SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10 - Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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
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(State of incorporation) (I.R.S. Employer
identification No.)
Popular Center Building
209 Munoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico 00918
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock $6.00 Par value 132,455,106
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(Title of Class) (Shares Outstanding as of November 1, 2002)
POPULAR, INC.
INDEX
Part I - Financial Information Page
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Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of September 30, 2002,
December 31, 2001 and September 30, 2001 3
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Unaudited Consolidated Statements of Income for the quarters and nine months
ended September 30, 2002 and 2001 4
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Unaudited Consolidated Statements of Comprehensive Income for
the quarters and nine months ended September 30, 2002 and 2001 5
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Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 6
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Notes to unaudited Consolidated Financial Statements 7-29
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 30-48
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Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
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Item 4. Controls and Procedures 48
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Part II - Other Information
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Item 1. Legal proceedings 48
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Item 2. Changes in securities and use of proceeds 49
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Item 3. Defaults upon senior securities - None N/A
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Item 4. Submission of matters to a vote of security holders - None N/A
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Item 5. Other information 49
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Item 6. Exhibits and reports on Form 8-K 49
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--- Signature 50
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Certification 51-52
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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, among others. 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
ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
SEPTEMBER 30, December 31, September 30,
(In thousands) 2002 2001 2001
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ASSETS
Cash and due from banks $ 574,282 $ 606,142 $ 617,012
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Money market investments:
Federal funds sold and securities purchased under agreements to resell 1,149,346 820,332 988,262
Time deposits with other banks 3,056 3,056 4,343
Bankers' acceptances 677 402 410
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1,153,079 823,790 993,015
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Investment securities available-for-sale, at market value:
Pledged securities with creditors' right to repledge 4,120,020 4,056,655 2,592,130
Other investment securities available-for-sale 5,533,328 5,227,746 5,205,898
Investment securities held-to-maturity, at amortized cost 644,685 592,360 240,763
Trading account securities, at market value:
Pledged securities with creditors' right to repledge 324,301 244,916 231,927
Other trading securities 149,101 25,270 45,942
Loans held-for-sale, at lower of cost or market 870,607 939,488 910,615
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Loans:
Loans pledged with creditors' right to repledge 357,780 301,706 -
Other loans 18,335,241 17,254,323 17,042,433
Less - Unearned income 300,120 326,966 320,774
Allowance for loan losses 354,282 336,632 326,630
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18,038,619 16,892,431 16,395,029
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Premises and equipment 446,161 405,705 390,324
Other real estate 33,713 31,533 29,257
Accrued income receivable 194,500 186,143 189,859
Other assets 546,388 496,855 467,296
Goodwill 180,337 177,842 180,943
Other intangible assets 34,005 37,800 40,412
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$ 32,843,126 $ 30,744,676 $ 28,530,422
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,274,152 $ 3,281,841 $ 3,045,604
Interest bearing 13,783,704 13,088,201 12,954,632
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17,057,856 16,370,042 16,000,236
Federal funds purchased and securities sold under agreements to repurchase 5,887,739 5,751,768 3,978,199
Other short-term borrowings 2,046,679 1,827,242 3,164,520
Notes payable 4,629,284 3,735,131 2,329,985
Other liabilities 632,476 512,686 482,117
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30,254,034 28,196,869 25,955,057
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Subordinated notes 125,000 125,000 125,000
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Preferred beneficial interest in Popular North America's junior subordinated
deferrable interest debentures guaranteed by the Corporation 144,000 149,080 150,000
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Commitments and contingencies (See Note 8)
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Minority interest in consolidated subsidiaries 1,080 909 908
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Stockholders' equity:
Preferred stock, 10,000,000 shares authorized (4,000,000 issued and
outstanding at December 31, 2001 and September 30, 2001) - 100,000 100,000
Common stock, $6 par value; 180,000,000 shares authorized; 139,028,367
shares issued (December 31, 2001 - 138,749,647; September 30, 2001 -
138,655,314) and 132,334,258 (December 31, 2001 - 136,362,364;
September 30, 2001 - 136,268,031) shares outstanding 834,170 832,498 831,932
Surplus 275,443 268,544 266,525
Retained earnings 1,246,098 1,057,724 1,011,473
Treasury stock - at cost, 6,694,109 shares (December 31, 2001 and
September 30, 2001 - 2,387,283) (205,210) (66,136) (66,136)
Accumulated other comprehensive income, net of tax of $52,488
(December 31, 2001 - $27,918; September 30, 2001 - $48,298) 168,511 80,188 155,663
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2,319,012 2,272,818 2,299,457
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$ 32,843,126 $ 30,744,676 $ 28,530,422
===================================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarter ended Nine months ended
September 30, September 30,
(Dollars in thousands, except per share information) 2002 2001 2002 2001
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INTEREST INCOME:
Loans $ 391,499 $ 392,801 $ 1,143,887 $ 1,178,207
Money market investments 7,716 10,350 22,871 38,682
Investment securities 105,125 110,095 332,813 362,397
Trading account securities 3,770 3,736 10,357 11,554
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508,110 516,982 1,509,928 1,590,840
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INTEREST EXPENSE:
Deposits 106,063 130,254 329,349 394,053
Short-term borrowings 46,185 72,664 135,902 276,275
Long-term debt 58,907 40,644 167,629 125,857
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211,155 243,562 632,880 796,185
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Net interest income 296,955 273,420 877,048 794,655
Provision for loan losses 50,992 55,259 155,521 154,755
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Net interest income after provision for loan losses 245,963 218,161 721,527 639,900
Service charges on deposit accounts 39,484 37,537 117,964 108,505
Other service fees 63,941 61,194 191,666 180,237
Gain (loss) on sale of securities 1,251 1,249 (2,674) (613)
Trading account profit (loss) 1,247 777 (142) 149
Derivatives losses (21,759) (8,140) (22,103) (7,119)
Gain on sales of loans 14,960 11,068 44,502 31,925
Other operating income 18,370 15,225 53,677 44,089
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363,457 337,071 1,104,417 997,073
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OPERATING EXPENSES:
Personnel costs:
Salaries 92,704 82,080 272,011 238,742
Profit sharing 5,646 3,986 15,954 13,101
Pension and other benefits 25,163 21,542 78,433 67,402
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123,513 107,608 366,398 319,245
Net occupancy expenses 19,581 17,974 58,659 52,895
Equipment expenses 24,469 24,148 73,610 72,850
Other taxes 9,115 9,135 27,948 27,755
Professional fees 22,503 18,798 59,734 53,021
Communications 13,907 12,181 40,292 36,153
Business promotion 15,588 13,414 45,786 37,118
Printing and supplies 4,754 4,269 14,341 13,078
Other operating expenses 18,489 17,525 52,871 53,645
Amortization of intangibles 1,938 6,858 7,037 20,594
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253,857 231,910 746,676 686,354
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Income before income tax, minority interest and cumulative
effect of accounting change 109,600 105,161 357,741 310,719
Income tax 23,730 27,952 86,472 82,440
Net (gain) loss of minority interest (116) 7 (166) 19
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Income before cumulative effect of accounting change 85,754 77,216 271,103 228,298
Cumulative effect of accounting change, net of tax - - - 686
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NET INCOME $ 85,754 $ 77,216 $ 271,103 $ 228,984
==================================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 85,754 $ 75,129 $ 268,593 $ 222,722
==================================================================================================================================
EARNINGS PER COMMON SHARE (BASIC AND DILUTED) (BEFORE AND
AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGE) $ 0.65 $ 0.55 $ 2.00 $ 1.63
==================================================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ 0.20 $ 0.60 $ 0.56
==================================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Quarter ended Nine months ended
September 30, September 30,
(In thousands) 2002 2001 2002 2001
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Net Income $ 85,754 $ 77,216 $ 271,103 $ 228,984
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Other comprehensive income net of tax:
Foreign currency translation adjustment (191) (153) (573) (403)
Unrealized gains on securities:
Unrealized holding gains arising during the
period, net of tax of $14,061 (2001- $25,066) for the quarter
and $24,526 (2001- $47,033) for the nine-month period 50,981 83,944 89,966 151,383
Less: reclassification adjustment for gains (losses) included
in net income, net of tax of $791 (2001 - $406) for the quarter
and ($1,305) (2001 - ($313)) for the nine-month period 768 843 (1,698) (1,555)
Net loss on derivatives (2,360) (908) (4,814) (1,645)
Less: reclassification adjustment for losses included
in net income, net of tax of ($791) (2001-($168)) for the
quarter and ($1,305) (2001-($568)) for the nine-month period (1,269) (262) (2,052) (947)
Cumulative effect of accounting change 254
Less: reclassification adjustment for gains (losses) included
in net income, net of tax of ($77) for the nine-month period in 2001 -- -- 6 (136)
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Total other comprehensive income $ 48,931 $ 82,302 $ 88,323 $ 152,227
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Comprehensive income $ 134,685 $ 159,518 $ 359,426 $ 381,211
==================================================================================================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME:
SEPTEMBER 30 December 31 September 30
(In thousands) 2002 2001 2001
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Foreign currency translation adjustment ($2,029) ($1,456) ($1,287)
Unrealized gains on securities 172,840 81,176 157,258
Unrealized (losses) gains on derivatives (2,684) 78 (698)
Cumulative effect of accounting change 384 390 390
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Accumulated other comprehensive income $168,511 $80,188 $155,663
===========================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
September 30,
(In thousands) 2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 271,103 $ 228,984
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Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 55,645 56,960
Provision for loan losses 155,521 154,755
Amortization of intangibles 7,037 20,594
Stock options expense 597
Net loss on sales of investment securities 2,674 613
Net loss on derivatives 22,103 7,119
Net loss on disposition of premises and equipment 547 351
Net gain on sales of loans, excluding loans held-for-sale (6,284) (860)
Net amortization of premiums and accretion of discounts on investments 10,580 1,975
Net decrease (increase) in loans held-for-sale 68,881 (86,714)
Net amortization of deferred loan fees and costs 21,759 15,622
Net increase in trading securities (203,216) (124,796)
Net (increase) decrease in accrued income receivable (8,357) 12,677
Net (increase) decrease in other assets (15,478) 11,657
Net decrease in interest payable (2,429) (73,384)
Net (decrease) increase in deferred and current taxes (28,779) 5,256
Net increase in postretirement benefit obligation 2,562 3,012
Net increase in other liabilities 101,300 6,962
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Total adjustments 184,663 11,799
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Net cash provided by operating activities 455,766 240,783
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in money market investments (323,513) 75,603
Purchases of investment securities held-to-maturity (18,206,606) (4,515,716)
Maturities of investment securities held-to-maturity 18,154,282 4,622,152
Purchases of investment securities available-for-sale (4,900,607) (3,303,701)
Maturities of investment securities available-for-sale 3,521,792 3,671,005
Proceeds from sales of investment securities available-for-sale 1,112,116 732,131
Net disbursements on loans (892,472) (1,411,985)
Proceeds from sales of loans 425,510 404,760
Acquisition of loan portfolios (913,579) (660,829)
Assets acquired, net of cash (13,613) (123)
Acquisition of premises and equipment (103,924) (45,044)
Proceeds from sales of premises and equipment 7,276 3,180
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Net cash used in investing activities (2,133,338) (428,567)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 715,864 1,186,127
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 135,971 (985,916)
Net increase (decrease) in other short-term borrowings 219,437 (1,204,692)
Net proceeds from notes payable and capital securities 889,073 1,153,074
Dividends paid (81,533) (77,041)
Proceeds from issuance of common stock 7,974 7,116
Redemption of preferred stock (102,000)
Treasury stock (acquired) sold (139,074) 77
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Net cash provided by financing activities 1,645,712 78,745
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Net decrease in cash and due from banks (31,860) (109,039)
Cash and due from banks at beginning of period 606,142 726,051
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Cash and due from banks at end of period $ 574,282 $ 617,012
=======================================================================================================================
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 financial holding company offering a full
range of financial products and services to consumer and corporate customers
through its offices in Puerto Rico, the United States, the Caribbean, including
the U.S. and British Virgin Islands, and Central America. The Corporation's
subsidiaries are engaged in the following businesses: commercial banking, auto
loans and lease financing, mortgage and consumer lending, broker/dealer
activities, retail financial services, insurance agency services and information
technology, ATM and data processing services through its subsidiaries in Puerto
Rico, the United States, the Caribbean and Central America. Note 14 to the
unaudited 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
statement of the results for the periods presented. These results are unaudited,
but include all necessary adjustments, of a normal recurring nature, for a fair
statement of such results. Certain minor reclassifications have been made to the
prior period consolidated financial statements to conform with the 2002
presentation.
