SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2001 Commission file number 0 - 13818
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POPULAR, INC.
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(Exact name of registrant as specified in its charter)
Puerto Rico 66-041-6582
- ---------------------- -----------------
(State of incorporation) (I.R.S. Employer
identification No.)
Popular Center Building
209 Munoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico 00918
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (787) 765-9800
--------------
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock $6.00 Par value 136,371,606
- ---------------------------- -------------------------------------------
(Title of Class) (Shares Outstanding as of November 14, 2001)
POPULAR, INC.
INDEX
Part I - Financial Information Page
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Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of September 30, 2001,
December 31, 2000 and September 30, 2000 3
Unaudited Consolidated Statements of Income for the quarters and nine months
ended September 30, 2001 and 2000 4
Unaudited Consolidated Statements of Comprehensive Income for
the quarters and nine months ended September 30, 2001 and 2000 5
Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000 6
Notes to unaudited Consolidated Financial Statements 7-26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27-41
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Part II - Other Information
Item 1. Legal proceedings 41
Item 2. Changes in securities - None N/A
Item 3. Defaults upon senior securities - None N/A
Item 4. Submission of matters to a vote of security holders N/A
Item 5. Other information - None N/A
Item 6. Exhibits and reports on Form 8-K 42
Signature 43
FORWARD-LOOKING INFORMATION. This Quarterly Report on Form 10-Q
contains certain forward-looking statements with respect to the adequacy of the
allowance for loan losses, the Corporation's market risk and the effect of legal
proceedings on Popular, Inc.'s financial condition and results of operations.
These forward-looking statements involve certain risks, uncertainties, estimates
and assumptions by management. Various factors could cause actual results to
differ from those contemplated by such forward-looking statements.
With respect to the adequacy of the allowance for loan losses and
market risk, these factors include, among others, the rate of growth in the
economy, the relative strength and weakness in the consumer and commercial
credit sectors and in the real estate markets, the performance of the stock and
bond market and the magnitude of interest rate changes. Moreover, the outcome of
litigation, as discussed in "Part II, Item I. Legal Proceedings," is inherently
uncertain and depends on judicial interpretations of law and the findings of
judges and juries.
2
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
SEPTEMBER 30, December 31, September 30,
(In thousands) 2001 2000 2000
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ASSETS
Cash and due from banks $ 617,012 $ 726,051 $ 573,396
- -------------------------------------------------------------------------------------------------------------------
Money market investments:
Federal funds sold and securities purchased under
agreements to resell 988,262 1,057,320 868,513
Time deposits with other banks 4,343 10,908 10,638
Banker's acceptances 410 390 500
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993,015 1,068,618 879,651
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Investment securities available-for-sale, at market value:
Pledged securities with creditors' right to repledge 2,592,130 3,657,729 3,579,407
Other investment securities available-for-sale 5,205,898 5,138,195 4,491,255
Investment securities held-to-maturity, at amortized cost 240,763 264,731 285,829
Trading account securities, at market value:
Pledged securities with creditors' right to repledge 231,927 124,016 122,806
Other trading securities 45,942 29,057 40,839
Loans held-for-sale 910,615 823,901 682,455
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Loans 17,042,433 15,580,379 15,908,554
Less - Unearned income 320,774 347,195 353,322
Allowance for loan losses 326,630 290,653 295,177
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16,395,029 14,942,531 15,260,055
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Premises and equipment 390,324 405,772 401,975
Other real estate 29,257 23,518 21,494
Customers' liabilities on acceptances 1,953 1,647 1,904
Accrued income receivable 189,863 202,540 200,638
Other assets 423,396 367,150 401,123
Intangible assets 263,302 281,595 287,436
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$28,530,426 $28,057,051 $27,230,263
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,045,604 $ 3,109,885 $2,945,057
Interest bearing 12,954,632 11,695,022 11,612,821
- -------------------------------------------------------------------------------------------------------------------
16,000,236 14,804,907 14,557,878
Federal funds purchased and securities sold under
agreements to repurchase 3,978,199 4,964,115 5,236,644
Other short-term borrowings 3,164,520 4,369,212 3,444,129
Notes payable 2,329,985 1,176,912 1,434,429
Acceptances outstanding 1,953 1,647 1,904
Other liabilities 480,168 470,687 443,707
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25,955,061 25,787,480 25,118,691
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Subordinated notes 125,000 125,000 125,000
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Preferred beneficial interests in Popular North
America's junior subordinated
deferrable interest debentures guaranteed
by the Corporation 150,000 150,000 150,000
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Commitments and contingencies
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Minority interest in consolidated subsidiaries 908 927 838
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Stockholders' equity:
Preferred stock 100,000 100,000 100,000
Common stock 831,932 830,356 829,729
Surplus 266,525 260,984 249,238
Retained earnings 1,011,473 865,082 823,418
Treasury stock-at cost (66,136) (66,214) (66,214)
Accumulated other comprehensive income (loss), net
of tax of $48,298 (December 31, 2000 - $1,683;
September 30, 2000 - ($26,385)) 155,663 3,436 (100,437)
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2,299,457 1,993,644 1,835,734
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$28,530,426 $28,057,051 $27,230,263
===================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarter ended Nine months ended
September 30, September 30,
(In thousands, except per share information) 2001 2000 2001 2000
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INTEREST INCOME:
Loans $ 392,801 $ 414,677 $ 1,178,207 $1,183,634
Money market investments 10,350 18,187 38,682 45,743
Investment securities 110,095 125,109 362,397 351,863
Trading account securities 3,736 3,201 11,554 10,509
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516,982 561,174 1,590,840 1,591,749
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INTEREST EXPENSE:
Deposits 130,254 140,811 394,053 392,684
Short-term borrowings 72,664 139,757 276,275 356,266
Long-term debt 40,644 31,750 125,857 105,787
- --------------------------------------------------------------------------------------------------------------
243,562 312,318 796,185 854,737
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Net interest income 273,420 248,856 794,655 737,012
Provision for loan losses 55,259 49,666 154,755 148,398
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 218,161 199,190 639,900 588,614
Service charges on deposit accounts 37,537 32,558 108,505 93,612
Other service fees 59,643 57,493 175,736 160,302
Gain (loss) on sale of securities 1,249 147 (613) 13,740
Trading account profit 777 259 149 1,617
Loss on derivatives (8,140) (7,119)
Other operating income 26,293 29,581 76,014 75,779
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335,520 319,228 992,572 933,664
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OPERATING EXPENSES:
Personnel costs:
Salaries 82,080 78,104 238,742 233,999
Profit sharing 3,986 5,197 13,101 14,897
Pension and other benefits 21,542 17,078 67,402 52,918
- --------------------------------------------------------------------------------------------------------------
107,608 100,379 319,245 301,814
Net occupancy expenses 17,974 17,610 52,895 50,346
Equipment expenses 24,148 25,294 72,850 73,807
Other taxes 9,135 8,507 27,754 25,423
Professional fees 17,247 15,602 48,521 50,107
Communications 12,181 11,661 36,153 34,497
Business promotion 13,414 9,694 37,118 36,353
Printing and supplies 4,269 5,351 13,078 15,836
Other operating expenses 17,525 17,289 53,645 51,952
Amortization of intangibles 6,858 8,829 20,594 25,958
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230,359 220,216 681,853 666,093
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Income before income tax, minority interest and cumulative
effect of accounting changes 105,161 99,012 310,719 267,571
Income tax 27,952 27,662 82,440 68,103
Net loss (gain) of minority interest 7 (58) 19 1,136
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Income before cumulative effect of accounting changes 77,216 71,292 228,298 200,604
Cumulative effect of accounting changes, net of tax 686
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NET INCOME $ 77,216 $ 71,292 $ 228,984 $ 200,604
==============================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 75,129 $ 69,205 $ 222,722 $ 194,342
==============================================================================================================
EARNINGS PER COMMON SHARE (BASIC AND DILUTED)
(BEFORE AND AFTER CUMULATIVE EFFECT OF ACCOUNTING $ 0.55 $ 0.51 $ 1.63 $ 1.43
CHANGES)
==============================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ 0.16 $ 0.56 $ 0.48
==============================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Quarter ended Nine months ended
September 30, September 30,
(In thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 77,216 $ 71,292 $ 228,984 $ 200,604
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Other comprehensive income, net of tax:
Foreign currency translation adjustment (153) (855) (403) (1,152)
Less: reclassification adjustment for foreign currency
translation loss realized upon sale of investment in a
foreign entity (1,678) (1,678)
Unrealized gains on securities:
Unrealized holding gains arising during the
period, net of tax of $25,066 (2000 - $12,978) for the quarter
and $47,033 (2000 - $13,109) for the nine-month period 83,944 50,235 151,383 50,398
Less: reclassification adjustment for gains (losses) included
in net income, net of tax of $406 (2000 - $24) for the quarter
and ($313) (2000 - $3,501) for the nine-month period 843 122 (1,555) 10,652
Net loss on cash flow hedges (908) (1,645)
Less: reclassification adjustment for losses included in net
income, net of tax of ($168) for the quarter and ($568)
for the nine-month period in 2001 (262) (947)
Cumulative effect of accounting change 254
Less: reclassification adjustment for losses included in net
income, net of tax of ($77) for the nine-month
period in 2001 (136)
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Total other comprehensive income $ 82,302 $ 50,936 $ 152,227 $ 40,272
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Comprehensive income $ 159,518 $ 122,228 $ 381,211 $ 240,876
===========================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
SEPTEMBER 30, December 31, September 30,
(In thousands) 2001 2000 2000
- ------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ (1,287) $ (884) $ (739)
Unrealized gains (losses) on securities 157,258 4,320 (99,698)
Unrealized losses on derivatives (698)
Cumulative effect of accounting change 390
---------------------------------------------------
Accumulated other comprehensive income (loss) $ 155,663 $ 3,436 ($100,437)
===================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
September 30,
(In thousands) 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 228,984 $ 200,604
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 56,960 57,339
Provision for loan losses 154,755 148,398
Amortization of intangibles 20,594 25,958
Loss (gain) on sale of investment securities available-for-sale 613 (13,740)
Loss on derivatives 7,119
Loss on disposition of premises and equipment 351 340
Gain on sale of loans (860) (3,862)
Net amortization of premiums and accretion of discounts on investments 1,975 1,300
Net increase in loans held-for-sale (86,714) (63,157)
Net amortization of deferred loan fees and costs (15,622) 504
Net (increase) decrease in trading securities (124,796) 72,966
Net decrease (increase) in accrued income receivable 12,677 (30,625)
Net decrease (increase) in other assets 11,657 (36,300)
Net decrease in interest payable (73,384) (3,129)
Net increase (decrease) in deferred and current taxes 5,256 (21,246)
Net increase in postretirement benefit obligation 3,012 4,516
Net increase in other liabilities 6,962 17,224
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Total adjustments (19,445) 156,486
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Net cash provided by operating activities 209,539 357,090
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments 75,603 91,664
Purchases of investment securities held-to-maturity (4,515,716) (4,857,246)
Maturities of investment securities held-to-maturity 4,622,152 4,779,569
Purchases of investment securities available-for-sale (3,303,701) (2,537,407)
Maturities of investment securities available-for-sale 3,671,005 1,866,852
Proceeds from sales of investment securities available-for-sale 732,131 89,611
Net disbursements on loans (1,380,741) (1,916,583)
Proceeds from sale of loans 404,760 711,375
Acquisition of loan portfolios (660,829) (394,632)
Assets acquired, net of cash (123) (8,831)
Acquisition of premises and equipment (45,044) (52,348)
Proceeds from sale of premises and equipment 3,180 12,308
Cash transferred due to sale of investment in subsidiary (46,899)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (397,323) (2,262,567)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,186,127 564,811
Net (decrease) increase in federal funds purchased and securities
sold under agreements to repurchase (985,916) 822,164
Net (decrease) increase in other short-term borrowings (1,204,692) 869,492
Net proceeds (payments) of notes payable 1,153,074 (375,228)
Dividends paid (77,041) (71,448)
Proceeds from issuance of common stock 7,116 7,450
Treasury stock sold (acquired) 77 (2,064)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 78,745 1,815,177
- --------------------------------------------------------------------------------------------------------------
Net decrease in cash and due from banks (109,039) (90,300)
Cash and due from banks at beginning of period 726,051 663,696
- --------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 617,012 $ 573,396
==============================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share information)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Popular, Inc. (the Corporation) is a bank holding company offering a full range
of financial services through banking offices in Puerto Rico, the United States
and the U.S. and British Virgin Islands. The Corporation is also engaged in
mortgage and consumer lending, auto and lease financing, investment banking and
broker/dealer activities, retail financial services, insurance agency services
and information technology, ATM and data processing services through its
non-banking subsidiaries in Puerto Rico, the United States, the Caribbean and
Central America. Note 12 to the consolidated financial statements presents
further information about the Corporation's business segments.
The consolidated financial statements include the accounts of Popular, Inc. and
its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. These statements are, in the opinion of management,
a fair presentation of the results for the periods presented. These results are
unaudited, but include all necessary adjustments, of a normal recurring nature,
for a fair presentation of such results. Certain reclassifications have been
made to the prior year consolidated financial statements to conform to the 2001
presentation.
NOTE 2 - ACCOUNTING CHANGES
Accounting for derivative and hedging activities.
On January 1, 2001 the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," as amended. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
The statement requires the recognition of all derivatives on the balance sheet
at fair value. On the date that a derivative contract is entered into, it may be
designated as (1) a hedge of (a) the fair value of a recognized asset or
liability or (b) an unrecognized firm commitment (a fair value hedge); (2) a
hedge of (a) a forecasted transaction or (b) the variability of cash flows
associated with a recognized asset or liability (a "cash flow" hedge); (3) a
foreign -currency fair-value or cash flow hedge (a "foreign currency" hedge);
(4) a hedge of a net investment in a foreign operation; or (5) an instrument
that is held for trading or non-hedging purposes ( a "trading" or "non-hedging"
instrument). Changes in the fair value of a derivative that is highly effective
as - and that is designated and qualifies as - a fair value hedge, along with
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk, are recorded in current-period earnings. Changes in the fair
value of a derivative that is highly effective as - and that is designated and
qualifies as - a cash flow hedge, to the extent that the hedge is effective, are
recorded in other comprehensive income, until earnings are affected by the
variability of cash flows of the hedged transaction. Any hedge ineffectiveness
is recorded in current-period earnings. Changes in the fair value of a
derivative that is highly effective as - and that is designated and qualifies as
- - a foreign-currency hedge is recorded in either current-period earnings or
other comprehensive income, depending on whether the hedging relationship
satisfies the criteria for a fair-value or cash-flow hedge. If, however, a
derivative is used as a hedge of a net investment in a foreign operation, the
changes in the derivative's fair value, to the extent that the derivative is
effective as a hedge, are recorded in the cumulative-translation-adjustment
account within other comprehensive income. Changes in the fair value of
derivatives not designated as hedges or that do not meet the hedging criteria
are reported in current-period earnings.
