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 March 31, 2002 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
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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 [ ]
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 136,567,253
---------------------------- --------------------------------------
(Title of Class) (Shares Outstanding as of May 10, 2002)
1
POPULAR, INC.
INDEX
Part I - Financial Information Page
- ------------------------------ ------
Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of March 31, 2002,
December 31, 2001 and March 31, 2001 3
Unaudited Consolidated Statements of Income for the quarters ended
March 31, 2002 and 2001 4
Unaudited Consolidated Statements of Comprehensive Income for
the quarters ended March 31, 2002 and 2001 5
Unaudited Consolidated Statements of Cash Flows for the quarters ended
March 31, 2002 and 2001 6
Notes to unaudited Consolidated Financial Statements 7-26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27-42
Item 3. Quantitative and Qualitative Disclosures about Market Risk 38
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 42
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 and liquidity risks 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)
MARCH 31, December 31, March 31,
(In thousands) 2002 2002 2001
- ----------------------------------------------------------------- ------------ ------------ ------------
ASSETS
Cash and due from banks $ 383,927 $ 606,142 $ 639,808
- ----------------------------------------------------------------- ------------ ------------ ------------
Money market investments:
Federal funds sold and securities purchased under
agreements to resell 716,123 820,332 961,126
Time deposits with other banks 3,056 3,056 8,397
Banker's acceptances 409 402 776
- ----------------------------------------------------------------- ------------ ------------ ------------
719,588 823,790 970,299
- ----------------------------------------------------------------- ------------ ------------ ------------
Investment securities available-for-sale, at market value:
Pledged securities with creditors' right to repledge 3,330,865 4,056,655 2,996,080
Other investment securities available-for-sale 6,070,293 5,227,746 4,685,210
Investment securities held-to-maturity, at amortized cost 202,022 592,360 312,170
Trading account securities, at market value:
Pledged securities with creditors' right to repledge 225,978 244,916 148,149
Other trading securities 73,437 25,270 69,721
Loans held-for-sale, at lower of cost or market value 900,461 939,488 834,242
- ----------------------------------------------------------------- ------------ ------------ ------------
Loans:
Loans pledged with creditors' right to repledge 233,442 301,706 --
Other loans 17,442,558 17,254,323 16,007,197
Less - Unearned income 319,537 326,966 331,962
Allowance for loan losses 341,744 336,632 305,295
- ----------------------------------------------------------------- ------------ ------------ ------------
17,014,719 16,892,431 15,369,940
- ----------------------------------------------------------------- ------------ ------------ ------------
Premises and equipment 404,842 405,705 403,263
Other real estate 34,550 31,533 27,638
Accrued income receivable 191,118 186,143 202,088
Other assets 549,197 496,855 418,056
Goodwill and other intangible assets 216,369 215,642 235,494
- ----------------------------------------------------------------- ------------ ------------ ------------
$ 30,317,366 $ 30,744,676 $ 27,312,158
================================================================= ============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,100,625 $ 3,281,841 $ 3,001,269
Interest bearing 13,423,529 13,088,201 12,091,910
- ----------------------------------------------------------------- ------------ ------------ ------------
16,524,154 16,370,042 15,093,179
Federal funds purchased and securities sold under
agreements to repurchase 4,564,815 5,751,768 4,053,012
Other short-term borrowings 2,252,679 1,827,242 3,067,197
Notes payable 3,996,616 3,735,131 2,233,968
Other liabilities 524,350 512,686 465,917
- ----------------------------------------------------------------- ------------ ------------ ------------
27,862,614 28,196,869 24,913,273
- ----------------------------------------------------------------- ------------ ------------ ------------
Subordinated notes 125,000 125,000 125,000
- ----------------------------------------------------------------- ------------ ------------ ------------
Preferred beneficial interest in Popular North America's
junior subordinated deferrable interest debentures guaranteed
by the Corporation 144,000 149,080 150,000
- ----------------------------------------------------------------- ------------ ------------ ------------
Commitments and contingencies (See Note 8)
- ----------------------------------------------------------------- ------------ ------------ ------------
Minority interest in consolidated subsidiaries 925 909 911
- ----------------------------------------------------------------- ------------ ------------ ------------
Stockholders' equity:
Preferred stock -- 100,000 100,000
Common stock 833,121 832,498 830,934
Surplus 270,766 268,544 262,748
Retained earnings 1,116,963 1,057,724 915,394
Treasury stock-at cost (66,363) (66,136) (66,136)
Accumulated other comprehensive income, net of tax
of $17,197 (December 31, 2001 - $27,918; March 31,
2001 - $27,283) 30,340 80,188 80,034
- ----------------------------------------------------------------- ------------ ------------ ------------
2,184,827 2,272,818 2,122,974
- ----------------------------------------------------------------- ------------ ------------ ------------
$ 30,317,366 $ 30,744,676 $ 27,312,158
================================================================= ============ ============ ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarters ended
March 31,
(Dollars in thousands, except per share information) 2002 2001
- ----------------------------------------------------- --------- ---------
INTEREST INCOME:
Loans $ 372,221 $ 393,565
Money market investments 7,785 15,306
Investment securities 111,911 138,059
Trading securities 3,502 3,521
- ----------------------------------------------------- --------- ---------
495,419 550,451
- ----------------------------------------------------- --------- ---------
INTEREST EXPENSE:
Deposits 112,931 132,777
Short-term borrowings 44,443 119,118
Long-term debt 53,030 42,839
- ----------------------------------------------------- --------- ---------
210,404 294,734
- ----------------------------------------------------- --------- ---------
Net interest income 285,015 255,717
Provision for loan losses 54,454 50,034
- ----------------------------------------------------- --------- ---------
Net interest income after provision for loan losses 230,561 205,683
Service charges on deposit accounts 38,973 34,658
Other service fees 61,687 58,694
(Loss) gain on sale of investment securities (4,010) 290
Trading account (loss) profit (1,030) 188
Gain (loss) on derivatives 511 (631)
Gain on sale of loans 17,566 9,149
Other operating income 17,111 13,173
- ----------------------------------------------------- --------- ---------
361,369 321,204
- ----------------------------------------------------- --------- ---------
OPERATING EXPENSES:
Personnel costs:
Salaries 88,561 77,778
Profit sharing 4,940 5,097
Pension and other benefits 26,801 22,019
- ----------------------------------------------------- --------- ---------
120,302 104,894
Net occupancy expenses 19,030 17,195
Equipment expenses 24,765 24,127
Other taxes 9,549 8,810
Professional fees 17,507 15,939
Communications 13,273 11,887
Business promotion 13,367 10,545
Printing and supplies 4,509 4,319
Other operating expenses 17,321 15,931
Amortization of intangibles 2,543 6,876
- ----------------------------------------------------- --------- ---------
242,166 220,523
- ----------------------------------------------------- --------- ---------
Income before income tax, minority interest and
cumulative effect of accounting change 119,203 100,681
Income tax 30,148 27,151
Net (gain) loss of minority interest (11) 16
- ----------------------------------------------------- --------- ---------
Income before cumulative effect of accounting change 89,044 73,546
Cumulative effect of accounting change, net of tax -- 686
- ----------------------------------------------------- --------- ---------
NET INCOME $ 89,044 $ 74,232
===================================================== ========= =========
NET INCOME APPLICABLE TO COMMON STOCK $ 86,534 $ 72,145
===================================================== ========= =========
EARNINGS PER COMMON SHARE (BASIC AND DILUTED) $ 0.63 $ 0.53
===================================================== ========= =========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ 0.16
===================================================== ========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Quarters ended
March 31,
(In thousands) 2002 2001
- ----------------------------------------------------------------- -------- ---------
Net Income $ 89,044 $ 74,232
- ----------------------------------------------------------------- -------- ---------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment (137) (126)
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during the
quarter, net of tax of ($11,663) (2001 - $25,903) (51,124) 77,098
Less: reclassification adjustment for (losses) gains included
in net income, net of tax of ($1,562) (2001- $78) (2,447) 212
Net loss on cash flow hedges (1,128) (652)
Less: reclassification adjustment for losses included
in net income, net of tax of ($63) (2001 - ($112)) (100) (175)
Cumulative effect of accounting change 254
Less: reclassification adjustment for gains (losses) included
in net income, net of tax of ($37) in 2001 6 (61)
- ----------------------------------------------------------------- -------- ---------
Total other comprehensive (loss) income ($49,848) $ 76,598
- ----------------------------------------------------------------- -------- ---------
Comprehensive income $ 39,196 $ 150,830
================================================================= ======== =========
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME:
MARCH 31, December 31, March 31,
(In thousands) 2002 2001 2001
- ----------------------------------------------------------------- ------------ ------------ ------------
Foreign currency translation adjustment $ (1,593) $ (1,456) $ (1,010)
Unrealized gains on securities 32,499 81,176 81,206
Unrealized (losses) gains on derivatives (950) 78 (477)
Cumulative effect of accounting change 384 390 315
- ----------------------------------------------------------------- ------------ ------------ ------------
Accumulated other comprehensive income $ 30,340 $ 80,188 $ 80,034
================================================================= ============ ============ ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the quarters ended
March 31,
(In thousands) 2002 2001
- ----------------------------------------------------------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 89,044 $ 74,232
- ----------------------------------------------------------------- ----------- -----------
Adjustments to reconcile net income to net cash provided
By operating activities:
Depreciation and amortization of premises and equipment 19,208 19,187
Provision for loan losses 54,454 50,034
Amortization of intangibles 2,543 6,876
Net loss (gain) on sale of investment securities
available-for-sale 4,010 (290)
Net (gain) loss on derivatives (511) 631
Net gain on disposition of premises and equipment (11) (51)
Net (gain) loss on sale of loans, excluding loans held-for-sale (2,826) 75
Net amortization of premiums and accretion of discounts
on investments 4,309 345
Net decrease (increase) in loans held-for-sale 39,027 (10,341)
Net amortization of deferred loan fees and costs 4,556 5,585
Net increase in trading securities (29,229) (64,797)
Net (increase) decrease in income receivable (4,975) 452
Net (increase) decrease in other assets (29,473) 11,635
Net decrease in interest payable (9,834) (33,536)
Net increase in deferred and current taxes 11,936 18,202
Net increase in postretirement benefit obligation 1,494 5,190
Net increase in other liabilities 9,166 7,851
- ----------------------------------------------------------------- -------- ---------
Total adjustments 73,844 17,048
- ----------------------------------------------------------------- -------- ---------
Net cash provided by operating activities 162,888 91,280
- ----------------------------------------------------------------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments 104,202 98,319
Purchases of investment securities held-to-maturity (132,401) (1,275,544)
Maturities of investment securities held-to-maturity 524,322 1,318,287
Purchases of investment securities available-for-sale (2,113,882) (774,340)
Maturities of investment securities available-for-sale 1,111,094 1,675,535
Proceeds from sales of investment securities available-for-sale 809,302 217,115
Net disbursements on loans (209,788) (478,271)
Proceeds from sale of loans 221,705 104,922
Acquisition of loan portfolios (210,395) (157,698)
Acquisition of premises and equipment (19,837) (18,132)
Proceeds from sale of premises and equipment 1,504 1,505
- ----------------------------------------------------------------- -------- ---------
Net cash provided by investing activities 85,826 711,698
- ----------------------------------------------------------------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 161,347 288,272
Net decrease in federal funds purchased and securities
sold under agreements to repurchase (1,186,952) (911,103)
Net increase (decrease) in other short-term borrowings 425,437 (1,302,015)
Net proceeds of notes payable and capital securities 256,405 1,057,056
Dividends paid (27,785) (23,850)
Proceeds from issuance of common stock 2,846 2,342
Redemption of preferred stock (102,000)
Treasury stock (acquired) sold (227) 77
- ----------------------------------------------------------------- -------- ---------
Net cash used in financing activities (470,929) (889,221)
- ----------------------------------------------------------------- -------- ---------
Net decrease in cash and due from banks (222,215) (86,243)
Cash and due from banks at beginning of period 606,142 726,051
- ----------------------------------------------------------------- -------- ---------
Cash and due from banks at end of period $ 383,927 $ 639,808
================================================================= =========== ===========
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 14 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. 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 2002
presentation.
NOTE 2 - ACCOUNTING CHANGES
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141 "Business Combinations," and SFAS No.
142 "Goodwill and Other Intangible Assets." SFAS No. 141, adopted by the
Corporation in 2001, supersedes Accounting Principles Board Opinion (APB) No.
16, "Business Combinations." The provisions of SFAS No. 141 (1) require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, (2) provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. SFAS No. 141 also requires that
upon adoption of SFAS No. 142 the Corporation reclassify the carrying amounts of
certain intangible assets into or out of goodwill, based on certain criteria.