NOTE 2 - ACCOUNTING CHANGES
Accounting for Stock-Based Compensation
In September 2002, the Corporation opted to use the more preferable fair
value method of recording stock options defined in SFAS No. 123 "Accounting for
Stock-Based Compensation." For information regarding the adoption of the fair
value method defined in SFAS No. 123, refer to Note 9 to the unaudited
consolidated financial statements.
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 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 require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, provide specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill, and 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 other intangible assets subsequent to their
initial recognition. The provisions of SFAS No. 142 repeal the amortization of
goodwill and indefinite-lived intangible assets, require that goodwill and
indefinite-lived intangible assets be tested at least annually for impairment,
require that reporting units be identified for the purpose of assessing
potential impairments of goodwill, and remove the forty-year limitation on the
amortization period of intangible assets that have definite 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 amortization relating to existing goodwill. In 2001, the quarterly
amortization of goodwill amounted to approximately $4,300.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify if a potential impairment
exists. 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. Other
intangible assets deemed to have an indefinite life will be tested for
impairment using a one-step process which compares the fair value with the
carrying amount of the asset as of the beginning of the fiscal year. Any
impairment loss resulting from the transitional impairment tests should be
reflected as a cumulative effect of a change in accounting principle.
7
The Corporation completed all transitional impairment tests during the first
quarter of 2002, and determined that there are no impairment losses to be
recognized in the period as a cumulative effect of accounting change.
The following table presents 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.
Quarter ended Nine-months ended
(In thousands, except per share information) September 30, 2001 September 30, 2001
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Reported Net Income $ 77,216 $228,984
Add back: Goodwill amortization, including
impact on profit sharing expense and
related tax 4,132 12,398
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Adjusted Net Income $ 81,348 $241,382
==========================================================================================================
Quarter ended Nine-months ended
September 30, 2001 September 30, 2001
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Reported EPS $0.55 $1.63
Add back: Goodwill amortization, including
impact on profit sharing expense and
related tax 0.03 0.09
- --------------------------------------------------------------------------------------------------------------
Adjusted EPS $0.58 $1.72
==============================================================================================================
With the adoption of SFAS No. 142, there were no changes to amortization expense
on acquired other intangible assets with definite lives.
For further disclosures required by SFAS No. 142, refer to Note 7 to the
consolidated financial statements.
Accounting for Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143
"Accounting for Asset Retirement Obligations." This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Management understands that the adoption of this
statement will not have a material effect on the consolidated financial
statements of the Corporation.
Accounting for the Impairment or Disposal of Long-Lived Assets
In 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 SFAS 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 SFAS No. 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 SFAS No. 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 spin-off 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
8
to include more disposal transactions. The adoption of this statement did not
have a material effect on the consolidated financial statements of the
Corporation.
Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS Statement No.
13, and Technical Corrections
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
"Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS
No. 13, and Technical Corrections." This Statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for transactions occurring after May 15, 2002. The adoption of SFAS
No. 145 did not have a material effect on the consolidated financial statements
of the Corporation.
Accounting for Costs Associated with Exit or Disposal Activities
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities. SFAS No.
146 requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF No. 94-3. The SFAS No. 146 is effective
prospectively for exit or disposal activities initiated after December 31, 2002.
Management does not anticipate that SFAS No. 146 will have a material impact on
the Corporation's financial condition or results of operations.
Acquisitions of Certain Financial Institutions
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes financial acquisitions of
financial institutions from the scope of both SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", and FASB Interpretation
No. 9, "Applying APB Opinions No. 16 and 17, When a Savings and Loan Association
or a Similar Institution is Acquired in a Business Combination Accounted for by
the Purchase Method" and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets". In addition, SFAS No. 147 amends FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. SFAS No. 147's
transition provisions require affected institutions to reclassify their SFAS No.
72 goodwill as SFAS No. 142 goodwill as of the date the company initially
applied SFAS No. 142 in its entirety. The adoption of SFAS No. 147 will not have
a material impact on the Corporation's financial condition or results of
operations.
9
NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost, gross unrealized gains and losses, approximate market value
(or fair value for certain investment securities where no market quotations are
available), and contractual maturities of investment securities
available-for-sale as of September 30, 2002, December 31, 2001 and September 30,
2001 were as follows:
AS OF SEPTEMBER 30, 2002
Amortized Gross Unrealized Gross Unrealized Market
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities (average maturity of 8 months) $ 359,958 $ 8,279 - $ 368,237
Obligations of other U.S. Government agencies and
corporations (average maturity of 4 years and 3 months) 5,622,265 122,284 $ 601 5,743,948
Obligations of Puerto Rico, states and political subdivisions
(average maturity of 7 years and 3 months) 72,999 4,937 134 77,802
Collateralized mortgage obligations (average maturity of
19 years and 9 months) 2,373,036 11,475 1,026 2,383,485
Mortgage-backed securities (average maturity of 24
years and 8 months) 635,546 15,341 378 650,509
Equity securities (without contractual maturity) 256,394 64,011 35 320,370
Others (average maturity of 16 years and 1 month) 105,875 3,125 3 108,997
- ---------------------------------------------------------------------------------------------------------------------------------
$9,426,073 $ 229,452 $ 2,177 $9,653,348
=================================================================================================================================
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
==================================================================================================================================
AS OF SEPTEMBER 30, 2001
Amortized Gross Unrealized Gross Unrealized Market
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities (average maturity of 1 year) $ 700,594 $ 21,373 - $ 721,967
Obligations of other U.S. Government agencies and
corporations (average maturity of 4 years and 6 months) 4,042,736 96,535 $ 1,351 4,137,920
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 8 years and 8 months) 102,954 4,572 39 107,487
Collateralized mortgage obligations (average maturity of
22 years and 9 months) 1,804,521 12,848 1,125 1,816,244
Mortgage-backed securities (average maturity of 21 years
and 6 months) 633,481 8,669 364 641,786
Equity securities (without contractual maturity) 222,814 64,065 561 286,318
Others (average maturity of 15 years and 5 months) 84,951 1,359 4 86,306
- -----------------------------------------------------------------------------------------------------------------------------------
$7,592,051 $ 209,421 $ 3,444 $7,798,028
===================================================================================================================================
10
The expected maturities of collateralized mortgage obligations, mortgage-backed
securities and certain other securities may differ from their contractual
maturities because they may be subject to prepayments.
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, at cost.
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 September 30, 2002, December 31, 2001 and September 30, 2001 were as
follows:
AS OF SEPTEMBER 30, 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) $483,544 - $ 19 $483,525
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 13 years and 8 months) 89,138 $ 416 649 88,905
Collateralized mortgage obligations (average maturity of 22 years) 1,197 - - 1,197
Others (average maturity of 2 years and 10 months) 70,806 690 - 71,496
- -----------------------------------------------------------------------------------------------------------------------------------
$644,685 $ 1,106 $ 668 $645,123
===================================================================================================================================
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 SEPTEMBER 30, 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) $ 69,842 $ 7 $ 4 $ 69,845
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 9 years and 8 months) 88,043 5,328 33 93,338
Collateralized mortgage obligations (average maturity
of 22 years and 8 months) 1,464 - - 1,464
Others (average maturity of 3 years and 7 months) 81,414 - 521 80,893
- ----------------------------------------------------------------------------------------------------------------------------------
$240,763 $ 5,335 $ 558 $245,540
==================================================================================================================================
11
NOTE 5 - PLEDGED ASSETS
Securities and loans were pledged to secure public and trust deposits,
securities sold under agreements to repurchase, other borrowings and credit
facilities available. 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:
SEPTEMBER 30, December 31, September 30,
(In thousands) 2002 2001 2001
- ------------------------------------------------------------------------------------------------------------
Investment securities available-for-sale $2,154,707 $1,973,552 $1,958,671
Investment securities held-to-maturity 3,281 5,110 5,114
Loans 3,092,833 1,413,789 1,832,089
- ------------------------------------------------------------------------------------------------------------
$5,250,821 $3,392,451 $3,795,874
============================================================================================================
Pledged 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 forwards and
future contracts, interest rate caps, swaptions, foreign exchange contracts and
interest-rate caps, floors and options embedded in financial contracts.