Certain derivative instruments contain embedded derivatives. When (1) the
embedded derivative possesses economic characteristics that are not clearly and
closely related to the economic characteristics of the host contract and (2) a
separate, stand-alone instrument with the same terms would qualify as a
derivative instrument, the embedded derivative is separated from the host
contract, carried at fair value, and may be designated as either (1) a
fair-value, cash flow, or foreign-currency hedge or (2) a trading or non-hedging
derivative instrument.
As of September 30, 2001, the Corporation had $390 in accumulated other
comprehensive income pertaining to the cumulative effect of adopting SFAS No.
133. This amount pertains to the reclassification of $29,526 of held-to-maturity
securities as available-for-sale. Therefore, the Corporation does not expect
reclassification of this transition
7
adjustment included in other comprehensive income within the next twelve months.
Transfer and Servicing of Financial Assets and Liabilities
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a replacement of SFAS
125," was issued by the Financial Accounting Standard Board. The statement's
provisions requiring the recognition and reclassification of collateral and
disclosures relating to securitization transactions and collateral were adopted
by the Corporation in the year ended December 31, 2000. SFAS 140 also provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The latter provisions are
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after March 31, 2001. The adoption of these provisions did
not have a material impact on the Corporation's financial condition or results
of operations.
Business Combinations
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations." This Statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." SFAS No. 141 changes the accounting for business
combinations in Opinion 16 in the following significant respects:
SFAS No. 141 requires the use of the purchase method of accounting
for all business combinations initiated after June 30, 2001, thereby
eliminating the use of the pooling-of-interests method.
In contrast to Opinion 16, which required separate recognition of
intangible assets that can be identified and named, SFAS No. 141
requires that they be recognized as assets apart from goodwill if
they meet one of two criteria--the contractual-legal criterion or the
separability criterion.
In addition to the disclosure requirements in Opinion 16, SFAS No.
141 requires disclosure of the primary reasons for a business
combination and the allocation of the purchase price paid to the
assets acquired and liabilities assumed by major balance sheet
caption. When the amounts of goodwill and intangible assets acquired
are significant in relation to the purchase price paid, disclosure of
other information about those assets is required, such as the amount
of goodwill by reportable segment and the amount of the purchase
price assigned to each major intangible asset class.
The provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001. This statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later.
Goodwill and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets." This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." It addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements.
SFAS No. 142 changes the subsequent accounting for goodwill and other intangible
assets in the following significant respects:
Under SFAS No. 142, goodwill and intangible assets that have indefinite
useful lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful
lives will continue to be amortized over their useful lives, but
without the constraint of an arbitrary ceiling. Opinion 17 mandated an
arbitrary ceiling of 40 years for that amortization.
8
SFAS No. 142 provides specific guidance for testing goodwill for
impairment. Goodwill will be tested for impairment at least annually
using a two-step process that begins with an estimation of the fair
value of a reporting unit. The first step is a screen for potential
impairment, and the second step measures the amount of impairment, if
any.
SFAS No. 142 requires disclosure of information about goodwill and
other intangible assets in the years subsequent to their acquisition
that was not previously required. Required disclosures include
information about the changes in the carrying amount of goodwill from
period to period (in the aggregate and by reportable segment), the
carrying amount of intangible assets by major intangible asset class
for those assets subject to amortization and for those not subject to
amortization, and the estimated intangible asset amortization expense
for the next five years.
The provisions of this statement are required to start with fiscal years
beginning after December 15, 2001. This statement is required to be applied at
the beginning of an entity's fiscal year and to be applied to all goodwill and
other intangible assets recognized in its financial statements at that date.
Impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial application of this statement (resulting from a transitional
impairment test) are to be reported as resulting from a change in accounting
principle. Goodwill and intangible assets acquired after June 30, 2001 will be
subject immediately to the nonamortization and amortization provisions of SFAS
No. 142. The annualized goodwill amortization for the year 2001 is estimated at
approximately $17,000. Management is still in the process of determining the
full impact of the provisions of SFAS 142.
Accounting for Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143
"Accounting for Asset Retirement Obligations." This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It requires that the fair value of a liability for an asset retirement
obligation be recognized 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. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Management understands that the adoption of this
statement will not have a material effect on the consolidated financial
statements of the Corporation.
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
SFAS No. 144 retains the requirements of Statement 121 to (a) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and fair value of the asset. This
Statement removes goodwill from its scope and, therefore, eliminates the
requirement of Statement 121 to allocate goodwill to long-lived assets to be
tested for impairment. Also, the Statement requires that a long-lived asset to
be abandoned, exchanged for a similar productive asset, or distributed to owners
in a spinoff be considered held and used until it is disposed of. The changes in
this Statement improve financial reporting by requiring that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and by broadening the presentation
of discontinued operations to include more disposal transactions. The provisions
of SFAS No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. Management understands that the adoption of this statement will not have
a material effect on the consolidated financial statements of the Corporation.
9
NOTE 3 - INVESTMENT SECURITIES
The average contractual maturities as of September 30, 2001 and the amortized
cost and market value (or fair value for certain investment securities when no
market quotations are available) for the following investment securities were as
follows:
Investment securities available-for-sale:
SEPTEMBER 30, December 31, September 30,
------------- ------------ -------------
2001 2000 2000
---- ---- ----
AMORTIZED MARKET Amortized Market Amortized Market
COST VALUE Cost Value Value Cost
---------------------------------------------------------------------------
(In thousands)
U.S. Treasury (average maturity of 1 year) $ 700,594 $ 721,967 $1,140,544 $1,146,744 $1,740,923 $1,735,129
Obligations of other U.S. Government
agencies and corporations (average maturity of
4 years and 6 months) 4,042,736 4,137,920 5,001,672 4,977,669 4,184,653 4,078,770
Obligations of Puerto Rico, States and
Political subdivisions (average maturity
Of 8 years and 8 months) 102,954 107,487 70,678 71,278 77,896 77,658
Collateralized mortgage obligations (average
maturity of 22 years and 9 months) 1,804,521 1,816,244 1,552,544 1,553,285 1,392,624 1,373,623
Mortgage-backed securities (average maturity
of 21 years and 6 months) 633,481 641,786 700,844 695,987 503,346 498,219
Equity securities (without contractual maturity) 222,814 286,318 229,547 255,651 228,434 238,055
Others (average maturity of 15 years and 5
months) 84,951 86,306 94,092 95,310 68,869 69,208
---------------------------------------------------------------------------
$7,592,051 $7,798,028 $8,789,921 $8,795,924 $8,196,745 $8,070,662
===========================================================================
Investment securities held-to-maturity:
SEPTEMBER 30, December 31, September 30,
------------- ------------ -------------
2001 2000 2000
---- ---- ----
AMORTIZED MARKET Amortized Market Amortized Market
COST VALUE Cost Value Value Cost
-------------------------------------------------------------------------
(In thousands)
Obligations of other U.S. Government agencies and
corporations (average maturity of 1 month) $ 69,842 $ 69,845 $ 11,061 $ 11,095 6,445 6,432
Obligations of Puerto Rico, States and
political subdivisions (average maturity
of 9 years and 8 months) 88,043 93,338 118,595 117,467 140,829 138,887
Collateralized mortgage obligations (average
maturity of 22 years and 8 months) 1,464 1,464 12,369 12,228 14,696 14,586
Mortgage-backed securities 18,744 19,110 19,930 19,930
Others (average maturity of 3 years and 7 months) 81,414 80,893 103,962 98,672 103,929 99,200
-------------------------------------------------------------------------
$240,763 $245,540 $264,731 $258,572 $285,829 $279,035
=========================================================================
The expected maturities of collateralized mortgage obligations, mortgage-backed
securities and certain other securities differ from their contractual maturities
because they may be subject to prepayments.
10
Stock that is owned by the Corporation to comply with regulatory requirements,
such as Federal Reserve Bank and Federal Home Loan Bank stock, is included as
equity securities available-for-sale.
NOTE 4 - PLEDGED ASSETS
At September 30, 2001 and 2000, securities and loans were pledged to secure
public and trust deposits, securities sold under agreements to repurchase and
other borrowings.
The classification and carrying amount of pledged assets, which the secured
parties are not permitted to sell or repledge the collateral were as follows:
SEPTEMBER 30, December 31, September 30,
(In thousands) 2001 2000 2000
- ----------------------------------------------------------------------------------------------------------
Investment securities available-for-sale $1,958,671 $1,617,134 $1,618,274
Investment securities held-to-maturity 5,114 6,798 6,803
Loans 1,832,089 777,118 561,826
- ----------------------------------------------------------------------------------------------------------
$3,795,874 $2,401,050 $2,186,903
==========================================================================================================
Securities that the creditor has the right by custom or contract to repledge are
presented separately in the consolidated statements of condition.
NOTE 5 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In managing its market risk the Corporation enters, to a limited extent, into
certain derivatives primarily interest rate swaps, interest rate forwards and
future contracts, interest rate swaptions, foreign exchange contracts and
interest-rate caps, floors and put options embedded in interest bearing
contracts.
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 133 and therefore changes in the fair
value of the derivative are recorded in other comprehensive income. As of
September 30, 2001 the total amount (net of tax) included in accumulated other
comprehensive income pertaining to future and forward contracts was an
unrealized loss of $363. These contracts have a maximum maturity of 123 days.
The Corporation purchased interest rate caps as part of a securitization in
order to limit the interest rate payable to the security holders. These
contracts qualify for cash flow hedge accounting in accordance with SFAS 133. As
of September 30, 2001, the fair market value of these interest rate caps was
$4,278 included in other assets. These contracts have a maximum maturity of 8.3
years.
To satisfy the needs of its customers, from time to time, the Corporation enters
into foreign exchange contracts in the spot or futures market and at the same
time into foreign exchange contracts with third parties under the same terms and
conditions. As of September 30, 2001, the Corporation included $13 and $13 in
other assets and other liabilities, respectively, pertaining to the fair value
of these contracts.
The interest-rate caps, floors and put options embedded in the interest bearing
contracts are clearly and closely related to the economic characteristics of the
contract and therefore as stated in FAS 133, are not bifurcated from the host
contract.
The Corporation enters into options on swaps ("swaption") derivative securities,
which combine the characteristics of interest rate swaps and options. These
swaptions are related to certificates of deposit with returns linked to the
Standard and Poor's 500 index through an embedded option which has been
bifurcated from the host contract, and in accordance with the pronouncement does
not qualify for hedge accounting.
11
As of September 30, 2001, the Corporation had recognized a derivative asset of
$8,919 based on the fair value of the swaptions, a derivative liability of
$32,552 based on the fair value of the bifurcated option, and a related discount
on the certificates of deposit of $21,594, these amounts are included in other
assets and deposits, respectively. The Corporation uses 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 are determined based on management's assessment of future interest
rates, as well as other factors. These swaps cannot be designated as hedges in
accordance with SFAS 133 and therefore changes in the fair value of the
derivatives are recorded in the statement of income. For the quarter and nine
months ended September 30, 2001, the Corporation recognized a loss of $8,140 and
$7,119, respectively, as a result of the changes in fair value of the
non-hedging derivatives included as part of the loss on derivatives.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In the normal course of business there are letters of credit outstanding and
stand-by letters of credit which at September 30, 2001, amounted to $17,183 and
$90,530, respectively (September 30, 2000 - $13,894 and $69,568; December 31,
2000 - $13,962 and $103,705). There are also outstanding other commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the accompanying financial statements. No losses are
anticipated as a result of these transactions.
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 7 - STOCK OPTION PLAN
In April 2001, the shareholders of the Corporation approved the 2001 Stock
Option Plan (the Plan), which permits the granting of incentive awards in the
form of qualified stock options, incentive stock options, or non-statutory stock
options of the Corporation. Any employee or director of the Corporation or of
any of its subsidiaries is eligible to participate in the Plan. The selection of
individuals eligible to participate is within the discretion of the Board of
Directors, or an appointed committee. The Plan provides for the issuance of
Popular, Inc.'s common stock at a price equal to its fair market value at the
date of grant, subject to certain Plan provisions. The aggregate number of
shares of common stock, which may be issued under the Plan, is limited to
5,000,000 shares, subject to adjustment for stock splits, recapitalizations and
similar events. The shares are to be made available from authorized but unissued
shares of common stock or treasury stock. The maximum option term is generally
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.
SFAS No. 123, "Accounting for Stock-Based Compensation" established a fair value
based method of accounting for stock-based compensation plans and encourages
entities to adopt that method of accounting for their employee stock
compensation plans. This pronouncement also allows an entity to continue to
measure compensation cost for those plans based on Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and disclose
the pro forma net income and net income per share as if the fair value method
had been applied in measuring cost. The Corporation has elected APB 25 and
related interpretations in accounting for stock-based compensation plans.
During 2001, options for 15,904 common shares were awarded under the Plan with
exercise prices ranging from $30.56 to $34.87. The exercise price equaled the
share's market price at the date of grant. The weighted average exercise price
of these options was $32.60 at September 30, 2001. The weighted average
remaining contractual life of all options at September 30, 2001 was 9.7 years.
No options were exercisable at September 30, 2001.
No compensation cost was recognized by the Corporation during the period ended
September 30, 2001 related to these stock options. Had the Corporation elected
to recognize compensation cost for options granted in 2001, consistent with the
fair value method of accounting of SFAS 123, the pro forma net income and pro
forma earnings per share would have been as follows:
12
Quarter ended Nine-months ended
September 30, September 30,
2001 2000 2001 2000
--------------------------------------------------------------------
(In thousands, except per share information)
Net income applicable to common stock
As reported $ 75,129 $ 69,205 $ 222,722 $ 194,342
Pro forma $ 75,121 $ 69,205 $ 222,711 $ 194,342
Basic earnings per common share
As reported $ 0.55 $ 0.51 $ 1.63 $ 1.43
Pro forma $ 0.55 $ 0.51 $ 1.63 $ 1.43
Diluted earnings per common share
As reported $ 0.55 $ 0.51 $ 1.63 $ 1.43
Pro forma $ 0.55 $ 0.51 $ 1.63 $ 1.43
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model. The following weighted-average assumptions
were used for the grants in 2001: an expected dividend yield of 2.10%, an
average expected life of the options of 10 years, an expected volatility of
31.66% and a risk-free interest rate of 5.10%. The weighted-average fair value
of options granted during 2001 was $12.52.
NOTE 8 - SUBORDINATED NOTES AND PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH
AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED
BY THE CORPORATION
Subordinated notes of $125,000 consist of notes issued by the Corporation on
December 12, 1995, maturing on December 15, 2005, with interest payable
semi-annually at 6.75%.