SFAS No. 142 supersedes APB No. 17, "Intangible Assets," and is effective for
fiscal years beginning after December 31, 2001. SFAS No. 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS No. 142 (1) repeals the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangibles assets be tested at least annually for impairment,
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
The Corporation adopted the provisions of SFAS No. 142 in the first quarter of
2002. Based on the provisions of SFAS No. 142, the Corporation will no longer
record approximately $4,349 of amortization during each quarter relating to
existing goodwill, as adjusted for the reclassification just mentioned. During
the quarter, the Corporation also evaluated the useful lives assigned to its
intangible assets, which were deemed adequate.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, the entity has six months from the date of adoption to complete the
first step. The second step of the goodwill impairment test measures the amount
of the impairment loss (measured as of the beginning of the year of adoption),
if any, and must be completed by the end of the entity's fiscal year. Intangible
assets deemed to have an indefinite life will be tested for impairment using a
one-step process which compares the fair value to the carrying amount of the
asset as of the beginning of the fiscal year. Any impairment loss resulting from
the transitional impairment tests will be reflected as the cumulative effect of
a change in accounting principle in the
7
first quarter of 2002.
The Corporation completed all transitional impairment tests during the first
quarter of 2002, and has determined that there are no impairment losses to be
recognized in the period as a cumulative effect of accounting change.
The following tables present the reconciliation of reported net income and
earnings per share (EPS)(basic and diluted) adjusted to exclude the amortization
expense recognized in the period prior to the adoption of SFAS No. 142.
(In thousands) AS OF MARCH 31, 2001
Reported Net Income $74,232
Add: Goodwill amortization, net of
tax and profit sharing expense 4,140
- -------------------------------------------------------------
Adjusted Net Income $78,372
=============================================================
AS OF MARCH 31, 2001
Reported EPS $ 0.53
Add: Goodwill amortization, net of tax and
profit sharing expense 0.03
- -------------------------------------------------------------
Adjusted EPS $ 0.56
=============================================================
With the adoption of SFAS No. 142, there were no changes to amortization expense
on acquired intangible assets with definite lives.
Refer to Note 7 to the consolidated financial statements for further disclosures
required by SFAS No. 142.
Accounting for the Impairment or Disposal of Long-Lived Assets
In January 2002, the Corporation adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" issued by the Financial Accounting
Standards Board. 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 adoption of this statement did not have a material effect on
the consolidated financial statements of the Corporation.
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.
8
NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost, gross unrealized gains and losses, approximate market value
(or fair value for certain investments securities where no market quotations are
available), and contractual maturities of investment securities
available-for-sale as of March 31, 2002, December 31, 2001 and March 31, 2001
were as follows:
AS OF MARCH 31, 2002
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED MARKET
(In thousands) COST GAINS LOSSES VALUE
- -------------------------------------------------------------- ---------- ---------------- ---------------- ----------
U.S. Treasury securities (average maturity of 9 months) $ 560,091 $ 11,706 $ 13 $ 571,784
Obligations of other U.S. Government agencies and
Corporations (average maturity of 4 years and 8 months) 5,070,786 28,385 66,048 5,033,123
Obligations of Puerto Rico, states and political
subdivisions (average maturity of 8 years and
8 months) 96,806 3,477 188 100,095
Collateralized mortgage obligations (average maturity of
20 years and 5 months) 2,449,183 12,097 7,392 2,453,888
Mortgage-backed securities (average maturity of 22
years and 5 months) 826,041 9,167 6,706 828,502
Equity securities (without contractual maturity) 258,313 55,705 14 314,004
Others (average maturity of 17 years and 9 months) 97,591 2,175 4 99,762
----------------------------------------------------------- ---------- -------- ---------- ----------
$9,358,811 $122,712 $ 80,365 $9,401,158
=========================================================== ========== ======== ========== ==========
AS OF DECEMBER 31, 2001
Amortized Gross Unrealized Gross Unrealized Market
(In thousands) Cost Gains Losses Value
----------------------------------------------------------- ---------- ---------------- ---------------- ----------
U.S. Treasury securities (average maturity of 1 year and 1
month) $ 650,247 $ 18,622 -- $ 668,869
Obligations of other U.S. Government agencies and
Corporations (average maturity of 4 years and 7 months) 5,208,568 64,393 $ 34,558 5,238,403
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 8 years and
5 months) 101,643 3,920 167 105,396
Collateralized mortgage obligations (average maturity of
21 years and 10 months) 2,241,827 8,161 7,902 2,242,086
Mortgage-backed securities (average maturity of 24
years and 10 months) 635,822 9,260 3,512 641,570
Equity securities (without contractual maturity) 231,474 48,475 10 279,939
Others (average maturity of 17 years and 6 months) 105,393 2,749 4 108,138
----------------------------------------------------------- ---------- -------- ---------- ----------
$9,174,974 $155,580 $ 46,153 $9,284,401
=========================================================== ========== ======== ========== ==========
9
AS OF MARCH 31, 2001
Amortized Gross Unrealized Gross Unrealized Market
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------- ---------- ---------------- ----------------- ----------
U.S. Treasury securities (average maturity of 1 year and 5 months) $ 737,645 $15,534 -- $ 753,179
Obligations of other U.S. Government agencies and
Corporations (average maturity of 4 years and 8 months) 4,304,337 43,838 $ 11,033 4,337,142
Obligations of Puerto Rico, States and political
Subdivisions (average maturity of 9 years and 6 months) 65,780 2,535 472 67,843
Collateralized mortgage obligations (average maturity of
23 years and 8 months) 1,634,808 8,130 829 1,642,109
Mortgage-backed securities (average maturity of 24
years and 1 month) 486,585 7,339 128 493,796
Equity securities (without contractual maturity) 233,808 42,094 -- 275,902
Others (average maturity of 15 years and 7 months) 109,142 2,411 234 111,319
- ----------------------------------------------------------- ---------- ------- ---------- ----------
$7,572,105 $121,881 $ 12,696 $7,681,290
=========================================================== ========== ======= ========== ==========
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.
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 - INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost, gross unrealized gains and losses, approximate market value
(or fair value for certain investment securities where no market quotations are
available), and contractual maturities of investment securities held-to-maturity
as of March 31, 2002, December 31, 2001 and March 31, 2001 were as follows:
AS OF MARCH 31, 2002
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED MARKET
(In thousands) COST GAINS LOSSES VALUE
- ----------------------------------------------------------- ---------- ---------------- ---------------- ----------
Obligations of other U.S. Government agencies and
Corporations (average maturity of 1 month) $ 19,902 -- $ 4 $ 19,898
Obligations of Puerto Rico, States and political
Subdivisions (average maturity of 9 years and 10 months) 99,144 $ 2,049 34 101,159
Collateralized mortgage obligations (average maturity of 22 years
and 5 months) 1,354 -- 82 1,272
Others (average maturity of 3 years) 81,622 639 291 81,970
- ----------------------------------------------------------- ---------- ------- ---------- ----------
$ 202,022 $ 2,688 $ 411 $ 204,299
=========================================================== ========== ======= ========== ==========
10
AS OF DECEMBER 31, 2001
Amortized Gross Unrealized Gross Unrealized Market
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------- ---------- ---------------- --------------- ---------
Obligations of other U.S. Government agencies and
Corporations (average maturity of 1 month) $ 416,980 $ 4 $ 416,984
Obligations of Puerto Rico, States and political
Subdivisions (average maturity of 13 years and 8
months) 92,522 4,485 $ 48 96,959
Collateralized mortgage obligations (average maturity
of 22 years and 9 months) 1,430 -- 114 1,316
Others (average maturity of 3 years and 4 months) 81,428 279 551 81,156
- ----------------------------------------------------------- ---------- ------- ---------- ----------
$ 592,360 $ 4,768 $ 713 $ 596,415
=========================================================== ========== ======= ========== ==========
AS OF MARCH 31, 2001
Amortized Gross Unrealized Gross Unrealized Market
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------- ---------- ---------------- ---------------- ---------
Obligations of other U.S. Government agencies and
Corporations (average maturity of 1 month) $ 118,441 $ 61 $ 20 $ 118,482
Obligations of Puerto Rico, States and political
Subdivisions (average maturity of 11 years and 5
months) 88,204 3,801 226 91,779
Collateralized mortgage obligations (average maturity
of 23 years and 2 months) 1,578 28 -- 1,606
Others (average maturity of 3 years and 5 months)
103,947 -- 2,939 101,008
- ----------------------------------------------------------- ---------- ------- ---------- ----------
$ 312,170 $ 3,890 $ 3,185 $ 312,875
=========================================================== ========== ======= ========== ==========
NOTE 5 - PLEDGED ASSETS
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 the Corporation's pledged assets, which
the secured parties are not permitted to sell or repledge the collateral were as
follows:
MARCH 31, December 31, March 31,
(In thousands) 2002 2001 2001
- ----------------------------------------------------------------- ------------ ------------ ------------
Investment securities available-for-sale $ 1,947,521 $ 1,973,552 $ 1,517,743
Investment securities held-to-maturity 4,215 5,110 5,975
Loans 1,570,726 1,413,789 929,658
- ----------------------------------------------------------------- ------------ ------------ ------------
$ 3,522,462 $ 3,392,451 $ 2,453,376
================================================================= ============ ============ ============
Securities and loans that the creditor has the right by custom or contract to
repledge are presented separately in the consolidated statements of condition.
NOTE 6 - 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 caps, forwards
and future contracts, interest rate swaptions, foreign exchange contracts and
interest-rate caps, floors and put options embedded in interest bearing
contracts.
11
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 March
31, 2002 the total amount (net of tax) included in accumulated other
comprehensive income pertaining to forward contracts was an unrealized loss of
$379. These contracts have a maximum maturity of 46 days.
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 March 31, 2002, the Corporation included $2 and $2 in other
assets and other liabilities, respectively, pertaining to the fair value of
these contracts.
The Corporation purchased interest rate caps as part of securitization
transactions in order to limit the interest rate payable to the security
holders. These contracts qualify for cash flow hedge accounting in accordance
with SFAS No. 133, as amended. As of March 31, 2002, the fair market value of
these interest rate caps was $3,370 included in other assets and the amount
included in accumulated other comprehensive income was a loss of $571. These
contracts have a maximum maturity of 7.8 years. As part of these contracts,
during the first quarter of 2002 the Corporation reclassified a loss of $10 from
other comprehensive income into earnings related to the ineffective portion of
its hedging instruments.
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. As of March 31, 2002, the Corporation had
recognized a derivative asset of $5,901 based on the fair value of the swaptions
and a derivative liability of $7,586 based on the fair value of the bifurcated
option, 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 term and notional amounts of the swaps are determined
based on management's assessment of future interest rates, as well as other
factors. These swaps do not qualify as hedges in accordance with SFAS No. 133,
as amended, and therefore changes in fair value of the derivatives are recorded
in the statement of income. For the quarter ended March 31, 2002, the
Corporation recognized a gain of $511 as a result of the changes in fair value
of the non-hedging derivatives.
The interest-rate caps and floors embedded in the interest bearing contracts are
clearly and closely related to the economic characteristics of the contract and
therefore, as stated in SFAS No. 133, are not bifurcated from the host contract.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142 requires that goodwill and other indefinite live intangible assets
be tested for impairment at least annually using a two-step process at each
reporting unit level. The first step of the goodwill impairment test, used to
identify potential impairment, compares the fair value of a reporting unit, with
its carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired, thus the second step of the impairment is unnecessary. The second step
of the goodwill impairment test compares the implied fair value of reporting
unit goodwill with the carrying amount of that goodwill. The Corporation uses
the expected present value of future cash flows and market price multiples of
comparable companies to determine the fair value of each reporting unit. The
cost of equity used to discount the cash flows was calculated using the Capital
Asset Pricing Model.
The Corporation's management has defined the reporting units based on legal
entity, which is the way that
12
operating decisions are made and performance is measured. For presentation
purposes, these reporting units have been aggregated by reportable segments
based on the provisions of SFAS No. 131 "Segment Reporting." These have been
defined as follows: Commercial Banking, Mortgage and Consumer Lending, Auto and
Lease Financing and Other. All the operating segments and components that
constitute reporting units were determined evaluating the nature of the products
and services offered, types of customers, methods used to distribute their
products and provide their services, and the nature of their regulatory
environment, as well as other similar economic characteristics. Goodwill has
been allocated to each reporting unit.
The changes in the carrying amount of goodwill for the quarter ended March 31,
2002, are as follows:
As of March 31, 2002
- ----------------------------------------------------------------------------------------------------------------------
Mortgage and Auto and
Commercial Consumer Lease
(In thousands) Banking Lending Financing Other Total
- --------------------------------- ---------- ------------- --------- ------- --------
Balance as of January 1, 2002 $110,482 $8,349 $6,727 $52,286 $177,844
Goodwill acquired during the year 536 536
- --------------------------------- -------- ------ ------ ------- --------
Balance as of March 31, 2002 $110,482 $8,885 $6,727 $52,286 $178,380
================================= ======== ====== ====== ======= ========
As of March 1, 2002, December 31, 2001 and March 31, 2001, goodwill totaled
$178,380, $177,844 and $189,792, respectively. The Corporation has no other
intangible assets not subject to amortization.