Futures and forwards are contracts for the delayed delivery of securities in
which the seller agrees to deliver on a specified future date, a specified
instrument, at a specified price or yield. The Corporation's use of these
contracts qualify for cash flow hedge accounting in accordance with SFAS No.
133, as amended, and therefore changes in the fair value of the derivative are
recorded in other comprehensive income. As of September 30, 2002 the total
amount (net of tax) included in accumulated other comprehensive income
pertaining to forward contracts was an unrealized loss of $305. These contracts
have a maximum maturity of 50 days.
The Corporation purchased interest rate caps as part of securitization
transactions in order to limit the interest rate payable to the security
holders. The Corporation's use of these contracts qualify for cash flow hedge
accounting in accordance with SFAS No. 133, as amended. As of September 30,
2002, the fair market value of these interest rate caps was $3,352 included in
other assets and the amount included in accumulated other comprehensive income
was a loss of $2,380. These contracts have a maximum maturity of 7.3 years. As
part of these contracts, during the third quarter of 2002 the Corporation
reclassified a loss of $318 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 SFAS No. 133, as
amended, does not qualify for hedge accounting. As of September 30, 2002, the
Corporation had a derivative liability of $15,858 representing the fair value of
the swaptions, which is included in other liabilities. Also, a derivative
liability of $4,141 which is the fair value of the embedded option and a
discount on the certificates of deposits of $17,065 are included in deposits.
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 September 30, 2002, the
Corporation recognized a loss of $21,759 as a result of the changes in fair
value of the non-hedging derivatives.
12
The interest-rate caps and floors embedded in the interest bearing contracts are
clearly and closely related to the economic characteristics of the contracts and
therefore, as stated in SFAS No. 133, are not bifurcated from the host
contracts.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142 requires that goodwill and other indefinite-life 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 not considered
impaired, thus the second step of the impairment test is unnecessary. If needed,
the second step consists in comparing the implied fair value of reporting unit
goodwill with the carrying amount of that goodwill. The Corporation uses the
expected present value of future cash flows and market price multiples of
comparable companies to determine the fair value of each reporting unit. The
cost of equity used to discount the cash flows was calculated using the Capital
Asset Pricing Model.
The Corporation's management has defined the reporting units based on legal
entity, which is the way that 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 segments 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 is assigned to each reporting unit at the
time of acquisition, since the Corporation records the intangibles originated in
the acquisition on the books of the entity acquired by using the practice of
push down accounting.
The changes in the carrying amount of goodwill for the nine-months ended
September 30, 2002, are as follows:
Nine-months ended September 30, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage Auto and
Commercial and Consumer Lease
(In thousands) Banking Lending Financing Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of January 1, 2002 $ 110,482 $ 8,349 $ 6,727 $ 52,284 $ 177,842
Goodwill acquired during the period - 2,120 - 680 2,800
Goodwill written-off during the period - (305) - - (305)
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of September 30, 2002 $ 110,482 $ 10,164 $ 6,727 $ 52,964 $ 180,337
================================================================================================================================
As of September 30, 2002, December 31, 2001 and September 30, 2001, goodwill
totaled $180,337, $177,842 and $180,943, respectively. Goodwill written-off
during 2002 was related to various branches of Popular Finance sold during the
year.
The following table reflects the components of other intangible assets subject
to amortization as of September 30, 2002, December 31, 2001 and September 30,
2001:
SEPTEMBER 30, 2002 December 31, 2001 September 30, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Accumulated Gross Accumulated Gross Accumulated
(In thousands) Amount Amortization Amount Amortization Amount Amortization
- ---------------------------------------------------------------------------------------------------------------------------------
Core Deposits $87,711 $54,328 $85,034 $48,101 $85,034 $45,871
Credit-based customer relationships - - 8,304 7,563 8,304 7,184
Other Intangibles 713 91 202 76 202 73
- ---------------------------------------------------------------------------------------------------------------------------------
Total $88,424 $54,419 $93,540 $55,740 $93,540 $53,128
=================================================================================================================================
13
During the quarter ended September 30, 2002, the Corporation recognized $1,938
in amortization expense related to other intangible assets with definite lives.
This expense totaled $2,524 for the quarter ended September 30, 2001, excluding
the effect of goodwill amortization. For the nine months ended September 30,
2002 and 2001, the Corporation recognized $7,037 and $7,579, respectively, in
amortization expense related to other intangible assets with definite lives.
The credit-based customer relationships were fully amortized during the quarter
ended June 30, 2002.
The following table presents the estimated aggregate amortization expense of the
intangible assets with definite lives that the Corporation has as of September
30, 2002, for each of the following fiscal years:
(In thousands)
--------------
2002 $8,948
2003 7,455
2004 6,765
2005 5,163
2006 5,017
2007 3,343
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 September 30, 2002, amounted to $16,504 and
$128,359, respectively (September 30, 2001 - $17,183 and $90,530; December 31,
2001 - $16,846 and $87,810). There are also other commitments outstanding and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the accompanying financial statements.
The Corporation is a defendant in a number of legal proceedings arising in the
normal course of business. Based on the opinion of legal counsel, management
believes that the final disposition of these matters will not have a material
adverse effect on the Corporation's financial position or results of operations.
Refer to Item 1- Legal Proceedings in Part II - Other Information in this
Form 10-Q for further information.
NOTE 9 - STOCK OPTION PLAN
The Corporation has a Stock Option Plan (the Plan) since 2001, which permits the
granting of incentive awards in the form of qualified stock options, incentive
stock options, or non-statutory stock options of the Corporation. Any employee
or director of the Corporation or of any of its subsidiaries is eligible to
participate in the Plan. The selection of individuals eligible to participate is
within the discretion of the Board of Directors, or an appointed committee. The
Plan provides for the issuance of Popular, Inc.'s common stock at a price equal
to its fair market value at the date of grant, subject to certain Plan
provisions. The aggregate number of shares of common stock, which may be issued
under the Plan, is limited to 5,000,000 shares, subject to adjustment for stock
splits, recapitalizations and similar events. The shares are to be made
available from authorized but unissued shares of common stock or treasury stock.
The maximum option term is generally ten years from the date of grant. Unless an
option agreement provides otherwise, all options granted are 20% exercisable
after the first year and an additional 20% is exercisable after each subsequent
year. The exercise price of each option is equal to the market price of the
Corporation's stock on the date of grant.
In September 2002, the Corporation opted to use the fair value method of
recording stock options as described in SFAS No. 123 "Accounting for Stock-Based
Compensation," which is considered the preferable accounting method for
stock-based compensation. All future stock option grants will be expensed over
the stock option vesting period based on the fair value at the date the options
are granted.
14
Previously, as permitted by SFAS No. 123, the Corporation measured compensation
cost for this plan based on APB No. 25 "Accounting for Stock Issued to
Employees" and disclosed the pro forma net income and net income per share as if
the fair value method had been applied in measuring cost.
The Corporation recognized $597 in operating expenses for the third quarter of
2002 as a result of the aforementioned accounting method change.
The following table summarizes information about stock options outstanding at
September 30, 2002:
- -------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted-Average Weighted Average
Exercise Price Options Exercise Price of Remaining Life of Options Exercise Price of
Range per share Outstanding Options Outstanding Options Outstanding Exercisable Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------
$28.78 - $35.65 437,753 $29.18 9.36 years 20,558 $29.55
The following table summarizes the stock option activity and related
information:
- ------------------------------------------------------------------------------------
Weighted-Average
Options Exercise Price
- ------------------------------------------------------------------------------------
Balance at January 1, 2001 - -
Granted 15,904 $ 32.60
- ------------------------------------------------------------------------------------
Outstanding at September 30, 2001 15,904 32.60
Granted 10,512 29.55
- ------------------------------------------------------------------------------------
Outstanding at December 31, 2001 26,416 31.39
Granted 412,337 29.04
Exercised (199) 32.60
Forfeited (801) 28.84
- ------------------------------------------------------------------------------------
Outstanding at September 30, 2002 437,753 $ 29.18
====================================================================================
The fair value of these options was estimated on the date of the grants using
the Black-Scholes Option Pricing Model. The weighted-average assumptions used
for the grants issued during 2002 were the following: an expected dividend yield
of 2.14%, an average expected life of options of 10 years, an expected
volatility of 26.55% and a risk-free interest rate of 4.94%. The
weighted-average fair value of options granted during 2002 was $9.84 per option.
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 BanPonce Trust I's 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"). As of September 30, 2002, the Corporation had
reacquired $6,000 of the capital securities. BanPonce Trust I is a 100%-owned
finance subsidiary of the Corporation. The 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 $148,640 of Junior Subordinated Debentures at
September 30, 2002 (September 30, 2001 - $154,640; December 31, 2001 - $154,640)
and a related accrued interest receivable of $1,031 (September 30, 2001 -
$1,073; December 31, 2001 - $4,292). The Junior Subordinated Debentures mature
on February 1, 2027; however, under certain circumstances, the
15
maturity of the Junior Subordinated Debentures may be shortened (which
shortening would result in a mandatory redemption of the Capital Securities).
NOTE 11 - STOCKHOLDERS' EQUITY
In May 2002, the Corporation repurchased 4,300,000 shares of its common stock
from Banco Popular de Puerto Rico Retirement Plan, at a cost of $139 million.
As of 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 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.
For the nine-month period ended September 30, 2002, the Corporation declared
cash dividends on common stock amounting to $80,219 (September 30, 2001 -
$76,271).
