2003 |
| |
| P.R. Commercial Banking | | $ | 14,674 | | | | — | | | | — | | | $ | 14,674 | |
| P.R. Consumer and Retail Banking | | | 30,698 | | | $ | 4,301 | | | | — | | | | 34,999 | |
| P.R. Other Financial Services | | | 845 | | | | 711 | | | | — | | | | 1,556 | |
| U.S. Financial Services | | | 93,814 | | | | | | | | ($228 | ) | | | 93,586 | |
| Popular Financial Holdings | | | 5,658 | | | | 3,212 | | | | — | | | | 8,870 | |
| Processing | | | 37,276 | | | | 529 | | | | — | | | | 37,805 | |
| |
| Total Popular, Inc. | | $ | 182,965 | | | $ | 8,753 | | | | ($228 | ) | | $ | 191,490 | |
| |
| | | | | | | | | | | | | | | | | |
| | 2004 |
| | | Balance at | | | | | | | | | | Balance at |
| | | January 1, | | Goodwill | | Goodwill | | December 31, |
| (In thousands) | | 2004 | | acquired | | written-of | | 2004 |
| |
| P.R. Commercial Banking | | $ | 14,674 | | | | — | | | | — | | | $ | 14,674 | |
| P.R. Consumer and Retail Banking | | | 34,999 | | | | — | | | | — | | | | 34,999 | |
| P.R. Other Financial Services | | | 1,556 | | | $ | 1,766 | | | | — | | | | 3,322 | |
| U.S. Financial Services | | | 93,586 | | | | 216,123 | | | | — | | | | 309,709 | |
| Popular Financial Holdings | | | 8,870 | | | | 644 | | | | — | | | | 9,514 | |
| Processing | | | 37,805 | | | | 1,285 | | | | — | | | | 39,090 | |
| |
| Total Popular, Inc. | | $ | 191,490 | | | $ | 219,818 | | | | — | | | $ | 411,308 | |
| |
Goodwill written-off during 2003 was related to the mobile units of Popular Cash Express sold during that year. The increase in goodwill during 2004 was mostly the result of the acquisition of Quaker City.
At December 31, 2004, other than goodwill, the Corporation had $65,000 of identifiable intangibles with an indefinite useful life related to a trademark. There were no identifiable intangibles with an indefinite useful life at December 31, 2003 and 2002. The following table reflects the components of other intangible assets subject to amortization at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 |
| |
| | | Gross | | Accumulated | | Gross | | Accumulated |
| (In thousands) | | Amount | | Amortization | | Amount | | Amortization |
| |
| Core deposits | | $ | 86,327 | | | $ | 50,376 | | | $ | 67,484 | | | $ | 43,474 | |
| Other customer relationships | | | 726 | | | | 59 | | | | 550 | | | | 5 | |
| Other intangibles | | | 3,295 | | | | 877 | | | | 3,348 | | | | 513 | |
| |
| Total | | $ | 90,348 | | | $ | 51,312 | | | $ | 71,382 | | | $ | 43,992 | |
| |
[P69]
The increase in core deposits intangibles was also related to the Quaker City acquisition. Partially offsetting this increase were certain core deposits intangibles that became fully amortized during 2004 and 2003, and as such, their gross amount and accumulated amortization were eliminated from the accounting records and the tabular disclosure presented above.
During the year ended December 31, 2004, the Corporation recognized $7,844,000 in amortization expense related to other intangible assets with definite lives (2003 — $7,844,000; 2002 -$9,104,000).
The following table presents the estimated aggregate amortization expense of the intangible assets with definite lives that the Corporation has at December 31, 2004, for each of the next five years:
| | | | | |
| (In thousands) | | | | |
| |
| 2005 | | $ | 7,599 | |
| 2006 | | | 7,395 | |
| 2007 | | | 5,632 | |
| 2008 | | | 3,978 | |
| 2009 | | | 3,467 | |
| |
No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.
Note 11 — Deposits:
Total interest bearing deposits at December 31, consisted of:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| |
| Savings deposits: | | | | | | | | |
| Savings accounts | | $ | 5,572,372 | | | $ | 5,281,210 | |
| NOW and money market accounts | | | 3,293,459 | | | | 2,558,081 | |
| |
| | | | 8,865,831 | | | | 7,839,291 | |
| |
| Certificates of deposit: | | | | | | | | |
| Under $100,000 | | | 3,969,152 | | | | 3,277,805 | |
| $100,000 and over | | | 3,584,909 | | | | 3,254,025 | |
| |
| | | | 7,554,061 | | | | 6,531,830 | |
| |
| | | $ | 16,419,892 | | | $ | 14,371,121 | |
| |
A summary of certificates of deposit by maturity at December 31, 2004, follows:
| | | | | |
| (In thousands) | | | | |
| |
| 2005 | | $ | 4,244,361 | |
| 2006 | | | 1,360,121 | |
| 2007 | | | 855,511 | |
| 2008 | | | 414,033 | |
| 2009 | | | 596,300 | |
| 2010 and thereafter | | | 83,735 | |
| |
| | | $ | 7,554,061 | |
| |
At December 31, 2004, the Corporation had brokered certificates of deposit amounting to $559,023,000 (2003 — $637,621,000).
Note 12 — Federal funds purchased and assets sold under agreements to repurchase:
The following table summarizes certain information on federal funds purchased and assets sold under agreements to repurchase at December 31:
| | | | | | | | | | | | | |
| (Dollars in thousands) | | 2004 | | 2003 | | 2002 |
| |
| Federal funds purchased | | $ | 619,792 | | | $ | 887,763 | | | $ | 834,338 | |
| Assets sold under agreements to repurchase | | | 5,817,061 | | | | 4,947,824 | | | | 5,850,213 | |
| |
| Total amount outstanding | | $ | 6,436,853 | | | $ | 5,835,587 | | | $ | 6,684,551 | |
| |
| Maximum aggregate balance outstanding at any month-end | | $ | 7,315,058 | | | $ | 7,655,105 | | | $ | 7,104,223 | |
| |
| Average monthly aggregate balance outstanding | | $ | 6,309,117 | | | $ | 6,454,110 | | | $ | 5,763,812 | |
| |
| Weighted average interest rate: | | | | | | | | | | | | |
| For the year | | | 2.07 | % | | | 1.95 | % | | | 2.62 | % |
| At December 31 | | | 2.57 | | | | 1.70 | | | | 2.36 | |
| |
The following table presents the liability associated with the repurchase transactions (including accrued interest), their maturities and weighted average interest rates. Also, it includes the amortized cost and approximate market value of the collateral (including accrued interest) as of December 31, 2004 and 2003. The information excludes repurchase agreement transactions which were collateralized with securities or other assets held for trading purposes or which have been obtained under agreements to resell:
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P70] | | |
| | | | | | | | | | | | | | | | | |
| | 2004 |
| | | | | | | | | | | | | | | Weighted |
| | | Repurchase | | Amortized cost | | Market value | | average |
| | | liability | | of collateral | | of collateral | | interest rate |
| | | (Dollars in thousands) |
| |
| U.S. Treasury securities | | | | | | | | | | | | | | | | |
| After 30 to 90 days | | $ | 435,852 | | | $ | 353,295 | | | $ | 441,390 | | | | 2.27 | % |
| After 90 days | | | 25,461 | | | | 26,491 | | | | 26,350 | | | | 5.63 | |
| |
| | | | 461,313 | | | | 379,786 | | | | 467,740 | | | | 2.45 | |
| |
| Obligations of other U.S. Government agencies and corporations | | | | | | | | | | | | | | | | |
| Overnight | | | 3,000 | | | | 4,018 | | | | 4,164 | | | | 1.71 | |
| Within 30 days | | | 1,195,792 | | | | 1,199,532 | | | | 1,217,740 | | | | 2.17 | |
| After 30 to 90 days | | | 794,256 | | | | 808,046 | | | | 807,741 | | | | 2.38 | |
| After 90 days | | | 906,648 | | | | 915,764 | | | | 938,250 | | | | 2.37 | |
| |
| | | | 2,899,696 | | | | 2,927,360 | | | | 2,967,895 | | | | 2.29 | |
| |
| Mortgage — backed securities | | | | | | | | | | | | | | | | |
| Overnight | | | 44,492 | | | | 64,346 | | | | 64,252 | | | | 1.71 | |
| After 30 to 90 days | | | 29,326 | | | | 30,396 | | | | 30,354 | | | | 2.50 | |
| After 90 days | | | 812,388 | | | | 879,308 | | | | 888,948 | | | | 2.91 | |
| |
| | | | 886,206 | | | | 974,050 | | | | 983,554 | | | | 2.84 | |
| |
| Collateralized mortgage obligations | | | | | | | | | | | | | | | | |
| After 30 to 90 days | | | 541 | | | | 626 | | | | 561 | | | | 2.30 | |
| After 90 days | | | 413,041 | | | | 425,873 | | | | 427,800 | | | | 3.81 | |
| |
| | | | 413,582 | | | | 426,499 | | | | 428,361 | | | | 3.81 | |
| |
| Loans | | | | | | | | | | | | | | | | |
| Within 30 days | | | 312,156 | | | | 320,095 | | | | 320,095 | | | | 2.67 | |
| |
| | | $ | 4,972,953 | | | $ | 5,027,790 | | | $ | 5,167,645 | | | | 2.55 | % |
| |
| | | | | | | | | | | | | | | | | |
| | 2003 |
| | | | | | | | | | | | | | | Weighted |
| | | Repurchase | | Amortized cost | | Market value | | average |
| | | liability | | of collateral | | of collateral | | interest rate |
| | | (Dollars in thousands) |
| |
| U.S. Treasury securities | | | | | | | | | | | | | | | | |
| After 30 to 90 days | | $ | 436,036 | | | $ | 353,276 | | | $ | 440,120 | | | | 1.04 | % |
| After 90 days | | | 25,461 | | | | 26,513 | | | | 26,568 | | | | 5.64 | |
| |
| | | | 461,497 | | | | 379,789 | | | | 466,688 | | | | 1.29 | |
| |
| Obligations of other U.S. Government agencies and corporations | | | | | | | | | | | | | | | | |
| Overnight | | | 25,500 | | | | 26,943 | | | | 27,010 | | | | 1.24 | |
| Within 30 days | | | 1,182,916 | | | | 1,179,659 | | | | 1,213,500 | | | | 1.10 | |
| After 30 to 90 days | | | 540,231 | | | | 564,711 | | | | 555,882 | | | | 1.26 | |
| After 90 days | | | 387,629 | | | | 387,572 | | | | 399,017 | | | | 2.98 | |
| |
| | | | 2,136,276 | | | | 2,158,885 | | | | 2,195,409 | | | | 1.48 | |
| |
| Obligations of P.R., States and political subdivisions | | | | | | | | | | | | | | | | |
| Overnight | | | 3,155 | | | | 4,066 | | | | 3,816 | | | | 1.24 | |
| |
| Mortgage — backed securities | | | | | | | | | | | | | | | | |
| Overnight | | | 21,871 | | | | 23,631 | | | | 24,226 | | | | 1.24 | |
| Within 30 days | | | 41,720 | | | | 42,041 | | | | 44,338 | | | | 1.11 | |
| After 90 days | | | 195,799 | | | | 235,049 | | | | 248,391 | | | | 3.39 | |
| |
| | | | 259,390 | | | | 300,721 | | | | 316,955 | | | | 2.84 | |
| |
| Collateralized mortgage obligations | | | | | | | | | | | | | | | | |
| After 30 to 90 days | | | 760 | | | | 868 | | | | 755 | | | | 1.35 | |
| After 90 days | | | 546,888 | | | | 563,149 | | | | 563,277 | | | | 2.79 | |
| |
| | | | 547,648 | | | | 564,017 | | | | 564,032 | | | | 2.78 | |
| |
| Loans | | | | | | | | | | | | | | | | |
| Within 30 days | | | 403,283 | | | | 413,586 | | | | 413,258 | | | | 1.54 | |
| |
| | | $ | 3,811,249 | | | $ | 3,821,064 | | | $ | 3,960,158 | | | | 1.74 | % |
| |
[P71]
Note 13 — Other short-term borrowings:
Other short-term borrowings as of December 31, consisted of:
| | | | | | | | | |
| (Dollars in thousands) | | 2004 | | 2003 |
| |
| Advances with FHLB paying interest monthly at: | | | | | | | | |
| - fixed rates ranging from 1.43% to 2.38% (2003 - 0.96% to 1.22%) | | $ | 528,500 | | | $ | 675,000 | |
| - the 3-month LIBOR rate less 3 basis points (3-month LIBOR rate at December 31, 2004 was 2.56%) | | | 100,000 | | | | | |
| Advances under credit facilities with other institutions at fixed rates ranging from 1.85% to 2.25% | | | 172,640 | | | | | |
| Commercial paper at rates ranging from 1.59% to 2.28% (2003 - 1.05% to 1.70%) | | | 165,213 | | | | 85,001 | |
| Term notes paying interest quarterly at fixed rates ranging from 1.60% to 1.73% in 2003 | | | | | | | 120,660 | |
| Term notes paying interest monthly at a fixed rate of 1.00% in 2003 | | | | | | | 675 | |
| Term funds purchased at fixed rates ranging from 2.00% to 2.75% (2003 - 1.03% to 1.14%) | | | 2,173,000 | | | | 1,115,000 | |
| Others | | | 286 | | | | 288 | |
| |
| | | $ | 3,139,639 | | | $ | 1,996,624 | |
| |
The weighted average interest rate of other short-term borrowings at December 31, 2004 was 2.24% (2003 - 1.11%; 2002 - - 1.71%). The maximum aggregate balance outstanding at any month-end was approximately $3,139,639,000 (2003 - $2,452,264,000; 2002 - $2,573,355,000). The average aggregate balance outstanding during the year was approximately $2,472,925,000 (2003 - $1,937,529,000; 2002 - $2,023,200,000). The weighted average interest rate during the year was 1.39% (2003 - 1.14%; 2002 - 1.69%).
Note 15 presents additional information with respect to available credit facilities.
Note 14 — Notes payable and subordinated notes:
Notes payable outstanding at December 31, consisted of the following:
| | | | | | | | | |
| (Dollars in thousands) | | 2004 | | 2003 |
| |
| Advances with FHLB: | | | | | | | | |
| - maturing from 2005 through 2028 and paying interest monthly at fixed rates ranging from 1.40% to 7.62% (2003 -1.52% to 7.62%) | | $ | 1,044,995 | | | $ | 426,237 | |
| - maturing in 2008 paying interest monthly at a floating rate of 0.75% over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2004 was 2.40%) | | | 250,000 | | | | | |
| Term notes with maturities ranging from 2005 through 2009 paying interest semiannually at fixed rates ranging from 2.40% to 7.29% (2003 - 2.40% to 7.43%) | | | 2,435,175 | | | | 2,277,397 | |
| Term notes maturing in 2004 paying interest quarterly at a fixed rate of 1.70% in 2003 | | | | | | | 31,000 | |
| Term notes with maturities until 2006 paying interest quarterly at a floating rate of 0.45% (2003 - 0.45% to 0.92%) over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 2004 was 2.56%; 2003 - 1.15%) | | | 50,000 | | | | 77,000 | |
| Term notes with maturities until 2030 paying interest monthly at fixed rates ranging from 3.00% to 6.00% (2003 - 6.50%) | | | 3,100 | | | | 925 | |
| Promissory notes maturing in 2005 with a floating interest rate of 92% of the 3-month LIBID rate (3-month LIBID rate at December 31, 2004 was 2.44%; 2003 - 1.06%) | | | 150,000 | | | | 150,000 | |
| Secured borrowings with maturities until 2014 paying interest monthly at fixed rates ranging from 2.48% to 7.12% (2003 - 2.41% to 7.12%) | | | 2,804,383 | | | | 1,694,974 | |
| Secured borrowings with maturities until 2014 paying interest monthly at rates ranging from 0.11% to 4.75% (2003 - 0.09% to 4.75%) over the 1-month LIBOR rate (1-month LIBOR rate at December 31, 2004 was 2.40%; 2003 - 1.12%) | | | 2,555,614 | | | | 1,841,472 | |
| Notes linked to the S&P 500 Index maturing in 2008 | | | 32,173 | | | | 31,324 | |
| Junior subordinated deferrable interest debentures with maturities ranging from 2027 and 2034 with fixed interest rates ranging from 6.13% to 8.33% | | | 849,672 | | | | 457,919 | |
| Mortgage notes and other debt | | | 5,598 | | | | 3,777 | |
| |
| | | $ | 10,180,710 | | | $ | 6,992,025 | |
| |
Subordinated notes at December 31, 2004 and 2003, consisted of $125,000,000 issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semiannually at 6.75%. The notes issued by the Corporation are unsecured obligations which are subordinated in right of payment to the prior payment in full of all present and future senior indebtedness of the Corporation. These notes do not provide for any sinking fund. The aggregate amounts of maturities of notes payable and subordinated notes were as follows:
| | | | |
| | | | | |
| Popular / 2004 / Annual Report | | [P72] | | |
| | | | | | | | | | | | | |
| | | Notes | | Subordinated | | |
| Year | | payable | | notes | | Total |
| | | (In thousands) |
| 2005 | | $ | 1,930,190 | | | $ | 125,000 | | | $ | 2,055,190 | |
| 2006 | | | 2,250,745 | | | | | | | | 2,250,745 | |
| 2007 | | | 865,527 | | | | | | | | 865,527 | |
| 2008 | | | 2,006,115 | | | | | | | | 2,006,115 | |
| 2009 | | | 886,289 | | | | | | | | 886,289 | |
| Later years | | | 2,241,844 | | | | | | | | 2,241,844 | |
| |
| Total | | $ | 10,180,710 | | | $ | 125,000 | | | $ | 10,305,710 | |
| |
Note 15 — Unused lines of credit and other funding sources:
At December 31, 2004, the Corporation had borrowings facilities available with the FHLB whereby the Corporation could borrow up to approximately $2,013,655,000 based on the assets pledged with the FHLB at that date (2003 — $1,151,709,000). Refer to Notes 13 and 14 for the amounts of FHLB advances outstanding under these facilities at December 31, 2004 and 2003.
The FHLB advances are collateralized by investment securities and mortgage loans, do not have restrictive covenants and do not have callable features. The maximum borrowing potential with the FHLB is dependent on certain restrictive computations determined by the FHLB and which are dependent on the amount and type of assets available for collateral, among the principal factors. The available lines of credit with the FHLB included in this note are based on the assets pledged as collateral with the FHLB as of the end of the years presented.
BPPR and BPNA have established a borrowing facility at the discount window of the Federal Reserve Bank of New York. At December 31, 2004, BPPR and BPNA had a borrowing capacity at the discount window of approximately $2,514,000,000, which remained unused at the December 31, 2004 (2003 — $1,763,000,000). These facilities are collateralized sources of credit that are highly reliable even under difficult market conditions. The amount available under this line is dependent upon the balance of loans and securities pledged as collateral.
At December 31, 2004, the Corporation and Popular North America had obtained a committed credit facility from a syndicate of institutions in the amount up to $450,000,000 (2003 - $340,000,000). The primary purpose of the facility is to serve as a back-up for the Corporation’s commercial paper program, but it can be utilized at any time for general liquidity purposes. The full amount of the facility was available at December 31, 2004 and 2003.
To provide further liquidity, at December 31, 2004 and 2003, BPPR had a $1,000,000,000 bank note program available for future issuance. Under this program BPPR has the requisite agreements in place to issue and sell its bank notes to institutional investors. At December 31, 2004 and 2003, the full amount was available for issuance.
In addition, at December 31, 2004 and 2003, the Corporation had an effective shelf registration with the Securities and Exchange Commission, which allows Popular, Inc., Popular North America, Inc. and Popular International Bank, Inc. to issue medium-term notes, debt securities and preferred stock in an aggregate amount of up to $2,500,000,000. At December 31, 2004, the Corporation had available approximately $2,100,000,000 under this shelf registration. At December 31, 2003, the full amount was available for issuance. This shelf registration is intended to permit the Corporation to raise funds with a relatively short lead-time. At December 31, 2004, the Corporation was also authorized to issue up to $170,000,000 in transactions for trust preferred securities under an existing shelf registration statement filed with the SEC.
Note 16 — Trust preferred securities:
At December 31, 2004, the Corporation had established four trusts for the purpose of issuing trust preferred securities (the “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation under FIN No. 46.
The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of condition. The Corporation also recorded in the caption of other investment securities in the consolidated statements of condition, the common securities issued by the issuer trusts. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.
[P73]
Financial data pertaining to the trusts follows:
(In thousands, including reference notes)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Popular North | | |
| | | BanPonce | | Popular Capital | | America Capital | | Popular Capital |
| Issuer | | Trust I | | Trust I | | Trust I | | Trust II |
| |
| Issuance date | | February 1997 | | | October 2003 | | | September 2004 | | | November 2004 | |
| Capital Securities | | $ | 144,000 | | | $ | 300,000 | | | $ | 250,000 | | | $ | 130,000 | |
| Distribution rate | | | 8.327% | | | | 6.700% | | | | 6.564% | | | | 6.125% | |
| Common Securities | | $ | 4,640 | | | $ | 9,279 | | | $ | 7,732 | | | $ | 4,021 | |
| Junior Subordinated Debentures aggregate liquidation amount | | $ | 148,640 | | | $ | 309,279 | | | $ | 257,732 | | | $ | 134,021 | |
| Stated maturity date | | February 2027 | | | November 2033 | | | September 2034 | | | December 2034 |
| Reference notes | | | (a),(c),(e),(f),(g) | | | | (b),(d),(f) | | | | (a),(c),(f) | | | | (b),(d),(f) | |
| |
(a) Statutory business trust that is wholly-owned by Popular North America (PNA) and indirectly wholly-owned by the Corporation.
(b) Statutory business trust that is wholly-owned by the Corporation.
(c) The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement.
(d) These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee
agreement.
(e) The original issuance was for $150,000. The Corporation had reacquired $6,000 of the 8.327% capital securities.
(f) The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. A capital treatment event would include a change in the regulatory capital treatment of the capital securities as a result of the recent accounting changes affecting the criteria for consolidation of variable interest entities such as the trust under FIN 46R.