The following table reflects the components of other intangible assets subject
to amortization as of March 31, 2002, December 31, 2001 and March 31, 2001:
As of March 31, 2002
- --------------------------------------------------------------------------
Accumulated
(In thousands) Book Value Amortization
- --------------------------------------- ---------- ------------
Core Deposits $ 37,505 $ 49,826
Covenants not to compete 121 81
Credit-based customer relationships 363 7,941
- --------------------------------------- --------- ------------
Total $ 37,989 $ 57,848
======================================= ========= ============
As of December 31, 2001
- --------------------------------------------------------------------------
Accumulated
(In thousands) Book Value Amortization
- --------------------------------------- ---------- ------------
Core Deposits $ 36,933 $ 47,671
Covenants not to compete 126 76
Credit-based customer relationships 739 7,565
- --------------------------------------- --------- ------------
Total $ 37,798 $ 55,312
======================================= ========= ============
As of March 31, 2001
- --------------------------------------------------------------------------
Accumulated
(In thousands) Book Value Amortization
- --------------------------------------- ---------- ------------
Core Deposits $ 43,700 $ 41,787
Covenants not to compete 134 68
Credit-based customer relationships 1,868 6,436
- --------------------------------------- --------- ------------
Total $ 45,702 $ 48,291
======================================= ========= ============
During the quarter ended March 31, 2002, the Corporation recognized $2,555 in
core deposits associated with the purchase of various branches from a financial
institution in Puerto Rico. This intangible has a weighted average life of 10
years.
During the quarter ended March 31, 2002, the Corporation recognized $2,543 in
amortization expense related to other intangible assets with definite lives.
This expense totaled $2,527 for the quarter ended March 31, 2001, excluding
13
the effect of goodwill amortization.
The following table presents the estimated aggregate amortization expense for
each of the following fiscal years:
(In thousands)
--------------
2002 $8,940
2003 7,443
2004 6,752
2005 5,150
2006 5,005
2007 3,330
No significant events or circumstances have occurred that would reduce the fair
value of any reporting unit below its carrying amount.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
In the normal course of business there are letters of credit outstanding and
stand-by letters of credit which, at March 31, 2002, amounted to $13,651 and
$78,087 respectively (March 31, 2001 - $11,049 and $118,846; December 31, 2001 -
$16,846 and $87,810). 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.
As of March 31, 2002, the Corporation has an outstanding commitment, entered
into during 2001, to purchase $100,000 of mortgage loans from another
institution with the option of purchasing $75 million in additional loans. The
commitment expires on June 30, 2003. As of March 31, 2002, $50,000 in loans have
been purchased under this agreement.
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 9 - STOCK OPTION PLAN
During 2002, options for 394,367 common shares were awarded under the
Corporation's Stock Option Plan with exercise prices ranging from $28.78 to
$28.84. The exercise price equaled the share's market price at the date of
grant. The weighted average exercise price of these options was $28.84 at March
31, 2002. The weighted average remaining contractual life at March 31, 2002 was
9.9 years. No options were exercisable at March 31, 2002. The Corporation's
Stock Option Plan was approved by the Corporation's Board of Directors on April
23, 2001, as a result, no options for common shares had been awarded as of March
31, 2001.
No compensation cost was recognized during the period ended March 31, 2002,
since the exercise price of the stock options equals the market price of the
stock on the date of grant. Had the Corporation elected to recognize
compensation cost for options granted in 2002, consistent with the fair value
method of accounting of SFAS 123, the pro forma net income and pro forma
earnings per common share would have been as follows:
14
Quarter ended
March 31,
(In thousands, except per share information)
2002 2001
- --------------------------------------------------------------------------------------------------
Net income applicable to common stock
As reported $86,534 $72,145
Pro forma $86,389 $72,145
Basic earnings per common share
As reported $0.63 $0.53
Pro forma $0.63 $0.53
Diluted earnings per common share
As reported $0.63 $0.53
Pro forma $0.63 $0.53
The fair value for these options was estimated at the date of grants using a
Black-Scholes Option Pricing Model. The weighted-average assumptions used for
the grants in 2002 were the following: an expected dividend yield of 2.13%, an
average expected life of the options of 10 years, an expected volatility of
26.6% and a risk-free interest rate of 4.95%. The weighted-average fair value of
options granted during 2002 was $9.81.
NOTE 10 - 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. As of March
31, 2002, the Corporation had reacquired $6,000 of the capital securities.
NOTE 11 - STOCKHOLDERS' EQUITY
Authorized common stock is 180,000,000 shares with a par value of $6 per share.
At March 31, 2002, there were 138,853,580 (March 31, 2001 - 138,489,075;
December 31, 2001 - 138,749,647) shares issued and 136,459,471 (March 31, 2001 -
136,101,782; December 31, 2001 - 136,362,364) shares outstanding. As of March
31, 2002, a total of 2,394,109 (March 31, 2001 - 2,387,293; December 31, 2001 -
2,387,283) common shares with a total cost of $66,363 (March 31, 2001 - $66,136;
December 31, 2001 - $66,136) were maintained as treasury stock.
As of March 31, 2001 and December 31, 2001, the Corporation had 4,000,000 shares
issued and outstanding of its 8.35% noncumulative monthly income Series A
preferred stock. Effective January 22, 2002, the Corporation redeemed the
4,000,000 shares outstanding of preferred stock at a redemption price of
$25.6276 per share, which consisted of the redemption price of $25.50 plus an
amount representing accrued and unpaid dividends for the
15
current monthly dividend period up to, but excluding, the redemption date. The
redemption price paid by the Corporation, excluding dividends, exceeded the
liquidation preference value by $2,000 or $0.50 per share.
NOTE 12 - EARNINGS PER COMMON SHARE
A computation of earnings per common share follows:
Quarter ended
March 31,
(In thousands, except per share information) 2002 2001
- ----------------------------------------------------------------- ------------ ------------
Net income $ 89,044 $ 74,232
Less: Preferred stock dividends and redemption price in
Excess of the preferred stock's liquidation preference 2,510 2,087
- ----------------------------------------------------------------- ------------ ------------
Net income applicable to common stock $ 86,534 $ 72,145
================================================================= ============ ============
Average common shares outstanding 136,475,530 136,111,025
Average potential common shares - stock options 3,146
- ----------------------------------------------------------------- ------------ ------------
Average common shares outstanding - assuming dilution 136,478,676 136,111,025
================================================================= ============ ============
Basic earnings per common share $ 0.63 $ 0.53
================================================================= ============ ============
Diluted earnings per common share $ 0.63 $ 0.53
================================================================= ============ ============
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.
NOTE 13 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the three-month period ended March 31, 2002, the Corporation paid
interest and income taxes amounting to $220,238 and $11,737, respectively (2001
- - $328,270 and $3,068). In addition, the loans receivable transferred to other
real estate and other property for the three-month period ended March 31, 2002,
amounted to $10,740 and $9,267, respectively (2001 - $11,474 and $7,621).
NOTE 14 - 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. 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.
16
The accounting policies of the segments are the same as those followed by the
Corporation in the ordinary course of 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 ended March 31, 2002 and
2001.
Mortgage and
Commercial Consumer Auto and Lease
Banking Lending Financing Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) March 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $223,018 $47,634 $15,254 ($950) $59 $285,015
Provision for loan losses 37,441 10,268 6,745 54,454
Other income 66,675 17,496 4,737 45,451 (3,551) 130,808
Amortization of intangibles 2,541 2 2,543
Depreciation expense 13,792 1,026 2,878 1,512 19,208
Other operating expenses 152,091 29,718 7,152 31,673 (219) 220,415
Net gain of minority interest (11) (11)
Income tax 18,121 8,331 1,157 3,440 (901) 30,148
- -----------------------------------------------------------------------------------------------------------------------------
Net income $65,707 $15,776 $2,059 $7,874 ($2,372) $89,044
- -----------------------------------------------------------------------------------------------------------------------------
Segment Assets $24,705,291 $4,595,582 $1,089,577 $6,815,654 ($6,888,738) $30,317,366
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage and
Commercial Consumer Auto and Lease
Banking Lending Financing Other Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands) March 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $219,075 $26,024 $11,880 ($1,225) ($37) $255,717
Provision for loan losses 36,092 9,339 4,603 50,034
Other income 58,989 13,784 4,975 39,555 (1,782) 115,521
Amortization of intangibles 5,461 182 189 1,044 6,876
Depreciation expense 14,575 916 2,644 1,052 19,187
Other operating expenses 135,938 22,392 5,567 30,763 (200) 194,460
Net loss of minority interest 16 16
Income tax 21,447 2,517 1,417 2,165 (395) 27,151
Cumulative effect of accounting
changes 686 686
- ---------------------------------------------------------------------------------------------------------------------------
Net income $65,237 $4,478 $2,435 $3,306 ($1,224) $74,232
- ---------------------------------------------------------------------------------------------------------------------------
Segment Assets $22,963,717 $3,186,191 $999,771 $6,486,056 ($6,323,577) $27,312,158
- ---------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
MARCH 31, March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------
Revenues*
Puerto Rico $282,936 $273,148
United States 117,140 89,160
Other 15,747 8,930
- --------------------------------------------------------------------------------------
Total consolidated revenues $415,823 $371,238
- --------------------------------------------------------------------------------------
* Total revenues include net interest income, service charges on deposit
accounts, other service fees, gain (loss) on sale of investment securities,
derivatives (losses) gains, trading account profit (loss), and other operating
income.
17
March 31, MARCH 31, December 31,
(In thousands) 2002 2001 2002
- --------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Information:
Puerto Rico
Total assets $20,095,919 $20,800,728 $19,027,161
Loans 9,870,630 9,879,632 9,438,485
Deposits 10,970,858 10,874,829 10,115,789
United States
Total assets $9,460,601 $9,174,050 $7,606,022
Loans 8,034,586 7,868,729 6,651,016
Deposits 4,736,838 4,718,692 4,171,534
Other
Total assets $760,846 $769,898 $678,975
Loans 351,708 420,190 419,976
Deposits 816,458 776,521 805,856
NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR AND ISSUERS
OF REGISTERED GUARANTEED SECURITIES:
The following condensed consolidating financial information presents the
financial position of Popular, Inc. Holding Company (PIHC), Popular
International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and all other
subsidiaries of the Corporation as of March 31, 2002, December 31, 2001 and
March 31, 2001, and the results of their operations and cash flows for the
quarters ended March 31, 2002 and 2001. 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
February 28, 2002, November 30, 2001 and February 28, 2001, corresponds to their
financial information included in the consolidated financial statements of
Popular, Inc. as of March 31, 2002, December 31, 2001 and March 31, 2001,
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 Popular
Insurance, 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 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 March 31, 2002,
BPPR could have declared a dividend of approximately $194,723 without the
approval of the Federal Reserve Board.
18
POPULAR, INC.
STATEMENTS OF CONDITION
AS OF MARCH 31, 2002
Popular, Popular,
Inc. PIBI PNA All other Elimination Inc.
(In thousands) Holding Co. Holding Co. Holding Co. subsidiaries Entries Consolidated
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 319 $ 27 $ 673 $ 429,586 $ (46,678) $ 383,927
Money market investments 5,436 301 47 973,980 (260,176) 719,588
Investment securities available-for-
sale, at market value 206,696 22,233 6,580 9,173,949 (8,300) 9,401,158
Investment securities held-to-
maturity, at amortized cost 356,662 (154,640) 202,022
Trading account securities, at
market value 305,415 (6,000) 299,415
Investment in subsidiaries 2,137,166 571,625 784,124 171,229 (3,664,144)
Loans held-for-sale, at lower of cost
or market value 872,949 27,512 900,461
- ------------------------------------------------------------------------------------------------------------------------
Loans 261,591 2,603,774 18,978,571 (4,167,936) 17,676,000
Less - Unearned income 319,537 319,537
Allowance for loan losses 341,744 341,744
- ------------------------------------------------------------------------------------------------------------------------
261,591 2,603,774 18,317,290 (4,167,936) 17,014,719
- ------------------------------------------------------------------------------------------------------------------------
Premises and equipment 11,802 393,040 404,842
Other real estate 34,550 34,550
Accrued income receivable 451 1 12,142 197,871 (19,347) 191,118
Other assets 22,489 33,511 9,054 482,751 1,392 549,197
Goodwill and other intangible assets 216,242 127 216,369
- ------------------------------------------------------------------------------------------------------------------------
$ 2,645,950 $ 627,698 $ 3,416,394 $ 31,925,514 $ (8,298,190) $ 30,317,366
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,147,244 $ (46,619) $ 3,100,625
Interest bearing 13,454,116 (30,587) 13,423,529
- ------------------------------------------------------------------------------------------------------------------------
16,601,360 (77,206) 16,524,154
Federal funds purchased and
securities sold under agreements
to repurchase $ 40,300 $ 399,038 4,339,067 (213,590) 4,564,815
Other short-term borrowings 59,975 4,297 426,568 2,812,312 (1,050,473) 2,252,679
Notes payable 191,733 1,980,974 5,065,598 (3,241,689) 3,996,616
Other liabilities 44,115 81 46,582 458,479 (24,907) 524,350
- ------------------------------------------------------------------------------------------------------------------------
336,123 4,378 2,853,162 29,276,816 (4,607,865) 27,862,614
- ------------------------------------------------------------------------------------------------------------------------
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 (6,000) 144,000
- ------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated
subsidiary 110 815 925
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 833,121 3,962 2 72,575 (76,539) 833,121
Surplus 270,766 492,494 439,964 1,335,418 (2,267,876) 270,766
Retained earnings 1,116,963 122,542 125,942 1,101,995 (1,350,479) 1,116,963
Treasury stock, at cost (66,363) (463) 463 (66,363)
Accumulated other comprehensive
income (loss), net of taxes 30,340 4,322 (2,676) (10,937) 9,291 30,340
- ------------------------------------------------------------------------------------------------------------------------
2,184,827 623,320 563,232 2,498,588 (3,685,140) 2,184,827
- ------------------------------------------------------------------------------------------------------------------------
$ 2,645,950 $ 627,698 $ 3,416,394 $ 31,925,514 $ (8,298,190) $30,317,366
========================================================================================================================
19
POPULAR, INC.
CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2001
(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 $ 263 $ 18 $ 252 $ 659,094 $ (53,485) $ 606,142
Money market investments 112,937 302 442 1,075,301 (365,192) 823,790
Investment securities available-
for-sale, at market value 166,193 20,781 6,473 9,101,954 (11,000) 9,284,401
Investment securities held-to-
maturity, at amortized cost 747,000 (154,640) 592,360
Trading account securities,
at market value 271,106 (920) 270,186
Investment in subsidiaries, at equity 2,129,890 559,658 772,220 164,146 (3,625,914)
Loans held-for-sale, at lower
of cost or market value 957,403 (17,915) 939,488
- ---------------------------------------------------------------------------------------------------------------------------
Loans 196,412 2,537,021 18,870,993 (4,048,397) 17,556,029
Less - Unearned income 326,966 326,966
Allowance for loan losses 336,632 336,632
- ---------------------------------------------------------------------------------------------------------------------------
196,412 2,537,021 18,207,395 (4,048,397) 16,892,431
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment 12,006 393,699 405,705
Other real estate 31,533 31,533
Accrued income receivable 323 2 12,263 196,277 (22,722) 186,143
Other assets 20,795 32,010 9,994 434,248 (192) 496,855
Goodwill and other intangible assets 215,642 215,642
- ---------------------------------------------------------------------------------------------------------------------------
$ 2,638,819 $ 612,771 $ 3,338,665 $ 32,454,798 $ (8,300,377) $ 30,744,676
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,335,268 $ (53,427) $ 3,281,841
Interest bearing 13,099,160 (10,959) 13,088,201
- ---------------------------------------------------------------------------------------------------------------------------
16,434,428 (64,386) 16,370,042
Federal funds purchased and securities
sold under agreements to repurchase $ 421,618 5,561,883 (231,733) 5,751,768
Other short-term borrowings $ 4,272 536,443 2,663,575 (1,377,048) 1,827,242
Notes payable $ 198,918 1,780,452 4,709,260 (2,953,499) 3,735,131
Other liabilities 42,083 72 48,959 450,637 (29,065) 512,686
- ---------------------------------------------------------------------------------------------------------------------------
241,001 4,344 2,787,472 29,819,783 (4,655,731) 28,196,869
- ---------------------------------------------------------------------------------------------------------------------------
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 (920) 149,080
- ---------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated
subsidiaries 105 804 909
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000 100,000
Common stock 832,498 3,962 2 72,575 (76,539) 832,498
Surplus 268,544 492,494 439,964 1,334,918 (2,267,376) 268,544
Retained earnings 1,057,724 105,748 110,687 1,032,542 (1,248,977) 1,057,724
Treasury stock - at cost (66,136) (236) 236 (66,136)
Accumulated other comprehensive
income, net of tax 80,188 6,223 540 45,111 (51,874) 80,188
- ---------------------------------------------------------------------------------------------------------------------------
2,272,818 608,427 551,193 2,484,910 (3,644,530) 2,272,818
- ---------------------------------------------------------------------------------------------------------------------------
$ 2,638,819 $ 612,771 $ 3,338,665 $ 32,454,798 $ (8,300,377) $ 30,744,676
===========================================================================================================================
20
POPULAR, INC.
CONSOLIDATING STATEMENT OF CONDITION
MARCH 31, 2001
(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 $ 179 $ 22 $ 151 $ 711,407 $ (71,951) $ 639,808
Money market investments 15,217 311 2,668 1,955,547 (1,003,444) 970,299
Investment securities
available-for-sale,
at market value 163,864 16,433 6,565 7,497,477 (3,049) 7,681,290
Investment securities held-to-maturity,
at amortized cost 466,810 (154,640) 312,170
Trading account securities,
at market value 217,870 217,870
Investment in subsidiaries, at equity 2,125,613 546,648 747,446 135,481 (3,555,188)
Loans held-for-sale, at lower of cost
or market value 834,242 834,242
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 479,444 22,500 2,132,294 16,085,125 (2,712,166) 16,007,197
Less - Unearned income 331,962 331,962
Allowance for loan losses 305,295 305,295
- -----------------------------------------------------------------------------------------------------------------------------------
479,444 22,500 2,132,294 15,447,868 (2,712,166) 15,369,940
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 403,263 403,263
Other real estate 27,638 27,638
Accrued income receivable 1,084 1,124 11,899 205,367 (17,386) 202,088
Other assets 23,923 993 4,984 390,083 (1,927) 418,056
Goodwill and other intangible assets 235,347 147 235,494
- -----------------------------------------------------------------------------------------------------------------------------------
$2,809,324 $ 588,031 $2,906,007 $28,528,400 $(7,519,604) $27,312,158
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,073,163 $ (71,894) $ 3,001,269
Interest bearing 12,150,044 (58,134) 12,091,910
- -----------------------------------------------------------------------------------------------------------------------------------
15,223,207 (130,028) 15,093,179
Federal funds purchased and
securities sold under
agreements to repurchase $ 79,000 4,127,355 (153,343) 4,053,012
Other short-term borrowings $ 12,184 $ 5,693 1,055,433 3,524,039 (1,530,152) 3,067,197
Notes payable 504,861 1,207,049 2,639,290 (2,117,232) 2,233,968
Other liabilities 44,305 283 27,298 416,867 (22,836) 465,917
- -----------------------------------------------------------------------------------------------------------------------------------
561,350 5,976 2,368,780 25,930,758 (3,953,591) 24,913,273
- -----------------------------------------------------------------------------------------------------------------------------------
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 105 806 911
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000 100,000
Common stock 830,934 3,962 2 72,575 (76,539) 830,934
Surplus 262,748 485,676 439,964 1,328,072 (2,253,712) 262,748
Retained earnings 915,394 86,892 93,381 998,901 (1,179,174) 915,394
Treasury stock - at cost (66,136) (236) 236 (66,136)
Accumulated other comprehensive
income, net of tax 80,034 5,525 3,880 48,225 (57,630) 80,034
- -----------------------------------------------------------------------------------------------------------------------------------
2,122,974 582,055 537,227 2,447,537 (3,566,819) 2,122,974
- -----------------------------------------------------------------------------------------------------------------------------------
$2,809,324 $ 588,031 $2,906,007 $28,528,400 $(7,519,604) $27,312,158
===================================================================================================================================
21
POPULAR, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 2002
(UNAUDITED)
Popular,
Inc. PIBI PNA Other Elimination Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 3,444 $ 38,186 $ 388,811 $ (58,220) $ 372,221
Money market investments 121 $ 3 6 18,598 (10,943) 7,785
Investment securities 192 189 114,803 (3,273) 111,911
Trading account securities 3,545 (43) 3,502
- -----------------------------------------------------------------------------------------------------------------------------------
3,757 3 38,381 525,757 (72,479) 495,419
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 113,186 (255) 112,931
Short-term borrowings 317 22 5,776 57,244 (18,916) 44,443
Long-term debt 5,248 33,014 68,135 (53,367) 53,030
- -----------------------------------------------------------------------------------------------------------------------------------
5,565 22 38,790 238,565 (72,538) 210,404
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (1,808) (19) (409) 287,192 59 285,015
Provision for loan losses 54,454 54,454
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses (1,808) (19) (409) 232,738 59 230,561
Service charges on deposit accounts 38,973 38,973
Other service fees 61,750 (63) 61,687
Loss on sale of securities (4,010) (4,010)
Trading account loss (1,030) (1,030)
Gain (loss) on derivatives 645 (134) 511
Gain on sale of loans 17,566 17,566
Other operating income 2,135 1,614 16,851 (3,489) 17,111
- -----------------------------------------------------------------------------------------------------------------------------------
327 1,595 236 362,704 (3,493) 361,369
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 78 88,483 88,561
Profit sharing 4,940 4,940
Pension and other benefits 16 26,785 26,801
- -----------------------------------------------------------------------------------------------------------------------------------
94 120,208 120,302
Net occupancy expenses 3 19,027 19,030
Equipment expenses 24,765 24,765
Other taxes 245 9,304 9,549
Professional fees 146 4 46 17,391 (80) 17,507
Communications 8 13,265 13,273
Business promotion 13,367 13,367
Printing and supplies 4,509 4,509
Other operating expenses 53 20 107 17,281 (140) 17,321
Amortization of intangibles 2,543 2,543
- -----------------------------------------------------------------------------------------------------------------------------------
452 121 153 241,660 (220) 242,166
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax, minority
interest and equity in earnings of
subsidiaries (125) 1,474 83 121,044 (3,273) 119,203
Income tax (13) 17 31,045 (901) 30,148
Net gain of minority interest (11) (11)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in
earnings of subsidiaries (112) 1,474 66 89,988 (2,372) 89,044
Equity in earnings of
subsidiaries 89,156 15,320 15,189 6,954 (126,619)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 89,044 $ 16,794 $ 15,255 $ 96,942 $ (128,991) $ 89,044
===================================================================================================================================
22
POPULAR, INC.
CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 2001
(UNAUDITED)
Popular,
Inc. PIBI PNA All other Elimination Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 8,729 $ 534 $ 36,293 $ 393,548 $ (45,539) $ 393,565
Money market investments 202 6 31 31,010 (15,943) 15,306
Investment securities 617 189 140,503 (3,250) 138,059
Trading account securities 3,521 3,521
- -----------------------------------------------------------------------------------------------------------------------------------
9,548 540 36,513 568,582 (64,732) 550,451
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 133,596 (819) 132,777
Short-term borrowings 534 88 15,857 127,636 (24,997) 119,118
Long-term debt 10,921 21,788 49,009 (38,879) 42,839
- -----------------------------------------------------------------------------------------------------------------------------------
11,455 88 37,645 310,241 (64,695) 294,734
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest (loss) income (1,907) 452 (1,132) 258,341 (37) 255,717
Provision for loan losses 50,034 50,034
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest (loss) income after
provision for loan losses (1,907) 452 (1,132) 208,307 (37) 205,683
Service charges on deposit accounts 34,658 34,658
Other service fees 58,721 (27) 58,694
Gain on sale of securities 290 290
Trading account profit 188 188
Loss on derivatives (631) (631)
Gain on sale of loans 9,149 9,149
Other operating income 2,422 205 12,300 (1,754) 13,173
- -----------------------------------------------------------------------------------------------------------------------------------
515 657 (1,132) 322,982 (1,818) 321,204
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 70 77,708 77,778
Profit sharing 5,097 5,097
Pension and other benefits 12 22,007 22,019
- -----------------------------------------------------------------------------------------------------------------------------------
82 104,812 104,894
Net occupancy expenses 3 17,192 17,195
Equipment expenses 24,127 24,127
Other taxes 452 8,358 8,810
Professional fees 191 2 45 15,757 (56) 15,939
Communications 8 11,879 11,887
Business promotion 10,545 10,545
Printing and supplies 4,319 4,319
Other operating expenses 21 4 108 15,942 (144) 15,931
Amortization of intangibles 6,876 6,876
- -----------------------------------------------------------------------------------------------------------------------------------
672 91 153 219,807 (200) 220,523
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
tax, minority interest, cumulative
effect of accounting change and
equity in earnings of Subsidiaries (157) 566 (1,285) 103,175 (1,618) 100,681
Income tax expense (benefit) 40 (482) 27,988 (395) 27,151
Net loss of minority interest 16 16
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change and
equity in earnings of subsidiaries (197) 566 (803) 75,203 (1,223) 73,546
Cumulative effect of accounting change 686 686
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in
earnings of subsidiaries (197) 566 (803) 75,889 (1,223) 74,232
Equity in earnings of subsidiaries 74,429 2,750 3,750 5,130 (86,059)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 74,232 $ 3,316 $ 2,947 $ 81,019 $ (87,282) $ 74,232
===================================================================================================================================
23
POPULAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD ENDED MARCH 31, 2002
Popular,
Inc. PIBI PNA All other Elimination Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 89,044 $ 16,794 $ 15,255 $ 96,942 $ (128,991) $ 89,044
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Equity in undistributed earnings of
subsidiaries (89,156) (15,320) (15,189) (6,954) 126,619
Depreciation and amortization of
premises and equipment 203 19,005 19,208
Provision for loan losses 54,454 54,454
Amortization of intangibles 2,543 2,543
Net loss on sale of investment
securities 4,010 4,010
Net (gain) loss on derivatives (645) 134 (511)
Net gain on disposition of
premises and equipment (11) (11)
Net gain on sale of loans,
excluding loans held-for-sale (2,826) (2,826)
Net amortization of premiums and
accretion of discounts
on investments 4,309 4,309
Net decrease in loans held-for-sale 84,453 (45,426) 39,027
Net amortization of deferred loan
fees and costs 4,556 4,556
Net increase in trading securities (34,309) 5,080 (29,229)
Net (increase) decrease in
income receivable (127) 1 121 (1,573) (3,397) (4,975)
Net (increase) decrease in
other assets (1,663) (1,501) 261 (25,361) (1,209) (29,473)
Net (decrease) increase in
interest payable 754 14 (1,709) (8,893) (9,834)
Net increase (decrease) in deferred
and current taxes (45) (54) 11,826 209 11,936
Net increase in postretirement
benefit obligation 1,494 1,494
Net increase (decrease) in
other liabilities 1,271 (5) 709 (554) 7,745 9,166
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (88,763) (16,811) (16,506) 106,303 89,621 73,844
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 281 (17) (1,251) 203,245 (39,370) 162,888
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in money market
investments 107,500 1 395 101,322 (105,016) 104,202
Purchases of investment securities
held-to-maturity (132,401) (132,401)
Maturities of investment securities
held-to-maturity 524,322 524,322
Purchases of investment
securities available-for-sale (36,197) (38) (2,076,987) (660) (2,113,882)
Maturities of investment
securities available-for-sale 1,113,794 (2,700) 1,111,094
Proceeds from sales of investment
securities available-for-sale 809,302 809,302
Net (disbursements) repayment on loans (65,180) (66,753) (196,196) 118,341 (209,788)
Proceeds from sale of loans 221,705 221,705
Acquisition of loan portfolios (210,395) (210,395)
Acquisition of premises and equipment (19,837) (19,837)
Proceeds from sale of premises
and equipment 1,504 1,504
Dividends received from subsidiary 27,500 (27,500)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 33,623 1 (66,396) 136,133 (17,535) 85,826
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 177,783 (16,436) 161,347
Net increase (decrease) in
federal funds purchased and
securities sold under agreements
to repurchase 40,300 (22,580) (1,222,816) 18,144 (1,186,952)
Net increase (decrease) in other
short-term borrowings 59,975 25 (109,874) 147,536 327,775 425,437
Net (payments) proceeds from
issuance of notes payable and
capital securities (7,184) 200,522 356,338 (293,271) 256,405
Dividends paid (27,785) (27,500) 27,500 (27,785)
Proceeds from issuance of
common stock 2,846 2,846
Redemption of preferred stock (102,000) (102,000)
Treasury stock acquired (227) (227)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing (33,848) 25 68,068 (568,886) 63,712 (470,929)
activities
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and due from banks 56 9 421 (229,508) 6,807 (222,215)
Cash and due from banks at
beginning of year 263 18 252 659,094 (53,485) 606,142
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 319 $ 27 $ 673 $ 429,586 ($ 46,678) $ 383,927
===================================================================================================================================
24
POPULAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD ENDED MARCH 31, 2001
Popular,
Inc. PIBI PNA All other Elimination Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 74,232 $ 3,316 $ 2,947 $ 81,019 $ (87,282) $ 74,232
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings
of subsidiaries (74,429) (2,750) (3,750) (5,130) 86,059
Depreciation and amortization
of premises and equipment 19,187 19,187
Provision for loan losses 50,034 50,034
Amortization of intangibles 6,876 6,876
Net gain on sale of investment
securities available-for-sale (290) (290)
Net gain on derivatives 631 631
Net gain on disposition of
premises and equipment (51) (51)
Net loss on sale of loans,
excluding loans held-for-sale 75 75
Net amortization of premiums and
accretion of discounts on
investments 345 345
Net increase in loans held-for-sale (10,341) (10,341)
Net amortization of deferred
loan fees and costs 5,585 5,585
Net increase in trading securities (64,797) (64,797)
Net decrease (increase) in income
receivable 29 (534) 152 3,911 (3,106) 452
Net (increase) decrease in
other assets (1,914) (99) (250) 13,889 9 11,635
Net increase (decrease) in
interest payable 1,639 34 (10,118) (25,091) (33,536)
Net increase (decrease) in
deferred and current taxes 19 (725) 24,116 (5,208) 18,202
Net increase in postretirement
benefit obligation 5,190 5,190
Net increase (decrease) in
other liabilities 5,801 (25) 626 (6,432) 7,881 7,851
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (68,855) (3,374) (14,065) 17,707 85,635 17,048
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 5,377 (58) (11,118) 98,726 (1,647) 91,280
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in money
market investments 5,620 15 (2,608) (11,181) 106,473 98,319
Purchases of investment securities
held-to-maturity (1,275,544) (1,275,544)
Maturities of investment securities
held-to-maturity 1,318,287 1,318,287
Purchases of investment securities
available-for-sale (3,243) (232) (76) (770,789) (774,340)
Maturities of investment securities
available-for-sale 1,672,485 3,050 1,675,535
Sales of investment securities
available-for-sale 217,115 217,115
Net collections (disbursements)
on loans 64,329 (289,779) (507,426) 254,605 (478,271)
Proceeds from sale of loans 104,922 104,922
Acquisition of loan portfolios (21) (157,698) 21 (157,698)
Acquisition of premises and
equipment (18,132) (18,132)
Proceeds from sale of premises
and equipment 1,505 1,505
Dividends received from subsidiary 22,000 (22,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 88,706 (217) (292,484) 573,544 342,149 711,698
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 277,254 11,018 288,272
Net increase (decrease) in federal
funds purchased and securities
sold under agreements to
repurchase 10,300 (905,762) (15,641) (911,103)
Net (decrease) increase in other
short-term borrowings (365,529) 279 (280,630) (774,693) 118,558 (1,302,015)
Net proceeds of notes payable 292,850 573,795 641,568 (451,157) 1,057,056
Dividends paid to parent company (22,000) 22,000
Dividends paid (23,850) (23,850)
Proceeds from issuance of
common stock 2,342 2,342
Treasury stock sold 77 77
Capital contribution from parent 21 (21)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (94,187) 279 303,465 (783,535) (315,243) (889,221)
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash
and due from banks (104) 4 (137) (111,265) 25,259 (86,243)
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 $ 179 $ 22 $ 151 $ 711,407 $ (71,951) $ 639,808
===================================================================================================================================
25
TABLE A
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
AT MARCH 31, AVERAGE FOR THE THREE MONTHS
BALANCE SHEET HIGHLIGHTS 2002 2001 Change 2002 2001 Change
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Money market investments $ 719,588 $ 970,299 $(250,711) $ 927,038 $ 959,452 $ (32,414)
Investment and trading securities 9,902,595 8,211,330 1,691,265 9,871,684 8,993,341 878,343
Loans 18,256,924 16,509,477 1,747,447 18,058,011 16,215,424 1,842,587
Total assets 30,317,366 27,312,158 3,005,208 30,417,589 27,714,226 2,703,363
Deposits 16,524,154 15,093,179 1,430,975 16,526,180 14,831,555 1,694,625
Borrowings 11,083,110 9,629,177 1,453,933 11,283,963 10,409,114 874,849
Stockholders' equity 2,184,827 2,122,974 61,853 2,154,243 2,018,788 135,455
- ---------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER
OPERATING HIGHLIGHTS 2002 2001 Change
(In thousands, except per share information)
- ----------------------------------------------------------------------------------------------------
Net interest income $285,015 $255,717 $29,298
Provision for loan losses 54,454 50,034 4,420
Fees and other income 130,808 115,521 15,287
Other expenses 272,325 247,658 24,667
Cumulative effect of accounting changes -- 686 (686)
Net income $ 89,044 $ 74,232 $14,812
Net income applicable to common stock $ 86,534 $ 72,145 $14,389
Earnings per common share $ 0.63 $ 0.53 $ 0.10
- ----------------------------------------------------------------------------------------------------
SELECTED STATISTICAL FIRST QUARTER
INFORMATION 2002 2001
- -----------------------------------------------------------------------------------------------------------
COMMON STOCK DATA - Market price
High $29.94 $29.45
Low 27.50 25.25
End 29.22 29.45
Book value at period ended 16.01 14.86
Dividends declared 0.20 0.16
Dividends payout ratio 30.81% 30.16%
Price/earnings ratio 12.87x 14.44x
- -----------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS - Return on assets 1.19% 1.09%
Return on common equity 16.83 15.25
Net interest spread (taxable equivalent) 3.79 3.41
Net interest yield (taxable equivalent) 4.29 4.21
Effective tax rate 25.29 26.97
Overhead ratio 39.07 41.06
Efficiency ratio 57.61 59.38
- -----------------------------------------------------------------------------------------------------------
CAPITALIZATION RATIOS - Equity to assets 7.08% 7.28%
Tangible equity to assets 6.29 6.34
Equity to loans 11.93 12.45
Internal capital generation 11.35 9.98
Tier I capital to risk - adjusted assets 10.20 10.63
Total capital to risk - adjusted assets 11.99 12.59
Leverage ratio 6.34 6.59
- -----------------------------------------------------------------------------------------------------------
26
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 offers a
wide range of products and services to consumer and corporate customers in
Puerto Rico, the United States, the Caribbean and Central America. The
Corporation's subsidiaries are 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. and Popular
Leasing, U.S.A.
- - Mortgage and Consumer Lending - Popular Mortgage, Inc., Equity One,
Inc., Popular Finance, Inc. and Newco Mortgage Holding Corporation
(d/b/a Levitt Mortgage)
- - 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. and Popular Insurance Agency
U.S.A., Inc.
OVERVIEW
The Corporation reported a 20% increase in net income for the first quarter of
2002 reaching $89.0 million, compared with $74.2 million for the same quarter in
2001. Earnings per common share (EPS), basic and diluted, for the quarter were
$0.63, compared with $0.53 on the first quarter of 2001. Refer to Note 12 to the
consolidated financial statements for a reconciliation of the average shares
used in the computation of basic and diluted EPS. Return on assets (ROA) and
return on common equity (ROE) for the quarter ended March 31, 2002 were 1.19%
and 16.83%, respectively, compared with 1.09% and 15.25% for the same period in
2001.
The Corporation's results of operations for the quarter ended March 31, 2002
reflected an increase of $29.3 million in net interest income and $19.6 million
in operating income, excluding derivatives, securities and trading transactions
compared with the same quarter the prior year. Derivatives gains for the quarter
amounted to $0.5 million, an improvement of $1.1 million, compared with losses
of $0.6 million at March 31, 2001. These favorable variances were partially
offset by higher losses on sale of securities and trading transactions of $5.5
million, higher operating expenses of $21.7 million and an increase in income
taxes of $3.0 million.
CRITICAL ACCOUNTING POLICIES
For a summary of the Corporation's Critical Accounting Policies, refer to that
particular section in the Management Discussion and Analysis included in
Popular, Inc.'s 2001 Financial Review and Supplementary Information to
Stockholders, incorporated by reference in Popular, Inc.'s Annual Report on Form
10-K. Also, refer to Note 1 to the consolidated financial statements included in
said report for a summary of the Corporation's significant accounting policies.
27
NET INTEREST INCOME
Net interest income for the first quarter of 2002 reached $285.0 million, an
increase of 11% compared with $255.7 million in the same period of 2001. On a
taxable equivalent basis, net interest income increased to $310.1 million from
$276.0 million in the same quarter of 2001.
The improvement of $34.1 million in net interest income, on a taxable equivalent
basis, from the first quarter of 2001 resulted from a $17.9 million increase due
to a higher volume of earning assets and a $16.2 million increase due to a
higher net interest yield. For analytical purposes, the interest earned on
tax-exempt assets is adjusted to a taxable equivalent basis assuming the
applicable statutory income tax rates.
Table B summarizes the changes in the composition of average earning assets and
interest-bearing liabilities, and their respective interest income and expense,
yields and costs, on a taxable equivalent basis, for the first quarter of 2002,
as compared with the same quarter in 2001.