On February 5, 1997, BanPonce Trust I, a statutory business trust created under
the laws of the State of Delaware that is wholly-owned by Popular North America,
Inc. (PNA) and indirectly wholly-owned by the Corporation, sold to institutional
investors $150,000 of its 8.327% Capital Securities Series A (liquidation amount
$1,000 per Capital Security) through certain underwriters. The proceeds of the
issuance, together with the proceeds of the purchase by PNA of $4,640 of its
8.327% common securities (liquidation amount $1,000 per common security) were
used to purchase $154,640 aggregate principal amount of PNA 8.327% Junior
Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated
Debentures"). These capital securities qualify as Tier 1 capital, are fully and
unconditionally guaranteed by the Corporation, and are presented in the
Consolidated Statements of Condition as "Preferred Beneficial Interests in
Popular North America's Junior Subordinated Deferrable Interest Debentures
Guaranteed by the Corporation." The obligations of PNA under the Junior
Subordinated Debentures and its guarantees of the obligations of BanPonce Trust
I are fully and unconditionally guaranteed by the Corporation. The assets of
BanPonce Trust I consisted of $154,640 of Junior Subordinated Debentures and a
related accrued interest receivable of $1,073. The Junior Subordinated
Debentures mature on February 1, 2027; however, under certain circumstances, the
maturity of the Junior Subordinated Debentures (which shortening would result in
a mandatory redemption of the Capital Securities) may be shortened.
NOTE 9 - STOCKHOLDERS' EQUITY
Authorized common stock is 180,000,000 shares with a par value of $6 per share.
At September 30, 2001, there were 138,655,314 (September 30, 2000 - 138,288,062;
December 31, 2000 - 138,392,822) shares issued and 136,268,031 (September 30,
2000 - 135,893,857; December 31, 2000 - 135,998,617) shares outstanding. As of
September 30, 2001, a total of 2,387,283 (September 30, 2000 - 2,394,205;
December 31, 2000 - 2,394,205) common shares with a total cost of $66,136
(September 30, 2000 - $66,214; December 31, 2000 - $66,214) were maintained as
treasury stock.
Authorized preferred stock consists of 10,000,000 shares without par value of
which 4,000,000 shares, non-cumulative with a dividend rate of 8.35% and a
liquidation preference value of $25 per share, were issued and outstanding at
September 30, 2001, September 30, 2000 and December 31, 2000.
13
NOTE 10 - EARNINGS PER COMMON SHARE
A computation of earnings per common share follows:
Quarter ended Nine-months ended
September 30, September 30,
2001 2000 2001 2000
---------------------------------------------------------
(In thousands, except per share information)
Net income $ 77,216 $ 71,292 $ 228,984 $ 200,604
Less: Preferred stock dividends 2,087 2,087 6,262 6,262
---------------------------------------------------------
Net income applicable to common stock $ 75,129 $ 69,205 $222,722 $194,342
=========================================================
Average common shares outstanding 136,277,273 135,971,955 136,193,360 135,871,832
Average potential common shares - stock options 594 - 244 -
---------------------------------------------------------
Average common shares outstanding - assuming dilution 136,277,867 135,971,955 136,193,604 135,871,832
=========================================================
Basic earnings per common share $ 0.55 $ 0.51 $ 1.63 $ 1.43
=========================================================
Diluted earnings per common share $ 0.55 $ 0.51 $ 1.63 $ 1.43
=========================================================
Potential common shares consist of common stock issuable under the assumed
exercise of stock options granted under the Corporation's stock option plan,
using the treasury stock method. The stock options granted in the third quarter
of 2001 were not included in the computation of the quarter and year-to-date
diluted earnings per share computation as the effect of their inclusion would be
antidilutive.
NOTE 11 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the nine-month period ended September 30, 2001, the Corporation paid
interest and income taxes amounting to $869,569 and $62,192, respectively (2000
- - $857,867 and $83,038). In addition, the loans receivable transferred to other
real estate and other property for the nine-month period ended September 30,
2001, amounted to $25,157 and $20,881, respectively (2000 - $23,609 and
$18,814).
NOTE 12 - SEGMENT REPORTING
Popular, Inc. operates three major reportable segments: commercial banking,
mortgage and consumer lending, and lease financing. Management has determined
its reportable segments based on legal entity, which is the way that operating
decisions and performance is measured. These entities have then been aggregated
by products, services and markets with similar characteristics.
The Corporation's commercial banking segment includes all banking subsidiaries,
which provide individuals, corporations and institutions with commercial and
retail banking services, including loans and deposits, trust, mortgage banking
and servicing, asset management, credit cards and other financial services.
These services are offered through a delivery system of branches throughout
Puerto Rico, the U.S. and British Virgin Islands and the United States.
The Corporation's mortgage and consumer lending segment includes those
non-banking subsidiaries whose principal activity is originating mortgage and
consumer loans such as Popular Mortgage, Popular Finance, Equity One and Levitt
Mortgage.
The Corporation's auto and lease financing segment provides financing for
vehicles and equipment through Popular Auto, Inc. (formerly Popular Leasing) in
Puerto Rico and Popular Leasing, USA in the U.S. mainland. The "Other" category
includes all holding companies and non-banking subsidiaries which provide
insurance agency services, retail financial services, investment banking and
broker/dealer activities, as well as those providing ATM processing services,
electronic data processing and consulting services, sale and rental of
electronic data processing equipment and selling and maintenance of computer
software.
The accounting policies of the segments are the same as those followed by the
Corporation in the ordinary course of
14
business and conform with generally accepted accounting principles and with
general practices within the financial industry. Following are the results of
operations and selected financial information by operating segments for the
quarters and nine months ended September 30, 2001 and 2000.
MORTGAGE AND AUTO AND
COMMERCIAL CONSUMER LEASE
BANKING LENDING FINANCING OTHER ELIMINATIONS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) QUARTER ENDED SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 222,419 $ 36,434 $ 13,797 $ 804 $ (34) $ 273,420
PROVISION FOR LOAN LOSSES 37,556 10,599 7,104 55,259
OTHER INCOME 64,351 16,023 4,399 35,878 (3,292) 117,359
AMORTIZATION EXPENSE 5,458 182 189 1,029 6,858
DEPRECIATION EXPENSE 14,259 905 2,410 1,176 18,750
OTHER OPERATING EXPENSES 144,036 24,698 5,330 30,958 (271) 204,751
MINORITY INTEREST 7 7
INCOME TAX 20,917 6,018 1,226 549 (758) 27,952
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 64,544 $ 10,062 $ 1,937 $ 2,970 $ (2,297) $ 77,216
- --------------------------------------------------------------------------------------------------------------------------------
SEGMENT ASSETS $23,648,015 $4,018,926 $980,114 $6,559,278 $(6,675,907) $28,530,426
- --------------------------------------------------------------------------------------------------------------------------------
MORTGAGE AND AUTO AND
COMMERCIAL CONSUMER LEASE
BANKING LENDING FINANCING OTHER ELIMINATIONS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 662,858 $ 94,209 $ 38,530 $ (836) $ (106) $ 794,655
PROVISION FOR LOAN LOSSES 108,776 29,669 16,310 154,755
OTHER INCOME 182,967 43,992 14,509 119,258 (8,054) 352,672
AMORTIZATION EXPENSE 16,380 546 566 3,102 20,594
DEPRECIATION EXPENSE 43,292 2,714 7,554 3,400 56,960
OTHER OPERATING EXPENSES 426,061 68,671 16,830 93,409 (672) 604,299
MINORITY INTEREST 19 19
INCOME TAX 61,261 13,623 4,469 4,939 (1,852) 82,440
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 686 686
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 190,741 $ 22,997 $ 7,310 $ 13,572 $ (5,636) $ 228,984
- --------------------------------------------------------------------------------------------------------------------------------
SEGMENT ASSETS $23,648,015 $4,018,926 $980,114 $6,559,278 $(6,675,907) $28,530,426
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage and Auto and
Commercial consumer Lease
Banking lending Financing Other Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) Quarter ended September 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 213,184 $ 23,627 $ 10,482 $ 1,599 $ (36) $ 248,856
Provision for loan losses 33,929 9,944 4,930 863 49,666
Other income 67,936 12,836 4,777 37,993 (3,504) 120,038
Amortization expense 7,222 201 188 1,218 8,829
Depreciation expense 14,578 553 2,247 1,473 18,851
Other operating expenses 136,169 18,897 5,448 32,399 (377) 192,536
Minority interest 10 (68) (58)
Income tax 24,407 2,210 964 893 (812) 27,662
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 64,815 $ 4,668 $ 1,482 $ 2,678 $ (2,351) $ 71,292
- ----------------------------------------------------------------------------------------------------------------------------------
Segment Assets $23,191,642 $2,663,259 $938,230 $6,174,048 $(5,736,916) $27,230,263
- ----------------------------------------------------------------------------------------------------------------------------------
15
Mortgage and Auto and
Commercial Consumer Lease
Banking Lending Financing Other Eliminations Total
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands) Nine-month period ended September 30, 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 632,749 $ 69,312 $ 31,990 $ 3,065 $ (104) $ 737,012
Provision for loan losses 107,003 22,632 14,273 4,490 148,398
Other income 193,224 32,923 16,125 111,150 (8,372) 345,050
Amortization expense 21,215 523 565 3,655 25,958
Depreciation expense 43,326 1,867 6,974 5,172 57,339
Other operating expenses 424,772 56,906 17,158 86,302 (2,342) 582,796
Minority interest 32 1,104 1,136
Income tax 56,949 6,771 3,462 2,520 (1,599) 68,103
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 172,708 $ 13,568 $ 5,683 $ 13,180 $ (4,535) $ 200,604
- --------------------------------------------------------------------------------------------------------------------------------
Segment Assets $23,191,642 $2,663,259 $938,230 $6,174,048 $(5,736,916) $27,230,263
- --------------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION Quarter ended Nine month period ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------
(In thousands)
Revenues*
Puerto Rico $432,917 $461,800 $1,349,396 $1,325,984
United States 185,038 186,584 545,626 514,328
Other 16,386 32,828 48,490 96,487
- --------------------------------------------------------------------------------------------------------
Total consolidated revenues $634,341 $681,212 $1,943,512 $1,936,799
- --------------------------------------------------------------------------------------------------------
* Total revenues include interest income, service charges on deposit
accounts, other service fees, gain (loss) on sale of securities,
trading account profit, loss on derivatives and other operating income.
SEPTEMBER 30, December 31, September 30,
2001 2000 2000
- -----------------------------------------------------------------------------------------------------------
(In thousands)
Selected Balance Sheet Information:
Puerto Rico
Total assets $19,107,359 $20,146,184 $19,386,613
Loans 9,643,769 9,370,627 9,616,626
Deposits 10,620,492 9,974,677 9,851,236
United States
Total assets $ 8,689,070 $ 7,246,259 $ 7,188,144
Loans 7,567,049 6,264,014 6,201,331
Deposits 4,584,680 4,107,994 4,004,726
Other
Total assets $ 733,997 $ 664,608 $ 655,506
Loans 421,456 422,444 419,730
Deposits 795,064 722,236 701,916
16
NOTE 13 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR AND ISSUERS
OF GUARANTEED REGISTERED SECURITIES:
The following condensed consolidating financial information presents the
financial position of Popular, Inc. Holding Company (PIHC), Popular
International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and all other
subsidiaries of the Corporation as of September 30, 2001, December 31, 2000 and
September 30, 2000, and the results of their operations and cash flows for the
periods ended September 30, 2001 and 2000. 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 August
31, 2001, November 30, 2000 and August 31, 2000, corresponds to their financial
information included in the consolidated financial statements of Popular, Inc.
as of September 30, 2001, December 31, 2000 and September 30, 2000,
respectively.
PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock
under various shelf registrations filed with the SEC.
PIBI is an operating subsidiary of PIHC and is the holding company of its
wholly-owned subsidiaries, ATH Costa Rica, CreST, S.A., and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its
wholly-owned subsidiaries, Popular Cash Express, Inc., Equity One, Inc., BPNA,
including its wholly-owned subsidiary Popular Leasing, U.S.A.; 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. The principal source of cash flows for
PIHC consists of dividends from Banco Popular de Puerto Rico (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 in any calendar year would exceed the total of
its net profits for that year, as defined by the Federal Reserve Board, combined
with its retained net profits for the preceding two years. The payment of
dividends may also be affected by other regulatory requirements and policies,
such as the maintenance of certain minimum capital levels. At September 30,
2001, BPPR could have declared a dividend of approximately $197,341 without the
approval of the Federal Reserve Board.
17
POPULAR, INC.
CONSOLIDATED STATEMENT OF CONDITION
SEPTEMBER 30, 2001
(UNAUDITED)
Popular, Inc. PIBI PNA All other Eliminations Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 207 $ 131 $ 195 $ 679,777 $ (63,298) $ 617,012
Money market investments 25,987 302 118 1,172,876 (206,268) 993,015
Investment securities available-for-sale,
at market value 181,937 19,712 6,599 7,592,580 (2,800) 7,798,028
Investment securities held-to-maturity, at
amortized cost 395,403 (154,640) 240,763
Trading account securities, at market value 277,869 277,869
Investment in subsidiaries, at equity 2,292,822 559,247 763,414 154,849 (3,770,332)
Loans held-for-sale, at lower of cost or market 910,615 910,615
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 197,817 2,494,883 18,328,989 (3,979,256) 17,042,433
Less - Unearned income 320,774 320,774
Allowance for loan losses 326,630 326,630
- -----------------------------------------------------------------------------------------------------------------------------------
197,817 2,494,883 17,681,585 (3,979,256) 16,395,029
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 390,324 390,324
Other real estate 29,257 29,257
Customers' liabilities on acceptances 1,953 1,953
Accrued income receivable 285 2 13,586 197,427 (21,437) 189,863
Other assets 24,527 26,398 3,651 368,293 527 423,396
Intangible assets 263,665 (363) 263,302
- -----------------------------------------------------------------------------------------------------------------------------------
$2,723,582 $605,792 $3,282,446 $30,116,473 $(8,197,867) $28,530,426
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,108,843 $ (63,239) $ 3,045,604
Interest bearing 12,974,309 (19,677) 12,954,632
- -----------------------------------------------------------------------------------------------------------------------------------
16,083,152 (82,916) 16,000,236
Federal funds purchased and securities
sold underagreements to repurchase $ 148,041 3,988,728 (158,570) 3,978,199
Other short-term borrowings $ 751 $ 4,365 1,639,400 2,712,352 (1,192,348) 3,164,520
Notes payable 250,493 917,530 4,113,966 (2,952,004) 2,329,985
Acceptances outstanding 1,953 1,953
Other liabilities 47,881 54 26,905 431,787 (26,459) 480,168
- -----------------------------------------------------------------------------------------------------------------------------------
299,125 4,419 2,731,876 27,331,938 (4,412,297) 25,955,061
- -----------------------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000 125,000
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred beneficial interests in Popular
North America's junior subordinated
deferrable interest debentures guaranteed
by the Corporation 150,000 150,000
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 105 803 908
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000 100,000
Common stock 831,932 3,962 2 72,575 (76,539) 831,932
Surplus 266,525 487,676 439,964 1,333,919 (2,261,559) 266,525
Retained earnings 1,011,473 99,459 105,112 1,119,671 (1,324,242) 1,011,473
Treasury stock-at cost (66,136) (1,495) 1,495 (66,136)
Accumulated other comprehensive income,
net of taxes 155,663 10,276 5,492 109,760 (125,528) 155,663
- ----------------------------------------------------------------------------------------------------------------------------------
2,299,457 601,373 550,570 2,634,430 (3,786,373) 2,299,457
- ----------------------------------------------------------------------------------------------------------------------------------
$2,723,582 $605,792 $3,282,446 $30,116,473 $(8,197,867) $28,530,426
==================================================================================================================================
18
POPULAR, INC.
CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2000
(UNAUDITED)
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 $ 18 $ 288 $ 822,672 $ (97,210) $ 726,051
Money market investments 20,837 326 60 1,944,366 (896,971) 1,068,618
Investment securities available-for-sale, at
market value 151,413 12,577 6,342 8,625,592 8,795,924
Investment securities held-to-maturity, at
amortized cost 419,371 (154,640) 264,731
Trading account securities, at market value 153,073 153,073
Investment in subsidiaries, at equity 2,005,774 542,158 741,505 126,351 (3,415,788)
Loans held-for-sale, at lower of cost or market 823,901 823,901
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 543,773 22,500 1,842,515 15,629,152 (2,457,561) 15,580,379
Less - Unearned income 347,195 347,195
Allowance for loan losses 290,653 290,653
- -----------------------------------------------------------------------------------------------------------------------------------
543,773 22,500 1,842,515 14,991,304 (2,457,561) 14,942,531
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 405,772 405,772
Other real estate 23,518 23,518
Customers' liabilities on acceptances 1,647 1,647
Accrued income receivable 1,113 590 12,051 209,278 (20,492) 202,540
Other assets 22,023 895 4,937 340,614 (1,319) 367,150
Intangible assets 282,048 (453) 281,595
- -----------------------------------------------------------------------------------------------------------------------------------
$2,745,216 $579,064 $2,607,698 $29,169,507 $(7,044,434) $28,057,051
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,207,037 $ (97,152) $ 3,109,885
Interest bearing 11,738,916 (43,894) 11,695,022
- -----------------------------------------------------------------------------------------------------------------------------------
14,945,953 (141,046) 14,804,907
Federal funds purchased and securities
sold under Agreements to repurchase $ 68,700 5,033,117 (137,702) 4,964,115
Other short-term borrowings $ 377,713 $ 5,414 1,336,063 4,298,732 (1,648,710) 4,369,212
Notes payable 212,011 633,254 1,997,722 (1,666,075) 1,176,912
Acceptances outstanding 1,647 1,647
Other liabilities 36,848 275 37,267 421,807 (25,510) 470,687
- -----------------------------------------------------------------------------------------------------------------------------------
626,572 5,689 2,075,284 26,698,978 (3,619,043) 25,787,480
- -----------------------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000 125,000
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred beneficial interests in Popular
North America's Junior subordinated
deferrable interest debentures guaranteed
by the Corporation 150,000 150,000
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 105 822 927
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000 100,000
Common stock 830,356 3,962 2 72,575 (76,539) 830,356
Surplus 260,984 485,676 439,964 1,328,053 (2,253,693) 260,984
Retained earnings 865,082 83,576 90,434 940,008 (1,114,018) 865,082
Treasury stock - at cost (66,214) (314) 314 (66,214)
Accumulated other comprehensive income (loss),
net of tax 3,436 161 2,014 (19,898) 17,723 3,436
- -----------------------------------------------------------------------------------------------------------------------------------
1,993,644 573,375 532,414 2,320,424 (3,426,213) 1,993,644
- -----------------------------------------------------------------------------------------------------------------------------------
$2,745,216 $579,064 $2,607,698 $29,169,507 $(7,044,434) $28,057,051
===================================================================================================================================
19
POPULAR, INC.
STATEMENT OF CONDITION
AS OF SEPTEMBER 30, 2000
(UNAUDITED)
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 $ 239 $ 41 $ 758 $ 655,513 $ (83,155) $ 573,396
Money market investments 8,937 303 47 1,752,507 (882,143) 879,651
Investment securities available-for-sale, at
market value 155,128 13,021 5,587 7,896,926 8,070,662
Investment securities held-to-maturity, at
amortized cost 440,469 (154,640) 285,829
Trading account securities, at market value 163,645 163,645
Investment in subsidiaries, at equity 1,848,621 530,448 726,066 113,586 (3,218,721)
Loans held-for-sale, at lower of cost or market 682,455 682,455
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 627,678 22,500 1,740,515 15,897,859 (2,379,998) 15,908,554
Less - Unearned income 353,322 353,322
Allowance for loan losses 2,000 293,177 295,177
- -----------------------------------------------------------------------------------------------------------------------------------
625,678 22,500 1,740,515 15,251,360 (2,379,998) 15,260,055
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 401,975 401,975
Other real estate 21,494 21,494
Customers' liabilities on acceptances 1,904 1,904
Accrued income receivable 1,819 49 11,120 206,074 (18,424) 200,638
Other assets 19,813 798 6,636 374,558 (682) 401,123
Intangible assets 287,920 (484) 287,436
- -----------------------------------------------------------------------------------------------------------------------------------
$2,660,235 $567,160 $2,490,729 $28,250,386 $(6,738,247) $27,230,263
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,028,107 $ (83,050) $ 2,945,057
Interest bearing 11,776,868 (164,047) 11,612,821
- -----------------------------------------------------------------------------------------------------------------------------------
14,804,975 (247,097) 14,557,878
Federal funds purchased and securities sold
under agreements to repurchase $ 17,800 $ 50,400 5,309,504 (141,060) 5,236,644
Other short-term borrowings 390,828 $ 5,414 978,840 3,480,691 (1,411,644) 3,444,129
Notes payable 251,440 913,589 1,955,542 (1,686,142) 1,434,429
Acceptances outstanding 1,904 1,904
Other liabilities 39,433 198 27,889 398,500 (22,313) 443,707
- -----------------------------------------------------------------------------------------------------------------------------------
699,501 5,612 1,970,718 25,951,116 (3,508,256) 25,118,691
- -----------------------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000 125,000
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred beneficial interests in Popular
North America's junior subordinated
deferrable interest debentures
guaranteed by the Corporation 150,000 150,000
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 838 838
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000 100,000
Common stock 829,729 3,962 2 33,363 (37,327) 829,729
Surplus 249,238 485,676 439,964 1,335,995 (2,261,635) 249,238
Retained earnings 823,418 73,371 80,241 890,767 (1,044,379) 823,418
Treasury stock, at cost (66,214) (314) 314 (66,214)
Accumulated other comprehensive income
(loss), net of deferred taxes (100,437) (1,461) (196) (110,541) 112,198 (100,437)
- -----------------------------------------------------------------------------------------------------------------------------------
1,835,734 561,548 520,011 2,149,270 (3,230,829) 1,835,734
- -----------------------------------------------------------------------------------------------------------------------------------
$2,660,235 $567,160 $2,490,729 $28,250,386 $(6,738,247) $27,230,263
===================================================================================================================================
20
POPULAR, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Popular, Inc. PIBI PNA All other Eliminations Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 3,751 $ 40,362 $ 411,020 $ (62,332) $ 392,801
Money market investments 227 $ 4 143 20,861 (10,885) 10,350
Investment securities 264 1 189 112,896 (3,255) 110,095
Trading account securities 3,736 3,736
- -----------------------------------------------------------------------------------------------------------------------------------
4,242 5 40,694 548,513 (76,472) 516,982
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 131,170 (916) 130,254
Short-term borrowings 247 48 18,377 78,712 (24,720) 72,664
Long-term debt 6,456 20,098 64,891 (50,801) 40,644
- -----------------------------------------------------------------------------------------------------------------------------------
6,703 48 38,475 274,773 (76,437) 243,562
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (2,461) (43) 2,219 273,740 (35) 273,420
Provision for loan losses 55,259 55,259
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses (2,461) (43) 2,219 218,481 (35) 218,161
Service charges on deposit accounts 37,580 (43) 37,537
Other service fees 59,703 (60) 59,643
Gain on sale of securities 1,249 1,249
Trading account profit 27 750 777
(Loss) gain on derivatives (8,228) 88 (8,140)
Other operating income 4,434 609 24,438 (3,188) 26,293
- -----------------------------------------------------------------------------------------------------------------------------------
1,973 593 (6,009) 342,289 (3,326) 335,520
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 74 82,006 82,080
Profit sharing 3,986 3,986
Pension and other benefits 13 21,529 21,542
- -----------------------------------------------------------------------------------------------------------------------------------
87 107,521 107,608
Net occupancy expenses 3 17,971 17,974
Equipment expenses 24,148 24,148
Other taxes 245 8,890 9,135
Professional fees 181 3 247 16,904 (88) 17,247
Communications 13 12,168 12,181
Business promotion 13,414 13,414
Printing and supplies 4,269 4,269
Other operating expenses 29 19 106 17,553 (182) 17,525
Amortization of intangibles 6,858 6,858
- -----------------------------------------------------------------------------------------------------------------------------------
468 112 353 229,696 (270) 230,359
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority interest
and equity in earnings of subsidiaries 1,505 481 (6,362) 112,593 (3,056) 105,161
Income tax (2,189) 30,899 (758) 27,952
Net loss of minority interest 7 7
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of
subsidiaries 1,505 481 (4,173) 81,701 (2,298) 77,216
Equity in earnings of subsidiaries 75,711 5,105 9,292 5,598 (95,706)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 77,216 $ 5,586 $ 5,119 $ 87,299 $ (98,004) $ 77,216
===================================================================================================================================
21
POPULAR, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
Popular, Inc. PIBI PNA Other Elimination Popular, Inc.
Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 11,712 $ 47 $ 31,544 $ 415,715 $ (44,341) $ 414,677
Money market investments 292 8 37 33,691 (15,841) 18,187
Investment securities 678 1 178 127,514 (3,262) 125,109
Trading account securities 3,201 3,201
- -----------------------------------------------------------------------------------------------------------------------------------
12,682 56 31,759 580,121 (63,444) 561,174
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 146,356 (5,545) 140,811
Short-term borrowings 7,856 91 15,807 141,600 (25,597) 139,757
Long-term debt 6,492 17,523 40,002 (32,267) 31,750
- -----------------------------------------------------------------------------------------------------------------------------------
14,348 91 33,330 327,958 (63,409) 312,318
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (1,666) (35) (1,571) 252,163 (35) 248,856
Provision for loan losses 49,666 49,666
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses (1,666) (35) (1,571) 202,497 (35) 199,190
Service charges on deposit accounts 32,558 32,558
Other service fees 57,635 (142) 57,493
Gain on sale of securities 147 147
Trading account profit 259 259
Other operating income 2,668 757 29,517 (3,361) 29,581
- -----------------------------------------------------------------------------------------------------------------------------------
1,002 722 (1,571) 322,613 (3,538) 319,228
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 70 78,034 78,104
Profit sharing 5,197 5,197
Pension and other benefits 10 17,068 17,078
----------------------------------------------------------------------------------------------------------------------------------
80 100,299 100,379
Net occupancy expenses 3 17,607 17,610
Equipment expenses 1 25,354 (61) 25,294
Other taxes 452 8,055 8,507
Professional fees 95 3 174 15,609 (279) 15,602
Communications 4 11,657 11,661
Business promotion 9,694 9,694
Printing and supplies 5,351 5,351
Other operating expenses 21 14 17,290 (36) 17,289
Amortization of intangibles 8,829 8,829
- -----------------------------------------------------------------------------------------------------------------------------------
572 101 174 219,745 (376) 220,216
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax,
minority interest and equity in earnings
of subsidiaries 430 621 (1,745) 102,868 (3,162) 99,012
Income tax (236) (611) 29,322 (813) 27,662
Net gain of minority interest (58) (58)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of
subsidiaries 666 621 (1,134) 73,488 (2,349) 71,292
Equity in earnings of subsidiaries 70,626 5,963 7,604 4,066 (88,259)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 71,292 $ 6,584 $ 6,470 $ 77,554 $ (90,608) $ 71,292
===================================================================================================================================
22
POPULAR, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Popular, Inc. PIBI PNA All other Eliminations Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 18,102 $ 1,069 $ 115,958 $ 1,215,341 $ (172,263) $ 1,178,207
Money market investments 690 14 199 76,310 (38,531) 38,682
Investment securities 1,148 2 567 370,436 (9,756) 362,397
Trading account securities 11,554 11,554
- -----------------------------------------------------------------------------------------------------------------------------------
19,940 1,085 116,724 1,673,641 (220,550) 1,590,840
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 396,000 (1,947) 394,053
Short-term borrowings 1,117 198 51,591 307,979 (84,610) 276,275
Long-term debt 25,442 63,960 170,341 (133,886) 125,857
- -----------------------------------------------------------------------------------------------------------------------------------
26,559 198 115,551 874,320 (220,443) 796,185
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (6,619) 887 1,173 799,321 (107) 794,655
Provision for loan losses 154,755 154,755
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses (6,619) 887 1,173 644,566 (107) 639,900
Service charges on deposit accounts 108,547 (42) 108,505
Other service fees 175,856 (120) 175,736
Loss on sale of securities (50) (563) (613)
Trading account profit 26 123 149
Loss on derivatives (6,711) (408) (7,119)
Other operating income 9,835 1,018 73,053 (7,892) 76,014
- -----------------------------------------------------------------------------------------------------------------------------------
3,216 1,881 (5,538) 1,001,174 (8,161) 992,572
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 217 238,525 238,742
Profit sharing 13,101 13,101
Pension and other benefits 38 67,364 67,402
- -----------------------------------------------------------------------------------------------------------------------------------
255 318,990 319,245
Net occupancy expenses 9 52,886 52,895
Equipment expenses 72,850 72,850
Other taxes 1,149 26,605 27,754
Professional fees 1,112 6 357 47,251 (205) 48,521
Communications 29 36,124 36,153
Business promotion 37,118 37,118
Printing and supplies 13,078 13,078
Other operating expenses 77 41 319 53,675 (467) 53,645
Amortization of intangibles 20,594 20,594
- -----------------------------------------------------------------------------------------------------------------------------------
2,367 311 676 679,171 (672) 681,853
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority interest,
cumulative
Effect of accounting changes and equity in
earnings of Subsidiaries 849 1,570 (6,214) 322,003 (7,489) 310,719
Income tax (1,386) (2,202) 87,880 (1,852) 82,440
Net loss of minority interest 19 19
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting changes and equity in earnings
of subsidiaries 2,235 1,570 (4,012) 234,142 (5,637) 228,298
Cumulative effect of accounting changes 686 686
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of
subsidiaries 2,235 1,570 (4,012) 234,828 (5,637) 228,984
Equity in earnings of subsidiaries 226,749 14,313 18,691 16,286 (276,039)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 228,984 $ 15,883 $ 14,679 $ 251,114 $ (281,676) $228,984
===================================================================================================================================
23
POPULAR, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
Popular, Inc. PIBI PNA Other Elimination Popular, Inc.
Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 40,364 $ 336 $ 85,165 $ 1,186,945 $ (129,176) $ 1,183,634
Money market investments 643 77 178 86,177 (41,332) 45,743
Investment securities 1,624 1 533 359,421 (9,716) 351,863
Trading account securities 10,509 10,509
- -----------------------------------------------------------------------------------------------------------------------------------
42,631 414 85,876 1,643,052 (180,224) 1,591,749
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 414,487 (21,803) 392,684
Short-term borrowings 24,223 467 29,883 370,565 (68,872) 356,266
Long-term debt 23,330 142 60,793 110,967 (89,445) 105,787
- -----------------------------------------------------------------------------------------------------------------------------------
47,553 609 90,676 896,019 (180,120) 854,737
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (4,922) (195) (4,800) 747,033 (104) 737,012
Provision for loan losses 148,398 148,398
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses (4,922) (195) (4,800) 598,635 (104) 588,614
Service charges on deposit accounts 93,612 93,612
Other service fees 162,004 (1,702) 160,302
Gain on sale of securities 13,000 740 13,740
Trading account profit 1,617 1,617
Other operating income 8,066 1,082 73,301 (6,670) 75,779
- -----------------------------------------------------------------------------------------------------------------------------------
16,144 87 (4,800) 929,909 (8,476) 933,664
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 210 233,789 233,999
Profit sharing 14,897 14,897
Pension and other benefits 36 52,882 52,918
- -----------------------------------------------------------------------------------------------------------------------------------
246 301,568 301,814
Net occupancy expenses 9 50,337 50,346
Equipment expenses 1 73,923 (117) 73,807
Other taxes 898 24,525 25,423
Professional fees 296 6 480 51,443 (2,118) 50,107
Communications 7 34,490 34,497
Business promotion 36,353 36,353
Printing and supplies 15,836 15,836
Other operating expenses 70 39 51,949 (106) 51,952
Amortization of intangibles 25,958 25,958
- -----------------------------------------------------------------------------------------------------------------------------------
1,271 301 480 666,382 (2,341) 666,093
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority
interest and equity in earnings of subsidiaries 14,873 586 (5,280) 263,527 (6,135) 267,571
Income tax 3,492 (1,848) 68,059 (1,600) 68,103
Net loss of minority interest 1,136 1,136
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of
subsidiaries 11,381 586 (3,432) 196,604 (4,535) 200,604
Equity in earnings of subsidiaries 189,223 3,256 9,668 10,639 (212,786)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 200,604 $ 3,842 $ 6,236 $ 207,243 $ (217,321) $200,604
===================================================================================================================================
24
POPULAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD ENDED SEPTEMBER 31, 2001
Popular, Inc. PIBI PNA All other Eliminations Consolidated
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Popular, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 228,984 $ 15,883 $ 14,679 $ 251,114 $ (281,676) $ 228,984
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Equity in undistributed earnings
of subsidiaries (226,749) (14,313) (18,691) (16,286) 276,039
Depreciation and amortization of
premises and equipment 56,960 56,960
Provision for loan losses 154,755 154,755
Amortization of intangibles 20,594 20,594
Loss on sale of investment securities
available-for-sale 50 563 613
Net loss on derivatives 6,712 407 7,119
Loss on disposition of premises
and equipment 351 351
Gain on sale of loans (860) (860)
Net amortization of premiums and accretion
of discounts on investments 1,975 1,975
Net increase in loans held-for-sale (86,714) (86,714)
Net amortization of deferred loan fees
and costs (15,622) (15,622)
Net increase in trading securities (124,796) (124,796)
Net decrease (increase) in accrued
income receivable 828 588 (1,536) 12,525 272 12,677
Net (increase) decrease in other assets (2,544) (25,503) 5,519 36,117 (1,932) 11,657
Net decrease in interest payable (11,013) (213) (17,038) (45,120) (73,384)
Net (decrease) increase in deferred and
current taxes (34) 733 5,999 (1,442) 5,256
Net increase in postretirement benefit
obligation 3,012 3,012
Net increase (decrease) in other
liabilities 16,628 (8) (5,001) (287) (4,370) 6,962
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments (222,884) (39,399) (29,302) 3,573 268,567 (19,445)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 6,100 (23,516) (14,623) 254,687 (13,109) 209,539
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in money
market investments (5,150) 25 (58) 771,489 (690,703) 75,603
Purchases of investment securities
held-to-maturity (4,515,716) (4,515,716)
Maturities of investment securities
held-to-maturity 4,622,152 4,622,152
Purchases of investment securities
available-for-sale (7,829) (146) (3,295,726) (3,303,701)
Maturities of investment securities
available-for-sale 34 3,668,545 2,426 3,671,005
Sales of investment securities
available-for-sale 732,131 732,131
Net collections (disbursements) on loans 345,956 22,500 (652,368) (2,497,778) 1,400,949 (1,380,741)
Proceeds from sale of loans 404,760 404,760
Acquisition of loan portfolios (660,829) (660,829)
Capital contribution to subsidiary (1,998) (32) 2,030
Assets acquired, net of cash (123) (123)
Return of investment from subsidiary 300 (300)
Acquisition of premises and equipment (45,044) (45,044)
Proceeds from sale of premises
and equipment 3,180 3,180
Dividends received from subsidiary 71,250 (71,250)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 402,229 22,679 (652,424) (812,959) 643,152 (397,323)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 1,122,091 64,036 1,186,127
Net increase (decrease) in federal
funds purchased and securities sold under
agreements to repurchase 79,341 (1,044,389) (20,868) (985,916)
Net (decrease) increase in other
short-term borrowings (376,962) (1,050) 303,337 (1,707,128) 577,111 (1,204,692)
Net proceeds of notes payable 38,482 284,276 2,116,244 (1,285,928) 1,153,074
Dividends paid to parent company (71,250) 71,250
Dividends paid (77,041) (77,041)
Proceeds from issuance of common stock 7,116 7,116
Treasury stock sold 77 77
Return of investment to parent (300) 300
Capital contribution from parent 2,000 32 (2,032)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (408,405) 950 666,954 415,377 (596,131) 78,745
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and due from
banks (76) 113 (93) (142,895) 33,912 (109,039)
Cash and due from banks at beginning of period 283 18 288 822,672 (97,210) 726,051
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 207 $ 131 $ 195 $ 679,777 $ 63,298 $ 617,012
====================================================================================================================================
</Table>
25
POPULAR, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Popular, Inc. PIBI PNA Other Elimination Consolidated
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Popular, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 200,604 $ 3,842 $ 6,236 $ 207,243 $ (217,321) $ 200,604
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to cash (used in) provided by
operating activities:
Equity in undistributed earnings of
subsidiaries (189,223) (3,256) (9,668) (10,639) 212,786
Depreciation and amortization of
premises and equipment 57,339 57,339
Provision for loan losses 148,398 148,398
Amortization of intangibles 25,958 25,958
Gain on sale of investment
securities available-for-sale (13,000) (740) (13,740)
Loss on disposition of premises and
equipment 340 340
Gain on sale of loans (3,862) (3,862)
Net amortization of premiums and
accretion of discounts on investments 170 1,130 1,300
Net increase in loans held-for-sale (63,157) (63,157)
Net amortization of deferred loan fees
and costs 504 504
Net decrease in trading securities 72,966 72,966
Net (increase) decrease in accrued
income receivable (1,697) 146 (10,448) (24,574) 5,948 (30,625)
Net increase in other assets (8,485) (205) (1,854) (25,389) (367) (36,300)
Net increase (decrease) in interest
payable 5,664 (127) (16,787) 8,121 (3,129)
Net (decrease) increase in current and
deferred taxes (1,393) 170 (20,023) (21,246)
Net increase in postretirement benefit
obligation 4,516 4,516
Net increase (decrease) in other
liabilities 3,057 (129) 1,923 19,777 (7,404) 17,224
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments (205,077) (3,571) (36,494) 190,665 210,963 156,486
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating
activities (4,473) 271 (30,258) 397,908 (6,358) 357,090
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in money
market investments 26,563 2,955 21,456 (46,881) 87,571 91,664
Purchases of investment securities
held-to-maturity (4,857,246) (4,857,246)
Maturities of investment securities
held-to-maturity 4,779,569 4,779,569
Purchases of investment securities
available-for-sale (108,576) (257) (2,428,574) (2,537,407)
Maturities of investment securities
available-for-sale 87,956 1,779,696 (800) 1,866,852
Sales of investment securities
available-for-sale 89,611 89,611
Net collections (disbursements)
on loans 269,771 16,392 (312,741) (1,882,520) (7,485) (1,916,583)
Proceeds from sale of loans 711,375 711,375
Acquisition of loan portfolios (394,632) (394,632)
Capital contribution to subsidiary (15,574) (7,943) (94,868) 118,385
Assets acquired, net of cash (8,831) (8,831)
Acquisition of premises and
equipment (52,348) (52,348)
Proceeds from sale of premises and
equipment 12,308 12,308
Cash transferred due to sale of
investment in subsidiary (46,899) (46,899)
Dividends received from subsidiary 66,000 (66,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 326,140 11,404 (386,410) (2,345,372) 131,671 (2,262,567)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 160,003 404,808 564,811
Net increase in federal funds
purchased and securities sold under
agreements to repurchase 17,800 50,400 787,804 (33,840) 822,164
Net (decrease) increase in other
short-term borrowings (40,222) (20,304) 654,184 567,534 (291,700) 869,492
Net (payments) proceeds of notes
payable (233,276) (7,007) (287,822) 375,663 (222,786) (375,228)
Dividends paid to parent company (66,000) 66,000
Dividends paid (71,448) (71,448)
Proceeds from issuance of common
stock 7,450 7,450
Treasury stock acquired (2,064) (2,064)
Capital contribution from parent 15,450 84,735 (100,185)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (321,760) (11,861) 416,762 1,909,739 (177,703) 1,815,177
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and
due from banks (93) (186) 94 (37,725) (52,390) (90,300)
Cash and due from banks at beginning
of period 332 227 664 693,238 (30,765) 663,696
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end
of period $ 239 $ 41 $ 758 $ 655,513 $ (83,155) $ 573,396
====================================================================================================================================
</Table>
26
TABLE A
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, AVERAGE FOR THE NINE MONTHS
------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS 2001 2000 Change 2001 2000 Change
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Money market investments $ 993,015 $ 879,651 $ 113,364 $ 940,122 $ 932,578 $ 7,544
Investment and trading securities 8,316,660 8,520,136 (203,476) 8,310,532 7,945,071 365,461
Loans 17,632,274 16,237,687 1,394,587 16,800,193 15,674,947 1,125,246
Total assets 28,530,426 27,230,263 1,300,163 27,594,261 26,240,525 1,353,736
Deposits 16,000,236 14,557,878 1,442,358 15,316,240 14,447,585 868,655
Borrowings 9,747,704 10,390,202 (642,498) 9,732,669 9,434,291 298,378
Stockholders' equity 2,299,457 1,835,734 463,723 2,072,049 1,859,882 212,167
- ------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER NINE MONTHS
------------------------------------------------------------------------------------
OPERATING HIGHLIGHTS 2001 2000 Change 2001 2000 Change
(In thousands, except per share
information)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $273,420 $248,856 $ 24,564 $794,655 $737,012 $57,643
Provision for loan losses 55,259 49,666 5,593 154,755 148,398 6,357
Fees and other income 117,359 120,038 (2,679) 352,672 345,050 7,622
Other expenses, net of minority 258,304 247,936 10,368 764,274 733,060 31,214
interest
Cumulative effect of accounting changes,
net of tax 686 686
Net income $77,216 $71,292 $5,924 $228,984 $200,604 $28,380
Net income applicable to common stock $75,129 $69,205 $5,924 $222,722 $194,342 $28,380
Earnings per common share $0.55 $0.51 $0.04 $1.63 $1.43 $0.20
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED STATISTICAL INFORMATION THIRD QUARTER NINE MONTHS
-----------------------------------------------------------
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA - Market price
High $36.26 $27.06 $36.26 $27.06
Low 27.42 19.63 25.25 18.63
End 31.20 27.06 31.20 27.06
Book value at period end 16.14 12.77 16.14 12.77
Dividends declared 0.20 0.16 0.56 0.48
Dividend payout ratio 36.26% 31.42% 31.78% 33.54%
Price/earnings ratio 14.38x 14.24x 14.38X 14.24x
- ------------------------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS - Return on assets 1.10% 1.04% 1.11% 1.02%
Return on common equity 14.71 15.24 15.10 14.75
Net interest spread (taxable equivalent) 3.80 3.33 3.63 3.46
Net interest yield (taxable equivalent) 4.48 4.16 4.37 4.29
Effective tax rate 26.58 27.94 26.53 25.45
Overhead ratio 41.33 40.26 41.42 43.56
Efficiency ratio 58.04 61.27 59.04 62.98
- ------------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION RATIOS - Equity to assets 7.63% 6.99% 7.51% 7.09%
Tangible equity to assets 6.74 5.99 6.59 6.02
Equity to loans 12.22 11.69 12.33 11.87
Internal capital generation 9.01 9.95 9.42 9.26
Tier I capital to risk - adjusted assets 10.70 10.29 10.70 10.29
Total capital to risk - adjusted assets 12.68 12.33 12.68 12.33
Leverage ratio 6.91 6.29 6.91 6.29
- ------------------------------------------------------------------------------------------------------------------------------
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial review contains the analysis of the consolidated financial
position and financial performance of Popular, Inc. and its subsidiaries (the
Corporation) and should be read in conjunction with the consolidated financial
statements, tables and notes included in this report. The Corporation is a bank
holding company, which offers a wide range of products and services through its
subsidiaries and is engaged in the following businesses:
- Commercial Banking - Banco Popular de Puerto Rico (BPPR),
Banco Popular North America (BPNA) and Banco Popular, National
Association (BP, N.A.)
- Auto Loans and Lease Financing - Popular Auto, Inc.
(previously d/b/a Popular Leasing and Rental, Inc.) and
Popular Leasing, U.S.A.
- Mortgage and Consumer Lending - Popular Mortgage, Inc., Equity
One, Inc. Popular Finance, Inc. and Newco Mortgage Holding
Company (d/b/a Levitt Mortgage, Inc.)
- Broker / dealer - Popular Securities, Inc.
- Processing and Information Technology Services and Products -
GM Group, ATH Costa Rica and CreST, S.A.
- Retail Financial Services - Popular Cash Express, Inc.
- Insurance Agency- Popular Insurance, Inc.
NET INCOME
The Corporation reported net income of $77.2 million for the third quarter of
2001, compared with $71.3 million for the same quarter of 2000. Earnings per
common share (EPS) for the quarter were $0.55, based on 136,277,273 average
shares outstanding, compared to $0.51 reported on the third quarter of 2000,
based on 135,971,955 average shares outstanding. Return on assets (ROA) and
return on common equity (ROE) for the quarter ended September 30, 2001 was 1.10%
and 14.71%, respectively, compared with 1.04% and 15.24% for the same period in
2000.