(g) Same as (f) above, except that the investment company event does not apply for early redemption.
The Capital Securities of Popular Capital Trust I and Popular Capital Trust II are traded on the NASDAQ under the symbols “BPOPN” and “BPOPM”, respectively.
Under the Federal Reserve Board’s risk-based capital guidelines, the capital securities are includable in the Corporation’s Tier I capital.
Note 17 — Earnings per common share:
The following table sets forth the computation of earnings per common share and diluted earnings per common share for the years ended December 31:
| | | | | | | | | | | | | |
| (In thousands, except share information) | | 2004 | | 2003 | | 2002 |
| |
| Net income | | $ | 489,908 | | | $ | 470,915 | | | $ | 351,932 | |
| Less: Preferred stock dividends (includes amount paid on redemption of preferred stock in 2002) | | | 11,913 | | | | 9,919 | | | | 2,510 | |
| |
| Net income applicable to common stock | | $ | 477,995 | | | $ | 460,996 | | | $ | 349,422 | |
| |
| Average common shares outstanding | | | 266,302,105 | | | | 265,481,840 | | | | 267,830,164 | |
| Average potential common shares | | | 372,751 | | | | 113,992 | | | | 386 | |
| |
| Average common shares outstanding - assuming dilution | | | 266,674,856 | | | | 265,595,832 | | | | 267,830,550 | |
| |
| Basic earnings per common share | | $ | 1.79 | | | $ | 1.74 | | | $ | 1.31 | |
| |
| Diluted earnings per common share | | $ | 1.79 | | | $ | 1.74 | | | $ | 1.31 | |
| |
Potential common shares consist of common stock issuable under the assumed exercise of stock options and under restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share.
During 2004 there were 908,802 weighted average antidilutive stock options outstanding (2003 - 731,084; 2002 — 759,060).
Note 18 — Stockholders’ equity:
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.
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P74] | | |
The Corporation has a dividend reinvestment and stock purchase plan under which stockholders may reinvest their quarterly dividends in shares of common stock at a 5% discount from the average market price at the time of issuance.
The Corporation’s authorized preferred stock may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation’s only outstanding class of preferred stock is its 6.375% noncumulative monthly income preferred stock, 2003 Series A. These shares of preferred stock are nonconvertible and are redeemable solely at the option of the Corporation beginning on March 31, 2008. The redemption price per share is $25.50 from March 31, 2008 through March 31, 2009, $25.25 from March 31, 2009 through March 31, 2010 and $25.00 from March 31, 2010 and thereafter.
During the year 2004, cash dividends of $0.62 (2003 — $0.51; 2002 — $0.40) per common share outstanding amounting to $163,787,000 (2003 — $134,082,000; 2002 — $106,709,000) were declared. In addition, dividends declared on preferred stock amounted to $11,913,000 (2003 — $9,919,000; 2002 — $510,000).
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to mantain sufficient statutory reserves would preclude BPPR from paying dividends. BPPR’s statutory reserve fund totaled $285,192,000 at December 31, 2004 (2003 — $338,192,000). During 2004, $53,000,000 was transferred out from the statutory reserve account to retained earnings. The excess in the reserve that was transferred out resulted principally from the redemption of $300,000,000 of BPPR’s preferred stock that was wholly-owned by the Corporation and from a reduction in BPPR’s surplus resulting mostly from the reorganization of certain of the Corporation’s subsidiaries, including the transfer of the information processing and technology functions of BPPR to EVERTEC, Inc. During 2003, $25,500,000 was transferred to the statutory reserve account. No transfer was required during 2002. At December 31, 2004, 2003 and 2002, BPPR was in compliance with the statutory reserve requirement.
Note 19 — Regulatory capital requirements:
The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Federal Reserve Bank and the other bank regulators have adopted quantitative measures which assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements. The regulations define well-capitalized levels of Tier I, total capital and Tier I leverage of 6%, 10% and 5%, respectively. Management has determined that as of December 31, 2004 and 2003, the Corporation exceeded all capital adequacy requirements to which it is subject.
At December 31, 2004 and 2003, BPPR and BPNA were well-capitalized under the regulatory framework for prompt corrective action, and there are no conditions or events since that date that management believes have changed the institutions’ category.
The Corporation’s risk-based capital and leverage ratios at December 31, were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Actual | | | | | | Capital adequacy minimum |
| | | | | | | | | | | | | | | requirement |
| (Dollars in thousands) | | Amount | | Ratio | | | | | | Amount | | Ratio |
| | 2004 |
Total Capital
(to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | | | |
| Corporation | | $ | 3,705,647 | | | | 13.21 | % | | | | | | | 2,244,573 | | | | 8 | % |
| BPPR | | | 2,011,181 | | | | 13.86 | | | | | | | | 1,160,781 | | | | 8 | |
| BPNA | | | 778,775 | | | | 10.71 | | | | | | | | 581,714 | | | | 8 | |
Tier I Capital
(to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | | | |
| Corporation | | $ | 3,316,009 | | | | 11.82 | % | | | | | | | 1,122,286 | | | | 4 | % |
| BPPR | | | 1,398,168 | | | | 9.64 | | | | | | | | 580,391 | | | | 4 | |
| BPNA | | | 690,256 | | | | 9.49 | | | | | | | | 290,857 | | | | 4 | |
Tier I Capital
(to Average Assets): | | | | | | | | | | | | | | | | | | | | |
| Corporation | | $ | 3,316,009 | | | | 7.78 | % | | | | | | | 1,277,925 | | | | 3 | % |
| BPPR | | | 1,398,168 | | | | 6.03 | | | | | | | | 695,900 | | | | 3 | |
| BPNA | | | 690,256 | | | | 7.13 | | | | | | | | 290,581 | | | | 3 | |
| |
[P75]
| | | | | | | | | | | | | | | | | |
| | | Actual | | Capital adequacy minimum |
| | | | | | | | | | | requirement |
| (Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio |
| | 2003 |
Total Capital
(to Risk-Weighted Assets): | | | | | | | | | | | | | | | | |
| Corporation | | $ | 3,176,439 | | | | 13.93 | % | | | 1,823,655 | | | | 8 | % |
| BPPR | | | 1,866,529 | | | | 14.00 | | | | 1,066,317 | | | | 8 | |
| BPNA | | | 546,597 | | | | 11.33 | | | | 385,857 | | | | 8 | |
| | | | | | | | | | | | | | | | | |
Tier I Capital
(to Risk-Weighted Assets): | | | | | | | | | | | | | | | | |
| Corporation | | $ | 2,834,599 | | | | 12.43 | % | | | 911,828 | | | | 4 | % |
| BPPR | | | 1,698,276 | | | | 12.74 | | | | 533,158 | | | | 4 | |
| BPNA | | | 486,074 | | | | 10.08 | | | | 192,929 | | | | 4 | |
| | | | | | | | | | | | | | | | | |
Tier I Capital
(to Average Assets): | | | | | | | | | | | | | | | | |
| Corporation | | $ | 2,834,599 | | | | 8.00 | % | | | 1,063,342 | | | | 3 | % |
| BPPR | | | 1,698,276 | | | | 7.84 | | | | 649,924 | | | | 3 | |
| BPNA | | | 486,074 | | | | 7.91 | | | | 184,398 | | | | 3 | |
| |
Note 20 — Servicing assets:
The changes in servicing assets for the years ended December 31, were as follows:
| | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Balance at beginning of year | | $ | 58,572 | | | $ | 49,827 | | | $ | 43,665 | |
| Rights originated | | | 9,984 | | | | 16,769 | | | | 14,895 | |
| Rights purchased | | | 4,320 | | | | 4,992 | | | | 2,824 | |
| Amortization | | | (14,773 | ) | | | (12,566 | ) | | | (11,557 | ) |
| Impairment charges | | | — | | | | (450 | ) | | | — | |
| |
| Balance at end of year | | | 58,103 | | | | 58,572 | | | | 49,827 | |
| Less: Valuation allowance | | | 920 | | | | 1,780 | | | | 1,991 | |
| |
| Balance at end of year, net of valuation allowance | | $ | 57,183 | | | $ | 56,792 | | | $ | 47,836 | |
| |
Total loans serviced for others were $6,695,297,000 at December 31, 2004 (2003 - $6,374,817,000). The estimated fair value of capitalized servicing rights was $63,705,000 at December 31, 2004 (2003 — $61,236,000).
The activity in the valuation allowance for impairment of recognized servicing assets for the years ended December 31, was as follows:
| | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Balance at beginning of year | | $ | 1,780 | | | $ | 1,991 | | | $ | 649 | |
| Additions charged to operations | | | 233 | | | | 239 | | | | 1,342 | |
| Impairment charges | | | — | | | | (450 | ) | | | — | |
| Reductions credited to operations | | | (1,093 | ) | | | — | | | | — | |
| |
| Balance at end of year | | $ | 920 | | | $ | 1,780 | | | $ | 1,991 | |
| |
Note 21 — Sales of receivables:
During the years ended December 31, 2004 and 2003, the Corporation retained servicing responsibilities and other subordinated interests on various securitization transactions and whole loan sales of residential mortgage and commercial loans.
Gains of $25,463,000 and $37,982,000 were realized on the securitization transactions that met the sale criteria under SFAS No. 140 and the whole loan sales involving retained interests, which took place in 2004 and 2003, respectively.
During 2004 and 2003, the Corporation also participated in various securitization transactions, which did not meet the SFAS No. 140 criteria for sale accounting and as such these transactions were accounted for as secured borrowings.
The Corporation receives average annual servicing fees based on a percentage of the outstanding loan balance. In 2004, those average fees ranged from 0.25 to 0.50 percent for mortgage loans (2003 — 0.25% to 0.50%) and from 1.0 to 2.4 percent for loans guaranteed by the Small Business Administration (SBA) (2003 — 1.0% to 1.30%).
Valuation methodologies used in determining the fair value of the retained interests, including servicing assets and interest-only securities, are disclosed in Note 1 to the consolidated financial statements.
Key economic assumptions used in measuring the retained interests at the date of the securitization and whole loan sales completed during the years ended December 31, 2004 and 2003, were as follows:
| | | | | | | | | | | | | | | | | |
| | | Residential Mortgage | | SBA |
| | | Loans | | Loans |
| | | 2004 | | 2003 | | 2004 | | 2003 |
| Prepayment speed | | | 10.6 | % | | | 13.6 | % | | | 15.0 | % | | | 16.0 | % |
| Weighted average life (in years) | | | 10.9 | | | | 10.4 | | | | 3.9 | | | | 3.7 | |
| Expected credit losses | | | — | | | | — | | | | — | | | | — | |
| Discount rate | | | 10.0% - 10.5 | % | | | 9.0% - 10.5 | % | | | 13.0 | % | | | 13.0 | % |
| |
At December 31, 2004, key economic assumptions and the sensitivity of the current value of residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions for retained interests as of the end of the year were as follows:
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P76] | | |
| | | | | | | | | |
| | | Residential | | |
| (Dollars in thousands) | | Mortgage Loans | | SBA Loans |
| Carrying amount of retained interests | | | $66,141 | | | $ | 3,777 | |
| Fair value of retained interests | | | 71,174 | | | | 5,266 | |
| Weighted average life (in years) | | | 8.9 - 9.7 | | | | 3.8 | |
| Prepayment Speed Assumption (annual rate) | | | 12.4% - 39.4 | % | | | 15.0 | % |
| Impact on fair value of 10% adverse change | | | $(2,201 | ) | | | $(294 | ) |
| Impact on fair value of 20% adverse change | | | (4,155 | ) | | | (538 | ) |
| Expected Credit Losses (annual rate) | | | 0% - 0.40 | % | | | — | |
| Impact on fair value of 10% adverse change | | | $(44 | ) | | | — | |
| Impact on fair value of 20% adverse change | | | (80 | ) | | | — | |
| Discount rate (annual rate) | | | 10.0% - 11.5 | % | | | 13.0 | % |
| Impact on fair value of 10% adverse change | | | $(2,194 | ) | | | ($253 | ) |
| Impact on fair value of 20% adverse change | | | (4,138 | ) | | | (484 | ) |
| |
The cash flows received from and paid to securitization trusts for the years ended December 31, on deals which had qualified as sales based on the criteria specified by SFAS No. 140, were as follows:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| Servicing fees received | | $ | 626 | | | $ | 1,031 | |
| Servicing advances paid | | | 1,117 | | | | 1,637 | |
| Repayment of servicing advances | | | 1,352 | | | | 272 | |
| Other cash flows received on retained interests | | | 410 | | | | 273 | |
| |
The expected credit losses for the residential mortgage loans securitized/sold are estimated at rates ranging from 0.0% to 0.40% for 2005 and 2006. No credit losses are anticipated on the retained servicing assets derived from the sale of SBA loans since the participation sold is fully guaranteed by the SBA.
Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them by the Corporation for the year ended December 31, 2004, follows:
| | | | | | | | | | | | | |
| | | Total principal | | Principal amount | | |
| | | amount of loans, | | 60 days or more | | Net credit |
| (In thousands) | | net of unearned | | past due | | losses |
| Loans (owned and managed): | | | | | | | | | | | | |
| Commercial | | $ | 10,953,273 | | | $ | 150,003 | | | $ | 45,153 | |
| Lease financing | | | 1,164,606 | | | | 10,974 | | | | 25,740 | |
| Mortgage | | | 14,471,172 | | | | 723,239 | | | | 36,755 | |
| Consumer | | | 4,038,579 | | | | 71,045 | | | | 74,818 | |
| Less: | | | | | | | | | | | | |
| Loans securitized/sold | | | 1,885,369 | | | | | | | | | |
| Loans held-for-sale | | | 750,728 | | | | | | | | | |
| |
| Loans held in portfolio | | $ | 27,991,533 | | | $ | 955,261 | | | $ | 182,466 | |
| |
During the year ended December 31, 2004, the Corporation transferred approximately $61,000,000 of GNMA mortgage-backed securities to an irrevocable trust in exchange for collateralized mortgage obligation (CMO) certificates. The Corporation derecognized the mortgage-backed securities transferred given that it relinquished control over such securities. The mortgage-backed securities transferred were accounted for at fair value prior to securitization. The Corporation subsequently sold approximately $36,000,000 of the CMO certificates and retained approximately $25,000,000 of such certificates including a residual interest certificate (interest only). Such residual interests are accounted for at fair value and included in trading securities. Cash flows received on the residual retained interest were approximately $724,000 for the year ended December 31, 2004.
The following table sets forth the weighted average key economic assumptions used in measuring the fair value of the residual retained interest, for which fair value was based on discounted cash flows, and the sensitivity of those fair values to immediate adverse changes of 10% and 20% in those assumptions:
| | | | | |
| (Dollars in thousands) | | | | |
| Fair value of retained interests | | $ | 4,352 | |
| Weighted average life (in years) | | | 3.92 | |
| Prepayment Speed Assumption (annual rate) | | | 12 | % |
| Impact on fair value of 10% adverse change | | $ | (395 | ) |
| Impact on fair value of 20% adverse change | | | (791 | ) |
| Discount rate (annual rate) | | | 15 | % |
| Impact on fair value of 10% adverse change | | $ | (237 | ) |
| Impact on fair value of 20% adverse change | | | (527 | ) |
| |
The sensitivity analyses are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
Note 22 — Employee benefits:
Pension and benefit restoration plans
Regular employees of BPPR and BPNA are covered by noncontributory defined benefit pension plans. Pension benefits begin to vest after one year of service and are based on age, years of credited service and final average compensation, as defined.
The Corporation’s funding policy is to make annual contributions to the plans in amounts which fully provide for all benefits as they become due under the plans.
The Corporation’s pension fund investment strategy is to invest in a prudent manner for the exclusive purpose of providing benefits to participants. A well defined internal structure has been established to develop and implement a risk-controlled investment strategy that is targeted to produce a total return that, when combined with the bank’s contributions to the fund, will maintain the funds ability
[P77]
to meet all required benefit obligations. Risk is controlled through diversification of asset types and investments in domestic and international equities and fixed income.
Equity investments include various types of stock and index funds. Also, this category includes Popular, Inc.’s common stock. Fixed income investments include U.S. Government securities and other U.S. agencies’ obligations, corporate bonds, mortgage loans, mortgage-backed securities and index funds, among others. A designated committee, with the assistance of an external consultant, periodically reviews the performance of the pension plans’ investments and assets allocation. The Trustee and the money managers are allowed to exercise investment discretion, subject to limitations established by the pension plans’ investment policies. The plans forbid money managers to enter into derivative transactions, unless approved by the Trustee.
The overall expected long-term rate-of-return-on-assets assumption reflects the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the plan assets, with consideration given to the distribution of the investments by asset class and historical rates of return for each individual asset class. This process is reevaluated at least on an annual basis and if market, actuarial and economic conditions change, adjustments to the rate of return may come into place.
The plans’ weighted-average asset allocations at December 31, by asset category were as follows:
| | | | | | | | | |
| | | 2004 | | 2003 |
| Equity securities | | | 69.5 | % | | | 72.1 | % |
| Debt securities | | | 28.7 | | | | 25.2 | |
| Other | | | 1.8 | | | | 2.7 | |
| |
| | | | 100.0 | % | | | 100.0 | % |
| |
The plans target allocation for 2004 and 2003, by asset category, approximated 70% in equity securities and 30% in debt securities.
At December 31, 2004, these plans included 2,745,720 shares (2003 — 2,745,720) of the Corporation’s common stock with a market value of approximately $79,159,000 (2003 — $61,573,000). Dividends paid on shares of the Corporation’s common stock held by the plan during 2004 amounted to $1,620,000 (2003 — $1,290,000). BPPR and BPNA also have supplementary pension and profit sharing plans for those employees whose compensation exceeds the limits established by ERISA.
The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31:
| | | | | | | | | | | | | |
| | | | | | | Benefit | | |
| | | Pension Plans | | Restoration Plans | | Total |
| | | | | | | 2004 | | | | |
| | | | | | | (In thousands) | | | | |
| Change in benefit obligation: | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 479,766 | | | $ | 15,619 | | | $ | 495,385 | |
| Service cost | | | 14,495 | | | | 690 | | | | 15,185 | |
| Interest cost | | | 27,915 | | | | 936 | | | | 28,851 | |
| Curtailment | | | (6,415 | ) | | | | | | | (6,415 | ) |
| Special termination benefits | | | 2,219 | | | | | | | | 2,219 | |
| Actuarial loss | | | 31,348 | | | | 4,852 | | | | 36,200 | |
| Benefits paid | | | (21,205 | ) | | | (217 | ) | | | (21,422 | ) |
| |
| Benefit obligations at end of year | | | 528,123 | | | | 21,880 | | | | 550,003 | |
| |
| Change in plan assets: | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | | 476,055 | | | | 8,322 | | | | 484,377 | |
| Actual return on plan assets | | | 63,331 | | | | 1,158 | | | | 64,489 | |
| Employer contributions | | | 1,528 | | | | 374 | | | | 1,902 | |
| Benefits paid | | | (21,205 | ) | | | (218 | ) | | | (21,423 | ) |
| |
| Fair value of plan assets at end of year | | | 519,709 | | | | 9,636 | | | | 529,345 | |
| |
| Unfunded status | | | (8,414 | ) | | | (12,244 | ) | | | (20,658 | ) |
| Unrecognized net asset | | | (862 | ) | | | | | | | (862 | ) |
| Unrecognized net prior service cost (benefit) | | | 3,858 | | | | (1,050 | ) | | | 2,808 | |
| Unrecognized net actuarial loss | | | 31,795 | | | | 9,184 | | | | 40,979 | |
| |
| Prepaid (accrued) pension cost | | | 26,377 | | | | (4,110 | ) | | | 22,267 | |
| |
| Amount recognized in the statement of financial condition consists of: | | | | | | | | | | | | |
| Prepaid benefit cost | | | 29,011 | | | | | | | | 29,011 | |
| Accrued benefit liability | | | (2,634 | ) | | | (4,110 | ) | | | (6,744 | ) |
| |
| Net amount recognized | | $ | 26,377 | | | $ | (4,110 | ) | | $ | 22,267 | |
| |
| Accumulated benefit obligation | | $ | 455,063 | | | $ | 13,898 | | | $ | 468,961 | |
| |
| | | | |
| Popular/ 2004 / Annual Report | | [P78] | | |
| | | | | | | | | | | | | |
| | | | | | | Benefit | | |
| | | Pension Plans | | Restoration Plans | | Total |
| | 2003 |
| | | | | | | (In thousands) | | | | |
| Change in benefit obligation: | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 412,027 | | | $ | 10,779 | | | $ | 422,806 | |
| Service cost | | | 13,641 | | | | 567 | | | | 14,208 | |
| Interest cost | | | 26,784 | | | | 798 | | | | 27,582 | |
| Plan amendment | | | (1,735 | ) | | | (95 | ) | | | (1,830 | ) |
| Actuarial loss | | | 49,081 | | | | 3,584 | | | | 52,665 | |
| Benefits paid | | | (20,032 | ) | | | (14 | ) | | | (20,046 | ) |
| |
| Benefit obligation at end of year | | | 479,766 | | | | 15,619 | | | | 495,385 | |
| |
| Change in plan assets: | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | | 393,556 | | | | 6,568 | | | | 400,124 | |
| Actual return on plan assets | | | 101,614 | | | | 1,754 | | | | 103,368 | |
| Employer contributions | | | 917 | | | | 14 | | | | 931 | |
| Benefits paid | | | (20,032 | ) | | | (14 | ) | | | (20,046 | ) |
| |
| Fair value of plan assets at end of year | | | 476,055 | | | | 8,322 | | | | 484,377 | |
| |
| Unfunded status | | | (3,711 | ) | | | (7,297 | ) | | | (11,008 | ) |
| Unrecognized net asset | | | (3,322 | ) | | | | | | | (3,322 | ) |
| Unrecognized net prior service cost (benefit) | | | 5,128 | | | | (1,156 | ) | | | 3,972 | |
| Unrecognized net actuarial loss | | | 32,905 | | | | 5,106 | | | | 38,011 | |
| |
| Prepaid (accrued) pension cost | | | 31,000 | | | | (3,347 | ) | | | 27,653 | |
| |
| Amount recognized in the statement of financial condition consists of: | | | | | | | | | | | | |
| Prepaid benefit cost | | | 33,378 | | | | | | | | 33,378 | |
| Accrued benefit liability | | | (2,378 | ) | | | (3,347 | ) | | | (5,725 | ) |
| |
| Net amount recognized | | $ | 31,000 | | | $ | (3,347 | ) | | $ | 27,653 | |
| |
| Accumulated benefit obligation | | $ | 403,828 | | | $ | 10,750 | | | $ | 414,578 | |
| |
Information for plans with an accumulated benefit obligation in excess of plan assets for the years ended December 31, follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Benefit |
| | | Pension Plans | | Restoration Plans |
| (In thousands) | | 2004 | | 2003 | | 2004 | | 2003 |
| Projected benefit obligation | | $ | 9,263 | | | $ | 6,874 | | | $ | 21,880 | | | $ | 15,619 | |
| Accumulated benefit obligation | | | 5,869 | | | | 4,409 | | | | 13,898 | | | | 10,750 | |
| Fair value of plan assets | | | 4,736 | | | | 3,000 | | | | 9,636 | | | | 8,322 | |
| |
The measurements dates of the assets and liabilities of all plans presented above for 2004 and 2003 were December 31, 2004 and December 31, 2003, respectively.