TABLE B
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
QUARTER ENDED MARCH 31,
VARIANCE
AVERAGE VOLUME AVERAGE YIELDS/COSTS INTEREST ATTRIBUTABLE TO
2002 2001 VARIANCE 2002 2001 VARIANCE 2002 2001 VARIANCE RATE VOLUME
- ------------------------------------------------ ----------------------------------------------------
($ in millions) (In thousands)
Money market
$ 927 $ 959 $ (32) 3.41% 6.47% (3.06%) investments $ 7,785 $ 15,306 $ (7,521) $ (6,899) $ (622)
9,526 8,779 747 5.67 7.13 (1.46) Investment securities 134,889 156,370 (21,481) (31,703) 10,222
345 214 131 4.21 6.86 (2.65) Trading securities 3,583 3,621 (38) (1,733) 1,695
- ------------------------------------------------ ----------------------------------------------------
10,798 9,952 846 5.43 7.06 (1.63) 146,257 175,297 (29,040) (40,335) 11,295
- ------------------------------------------------ ----------------------------------------------------
Loans:
Commercial and
7,611 7,292 319 6.78 9.13 (2.35) construction 127,300 164,149 (36,849) (43,762) 6,913
860 835 25 11.23 11.61 (0.38) Leasing 24,137 24,223 (86) (813) 727
6,474 4,799 1,675 7.82 8.38 (0.56) Mortgage 126,634 100,496 26,138 (6,989) 33,127
3,113 3,290 (177) 12.41 13.03 (0.62) Consumer 96,147 106,546 (10,399) (5,000) (5,399)
- ------------------------------------------------ ----------------------------------------------------
18,058 16,216 1,842 8.34 9.83 (1.49) 374,218 395,414 (21,196) (56,564) 35,368
- ------------------------------------------------ ----------------------------------------------------
$ 28,856 $26,168 $2,688 7.25% 8.78% (1.53%) TOTAL EARNING ASSETS $520,475 $570,711 ($50,236) ($ 96,899) $46,663
================================================ ====================================================
Interest bearing deposits:
$ 2,493 $ 1,966 $ 527 2.41% 3.51% (1.10%) NOW and money market $ 14,844 $ 16,998 ($ 2,154) ($ 5,810) $ 3,656
4,470 4,076 394 2.58 2.87 (0.29) Savings 28,459 28,798 (339) (3,032) 2,693
6,378 5,793 585 4.43 6.09 (1.66) Time deposits 69,628 86,981 (17,353) (25,853) 8,500
- ------------------------------------------------ ----------------------------------------------------
13,341 11,835 1,506 3.43 4.55 (1.12) 112,931 132,777 (19,846) (34,695) 14,849
- ------------------------------------------------ ----------------------------------------------------
7,263 7,892 (629) 2.48 6.12 (3.64) Short-term borrowings 44,443 119,118 (74,675) (67,882) (6,793)
4,021 2,517 1.504 5.34 6.89 (1.55) Medium and long-term
- ------------------------------------------------ debt 53,030 42,839 10,191 (10,545) 20,736
----------------------------------------------------
TOTAL INTEREST-BEARING
24,625 22,244 2,381 3.46 5.37 (1.91) LIABILITIES 210,404 294,734 (84,330) (113,122) 28,792
3,185 2,997 188 Demand deposits
1,046 927 119 Other sources of funds
- ------------------------------------------------ ----------------------------------------------------
$ 28,856 $26,168 $2,688 2.96% 4.57% (1.61%)
================================================
4.29% 4.21% 0.08% NET INTEREST MARGIN
==================== AND NET INTEREST INCOME
ON A TAXABLE
EQUIVALENT BASIS 310,071 275,977 34,094 $ 16,223 $17,871
====================
NET INTEREST SPREAD
3.79% 3.41% 0.38%
====================
TAXABLE EQUIVALENT
ADJUSTMENT 25,056 20,260 4,796
------------------------------
NET INTEREST INCOME $285,015 $255,717 $ 29,298
==============================
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.
28
Average earning assets increased by $2.7 billion or 10%, primarily due to higher
average loan volume by $1.8 billion, mostly mortgage loans. The interest rate
environment has stimulated mortgage originations and the refinancing through
mortgage loans. The mortgage loan portfolio contributed with $33 million in
additional interest income due to its higher volume when compared with the first
quarter in 2001. The average commercial loan portfolio increased by $319
million. The rise resulted from the Corporation's sustained business growth in
both the retail and middle markets. Average investment securities also rose by
$747 million or 9% compared with the first quarter of 2001, mostly in
mortgage-backed securities, collateralized mortgage obligations and U.S. Agency
securities. The rise was partly attributed to investment opportunities
undertaken during this quarter and the latter part of 2001.
The average yield on earning assets, on a taxable equivalent basis, declined
153 basis points from 8.78% in the first quarter of 2001 to 7.25% during the
first quarter of 2002. The reduction can be attributed to the lower interest
rate scenario, which resulted from the Federal Reserve easing cycle that
prevailed during 2001. Commercial loans had the major impact due to their
repricing characteristics and to the origination of new loans in a lower rate
environment. The decrease in yield in this loan category amounted to 235 basis
points. As of March 31, 2002, approximately 50% of the commercial and
construction loan portfolios had floating or adjustable rates. The average
yield on investment securities decreased from 7.13% in the first quarter of
2001 to 5.67% for the same quarter this year. The reduction of 146 basis points
resulted primarily from the maturity during the year of investment securities
with a higher yield. In addition, the growth in the investment portfolio during
a period of lower interest rates also led to the decline in yield.
The increase of $2.4 billion in average interest-bearing liabilities for the
first quarter of 2002, as compared with the same quarter in 2001, was mostly
reflected in average interest-bearing deposits. NOW and money market deposits,
and savings accounts increased favorably by $527 million and $394 million,
respectively. The time deposits category increased in average by $585 million
or 10% from March 31, 2001. Brokered deposits, which are included in the time
deposits category, increased from $490 million to $732 million, a rise of $242
million or 49%.
Average short-term borrowings, which are comprised mostly of Fed funds,
repurchase agreements and commercial paper, decreased by $629 million or 8% in
the first quarter of 2002, compared with the same quarter last year, while
longer-term borrowings increased by $1.5 billion or 60%. The increase in
long-term debt, which is debt with an original maturity of more than one year,
was principally due to the issuance of medium term notes and secured borrowings
arising in securitization transactions. The shift in the composition of debt
primarily results from the extension of the duration of the Corporation's
borrowings to reduce future interest rate risk, and better positioned itself
for a rising rate scenario.
The average cost of interest-bearing liabilities decreased 191 basis points
when compared with the same quarter of 2001. The decline is mostly due to a
lower cost of short-term borrowed money by 364 basis points and to the lower
cost of time deposits by 166 basis points, attributed to the lower interest
rate scenario.
The Corporation's net interest margin, on a taxable equivalent basis, for the
first quarter of 2002 was 4.29% compared with 4.21% in the same quarter of
2001. The Federal Reserve Monetary Policy positively impacted the net interest
margin of the Corporation, due to its liability sensitive structure at the
beginning of the easing cycle, in which more interest-bearing liabilities
repriced than earning assets.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses totaled $54.5 million for the first quarter of
2002 and $50.0 million for the same period in 2001, an increase of $4.5 million
or 9%. The increase reflects the growth in the loan portfolio and higher net
charge-offs. The provision for loan losses reflects management's assessment of
the adequacy of the allowance for loan losses to cover probable losses
inherent in the loan portfolio after taking into account loan impairment and
net charge-offs for the current period. The provision exceeded the net
charge-offs for the quarter by $4.8 million.
29
The methodology used to establish the allowance for loan losses is based on
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No.
5 "Accounting for Contingencies." Under SFAS No. 114, certain commercial loans
are identified for evaluation on an individual basis, and specific reserves are
calculated based on impairment. SFAS No. 5 provides for the recognition of a
loss allowance for a group of homogeneous loans when it is probable that a loss
will be incurred and the amount can be reasonably estimated.
In determining the allowance, management considers the portfolio risk
characteristics, the results of periodic credit reviews of individual loans,
the value of the collateral, prior loss experience, current economic conditions
and loan impairment measurement, among other factors. Management's judgment of
the quantitative factors as well as qualitative factors results in the final
determination of the provision for loan losses to maintain a level of allowance
for loan losses which is deemed to be adequate. The adequacy of the allowance
for loan losses is evaluated on a monthly basis.
The allowance for loan losses amounted to $342 million as of March 31, 2002, or
1.87% of loans, compared with $305 million or 1.85% at the same date in 2001.
At December 31, 2001, the allowance for loan losses totaled $337 million or
1.85% of loans. The Corporation's management considers the allowance for loan
losses to be at a level sufficient to provide for estimated losses based on
current economic conditions, the expected level of net loan losses and the
methodology established to evaluate the adequacy of the allowance for loan
losses. For more information regarding the allowance for loan losses and asset
quality refer to the Credit Quality section.
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 March 31, 2002, December 31, 2001 and March 31,
2001.
MARCH 31, 2002 December 31, 2001 March 31, 2001
(In millions)
RECORDED VALUATION Recorded Valuation Recorded Valuation
INVESTMENT ALLOWANCE Investment Allowance Investment Allowance
- -----------------------------------------------------------------------------------------------------------------------------------
Impaired loans:
Valuation allowance required $ 95.6 $38.3 $ 90.9 $36.8 $118.4 $28.7
No valuation allowance required 52.7 53.1 49.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total impaired loans $148.3 $38.3 $144.0 $36.8 $167.6 $28.7
- -----------------------------------------------------------------------------------------------------------------------------------
Average impaired loans during the first quarter of 2002 and 2001 were $146
million and $161 million, respectively. The Corporation recognized interest
income on impaired loans of $0.8 million and $0.9 million, respectively, for
the quarters ended March 31, 2002 and 2001.
Table C summarizes the movement in the allowance for loan losses and presents
selected loan loss statistics for the quarters ended March 31, 2002 and 2001.
As shown in Table C, net charge-offs for the quarter ended March 31, 2002 were
$49.7 million or 1.10% of average loans compared with $36.1 million or 0.89% of
average loans for the first quarter of 2001. Net charge-offs increased mainly
in the commercial and construction loan portfolios, rising $11.8 million
compared with the first quarter of 2001.
30
TABLE C
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
FIRST QUARTER
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------
Balance at beginning of period $336,632 $290,653
Allowance Purchased 343 738
Provision for loan losses 54,454 50,034
- -----------------------------------------------------------------------------------------------
391,429 341,425
- -----------------------------------------------------------------------------------------------
Losses charged to the allowance:
Commercial 23,840 14,370
Construction 3,320 1,000
Lease financing 10,755 7,255
Mortgage 2,511 1,500
Consumer 25,483 24,361
- -----------------------------------------------------------------------------------------------
65,909 48,486
- -----------------------------------------------------------------------------------------------
Recoveries:
Commercial 3,632 3,825
Construction 159
Lease financing 6,479 2,272
Mortgage 218 116
Consumer 5,736 6,143
- -----------------------------------------------------------------------------------------------
16,224 12,356
- -----------------------------------------------------------------------------------------------
Net loans charged-off:
Commercial 20,208 10,545
Construction 3,161 1,000
Lease financing 4,276 4,983
Mortgage 2,293 1,384
Consumer 19,747 18,218
- -----------------------------------------------------------------------------------------------
49,685 36,130
- -----------------------------------------------------------------------------------------------
Balance at end of period $341,744 $305,295
===============================================================================================
Ratios:
Allowance for losses to loans 1.87% 1.85%
Allowance to non-performing assets 69.24 83.01
Allowance to non-performing loans 74.45 89.76
Non-performing assets to loans 2.70 2.23
Non-performing assets to total assets 1.63 1.35
Net charge-offs to average loans 1.10 0.89
Provision to net charge-offs 1.10x 1.38x
Net charge-offs earnings coverage 3.50 4.17
Commercial and construction loans net charge-offs amounted to $23.4 million for
the first quarter of 2002, compared with $11.5 million for the same period last
year. As a percentage of average commercial and construction loans, these net
credit losses increased from 0.63% in the first quarter of 2001 to 1.23% in the
quarter ended in March 31, 2002. The rise in commercial loans net charge-offs
was related to the growth in the commercial loan portfolio as well as the
increase in non-performing assets, this last as a consequence of the slowdown
of the economy since 2001, which is still affecting credit losses. Moreover, in
2002, the Corporation recorded a $3.7 million charge-off on a participation
loan pertaining to Kmart, sold at a discount during the quarter.
Consumer loans net charge-offs increased $1.5 million or 8% for the quarter
ended March 31, 2002, from $18.2 million in the same quarter of 2001. These net
charge-offs represented 2.54% of average consumer loans for the quarter ended
in March 31, 2002, compared with 2.21% for the same quarter last year. The
increase was mostly related to higher delinquencies in the credit card
portfolio.
31
Mortgage loans net charge-offs amounted to $2.3 million for the quarter ended
March 31, 2002, compared with $1.4 million for the same period last year, an
increase of $0.9 million or 66%, mostly as a result of the growth in the
portfolio. These net charge-offs represented 0.14% of average mortgage loans at
the end of the first quarter of 2002, compared with 0.12% at March 31, 2001.
The aforementioned rise in net charge-offs in the commercial, consumer and
mortgage loan portfolios for the quarter ended March 31, 2002, was partially
offset by a decrease of $0.7 million in lease financing net charge-offs. These
net charge-offs totaled $4.3 million or 1.99% of the average lease financing
portfolio for the quarter ended March 31, 2002, compared with $5.0 million or
2.39% for the same period in 2001.
CREDIT QUALITY
Non-performing assets consist of past-due loans that are no longer accruing
interest, renegotiated loans and real estate property acquired through
foreclosure. A summary of non-performing assets by loan categories and related
ratios is presented in Table D.
TABLE D
NON-PERFORMING ASSETS
MARCH 31, December 31, March 31,
(Dollars in thousands) 2002 2001 2001
- ------------------------------------------------------------------------------------------------------------------------
Commercial, construction, industrial and $199,290 $198,556 $191,464
agricultural
Lease financing 11,366 10,297 11,308
Mortgage 208,682 176,967 98,430
Consumer 39,687 40,946 38,921
Other real estate 34,550 31,532 27,638
- ------------------------------------------------------------------------------------------------------------------------
Total $493,575 $458,298 $367,761
========================================================================================================================
Accruing loans past-due 90 days or more $ 24,771 $ 24,613 $ 21,700
========================================================================================================================
Non-performing assets to loans 2.70% 2.52% 2.23%
Non-performing assets to assets 1.63 1.49 1.35
It is the Corporation's policy 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. Unsecured retail loans to borrowers who declare
bankruptcy are charged-off within 60 days of receipt of notification of filing
from the bankruptcy court.