The Corporation's results of operations for the quarter ended September 30, 2001
reflected an increase of $24.6 million in net interest income, compared with the
same quarter the prior year. This improvement was partially offset by a decline
of $2.7 million in other revenues, together with rises of $5.6 million in the
provision for loan losses and $10.1 million in operating expenses.
For the first nine months of 2001, the Corporation's net earnings rose to $229.0
million, compared with $200.6 million for the same period in 2000. EPS for the
first nine months of 2001 and 2000 were $1.63 and $1.43, based on average shares
outstanding of 136,193,360 and 135,871,832, respectively. ROA and ROE for the
period ended September 30, 2001 were 1.11% and 15.10%, respectively, compared
with 1.02% and 14.75% for the same period last year.
NET INTEREST INCOME
Net interest income for the third quarter of 2001 reached $273.4 million, an
increase of 10% when compared with $248.8 million in the same period of 2000. On
a taxable equivalent basis, net interest income increased to $294.1 million,
from $265.1 million in the same quarter of 2000.
The improvement of $29.0 million in net interest income on a taxable equivalent
basis from the third quarter of 2000 resulted from a $29.1 million increase due
to a higher net interest yield, partially offset by a $0.1 million decrease due
to levels. For analytical purposes, the interest earned on tax-exempt assets is
adjusted to a taxable equivalent basis assuming the applicable statutory income
tax rates.
28
Table B summarizes the changes in the composition of average earning assets and
interest bearing liabilities, and their respective interest income and expense,
and yields and costs, on a taxable equivalent basis, for the third quarter of
2001, as compared with the same quarter in 2000.
TABLE B
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE
EQUIVALENT BASIS
QUARTER ENDED ON SEPTEMBER 30,
Variance
Average Volume Average Yields Interest Attributable to
- ---------------------------------------------------- --------------------------------------------------
2001 2000 Variance 2001 2000 Variance 2001 2000 Variance Rate Volume
- ---------------------------------------------------- --------------------------------------------------
($ in millions) (in thousands)
$ 920 $ 1,033 $ (113) 4.46% 7.00% (2.54)% Money market investments $ 10,351 $ 18,187 $ (7,836) $ (6,136) $(1,700)
7,729 8,035 (306) 6.67 6.92 (0.25) Investment securities 128,898 139,195 (10,297) (3,125) (7,172)
274 176 98 5.53 7.37 (1.84) Trading 3,824 3,255 569 (942) 1,511
- --------------------------------------------------- --------------------------------------------------
8,923 9,244 (321) 6.40 6.94 (0.54) 143,073 160,637 (17,564) (10,203) (7,361)
- --------------------------------------------------- --------------------------------------------------
Loans:
7,547 7,399 148 7.84 9.88 (2.04) Commercial 149,182 183,726 (34,544) (38,172) 3,628
846 777 69 11.82 12.75 (0.93) Leasing 24,994 24,776 218 (1,880) 2,098
5,790 4,559 1,231 8.04 8.27 (0.23) Mortgage 116,388 94,282 22,106 (2,694) 24,800
3,215 3,574 (359) 12.91 12.74 0.17 Consumer 104,095 114,037 (9,942) 3,800 (13,742)
- --------------------------------------------------- --------------------------------------------------
17,398 16,309 1,089 9.04 10.19 (1.15) 394,659 416,821 (22,162) (38,946) 16,784
- --------------------------------------------------- --------------------------------------------------
$26,321 $25,553 $ 768 8.15% 9.02% (0.87)% TOTAL EARNING ASSETS $537,732 $577,458 $(39,726) ($49,149) $9,423
=================================================== ==================================================
Interest bearing deposits:
$ 2,096 $ 1,932 $ 164 3.03% 3.93% (0.90)% NOW and money market $ 16,004 $19,098 $(3,094) ($4,386) $1,292
4,182 4,022 160 2.78 2.75 0.03 Savings 29,308 27,845 1,463 190 1,273
6,478 5,812 666 5.20 6.43 (1.23) Time deposits 84,942 93,868 (8,926) (17,635) 8,709
- --------------------------------------------------- --------------------------------------------------
12,756 11,766 990 4.05 4.76 (0.71) 130,254 140,811 (10,557) (21,831) 11,274
- --------------------------------------------------- --------------------------------------------------
6,941 8,177 (1,236) 4.15 6.80 (2.65) Short-term borrowings 72,664 139,757 (67,093) (55,379) (11,714)
2,508 1,878 630 6.44 6.73 (0.29) Medium and long-term debt 40,644 31,750 8,894 (1,111) 10,005
- --------------------------------------------------- --------------------------------------------------
TOTAL INTEREST-BEARING
22,205 21,821 384 4.35 5.69 (1.34) LIABILITIES 243,562 312,318 (68,756) (78,321) 9,565
3,048 3,004 44 Demand deposits
1,068 728 340 Other sources of funds
- --------------------------------------------------- --------------------------------------------------
$26,321 $25,553 $ 768 3.67% 4.86% (1.19)%
===================================================
4.48% 4.16% 0.32% NET INTEREST MARGIN
=========================
NET INTEREST INCOME ON A
TAXABLE EQUIVALENT BASIS $294,170 $265,140 $ 29,030 $ 29,172 $ (142)
3.80% 3.33% 0.47% NET INTEREST SPREAD =================
=========================
Taxable equivalent
adjustment 20,750 16,284 4,466
------------------------------
Net interest income $273,420 $248,856 $24,564
==============================
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.
- --------------------------------------------------------------------------------
Average earning assets for the quarter ended September 30, 2001 increased by
$768 million from the same quarter in 2000, primarily due to a rise of $1.1
billion in average loans, mainly mortgage. Partially offsetting the increase in
loans, was the decrease in average investment securities of $306 million
compared with the third quarter in 2000.
The mortgage loan volume was favorably impacted by the current interest rate
environment, which has stimulated the market for new volume and refinancing
activity. Average mortgage loans for the quarter just ended rose 27% compared
with the same period in prior year. Also, the average commercial loan portfolio
increased $148 million compared with the same quarter in 2000. The rise resulted
from the Corporation's business growth in both the retail and middle markets. On
the other hand, consumer loans decreased by $359 million or 10% when compared
with the third quarter of 2000, partly related to the sale of the U.S. credit
card portfolio in 2000, which approximated $107 million in average balances for
the quarter ended September 30, 2000. Also, the decrease is due to lower demand
for personal loans
29
resulting from the slowdown in the economy, coupled with higher mortgage
refinancing activity prompted by the lower interest rate scenario.
The average yield on earning assets, on a taxable equivalent basis, declined 87
basis points from 9.02% in the third quarter of 2000 to 8.15% during the third
quarter of 2001. This reduction is attributed to the lower interest rate
scenario that has prevailed during the three months ended September 30, 2001, as
compared with the same period last year, which affected principally commercial
loans due to their volatility related to interest rates, and the lease financing
portfolio. Also, the decrease in yield is related to the higher proportion of
mortgages, which carry a lower yield, and to the lower yields related to fed
funds, resale agreements and investment securities, which have also been
negatively impacted by the further declines in interest rates.
The increase of $384 million in the average balance of interest bearing
liabilities for the third quarter of 2001, as compared with the same quarter in
2000, was mostly reflected in average interest bearing deposits, which grew by
$990 million or 8%. Lower borrowing levels offset this rise. The increase in
average interest bearing deposits was mostly in time deposits, which rose 11%
compared with the third quarter of 2000. Within this category, brokered deposits
increased $305 million, from an average of $423 million in the third quarter of
2000.
The average cost of interest bearing liabilities decreased 134 basis points when
compared with the same quarter of 2000. The reduction is mostly attributed to
the interest rate scenario, which resulted in a lower cost of short-term
borrowed money by 265 basis points or $55.4 million and interest bearing
deposits by 71 basis points or $21.8 million.
The Corporation's taxable equivalent net interest margin for the third quarter
of 2001 was 4.48%, compared with 4.16% in the same quarter of 2000. The increase
was mostly attributed to a larger reduction in the cost of funding earning
assets compared with the reduction in their yields, principally as a result of
the Corporation's assets and liabilities positioning at the beginning of the
Federal Reserve's easing cycle, having a larger proportion of liabilities
repricing faster than assets.
For the nine-month period ended September 30, 2001, net interest income, on a
taxable equivalent basis, rose $65.3 million, compared with the same period of
2000. The improvement resulted from a $32.4 million increase due to volume and
$32.9 million increase due to a higher taxable equivalent net interest yield.
As shown in Table C, average earning assets rose by $1.5 billion for the
nine-month period ended September 30, 2001, compared with the same period in
2000. The increase in average mortgage loans for the period of $1.0 billion,
represented 67% of the rise in average earning assets. Average interest bearing
liabilities rose $1.2 billion when compared with the nine-month period ended
September 30, 2000, mostly in time deposits, which represented $646 million or
54% of the rise compared with the first nine months of 2000. Most of this rise
was in brokered deposits, which for the nine-month period ended September 30,
2001 averaged $406 million higher than in 2000.
30
TABLE C
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE
EQUIVALENT BASIS
NINE MONTHS ENDED SEPTEMBER 30,
Variance
Average Volume Average Yields Interest Attributable to
- ------------------------------------------------------- ------------------------------------------------------
2001 2000 Variance 2001 2000 Variance 2001 2000 Variance Rate Volume
- ------------------------------------------------------- ------------------------------------------------------
($ in millions) (in thousands)
Money market
$ 940 $ 933 $ 7 5.50% 6.55% (1.05)% investments $ 38,682 $ 45,743 $ (7,061) $ (7,442) $ 381
Investment
8,056 7,740 316 6.91 6.82 0.09 securities 417,431 395,661 21,770 4,988 16,782
255 205 50 6.18 7.40 (1.22) Trading 11,770 11,340 430 (2,049) 2,479
- ------------------------------------------------------ ------------------------------------------------------
9,251 8,878 373 6.75 6.80 (0.05) 467,883 452,744 15,139 (4,503) 19,642
- ------------------------------------------------------- ------------------------------------------------------
Loans:
7,430 7,211 219 8.45 9.67 (1.22) Commercial 469,560 522,175 (52,615) (68,124) 15,509
840 753 87 11.68 12.21 (0.53) Leasing 73,565 68,931 4,634 (3,117) 7,751
5,279 4,278 1,001 8.21 8.30 (0.09) Mortgage 324,907 266,325 58,582 (3,050) 61,632
3,251 3,433 (182) 12.95 13.00 (0.05) Consumer 315,516 334,512 (18,996) 3,134 (22,130)
- ------------------------------------------------------- ------------------------------------------------------
16,800 15,675 1,125 9.41 10.15 (0.74) 1,183,548 1,191,943 (8,395) (71,157) 62,762
- ------------------------------------------------------- ------------------------------------------------------
TOTAL EARNING
$26,051 $24,553 $1,498 8.46% 8.94% (0.48)% ASSETS $1,651,431 $1,644,687 $ 6,744 $ (75,660) $ 82,404
======================================================= ======================================================
Interest bearing
deposits:
NOW and money
$ 2,025 $ 1,783 $242 3.25% 3.59% (0.34%) market $ 49,203 $ 47,954 $ 1,249 $ (4,870) $ 6,119
4,135 4,133 2 2.82 2.90 (0.08) Savings 87,322 89,572 (2,250) (2,875) 625
6,128 5,482 646 5.62 6.22 (0.60) Time deposits 257,528 255,158 2,370 (23,005) 25,375
- ------------------------------------------------------- ------------------------------------------------------
12,288 11,398 890 4.29 4.60 (0.31) 394,053 392,684 1,369 (30,750) 32,119
- ------------------------------------------------------- ------------------------------------------------------
Short-term
7,234 7,375 (141) 5.11 6.45 (1.34) borrowings 276,275 356,266 (79,991) (76,167) (3,824)
Medium and
2,499 2,059 440 6.73 6.86 (0.13) long-term debt 125,857 105,787 20,070 (1,657) 21,727
- ------------------------------------------------------- ------------------------------------------------------
22,021 20,832 1,189 4.83 5.48 (0.65) TOTAL
INTEREST-BEARING
LIABILITIES 796,185 854,737 (58,552) (108,574) 50,022
3,028 3,050 (22) Demand deposits
Other sources of
1,002 671 331 funds
- ------------------------------------------------------- ------------------------------------------------------
$26,051 $24,553 $1,498 4.09% 4.65% (0.56)%
=======================================================
4.37% 4.29% 0.08% NET INTEREST MARGIN
========================== NET INTEREST INCOME
ON A TAXABLE
EQUIVALENT BASIS $ 855,246 $ 789,950 $ 65,296 $ 32,914 $ 32,382
==================
3.63% 3.46% 0.17% NET INTEREST SPREAD
==========================
Taxable
equivalent
adjustment 60,591 52,938 7,653
--------------------------------
Net interest income $ 794,655 $ 737,012 $ 57,643
================================
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.
- ------------------------------------------------------------------------------
The net interest margin on a taxable equivalent basis for the nine-month period
ended September 30, 2001 was 4.37%, compared with 4.29% for the same period in
2000.
MARKET RISK
Market risk is the risk of economic loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates,
commodity prices, and other relevant market or price changes. The Corporation's
primary market risk exposure is to interest rates, as primarily interest rate
volatility and its impact on the repricing of assets and liabilities affect the
net interest income. The Corporation maintains a formal asset and liability
management process to quantify, monitor and control interest rate risk and to
assist management in maintaining stability in the net interest margin under
varying interest rate environments.
31
The Corporation uses various techniques to assess the degree of interest rate
risk, including static gap analysis, simulation and duration analysis. Each
focuses on different aspects of the interest rate risk that is assumed at any
point in time, and are therefore used jointly to make informed judgements about
the risk levels and the appropriateness of strategies under consideration. An
interest rate sensitivity analysis, performed at the Corporation level, is the
primary tool used in expressing the potential improvement or 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, loan prepayments and deposit decay. 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 choices are only estimates and may be
different from what actually may occur in the future.
Based on the results of the sensitivity analysis as of September 30, 2001, the
change in net interest income on a hypothetical rising rate scenario for the
next twelve months was a $1.3 million decrease and the change for the same
period utilizing a hypothetical declining rate scenario was an increase of $0.6
million. Both hypothetical rate scenarios consider a gradual change of 150 basis
points during the twelve-month period. These estimated changes are well within
the policy guidelines established by the Board.
In managing its market risk the Corporation enters, to a limited extent, into
certain financial derivative instruments primarily interest rate swaps, interest
rate forwards and future contracts, interest rate swaptions, foreign exchange
contracts, and interest-rate caps, floors and put options embedded in interest
bearing contracts. Refer to Note 5 to the consolidated financial statements for
further information on the Corporation's derivative transactions.
The Corporation conducts business in the Latin American markets through several
of its processing and information technology services and products subsidiaries.