The actuarial assumptions used to determine benefit obligations for the years ended December 31, were as follows:
| | | | | | | | | |
| | | 2004 | | 2003 |
| Discount rate | | | 5.75 | % | | | 6.00 | % |
| Rate of compensation increase — weighted average | | | 5.10 | % | | | 5.10 | % |
| |
The actuarial assumptions used to determine the components of net periodic pension cost for the years ended December 31, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Benefit |
| | | Pension Plans | | Restoration Plans |
| | | 2004 | | 2003 | | 2002 | | 2004 | | 2003 | | 2002 |
| Discount rate | | | 6.00 | % | | | 6.50 | % | | | 7.00 | % | | | 6.00 | % | | | 6.50 | % | | | 7.00 | % |
| Expected return on plan assets | | | 8.00 | % | | | 8.00 | % | | | 8.50 | % | | | 8.00 | % | | | 8.00 | % | | | 8.50 | % |
| Rate of compensation increase — weighted average | | | 5.10 | % | | | 5.10 | % | | | 4.20 | % | | | 5.10 | % | | | 5.10 | % | | | 4.20 | % |
| |
The components of net periodic pension cost for the years ended December 31, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Benefit |
| | | Pension Plans | | Restoration Plans |
| | | 2004 | | 2003 | | 2002 | | 2004 | | 2003 | | 2002 |
| | | (In thousands) |
| Components of net periodic pension cost: | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | | $ | 14,495 | | | $ | 13,641 | | | $ | 12,823 | | | $ | 690 | | | $ | 567 | | | $ | 511 | |
| Interest cost | | | 27,915 | | | | 26,784 | | | | 25,304 | | | | 936 | | | | 798 | | | | 789 | |
| Expected return on plan assets | | | (37,338 | ) | | | (30,772 | ) | | | (35,421 | ) | | | (687 | ) | | | (524 | ) | | | (307 | ) |
| Amortization of asset obligation | | | (2,460 | ) | | | (2,461 | ) | | | (2,461 | ) | | | | | | | | | | | | |
| Amortization of prior service cost | | | 421 | | | | 482 | | | | 565 | | | | (106 | ) | | | (106 | ) | | | 53 | |
| Amortization of net (gain) loss | | | 50 | | | | 2,145 | | | | | | | | 303 | | | | 291 | | | | 189 | |
| |
| Net periodic cost (benefit) | | | 3,083 | | | | 9,819 | | | | 810 | | | | 1,136 | | | | 1,026 | | | | 1,235 | |
| Curtailment gain | | | 849 | | | | | | | | (139 | ) | | | | | | | | | | | | |
| Special termination benefits | | | 2,219 | | | | | | | | | | | | | | | | | | | | | |
| |
| Total cost (benefit) | | $ | 6,151 | | | $ | 9,819 | | | $ | 671 | | | $ | 1,136 | | | $ | 1,026 | | | $ | 1,235 | |
| |
During March 2004, the Corporation received authorization from the Federal Reserve Bank of New York for the proposed reorganization to consolidate the information processing and technology functions of both Banco Popular de Puerto Rico and GM Group, Inc. into GM Group, Inc., renamed EVERTEC, Inc. The effective date for the transaction was April 1, 2004. As part of this reorganization, the Corporation incurred certain curtailment gains / losses on the pension and postretirement plans related with the employees that were transferred to EVERTEC, Inc. and whose benefits were frozen. Also, the Corporation incurred certain costs related to employees of BPPR who elected early retirement effective March 31, 2004, as part of this reorganization.
[P79]
During 2005, the Corporation expects to contribute $317,000 to the pension plans and $917,000 to the benefit restoration plans.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| | | | | | | | | |
| | | | | | | Benefit |
| (In thousands) | | Pension | | Restoration Plans |
| 2005 | | $ | 21,959 | | | $ | 291 | |
| 2006 | | | 22,584 | | | | 385 | |
| 2007 | | | 23,376 | | | | 485 | |
| 2008 | | | 24,281 | | | | 595 | |
| 2009 | | | 25,386 | | | | 731 | |
| 2010 - 2014 | | | 147,264 | | | | 6,097 | |
| |
Retirement and savings plans
The Corporation also provides contributory retirement and savings plans pursuant to Section 1165 (e) of the Puerto Rico Internal Revenue Code and Section 401 (k) of the U.S. Internal Revenue Code, as applicable, for substantially all the employees of certain of the Corporation’s subsidiaries. Some of these plans incorporate profit sharing benefits, which are determined by each subsidiary annually, if applicable. Employer contributions are determined based on specific provisions of each plan. Employees are fully vested in the employer’s contribution after five years of service. The cost of providing these benefits in 2004 was $13,398,000 (2003 — $9,166,000; 2002 — $9,726,000).
The plans held 7,425,012 (2003 — 5,927,714; 2002 — 5,613,430) shares of common stock of the Corporation with a market value of approximately $214,063,000 at December 31, 2004 (2003 — $265,858,000; 2002 — $189,734,000).
Postretirement health care benefits
In addition to providing pension benefits, BPPR provides certain health care benefits for retired employees. Substantially all of the employees of BPPR who are eligible to retire under the pension plan, and provided they reach retirement age while working for BPPR, may become eligible for these benefits. Employees hired after February 1, 2000 are not eligible for retiree health benefits.
The status of the Corporation’s unfunded postretirement benefit plan at December 31, was as follows:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| Change in benefit obligation: | | | | | | | | |
| Benefit obligation at beginning of the year | | $ | 158,659 | | | $ | 145,621 | |
| Service cost | | | 2,898 | | | | 3,140 | |
| Interest cost | | | 8,798 | | | | 9,254 | |
| Curtailment | | | (814 | ) | | | | |
| Special termination benefits | | | 347 | | | | | |
| Plan amendment | | | | | | | (3,200 | ) |
| Benefits paid | | | (6,404 | ) | | | (6,501 | ) |
| Actuarial loss | | | (16,339 | ) | | | 10,345 | |
| |
| Benefit obligation at end of year | | $ | 147,145 | | | $ | 158,659 | |
| |
| Change in plan assets: | | | | | | | | |
| Unfunded status | | $ | (147,145 | ) | | $ | (158,659 | ) |
| Unrecognized net prior service benefit | | | (7,437 | ) | | | (9,529 | ) |
| Unrecognized net actuarial loss | | | 37,264 | | | | 56,549 | |
| |
| Accrued benefit cost | | $ | (117,318 | ) | | $ | (111,639 | ) |
| |
The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 2004 was 5.75% (2003 — 6.00%).
The weighted average discount rate used to determine the components of net periodic postretirement benefit cost for the year ended December 31, 2004 was 6.00% (2003 — 6.50%; 2002 — 7.00%).
The components of net periodic postretirement benefit cost for the year ended December 31, were as follows:
| | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Service cost | | $ | 2,898 | | | $ | 3,140 | | | $ | 2,987 | |
| Interest cost | | | 8,798 | | | | 9,254 | | | | 9,160 | |
| Amortization of prior service benefit | | | (1,087 | ) | | | (807 | ) | | | (807 | ) |
| Amortization of net loss | | | 2,132 | | | | 2,305 | | | | 2,204 | |
| |
| Net periodic benefit cost | | | 12,741 | | | | 13,892 | | | | 13,544 | |
| Curtailment gain | | | (1,005 | ) | | | | | | | | |
| Special termination benefits | | | 347 | | | | | | | | | |
| |
| Total benefit cost | | $ | 12,083 | | | $ | 13,892 | | | $ | 13,544 | |
| |
As stated in Note 1 to these consolidated financial statements, the Corporation adopted the provisions of FSP 106-2 on a prospective basis in the third quarter of 2004. The subsidy-related reduction in the accumulated postretirement benefit obligation was $9,176,000. This reduction is treated as an actuarial gain and will decrease the net periodic cost over the average remaining service period of active plan participants. The effect of the subsidy on the measurement of the net periodic postretirement benefit cost for the year ended December 31, 2004 was a decrease of $584,000.
The assumed health care cost trend rates at December 31, were as follows:
| | | | |
| | | | | |
| Popular / 2004 / Annual Report | | [P80] | | |
| | | | | | | | | |
| | | 2004 | | 2003 |
| Health care cost trend rate assumed for next year | | | 9.00 | % | | | 10.00 | % |
| Rate to which the cost trend rate is assumed to decline | | | 5.00 | % | | | 5.00 | % |
| Year that the ultimate trend rate is reached | | | 2009 | | | | 2009 | |
| |
The Plan provides that the cost will be capped to 3% of the annual health care cost increase affecting only those employees retiring after February 1, 2001.
Assumed health care trend rates generally have a significant effect on the amounts reported for a health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| | | | | | | | | |
| | | 1-Percentage | | 1-Percentage |
| | | Point Increase | | Point Decrease |
| Effect on total service cost and interest cost components | | $ | 457,000 | | | $ | (394,000 | ) |
| Effect on postretirement benefit obligation | | $ | 7,486,000 | | | $ | (6,461,000 | ) |
| |
The Corporation expects to contribute $6,728,000 to the postretirement benefit plan in 2005 to fund current benefit payment requirements.
The following benefit payments, which reflect expected future service, as appropiate, are expected to be paid:
| | | | | | | | | | | | | |
| | | | | | | | | | | Expected Medicare |
| (In thousands) | | Gross | | Net | | Part D subsidy |
| 2005 | | $ | 6,728 | | | $ | 6,728 | | | | | |
| 2006 | | | 7,210 | | | | 6,658 | | | $ | 552 | |
| 2007 | | | 7,697 | | | | 7,107 | | | | 590 | |
| 2008 | | | 8,124 | | | | 7,487 | | | | 637 | |
| 2009 | | | 8,512 | | | | 7,828 | | | | 684 | |
| 2010 - 2014 | | | 48,043 | | | | 44,126 | | | | 3,917 | |
| |
Profit sharing plan
BPPR also has a profit sharing plan covering substantially all regular employees. Annual contributions are determined based on the bank’s profitability ratios, as defined in the plan, and are deposited in trust. Profit sharing expense for the year, including the cash portion paid annually to employees which represented 50% of the expense, amounted to $19,544,000 in 2004 (2003- $19,821,000; 2002 -$21,219,000).
Note 23 — Stock option and other incentive plans:
Since 2001, the Corporation had a Stock Option Plan (the Stock Option Plan), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the Incentive Plan), which replaces and supersedes the Stock Option Plan. All outstanding award grants under the Stock Option Plan continue to remain outstanding at December 31, 2004 under the original terms of the Stock Option Plan.
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provided for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year. The exercise price of each option is equal to the market price of the Corporation’s stock on the date of grant.
The Incentive Plan permits the granting of incentive awards in the form of an Annual Incentive Award, a Long-term Performance Unit Award, an Option, a Stock Appreciation Right, Restricted Stock, Restricted Unit or Performance Share. Participants in the Incentive Plan are be designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation or any of its subsidiaries are eligible to participate in the Incentive Plan. The aggregate number of shares of common stock which may be issued under the Incentive Plan is limited to 10,000,000 shares, subject to adjustments for stock splits, recapitalizations and similar events. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock.
The Corporation recognized $3,223,000 in stock options expense for the year ended December 31, 2004 (2003 — $1,490,000; 2002 — $957,000).
[P81]
The following table presents information on stock options as of December 31, 2004:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Weighted- | | Weighted- | | | | | | Weighted- |
| | | | | | | Average | | Average | | | | | | Average |
| Exercise | | | | | | Exercise | | Remaining | | | | | | Exercise |
| Price | | | | | | Price of | | Life of Options | | | | | | Price of |
| Range | | Options | | Options | | Outstanding | | Options | | Options |
| per Share | | Outstanding | | Outstanding | | in Years | | Exercisable | | Exercisable |
| $14.39 - $18.50 | | | 1,634,111 | | | $ | 15.80 | | | | 7.72 | | | | 533,976 | | | $ | 15.51 | |
| $19.25 - $24.05 | | | 949,878 | | | $ | 23.86 | | | | 9.04 | | | | 58,011 | | | $ | 23.61 | |
| |
| $14.39 - $24.05 | | | 2,583,989 | | | $ | 18.76 | | | | 8.21 | | | | 591,987 | | | $ | 16.30 | |
| |
The following table summarizes the stock options activity and related information:
| | | | | | | | | |
| | | Options | | Weighted-Average |
| | | Outstanding | | Exercise Price |
| Balance at January 1, 2002 | | | 52,832 | | | $ | 15.70 | |
| Granted | | | 847,294 | | | | 14.56 | |
| Exercised | | | (398 | ) | | | 16.30 | |
| Forfeited | | | (9,578 | ) | | | 14.42 | |
| |
| Balance at December 31, 2002 | | | 890,150 | | | $ | 14.63 | |
| Granted | | | 963,872 | | | | 16.93 | |
| Exercised | | | (58,588 | ) | | | 14.47 | |
| Forfeited | | | (16,846 | ) | | | 14.73 | |
| |
| Balance at December 31, 2003 | | | 1,778,588 | | | $ | 15.88 | |
| Granted | | | 997,232 | | | | 23.95 | |
| Exercised | | | (110,681 | ) | | | 15.82 | |
| Forfeited | | | (81,150 | ) | | | 23.22 | |
| |
| Outstanding at December 31, 2004 | | | 2,583,989 | | | $ | 18.76 | |
| |
The stock options exercisable at December 31, 2004 totaled 591,987 (2003 — 201,874; 2002 — 45,058).
The fair value of these options was estimated on the date of the grants using the Black-Scholes Option Pricing Model. The weighted average assumptions used for the grants issued during 2004, 2003 and 2002 were:
| | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| Expected dividend yield | | | 2.00 | % | | | 2.41 | % | | | 2.79 | % |
| Expected life of options | | 10 years | | 10 years | | 10 years |
| Expected volatility | | | 16.50 | % | | | 23.87 | % | | | 26.48 | % |
| Risk-free interest rate | | | 4.06 | % | | | 3.78 | % | | | 4.90 | % |
| Weighted average fair value of options granted (per option) | | $ | 5.74 | | | $ | 4.56 | | | $ | 4.35 | |
| |
During the year ended December 31, 2004, the Compensation Committee approved incentive awards for certain corporate executive officers under the Incentive Plan, based on the 2004 performance payable in the form of restricted stock. Shares of restricted stock will be granted at the beginning of 2005 subject to the attainment of the established performance goals for 2004. During 2004, the Corporation recognized $1,030,000 of restricted stock expense related to the executive officers incentive awards, which represents a form of deferred compensation. The compensation cost was estimated based upon a vesting period which extends up to each participant attaining 55 years of age.
In addition, during the year ended December 31, 2004, shares of restricted stock were granted to members of the Board of Directors of Popular, Inc. and BPPR. During this year, the Corporation recognized $269,000 of restricted stock expense related to such grants.
Note 24 — Rental expense and commitments:
At December 31, 2004, the Corporation was obligated under a number of noncancelable leases for land, buildings, and equipment which require rentals (net of related sublease rentals) as follows:
| | | | | | | | | | | | | |
| | | Minimum | | Sublease | | |
| Year | | payments | | rentals | | Net |
| | | (In thousands) | | | | |
| 2005 | | $ | 47,121 | | | $ | 3,464 | | | $ | 43,657 | |
| 2006 | | | 40,533 | | | | 2,464 | | | | 38,069 | |
| 2007 | | | 35,274 | | | | 2,016 | | | | 33,258 | |
| 2008 | | | 28,947 | | | | 1,363 | | | | 27,584 | |
| 2009 | | | 19,380 | | | | 986 | | | | 18,394 | |
| Later years | | | 86,267 | | | | 6,078 | | | | 80,189 | |
| |
| | | $ | 257,522 | | | $ | 16,371 | | | $ | 241,151 | |
| |
Total rental expense for the year ended December 31, 2004, was $56,972,000 (2003 - $52,137,000; 2002 — $45,823,000).
Note 25 — Income tax:
The components of income tax expense for the years ended December 31, are summarized below. Included in these amounts are income taxes of $313,000 in 2004 (2003 — $9,968,000; 2002 — ($469,000)), related to net gains or losses on securities transactions.
| | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Current income tax expense: | | | | | | | | | | | | |
| Puerto Rico | | $ | 86,734 | | | $ | 85,200 | | | $ | 92,110 | |
| Federal and States | | | 62,162 | | | | 41,557 | | | | 57,291 | |
| |
| Subtotal | | | 148,896 | | | | 126,757 | | | | 149,401 | |
| |
| Deferred income tax (benefit) cost: | | | | | | | | | | | | |
| Puerto Rico | | | (4,088 | ) | | | (7,578 | ) | | | (12,548 | ) |
| Federal and States | | | (103 | ) | | | 11,147 | | | | (19,598 | ) |
| |
| Subtotal | | | (4,191 | ) | | | 3,569 | | | | (32,146 | ) |
| |
| Total income tax expense | | $ | 144,705 | | | $ | 130,326 | | | $ | 117,255 | |
| |
The reasons for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico, were as follows:
| | | | |
| | | | | |
| Popular /2004 / Annual Report | | [P82] | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | |
| | | | | % of | | | | % of | | | | % of |
| | | | | pre-tax | | | | pre-tax | | | | pre-tax |
| (Dollars in thousands) | | Amount | | income | | Amount | | income | | Amount | | income |
| Computed income tax at statutory rates | | $ | 247,499 | | | | 39 | % | | $ | 234,654 | | | | 39 | % | | $ | 183,080 | | | | 39 | % |
| Benefits of net tax exempt interest income | | | (74,599 | ) | | | (12 | ) | | | (83,853 | ) | | | (14 | ) | | | (71,696 | ) | | | (15 | ) |
| Effect of income subject to capital gain tax rate | | | (3,459 | ) | | | (1 | ) | | | (18,532 | ) | | | (3 | ) | | | | | | | | |
| Federal, States taxes and other | | | (24,736 | ) | | | (3 | ) | | | (1,943 | ) | | | | | | | 5,871 | | | | 1 | |
| |
| Income tax expense | | $ | 144,705 | | | | 23 | % | | $ | 130,326 | | | | 22 | % | | $ | 117,255 | | | | 25 | % |
| |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation’s deferred tax assets and liabilities at December 31, were as follows:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| Deferred tax assets: | | | | | | | | |
| Tax credits available for carryforward | | $ | 8,407 | | | $ | 10,166 | |
| Net operating loss and donation carryforward available | | | 1,691 | | | | 2,082 | |
| Deferred compensation | | | 3,581 | | | | 1,605 | |
| Postretirement and pension benefits | | | 41,486 | | | | 36,592 | |
| Basis difference related to securitizations treated as sales for tax and borrowings for books | | | 8,699 | | | | 15,972 | |
| Deferred loan origination fees | | | 3,827 | | | | 1,165 | |
| Allowance for loan losses | | | 165,364 | | | | 158,131 | |
| Amortization of intangibles | | | 7,757 | | | | 4,495 | |
| Unearned income | | | 1,565 | | | | 1,791 | |
| Unrealized loss on derivatives | | | 603 | | | | 1,895 | |
| Intercompany deferred gains | | | 19,658 | | | | 15,501 | |
| Other temporary differences | | | 11,362 | | | | 9,604 | |
| |
| Total gross deferred tax assets | | | 274,000 | | | | 258,999 | |
| |
| Deferred tax liabilities: | | | | | | | | |
| Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations | | | 10,635 | | | | 4,465 | |
| Deferred loan origination costs | | | 21,471 | | | | 17,053 | |
| Accelerated depreciation | | | 7,436 | | | | 7,436 | |
| Unrealized net gain on securities available-for-sale | | | 14,323 | | | | 9,215 | |
| Other temporary differences | | | 3,338 | | | | 326 | |
| |
| Total gross deferred tax liabilities | | | 57,203 | | | | 38,495 | |
| |
| Valuation allowance | | | 59 | | | | 418 | |
| |
| Net deferred tax asset | | $ | 216,738 | | | $ | 220,086 | |
| |
The net deferred tax asset shown in the table above at December 31, 2004 is reflected in the consolidated statements of condition as $231,892,000 in deferred tax assets (in the “other assets” caption)(2003 — $234,968,000) and $15,154,000 in deferred tax liabilities (in the “other liabilities” caption)(2003 — $14,882,000), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.
At December 31, 2004, the Corporation had $8,407,000 in credits expiring in annual installments through year 2016 that will reduce the regular income tax liability in future years.
A valuation allowance of $59,000 is reflected in 2004, and $418,000 in 2003, related to deferred tax assets arising from temporary differences for which the Corporation could not determine the likelihood of its realization. Based on the information available, the Corporation expects to fully realize all other items comprising the net deferred tax asset as of December 31, 2004.
Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Code provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.