NOTE 12 - EARNINGS PER COMMON SHARE
A computation of earnings per common share follows:
Quarter ended Nine-months ended
September 30, September 30,
(In thousands, except share and per share information) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Net income $85,754 $77,216 $271,103 $228,984
Less: Preferred stock dividends - 2,087 2,510 6,262
- -----------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $85,754 $75,129 $268,593 $222,722
=============================================================================================================================
Average common shares outstanding 132,350,192 136,277,273 134,407,089 136,193,360
Average potential common shares - stock options - 594 9,653 244
- -----------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding - assuming dilution 132,350,192 136,277,867 134,416,742 136,193,604
=============================================================================================================================
Basic earnings per common share $0.65 $0.55 $2.00 $1.63
=============================================================================================================================
Diluted earnings per common share $0.65 $0.55 $2.00 $1.63
=============================================================================================================================
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.
During the third quarter of 2002, there were 437,753 antidilutive stock options
outstanding. For the nine-months ended September 30, 2002, there were 158,736
weighted-average antidilutive stock options outstanding.
For the quarter ended September 30, 2001, there were 7,520 antidilutive stock
options and for the nine-month period ended September 30, 2001, there were 2,534
weighted-average antidilutive stock options not included in the computation of
diluted earnings per common share.
NOTE 13 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the nine-month period ended September 30, 2002, the Corporation paid
interest and income taxes amounting to $635,309 and $97,204, respectively (2001
- - $869,569 and $62,192). In addition, the loans receivable transferred to other
real estate and other property for the nine-month period ended September 30,
2002 amounted to $40,092 and $23,783, respectively (2001 - $25,157 and $20,881).
NOTE 14 - SEGMENT REPORTING
Popular, Inc. operates three major reportable segments: commercial banking,
mortgage and consumer lending, and auto and lease financing. Management has
determined its reporting units based on legal entity, which is the way that
operating decisions are made and performance is measured. These reporting units
have then been aggregated into segments by products, services and
16
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, broker/dealer activities, as well as those providing
ATM processing services, electronic data processing and consulting services,
sale and rental of electronic data processing equipment and selling and
maintenance of computer software.
The accounting policies of the segments are the same as those followed by the
Corporation in the ordinary course of business and conform with generally
accepted accounting principles and with general practices within the financial
industry. Following are the results of operations and selected financial
information by operating segments for the quarters and nine-months ended
September 30, 2002 and 2001.
Mortgage and Auto and
Commercial Consumer Lease
Banking Lending Financing Other Eliminations Total
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands) QUARTER ENDED SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $226,330 $53,064 $17,274 $220 $67 $296,955
Provision for loan losses 33,439 10,573 6,980 50,992
Other income 65,397 19,265 4,732 30,878 (2,778) 117,494
Amortization of intangibles 1,933 5 1,938
Depreciation expense 12,401 1,041 2,543 1,618 17,603
Other operating expenses 159,424 33,298 7,936 33,806 (148) 234,316
Net gain of minority interest (116) (116)
Income tax 16,877 9,600 1,735 (3,919) (563) 23,730
- --------------------------------------------------------------------------------------------------------------------------------
Net income $67,653 $17,701 $2,812 ($412) ($2,000) $85,754
- --------------------------------------------------------------------------------------------------------------------------------
Segment Assets $26,171,941 $5,397,639 $1,201,864 $6,994,579 ($6,922,897) $32,843,126
- --------------------------------------------------------------------------------------------------------------------------------
17
Mortgage and Auto and
Commercial Consumer Lease
Banking Lending Financing Other Eliminations Total
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands) NINE-MONTHS ENDED SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $677,137 $151,297 $48,919 ($504) $199 $877,048
Provision for loan losses 104,321 30,800 20,400 155,521
Other income 201,523 52,521 14,299 123,060 (8,513) 382,890
Amortization of intangibles 7,022 15 7,037
Depreciation expense 39,686 3,154 8,116 4,689 55,645
Other operating expenses 472,228 91,612 22,725 98,062 (633) 683,994
Net gain of minority interest (166) (166)
Income tax 53,237 27,207 4,416 3,525 (1,913) 86,472
- --------------------------------------------------------------------------------------------------------------------------------
Net income $202,166 $50,879 $7,561 $16,265 ($5,768) $271,103
- --------------------------------------------------------------------------------------------------------------------------------
Segment Assets $26,171,941 $5,397,639 $1,201,864 $6,994,579 ($6,922,897) $32,843,126
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage and Auto and
Commercial Consumer Lease
Banking Lending Financing Other Eliminations Total
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands) Quarter ended September 30, 2001
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $222,419 $36,434 $13,797 $805 ($35) $273,420
Provision for loan losses 37,556 10,599 7,104 55,259
Other income 64,351 17,574 4,399 35,877 (3,291) 118,910
Amortization expense 5,458 182 189 1,029 6,858
Depreciation expense 14,259 905 2,410 1,176 18,750
Other operating expenses 144,036 26,249 5,330 30,957 (270) 206,302
Net loss of minority interest 7 7
Income tax 20,917 6,018 1,226 549 (758) 27,952
- --------------------------------------------------------------------------------------------------------------------------------
Net income $64,544 $10,062 $1,937 $2,971 ($2,298) $77,216
- --------------------------------------------------------------------------------------------------------------------------------
Segment Assets $23,648,015 $4,018,926 $980,114 $6,559,278 ($6,675,911) $28,530,422
- --------------------------------------------------------------------------------------------------------------------------------
Mortgage and Auto and
Commercial Consumer Lease
Banking Lending Financing Other Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) Nine-months ended September 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $662,858 $94,209 $38,530 ($835) ($107) $794,655
Provision for loan losses 108,776 29,669 16,310 154,755
Other income 182,967 48,493 14,509 119,258 (8,054) 357,173
Amortization expense 16,380 546 566 3,102 20,594
Depreciation expense 43,292 2,714 7,554 3,400 56,960
Other operating expenses 426,061 73,172 16,830 93,409 (672) 608,800
Net loss of minority interest 19 19
Income tax 61,261 13,623 4,469 4,939 (1,852) 82,440
Cumulative effect of accounting changes 686 686
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $190,741 $22,997 $7,310 $13,573 ($5,637) $228,984
- ----------------------------------------------------------------------------------------------------------------------------------
Segment Assets $23,648,015 $4,018,926 $980,114 $6,559,278 ($6,675,911) $28,530,422
- ----------------------------------------------------------------------------------------------------------------------------------
18
<Caption>
INTERSEGMENT REVENUES**
Quarter ended Nine-months ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
(In thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------
Commercial Banking $ 17,071 $ 18,977 $ 50,797 $ 51,740
Mortgage and Consumer Lending (44,032) (45,534) (131,494) (134,608)
Auto and Lease Financing (13,660) (13,729) (40,492) (42,950)
Other 43,332 43,612 129,503 133,979
- ---------------------------------------------------------------------------------------------------
Total intersegment revenues $2,711 $3,326 $8, 314 $8,161
===================================================================================================
** For purposes of the intersegment revenues disclosure, revenues include
interest income (expense) related to internal funding and other income
derived from intercompany transactions, mainly related to gain on sales
of loans.
GEOGRAPHIC INFORMATION
Quarter ended Nine-months ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
(In thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------
Revenues*
Puerto Rico $298,651 $282,821 $874,410 $829,496
United States mainland 104,102 97,764 345,967 287,260
Other 11,696 11,745 39,561 35,072
- ---------------------------------------------------------------------------------------------------
Total consolidated revenues $414,449 $392,330 $1,259,938 $1,151,828
- ---------------------------------------------------------------------------------------------------
* Total revenues include net interest income, service charges on deposit
accounts, other service fees, gain (loss) on sale of Securities, derivatives
losses, trading account profit (loss), gain on sales of loans and other
operating income.
SEPTEMBER 30, December 31, September 30,
(In thousands) 2002 2001 2001
- ----------------------------------------------------------------------------------------------
Selected Balance Sheet Information:
Puerto Rico
Total assets $21,840,940 $20,800,728 $19,107,355
Loans 10,015,317 9,879,632 9,643,769
Deposits 11,463,494 10,874,829 10,620,492
United States mainland
Total assets $10,315,438 $9,174,050 $8,689,070
Loans 8,885,565 7,868,729 7,567,049
Deposits 4,758,428 4,718,692 4,584,680
Other
Total assets $686,748 $769,898 $733,997
Loans 362,626 420,190 421,456
Deposits 835,934 776,521 795,064
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 September 30, 2002, December 31, 2001 and
September 30, 2001, and the results of their operations and cash flows for
periods ended September 30, 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 August
31, 2002, November 30, 2001 and August 31, 2001, corresponds to their financial
information included in the consolidated financial statements of Popular, Inc.
as of September 30, 2002, December 31, 2001 and September 30, 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., Popular Insurance, V.I.,
Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its
wholly-owned subsidiaries, Popular Cash Express, Inc., 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.
19
As a member subject to the regulations of the Federal Reserve Board, BPPR must
obtain the approval of the Federal Reserve Board for any dividend if the total
of all dividends declared by it in any calendar year would exceed the total of
its net profits for that year, as defined by the Federal Reserve Board, combined
with its retained net profits for the preceding two years. The payment of
dividends may also be affected by other regulatory requirements and policies,
such as the maintenance of certain minimum capital levels. At September 30,
2002, BPPR could have declared a dividend of approximately $138,385 without the
approval of the Federal Reserve Board.
20
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2002
(UNAUDITED)
Popular, Inc. PIBI PNA
(In thousands) Holding Co. Holding Co. Holding Co.