Also, it holds an equity interest in ATH Dominicana and Centro Financiero BHD,
S.A. in the Dominican Republic. Although not significant, some of these
businesses are conducted in the country's particular foreign currency. However,
management does not expect future exchange volatility between the U.S. dollar
and the particular foreign currency to affect significantly the value to the
Corporation's investment in these companies.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses for the third quarter of 2001 amounted to $55.3
million, up $5.6 million or 11% when compared with the same period of 2000. For
the nine-month period ended September 30, 2001, the provision totaled $154.8
million, an increase of $6.4 million or 4% compared with the same period in
prior year. The higher provision for loan losses during this quarter was
principally attributed to rises in non-performing loans and weak economic
conditions, heightened by the impact of the September 11th events in the United
States. The provision for loan losses for the first nine months of 2001 exceeded
by $35 million or 29% the reported net charge-offs for the period. Refer to the
"Allowance for Loan Losses" and "Credit Quality" discussions for information
regarding net credit losses, credit quality statistics and other items, which
impacted the provision for loan losses.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level, which is considered by
management to be sufficient to provide for estimated losses based on evaluations
of known and 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 the portfolio risk
characteristics, the results of periodic credit reviews of individual loans,
value of the collateral, prior loss experience, and prevailing economic
conditions and loan impairment measurement, among other factors.
32
Table D summarizes the movement in the allowance for loan losses and presents
certain key ratios for the quarter and nine-month periods ended September 30,
2001 and 2000.
TABLE D
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
THIRD QUARTER NINE MONTHS
(Dollars in thousands) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 313,337 $ 305,526 $290,653 $ 292,010
Allowance purchased (sold) 259 (17,468)
1,263 (15,987)
Provision for loan losses 55,259 49,666 154,755 148,398
----------------------------------------------------------------------
368,855 337,724 446,671 424,421
----------------------------------------------------------------------
Losses charged to the allowance:
Commercial 20,213 19,940 54,207 55,064
Construction 4 0 2,623 145
Lease financing 12,685 6,617 32,565 22,589
Mortgage 2,286 1,188 5,873 3,380
Consumer 24,596 30,615 75,268 92,324
----------------------------------------------------------------------
59,784 58,360 170,536 173,502
----------------------------------------------------------------------
Recoveries:
Commercial 4,241 3,969 12,019 12,430
Construction 0 6 0 6
Lease financing 7,040 5,462 19,774 13,217
Mortgage 242 214 440 395
Consumer 6,036 6,162 18,262 18,210
----------------------------------------------------------------------
17,559 15,813 50,495 44,258
----------------------------------------------------------------------
Net loans charged-off (recovered):
Commercial 15,972 15,971 42,188 42,634
Construction 4 (6) 2,623 139
Lease financing 5,645 1,155 12,791 9,372
Mortgage 2,044 974 5,433 2,985
Consumer 18,560 24,453 57,006 74,114
----------------------------------------------------------------------
42,225 42,547 120,041 129,244
----------------------------------------------------------------------
Balance at end of period $ 326,630 $ 295,177 $326,630 $ 295,177
======================================================================
Ratios:
Allowance for losses to loans 1.85% 1.82% 1.85% 1.82%
Allowance to non-performing assets 74.88 85.85 74.88 85.85
Allowance to non-performing loans 80.27 91.57 80.27 91.57
Non-performing assets to loans 2.47 2.12 2.47 2.12
Non-performing assets to total
assets 1.53 1.26 1.53 1.26
Net charge-offs to average loans 0.97 1.04 0.95 1.10
Provision to net charge-offs 1.31 x 1.17 x 1.29 x 1.15 x
Net charge-offs earnings coverage 3.80 3.49 3.88 3.22
Net charge-offs for the third quarter of 2001 totaled $42.2 million or 0.97% of
average loans, compared with $42.5 million or 1.04% of average loans in the same
quarter of 2000.
Consumer loans net charge-offs decreased $5.9 million or 24% for the quarter
ended September 30, 2001, compared with the same quarter of 2000. These net
charge-offs represented 2.31% of average consumer loans for the quarter ended
September 30, 2001, compared with 2.74% for the same quarter last year. The
decline was mostly due to the fact that the third quarter of 2000 included
approximately $2.7 million of net charge-offs related to the U.S. credit card
portfolio, which was sold in August 2000. Also, the credit environment has
prompted the Corporation to tighten its credit criteria for unsecured consumer
borrowings and to set objective standards to price loans according to risk
levels.
33
Commercial and construction loans net charge-offs for this quarter remained
steady from the third quarter of 2000. As a percentage of average commercial and
construction loans, these net credit losses declined from 0.86% in the third
quarter of 2000, to 0.85% in 2001.
The aforementioned decline in net charge-offs in the consumer loan portfolio for
the quarter ended September 30, 2001, was partially offset by increases in net
charge-offs in the lease financing and mortgage portfolios. Lease financing net
charge-offs totaled $5.6 million or 2.67% of the average lease financing
portfolio for the quarter ended September 30, 2001, compared with $1.2 million
or 0.59% for the same period in 2000. The increase reflected the rise in the
portfolio and a higher level of delinquencies due to the deteriorated economy.
Mortgage loans net charge-offs increased to $2.0 million or 0.14% of average
mortgage loans for the third quarter of 2001, from $1.0 million or 0.09% in the
same period a year earlier.
Net charge-offs for the nine-month period ended September 30, 2001, reached
$120.0 million or 0.95% of average loans, compared with $129.2 million or 1.10%
for the same period in 2000.
Consumer loans net charge-offs totaled $57.0 million or 2.34% of average
consumer loans for the nine-month period ended September 30, 2001, compared with
$74.1 million or 2.88% in the same period of 2000. The U.S. credit card
operations portfolio had $9.2 million in net charge-offs when it was sold in
August 2000. Also, as explained above, the Corporation has tightened its credit
criteria for unsecured consumer loans.
Lease financing net charge-offs totaled $12.8 million or 2.03% of the average
lease financing portfolio for the first nine months of 2001, compared with $9.4
million or 1.66% for the same period last year. The rise resulted from the
increase in the portfolio and higher delinquencies due to economic conditions,
partially offset by a $2.5 million charge-off recorded in the nine-month period
ended September 30, 2000 related to an external fraud scheme unveiled in the
U.S. operations that year.
Commercial and construction loans net charge-offs for the nine-month period
increased by $2.0 million compared with the same period last year. They
represented 0.80% of the average balance of those loans for the nine-months
ended September 30, 2001, compared with 0.79% for the same period last year.
Mortgage loans net charge-offs increased to $5.4 million or 0.14% of average
mortgage loans for the first nine months of 2001, from $3.0 million or 0.09% for
the same period in prior year.
The allowance for loan losses at September 30, 2001, amounted to $327 million or
1.85% of loans compared with $295 million or 1.82% at September 30, 2000. At
December 31, 2000, the allowance for loan losses totaled $291 million or 1.81%
of loans.
34
CREDIT QUALITY
Non-performing assets consist of past-due loans that are no longer accruing
interest and real estate property acquired through foreclosure. A summary of
non-performing assets by loan categories and related ratios is presented in
Table E.
TABLE E
NON-PERFORMING ASSETS
- -----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
2001 2000 2000
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial, construction, industrial and
agricultural $209,354 $172,402 $168,039
Lease financing 10,243 7,152 12,987
Mortgage 149,204 99,861 93,047
Consumer 38,131 43,814 48,269
Other real estate 29,257 23,518 21,494
--------------------------------------------------------
Total $436,189 $346,747 $343,836
========================================================
Accruing loans past-due 90 days or more $ 22,789 $ 21,599 $ 24,960
========================================================
Non-performing assets to loans 2.47% 2.16% 2.12%
Non-performing assets to total assets 1.53 1.24 1.26
The Corporation's policy is to place commercial loans on non-accrual status if
payments of principal or interest are delinquent 60 days rather than the
standard industry practice of 90 days. Financing leases, conventional mortgages
and close-end consumer loans are placed on non-accrual status if payments are
delinquent 90 days. Closed-end consumer loans are charged-off when payments are
delinquent 120 days. Open-end (revolving credit) consumer loans are charged-off
when payments are delinquent 180 days. Certain loans which would be treated as
non-accrual loans pursuant to the foregoing policy, are treated as accruing
loans if they are considered well-secured and in the process of collection.
Under the standard industry practice, close-end consumer loans are charged-off
when delinquent 120 days, but are not customarily placed on non-accrual status
prior to being charged-off.
During 2000, the Corporation adopted the revised Uniform Retail Credit
Classification and Account Management Policy issued by the Federal Financial
Institutions Examination Council (FFIEC) on February 10, 1999. The revised
policy requires that unsecured retail loans to borrowers who declare bankruptcy
are charged-off within 60 days of receipt of notification of filing from the
bankruptcy court, or within the charge-off time frames adopted in the
classification policy, whichever is shorter. Also, the revised policy details
criteria that must be met before the Corporation may consider a delinquent
open-end loan current, such as in the process of account re-aging, extension and
deferral.
Non-performing assets were $436 million or 2.47% of loans at September 30, 2001,
compared with $344 million or 2.12% at the same date last year and $347 million
or 2.16% at December 31, 2001. The increase in non-performing assets since
September 30, 2000, and December 31, 2001, was mostly reflected in mortgage
loans, which grew by $56 million and $49 million, from each respective date.
Non-performing mortgage loans amounted to $149 million or 34% of non-performing
assets as of September 30, 2001. Commercial non-performing loans also increased
by $41 million and $37 million as of September 30, 2000 and December 31, 2001,
respectively.
Non-performing mortgage loans, represented 2.47% of mortgage loans as of the end
of the third quarter of 2001, compared with 2.15% at the end of 2000.
Non-performing commercial and construction loans represented 2.77% of that
portfolio at September 30, 2001,
35
compared with 2.37% at the end of 2000. The increase was principally due to the
current economic slowdown, worsened by the impact of the terrorist attacks.
Non-performing consumer loans represented 1.20% of consumer loans as of
September 30, 2001, compared with 1.32% as of December 31, 2000. The decrease in
the ratio results partly due to a tightening in the Corporation's credit
approval standards for unsecured consumer loans. Non-performing financing leases
were 1.20% of the lease financing portfolio as of September 30, 2001, compared
with 0.88% as of December 31, 2000, reflecting higher delinquencies.
At September 30, 2001, the allowance for loan losses as a percentage of
non-performing loans was 80.27% compared with 91.57% at September 30, 2000 and
89.92% at December 31, 2000. The lower allowance to non-performing loans ratio
reflects the changing composition of the loan portfolio, as most of its growth
was realized in mortgage loans, which historically represents a low-risk
portfolio with minimal losses. Mortgage loans comprised 89% of total loan growth
since December 31, 2000. The Corporation, based on historical experience and
current economic conditions, does not foresee significant losses in the mortgage
portfolio. Excluding non-performing mortgage loans, the allowance for loan
losses to non-performing loans was 126.73% as of September 30, 2001, compared
with 128.73% and 130.12% as of September 30, 2000, and December 31, 2000,
respectively.
In the third quarter of 2001, Banco Popular North America experienced an
increase in non-performing loans in most of the industry sectors represented in
its commercial loan portfolio, due to the economic downturn in the U.S. economy,
which was heightened by the negative impact of the recent events of September
11th. As of September 30, 2001, BPNA had no significant concentrations of loans
in any single industry and the increase experienced in non-performing loans was
spread out throughout all geographical regions in which the subsidiary operates.
Non-performing loans as of the end of this quarter included $8 million of the
New York City taxicab medallion portfolio. This portfolio aggregated $288
million at September 30, 2001, which approximated 1.6% of the Corporation's loan
portfolio. This industry, which had already been experiencing high volatility in
the market value of the taxicab medallions, was adversely impacted by the recent
events in New York City. The Corporation expects to provide the taxicab
medallion owners, in coordination with the New York City Economic Development
Corporation and the U.S. Small Business Administration, a disaster relief loan
program, which will provide cash flow relief to the affected taxicab medallion
owners. As a result and due to the fact that these loans are secured by
collateral, the Corporation does not expect any significant loss in this
portfolio.
The Corporation has defined impaired loans as loans with interest and/or
principal past due 90 days or more and other specific loans for which, 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.
Loan impairment is measured based on the present value of the expected future
cash flows discounted at the loan's effective rate, on the observable market
price of the loan, or on the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment based on past experience adjusted for
current conditions. Larger balance commercial loans are evaluated on a
loan-by-loan basis. Once a specific measurement methodology is chosen, it is
consistently applied unless there is a significant change in the financial
position of the borrower. An impaired loan for which the discounted cash flows,
collateral value or market price is less than its carrying value requires an
allowance. The allowance for impaired loans is part of the Corporation's overall
allowance for loan losses. The Corporation's management evaluates the adequacy
of the allowance for loan losses on a monthly basis.
The following table shows the Corporation's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 (as
amended by SFAS No. 118) at September 30, 2001, December 31, 2000 and September
30, 2000.
SEPTEMBER 30, 2001 December 31, 2000 September 30, 2000
(In millions)
RECORDED VALUATION Recorded Valuation Recorded Valuation
INVESTMENT ALLOWANCE Investment Allowance Investment Allowance
----------------------------------------------------------------------------
Impaired loans:
Valuation allowance required $111 $46 $113 $27 $137 $32
No valuation allowance required 53 42 39
-----------------------------------------------------------------------
Total impaired loans $164 $46 $155 $27 $176 $32
-----------------------------------------------------------------------
36
Average impaired loans during the third quarter of 2001 and 2000 were $174
million and $171 million, respectively. The Corporation recognized interest
income on impaired loans of $0.8 million and $1.0 million, respectively, during
the quarters ended September 30, 2001 and 2000.
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, the
Corporation's non-performing assets as of September 30, 2001, would have been
$350 million or 1.98% of loans, and the allowance for loan losses would have
been 93.35% of non-performing assets. At September 30, 2000 and December 31,
2000, adjusted non-performing assets would have been $266 million or 1.64% of
loans and $273 million or 1.70% of loans, respectively, and the allowance to
non-performing assets would have been 111.09% and 106.49%, respectively.
NON-INTEREST INCOME
A breakdown of non-interest income categories is presented in Table F.
TABLE F
NON-INTEREST INCOME
Third Quarter Year-to-Date
- ----------------------------------------------------------------------------------------------------------------------------
2001 2000 Change 2001 2000 Change
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service charges on deposit accounts $ 37,537 $ 32,558 $ 4,979 $ 108,505 $ 93,612 $ 14,893
--------------------------------------------------------------------------
Other service fees:
Credit cards fees and discounts 14,782 15,652 (870) 42,040 48,327 (6,287)
Debit card fees 9,192 8,116 1,076 28,123 20,307 7,816
Processing fees 9,410 8,005 1,405 27,833 21,034 6,799
Other fees 6,126 9,401 (3,275) 19,202 25,335 (6,133)
Sale and administration of investment
products 5,320 4,172 1,148 15,027 12,669 2,358
Insurance fees 4,989 2,845 2,144 13,558 5,667 7,891
Check cashing fees 4,517 3,523 994 13,883 10,734 3,149
Mortgage servicing fees, net of amortization 2,966 3,448 (482) 8,982 9,162 (180)
Trust fees 2,341 2,331 10 7,088 7,067 21
--------------------------------------------------------------------------
Subtotal other service fees 59,643 57,493 2,150 175,736 160,302 15,434
--------------------------------------------------------------------------
Other operating income 26,293 29,581 (3,288) 76,014 75,779 235
--------------------------------------------------------------------------
Total operating income 123,473 119,632 3,841 360,255 329,693 30,562
--------------------------------------------------------------------------
Gain (loss) on sale of securities 1,249 147 1,102 (613) 13,740 (14,353)
Trading account profit 777 259 518 149 1,617 (1,468)
Loss on derivatives (8,140) (8,140) (7,119) (7,119)
--------------------------------------------------------------------------
Total non-interest income $ 117,359 $ 120,038 $ (2,679) $ 352,672 $345,050 $ 7,622
==========================================================================
Non-interest income, excluding securities, trading and derivative transactions,
for the quarter ended September 30, 2001 amounted to $123.5 million, an increase
of $3.8 million or 3% compared with the same quarter in 2000.