The Corporation has never received any dividend payments from its U.S. subsidiaries. Any such dividend paid from a U.S. subsidiary to the Corporation would be subject to a 10% withholding tax based on the provisions of the U.S. Internal Revenue Code. The Corporation has not recorded any deferred tax liability on the unremitted earnings of its U.S. subsidiaries because the reinvestment of such earnings is considered permanent. The Corporation believes that the likelihood of receiving dividend payments from any of its U.S. subsidiaries in the foreseeable future is remote based on the growth it is undertaking in the U.S. mainland.
The Corporation’s subsidiaries in the United States file a consolidated federal income tax return. The Corporation’s federal income tax provision for 2004 was $58,934,000 (2003 — $47,002,000; 2002 — $34,614,000). The intercompany settlement of taxes paid is based on tax sharing agreements which generally allocate taxes to each entity based on a separate return basis.
In January 2004, the Government of Puerto Rico approved a legislation that partially eliminates the tax exempt status of an International Banking Entity (“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, 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.
On October 22, 2004, President George W. Bush signed into law theAmerican 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
[P83]
Commonwealth of Puerto Rico from 30% to 10%. As described above, the Corporation’s U.S. 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.
Note 26 — Off-balance sheet lending activities and concentration of credit risk:
Off-balance sheet risk
The Corporation is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financial needs of its customers. These financial instruments include loan commitments, letters of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of condition.
The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the consolidated statements of condition.
Financial instruments with off-balance sheet credit risk at December 31, whose contract amounts represent potential credit risk were as follows:
| | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| Commitments to extend credit: | | | | | | | | |
| Credit card lines | | $ | 2,716,236 | | | $ | 1,972,802 | |
| Commercial lines of credit | | | 3,300,415 | | | | 2,888,742 | |
| Other unused commitments | | | 194,177 | | | | 182,361 | |
| Commercial letters of credit | | | 19,017 | | | | 13,833 | |
| Standby letters of credit | | | 187,094 | | | | 137,290 | |
| Commitments to purchase mortgage loans | | | | | | | 200,000 | |
| Commitments to originate mortgage loans | | | 429,716 | | | | 425,493 | |
| |
Commitments to extend credit
Contractual commitments to extend credit are legally binding agreements to lend money to customers for a specified period of time. To extend credit the Corporation evaluates each customer’s creditworthiness. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include cash, accounts receivable, inventory, property, plant and equipment and investment securities, among others. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
Letters of credit
There are two principal types of letters of credit: commercial and standby letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
In general, commercial letters of credit are short-term instruments used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller in accordance with the terms of the contract. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction.
Standby letters of credit are issued by the Corporation to disburse funds to a third party beneficiary if the Corporation’s customer fails to perform under the terms of an agreement with the beneficiary. These letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon.
Other commitments
In 2003, the Corporation entered into loan commitments to purchase an aggregate amount of $275,000,000 of mortgage loans with the option of purchasing $125,000,000 in additional loans. The commitments expire completely by June 30, 2005. At December 31, 2004, all commitments to purchase mortgage loans were exercised and $50,000,000 of the optional amount was still available.
Geographic concentration
As of December 31, 2004, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. Note 30 provides further information on the asset composition of the Corporation by geographical area as of December 31, 2004 and 2003.
Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $6.4 billion and $6.2 billion in 2004 and 2003, respectively.
Note 27 — Disclosures about fair value of financial instruments:
The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.
The information about the estimated fair values of financial instruments presented hereunder excludes all nonfinancial instruments presented hereunder excludes all nonfinancial
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P84] | | |
instruments and certain other specific items.
Derivatives are considered financial instruments and their carrying value equals fair value. For disclosures about the fair value of derivative instruments refer to Note 28 to the consolidated financial statements.
For those financial instruments with no quoted market prices available, fair values have been estimated using present value or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows and prepayment assumptions.
The fair values reflected herein have been determined based on the prevailing interest rate environment as of December 31, 2004 and 2003, respectively. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 2004 and 2003.
Short-term financial assets and liabilities have relatively short maturities, or no defined maturities, and little or no credit risk. The carrying amounts reported in the consolidated statements of condition approximate fair value. Included in this category are: cash and due from banks, federal funds sold and securities purchased under agreements to resell, time deposits with other banks, bankers acceptances, customers’ liabilities on acceptances, accrued interest receivable, federal funds purchased and assets sold under agreements to repurchase, short-term borrowings, acceptances outstanding and accrued interest payable. Resell and repurchase agreements with long-term maturities are valued using discounted cash flows based on market rates currently available for agreements with similar terms and remaining maturities.
Trading and investment securities, except for investments classified as other investment securities in the consolidated statement of condition, are financial instruments that regularly trade on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes, where available, or quoted market prices of financial instruments with similar characteristics. Trading account securities and securities available-for-sale are reported at their respective fair values in the consolidated statements of condition since they are marked-to-market for accounting purposes. These instruments are detailed in the consolidated statements of condition and in Notes 4, 5 and 28.
The estimated fair value for loans held-for-sale is based on secondary market prices. The fair values of the loan portfolios have been determined for groups of loans with similar characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer and credit cards. Each loan category was further segmented based on loan characteristics, including repricing term and pricing. The fair value of most fixed-rate loans was estimated by discounting scheduled cash flows using interest rates currently being offered on loans with similar terms. For variable rate loans with frequent repricing terms, fair values were based on carrying values. Prepayment assumptions have been applied to the mortgage and installment loan portfolio. The fair value of the loans was also reduced by an estimate of credit losses inherent in the portfolio. Generally accepted accounting principles do not require, and the Corporation has not performed a fair valuation of its lease financing portfolio, therefore it is included in the loans total at its carrying amount.
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW and money market accounts is, for purpose of this disclosure, equal to the amount payable on demand as of the respective dates. The fair value of certificates of deposit is based on the discounted value of contractual cash flows, using interest rates currently being offered on certificates with similar maturities.
Long-term borrowings were valued using discounted cash flows, based on market rates currently available for debt with similar terms and remaining maturities and in certain instances using quoted market rates for similar instruments at December 31, 2004 and 2003, respectively.
Commitments to extend credit were fair valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments, which are expected to be disbursed, based on historical experience. The fair value of letters of credit is based on fees currently charged on similar agreements.
[P85]
Carrying or notional amounts, as applicable, and estimated fair values for financial instruments at December 31, were:
| | | | | | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 |
| | | Carrying | | Fair | | Carrying | | Fair |
| | | amount | | value | | amount | | value |
Financial Assets: | | | | | | | | | | | | | | | | |
| Cash and money market investments | | $ | 1,596,099 | | | $ | 1,596,099 | | | $ | 1,460,983 | | | $ | 1,460,983 | |
| Trading securities | | | 385,139 | | | | 385,139 | | | | 605,119 | | | | 605,119 | |
| Investment securities available-for-sale | | | 11,162,145 | | | | 11,162,145 | | | | 10,051,579 | | | | 10,051,579 | |
| Investment securities held-to-maturity | | | 340,850 | | | | 344,899 | | | | 186,821 | | | | 188,074 | |
| Other investment securities | | | 302,440 | | | | 308,489 | | | | 233,144 | | | | 238,162 | |
| Loans held-for-sale | | | 750,728 | | | | 758,029 | | | | 271,592 | | | | 314,896 | |
| Loans held-in-portfolio, net | | | 27,554,452 | | | | 27,856,123 | | | | 21,922,058 | | | | 22,463,353 | |
Financial Liabilities: | | | | | | | | | | | | | | | | |
| Deposits | | $ | 20,593,160 | | | $ | 20,533,863 | | | $ | 18,097,828 | | | $ | 18,190,979 | |
| Federal funds purchased | | | 619,792 | | | | 619,792 | | | | 887,763 | | | | 887,763 | |
| Assets sold under agreements to repurchase | | | 5,817,061 | | | | 5,840,492 | | | | 4,947,824 | | | | 4,953,772 | |
| Short-term borrowings | | | 3,139,639 | | | | 3,139,639 | | | | 1,996,624 | | | | 1,996,624 | |
| Notes payable | | | 10,180,710 | | | | 9,926,375 | | | | 6,992,025 | | | | 7,071,807 | |
| Subordinated notes | | | 125,000 | | | | 129,025 | | | | 125,000 | | | | 134,975 | |
| |
| | | Notional
amount | | Fair
Value | | Notional
amount | | Fair
Value |
| |
Commitments to extend credit and letters of credit: | | | | | | | | | | | | | | | | |
| Commitments to extend credit | | $ | 6,210,828 | | | $ | 13,805 | | | $ | 5,043,905 | | | $ | 12,228 | |
| Letters of credit | | | 206,111 | | | | 3,086 | | | | 151,123 | | | | 1,313 | |
Note 28 — Derivative instruments and hedging activities:
The Corporation maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Corporation’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuations is that the interest income and interest expense of hedged variable-rate assets and liabilities, respectively, will increase or decrease. The effect of this variability in earnings is expected to be substantially offset by the Corporation’s gains and losses on the derivative instruments that are linked to these hedged assets and liabilities. The Corporation considers its strategic use of derivatives to be a prudent method of managing interest-rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest rates.
Derivative instruments that are used as part of the Corporation’s interest rate risk-management strategy include interest rate swaps, index options and interest rate forwards and futures contracts. As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management. Interest rate swaps generally involve the exchange of fixed- and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date. Index options are over-the-counter (OTC) contracts that the Corporation enters into in order to receive the appreciation of the Standard and Poor’s 500 index over a specified period. Interest rate forwards and futures are contracts for the delayed delivery of securities which the seller agrees to deliver on a specified future date at a specified price or yield.
The Corporation also enters into foreign exchange contracts and interest rate caps, floors and put options embedded in interest bearing contracts. The Corporation enters into foreign exchange contracts to a limited extent in the spot or futures market. Spot contracts require the exchange of two currencies at an agreed rate. Forward and futures contracts to purchase or sell currencies at a future date settle over periods of up to one year, in general. Interest rate caps and floors are option-like contracts that require the writer to pay the purchaser at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate, applied to a notional principal amount. The option writer receives a premium for bearing the risk of unfavorable interest rate changes.
By using derivative instruments, the Corporation exposes itself to credit and market risk. If counterparty fails to fulfill its performance obligations under a derivative contract, the Corporation’s credit risk will equal the fair-value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Corporation, thus creating a repayment risk for the Corporation. When the fair value of a derivative contract is negative, the Corporation owes the counterparty and, therefore, assumes no repayment risk. To manage the level of credit risk, the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Concentrations of credit risk which arise through the Corporation’s off-balance sheet lending activities are presented in Note 26.
Market risk is the adverse effect that a change in interest rates, currency exchange rates, or implied volatility rates might have on the value of a financial instrument. The Corporation manages the market risk associated with interest rates, and to a limited extent, with fluctuations in foreign currency exchange rates, by establishing
| | | | |
| | | | | |
| Popular /2004 / Annual Report | | [P86] | | |
and monitoring limits for the types and degree of risk that may be undertaken. The Corporation regularly measures this risk by using static gap analysis, simulations and duration analysis.
The Corporation’s derivatives activities are monitored by its Market Risk Committee as part of that committee’s oversight of the Corporation’s asset/liability and treasury functions. The Corporation’s Market Risk Committee is responsible for approving hedging strategies that are developed through its analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Corporation’s overall interest rate risk-management and trading strategies.
Cash Flow Hedges
Futures and forwards are contracts for the delayed delivery of securities in which the seller agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. These contracts qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended and therefore, changes in the fair value of the derivatives are recorded in other comprehensive income. As of December 31, 2004, the fair market values of these forwards were $59,000 recorded in other assets and $54,000 in other liabilities. As of December 31, 2004, the total amount (net of tax) included in accumulated other comprehensive income pertaining to forward contracts was an unrealized gain of $3,000, which the Corporation expects to reclassify into earnings in the next twelve months. These contracts have a maximum remaining maturity of 46 days. As of December 31, 2003, the fair market value of these forwards was $72,000 recorded in other liabilities. As of December 31, 2003, the total amount (net of tax) included in accumulated other comprehensive income pertaining to forward contracts was an unrealized loss of $44,000.
Additionally, during 2004 the Corporation entered into a forward contract to sell residential first mortgage loans for a specified price at a scheduled date. As a result the Corporation recognized a derivative liability of $213,000, pertaining to their fair market value and included an unrealized loss of $130,000, net of tax, in other comprehensive income.
The Corporation purchased interest rate caps in conjunction with a series of securitizations in order to hedge its exposure to increases in cash flows for floating rate secured borrowings resulting from securitization transactions that do not qualify for the sale treatment under SFAS No. 140 criteria. These contracts are designated as cash flow hedges and considered highly effective at inception. As of December 31, 2004, the fair market value of these interest rate caps considered highly effective was $13,791,000 included in other assets and the amount included in accumulated other comprehensive income was a gain of $964,000. These contracts have a maximum remaining maturity of 3.6 years. Hedge effectiveness is assessed based on the total changes in the option’s cash flows during the periods where the hedge risk exists. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the adjustment to fair value of the derivative instrument is recorded in earnings. As a part of these contracts, during 2004 the Corporation reclassified $300,000 into earnings pertaining to the ineffective portion of changes in fair value of the cash flow hedge and $864,000 pertaining to the caplets expiration, both amounts included as an increase to interest expense. Assuming no change in interest rates, $4,776,000, net of tax, of interest rate cap value is expected to be charged to earnings over the next twelve months as contractual payments are made.
During 2004, the Corporation discontinued the hedge accounting for certain caps that ceased to be highly effective and as a result reclassified a net loss of $1,443,000 into earnings. As of December 31, 2004, the fair value of these caps was $527,000 and the related unrealized loss in accumulated other comprehensive income amounted to $637,000, net of tax. The changes in fair value of the caps after the discontinuance of the hedging relationship amounted to a gain of $277,000 and were recorded in interest expense. In addition, the unrealized loss in accumulated other comprehensive income related to hedges which ceased to be highly effective in prior periods was $910,000, net of tax, as of December 31, 2004. The change in fair value of these caps amounted to a loss of $689,000 and was recorded in interest expense. The unrealized loss accumulated in other comprehensive income will be amortized to earnings over the term of the contract as contractual payments are made.
As of December 31, 2003, the fair market value of the interest rate caps considered highly effective was $4,037,000 included in other assets and the amount included in accumulated other comprehensive income was a loss of $1,370,000. As part of these contracts, during 2003 the Corporation reclassified $347,000 from other comprehensive income into earnings pertaining to the ineffective portion of changes in fair value of the cash flow hedge and $1,489,000 pertaining to the caplets expiration, both amounts included as an increase to interest expense. As of December 31, 2003, the fair value of the interest rate caps that ceased to be highly effective was $1,397,000 and the related unrealized loss in accumulated other comprehensive income amounted to $1,177,000, net of tax. As a result of the discontinuance of these interest rate caps a net loss of $1,285,000 was reclassified into earnings during 2003.
The Corporation has a $25,000,000 notional amount interest rate swap to convert floating rate debt to fixed rate debt in order to fix the cost of short-term borrowings. This contract qualifies for cash flow hedge accounting in accordance with SFAS No. 133, as amended. As of December 31, 2004, the fair market value of the interest rate swap was $59,000 included in other liabilities and the amount included in accumulated other comprehensive income was a loss of $36,000. This contract matures on October 17, 2005. As of December 31, 2003, the fair market value of this interest rate swap
[P87]
was $188,000 recorded in other liabilities and the amount included in accumulated other comprehensive income was a loss of $115,000.
For cash flow hedges, gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income to current period earnings are included in the line item in which the hedged item is recorded and in the same period in which the forecasted transaction affects earnings.
Trading and Non-Hedging Activities
The Corporation, through its Puerto Rico banking subsidiary, BPPR, offers certificates of deposit with returns linked to the S&P 500 index to its retail customers, principally in connection with individual retirement accounts. At December 31, 2004, these deposits amounted to $114,742,000 (2003 - $122,259,000). These certificates have a maturity of five years, and the customer’s principal is guaranteed by BPPR and insured by the FDIC to the maximum extent permitted by law. Instead of paying a fixed rate of interest, the instruments pay a return based on the increase of the S&P 500 index, if any, during the term of the instrument. Accordingly, this product gives customers the opportunity to invest in a product that protects the principal invested, but allows the customer the potential to earn a return based on the performance of the U.S. stock market.
In order to limit the Corporation’s exposure to changes in the S&P 500 index, the Corporation purchases S&P 500 index options from financial institutions with strong credit standing. These options are contracts that are traded in the over the counter market. OTC options are not listed on an options exchange and do not have standardized terms. The terms of the OTC contracts including the underlying notional amount, exercise price and maturity, are negotiated with the various counterparties with the amounts payable mirroring the terms on the deposits. The contracts have a maturity and an index equal to the terms of the pool of client deposits they are economically hedging.
The purchased option contracts are initially accounted for at cost (i.e. amount of premium paid) and recorded as a derivative asset. The derivative asset is marked to market on a monthly basis with changes in fair value charged to operations. The deposits are hybrid instruments containing embedded options (component of the deposit contract that pays return based on changes in the S&P 500 index) that must be bifurcated in accordance with SFAS No. 133. The initial value of the embedded option is bifurcated from the related certificate of deposit (host contract) and is initially recorded as a derivative liability; also a related discount on the certificate of deposit is recorded. Subsequently, the discount on the deposit is accreted and is included as part of interest expense and the bifurcated option is marked to market with changes in fair value charged to operations. These option contracts do not qualify for hedge accounting in accordance with the provision of SFAS No. 133 and therefore cannot be designated as accounting hedges. Both the purchased option contracts and the bifurcated option are marked to market based on valuations received from an independent third party on a quarterly basis.
As of December 31, 2004, the Corporation had recognized a derivative asset of $7,113,000 based on the fair value of the indexed options, a derivative liability of $14,475,000 based on the fair value of the bifurcated option, and a related discount on the certificates of deposit of $10,478,000. These amounts are included in other assets, other liabilities and deposits, respectively. As of December 31, 2003, the Corporation had recognized a derivative liability of $7,383,000 based on the fair value of the indexed options, a derivative liability of $6,596,000 based on the fair value of the bifurcated option, and a related discount on the certificates of deposit of $11,319,000.
The Corporation has an option related to the issuance of $31,152,000 in notes linked to the S&P 500 Index through an embedded option which has been bifurcated from the host contract, and in accordance with SFAS No. 133 does not qualify for hedge accounting. As of December 31, 2004 the Corporation recognized an asset of $2,478,000 pertaining to the fair market value of the purchased option, a derivative liability of $2,478,000 based on the fair value of the bifurcated option and a related discount on the notes of $1,456,000. At December 31, 2003 the Corporation recognized an asset of $2,050,000 pertaining to the fair market value of the purchased option, a derivative liability of $2,050,000 based on the fair value of the bifurcated option and a related discount on the notes of $1,833,000.
In addition to using derivative instruments as an interest rate risk management tool, the Corporation also utilizes derivatives such as foreign exchange contracts and interest rate swaps in its capacity as an intermediary on behalf of its customers. The Corporation minimizes its market risk and credit risk by taking offsetting positions under the same terms and conditions with credit limit approvals and monitoring procedures. Market value changes on these swaps and other derivatives are recognized in income in the period of change. As of December 31, 2004, the Corporation included $269,000 and $88,000 in securities and other assets, respectively, and $210,000 in other liabilities pertaining to the fair value of $90,467,000 in interest rate contracts. At December 31, 2003, the Corporation included $414,000 and $129,000 in securities and other assets, respectively, and $543,000 in other liabilities pertaining to the fair value of $49,371,000 in interest rate contracts.
For the years ended December 31, 2004, 2003 and 2002 the Corporation recognized losses of $100,000, $7,477,000 and $20,085,000, respectively, as a result of the changes in fair value of non-hedging derivatives included as part of interest expense. Additionally, during 2004 the Corporation recognized gains of $1,173,000 as a result of changes in fair value of non-hedging derivatives included as part of trading gains.
To satisfy the needs of its customers, the Corporation entered into foreign exchange contracts in the spot or futures market and at
Popular /2004 / Annual Report
[P88]
the same time into foreign exchange contracts with third parties under the same terms and conditions. As of December 31, 2004, the Corporation included $3,000 and $3,000 in other assets and other liabilities, respectively, pertaining to the fair value of these contracts.
At December 31, 2004, 2003 and 2002 respectively, the Corporation also had forward contracts to sell $112,600,000 and $351,900,000 of mortgage-backed securities with terms lasting less than a month which were accounted for as trading derivatives. These contracts are recognized at fair market value with changes directly reported in income. At December 31, 2004 and 2003, respectively, the fair market value of these forwards was a loss of $128,000 and $990,000, respectively. These contracts are entered into in order to optimize the gain on sales of mortgage loans and/or mortgage-backed securities and net interest income, given levels of interest rate risk consistent with the Corporation’s business strategies.
The Corporation entered into forward commitments to sell / purchase mortgage-backed securities (TBA’s) for trading purposes. The gross notional amounts of these forward commitments to sell as of December 31, 2004 amounted to $3,000,000. The fair value of these derivative financial instruments was $5,000. At December 31, 2003, the gross notional amounts of these forward commitments to sell amounted to $94,200,000 and the gross notional amount of the commitments to purchase amounted to $11,000,000. The fair value of these derivative financial instruments was $99,000.
Also, the Corporation has options contracts that grant the purchaser the right to buy or sell the underlying asset by a certain date at a specified price. The gross notional amount of call option contracts to purchase is $1,000,000 with a fair value of $12,000 recognized in other assets. The gross notional amount of call option contracts to sell is $6,000,000 with a fair value of $10,000 recognized in other liabilities. Put option contracts to purchase notional amount is $55,000,000 with a fair value of $426,000 recognized in other assets. Notional amount of put option contracts to sell is $25,000,000 with a fair value of $106,000 recognized in other liabilities.
In addition, the Corporation has interest rate future contracts which are commitments to either purchase or sell designated instruments, such as U.S. Treasury securities, at a future date for a specified price. The notional amount of these futures contracts are $15,000,000 with a fair value of $113,000 recognized in other liabilities.