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $320 $17 $1,673
Money market investments 23,187 300 7,762
Investment securities available-for-sale, at market value 209,732 30,564 82,664
Investment securities held-to-maturity, at amortized cost
Trading account securities, at market value
Investment in subsidiaries 2,254,085 604,243 830,100
Loans held-for-sale, at lower of cost or market
- ------------------------------------------------------------------------------------------------------------------------
Loans 163,123 2,636,162
Less - Unearned income
Allowance for loan losses
- ------------------------------------------------------------------------------------------------------------------------
163,123 2,636,162
- ------------------------------------------------------------------------------------------------------------------------
Premises and equipment 11,395
Other real estate
Accrued income receivable 309 13,691
Other assets 21,841 35,137 15,065
Goodwill
Other intangible assets
- ------------------------------------------------------------------------------------------------------------------------
$2,683,992 $670,261 $3,587,117
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
- ------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under
agreements
To repurchase $457,266
Other short-term borrowings $27,480 $8,743 492,467
Notes payable 169,970 1,973,367
Other liabilities 42,530 137 67,970
- ------------------------------------------------------------------------------------------------------------------------
239,980 8,880 2,991,070
- ------------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000
- ------------------------------------------------------------------------------------------------------------------------
Preferred beneficial interest in Popular North America's
Junior subordinated deferrable interest
debentures guaranteed
By the Corporation
- ------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 834,170 3,962 2
Surplus 275,443 492,543 439,964
Retained earnings 1,246,098 148,806 150,184
Treasury stock, at cost (205,210)
Accumulated other comprehensive income, net of tax 168,511 16,070 5,897
- ------------------------------------------------------------------------------------------------------------------------
2,319,012 661,381 596,047
- ------------------------------------------------------------------------------------------------------------------------
$2,683,992 $670,261 $3,587,117
========================================================================================================================
All other Elimination Popular, Inc.
(In thousands) Subsidiaries Entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $640,788 ($68,516) $574,282
Money market investments 1,307,174 (185,344) 1,153,079
Investment securities available-for-sale, at market value 9,316,293 14,095 9,653,348
Investment securities held-to-maturity, at amortized cost 793,325 (148,640) 644,685
Trading account securities, at market value 473,402 473,402
Investment in subsidiaries 190,660 (3,879,088)
Loans held-for-sale, at lower of cost or market 887,646 (17,039) 870,607
- -----------------------------------------------------------------------------------------------------------------------
Loans 20,136,439 (4,242,703) 18,693,021
Less - Unearned income 300,120 300,120
Allowance for loan losses 354,282 354,282
- -----------------------------------------------------------------------------------------------------------------------
19,482,037 (4,242,703) 18,038,619
- -----------------------------------------------------------------------------------------------------------------------
Premises and equipment 434,766 446,161
Other real estate 33,713 33,713
Accrued income receivable 201,697 (21,197) 194,500
Other assets 473,075 1,270 546,388
Goodwill 180,337 180,337
Other intangible assets 34,005 34,005
- -----------------------------------------------------------------------------------------------------------------------
$34,448,918 ($8,547,162) $32,843,126
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $3,327,160 ($53,008) $3,274,152
Interest bearing 13,818,702 (34,998) 13,783,704
- -----------------------------------------------------------------------------------------------------------------------
17,145,862 (88,006) 17,057,856
Federal funds purchased and securities sold under
agreements
To repurchase 5,572,818 (142,345) 5,887,739
Other short-term borrowings 2,430,499 (912,510) 2,046,679
Notes payable 5,960,307 (3,474,360) 4,629,284
Other liabilities 549,808 (27,969) 632,476
- -----------------------------------------------------------------------------------------------------------------------
31,659,294 (4,645,190) 30,254,034
- -----------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000
- -----------------------------------------------------------------------------------------------------------------------
Preferred beneficial interest in Popular North America's
Junior subordinated deferrable interest
debentures guaranteed
By the Corporation 144,000 144,000
- -----------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 110 970 1,080
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 72,577 (76,541) 834,170
Surplus 1,335,498 (2,268,005) 275,443
Retained earnings 1,116,482 (1,415,472) 1,246,098
Treasury stock, at cost (463) 463 (205,210)
Accumulated other comprehensive income, net of tax 121,420 (143,387) 168,511
- -----------------------------------------------------------------------------------------------------------------------
2,645,514 (3,902,942) 2,319,012
- -----------------------------------------------------------------------------------------------------------------------
$34,448,918 ($8,547,162) $32,843,126
=======================================================================================================================
21
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2001
(UNAUDITED)
Popular, Inc. PIBI PNA
(In thousands) Holding Co. Holding Co. Holding Co.
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $263 $18 $252
Money market investments 112,937 302 442
Investment securities available-for-sale, at market value 166,193 20,781 6,473
Investment securities held-to-maturity, at amortized cost
Trading account securities, at market value
Investment in subsidiaries, at equity 2,129,890 559,658 772,220
Loans held-for-sale, at lower of cost or market value
- ----------------------------------------------------------------------------------------------------------------------------------
Loans 196,412 2,537,021
Less - Unearned income
Allowance for loan losses
- ----------------------------------------------------------------------------------------------------------------------------------
196,412 2,537,021
- ----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 12,006
Other real estate
Accrued income receivable 323 2 12,263
Other assets 20,795 32,010 9,994
Goodwill
Other intangible assets
- ----------------------------------------------------------------------------------------------------------------------------------
$2,638,819 $612,771 $3,338,665
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
- ----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under
Agreements to repurchase $421,618
Other short-term borrowings $4,272 536,443
Notes payable $198,918 1,780,452
Other liabilities 42,083 72 48,959
- ----------------------------------------------------------------------------------------------------------------------------------
241,001 4,344 2,787,472
- ----------------------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred beneficial interests in Popular North America's
Junior subordinated deferrable interest debentures guaranteed
by the Corporation
- ----------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000
Common stock 832,498 3,962 2
Surplus 268,544 492,494 439,964
Retained earnings 1,057,724 105,748 110,687
Treasury stock - at cost (66,136)
Accumulated other comprehensive income, net of tax 80,188 6,223 540
- ----------------------------------------------------------------------------------------------------------------------------------
2,272,818 608,427 551,193
- ----------------------------------------------------------------------------------------------------------------------------------
$2,638,819 $612,771 $3,338,665
==================================================================================================================================
All other Elimination Popular, Inc.
(In thousands) Subsidiaries Entries Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $659,094 ($53,485) $606,142
Money market investments 1,075,301 (365,192) 823,790
Investment securities available-for-sale, at market value 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 164,146 (3,625,914)
Loans held-for-sale, at lower of cost or market value 957,403 (17,915) 939,488
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 18,870,993 (4,048,397) 17,556,029
Less - Unearned income 326,966 326,966
Allowance for loan losses 336,632 336,632
- -----------------------------------------------------------------------------------------------------------------------------------
18,207,395 (4,048,397) 16,892,431
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 393,699 405,705
Other real estate 31,533 31,533
Accrued income receivable 196,277 (22,722) 186,143
Other assets 434,248 (192) 496,855
Goodwill 177,842 177,842
Other intangible assets 37,800 37,800
- -----------------------------------------------------------------------------------------------------------------------------------
$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 5,561,883 (231,733) 5,751,768
Other short-term borrowings 2,663,575 (1,377,048) 1,827,242
Notes payable 4,709,260 (2,953,499) 3,735,131
Other liabilities 450,637 (29,065) 512,686
- -----------------------------------------------------------------------------------------------------------------------------------
29,819,783 (4,655,731) 28,196,869
- -----------------------------------------------------------------------------------------------------------------------------------
Subordinated notes 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
Common stock 72,575 (76,539) 832,498
Surplus 1,334,918 (2,267,376) 268,544
Retained earnings 1,032,542 (1,248,977) 1,057,724
Treasury stock - at cost (236) 236 (66,136)
Accumulated other comprehensive income, net of tax 45,111 (51,874) 80,188
- -----------------------------------------------------------------------------------------------------------------------------------
2,484,910 (3,644,530) 2,272,818
- -----------------------------------------------------------------------------------------------------------------------------------
$32,454,798 ($8,300,377) $30,744,676
===================================================================================================================================
22
POPULAR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CONDITION
SEPTEMBER 30, 2001
(UNAUDITED)
Popular, Inc. PIBI PNA
(In thousands) Holding Co. Holding Co. Holding Co.
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $207 $131 $195
Money market investments 25,987 302 118
Investment securities available-for-sale, at market value 181,937 19,712 6,599
Investment securities held-to-maturity, at amortized cost
Trading account securities, at market value
Investment in subsidiaries, at equity 2,292,822 559,247 763,414
Loans held-for-sale, at lower of cost or market
- --------------------------------------------------------------------------------------------------------------------------
Loans 197,817 2,494,883
Less - Unearned income
Allowance for loan losses
- --------------------------------------------------------------------------------------------------------------------------
197,817 2,494,883
- --------------------------------------------------------------------------------------------------------------------------
Premises and equipment
Other real estate
Accrued income receivable 285 2 13,586
Other assets 24,527 26,398 3,651
Goodwill
Other intangible assets
- --------------------------------------------------------------------------------------------------------------------------
$2,723,582 $605,792 $3,282,446
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
- --------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under
agreements to repurchase $148,041
Other short-term borrowings $751 $4,365 1,639,400
Notes payable 250,493 917,530
Other liabilities 47,881 54 26,905
- --------------------------------------------------------------------------------------------------------------------------
299,125 4,419 2,731,876
- --------------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000
- --------------------------------------------------------------------------------------------------------------------------
Preferred beneficial interests in Popular North America's
Junior subordinated deferrable interest debentures
guaranteed by the Corporation
- --------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000
Common stock 831,932 3,962 2
Surplus 266,525 487,676 439,964
Retained earnings 1,011,473 99,459 105,112
Treasury stock-at cost (66,136)
Accumulated other comprehensive income, net of tax 155,663 10,276 5,492
- --------------------------------------------------------------------------------------------------------------------------
2,299,457 601,373 550,570
- --------------------------------------------------------------------------------------------------------------------------
$2,723,582 $605,792 $3,282,446
==========================================================================================================================
All other Elimination Popular, Inc.