Service charges on deposit accounts for the quarter just ended increased $5.0
million or 15% when compared with the third quarter of 2000. This rise is mostly
related to commercial accounts, particularly non-balance compensation accounts,
which have been favorably impacted by a lower earnings credit and higher
transaction volume. Also, the increase relates to certain external payments and
lockbox fees, previously accounted for in the category of other fees, and
beginning in 2001 they are being included in the deposit account analysis for
certain commercial customers. The growth in service charges is also related to
fees on deposit accounts implemented during the latter part of 2000, including
charges for daily and electronic transactions overdrafts, and to certain ATM
usage fees, which commenced in mid-2001.
37
Other service fees, for the third quarter of 2001, increased $2.2 million or 4%
compared with the same period in prior year. Insurance fees, the principal
contributor to this favorable variance, increased $2.1 million or 75%, mostly
attributed to higher insurance commissions generated by Popular Insurance, which
began operating shortly after midyear 2000. Processing and debit card fees
combined increased $2.5 million or 15%, resulting from the growing volume of
point-of-sale terminals and automated teller machine (ATM's) transactions
processed. Fees on the sale and administration of investment products rose $1.1
million or 28% due to higher commissions derived from the retail business. The
rise in check cashing fees of $1.0 million or 28% is associated with the
expansion of the Corporation's retail financial services subsidiary in the
United States. On the other hand, credit card fees and discounts decreased
mainly due to income no longer derived as a result of the sale of U.S. credit
card operations. For the quarter ended September 30, 2000, these operations
contributed approximately $3.5 million in other service fees. The decrease in
the category of other fees was partly due to the partial reclassification of
external payment and lockbox fees to the category of service charges on deposit
accounts as previously explained.
For the quarter ended September 30, 2001, the Corporation had a decrease of $3.3
million or 11% in other operating income, compared with the third quarter
results in 2000. The decline was mostly the result of last year's pretax gain
realized on the sale of the Corporation's U.S. credit card operations of $8.5
million in the third quarter of 2000. These decreases were partially offset by
higher gains on the sale of mortgage loans held-for-sale and higher dividend
income derived from the Corporation's investment in Telecomunicaciones de Puerto
Rico, Inc. (TELPRI).
For the third quarter of 2001, the Corporation recognized profits of $0.8
million in trading account transactions and gains of $1.2 million in the sale of
securities, compared with $0.3 million and $0.1 million, respectively, for the
third quarter of 2000. Also, for the quarter just ended, the Corporation
recognized losses on derivatives amounting to $8.1 million. These losses result
primarily from adjustments to the market value of interest rate swaps, that were
negatively impacted by declines in interest rates during the quarter.
For the nine-month period ended September 30, 2001, non-interest income,
excluding securities, trading and derivative transactions, amounted to $360.3
million, an increase of $30.6 million or 9%, compared with the same period in
2000. As shown in Table F, and principally for the same reasons explained above,
service charges on deposit accounts, which increased $14.9 million or 16%, and
other service fees, which increased $15.4 million or 10%, were the principal
contributors to the rise since 2000. These favorable variances were partially
offset by a decrease of $14.4 million in the gain on sale of securities, mostly
attributed to the fact that in the first quarter of 2000, the Corporation
exercised its conversion right and exchanged its investment in preferred stock
of a financial corporation in Puerto Rico for common stock of the same entity,
resulting in a $13.4 million pretax gain. Also, non-interest income for the
nine-month period ended September 30, 2001 was negatively impacted by a $7.1
million derivative loss associated to the interest rate swaps.
OPERATING EXPENSES
For the third quarter of 2001, operating expenses were $230.4 million,
representing an increase of $10.1 million or 5% compared with the same quarter
in 2000.
Personnel costs, the largest category of operating expenses, totaled $107.6
million for the third quarter of 2001, an increase of $7.2 million or 7%
compared with the same period last year. Salaries and pension and other benefits
accounted for the major increase in this category, rising $8.4 million,
partially offset by a decrease in profit sharing expenses. The increase in
salaries and benefits was mostly related to higher incentive compensation,
pension and postretirement costs, higher medical insurance expenses, as well as
the impact of the annual merit increases. At the end of this quarter, full-time
equivalent employees (FTE's) totaled 11,088, an increase of 392 employees from
the 10,696 FTE's at the same date in 2000.
Other operating expenses, excluding personnel costs, amounted to $122.8 million,
an increase of $2.9 million or 2% when compared with the same period in 2000.
This increase was mainly reflected in the categories of business promotion and
professional fees, partially offset by lower amortization of intangibles,
equipment expenses and printing and supplies. The increase in business promotion
was mostly associated to higher advertising and public relations expenses, while
professional fees rose mostly due to higher attorneys' fees. Partially
compensating these rises were lower amortization of intangibles, which had
become fully amortized in late 2000 related to the core deposits acquired
38
in the merger with BanPonce Corporation in 1990, and lower equipment, printing
and supplies expenses. The decline in equipment expenses was related in part to
costs associated to the former subsidiary, Banco Fiduciario.
Income tax expense rose $0.3 million from $27.7 million in the third quarter of
2000, to $28.0 million this quarter. The effective tax rate for the third
quarter of 2001 was 26.58% compared with 27.94% for the same period in prior
year.
For the nine-month period ended September 30, 2001, total operating expenses
rose to $681.9 million, from $666.1 million for the same period in 2000, an
increase of $15.8 million or 2%. This increase was primarily as a result of
higher personnel costs, impacted by the same factors explained above, net
occupancy expenses, mainly in building rentals, other operating taxes and other
operating expenses, mainly related to credit card processing and interchange
expenses, as well as other real estate expenses. These rises were partially
offset by decreases in the amortization of intangibles, printing and supplies
and professional fees, the latter associated in part to the sale of the U.S.
credit card operations in 2000. Income tax expense for the nine-month period
ended September 30, 2001 totaled $82.4 million, compared with $68.1 million a
year ago, resulting in an effective tax rate of 26.53% and 25.45%, for each
respective period.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
On January 1, 2001, the Corporation adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," which requires the recognition
of derivatives as either assets or liabilities in the statement of condition
measured at fair value. Upon the adoption, the Corporation recognized $0.7
million (net of tax) in income as a cumulative effect of accounting changes.
Refer to Note 5 of the consolidated financial statements for further
information.
BALANCE SHEET COMMENTS
Total assets as of September 30, 2001 reached $28.5 billion, compared with $28.1
billion as of December 31, 2000 and $27.2 billion as of the same date a year
earlier. Earning assets totaled $26.9 billion at September 30, 2001, compared
with $26.3 billion at December 31, 2000 and $25.6 billion at September 30, 2000.
Investment and trading securities reached $8.3 billion as of September 30, 2001,
a decrease of $0.9 billion, compared with $9.2 billion as of December 31, 2000.
This decline was mostly due to lower arbitrage activity in 2001. Investment and
trading securities as of September 30, 2000 amounted to $8.5 billion. As seen in
Note 3 of the consolidated financial statements, the investment portfolio is
comprised significantly of U.S. Treasuries and agencies obligations.
As shown in Table G, the loan portfolio reached $17.6 billion as of September 30
2001, an increase of $1.6 billion or 10%, compared with December 31, 2000. This
increase is mostly attributed to higher mortgage loans by $1.4 billion and
commercial loans, including construction, by $294 million. The rise in the
mortgage loan portfolio is principally due to an aggressive marketing campaign
and to the impact of the reduction in interest rates, which generally results in
a higher demand for mortgage loans. The growth in the commercial loan portfolio
resulted principally from the continued marketing efforts towards the retail and
middle market, including franchise loans, among others. On the other hand,
consumer loans decreased by $158 million since the end of 2000, partly due to
lower demand for personal loans as a result of the declining interest rate
scenario, which tends to favor the refinancing of mortgage loans and the
consolidation of personal debt. Also, it is due to the Corporation's tightening
in the credit criteria for granting unsecured loans. Total loans increased 9% or
$1.4 billion compared with September 30, 2000. The growth was also experienced
in the mortgage and commercial, including construction, loan portfolios, which
rose by $1.3 billion and $233 million, respectively.
39
TABLE G
LOANS ENDING BALANCES
- ------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
2001 2000 2000,
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial, industrial and agricultural $ 7,308,894 $ 7,013,834 $ 7,038,558
Construction 256,686 258,197 293,702
Lease financing 850,949 816,714 820,320
Mortgage * 6,049,448 4,643,646 4,733,684
Consumer * 3,166,297 3,324,694 3,351,423
------------------------------------------------
Total $17,632,274 $16,057,085 $16,237,687
================================================
* Includes loans held-for-sale
- ------------------------------------------------------------------------------------------------
Other assets were $423 million at September 30, 2001, an increase of $56 million
or 15%, compared with December 31, 2000. The increase in other assets is mainly
due to an investment during the second quarter of 2001 in Centro Financiero BHD,
S.A., the third largest private financial institution in the Dominican Republic,
and in Coqui.com, an Internet service provider in Puerto Rico. Also, it is due
to the recording of the fair value of certain derivatives based on the
accounting provision of SFAS No. 133, and to premium receivables recorded by the
Corporation's insurance subsidiary. Other assets totaled $401 million as of
September 30, 2000.
Total deposits were $16.0 billion at September 30, 2001, or $1.2 billion or 8%
higher than the $14.8 billion reported at December 31, 2000. Time and savings
deposits increased $990 million and $276 million, respectively, when compared
with December 31, 2000. The increase in time deposits since the end of 2000 is
mainly due to an aggressive marketing campaign in the U.S. mainland and to
higher activity in Puerto Rico, mostly associated to IRA accounts, public funds
and other products. Also, included in time deposits, are brokered certificates
of deposit, which increased $301 million since December 31, 2000. Demand
deposits decreased $71 million or 2% compared with December 31, 2000, mainly in
commercial accounts. Total deposits amounted to $16.0 billion at September 30,
2001, an increase of $1.4 billion or 10% compared with the period ended
September 30, 2000. The favorable variance since September 30, 2000 was
reflected in all deposit categories. Demand deposits grew by $100 million, while
savings and time deposits rose $325 million and $1.0 billion, respectively.
Borrowed funds, including subordinated notes and capital securities, amounted to
$9.7 billion at September 30, 2001, from $10.8 billion at December 31, 2000 and
$10.4 billion at September 30, 2000.
As part of the investment in subsidiaries, the Corporation recognized a minority
interest of $0.9 million as of September 30, 2001, which represented mostly the
beneficial interest of the minority investors of Levitt Mortgage. As of December
31, 2000 and September 30, 2000, the minority interest amounted to $0.9 million
and $0.8 million, respectively.
The Corporation's stockholders' equity as of September 30, 2001 and December 31,
2000 was $2.3 billion and $2.0 billion, respectively, compared with $1.8 billion
as of September 30, 2000. Included in accumulated other comprehensive income
(loss) within the stockholders' equity category at September 30, 2001 was $157
million in unrealized gains on securities available-for-sale, net of tax,
compared with $100 million in unrealized losses at September 30, 2000 and $4
million in unrealized gains as of the end of 2000.
The Corporation is subject to various regulatory requirements imposed by the
federal banking agencies. Management has determined that as of the periods
presented, the Corporation exceeded all capital adequacy requirements to which
it is subject. The Corporation's ratios and amounts of total risk-based capital,
Tier 1 risk based capital and Tier 1 leverage, as of September 30, 2001,
September 30, 2000 and December 31, 2000 are presented on Table H.
40
The Corporation's common stock price at September 30, 2001 was $31.20, compared
with $26.31 at December 31, 2000 and $27.06 at September 30, 2000. The
Corporation's market capitalization at September 30, 2001, was $4.3 billion,
compared with $3.6 billion at December 31, 2000 and $3.7 billion at September
30, 2000.
TABLE H
CAPITAL ADEQUACY DATA
- ----------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
2001 2000 2000
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------
Risk-based capital
Tier I capital $ 1,900,169 $ 1,741,004 $ 1,690,399
Supplementary (Tier II) capital 351,937 321,627 336,095
--------------------------------------------
Total capital $ 2,252,106 $ 2,062,631 $ 2,026,494
============================================
Risk-weighted assets
Balance sheet items 17,309,296 16,173,005 $16,005,655
Off-balance sheet items 456,249 496,735 425,716
--------------------------------------------
Total risk-weighted assets $17,765,545 $16,669,740 $16,431,371
============================================
Ratios:
Tier I capital (minimum required - 4.00%) 10.70% 10.44% 10.29%
Total capital (minimum required - 8.00%) 12.68% 12.37% 12.33%
Leverage ratio (minimum required - 3.00%) 6.91% 6.40% 6.29%
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
As described on page 7 of the Annual Report, Banco Popular de Puerto Rico (the
"Bank") has been cooperating fully with an investigation by federal law
enforcement authorities. The investigation relates principally to the
circumstances surrounding the activities of a former customer of the Bank,
including the Bank's reporting and compliance efforts. The former customer has
been indicted for money laundering, including in connection with transactions
through an account at the Bank. The Bank believes based on the information
available to it that there was no knowing participation by the Bank or any Bank
employee in the former customer's activities. The law enforcement investigation
could result in adverse consequences to the Corporation and the Bank including
the possibility of civil and criminal claims being brought against the Bank. The
Corporation cannot predict when or on what basis the investigation will conclude
or its effect if any on the Corporation or the Bank.
On March 9, 2000, the Bank entered into a written agreement with the Federal
Reserve Bank of New York, which imposed a number of compliance, reporting and
control requirements. Substantially, all of these compliance, reporting and
control requirements are now in place.
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Exhibit Description Reference
----------- ------------------- ---------
19 Quarterly Report to Shareholders for the Exhibit "A"
period ended September 30, 2001
b) One report on Form 8-K was filed for the quarter ended September 30, 2001:
Dated: July 13, 2001
Items reported: Item 5 - Other Events
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
POPULAR, INC.
-------------
(Registrant)
Date: November 14, 2001 By: S/ Jorge A. Junquera
--------------------------------
Jorge A. Junquera
Senior Executive Vice President
Date: November 14, 2001 By: S/ Amilcar L. Jordan
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Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller
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