The Corporation may use interest rate swaps to convert floating rate debt to fixed rate debt in order to fix the future cost of the portfolio of short-term borrowings. The specific terms and notional amounts of the swaps would be determined based on management’s assessment of future interest rates, as well as other factors. At December 31, 2004, there were no such contracts oustanding. During the second quarter of 2003, the Corporation terminated the interest rate contracts outstanding at the time with a notional amount of $500,000,000. These swaps did not qualify as hedges in accordance with SFAS No. 133, as amended, and therefore changes in fair value of the derivatives were recorded in the statement of income as interest expense.
Note 29 — Supplemental disclosure on the consolidated statements of cash flows:
During the year ended December 31, 2004, the Corporation paid interest and income taxes amounting to $810,669,000 and $128,558,000, respectively (2003 — $751,152,000 and $136,634,000; 2002 — $842,137,000 and $135,247,000). In addition, loans transferred to other real estate and other property for the year ended December 31, 2004, amounted to $121,412,000 and $24,667,000, respectively (2003 — $85,493,000 and $27,205,000).
During the second quarter of 2004, the Corporation transferred certain trading account securities to the available-for-sale portfolio as described in Note 4.
In addition, the consolidated statement of cash flows for the year ended December 31, 2004, was impacted by the Quaker City acquisition, which net assets acquired are included in a separate line item in such financial statement under the caption “Assets acquired, net of cash”.
Note 30 — Segment reporting:
During 2004, the Corporation reorganized its corporate structure into five principal areas (referred to by management as “circles”): one for the corporate group and one for each of the Corporation’s four principal businesses — Popular Puerto Rico, United States Financial Services, Popular Financial Holdings and Processing.
There are seven identified reportable segments: Puerto Rico Commercial Banking, Puerto Rico Consumer and Retail Banking, Puerto Rico Other Financial Services (these three reportable segments compose the Popular Puerto Rico circle), United States Financial Services, Popular Financial Holdings, Processing and Corporate. 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 and 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. These reportable segments, which are described below, are also evaluated and grouped for managerial reporting in the corresponding circles:
Popular Puerto Rico:
This business circle has been segregated into three reportable segments based on how management evaluates business, performance and strategies:
[P89]
| | • | Commercial banking represents the Corporation’s banking operations in Puerto Rico conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across segments based on duration matched transfer pricing at market rates. This segment also incorporates income related with the investment of excess funds as well as a proportionate share of the investment function of BPPR. |
| |
| | • | Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto, Popular Finance, and Popular Mortgage. These three subsidiaries focus respectively on auto and lease financing, mortgage loan originations, and small personal loans. This segment also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR. |
| |
| | • | Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I. and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income. |
United States Financial Services:
This reportable segment includes principally the activities of Banco Popular North America (BPNA), including its subsidiaries Popular Leasing, U.S.A and Popular Insurance Agency, U.S.A. BPNA has become the largest Hispanic-owned financial services franchise in the U.S., providing complete financial solutions to all the communities it serves. BPNA operates through a branch network of 128 branches in six states. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network. Popular Leasing, U.S.A. provides mainly small to mid-ticket commercial and medical equipment financing. The U.S. Financial Services segment also includes the retail financial services of Popular Cash Express, a fee driven business that serves the unbanked, retail customer. These subsidiaries are all evaluated and report to a common senior executive officer.
Popular Financial Holdings:
This reportable segment corresponds to the Corporation’s consumer lending subsidiaries in the United States, principally Popular Financial Holdings, Inc., and its wholly-owned subsidiary Equity One, and Popular FS, LLC. These subsidiaries are primarily engaged in the business of granting non-prime mortgage and personal loans, acquiring retail installment contracts and providing warehouse lines to small and medium-sized mortgage companies. Also, it maintains a substantial wholesale broker network and an asset acquisitions unit. This segment operates through 183 offices across 28 states.
Processing:
This reportable segment includes the information processing and technology functions of the Corporation, including EVERTEC, with offices in Puerto Rico, the Dominican Republic and Venezuela; and ATH Costa Rica, S.A. and CreST, S.A., located in Costa Rica. In addition, this reportable segment includes the equity investments in CONTADO and Servicios Financieros, S.A. de C.V. (Serfinsa), which operate in the Dominican Republic and El Salvador, respectively. This segment provides processing and technology services to other units of the Corporation as well as to third parties, principally other financial institutions in Puerto Rico, the Caribbean and Central America.
Corporate:
This reportable segment includes the Holding companies: Popular, Inc., Popular North America and Popular International Bank, excluding the equity investments in CONTADO and Serfinsa, which due to the nature of their operations are included as part of the processing segment. The holding companies obtain funding in the capital markets to finance the Corporation’s growth, including acquisitions.
The accounting policies of the individual operating segments are the same as those of the Corporation described in Note 1. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations.
Prior period amounts corresponding to the years 2002 and 2003 have been restated to reflect changes in segment reporting.
| | | | | | | | | | | | | | | | | | | | | |
| 2004 |
| At December 31, 2004 |
| Popular Puerto Rico |
| | | | | | | Consumer | | Other | | | | |
| | | Commercial | | and Retail | | Financial | | Intersegment | | |
| (In thousands) | | Banking | | Banking | | Services | | Eliminations | | Total |
| Net interest income | | $ | 271,335 | | | $ | 592,484 | | | $ | 15,718 | | | $ | 3 | | | $ | 879,540 | |
| Provision for loan losses | | | 15,600 | | | | 75,177 | | | | | | | | | | | | 90,777 | |
| Other income | | | 156,678 | | | | 144,636 | | | | 68,862 | | | | (3,268 | ) | | | 366,908 | |
| Amortization of intangibles | | | | | | | 2,231 | | | | 298 | | | | | | | | 2,529 | |
| Depreciation expense | | | 17,261 | | | | 25,005 | | | | 1,409 | | | | | | | | 43,675 | |
| Other operating expenses | | | 225,204 | | | | 384,430 | | | | 51,069 | | | | (1,098 | ) | | | 659,605 | |
| Income tax | | | 35,991 | | | | 31,521 | | | | 11,178 | | | | (809 | ) | | | 77,881 | |
| |
| Net income | | $ | 133,957 | | | $ | 218,756 | | | $ | 20,626 | | | $ | (1,358 | ) | | $ | 371,981 | |
| |
| Segment assets | | $ | 9,239,612 | | | $ | 15,563,662 | | | $ | 1,070,092 | | | $ | (1,190,976 | ) | | $ | 24,682,390 | |
| |
| | | | |
| | | | | |
| Popular / 2004 / Annual Report | | [P90] | | |
| | | | | | | | | | | | | | | | | | | | | |
| |
| At December 31, 2004 |
| | | | | | | | | | | Popular | | | | | | | Total |
| | | Popular | | U.S. Financial | | Financial | | | | | | Business |
| (In thousands) | | Puerto Rico | | Services | | Holdings | | Processing | | Circles |
| Net interest income | | $ | 879,540 | | | $ | 277,814 | | | $ | 256,682 | | | $ | 391 | | | $ | 1,414,427 | |
| Provision for loan losses | | | 90,777 | | | | 42,589 | | | | 45,291 | | | | | | | | 178,657 | |
| Other income | | | 366,908 | | | | 98,894 | | | | 23,634 | | | | 173,061 | | | | 662,497 | |
| Amortization of intangibles | | | 2,529 | | | | 5,260 | | | | | | | | 55 | | | | 7,844 | |
| Depreciation expense | | | 43,675 | | | | 13,536 | | | | 3,799 | | | | 11,293 | | | | 72,303 | |
| Other operating expenses | | | 659,605 | | | | 230,861 | | | | 138,661 | | | | 139,651 | | | | 1,168,778 | |
| Income tax | | | 77,881 | | | | 29,978 | | | | 34,361 | | | | 6,125 | | | | 148,345 | |
| |
| Net income | | $ | 371,981 | | | $ | 54,484 | | | $ | 58,204 | | | $ | 16,328 | | | $ | 500,997 | |
| |
| Segment assets | | $ | 24,682,390 | | | $ | 10,284,009 | | | $ | 9,166,771 | | | $ | 234,966 | | | $ | 44,368,136 | |
| |
| | | | | | | | | | | | | | | | | |
| At December 31, 2004 |
| | | Total | | | | | | Intersegment | | Total | | |
| (In thousands) | | Business Circles | | Corporate | | Eliminations | | Popular, Inc. |
| Net interest income | | $ | 1,414,427 | | | $ | (39,669 | ) | | $ | 753 | | | $ | 1,375,511 | |
| Provision for loan losses | | | 178,657 | | | | | | | | | | | | 178,657 | |
| Other income | | | 662,497 | | | | 31,578 | | | | (85,304 | ) | | | 608,771 | |
| Amortization of intangibles | | | 7,844 | | | | | | | | | | | | 7,844 | |
| Depreciation expense | | | 72,303 | | | | 1,043 | | | | 924 | | | | 74,270 | |
| Other operating expenses | | | 1,168,778 | | | | 4,495 | | | | (84,375 | ) | | | 1,088,898 | |
| Income tax | | | 148,345 | | | | (3,180 | ) | | | (460 | ) | | | 144,705 | |
| |
| Net income | | $ | 500,997 | | | $ | (10,449 | ) | | $ | (640 | ) | | $ | 489,908 | |
| |
| Segment assets | | $ | 44,368,136 | | | $ | 5,598,732 | | | $ | (5,565,292 | ) | | $ | 44,401,576 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| 2003 |
| At December 31, 2003 |
| Popular Puerto Rico |
| | | | | | | Consumer | | | | | | |
| | | Commercial | | and Retail | | Other Financial | | Intersegment | | |
| (In thousands) | | Banking | | Banking | | Services | | Eliminations | | Total |
| Net interest income | | $ | 268,108 | | | $ | 571,448 | | | $ | 17,550 | | | $ | (69 | ) | | $ | 857,037 | |
| Provision for loan losses | | | 35,121 | | | | 80,922 | | | | | | | | | | | | 116,043 | |
| Other income | | | 102,646 | | | | 146,109 | | | | 58,445 | | | | (928 | ) | | | 306,272 | |
| Amortization of intangibles | | | | | | | 2,683 | | | | 290 | | | | | | | | 2,973 | |
| Depreciation expense | | | 28,831 | | | | 17,201 | | | | 957 | | | | | | | | 46,989 | |
| Other operating expenses | | | 155,505 | | | | 407,490 | | | | 41,496 | | | | (445 | ) | | | 604,046 | |
| Net gain of minority interest | | | | | | | (435 | ) | | | | | | | | | | | (435 | ) |
| Income tax | | | 36,936 | | | | 20,570 | | | | 11,776 | | | | | | | | 69,282 | |
| |
| Net income | | $ | 114,361 | | | $ | 188,256 | | | $ | 21,476 | | | $ | (552 | ) | | $ | 323,541 | |
| |
| Segment assets | | $ | 8,270,945 | | | $ | 14,854,277 | | | $ | 1,150,275 | | | $ | (1,073,742 | ) | | $ | 23,201,755 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2003 |
| | | | | | | | | | | Popular | | | | | | Total |
| | | Popular | | U.S. Financial | | Financial | | | | | | Business |
| (In thousands) | | Puerto Rico | | Services | | Holdings | | Processing | | Circles |
| Net interest income | | $ | 857,037 | | | $ | 243,765 | | | $ | 209,159 | | | $ | (4,427 | ) | | $ | 1,305,534 | |
| Provision for loan losses | | | 116,043 | | | | 34,290 | | | | 45,606 | | | | | | | | 195,939 | |
| Other income | | | 306,272 | | | | 92,659 | | | | 31,922 | | | | 192,011 | | | | 622,864 | |
| Amortization of intangibles | | | 2,973 | | | | 4,866 | | | | | | | | 5 | | | | 7,844 | |
| Depreciation expense | | | 46,989 | | | | 13,334 | | | | 2,756 | | | | 9,114 | | | | 72,193 | |
| Other operating expenses | | | 604,046 | | | | 226,474 | | | | 107,003 | | | | 163,035 | | | | 1,100,558 | |
| Net gain of minority interest | | | (435 | ) | | | | | | | | | | | | | | | (435 | ) |
| Income tax | | | 69,282 | | | | 22,046 | | | | 31,090 | | | | 3,648 | | | | 126,066 | |
| |
| Net income | | $ | 323,541 | | | $ | 35,414 | | | $ | 54,626 | | | $ | 11,782 | | | $ | 425,363 | |
| |
| Segment assets | | $ | 23,201,755 | | | $ | 6,382,710 | | | $ | 6,921,252 | | | $ | 224,481 | | | $ | 36,730,198 | |
| |
| | | | | | | | | | | | | | | | | |
| At December 31, 2003 |
| | | Total | | | | | | Intersegment | | Total |
| (In thousands) | | Business Circles | | Corporate | | Eliminations | | Popular, Inc. |
| Net interest income | | $ | 1,305,534 | | | $ | (21,332 | ) | | $ | 486 | | | $ | 1,284,688 | |
| Provision for loan losses | | | 195,939 | | | | | | | | | | | | 195,939 | |
| Other income | | | 622,864 | | | | 86,113 | | | | (82,967 | ) | | | 626,010 | |
| Amortization of intangibles | | | 7,844 | | | | | | | | | | | | 7,844 | |
| Depreciation expense | | | 72,193 | | | | 814 | | | | | | | | 73,007 | |
| Other operating expenses | | | 1,100,558 | | | | 6,847 | | | | (75,173 | ) | | | 1,032,232 | |
| Net gain of minority interest | | | (435 | ) | | | | | | | | | | | (435 | ) |
| Income tax | | | 126,066 | | | | 7,185 | | | | (2,925 | ) | | | 130,326 | |
| |
| Net income | | $ | 425,363 | | | $ | 49,935 | | | $ | (4,383 | ) | | $ | 470,915 | |
| |
| Segment assets | | $ | 36,730,198 | | | $ | 4,685,261 | | | $ | (4,980,744 | ) | | $ | 36,434,715 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| 2002 |
| At December 31, 2002 |
| Popular Puerto Rico |
| | | | | | | Consumer | | | | | | |
| | | Commercial | | and Retail | | Other Financial | | Intersegment | | |
| (In thousands) | | Banking | | Banking | | Services | | Eliminations | | Total |
| Net interest income | | $ | 261,903 | | | $ | 537,603 | | | $ | 7,845 | | | $ | (108 | ) | | $ | 807,243 | |
| Provision for loan losses | | | 42,085 | | | | 96,574 | | | | | | | | | | | | 138,659 | |
| Other income | | | 98,162 | | | | 148,861 | | | | 57,641 | | | | (123 | ) | | | 304,541 | |
| Amortization of intangibles | | | | | | | 3,503 | | | | 120 | | | | | | | | 3,623 | |
| Depreciation expense | | | 29,482 | | | | 17,698 | | | | 817 | | | | | | | | 47,997 | |
| Other operating expenses | | | 148,742 | | | | 381,147 | | | | 37,001 | | | | (294 | ) | | | 566,596 | |
| Net gain of minority interest | | | | | | | (248 | ) | | | | | | | | | | | (248 | ) |
| Income tax | | | 40,786 | | | | 25,266 | | | | 10,829 | | | | | | | | 76,881 | |
| |
| Net income | | $ | 98,970 | | | $ | 162,028 | | | $ | 16,719 | | | $ | 63 | | | $ | 277,780 | |
| |
| Segment assets | | $ | 7,960,002 | | | $ | 14,574,233 | | | $ | 1,371,999 | | | $ | (1,220,118 | ) | | $ | 22,686,116 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2002 |
| | | | | | | | | | | Popular | | | | Total | |
| | | Popular | | U.S. Financial | | Financial | | | | Business | |
| (In thousands) | | Puerto Rico | | Services | | Holdings | | Processing | | Circles |
| Net interest income | | $ | 807,243 | | | $ | 226,197 | | | $ | 157,983 | | | $ | (4,107 | ) | | $ | 1,187,316 | |
| Provision for loan losses | | | 138,659 | | | | 34,000 | | | | 32,911 | | | | | | | | 205,570 | |
| Other income | | | 304,541 | | | | 83,908 | | | | 30,830 | | | | 193,187 | | | | 612,466 | |
| Amortization of intangibles | | | 3,623 | | | | 5,481 | | | | | | | | | | | | 9,104 | |
| Depreciation expense | | | 47,997 | | | | 13,064 | | | | 2,587 | | | | 9,705 | | | | 73,353 | |
| Other operating expenses | | | 566,596 | | | | 216,072 | | | | 83,285 | | | | 165,886 | | | | 1,031,839 | |
| Net gain of minority interest | | | (248 | ) | | | | | | | | | | | | | | | (248 | ) |
| Income tax | | | 76,881 | | | | 16,252 | | | | 26,411 | | | | 4,662 | | | | 124,206 | |
| |
| Net income | | $ | 277,780 | | | $ | 25,236 | | | $ | 43,619 | | | $ | 8,827 | | | $ | 355,462 | |
| |
| Segment assets | | $ | 22,686,116 | | | $ | 5,718,145 | | | $ | 4,770,673 | | | $ | 225,362 | | | $ | 33,400,296 | |
| |
| | | | | | | | | | | | | | | | | |
| At December 31, 2002 |
| | | Total | | | | | | Intersegment | | Total |
| (In thousands) | | Business Circles | | Corporate | | Eliminations | | Popular, Inc. |
| Net interest income | | $ | 1,187,316 | | | $ | (27,392 | ) | | $ | 320 | | | $ | 1,160,244 | |
| Provision for loan losses | | | 205,570 | | | | | | | | | | | | 205,570 | |
| Other income | | | 612,466 | | | | 20,298 | | | | (89,001 | ) | | | 543,763 | |
| Amortization of intangibles | | | 9,104 | | | | | | | | | | | | 9,104 | |
| Depreciation expense | | | 73,353 | | | | 814 | | | | | | | | 74,167 | |
| Other operating expenses | | | 1,031,839 | | | | 2,229 | | | | (88,337 | ) | | | 945,731 | |
| Net gain of minority interest | | | (248 | ) | | | | | | | | | | | (248 | ) |
| Income tax | | | 124,206 | | | | (6,802 | ) | | | (149 | ) | | | 117,255 | |
| |
| Net income | | $ | 355,462 | | | $ | (3,335 | ) | | $ | (195 | ) | | $ | 351,932 | |
| |
| Segment assets | | $ | 33,400,296 | | | $ | 4,359,739 | | | $ | (4,099,683 | ) | | $ | 33,660,352 | |
| |
[P91]
During the year ended December 31, 2004, the Corporation’s holding companies realized gains on the sale of marketable equity securities approximating $14,804,000 (2003 — $67,920,000). These gains are included as part of “other income” within the Corporate reportable segment.
| | | | | | | | | | | | | |
| Intersegment revenues* | | | | | | |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| P.R.Commercial Banking | | $ | (117 | ) | | $ | 280 | | | $ | (90 | ) |
| P.R.Consumer and Retail Banking | | | 2,319 | | | | 6,953 | | | | 13,545 | |
| P.R. Other Financial Services | | | (8,701 | ) | | | (12,236 | ) | | | (6,047 | ) |
| U.S. Financial Services | | | 873 | | | | 1,986 | | | | (379 | ) |
| Popular Financial Holdings | | | 129,058 | | | | 144,081 | | | | 155,152 | |
| Processing | | | (81,802 | ) | | | (75,713 | ) | | | (88,151 | ) |
| Corporate | | | (129,446 | ) | | | (148,829 | ) | | | (162,942 | ) |
| |
| Total intersegment revenues | | $ | (87,816 | ) | | $ | (83,478 | ) | | $ | (88,912 | ) |
| |
* For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany transactions, mainly related to gain on sales of loans and processing / information technology services.
| | | | | | | | | | | | | |
| Geographic Information | | | | |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Revenues*: | | | | | | | | | | | | |
| Puerto Rico | | $ | 1,276,322 | | | $ | 1,286,068 | | | $ | 1,169,494 | |
| United States | | | 647,554 | | | | 568,755 | | | | 477,990 | |
| Other | | | 60,406 | | | | 55,875 | | | | 56,523 | |
| |
| Total consolidated revenues | | $ | 1,984,282 | | | $ | 1,910,698 | | | $ | 1,704,007 | |
| |
* Total revenues include net interest income, service charges on deposit accounts, other service fees, gain (loss) on sale of investment securities, trading account loss, gain on sale of loans and other operating income.
| | | | | | | | | | | | | |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Selected Balance Sheet Information: | | | | | | | | | | | | |
| Puerto Rico | | | | | | | | | | | | |
| Total assets | | $ | 24,226,240 | | | $ | 22,509,358 | | | $ | 22,271,384 | |
| Loans | | | 12,540,668 | | | | 10,792,902 | | | | 10,065,646 | |
| Deposits | | | 12,630,045 | | | | 12,377,181 | | | | 12,036,491 | |
| United States | | | | | | | | | | | | |
| Total assets | | $ | 19,303,924 | | | $ | 13,221,947 | | | $ | 10,637,293 | |
| Loans | | | 15,736,033 | | | | 11,421,958 | | | | 9,140,382 | |
| Deposits | | | 6,898,517 | | | | 4,798,841 | | | | 4,778,234 | |
| Other | | | | | | | | | | | | |
| Total assets | | $ | 871,412 | | | $ | 703,410 | | | $ | 751,675 | |
| Loans | | | 465,560 | | | | 387,332 | | | | 376,091 | |
| Deposits | | | 1,064,598 | | | | 921,806 | | | | 800,015 | |
| |
Note 31 — Contingent liabilities:
The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations.
Note 32 — Guarantees
The Corporation has obligations upon the occurrence of certain events under financial guarantees provided in certain contractual agreements. These various arrangements are summarized below.
The Corporation issues financial standby letters of credit and has risk participation in standby letters of credit issued by other financial institutions, in each case to guarantee the performance of various customers to third parties. If the customer fails to meet its financial or performance obligation to the third party under the terms of the contract, then, upon their request, the Corporation would be obligated to make the payment to the guaranteed party. In accordance with the provisions of FIN No. 45, at December 31, 2004 and 2003, the Corporation recorded a liability of $333,000 and $334,000, respectively, which represents the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002. The fair value approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The contract amounts in standby letters of credit outstanding at December 31, 2004 and 2003, shown in Note 26, represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. Management does not anticipate any material losses related to these instruments.