(In thousands) Subsidiaries Entries Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $679,777 ($63,298) $617,012
Money market investments 1,172,876 (206,268) 993,015
Investment securities available-for-sale, at market value 7,592,580 (2,800) 7,798,028
Investment securities held-to-maturity, at amortized cost 395,403 (154,640) 240,763
Trading account securities, at market value 277,869 277,869
Investment in subsidiaries, at equity 154,849 (3,770,332)
Loans held-for-sale, at lower of cost or market 910,615 910,615
- ----------------------------------------------------------------------------------------------------------------------------
Loans 18,328,989 (3,979,256) 17,042,433
Less - Unearned income 320,774 320,774
Allowance for loan losses 326,630 326,630
- ----------------------------------------------------------------------------------------------------------------------------
17,681,585 (3,979,256) 16,395,029
- ----------------------------------------------------------------------------------------------------------------------------
Premises and equipment 390,324 390,324
Other real estate 29,257 29,257
Accrued income receivable 197,427 (21,441) 189,859
Other assets 412,556 164 467,296
Goodwill 180,943 180,943
Other intangible assets 40,412 40,412
- ----------------------------------------------------------------------------------------------------------------------------
$30,116,473 ($8,197,871) $28,530,422
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $3,108,843 ($63,239) $3,045,604
Interest bearing 12,974,309 (19,677) 12,954,632
- ----------------------------------------------------------------------------------------------------------------------------
16,083,152 (82,916) 16,000,236
Federal funds purchased and securities sold under
agreements to repurchase 3,988,728 (158,570) 3,978,199
Other short-term borrowings 2,712,352 (1,192,348) 3,164,520
Notes payable 4,113,966 (2,952,004) 2,329,985
Other liabilities 433,740 (26,463) 482,117
- ----------------------------------------------------------------------------------------------------------------------------
27,331,938 (4,412,301) 25,955,057
- ----------------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000
- ----------------------------------------------------------------------------------------------------------------------------
Preferred beneficial interests in Popular North America's
Junior subordinated deferrable interest debentures
guaranteed by the Corporation 150,000 150,000
- ----------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 105 803 908
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000
Common stock 72,575 (76,539) 831,932
Surplus 1,333,919 (2,261,559) 266,525
Retained earnings 1,119,671 (1,324,242) 1,011,473
Treasury stock-at cost (1,495) 1,495 (66,136)
Accumulated other comprehensive income, net of tax 109,760 (125,528) 155,663
- ----------------------------------------------------------------------------------------------------------------------------
2,634,430 (3,786,373) 2,299,457
- ----------------------------------------------------------------------------------------------------------------------------
$30,116,473 ($8,197,871) $28,530,422
============================================================================================================================
23
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Popular, Inc. PIBI PNA All other
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $2,748 $40,059 $408,267
Money market investments 46 $2 24 18,410
Investment securities 380 296 107,570
Trading account securities 3,770
- --------------------------------------------------------------------------------------------------------------------------------
3,174 2 40,379 538,017
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 106,264
Short-term borrowings 408 45 5,350 58,605
Long-term debt 4,918 33,971 75,123
- --------------------------------------------------------------------------------------------------------------------------------
5,326 45 39,321 239,992
- --------------------------------------------------------------------------------------------------------------------------------
Net interest (loss) income (2,152) (43) 1,058 298,025
Provision for loan losses 50,992
- --------------------------------------------------------------------------------------------------------------------------------
Net interest (loss) income after provision for loan losses (2,152) (43) 1,058 247,033
Service charges on deposit accounts 39,484
Other service fees 63,984
Gain on sale of securities 2 1,699
Trading account profit 1,247
Derivatives losses (21,325) (434)
Gain on sales of loans 17,196
Other operating income 7,760 1,138 9,521
- --------------------------------------------------------------------------------------------------------------------------------
5,608 1,095 (20,265) 379,730
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 23 74 92,607
Profit sharing 5,646
Pension and other benefits 14 25,149
- --------------------------------------------------------------------------------------------------------------------------------
23 88 123,402
Net occupancy expenses 3 19,578
Equipment expenses 24,469
Other taxes 290 8,825
Professional fees 258 3 45 22,260
Communications 10 13,897
Business promotion 15,588
Printing and supplies 4,754
Other operating expenses 168 18 133 18,255
Amortization of intangibles 1,938
- --------------------------------------------------------------------------------------------------------------------------------
749 112 178 252,966
- --------------------------------------------------------------------------------------------------------------------------------
Income before income tax, minority interest and equity in
earnings of subsidiaries 4,859 983 (20,443) 126,764
Income tax (7,170) 31,463
Net gain of minority interest (116)
- --------------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries 4,859 983 (13,273) 95,185
Equity in earnings of subsidiaries 80,895 5,279 18,456 8,885
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $85,754 $6,262 $5,183 $104,070
================================================================================================================================
Elimination Popular, Inc.
(In thousands) Entries Consolidated
- ----------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans ($59,575) $391,499
Money market investments (10,766) 7,716
Investment securities (3,121) 105,125
Trading account securities 3,770
- ----------------------------------------------------------------------------------------------
(73,462) 508,110
- ----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (201) 106,063
Short-term borrowings (18,223) 46,185
Long-term debt (55,105) 58,907
- ----------------------------------------------------------------------------------------------
(73,529) 211,155
- ----------------------------------------------------------------------------------------------
Net interest (loss) income 67 296,955
Provision for loan losses 50,992
- ----------------------------------------------------------------------------------------------
Net interest (loss) income after provision for loan losses 67 245,963
Service charges on deposit accounts 39,484
Other service fees (43) 63,941
Gain on sale of securities (450) 1,251
Trading account profit 1,247
Derivatives losses (21,759)
Gain on sales of loans (2,236) 14,960
Other operating income (49) 18,370
- ----------------------------------------------------------------------------------------------
(2,711) 363,457
- ----------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 92,704
Profit sharing 5,646
Pension and other benefits 25,163
- ----------------------------------------------------------------------------------------------
123,513
Net occupancy expenses 19,581
Equipment expenses 24,469
Other taxes 9,115
Professional fees (63) 22,503
Communications 13,907
Business promotion 15,588
Printing and supplies 4,754
Other operating expenses (85) 18,489
Amortization of intangibles 1,938
- ----------------------------------------------------------------------------------------------
(148) 253,857
- ----------------------------------------------------------------------------------------------
Income before income tax, minority interest and equity in
earnings of subsidiaries (2,563) 109,600
Income tax (563) 23,730
Net gain of minority interest (116)
- ----------------------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries (2,000) 85,754
Equity in earnings of subsidiaries (113,515)
- ----------------------------------------------------------------------------------------------
NET INCOME ($115,515) $85,754
==============================================================================================
24
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Popular, Inc. PIBI PNA
(In thousands) Holding Co. Holding Co. Holding Co.
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $9,734 $118,358
Money market investments 218 $8 43
Investment securities 858 673
Trading account securities
- ----------------------------------------------------------------------------------------------------------------------
10,810 8 119,074
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits
Short-term borrowings 1,381 106 16,473
Long-term debt 15,174 101,329
- ----------------------------------------------------------------------------------------------------------------------
16,555 106 117,802
- ----------------------------------------------------------------------------------------------------------------------
Net interest (loss) income (5,745) (98) 1,272
Provision for loan losses
- ----------------------------------------------------------------------------------------------------------------------
Net interest (loss) income after provision for loan losses (5,745) (98) 1,272
Service charges on deposit accounts
Other service fees
(Loss) gain on sale of securities (1,078) 2
Trading account loss
Derivatives losses (20,611)
Gain on sales of loans
Other operating income 14,059 3,790 169
- ----------------------------------------------------------------------------------------------------------------------
7,236 3,692 (19,168)
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 23 229
Profit sharing
Pension and other benefits 43
- ----------------------------------------------------------------------------------------------------------------------
23 272
Net occupancy expenses 10
Equipment expenses
Other taxes 780
Professional fees 549 9 140
Communications 29
Business promotion
Printing and supplies
Other operating expenses 276 63 403
Amortization of intangibles
- ----------------------------------------------------------------------------------------------------------------------
1,657 354 543
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority interest and
equity in earnings of subsidiaries 5,579 3,338 (19,711)
Income tax (147) (6,551)
Net gain of minority interest
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries 5,726 3,338 (13,160)
Equity in earnings of subsidiaries 265,377 39,720 52,657
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $271,103 $43,058 $39,497
======================================================================================================================
All other Elimination Popular, Inc.
(In thousands) Subsidiaries Entries Consolidated
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $1,193,870 ($178,075) $1,143,887
Money market investments 55,167 (32,565) 22,871
Investment securities 340,925 (9,643) 332,813
Trading account securities 10,522 (165) 10,357
- --------------------------------------------------------------------------------------------------------------------
1,600,484 (220,448) 1,509,928
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 329,972 (623) 329,349
Short-term borrowings 173,855 (55,913) 135,902
Long-term debt 215,237 (164,111) 167,629
- --------------------------------------------------------------------------------------------------------------------
719,064 (220,647) 632,880
- --------------------------------------------------------------------------------------------------------------------
Net interest (loss) income 881,420 199 877,048
Provision for loan losses 155,521 155,521
- --------------------------------------------------------------------------------------------------------------------
Net interest (loss) income after provision for loan losses 725,899 199 721,527
Service charges on deposit accounts 117,964 117,964
Other service fees 191,823 (157) 191,666
(Loss) gain on sale of securities (1,148) (450) (2,674)
Trading account loss (212) 70 (142)
Derivatives losses (1,492) (22,103)
Gain on sales of loans 51,369 (6,867) 44,502
Other operating income 36,768 (1,109) 53,677
- --------------------------------------------------------------------------------------------------------------------
1,120,971 (8,314) 1,104,417
- --------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 271,759 272,011
Profit sharing 15,954 15,954
Pension and other benefits 78,390 78,433
- --------------------------------------------------------------------------------------------------------------------
366,103 366,398
Net occupancy expenses 58,649 58,659
Equipment expenses 73,610 73,610
Other taxes 27,168 27,948
Professional fees 59,239 (203) 59,734
Communications 40,263 40,292
Business promotion 45,786 45,786
Printing and supplies 14,341 14,341
Other operating expenses 52,559 (430) 52,871
Amortization of intangibles 7,037 7,037
- --------------------------------------------------------------------------------------------------------------------
744,755 (633) 746,676
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority interest and
equity in earnings of subsidiaries 376,216 (7,681) 357,741
Income tax 95,083 (1,913) 86,472
Net gain of minority interest (166) (166)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries 280,967 (5,768) 271,103
Equity in earnings of subsidiaries 24,306 (382,060)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $305,273 ($387,828) $271,103
=====================================================================================================================
25
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Popular, Inc. PIBI PNA
(In thousands) Holding Co. Holding Co. Holding Co.