Non-performing assets were $494 million or 2.70% of ending loans at March 31,
2002, compared with $368 million or 2.23% at the same date last year and $458
million or 2.52% at December 31, 2001.
The increase in non-performing assets since March 31, 2001 and December 31,
2001 was mostly reflected in mortgage loans, which rose by $110 million and $32
million, respectively, principally due to the growth in the portfolio.
Non-performing mortgage loans were $209 million or 42% of non-performing assets
and 3.13% of total mortgage loans as of March 31, 2002, compared with $98
million or 27% of non-performing assets and 1.96%
32
of total mortgage loans as of March 31, 2001. At the end of 2001,
non-performing mortgage loans were $177 million or 39% of non-performing assets
and 2.72% of total mortgage loans. The Corporation has experienced a low level
of losses in its mortgage portfolio, historically, both in the U.S. mainland
and Puerto Rico.
Commercial and construction non-performing loans also increased $7.8 million as
of March 31, 2002 from the same date in 2001, and $0.7 million since December
31, 2001. The increase was principally due to the economic slowdown experienced
since 2001, but also to the growth in these portfolios, which increased by $247
million from March 31, 2001. Non-performing commercial and construction loans
represented 2.61% of that portfolio at March 31, 2002, compared with 2.59% at
both March 31, 2001 and December 31, 2001.
Non-performing consumer loans amounted to $40 million or 1.29% of consumer
loans as of March 31, 2002, compared with $39 million or 1.19% at March 31,
2001, and $41 million or 1.31% at December 31, 2001.
Non-performing financing leases amounted to $11 million or 1.32% of the lease
financing portfolio as of March 31, 2002, compared with $11 million or 1.35% as
of March 31, 2001 and $10 million or 1.20% as of December 31, 2001. The rise
since December 31, 2001 was the result of the growth in the portfolio as well
as higher delinquencies.
At March 31, 2002, the allowance for loan losses as a percentage of
non-performing loans was 74.45%, compared with 89.76% at March 31, 2001 and
78.88% at December 31, 2001. 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 95% of total loan
growth since March 31, 2001. 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 total
allowance for loan losses to non-performing loans was 136.51% as of March 31,
2002, compared with 126.32% and 134.76% as of March 31, 2001 and December 31,
2001, respectively.
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 March 31, 2002 would have been $425
million or 2.33% of loans, and the allowance for loan losses would have been
80.38% of non-performing assets. At March 31, 2001 and December 31, 2001,
adjusted non-performing assets would have been $292 million or 1.77% of loans
and $389 million or 2.14% of loans, respectively, and the allowance to
non-performing assets would have been 104.65% and 86.57%, respectively.
OPERATING INCOME
Operating income, excluding securities, trading and derivatives transactions,
totaled $135.3 million for the quarter ended March 31, 2002, an increase of
$19.6 million or 17% compared with $115.7 million in the same period of 2001.
Refer to Table E for a breakdown of operating income by major categories.
33
TABLE E
Operating Income
First Quarter
(Dollars in thousands) 2002 2001 Change
- -----------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 38,973 $ 34,658 $ 4,315
- -----------------------------------------------------------------------------------------------------------------
Other service fees:
Credit card fees and discounts 14,468 13,569 899
Debit card fees 10,071 9,522 549
Processing fees 9,169 9,106 63
Other fees 7,831 7,485 346
Check cashing fees 5,262 4,581 681
Sale and administration of investment products 4,705 4,401 304
Insurance fees 4,677 4,432 245
Mortgage servicing fees, net of amortization 2,894 3,078 (184)
Trust fees 2,610 2,520 90
- -----------------------------------------------------------------------------------------------------------------
Total other service fees 61,687 58,694 2,993
- -----------------------------------------------------------------------------------------------------------------
Other operating income 17,111 13,173 3,938
- -----------------------------------------------------------------------------------------------------------------
Gain on sale of loans 17,566 9,149 8,417
- -----------------------------------------------------------------------------------------------------------------
Total operating income $135,337 $115,674 $19,663
=================================================================================================================
Note: For purposes of this management discussion and analysis, operating
income excludes securities, trading and derivative gains/losses.
- -------------------------------------------------------------------------------
Service charges on deposit accounts reached $39.0 million in the first quarter
of 2002, an increase of $4.3 million or 12%, compared with $34.7 million in the
first quarter of 2001. This increase was primarily the result of higher
commercial account charges, and to new charges implemented during 2001.
Other service fees for the first quarter of 2002 rose by $3.0 million, or 5%,
compared with $58.7 million in the first quarter of 2001. This increase is
mostly attributed to higher credit card fees and discounts, debit card and
check cashing fees. Higher credit card fees and discounts are associated mostly
to increases in late payment fees and merchant discount income. Debit card fees
rose as a result of the continued growth in the point-of-sale terminals and
automated teller machines network and to higher transactional volume. Average
debit card transactions increased to approximately 8.7 million as of March 31,
2002, from 6.4 million a year earlier. The rise in check-cashing fees was
driven by the continuous expansion of Popular Cash Express in the United
States.
Other operating income amounted to $34.7 million in 2002, an increase of $12.4
million or 55% from $22.3 million in the first quarter of 2001. The rise in
other operating income is mostly the result of higher gains on the sales of
mortgage loans and loans guaranteed by the Small Business Administration (SBA).
The increase in other operating income is also due to higher underwriting
profits derived by the Corporation's broker/dealer subsidiary and to higher
income recorded on the investments carried on the equity method.
SECURITIES, TRADING AND DERIVATIVES GAINS/LOSSES
For the first quarter of 2002, the Corporation reported losses of $4.0 million
in the sale of securities, coupled with losses of $1.0 million in trading
account transactions, compared with gains of $0.3 million and $0.2 million
respectively, for the same period in 2001. The loss on sale of securities for
the first quarter of 2002 resulted mainly from the sale of $710 million in U.S.
Agency Securities, as part of the positioning strategies followed by the
Corporation in the current interest rate environment. Proceeds of this sale
were reinvested at higher yields.
34
Gain on derivatives reached $0.5 million at March 31, 2002, an improvement of
$1.1 million compared with losses of $0.6 million at March 31, 2001. These
gains on derivatives resulted from adjustments to the fair value of the
interest rate swaps and swaptions entered into by the Corporation.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Upon the adoption of SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities," on January 1st, 2001, the Corporation recognized $0.7
million (net of tax) in income as a cumulative effect of accounting change.
During the first quarter of 2001, the Corporation adopted the provisions of
SFAS No. 142 "Goodwill and Other Intangibles Assets." As further discussed in
Notes 1 and 7 to the consolidated financial statements, the Corporation did not
record any cumulative effect of accounting change in connection with the
adoption provisions of this statement.
OPERATING EXPENSES
During the first quarter of 2002, operating expenses were $242.2 million, an
increase of $21.7 million or 10%, compared with $220.5 million in the same
period of 2001.
Personnel costs, the largest category of operating expenses, totaled $120.3
million in the first quarter of 2002, an increase of $15.4 million or 15%
compared with $104.9 million in the same period last year. The increase in
personnel cost is mostly due to increase in headcount, annual merit increases,
higher incentive compensation and pension and other benefits. At March 31,
2002, full-time equivalent employees (FTEs) were 11,332, an increase of 506
employees from 10,826 FTEs at March 31, 2001. Partially offsetting the rise in
personnel costs was a lower profit sharing expense due to a lower return on
equity at BPPR.
Other operating expenses, excluding personnel costs, amounted to $121.9 million
for the first quarter of 2002, an increase of $6.2 million or 5% when compared
with the same period in 2001. This rise was mainly reflected in the categories
of net occupancy expenses, business promotion, professional fees and other
operating expenses, offset in part by lower amortization of intangible assets.
Net occupancy expenses rose as a result of the Corporation's continued business
expansion. The increase in business promotion was mainly associated to higher
advertising and public relations expenses, related in part to an aggressive
marketing campaign mostly directed to the mortgage lending segment, and to
programs associated with the Corporation's involvement and contributions to the
community. Professional fees rose due to higher legal and consulting services,
marketing research and other professional services. The increase in other
expenses was mostly associated to higher interchange, volume and processing
fees on credit cards, sundry losses and travelling expenses. Partially
offsetting these rises was the decrease in the amortization of intangibles
associated with the adoption of SFAS No. 142 "Goodwill and Other Intangible
Assets," which no longer permits the amortization of goodwill and other
intangibles that have indefinite useful lives, but rather requires that they be
tested at least annually for impairment. Goodwill amortization for the quarter
ended March 31, 2001 approximated $4.3 million. Refer to Note 7 to the
consolidated financial statements for further information on the impact of the
adoption of SFAS No. 142. The Corporation did not recognize any impairment of
goodwill nor a cumulative effect of accounting change in connection with the
adoption provisions of SFAS No 142.
Income taxes rose $3.0 million from $27.2 million in the first quarter of 2001,
to $30.1 million at March 31, 2002. The effective tax rate for the first
quarter of 2002 was 25.29% compared with 26.97% for the same period in 2001.
BALANCE SHEET COMMENTS
The Corporation's total assets at March 31, 2002 reached $30.3 billion, an
increase of $3.0 billion or 11.0%, compared with $27.3 billion a year earlier.
At December 31, 2001, total assets were $30.7 billion. Earning assets totaled
$28.9 billion at March 31, 2002, compared with $25.7 billion and $29.1 billion
at March 31, 2001 and December 31, 2001, respectively.
35
The investment portfolio reached $9.6 billion, an increase of $1.6 billion or
20%, compared with $8.0 billion at March 31, 2001. The increase since March
2001 was mostly related to investment opportunities undertaken by the
Corporation during the later part of 2001. Investment securities at December
31, 2001 were $9.9 billion. Refer to Notes 3 and 4 to the consolidated
financial statements for a breakdown of the Corporation's investment portfolio.
Table F presents a breakdown of the Corporation's loan portfolio. Total loans
at March 31, 2002 amounted to $18.3 billion, a slight increase of $88 million
or less than 1% from December 31, 2001. Total loans were $16.5 billion at March
31, 2001. Mortgage loans contributed with the largest growth in the portfolio
since December 31, 2001, rising $179 million, offset by a decline in consumer
and commercial (including construction) loans of $46 million and $49 million,
respectively. Consumer loans declined principally in credit cards and personal
loans. The decline in commercial loans was partly due to $49 million in SBA
loans sold during this quarter. When compared with the same date last year, the
loan portfolio reflects increases in mortgage and commercial loans (including
construction) of $1.7 billion and $247 million, respectively. The rise in the
mortgage loan portfolio was principally due to the favorable low interest rate
scenario that has prevailed during the second half of 2001 and in the first
quarter of 2002, which results in a high demand for mortgage loans, including
refinancing activities. Also, it is due to increased sales force efforts and
marketing campaigns. On the other hand, consumer loans declined $177 million
since March 31, 2001, particularly personal loans, partly related to high
volume of refinancing activity through mortgage loans.
TABLE F
LOANS ENDING BALANCES
MARCH 31, December 31, March 31,
(Dollars in thousands) 2002 2001 2001
- -------------------------------------------------------------------------------------------------------------
Commercial, industrial and agricultural $ 7,379,137 $ 7,420,738 $ 7,111,151
Construction 251,003 258,453 271,715
Lease financing 864,008 859,119 839,786
Mortgage* 6,676,227 6,497,459 5,023,423
Consumer 3,086,549 3,132,782 3,263,402
- -------------------------------------------------------------------------------------------------------------
Total $18,256,924 $18,168,551 $16,509,477
=============================================================================================================
* Includes loans held-for-sale
Other assets were $549 million at March 31, 2002, an increase of $52 million or
11%, compared with December 31, 2001. The increase in other assets is mainly
due to an increase in accounts receivables, mostly related to sale
transactions. Also, there was an increase in deferred taxes, as a result of
unrealized losses on securities available-for-sale. Other assets totaled $418
million at March 31, 2001. The increase since that date is mostly related to
similar factors, coupled with the investments 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.
At March 31, 2002, total deposits amounted to $16.5 billion, compared with
$16.4 billion at December 31, 2001. Savings deposits increased $314 million
compared with December 31, 2001, while demand deposits decreased by $180
million, mostly in commercial accounts. Time deposits, including brokered
certificates of deposit, remained relatively stable, reflecting a slight
increase of $20 million. At March 31, 2001 total deposits were $15.1 billion.
The growth in the deposits base from March 31, 2001 to 2002 was reflected in
all deposit categories. Demand, savings and time deposits grew by $103 million,
$868 million and $460 million, respectively, from March 31, 2001.
Borrowed funds, including subordinated notes and capital securities decreased
slightly from $11.6 billion at December 31, 2001 to $11.1 billion at March 31,
2002. Borrowed funds at March 31, 2001 totaled $9.6 billion. The rise in
borrowed funds since March 31, 2001 was primarily as a result of loan growth
and investment opportunities. Refer to the Liquidity section for further
information as to the composition of the Corporation's funding sources.