At December 31, 2004, the Corporation serviced $1,741,652,000 (2003 — $1,625,839,000) in residential mortgage loans with recourse or other servicer-provided credit enhancement. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to reimburse the third party investor. The maximum potential amount of future payments that the Corporation would be required to make under the agreement in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced. In the event of nonperformance, the Corporation has rights to the underlying collateral securing the mortgage loan, thus the losses associated to these guarantees should not be significant. At December 31, 2004, the Corporation also serviced $4,735,731,000 (2003 -$4,657,422,000) in mortgage loans without recourse or other servicer-provided credit enhancement. Although the Corporation may, from time to time, be required to make advances to maintain a regular flow of scheduled interest and principal payments to investors, including special purpose entities, this does not represent an insurance against losses. These loans serviced are mostly insured by FHA, VA,
| | | | |
| | | | | |
| Popular /2004 / Annual Report | | [P92] | | |
and others, or the certificates arising in securitization transactions may be covered by a funds guaranty insurance policy.
Also, in the ordinary course of business, the Corporation sold SBA loans with recourse, in which servicing was retained. At December 31, 2004, SBA loans serviced with recourse amounted to $55,526,000 (2003 — $91,556,000). Due to the guaranteed nature of the SBA loans sold, the Corporation’s exposure to loss under these agreements should not be significant.
The Corporation fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries totaling $3,926,087,000 at December 31, 2004 (2003 — $3,623,787,000). In addition, at December 31, 2004, the Corporation fully and unconditionally guaranteed $824,000,000 (2003 — $444,000,000) of Capital Securities issued by four (2003 -two) wholly-owned issuing trust entities that have been deconsolidated based on FIN No. 46R. Also, as of the end of 2004, Popular North America, Inc. fully and unconditionally guaranteed $209,661,000 (2003 - $403,000,000) of certain borrowing obligations issued by one of its non-banking subsidiaries.
A number of the acquisition agreements to which the Corporation is a party and under which it has purchased various types of assets, including the purchase of entire businesses, require the Corporation to make additional payments in future years if certain predetermined goals, such as revenue targets, are achieved and occur within a specified time. As these contingencies are relative to the attainment of the established goals and do not specify dollar limitations, it is not possible to quantify the aggregate exposure to the Corporation resulting from these agreements. Due to the nature and size of the operations acquired, management does not anticipate that these additional payments will have a material impact on the Corporation’s financial condition or results of future operations.
Note 33 — Popular, Inc. (Holding Company only) financial information:
The following condensed financial information presents the financial position of Holding Company only as of December 31, 2004 and 2003, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2004.
Statement of Condition
| | | | | | | | | |
| | | December 31, |
| (in thousands) | | 2004 | | 2003 |
| ASSETS | | | | | | | | |
| Cash | | $ | 283 | | | $ | 995 | |
| Money market investments | | | 48,500 | | | | 114,297 | |
| Investment securities available-for-sale, at market value | | | 66,428 | | | | 56,680 | |
| Investments securities held-to-maturity, at amortized cost | | | 579,985 | | | | | |
| Other investment securities, at lower of cost or realizable value | | | 145,590 | | | | 441,686 | |
| Investment in BPPR and subsidiaries, at equity | | | 1,523,188 | | | | 1,525,426 | |
| Investment in Popular International Bank and subsidiaries, at equity | | | 1,113,937 | | | | 962,448 | |
| Investment in other subsidiaries, at equity | | | 241,086 | | | | 164,254 | |
| Advances to subsidiaries | | | 20,000 | | | | 64,700 | |
| Loans to affiliates | | | 15,569 | | | | 14,768 | |
| Loans | | | 5,940 | | | | | |
| Less — Allowance for loan losses | | | 40 | | | | | |
| Premises and equipment | | | 24,534 | | | | 10,378 | |
| Other assets | | | 45,603 | | | | 29,285 | |
| |
| Total assets | | $ | 3,830,603 | | | $ | 3,384,917 | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Federal funds purchased | | $ | 6,690 | | | | | |
| Commercial paper | | | 4,501 | | | | | |
| Other short-term borrowings | | | | | | $ | 35,675 | |
| Notes payable | | | 536,673 | | | | 424,635 | |
| Accrued expenses and other liabilities | | | 53,118 | | | | 45,190 | |
| Subordinated notes | | | 125,000 | | | | 125,000 | |
| Stockholders’ equity | | | 3,104,621 | | | | 2,754,417 | |
| |
| Total liabilities and stockholders’ equity | | $ | 3,830,603 | | | $ | 3,384,917 | |
| |
[P93]
Statements of Income
| | | | | | | | | | | | | |
| | | Year ended December 31, |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Income: | | | | | | | | | | | | |
| Dividends from subsidiaries | | $ | 332,927 | | | $ | 135,273 | | | $ | 248,000 | |
| Interest on money market and investment securities | | | 4,351 | | | | 2,070 | | | | 1,466 | |
| Other operating income | | | 12,741 | | | | 15,331 | | | | 18,472 | |
| Gain (loss) on sale of securities | | | 12,354 | | | | 67,778 | | | | (2,361 | ) |
| Interest on advances to subsidiaries | | | 789 | | | | 2,667 | | | | 10,774 | |
| Interest on loans to affiliates | | | 1,460 | | | | 716 | | | | 961 | |
| Interest on loans | | | 212 | | | | | | | | | |
| |
| Total income | | | 364,834 | | | | 223,835 | | | | 277,312 | |
| |
| Expenses: | | | | | | | | | | | | |
| Interest expense | | | 35,735 | | | | 19,804 | | | | 21,435 | |
| Operating expenses | | | 4,702 | | | | 6,410 | | | | 2,297 | |
| |
| Total expenses | | | 40,437 | | | | 26,214 | | | | 23,732 | |
| |
| Income before income taxes and equity in undistributed earnings of subsidiaries | | | 324,397 | | | | 197,621 | | | | 253,580 | |
| Income taxes | | | (110 | ) | | | 8,490 | | | | (308 | ) |
| |
| Income before equity in undistributed earnings of subsidiaries | | | 324,507 | | | | 189,131 | | | | 253,888 | |
| Equity in undistributed earnings of subsidiaries | | | 165,401 | | | | 281,784 | | | | 98,044 | |
| |
| Net income | | $ | 489,908 | | | $ | 470,915 | | | $ | 351,932 | |
| |
Statements of Cash Flows
| | | | | | | | | | | | | |
| | | Year ended December 31, |
| (In thousands) | | 2004 | | 2003 | | 2002 |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 489,908 | | | $ | 470,915 | | | $ | 351,932 | |
| |
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | | | | | |
| Equity in undistributed earnings of subsidiaries | | | (498,328 | ) | | | (417,057 | ) | | | (346,044 | ) |
| Net (gain) loss on sale of investment securities available-for-sale | | | (12,354 | ) | | | (67,778 | ) | | | 2,361 | |
| Net amortization of premiums and deferred loan origination fees and costs | | | (38 | ) | | | | | | | | | |
| Earnings from investments under the equity method | | | (2,430 | ) | | | (1,442 | ) | | | (1,430 | ) |
| Stock options expense | | | 459 | | | | 217 | | | | 148 | |
| Net (increase) decrease in other assets | | | (5,698 | ) | | | (1,748 | ) | | | 2,403 | |
| Net increase (decrease) in current and deferred taxes | | | 1,004 | | | | (267 | ) | | | (339 | ) |
| Net increase (decrease) in interest payable | | | 880 | | | | 22 | | | | (179 | ) |
| Net increase (decrease) in other liabilities | | | 2,485 | | | | 1,544 | | | | (2,080 | ) |
| | | | | | | | | | | | | |
| Total adjustments | | | (514,020 | ) | | | (486,509 | ) | | | (345,160 | ) |
| | | | | | | | | | | | | |
| |
| Net cash (used in) provided by operating activities | | | (24,112 | ) | | | (15,594 | ) | | | 6,772 | |
| |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Net decrease (increase) in money market investments | | | 65,797 | | | | (111,360 | ) | | | 110,000 | |
| Purchases of investment securities: | | | | | | | | | | | | |
| Held-to-maturity | | | (279,985 | ) | | | | | | | | |
| Other | | | (3,904 | ) | | | (300,038 | ) | | | (34,347 | ) |
| Proceeds from maturities and redemptions of other investment securities | | | | | | | | | | | 38 | |
| Proceeds from sales of investment securities available-for-sale | | | 14,502 | | | | 83,003 | | | | 93 | |
| Capital contribution to subsidiaries | | | (55,559 | ) | | | (212,090 | ) | | | (50 | ) |
| Net change in advances to subsidiaries and affiliates | | | 43,899 | | | | 88,055 | | | | 28,889 | |
| Net disbursements on loans | | | (1,806 | ) | | | | | | | | |
| Acquisition of loan portfolios | | | (4,776 | ) | | | | | | | | |
| Acquisition of premises and equipment | | | (15,198 | ) | | | | | | | | |
| Dividends received from subsidiaries | | | 332,927 | | | | 135,273 | | | | 248,000 | |
| |
| Net cash provided by (used in) investing activities | | | 95,897 | | | | (317,157 | ) | | | 352,623 | |
| |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Net increase (decrease) in assets sold under agreements to repurchase | | | 6,690 | | | | (10,300 | ) | | | 10,300 | |
| Net increase (decrease) in commercial paper | | | 4,501 | | | | (18,989 | ) | | | 18,989 | |
| Net (decrease) increase in other short-term borrowings | | | (35,675 | ) | | | 25,473 | | | | 10,202 | |
| Net increase (decrease) in notes payable | | | 103,671 | | | | 275,528 | | | | (61,141 | ) |
| Cash dividends paid | | | (168,927 | ) | | | (134,603 | ) | | | (108,003 | ) |
| Proceeds from issuance of common stock | | | 17,243 | | | | 15,765 | | | | 11,166 | |
| Proceeds from issuance of preferred stock | | | | | | | 180,548 | | | | | |
| Redemption of preferred stock | | | | | | | | | | | (102,000 | ) |
| Treasury stock acquired | | | | | | | | | | | (138,847 | ) |
| |
| Net cash (used in) provided by financing activities | | | (72,497 | ) | | | 333,422 | | | | (359,334 | ) |
| |
| Net (decrease) increase in cash | | | (712 | ) | | | 671 | | | | 61 | |
| Cash at beginning of year | | | 995 | | | | 324 | | | | 263 | |
| |
| Cash at end of year | | $ | 283 | | | $ | 995 | | | $ | 324 | |
| |
| | | | |
| Popular / 2004 / Annual Report | | [P94] | | |
The principal source of income for the Holding Company consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve Board, BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels described in Note 19. At December 31, 2004, BPPR could have declared a dividend of approximately $222,480,000 without the approval of the Federal Reserve.
Note 34 — Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities:
The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (PIHC) (parent only), Popular International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and all other subsidiaries of the Corporation as of December 31, 2004 and 2003, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2004. PIBI, PNA, and their wholly-owned subsidiaries, except Banco Popular North America (BPNA) and Banco Popular, National Association (BP, N.A.), have a fiscal year that ends on November 30. Accordingly, the consolidated financial information of PIBI and PNA as of November 30, 2004, 2003 and 2002, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of December 31, 2004, 2003 and 2002, respectively.
PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under a shelf registration statement filed with the SEC.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica S.A., CreST, S.A., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries, Popular Cash Express, Inc.; Popular Financial Holdings, Inc., including its wholly-owned subsidiary Equity One, Inc.; BPNA, including its wholly-owned subsidiaries Popular Leasing, U.S.A., Popular Insurance Agency, U.S.A. and Popular FS, LLC; and BP, N.A., including its wholly-owned subsidiary Popular Insurance, Inc.
PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA. As described in Note 33 to the consolidated financial statements, the principal source of income for PIHC consists of dividends from BPPR.
[P95]
Condensed Consolidating Statement of Condition
| | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2004 |
| | | Popular, Inc. | | PIBI | | PNA | | All other | | Elimination | | Popular, Inc. |
| (In thousands) | | Holding Co. | | Holding Co. | | Holding Co. | | Subsidiaries | | Entries | | Consolidated |
| ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 283 | | | $ | 54 | | | $ | 384 | | | $ | 767,092 | | | $ | (51,354 | ) | | $ | 716,459 | |
| Money market investments | | | 48,500 | | | | 300 | | | | 214 | | | | 1,236,659 | | | | (406,033 | ) | | | 879,640 | |
| Investment securities available-for-sale, at market value | | | 66,428 | | | | 39,207 | | | | 7,067 | | | | 11,054,856 | | | | (5,413 | ) | | | 11,162,145 | |
| Investment securities held-to-maturity, at amortized cost | | | 579,985 | | | | | | | | | | | | 190,865 | | | | (430,000 | ) | | | 340,850 | |
| Trading account securities, at market value | | | | | | | | | | | | | | | 391,420 | | | | (6,281 | ) | | | 385,139 | |
| Other investment securities, at lower of cost or realizable value | | | 145,590 | | | | 5,001 | | | | 12,372 | | | | 139,477 | | | | | | | | 302,440 | |
| Investment in subsidiaries | | | 2,878,211 | | | | 1,036,960 | | | | 1,376,296 | | | | 287,639 | | | | (5,579,106 | ) | | | | |
| Loans held-for-sale, at lower of cost or market | | | | | | | | | | | | | | | 750,728 | | | | | | | | 750,728 | |
| |
| Loans | | | 41,509 | | | | | | | | 2,836,701 | | | | 30,711,045 | | | | (5,335,332 | ) | | | 28,253,923 | |
| Less — Unearned income | | | | | | | | | | | | | | | 262,390 | | | | | | | | 262,390 | |
| Allowance for loan losses | | | 40 | | | | | | | | | | | | 437,041 | | | | | | | | 437,081 | |
| |
| | | | 41,469 | | | | | | | | 2,836,701 | | | | 30,011,614 | | | | (5,335,332 | ) | | | 27,554,452 | |
| |
| Premises and equipment | | | 24,534 | | | | | | | | | | | | 521,460 | | | | (313 | ) | | | 545,681 | |
| Other real estate | | | 240 | | | | | | | | | | | | 59,477 | | | | | | | | 59,717 | |
| Accrued income receivable | | | 185 | | | | | | | | 10,836 | | | | 213,977 | | | | (17,456 | ) | | | 207,542 | |
| Other assets | | | 45,178 | | | | 36,905 | | | | 65,662 | | | | 1,012,132 | | | | (113,503 | ) | | | 1,046,374 | |
| Goodwill | | | | | | | | | | | | | | | 411,308 | | | | | | | | 411,308 | |
| Other intangible assets | | | | | | | | | | | | | | | 39,101 | | | | | | | | 39,101 | |
| |
| | | $ | 3,830,603 | | | $ | 1,118,427 | | | $ | 4,309,532 | | | $ | 47,087,805 | | | $ | (11,944,791 | ) | | $ | 44,401,576 | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-interest bearing | | | | | | | | | | | | | | $ | 4,224,546 | | | $ | (51,278 | ) | | $ | 4,173,268 | |
| Interest bearing | | | | | | | | | | | | | | | 16,685,578 | | | | (265,686 | ) | | | 16,419,892 | |
| |
| | | | | | | | | | | | | | | | 20,910,124 | | | | (316,964 | ) | | | 20,593,160 | |
| Federal funds purchased and assets sold under agreements to repurchase | | $ | 6,690 | | | | | | | $ | 71,300 | | | | 6,492,165 | | | | (133,302 | ) | | | 6,436,853 | |
| Other short-term borrowings | | | 4,501 | | | $ | 4,825 | | | | 339,653 | | | | 3,962,975 | | | | (1,172,315 | ) | | | 3,139,639 | |
| Notes payable | | | 536,673 | | | | | | | | 2,835,325 | | | | 10,839,526 | | | | (4,030,814 | ) | | | 10,180,710 | |
| Subordinated notes | | | 125,000 | | | | | | | | | | | | 430,000 | | | | (430,000 | ) | | | 125,000 | |
| Other liabilities | | | 53,118 | | | | 100 | | | | 35,048 | | | | 966,387 | | | | (233,162 | ) | | | 821,491 | |
| |
| | | | 725,982 | | | | 4,925 | | | | 3,281,326 | | | | 43,601,177 | | | | (6,316,557 | ) | | | 41,296,853 | |
| |
| Minority interest in consolidated subsidiaries | | | | | | | | | | | | | | | 102 | | | | | | | | 102 | |
| |
| Stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | | 186,875 | | | | | | | | | | | | | | | | | | | | 186,875 | |
| Common stock | | | 1,680,096 | | | | 3,961 | | | | 2 | | | | 77,393 | | | | (81,356 | ) | | | 1,680,096 | |
| Surplus | | | 276,229 | | | | 740,193 | | | | 659,964 | | | | 1,805,514 | | | | (3,203,060 | ) | | | 278,840 | |
| Retained earnings | | | 1,132,404 | | | | 381,496 | | | | 368,661 | | | | 1,612,126 | | | | (2,364,894 | ) | | | 1,129,793 | |
| Treasury stock, at cost | | | (206,437 | ) | | | | | | | | | | | (1,690 | ) | | | 1,690 | | | | (206,437 | ) |
| Accumulated other comprehensive income (loss), net of tax | | | 35,454 | | | | (12,148 | ) | | | (421 | ) | | | (6,817 | ) | | | 19,386 | | | | 35,454 | |
| |
| | | | 3,104,621 | | | | 1,113,502 | | | | 1,028,206 | | | | 3,486,526 | | | | (5,628,234 | ) | | | 3,104,621 | |
| |
| | | $ | 3,830,603 | | | $ | 1,118,427 | | | $ | 4,309,532 | | | $ | 47,087,805 | | | $ | (11,944,791 | ) | | $ | 44,401,576 | |
| |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P96] | | |
Condensed Consolidating Statement of Condition
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, 2003 |
| | | Popular, Inc. | | PIBI | | PNA | | All other | | Elimination | | Popular, Inc. |
| (In thousands) | | Holding Co. | | Holding Co. | | Holding Co. | | Subsidiaries | | Entries | | Consolidated |
| ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 995 | | | $ | 47 | | | $ | 2,444 | | | $ | 722,181 | | | $ | (37,577 | ) | | $ | 688,090 | |
| Money market investments | | | 114,297 | | | | 300 | | | | 56,890 | | | | 1,139,713 | | | | (538,307 | ) | | | 772,893 | |
| Investment securities available-for-sale, at market value | | | 56,680 | | | | 35,536 | | | | 6,879 | | | | 9,957,584 | | | | (5,100 | ) | | | 10,051,579 | |
| Investment securities held-to-maturity, at amortized cost | | | | | | | | | | | | | | | 186,821 | | | | | | | | 186,821 | |
| Trading account securities, at market value | | | | | | | | | | | | | | | 605,119 | | | | | | | | 605,119 | |
| Other investment securities, at lower of cost or realizable value | | | 441,686 | | | | 5,002 | | | | 4,640 | | | | 81,816 | | | | (300,000 | ) | | | 233,144 | |
| Investment in subsidiaries | | | 2,652,128 | | | | 887,671 | | | | 935,084 | | | | 219,378 | | | | (4,694,261 | ) | | | | |
| Loans held-for-sale, at lower of cost or market | | | | | | | | | | | | | | | 283,571 | | | | (11,979 | ) | | | 271,592 | |
| |
| Loans | | | 79,468 | | | | | | | | 2,511,262 | | | | 24,634,365 | | | | (4,611,216 | ) | | | 22,613,879 | |
| Less — Unearned income | | | | | | | | | | | | | | | 283,279 | | | | | | | | 283,279 | |
| Allowance for loan losses | | | | | | | | | | | | | | | 408,542 | | | | | | | | 408,542 | |
| |
| | | | 79,468 | | | | | | | | 2,511,262 | | | | 23,942,544 | | | | (4,611,216 | ) | | | 21,922,058 | |
| |
| Premises and equipment | | | 10,378 | | | | | | | | | | | | 475,074 | | | | | | | | 485,452 | |
| Other real estate | | | | | | | | | | | | | | | 53,898 | | | | | | | | 53,898 | |