- ----------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $3,751 $40,362
Money market investments 227 $4 143
Investment securities 264 1 189
Trading account securities
- ----------------------------------------------------------------------------------------------------------------
4,242 5 40,694
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits
Short-term borrowings 247 48 18,377
Long-term debt 6,456 20,098
- ----------------------------------------------------------------------------------------------------------------
6,703 48 38,475
- ----------------------------------------------------------------------------------------------------------------
Net interest (loss) income (2,461) (43) 2,219
Provision for loan losses
- ----------------------------------------------------------------------------------------------------------------
Net interest (loss) income after provision for loan losses (2,461) (43) 2,219
Service charges on deposit accounts
Other service fees
Gain on sale of securities
Trading account profit 27
Derivatives (losses) gains (8,228)
Gain on sales of loans
Other operating income 4,434 609
- ----------------------------------------------------------------------------------------------------------------
1,973 593 (6,009)
- ----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 74
Profit sharing
Pension and other benefits 13
- ----------------------------------------------------------------------------------------------------------------
87
Net occupancy expenses 3
Equipment expenses
Other taxes 245
Professional fees 181 3 247
Communications 13
Business promotion
Printing and supplies
Other operating expenses 29 19 106
Amortization of intangibles
- ----------------------------------------------------------------------------------------------------------------
468 112 353
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority interest
and equity in earnings of subsidiaries 1,505 481 (6,362)
Income tax (2,189)
Net loss of minority interest
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries 1,505 481 (4,173)
Equity in earnings of subsidiaries 75,711 5,105 9,292
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $77,216 $5,586 $5,119
================================================================================================================
All other Elimination Popular, Inc.
(In thousands) Subsidiaries Entries Consolidated
- --------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $411,020 ($62,332) $392,801
Money market investments 20,861 (10,885) 10,350
Investment securities 112,896 (3,255) 110,095
Trading account securities 3,736 3,736
- --------------------------------------------------------------------------------------------------------------
548,513 (76,472) 516,982
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 131,170 (916) 130,254
Short-term borrowings 78,712 (24,720) 72,664
Long-term debt 64,891 (50,801) 40,644
- --------------------------------------------------------------------------------------------------------------
274,773 (76,437) 243,562
- --------------------------------------------------------------------------------------------------------------
Net interest (loss) income 273,740 (35) 273,420
Provision for loan losses 55,259 55,259
- --------------------------------------------------------------------------------------------------------------
Net interest (loss) income after provision for loan losses 218,481 (35) 218,161
Service charges on deposit accounts 37,580 (43) 37,537
Other service fees 61,254 (60) 61,194
Gain on sale of securities 1,249 1,249
Trading account profit 750 777
Derivatives (losses) gains 88 (8,140)
Gain on sales of loans 14,151 (3,083) 11,068
Other operating income 10,287 (105) 15,225
- --------------------------------------------------------------------------------------------------------------
343,840 (3,326) 337,071
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 82,006 82,080
Profit sharing 3,986 3,986
Pension and other benefits 21,529 21,542
- --------------------------------------------------------------------------------------------------------------
107,521 107,608
Net occupancy expenses 17,971 17,974
Equipment expenses 24,148 24,148
Other taxes 8,890 9,135
Professional fees 18,455 (88) 18,798
Communications 12,168 12,181
Business promotion 13,414 13,414
Printing and supplies 4,269 4,269
Other operating expenses 17,553 (182) 17,525
Amortization of intangibles 6,858 6,858
- --------------------------------------------------------------------------------------------------------------
231,247 (270) 231,910
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority interest
and equity in earnings of subsidiaries 112,593 (3,056) 105,161
Income tax 30,899 (758) 27,952
Net loss of minority interest 7 7
- --------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries 81,701 (2,298) 77,216
Equity in earnings of subsidiaries 5,598 (95,706)
- --------------------------------------------------------------------------------------------------------------
NET INCOME $87,299 ($98,004) $77,216
==============================================================================================================
26
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Popular, Inc. PIBI PNA
(In thousands) Holding Co. Holding Co. Holding Co.
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $18,102 $1,069 $115,958
Money market investments 690 14 199
Investment securities 1,148 2 567
Trading account securities
- -----------------------------------------------------------------------------------------------------------------------
19,940 1,085 116,724
- -----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits
Short-term borrowings 1,117 198 51,591
Long-term debt 25,442 63,960
- -----------------------------------------------------------------------------------------------------------------------
26,559 198 115,551
- -----------------------------------------------------------------------------------------------------------------------
Net interest (loss) income (6,619) 887 1,173
Provision for loan losses
- -----------------------------------------------------------------------------------------------------------------------
Net interest (loss) income after provision for loan losses (6,619) 887 1,173
Service charges on deposit accounts
Other service fees
Loss on sale of securities (50)
Trading account profit 26
Derivatives losses (6,711)
Gain on sales of loans
Other operating income 9,835 1,018
- -----------------------------------------------------------------------------------------------------------------------
3,216 1,881 (5,538)
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 217
Profit sharing
Pension and other benefits 38
- -----------------------------------------------------------------------------------------------------------------------
255
Net occupancy expenses 9
Equipment expenses
Other taxes 1,149
Professional fees 1,112 6 357
Communications 29
Business promotion
Printing and supplies
Other operating expenses 77 41 319
Amortization of intangibles
- -----------------------------------------------------------------------------------------------------------------------
2,367 311 676
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority interest,
cumulative effect of accounting change and equity
in earnings of subsidiaries 849 1,570 (6,214)
Income tax (1,386) (2,202)
Net loss of minority interest
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting
change and equity in earnings of subsidiaries 2,235 1,570 (4,012)
Cumulative effect of accounting change
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries 2,235 1,570 (4,012)
Equity in earnings of subsidiaries 226,749 14,313 18,691
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $228,984 $15,883 $14,679
=======================================================================================================================
All other Elimination Popular, Inc.
(In thousands) Subsidiaries entries Consolidated
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $1,215,341 ($172,263) $1,178,207
Money market investments 76,310 (38,531) 38,682
Investment securities 370,436 (9,756) 362,397
Trading account securities 11,554 11,554
- ----------------------------------------------------------------------------------------------------------------------
1,673,641 (220,550) 1,590,840
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 396,000 (1,947) 394,053
Short-term borrowings 307,979 (84,610) 276,275
Long-term debt 170,341 (133,886) 125,857
- ----------------------------------------------------------------------------------------------------------------------
874,320 (220,443) 796,185
- ----------------------------------------------------------------------------------------------------------------------
Net interest (loss) income 799,321 (107) 794,655
Provision for loan losses 154,755 154,755
- ----------------------------------------------------------------------------------------------------------------------
Net interest (loss) income after provision for loan losses 644,566 (107) 639,900
Service charges on deposit accounts 108,547 (42) 108,505
Other service fees 180,357 (120) 180,237
Loss on sale of securities (563) (613)
Trading account profit 123 149
Derivatives losses (408) (7,119)
Gain on sales of loans 39,502 (7,577) 31,925
Other operating income 33,551 (315) 44,089
- ----------------------------------------------------------------------------------------------------------------------
1,005,675 (8,161) 997,073
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 238,525 238,742
Profit sharing 13,101 13,101
Pension and other benefits 67,364 67,402
- ----------------------------------------------------------------------------------------------------------------------
318,990 319,245
Net occupancy expenses 52,886 52,895
Equipment expenses 72,850 72,850
Other taxes 26,606 27,755
Professional fees 51,751 (205) 53,021
Communications 36,124 36,153
Business promotion 37,118 37,118
Printing and supplies 13,078 13,078
Other operating expenses 53,675 (467) 53,645
Amortization of intangibles 20,594 20,594
- ----------------------------------------------------------------------------------------------------------------------
683,672 (672) 686,354
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax, minority interest,
cumulative effect of accounting change and equity
in earnings of subsidiaries 322,003 (7,489) 310,719
Income tax 87,880 (1,852) 82,440
Net loss of minority interest 19 19
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting
change and equity in earnings of subsidiaries 234,142 (5,637) 228,298
Cumulative effect of accounting change 686 686
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries 234,828 (5,637) 228,984
Equity in earnings of subsidiaries 16,286 (276,039)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $251,114 ($281,676) $228,984
======================================================================================================================
27
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Popular, Inc. PIBI PNA
(In thousands) Holding Co. Holding Co. Holding Co.