36
The Corporation's stockholders' equity at March 31, 2002 was $2.2 billion,
compared with $2.1 billion at March 31, 2001 and $2.3 billion at the end of
2001. The decline in equity since December 31, 2001 was impacted by the
redemption of $100 million of the Corporation's preferred stock in January 22,
2002. The redemption consisted of the repurchase of shares at the liquidation
preference value of $25.50 per share plus accrued dividends, for a total
repurchase price of $25.6276 per share. The price paid in excess of the
liquidation preference value, which totaled $2 million, was deducted from the
net income applicable to common stock in this quarter's earnings per common
share computation. In addition, accumulated other comprehensive income declined
by $50 million, from $80 million at December 31, 2001 to $30 million at March
31, 2002. This decline resulted from lower unrealized gains, net of taxes, on
securities available-for-sale by $49 million. Dividends declared per common
share for the first quarter of 2002 were $0.20, compared with $0.16 in 2001.
The dividend payout ratio to common stockholders for the quarter was 30.81%
compared with 30.16% in March 31, 2001.
Table G presents the Corporation's capital adequacy information for the
quarters ended in March 31, 2002 and 2001 and December 31, 2001. The
Corporation continues to exceed the well-capitalized guidelines under the
federal banking regulations.
TABLE G
CAPITAL ADEQUACY DATA
- ------------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(Dollars in thousands) 2002 2001 2001
- ------------------------------------------------------------------------------------------------------------------
Risk-based capital
Tier I capital $ 1,903,589 $ 1,849,305 $ 1,801,296
Supplementary (Tier II) capital 334,747 330,213 332,511
- ------------------------------------------------------------------------------------------------------------------
Total capital $ 2,238,336 $ 2,179,518 $ 2,133,807
==================================================================================================================
Risk-weighted assets
Balance sheet items 18,197,827 18,087,672 16,452,469
Off-balance sheet items 469,492 479,691 490,034
- ------------------------------------------------------------------------------------------------------------------
Total risk-weighted assets $18,667,319 $18,567,363 $16,942,503
==================================================================================================================
Ratios:
Tier I capital (minimum required - 4.00%) 10.20% 9.96% 10.63%
Total capital (minimum required - 8.00%) 11.99% 11.74% 12.59%
Leverage ratio (minimum required - 3.00%) 6.34% 6.46% 6.59%
Book value per common share was $16.01 at March 31, 2002, compared with $14.86
at the end of the first quarter of 2001, and $15.93 at December 31, 2001. The
market value of the Corporation's common stock at March 31, 2002 was $29.22 per
share, compared with $29.45 at March 31, 2001, and $29.08 at December 31, 2001.
The Corporation's market capitalization at March 31, 2002, March 31, 2001 and
December 31, 2001 was $4.0 billion. The Corporation's stock is traded on the
National Association of Securities Dealers Automated Quotation (NASDAQ)
National Market System under the symbol BPOP.
MARKET RISK
Market risk refers to the impact of changes in interest rates on the
Corporation's net interest income, market value of equity and trading
operations. It also arises from fluctuations in the value of some foreign
currencies against the U.S. dollar. Despite the varied nature of market risks,
the primary source of this risk at the Corporation is the impact of changes in
interest rates. Depending on the duration and repricing characteristics of the
Corporation's assets, liabilities and derivatives instruments, changes in
interest rates could either increase or decrease the level
37
of net interest income. The Corporation maintains a formal asset and liability
management process to quantify, monitor and control interest rate risk (IRR)
and to assist management in maintaining stability in the net interest margin
under varying interest rate environments.
The Corporation uses various techniques to assess the degree of interest rate
risk, including simulation analysis and static gap estimates for measuring
short-term IRR, and duration analysis to quantify the level of long-term IRR.
These techniques focus on different aspects of the interest rate risk that is
assumed at any point in time, and are therefore used jointly to make informed
judgments 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 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 March 31, 2002, the
change in net interest income, on a hypothetical rising rate scenario, for the
next twelve months was a $11.5 million decrease and the change for the same
period, utilizing a hypothetical declining rate scenario, was an increase of
$9.0 million. Both hypothetical rate scenarios consider a gradual change of 150
basis points during the twelve-month period. These estimated changes are within
the policy guidelines established by the Board of Directors.
The Corporation maintains an overall interest rate risk management strategy
that incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate volatility.
The Corporation's goal is to manage interest rate sensitivity by modifying the
repricing or maturity characteristics of certain balance sheet assets and
liabilities so that the net interest margin is not, on a material basis,
adversely affected by movements in interest rates. Derivative instruments that
are used, to a limited extent, include 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
rate contracts.
As a matter of policy, the Corporation does not use highly leveraged derivative
instruments for interest rate risk management. Hedging strategies are developed
through analysis of data derived from financial simulation models and other
internal and industry sources. The resulting hedging strategies are then
incorporated into Popular Inc.'s overall interest rate risk management and
trading strategies. These hedging strategies are managed by the Market Risk
Committee, composed of members from management, and monitored by the Board's
Risk Management Committee. Refer to Note 6 to the consolidated financial
statements for further information on the Corporation's involvement in
derivative instruments and hedging activities.
The Corporation's trading activities are another source of market risk and are
subject to strict guidelines approved by the Board of Directors. Most of the
Corporation's trading activities are limited to the purchase of debt securities
for the purpose of selling them in the near term and positioning securities for
resale to retail customers. As the trading instruments are recognized at market
value, the changes resulting from fluctuations in market prices, interest rates
or exchange rates directly affect reported income. In the opinion of
management, the size and composition of the trading portfolio as of March 31,
2002 does not represent a potentially significant source of market risk for the
Corporation. The Corporation does not participate in any trading activities
involving commodity contracts.
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 interest in Consorcio de Tarjetas
38
Dominicanas, S.A. 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 of the Corporation's investment in
these companies.
LIQUIDITY
Liquidity refers to the ability to fund current operations, including the cash
flow requirements of depositors and borrowers as well as future growth. These
needs can be met by generating profits, attracting new depositors, converting
assets to cash through sales or securitizations and increasing borrowings. The
Corporation utilizes various sources of funding to help ensure that adequate
levels of liquidity are always available.
The Corporation raises its funding from a combination of retail and wholesale
markets. Historically, core deposits have been the Corporation's primary source
of funding, although wholesale borrowings have become an increasingly important
source. Retail sources of funds include individual and corporate depositors in
the market where the Corporation competes, which over the past several years
has become more geographically diverse as a result of acquisitions and
expansion of the Corporation's business. Deposits tend to be less volatile than
institutional borrowings and their cost is less sensitive to changes in market
rates.
The Corporation has also established borrowing relationships with FHLB and
other correspondent banks, which further support and enhance liquidity.
Wholesale or institutional sources of funds comprise primarily other financial
intermediaries such as commercial banks, securities dealers, investment
companies, insurance companies, as well as non-financial corporations.
Another important liquidity source to the Corporation is its assets,
particularly the investment portfolio. Refer to Notes 3 and 4 to the
consolidated financial statements for further information as to the composition
of the available-for-sale and held-to-maturity investment portfolios. Liquid
U.S. Treasury and Agency securities can be used to raise funds in the repo
markets. The loan portfolio can also be used to obtain funding in the capital
markets. In particular, mortgage loans and some types of consumer loans and to
a lesser extent commercial loans, have highly developed secondary markets. In
addition, other sources of liquidity include maturities of money market
investments, repayments of loans and investment securities, and cash generated
from operations, such as fees collected for services.
RISKS TO LIQUIDITY
The Corporation's ability to compete successfully in the marketplace for
deposits depends on various factors, including service, convenience and
financial stability as reflected by operating results and credit ratings (by
one of the nationally recognized credit rating agencies). Although a downgrade
in the credit rating of the Corporation may impact its ability to raise
deposits, management does not believe that the impact should be material.
Deposits at all of the Corporation's banking subsidiaries are federally insured
and this is expected to mitigate the effect of a downgrade in credit ratings.
Although the Corporation raises the majority of its financing from retail
deposits, it still borrows a material amount of funds from institutional
sources. Institutional lenders tend to be sensitive to the perceived credit
risk of the entities to which they lend and this exposes the Corporation to the
possibility of having its access to funding affected by how the market
perceives its credit quality; this in part, may be due to factors beyond its
control.
Changes in the credit rating of the Corporation or any of its subsidiaries to a
level below "investment grade" may affect the Corporation's access to the
capital markets. The Corporation's counterparties are sensitive to the risk of
a rating downgrade. In the event of a downgrade, it may be expected that the
cost of borrowing funds in the institutional market would increase. In
addition, the ability of the Corporation to raise new funds or renew maturing
debt may be more difficult. Management does not anticipate changes in the
credit ratings of the Corporation based on its expected outlook for the P.R. /
U.S. economy, interest rates and expected financial results of the Corporation.
In the course of borrowing from institutional lenders, the Corporation has
entered into contractual agreements
39
to maintain certain levels of debt, capital and non-performing loans, among
other financial covenants. If the Corporation were to fail to comply with those
agreements, it may incur in an event of default. Such failure may accelerate
the repayment of the related borrowings. It could also affect the ability of
the Corporation to raise new funds or renew maturing borrowings. The
Corporation is currently in full compliance with all financial covenants in
effect and expects to remain so in the future.
The Corporation's non-banking subsidiaries may be subject to a higher degree of
liquidity risk than the banking subsidiaries, due to the latter's access to
federally-insured deposits. A higher proportion of the funding of the
non-banking subsidiaries is from institutional sources, as compared to the
banking subsidiaries, and these are more sensitive to the perceived credit risk
of the Corporation than providers of deposits. In the event of a downgrade in
the credit ratings of the Corporation, the non-banking subsidiaries may
experience an increase in their cost of funds and reduced availability of
financing. Management does not anticipate such a scenario developing in the
foreseeable future.
The importance of the Puerto Rico market for the Corporation is an additional
risk factor that could affect its financing activities. In the case of an
extended economic slowdown in Puerto Rico, the credit quality of the
Corporation could be affected as a result of higher credit costs and possible
decreases in profitability. The substantial integration of Puerto Rico with the
U.S. economy should limit the probability of a prolonged recession in Puerto
Rico and the resulting risks to the Corporation.
OFF-BALANCE SHEET ACTIVITIES
In the normal course of business, the Corporation has conducted asset
securitizations involving the transfer of mortgage loans to a qualifying special
purpose entity (QSPE), which in turned has transferred the assets to different
trusts. The transactions qualified for sale accounting based on the provisions
of SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," as such trusts are not consolidated in the
Corporation's financial statements. As of March 31, 2002, these trusts held
approximately $324 million in assets in the form of mortgage loans. Liabilities
in the form of debt principal due to investors approximated $322 million at the
end of the first quarter of 2002. In these securitizations, the Corporation
retained servicing responsibilities and certain subordinated interest in the
form of interest-only securities. The investors and the securitization trusts
have no recourse to the Corporation's assets. The servicing rights and the
interest-only securities retained by the Corporation are recorded in the
statement of condition at the lower of amortized cost or market, and fair value,
respectively.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various
lawsuits arising in the ordinary course of business. Management believes, based
on the opinion of legal counsel, that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
financial position and results of operations of the Corporation.
BPPR 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 BPPR,
including BPPR reporting and compliance efforts. The former customer has been
indicted for money laundering, including in connection with transactions
through an account at BPPR. BPPR believes based on the information available to
it that there was no knowing participation by BPPR or any BPPR employee in the
former customer's activities. The law enforcement investigation could result in
adverse consequences to the Corporation and BPPR including the possibility of
civil and criminal claims being brought against BPPR. The Corporation cannot
predict when or on what basis the investigation will conclude or its effects,
if any, on the Corporation or BPPR.
ITEM 5. OTHER INFORMATION
Under the Gramm-Leach-Bliley Act (the "GLB Act"), bank holding
companies, whose depository institution subsidiaries are "well
40
capitalized" as defined under the Federal Deposit Insurance Act and "well
managed" as defined under Regulation Y under the BHC Act and which obtain at
least a "satisfactory" rating under the Community Reinvestment Act, have the
ability to declare themselves to be financial holding companies and engage in a
broader range of activities than those traditionally permissible for U.S. bank
holding companies. The Corporation's declaration to become a financial holding
company became effective on April 30, 2002.
As a financial holding company, the Corporation may engage in
activities that are "financial in nature," as well as additional activities
that the Federal Reserve Board, in coordination with the Secretary of the
Treasury, determines are incidental or complementary to financial activities,
generally without Federal Reserve Board approval. Under the GLB Act, activities
that are financial in nature include insurance, securities underwriting and
dealing, merchant banking, and lending activities.
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 March 31,2002
b) One report on Form 8-K was filed for the quarter ended March 31, 2002:
Dated: January 9, 2002
Filed: January 11, 2002
Items reported: Item 5 - Other Events (Operational results for the
quarter and year-ended December 31, 2001)
41
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: 05/10/2002 By: /s/ Jorge A. Junquera
------------------------ --------------------------------------
Jorge A. Junquera
Senior Executive Vice President
Date: 05/10/2002 By: /s/ Amilcar L. Jordan
------------------------ --------------------------------------
Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller
42