| Accrued income receivable | | | 205 | | | | 1 | | | | 11,180 | | | | 181,939 | | | | (17,173 | ) | | | 176,152 | |
| Other assets | | | 29,080 | | | | 20,705 | | | | 2,435 | | | | 707,310 | | | | 9,507 | | | | 769,037 | |
| Goodwill | | | | | | | | | | | | | | | 191,490 | | | | | | | | 191,490 | |
| Other intangible assets | | | | | | | | | | | | | | | 27,390 | | | | | | | | 27,390 | |
| |
| | | $ | 3,384,917 | | | $ | 949,262 | | | $ | 3,530,814 | | | $ | 38,775,828 | | | $ | (10,206,106 | ) | | $ | 36,434,715 | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-interest bearing | | | | | | | | | | | | | | $ | 3,764,226 | | | $ | (37,519 | ) | | $ | 3,726,707 | |
| Interest bearing | | | | | | | | | | | | | | | 14,675,297 | | | | (304,176 | ) | | | 14,371,121 | |
| |
| | | | | | | | | | | | | | | | 18,439,523 | | | | (341,695 | ) | | | 18,097,828 | |
| |
| Federal funds purchased and assets sold under agreements to repurchase | | | | | | | | | | | | | | | 6,038,714 | | | | (203,127 | ) | | | 5,835,587 | |
| Other short-term borrowings | | $ | 35,675 | | | $ | 205 | | | $ | 175,761 | | | | 2,732,405 | | | | (947,422 | ) | | | 1,996,624 | |
| Notes payable | | | 424,635 | | | | 8,573 | | | | 2,445,336 | | | | 7,737,952 | | | | (3,624,471 | ) | | | 6,992,025 | |
| Subordinated notes | | | 125,000 | | | | | | | | | | | | | | | | | | | | 125,000 | |
| Other liabilities | | | 45,190 | | | | 133 | | | | 30,450 | | | | 636,376 | | | | (79,020 | ) | | | 633,129 | |
| |
| | | | 630,500 | | | | 8,911 | | | | 2,651,547 | | | | 35,584,970 | | | | (5,195,735 | ) | | | 33,680,193 | |
| |
| Minority interest in consolidated subsidiaries | | | | | | | | | | | | | 105 | | | | | | | | 105 | |
| |
| Stockholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | | 186,875 | | | | | | | | | | | | 300,000 | | | | (300,000 | ) | | | 186,875 | |
| Common stock | | | 837,566 | | | | 3,962 | | | | 2 | | | | 69,537 | | | | (73,501 | ) | | | 837,566 | |
| Surplus | | | 312,027 | | | | 678,038 | | | | 619,964 | | | | 1,363,998 | | | | (2,659,389 | ) | | | 314,638 | |
| Retained earnings | | | 1,604,462 | | | | 263,840 | | | | 259,360 | | | | 1,471,535 | | | | (1,997,346 | ) | | | 1,601,851 | |
| Treasury stock, at cost | | | (205,527 | ) | | | | | | | | | | | (780 | ) | | | 780 | | | | (205,527 | ) |
| Accumulated other comprehensive income (loss), net of tax | | | 19,014 | | | | (5,489 | ) | | | (59 | ) | | | (13,537 | ) | | | 19,085 | | | | 19,014 | |
| |
| | | | 2,754,417 | | | | 940,351 | | | | 879,267 | | | | 3,190,753 | | | | (5,010,371 | ) | | | 2,754,417 | |
| |
| | | $ | 3,384,917 | | | $ | 949,262 | | | $ | 3,530,814 | | | $ | 38,775,828 | | | $ | (10,206,106 | ) | | $ | 36,434,715 | |
| |
[P97]
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2004 |
| | | Popular, Inc. | | PIBI | | PNA | | Other | | Elimination | | Popular, Inc. |
| (In thousands) | | Holding Co. | | Holding Co. | | Holding Co. | | Subsidiaries | | Entries | | Consolidated |
| INTEREST INCOME: | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans | | $ | 2,461 | | | | | | | $ | 127,400 | | | $ | 1,815,330 | | | $ | (194,041 | ) | | $ | 1,751,150 | |
| Money market investments | | | 835 | | | $ | 5 | | | | 310 | | | | 33,861 | | | | (9,351 | ) | | | 25,660 | |
| Investment securities | | | 3,516 | | | | | | | | 867 | | | | 410,245 | | | | (1,136 | ) | | | 413,492 | |
| Trading securities | | | | | | | | | | | | | | | 25,963 | | | | | | | | 25,963 | |
| |
| | | | 6,812 | | | | 5 | | | | 128,577 | | | | 2,285,399 | | | | (204,528 | ) | | | 2,216,265 | |
| |
| INTEREST EXPENSE: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | 334,109 | | | | (3,758 | ) | | | 330,351 | |
| Short-term borrowings | | | 588 | | | | 62 | | | | 6,720 | | | | 184,616 | | | | (26,561 | ) | | | 165,425 | |
| Long-term debt | | | 35,147 | | | | 63 | | | | 132,483 | | | | 359,169 | | | | (181,884 | ) | | | 344,978 | |
| |
| | | | 35,735 | | | | 125 | | | | 139,203 | | | | 877,894 | | | | (212,203 | ) | | | 840,754 | |
| |
| Net interest (loss) income | | | (28,923 | ) | | | (120 | ) | | | (10,626 | ) | | | 1,407,505 | | | | 7,675 | | | | 1,375,511 | |
| Provision for loan losses | | | | | | | | | | | | | | | 178,657 | | | | | | | | 178,657 | |
| |
| Net interest (loss) income after provision for loan losses | | | (28,923 | ) | | | (120 | ) | | | (10,626 | ) | | | 1,228,848 | | | | 7,675 | | | | 1,196,854 | |
| Service charges on deposit accounts | | | | | | | | | | | | | | | 165,241 | | | | | | | | 165,241 | |
| Other service fees | | | | | | | | | | | | | | | 363,158 | | | | (67,607 | ) | | | 295,551 | |
| Gain on sale of investment securities | | | 12,354 | | | | 2,206 | | | | 14 | | | | 680 | | | | | | | | 15,254 | |
| Trading account profit | | | | | | | | | | | | | | | 1,262 | | | | (1,421 | ) | | | (159 | ) |
| Gain on sale of loans | | | | | | | | | | | | | | | 63,115 | | | | (18,947 | ) | | | 44,168 | |
| Other operating income | | | 12,741 | | | | 5,640 | | | | 81 | | | | 89,897 | | | | (19,643 | ) | | | 88,716 | |
| |
| | | | (3,828 | ) | | | 7,726 | | | | (10,531 | ) | | | 1,912,201 | | | | (99,943 | ) | | | 1,805,625 | |
| |
| OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
| Personnel costs: | | | | | | | | | | | | | | | | | | | | | | | | |
| Salaries | | | | | | | 330 | | | | | | | | 425,247 | | | | 2,293 | | | | 427,870 | |
| Profit sharing | | | | | | | | | | | | | | | 21,827 | | | | 255 | | | | 22,082 | |
| Pension and other benefits | | | | | | | 55 | | | | | | | | 120,538 | | | | 473 | | | | 121,066 | |
| |
| | | | | | | | 385 | | | | | | | | 567,612 | | | | 3,021 | | | | 571,018 | |
| Net occupancy expenses | | | | | | | 13 | | | | | | | | 89,262 | | | | 546 | | | | 89,821 | |
| Equipment expenses | | | 4 | | | | 1 | | | | 7 | | | | 106,136 | | | | 2,675 | | | | 108,823 | |
| Other taxes | | | 1,263 | | | | | | | | | | | | 38,815 | | | | 182 | | | | 40,260 | |
| Professional fees | | | 1,864 | | | | 1 | | | | 222 | | | | 184,372 | | | | (91,375 | ) | | | 95,084 | |
| Communications | | | 68 | | | | | | | | | | | | 60,595 | | | | 302 | | | | 60,965 | |
| Business promotion | | | | | | | | | | | | | | | 75,695 | | | | 13 | | | | 75,708 | |
| Printing and supplies | | | | | | | | | | | | | | | 17,761 | | | | 177 | | | | 17,938 | |
| Other operating expenses | | | 1,503 | | | | 82 | | | | 543 | | | | 102,081 | | | | (658 | ) | | | 103,551 | |
| Amortization of intangibles | | | | | | | | | | | | | | | 7,844 | | | | | | | | 7,844 | |
| |
| | | | 4,702 | | | | 482 | | | | 772 | | | | 1,250,173 | | | | (85,117 | ) | | | 1,171,012 | |
| |
| (Loss) income before income tax and equity in earnings of subsidiaries | | | (8,530 | ) | | | 7,244 | | | | (11,303 | ) | | | 662,028 | | | | (14,826 | ) | | | 634,613 | |
| Income tax | | | (110 | ) | | | | | | | (3,070 | ) | | | 152,042 | | | | (4,157 | ) | | | 144,705 | |
| |
| Income (loss) before equity in earnings of subsidiaries | | | (8,420 | ) | | | 7,244 | | | | (8,233 | ) | | | 509,986 | | | | (10,669 | ) | | | 489,908 | |
| Equity in earnings of subsidiaries | | | 498,328 | | | | 110,412 | | | | 117,535 | | | | 49,641 | | | | (775,916 | ) | | | | |
| |
| NET INCOME | | $ | 489,908 | | | $ | 117,656 | | | $ | 109,302 | | | $ | 559,627 | | | $ | (786,585 | ) | | $ | 489,908 | |
| |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P98] | | |
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2003 |
| | | Popular, Inc. | | PIBI | | PNA | | Other | | Elimination | | Popular, Inc. |
| (In thousands) | | Holding Co. | | Holding Co. | | Holding Co. | | Subsidiaries | | Entries | | Consolidated |
| INTEREST INCOME: | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans | | $ | 3,383 | | | | | | | $ | 145,272 | | | $ | 1,612,362 | | | $ | (210,981 | ) | | $ | 1,550,036 | |
| Money market investments | | | 833 | | | $ | 6 | | | | 1,364 | | | | 67,396 | | | | (43,718 | ) | | | 25,881 | |
| Investment securities | | | 1,237 | | | | | | | | 817 | | | | 419,235 | | | | 1,006 | | | | 422,295 | |
| Trading securities | | | | | | | | | | | | | | | 36,026 | | | | | | | | 36,026 | |
| |
| | | | 5,453 | | | | 6 | | | | 147,453 | | | | 2,135,019 | | | | (253,693 | ) | | | 2,034,238 | |
| |
| INTEREST EXPENSE: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | 344,458 | | | | (1,567 | ) | | | 342,891 | |
| Short-term borrowings | | | 446 | | | | 1 | | | | 15,097 | | | | 200,298 | | | | (68,386 | ) | | | 147,456 | |
| Long-term debt | | | 19,358 | | | | 231 | | | | 139,111 | | | | 290,312 | | | | (189,809 | ) | | | 259,203 | |
| |
| | | | 19,804 | | | | 232 | | | | 154,208 | | | | 835,068 | | | | (259,762 | ) | | | 749,550 | |
| |
| Net interest (loss) income | | | (14,351 | ) | | | (226 | ) | | | (6,755 | ) | | | 1,299,951 | | | | 6,069 | | | | 1,284,688 | |
| Provision for loan losses | | | | | | | | | | | | | | | 195,939 | | | | | | | | 195,939 | |
| |
| Net interest (loss) income after provision for loan losses | | | (14,351 | ) | | | (226 | ) | | | (6,755 | ) | | | 1,104,012 | | | | 6,069 | | | | 1,088,749 | |
| Service charges on deposit accounts | | | | | | | | | | | | | | | 161,851 | | | | (12 | ) | | | 161,839 | |
| Other service fees | | | | | | | | | | | | | | | 287,599 | | | | (3,207 | ) | | | 284,392 | |
| Gain (loss) on sale of investment securities | | 67,778 | | | | | | | (68 | ) | | | 3,384 | | | | | | | | 71,094 | |
| Trading account loss | | | | | | | | | | | | | | | (10,214 | ) | | | | | | | (10,214 | ) |
| Gain on sale of loans | | | | | | | | | | | | | | | 73,471 | | | | (19,899 | ) | | | 53,572 | |
| Other operating income | | | 15,331 | | | | 4,272 | | | | | | | | 51,779 | | | | (6,055 | ) | | | 65,327 | |
| |
| | | | 68,758 | | | | 4,046 | | | | (6,823 | ) | | | 1,671,882 | | | | (23,104 | ) | | | 1,714,759 | |
| |
| OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
| Personnel costs: | | | | | | | | | | | | | | | | | | | | | | | | |
| Salaries | | | | | | | 325 | | | | | | | | 388,205 | | | | (3 | ) | | | 388,527 | |
| Profit sharing | | | | | | | | | | | | | | | 20,647 | | | | | | | | 20,647 | |
| Pension and other benefits | | | | | | | 58 | | | | | | | | 117,212 | | | | | | | | 117,270 | |
| |
| | | | | | | | 383 | | | | | | | | 526,064 | | | | (3 | ) | | | 526,444 | |
| Net occupancy expenses | | | | | | | 13 | | | | | | | | 83,617 | | | | | | | | 83,630 | |
| Equipment expenses | | | | | | | | | | | | | | | 104,821 | | | | | | | | 104,821 | |
| Other taxes | | | 1,297 | | | | | | | | | | | | 36,607 | | | | | | | | 37,904 | |
| Professional fees | | | 1,480 | | | | 20 | | | | 400 | | | | 80,826 | | | | (401 | ) | | | 82,325 | |
| Communications | | | 47 | | | | | | | | | | | | 57,991 | | | | | | | | 58,038 | |
| Business promotion | | | | | | | | | | | | | | | 73,277 | | | | | | | | 73,277 | |
| Printing and supplies | | | | | | | | | | | | | | | 19,111 | | | | | | | | 19,111 | |
| Other operating expenses | | | 3,586 | | | | 98 | | | | 756 | | | | 115,844 | | | | (595 | ) | | | 119,689 | |
| Amortization of intangibles | | | | | | | | | | | | | | | 7,844 | | | | | | | | 7,844 | |
| |
| | | | 6,410 | | | | 514 | | | | 1,156 | | | | 1,106,002 | | | | (999 | ) | | | 1,113,083 | |
| |
| Income (loss) before income tax, minority interest and equity in earnings of subsidiaries | | | 62,348 | | | | 3,532 | | | | (7,979 | ) | | | 565,880 | | | | (22,105 | ) | | | 601,676 | |
| Income tax | | | 8,490 | | | | | | | | (1,305 | ) | | | 129,750 | | | | (6,609 | ) | | | 130,326 | |
| Net gain of minority interest | | | | | | | | | | | | | | | (435 | ) | | | | | | | (435 | ) |
| |
| Income (loss) before equity in earnings of subsidiaries | | | 53,858 | | | | 3,532 | | | | (6,674 | ) | | | 435,695 | | | | (15,496 | ) | | | 470,915 | |
| Equity in earnings of subsidiaries | | | 417,057 | | | | 89,433 | | | | 95,077 | | | | 50,442 | | | | (652,009 | ) | | | | |
| |
| NET INCOME | | $ | 470,915 | | | $ | 92,965 | | | $ | 88,403 | | | $ | 486,137 | | | $ | (667,505 | ) | | $ | 470,915 | |
| |
[P99]
Condensed Consolidating Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2002 |
| |
| | | Popular, Inc. | | PIBI | | PNA | | Other | | Elimination | | Popular, Inc. |
| (In thousands) | | Holding Co. | | Holding Co. | | Holding Co. | | Subsidiaries | | Entries | | Consolidated |
| |
| INTEREST INCOME: |
| Loans | | $ | 11,735 | | | | | | | $ | 154,873 | | | $ | 1,595,811 | | | $ | (233,516 | ) | | $ | 1,528,903 | |
| Money market investments | | | 260 | | | $ | 9 | | | | 179 | | | | 76,499 | | | | (44,442 | ) | | | 32,505 | |
| Investment securities | | | 1,206 | | | | | | | | 1,059 | | | | 456,426 | | | | (12,766 | ) | | | 445,925 | |
| Trading securities | | | | | | | | | | | | | | | 16,628 | | | | (164 | ) | | | 16,464 | |
| |
| | | | 13,201 | | | | 9 | | | | 156,111 | | | | 2,145,364 | | | | (290,888 | ) | | | 2,023,797 | |
| |
| INTEREST EXPENSE: |
| Deposits | | | | | | | | | | | | | | | 433,252 | | | | (837 | ) | | | 432,415 | |
| Short-term borrowings | | | 1,588 | | | | 110 | | | | 22,308 | | | | 237,402 | | | | (76,065 | ) | | | 185,343 | |
| Long-term debt | | | 19,847 | | | | 52 | | | | 152,809 | | | | 287,320 | | | | (214,233 | ) | | | 245,795 | |
| |
| | | | 21,435 | | | | 162 | | | | 175,117 | | | | 957,974 | | | | (291,135 | ) | | | 863,553 | |
| |
| Net interest (loss) income | | | (8,234 | ) | | | (153 | ) | | | (19,006 | ) | | | 1,187,390 | | | | 247 | | | | 1,160,244 | |
| Provision for loan losses | | | | | | | | | | | | | | | 205,570 | | | | | | | | 205,570 | |
| |
| Net interest (loss) income after provision for loan losses | | | (8,234 | ) | | | (153 | ) | | | (19,006 | ) | | | 981,820 | | | | 247 | | | | 954,674 | |
| Service charges on deposit accounts | | | | | | | | | | | | | | | 157,727 | | | | (14 | ) | | | 157,713 | |
| Other service fees | | | | | | | | | | | | | | | 266,130 | | | | (324 | ) | | | 265,806 | |
| (Loss) gain on sale of investment securities | | | (2,361 | ) | | | | | | | 25 | | | | (1,006 | ) | | | | | | | (3,342 | ) |
| Trading account loss | | | | | | | | | | | | | | | (874 | ) | | | 70 | | | | (804 | ) |
| Gain on sale of loans | | | | | | | | | | | | | | | 61,245 | | | | (9,168 | ) | | | 52,077 | |
| Other operating income | | | 18,472 | | | | 5,119 | | | | 169 | | | | 49,768 | | | | (1,215 | ) | | | 72,313 | |
| |
| | | | 7,877 | | | | 4,966 | | | | (18,812 | ) | | | 1,514,810 | | | | (10,404 | ) | | | 1,498,437 | |
| |
| OPERATING EXPENSES: |
| Personnel costs: |
| Salaries | | | | | | | 303 | | | | | | | | 361,651 | | | | 3 | | | | 361,957 | |
| Profit sharing | | | | | | | | | | | | | | | 22,235 | | | | | | | | 22,235 | |
| Pension and other benefits | | | | | | | 56 | | | | | | | | 104,493 | | | | | | | | 104,549 | |
| |
| | | | | | | | 359 | | | | | | | | 488,379 | | | | 3 | | | | 488,741 | |
| Net occupancy expenses | | | | | | | 13 | | | | | | | | 78,490 | | | | | | | | 78,503 | |
| Equipment expenses | | | | | | | | | | | | | | | 99,099 | | | | | | | | 99,099 | |
| Other taxes | | | 1,071 | | | | | | | | | | | | 36,073 | | | | | | | | 37,144 | |
| Professional fees | | | 869 | | | | 11 | | | | 189 | | | | 83,930 | | | | (339 | ) | | | 84,660 | |
| Communications | | | 40 | | | | | | | | | | | | 53,852 | | | | | | | | 53,892 | |
| Business promotion | | | | | | | | | | | | | | | 61,451 | | | | | | | | 61,451 | |
| Printing and supplies | | | | | | | | | | | | | | | 19,918 | | | | | | | | 19,918 | |
| Other operating expenses | | | 317 | | | | 81 | | | | 513 | | | | 96,232 | | | | (653 | ) | | | 96,490 | |
| Amortization of intangibles | | | | | | | | | | | | | | | 9,104 | | | | | | | | 9,104 | |
| |
| | | | 2,297 | | | | 464 | | | | 702 | | | | 1,026,528 | | | | (989 | ) | | | 1,029,002 | |
| |
| Income (loss) before income tax, minority interest and equity in earnings of subsidiaries | | | 5,580 | | | | 4,502 | | | | (19,514 | ) | | | 488,282 | | | | (9,415 | ) | | | 469,435 | |
| Income tax | | | (308 | ) | | | | | | | (6,494 | ) | | | 126,463 | | | | (2,406 | ) | | | 117,255 | |
| Net gain of minority interest | | | | | | | | | | | | | | | (248 | ) | | | | | | | (248 | ) |
| |
| Income (loss) before equity in earnings of subsidiaries | | | 5,888 | | | | 4,502 | | | | (13,020 | ) | | | 361,571 | | | | (7,009 | ) | | | 351,932 | |
| Equity in earnings of subsidiaries | | | 346,044 | | | | 60,625 | | | | 73,289 | | | | 31,960 | | | | (511,918 | ) | | | | |
| |
| NET INCOME | | $ | 351,932 | | | $ | 65,127 | | | $ | 60,269 | | | $ | 393,531 | | | $ | (518,927 | ) | | $ | 351,932 | |
| |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P100] | | |
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2004 |
| |
| | | Popular, Inc. | | PIBI | | PNA | | Other | | Elimination | | Popular, Inc. |
| (In thousands) | | Holding Co. | | Holding Co. | | Holding Co. | | subsidiaries | | Entries | | Consolidated |
| |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 489,908 | | | $ | 117,656 | | | $ | 109,302 | | | $ | 559,627 | | | $ | (786,585 | ) | | $ | 489,908 | |
| |
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in undistributed earnings of subsidiaries | | | (498,328 | ) | | | (110,412 | ) | | | (117,535 | ) | | | (49,641 | ) | | | 775,916 | | | | | |
| Depreciation and amortization of premises and equipment | | | 1,042 | | | | | | | | | | | | 72,302 | | | | 926 | | | | 74,270 | |
| Provision for loan losses | | | | | | | | | | | | | | | 178,657 | | | | | | | | 178,657 | |
| Amortization of intangibles | | | | | | | | | | | | | | | 7,844 | | | | | | | | 7,844 | |
| Net gain on sale of investment securities | | | (12,354 | ) | | | (2,206 | ) | | | (14 | ) | | | (680 | ) | | | | | | | (15,254 | ) |
| Net gain on disposition of premises and equipment | | | | | | | | | | | | | | | (15,804 | ) | | | | | | | (15,804 | ) |
| Net gain on sale of loans, excluding loans held-for-sale | | | | | | | | | | | | | | | (21,472 | ) | | | | | | | (21,472 | ) |
| Net amortization of premiums and accretion of discounts on investments | | | | | | | | | | | | | | | 41,948 | | | | (887 | ) | | | 41,061 | |
| Net amortization of premiums and deferred loan origination fees and costs | | | (38 | ) | | | | | | | | | | | 124,159 | | | | (6,034 | ) | | | 118,087 | |
| Earnings from investments under the equity method | | | (2,430 | ) | | | (5,220 | ) | | | | | | | (621 | ) | | | | | | | (8,271 | ) |
| Stock options expense | | | 459 | | | | | | | | | | | | 2,742 | | | | 22 | | | | 3,223 | |
| Net increase in loans held-for-sale | | | | | | | | | | | | | | | (543,892 | ) | | | | | | | (543,892 | ) |
| Net increase in trading securities | | | | | | | | | | | | | | | (143,490 | ) | | | 6,281 | | | | (137,209 | ) |
| Net decrease (increase) in accrued income receivable | | | 20 | | | | 1 | | | | 344 | | | | (24,860 | ) | | | 281 | | | | (24,214 | ) |
| Net increase in other assets | | | (6,760 | ) | | | (21,253 | ) | | | (2,800 | ) | | | (96,736 | ) | | | 24,809 | | | | (102,740 | ) |
| Net increase (decrease) in interest payable | | | 880 | | | | (18 | ) | | | 5,546 | | | | 23,960 | | | | (283 | ) | | | 30,085 | |
| Net increase (decrease) in current and deferred taxes | | | 1,004 | | | | | | | | (3,989 | ) | | | 31,055 | | | | (4,156 | ) | | | 23,914 | |
| Net increase in postretirement benefit obligation | | | | | | | | | | | | | | | 5,679 | | | | | | | | 5,679 | |
| Net increase (decrease) in other liabilities | | | 2,485 | | | | (15 | ) | | | 193 | | | | 8,379 | | | | 28,026 | | | | 39,068 | |
| |
| Total adjustments | | | (514,020 | ) | | | (139,123 | ) | | | (118,255 | ) | | | (400,471 | ) | | | 824,901 | | | | (346,968 | ) |
| |
| Net cash (used in) provided by operating activities | | | (24,112 | ) | | | (21,467 | ) | | | (8,953 | ) | | | 159,156 | | | | 38,316 | | | | 142,940 | |
| |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net decrease (increase) in money market investments | | | 65,797 | | | | | | | | 56,676 | | | | (96,747 | ) | | | (132,274 | ) | | | (106,548 | ) |
| Purchases of investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | (1,500 | ) | | | (6,222,302 | ) | | | 603,705 | | | | (5,620,097 | ) |
| Held-to-maturity | | | (279,985 | ) | | | | | | | | | | | (1,197,603 | ) | | | 130,000 | | | | (1,347,588 | ) |
| Other | | | (3,904 | ) | | | | | | | (7,732 | ) | | | (68,221 | ) | | | | | | | (79,857 | ) |
| Proceeds from calls, paydowns, maturities and redemptions of investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | | | | | 5,230,556 | | | | (602,505 | ) | | | 4,628,051 | |
| Held-to-maturity | | | | | | | | | | | | | | | 1,085,175 | | | | | | | | 1,085,175 | |
| Other | | | | | | | 1 | | | | | | | | 10,560 | | | | | | | | 10,561 | |
| Proceeds from sales of investment securities available-for-sale | | | 14,502 | | | | 3,271 | | | | 1,514 | | | | 612,864 | | | | | | | | 632,151 | |
| Net repayments (disbursements) on loans | | | 42,093 | | | | | | | | (325,438 | ) | | | (1,732,414 | ) | | | 718,171 | | | | (1,297,588 | ) |
| Proceeds from sale of loans | | | | | | | | | | | | | | | 559,581 | | | | (4,510 | ) | | | 555,071 | |
| Acquisition of loan portfolios | | | (4,776 | ) | | | | | | | | | | | (3,671,827 | ) | | | 4,510 | | | | (3,672,093 | ) |
| Capital contribution to subsidiaries | | | (55,559 | ) | | | (40,000 | ) | | | (374,161 | ) | | | | | | | 469,720 | | | | | |
| Assets acquired, net of cash | | | | | | | | | | | | | | | (169,036 | ) | | | | | | | (169,036 | ) |
| Acquisition of premises and equipment | | | (15,198 | ) | | | | | | | | | | | (130,662 | ) | | | (612 | ) | | | (146,472 | ) |
| Proceeds from sale of premises and equipment | | | | | | | | | | | | | | | 34,846 | | | | | | | | 34,846 | |
| Dividends received from subsidiary | | | 332,927 | | | | | | | | | | | | | | | | (332,927 | ) | | | | |
| |
| Net cash provided by (used in) investing activities | | | 95,897 | | | | (36,728 | ) | | | (650,641 | ) | | | (5,755,230 | ) | | | 853,278 | | | | (5,493,424 | ) |
| |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net increase in deposits | | | | | | | | | | | | | | | 1,306,173 | | | | 24,730 | | | | 1,330,903 | |
| Net increase in federal funds purchased and assets sold under agreements to repurchase | | | 6,690 | | | | | | | | 71,300 | | | | 429,797 | | | | 69,825 | | | | 577,612 | |
| Net (decrease) increase in other short-term borrowings | | | (31,174 | ) | | | 4,620 | | | | 163,892 | | | | 1,191,070 | | | | (224,893 | ) | | | 1,103,515 | |
| Net proceeds from (payments of) notes payable and capital securities | | | 103,671 | | | | (8,573 | ) | | | 382,342 | | | | 2,573,216 | | | | (530,890 | ) | | | 2,519,766 | |
| Dividends paid to parent company | | | | | | | | | | | | | | | (247,927 | ) | | | 247,927 | | | | | |
| Dividends paid | | | (168,927 | ) | | | | | | | | | | | | | | | | | | | (168,927 | ) |
| Proceeds from issuance of common stock | | | 17,243 | | | | | | | | | | | | 15,000 | | | | (15,000 | ) | | | 17,243 | |
| Treasury stock acquired | | | | | | | | | | | | | | | (1,259 | ) | | | | | | | (1,259 | ) |
| Capital contribution from parent | | | | | | | 62,155 | | | | 40,000 | | | | 374,915 | | | | (477,070 | ) | | | | |
| |
| Net cash (used in) provided by financing activities | | | (72,497 | ) | | | 58,202 | | | | 657,534 | | | | 5,640,985 | | | | (905,371 | ) | | | 5,378,853 | |
| |
| Net (decrease) increase in cash and due from banks | | | (712 | ) | | | 7 | | | | (2,060 | ) | | | 44,911 | | | | (13,777 | ) | | | 28,369 | |
| Cash and due from banks at beginning of year | | | 995 | | | | 47 | | | | 2,444 | | | | 722,181 | | | | (37,577 | ) | | | 688,090 | |
| |
| Cash and due from banks at end of year | | $ | 283 | | | $ | 54 | | | $ | 384 | | | $ | 767,092 | | | $ | (51,354 | ) | | $ | 716,459 | |
| |
[P101]
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2002 |
| |
| | | Popular, Inc. | | PIBI | | PNA | | Other | | Elimination | | Popular, Inc. |
| (In thousands) | | Holding Co. | | Holding Co. | | Holding Co. | | subsidiaries | | Entries | | Consolidated |
| |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 470,915 | | | $ | 92,965 | | | $ | 88,403 | | | $ | 486,137 | | | $ | (667,505 | ) | | $ | 470,915 | |
| |
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in undistributed earnings of subsidiaries | | | (417,057 | ) | | | (89,433 | ) | | | (95,077 | ) | | | (50,442 | ) | | | 652,009 | | | | | |
| Depreciation and amortization of premises and equipment | | | 814 | | | | | | | | | | | | 72,193 | | | | | | | | 73,007 | |
| Provision for loan losses | | | | | | | | | | | | | | | 195,939 | | | | | | | | 195,939 | |
| Amortization of intangibles | | | | | | | | | | | | | | | 7,844 | | | | | | | | 7,844 | |
| Net (gain) loss on sale of investment securities | | | (67,778 | ) | | | | | | | 68 | | | | (3,384 | ) | | | | | | | (71,094 | ) |
| Net gain on disposition of premises and equipment | | | | | | | | | | | | | | | (3,369 | ) | | | | | | | (3,369 | ) |
| Net gain on sale of loans, excluding loans held-for-sale | | | | | | | | | | | | | | | (12,550 | ) | | | | | | | (12,550 | ) |
| Net amortization of premiums and accretion of discounts on investments | | | | | | | | | | | | | | | 29,408 | | | | (1,112 | ) | | | 28,296 | |
| Net amortization of premiums and deferred loan origination fees and costs | | | | | | | | | | | | | | | 77,804 | | | | (4,540 | ) | | | 73,264 | |
| Earnings from investments under the equity method | | | (1,442 | ) | | | (3,852 | ) | | | | | | | | | | | | | | | (5,294 | ) |
| Stock options expense | | | 217 | | | | | | | | | | | | 1,277 | | | | (4 | ) | | | 1,490 | |
| Net decrease in loans held-for-sale | | | | | | | | | | | | | | | 81,893 | | | | (4,255 | ) | | | 77,638 | |
| Net increase in trading securities | | | | | | | | | | | | | | | (138,811 | ) | | | | | | | (138,811 | ) |
| Net decrease in accrued income receivable | | | 89 | | | | 1 | | | | 711 | | | | 8,307 | | | | (711 | ) | | | 8,397 | |
| Net increase in other assets | | | (2,651 | ) | | | (1,957 | ) | | | (868 | ) | | | (76,297 | ) | | | 1,002 | | | | (80,771 | ) |
| Net increase (decrease) in interest payable | | | 22 | | | | (24 | ) | | | 10,335 | | | | (12,690 | ) | | | 755 | | | | (1,602 | ) |
| Net (decrease) increase in current and deferred taxes | | | (267 | ) | | | | | | | 18,166 | | | | (15,380 | ) | | | (6,650 | ) | | | (4,131 | ) |
| Net increase in postretirement benefit obligation | | | | | | | | | | | | | | | 7,391 | | | | | | | | 7,391 | |
| Net increase (decrease) in other liabilities | | | 1,544 | | | | (9 | ) | | | (49,310 | ) | | | 14,848 | | | | (57,064 | ) | | | (89,991 | ) |
| |
| Total adjustments | | | (486,509 | ) | | | (95,274 | ) | | | (115,975 | ) | | | 183,981 | | | | 579,430 | | | | 65,653 | |
| |
| Net cash (used in) provided by operating activities | | | (15,594 | ) | | | (2,309 | ) | | | (27,572 | ) | | | 670,118 | | | | (88,075 | ) | | | 536,568 | |
| |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (increase) decrease in money market investments | | | (111,360 | ) | | | | | | | (47,182 | ) | | | 111,281 | | | | 369,014 | | | | 321,753 | |
| Purchases of investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | (3,108 | ) | | | (25,137 | ) | | | (7,137,932 | ) | | | 444,738 | | | | (6,721,439 | ) |
| Held-to-maturity | | | | | | | | | | | | | | | (667,127 | ) | | | | | | | (667,127 | ) |
| Other | | | (300,038 | ) | | | | | | | | | | | (36,905 | ) | | | 300,000 | | | | (36,943 | ) |
| Proceeds from calls, paydowns, maturities and redemptions of investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | | | | | 6,608,023 | | | | (443,525 | ) | | | 6,164,498 | |
| Held-to-maturity | | | | | | | | | | | | | | | 661,555 | | | | | | | | 661,555 | |
| Other | | | | | | | | | | | | | | | 43,353 | | | | | | | | 43,353 | |
| Proceeds from sales of investment securities available-for-sale | | 83,003 | | | | | | | 25,069 | | | | 702,468 | | | | | | | | 810,540 | |
| Net repayments (disbursements) on loans | | | 88,055 | | | | | | | | 61,960 | | | | (1,359,365 | ) | | | 309,257 | | | | (900,093 | ) |
| Proceeds from sale of loans | | | | | | | | | | | | | | | 370,755 | | | | | | | | 370,755 | |
| Acquisition of loan portfolios | | | | | | | | | | | | | | | (2,970,276 | ) | | | | | | | (2,970,276 | ) |
| Capital contribution to subsidiaries | | | (212,090 | ) | | | (180,000 | ) | | | | | | | | | | | 392,090 | | | | | |
| Assets acquired, net of cash | | | | | | | | | | | | | | | (1,079 | ) | | | | | | | (1,079 | ) |
| Acquisition of premises and equipment | | | | | | | | | | | | | | | (109,664 | ) | | | | | | | (109,664 | ) |
| Proceeds from sale of premises and equipment | | | | | | | | | | | | | | | 15,785 | | | | | | | | 15,785 | |
| Dividends received from subsidiary | | | 135,273 | | | | | | | | | | | | 32,000 | | | | (167,273 | ) | | | | |
| |
| Net cash (used in) provided by investing activities | | | (317,157 | ) | | | (183,108 | ) | | | 14,710 | | | | (3,737,128 | ) | | | 1,204,301 | | | | (3,018,382 | ) |
| |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net increase in deposits | | | | | | | | | | | | | | | 751,805 | | | | (275,498 | ) | | | 476,307 | |
| Net decrease in federal funds purchased and assets sold under agreements to repurchase | | | (10,300 | ) | | | | | | | (498,883 | ) | | | (268,774 | ) | | | (71,007 | ) | | | (848,964 | ) |
| Net increase (decrease) in other short-term borrowings | | | 6,484 | | | | 115 | | | | (263,291 | ) | | | 254,934 | | | | 294,820 | | | | 293,062 | |
| Net proceeds from (payments of) notes payable and capital securities | | | 275,528 | | | | (215 | ) | | | 596,319 | | | | 2,219,966 | | | | (558,395 | ) | | | 2,533,203 | |
| Dividends paid to parent company | | | | | | | | | | | | | | | (135,273 | ) | | | 135,273 | | | | | |
| Dividends paid | | | (134,603 | ) | | | | | | | | | | | (32,000 | ) | | | 32,000 | | | | (134,603 | ) |
| Proceeds from issuance of common stock | | | 15,765 | | | | | | | | | | | | 3,000 | | | | (3,000 | ) | | | 15,765 | |
| Proceeds from issuance of preferred stock | | | 180,548 | | | | | | | | | | | | 300,000 | | | | (297,389 | ) | | | 183,159 | |
| Treasury stock acquired | | | | | | | | | | | | | | | (581 | ) | | | | | | | (581 | ) |
| Capital contribution from parent | | | | | | | 185,494 | | | | 180,000 | | | | 2,000 | | | | (367,494 | ) | | | | |
| |
| Net cash provided by financing activities | | | 333,422 | | | | 185,394 | | | | 14,145 | | | | 3,095,077 | | | | (1,110,690 | ) | | | 2,517,348 | |
| |
| Net increase (decrease) in cash and due from banks | | | 671 | | | | (23 | ) | | | 1,283 | | | | 28,067 | | | | 5,536 | | | | 35,534 | |
| |
| Cash and due from banks at beginning of year | | | 324 | | | | 70 | | | | 1,161 | | | | 694,114 | | | | (43,113 | ) | | | 652,556 | |
| |
| Cash and due from banks at end of year | | $ | 995 | | | $ | 47 | | | $ | 2,444 | | | $ | 722,181 | | | $ | (37,577 | ) | | $ | 688,090 | |
| |
| | | | |
| | | | | |
| Popular/ 2004 / Annual Report | | [P102] | | |
Condensed Consolidating Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2002 |
| |
| | | Popular, Inc. | | PIBI | | PNA | | Other | | Elimination | | Popular, Inc. |
| (In thousands) | | Holding Co. | | Holding Co. | | Holding Co. | | subsidiaries | | Entries | | Consolidated |
| |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 351,932 | | | $ | 65,127 | | | $ | 60,269 | | | $ | 393,531 | | | $ | (518,927 | ) | | $ | 351,932 | |
| |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in undistributed earnings of subsidiaries | | | (346,044 | ) | | | (60,625 | ) | | | (73,289 | ) | | | (31,960 | ) | | | 511,918 | | | | | |
| Depreciation and amortization of premises and equipment | | | 814 | | | | | | | | | | | | 73,353 | | | | | | | | 74,167 | |
| Provision for loan losses | | | | | | | | | | | | | | | 205,570 | | | | | | | | 205,570 | |
| Amortization of intangibles | | | | | | | | | | | | | | | 9,104 | | | | | | | | 9,104 | |
| Net loss (gain) on sale of investment securities | | | 2,361 | | | | | | | | (25 | ) | | | 1,006 | | | | | | | | 3,342 | |
| Net gain on disposition of premises and equipment | | | | | | | | | | | | | | | (1,765 | ) | | | | | | | (1,765 | ) |
| Net gain on sale of loans, excluding loans held-for-sale | | | | | | | | | | | | | | | (6,718 | ) | | | | | | | (6,718 | ) |
| Net amortization of premiums and accretion of discounts on investments | | | | | | | | | | | | | | | 15,980 | | | | | | | | 15,980 | |
| Net amortization of premiums and deferred loan origination fees and costs | | | | | | | | | | | | | | | 52,018 | | | | (3,782 | ) | | | 48,236 | |
| Earnings from investments under the equity method | | | (1,430 | ) | | | (4,698 | ) | | | | | | | | | | | | | | | (6,128 | ) |
| Stock options expense | | | 148 | | | | | | | | | | | | 809 | | | | | | | | 957 | |
| Net increase in loans held-for-sale | | | | | | | | | | | | | | | (151,759 | ) | | | (1,680 | ) | | | (153,439 | ) |
| Net increase in trading securities | | | | | | | | | | | | | | | (239,240 | ) | | | (920 | ) | | | (240,160 | ) |
| Net decrease in accrued income receivable | | | 29 | | | | | | | | 371 | | | | 1,906 | | | | (712 | ) | | | 1,594 | |
| Net decrease (increase) in other assets | | | 1,560 | | | | 300 | | | | 1,406 | | | | (6,038 | ) | | | (1,758 | ) | | | (4,530 | ) |
| Net (decrease) increase in interest payable | | | (179 | ) | | | (47 | ) | | | 17,095 | | | | 3,556 | | | | 991 | | | | 21,416 | |
| Net decrease in current and deferred taxes | | | (339 | ) | | | | | | | (867 | ) | | | (16,336 | ) | | | (5,224 | ) | | | (22,766 | ) |
| Net increase in postretirement benefit obligation | | | | | | | | | | | | | | | 7,479 | | | | | | | | 7,479 | |
| Net (decrease) increase in other liabilities | | | (2,080 | ) | | | 140 | | | | (7,048 | ) | | | 101,223 | | | | 4,166 | | | | 96,401 | |
| |
| Total adjustments | | | (345,160 | ) | | | (64,930 | ) | | | (62,357 | ) | | | 18,188 | | | | 502,999 | | | | 48,740 | |
| |
| Net cash provided by (used in) operating activities | | | 6,772 | | | | 197 | | | | (2,088 | ) | | | 411,719 | | | | (15,928 | ) | | | 400,672 | |
| |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net decrease (increase) in money market investments | | | 110,000 | | | | 1 | | | | (9,266 | ) | | | (169,917 | ) | | | (195,898 | ) | | | (265,080 | ) |
| Purchases of investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | (4,721 | ) | | | (1,932,303 | ) | | | (7,401,612 | ) | | | | | | | (9,338,636 | ) |
| Held-to-maturity | | | | | | | | | | | | | | | (26,588,518 | ) | | | | | | | (26,588,518 | ) |
| Other | | | (34,347 | ) | | | | | | | | | | | (17,416 | ) | | | | | | | (51,763 | ) |
| Proceeds from calls, paydowns, maturities and redemptions of investment securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Available-for-sale | | | | | | | | | | | 1,931,303 | | | | 5,501,629 | | | | (6,000 | ) | | | 7,426,932 | |
| Held-to-maturity | | | | | | | | | | | | | | | 27,006,127 | | | | (6,000 | ) | | | 27,000,127 | |
| Other | | | 38 | | | | | | | | | | | | 22,208 | | | | | | | | 22,246 | |
| Proceeds from sales of investment securities available-for-sale | | | 93 | | | | | | | | 1,024 | | | | 1,265,387 | | | | | | | | 1,266,504 | |
| Net repayments (disbursements) on loans | | | 28,889 | | | | | | | | (36,201 | ) | | | (1,625,754 | ) | | | 261,884 | | | | (1,371,182 | ) |
| Proceeds from sale of loans | | | | | | | | | | | | | | | 592,992 | | | | | | | | 592,992 | |
| Acquisition of loan portfolios | | | | | | | | | | | | | | | (1,220,139 | ) | | | | | | | (1,220,139 | ) |
| Capital contribution to subsidiaries | | | (50 | ) | | | (81 | ) | | | | | | | | | | | 131 | | | | | |
| Assets acquired, net of cash | | | | | | | | | | | | | | | (1,500 | ) | | | | | | | (1,500 | ) |
| Acquisition of premises and equipment | | | | | | | | | | | | | | | (143,724 | ) | | | | | | | (143,724 | ) |
| Proceeds from sale of premises and equipment | | | | | | | | | | | | | | | 15,850 | | | | | | | | 15,850 | |
| Dividends received from subsidiary | | | 248,000 | | | | | | | | | | | | | | | | (248,000 | ) | | | | |
| |
| Net cash provided by (used in) investing activities | | | 352,623 | | | | (4,801 | ) | | | (45,443 | ) | | | (2,764,387 | ) | | | (193,883 | ) | | | (2,655,891 | ) |
| |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net increase in deposits | | | | | | | | | | | | | | | 1,273,778 | | | | (1,811 | ) | | | 1,271,967 | |
| Net increase in federal funds purchased and assets sold under agreements to repurchase | | | 10,300 | | | | | | | | 77,265 | | | | 745,605 | | | | 99,613 | | | | 932,783 | |
| Net increase (decrease) in other short-term borrowings | | | 29,191 | | | | (4,182 | ) | | | (97,390 | ) | | | (186,107 | ) | | | 134,808 | | | | (123,680 | ) |
| Net (payments of) proceeds from notes payable and capital securities | | | (61,141 | ) | | | 8,788 | | | | 68,565 | | | | 802,726 | | | | (260,296 | ) | | | 558,642 | |
| Dividends paid to parent company | | | | | | | | | | | | | | | (248,000 | ) | | | 248,000 | | | | | |
| Dividends paid | | | (108,003 | ) | | | | | | | | | | | | | | | | | | | (108,003 | ) |
| Proceeds from issuance of common stock | | | 11,166 | | | | | | | | | | | | | | | | | | | | 11,166 | |
| Redemption of preferred stock | | | (102,000 | ) | | | | | | | | | | | | | | | | | | | (102,000 | ) |
| Treasury stock acquired | | | (138,847 | ) | | | | | | | | | | | (395 | ) | | | | | | | (139,242 | ) |
| Capital contribution from parent | | | | | | | 50 | | | | | | | | 81 | | | | (131 | ) | | | | |
| |
| Net cash (used in) provided by financing activities | | | (359,334 | ) | | | 4,656 | | | | 48,440 | | | | 2,387,688 | | | | 220,183 | | | | 2,301,633 | |
| |
| Net increase in cash and due from banks | | | 61 | | | | 52 | | | | 909 | | | | 35,020 | | | | 10,372 | | | | 46,414 | |
| |
| Cash and due from banks at beginning of year | | | 263 | | | | 18 | | | | 252 | | | | 659,094 | | | | (53,485 | ) | | | 606,142 | |
| |
| Cash and due from banks at end of year | | $ | 324 | | | $ | 70 | | | $ | 1,161 | | | $ | 694,114 | | | $ | (43,113 | ) | | $ | 652,556 | |
| |
[P103]