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $271,103 $43,058 $39,497
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries (265,377) (39,720) (52,657)
Depreciation and amortization of premises and equipment 610
Provision for loan losses
Amortization of intangibles
Stock options expense 119
Net loss (gain) on sales of investment securities 1,078 (2)
Net loss on derivatives 20,611
Net loss on disposition of premises and equipment
Net gain on sales of loans, excluding loans held-for-sale
Net amortization of premiums and accretion of discounts
on investments
Net decrease in loans held-for-sale
Net amortization of deferred loan fees and costs
Net increase in trading securities
Net decrease (increase) in accrued income receivable 14 2 (1,428)
Net increase in other assets (3,031) (3,127) (5,528)
Net increase (decrease) in interest payable 713 35 (1,016)
Net (decrease) increase in deferred and current taxes (179) 304
Net increase in postretirement benefit obligation
Net increase (decrease) in other liabilities 571 30 (503)
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (265,482) (42,780) (40,219)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 5,621 278 (722)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in money market investments 89,750 1 (7,321)
Purchases of investment securities held-to-maturity
Maturities of investment securities held-to-maturity
Purchases of investment securities available-for-sale (34,179) (4,721) (75,983)
Maturities of investment securities
Proceeds from sales of investment securities available-for-sale
Net collections (disbursements) on loans 33,289 (99,141)
Proceeds from sales of loans
Acquisition of loan portfolios
Capital contribution to subsidiary (50) (81)
Assets acquired, net of cash
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Dividends received from subsidiary 221,500
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 310,310 (4,801) (182,445)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
Net increase in federal funds purchased and securities
sold under agreements to repurchase 35,649
Net increase (decrease) in other short-term borrowings 27,480 4,472 (43,976)
Net (payments of) proceeds from notes payable
and capital securities (28,948) 192,915
Dividends paid to parent company
Dividends paid (81,533)
Proceeds from issuance of common stock 7,974
Redemption of preferred stock (102,000)
Treasury stock acquired (138,847)
Capital contribution from parent 50
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (315,874) 4,522 184,588
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 57 (1) 1,421
Cash and due from banks at beginning of period 263 18 252
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $320 $17 $1,673
==================================================================================================================================
All other Elimination Consolidated
(In thousands) Subsidiaries Entries Popular, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $305,273 ($387,828) $271,103
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
Provided by operating activities:
Equity in undistributed earnings of subsidiaries (24,306) 382,060
Depreciation and amortization of premises and equipment 55,035 55,645
Provision for loan losses 155,521 155,521
Amortization of intangibles 7,037 7,037
Stock options expense 478 597
Net loss (gain) on sales of investment securities 1,148 450 2,674
Net loss on derivatives 1,492 22,103
Net loss on disposition of premises and equipment 547 547
Net gain on sales of loans, excluding loans held-for-sale (6,284) (6,284)
Net amortization of premiums and accretion of discounts
on investments 10,580 10,580
Net decrease in loans held-for-sale 69,756 (875) 68,881
Net amortization of deferred loan fees and costs 21,759 21,759
Net increase in trading securities (202,296) (920) (203,216)
Net decrease (increase) in accrued income receivable (5,420) (1,525) (8,357)
Net increase in other assets (2,287) (1,505) (15,478)
Net increase (decrease) in interest payable (2,161) (2,429)
Net (decrease) increase in deferred and current taxes (29,825) 921 (28,779)
Net increase in postretirement benefit obligation 2,562 2,562
Net increase (decrease) in other liabilities 100,633 569 101,300
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments 153,969 379,175 184,663
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 459,242 (8,653) 455,766
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in money market investments (226,096) (179,847) (323,513)
Purchases of investment securities held-to-maturity (18,206,606) (18,206,606)
Maturities of investment securities held-to-maturity 18,160,282 (6,000) 18,154,282
Purchases of investment securities available-for-sale (4,785,724) (4,900,607)
Maturities of investment securities 3,546,992 (25,200) 3,521,792
Proceeds from sales of investment securities available-for-sale 1,112,116 1,112,116
Net disbursements on loans (1,020,926) 194,306 (892,472)
Proceeds from sales of loans 425,510 425,510
Acquisition of loan portfolios (913,579) (913,579)
Capital contribution to subsidiary 131
Assets acquired, net of cash (13,613) (13,613)
Acquisition of premises and equipment (103,924) (103,924)
Proceeds from sale of premises and equipment 7,276 7,276
Dividends received from subsidiary (221,500)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,018,292) (238,110) (2,133,338)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 739,484 (23,620) 715,864
Net increase in federal funds purchased and securities
sold under agreements to repurchase 10,936 89,386 135,971
Net increase (decrease) in other short-term borrowings (233,077) 464,538 219,437
Net (payments of) proceeds from notes payable
and capital securities 1,245,047 (519,941) 889,073
Dividends paid to parent company (221,500) 221,500
Dividends paid (81,533)
Proceeds from issuance of common stock 7,974
Redemption of preferred stock (102,000)
Treasury stock acquired (227) (139,074)
Capital contribution from parent 81 (131)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 1,540,744 231,732 1,645,712
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks (18,306) (15,031) (31,860)
Cash and due from banks at beginning of period 659,094 (53,485) 606,142
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $640,788 ($68,516) $574,282
==================================================================================================================================
28
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Popular, Inc. PIBI PNA
(In thousands) Holding Co. Holding Co. Holding Co.
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $228,984 $15,883 $14,679
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in undistributed earnings of subsidiaries (226,749) (14,313) (18,691)
Depreciation and amortization of premises and equipment
Provision for loan losses
Amortization of intangibles
Loss on sale of investment securities available-for-sale 50
Net loss on derivatives 6,712
Loss on disposition of premises and equipment
Gain on sale of loans
Net amortization of premiums and accretion of discounts
on investments
Net increase in loans held-for-sale
Net amortization of deferred loan fees and costs
Net increase in trading securities
Net decrease (increase) in accrued income receivable 828 588 (1,536)
Net (increase) decrease in other assets (2,544) (25,503) 5,519
Net decrease in interest payable (11,013) (213) (17,038)
Net (decrease) increase in deferred and current taxes (34) 733
Net increase in postretirement benefit obligation
Net increase (decrease) in other liabilities 16,628 (8) (5,001)
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (222,884) (39,399) (29,302)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 6,100 (23,516) (14,623)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in money market investments (5,150) 25 (58)
Purchases of investment securities held-to-maturity
Maturities of investment securities held-to-maturity
Purchases of investment securities available-for-sale (7,829) (146)
Maturities of investment securities available-for-sale 34
Sales of investment securities available-for-sale
Net collections (disbursements) on loans 345,956 22,500 (652,368)
Proceeds from sale of loans
Acquisition of loan portfolios
Capital contribution to subsidiary (1,998) (32)
Assets acquired, net of cash
Return of investment from subsidiary 300
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Dividends received from subsidiary 71,250
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 402,229 22,679 (652,424)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 79,341
Net (decrease) increase in other short-term borrowings (376,962) (1,050) 303,337
Net proceeds of notes payable 38,482 284,276
Dividends paid to parent company
Dividends paid (77,041)
Proceeds from issuance of common stock 7,116
Treasury stock sold
Return of investment to parent
Capital contribution from parent 2,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (408,405) 950 666,954
- ----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and due from banks (76) 113 (93)
Cash and due from banks at beginning of period 283 18 288
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $207 $131 $195
==================================================================================================================================
All other Elimination Consolidated
(In thousands) Subsidiaries Entries Popular, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $251,114 ($281,676) $228,984
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in undistributed earnings of subsidiaries (16,286) 276,039
Depreciation and amortization of premises and equipment 56,960 56,960
Provision for loan losses 154,755 154,755
Amortization of intangibles 20,594 20,594
Loss on sale of investment securities available-for-sale 563 613
Net loss on derivatives 407 7,119
Loss on disposition of premises and equipment 351 351
Gain on sale of loans (860) (860)
Net amortization of premiums and accretion of discounts
on investments 1,975 1,975
Net increase in loans held-for-sale (86,714) (86,714)
Net amortization of deferred loan fees and costs 15,622 15,622
Net increase in trading securities (124,796) (124,796)
Net decrease (increase) in accrued income receivable 12,525 272 12,677
Net (increase) decrease in other assets 36,117 (1,932) 11,657
Net decrease in interest payable (45,120) (73,384)
Net (decrease) increase in deferred and current taxes 5,999 (1,442) 5,256
Net increase in postretirement benefit obligation 3,012 3,012
Net increase (decrease) in other liabilities (287) (4,370) 6,962
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 34,817 268,567 11,799
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 285,931 (13,109) 240,783
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in money market investments 771,489 (690,703) 75,603
Purchases of investment securities held-to-maturity 4,515,716) (4,515,716)
Maturities of investment securities held-to-maturity 4,622,152 4,622,152
Purchases of investment securities available-for-sale (3,295,726) (3,303,701)
Maturities of investment securities available-for-sale 3,668,545 2,426 3,671,005
Sales of investment securities available-for-sale 732,131 732,131
Net collections (disbursements) on loans (2,529,022) 1,400,949 (1,411,985)
Proceeds from sale of loans 404,760 404,760
Acquisition of loan portfolios (660,829) (660,829)
Capital contribution to subsidiary 2,030
Assets acquired, net of cash (123) (123)
Return of investment from subsidiary (300)
Acquisition of premises and equipment (45,044) (45,044)
Proceeds from sale of premises and equipment 3,180 3,180
Dividends received from subsidiary (71,250)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (844,203) 643,152 (428,567)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 1,122,091 64,036 1,186,127
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (1,044,389) (20,868) (985,916)
Net (decrease) increase in other short-term borrowings (1,707,128) 577,111 (1,204,692)
Net proceeds of notes payable 2,116,244 (1,285,928) 1,153,074
Dividends paid to parent company (71,250) 71,250
Dividends paid (77,041)
Proceeds from issuance of common stock 7,116
Treasury stock sold 77 77
Return of investment to parent (300) 300
Capital contribution from parent 32 (2,032)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 415,377 (596,131) 78,745
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and due from banks (142,895) 33,912 (109,039)
Cash and due from banks at beginning of period 822,672 (97,210) 726,051
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $679,777 ($63,298) $617,012
====================================================================================================================================
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TABLE A
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, AVERAGE FOR THE NINE MONTHS
---------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS 2002 2001 Change 2002 2001 Change
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Money market investments $1,153,079 $993,015 $160,064 $876,401 $940,107 ($63,706)
Investment and trading securities 10,771,435 8,316,660 2,454,775 10,243,457 8,310,532 1,932,925
Loans 19,263,508 17,632,274 1,631,234 18,517,164 16,800,193 1,716,971
Total assets 32,843,126 28,530,422 4,312,704 31,234,800 27,594,246 3,640,554
Deposits 17,057,856 16,000,236 1,057,620 16,859,835 15,316,240 1,543,595
Borrowings 12,832,702 9,747,704 3,084,998 11,768,240 9,732,654 2,035,586
Stockholders' equity 2,319,012 2,299,457 19,555 2,135,096 2,072,049 63,047
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER NINE MONTHS
-----------------------------------------------------------------------------
OPERATING HIGHLIGHTS 2002 2001 Change 2002 2001 Change
(In thousands, except per share information)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $296,955 $273,420 $23,535 $877,048 $794,655 $82,393
Provision for loan losses 50,992 55,259 (4,267) 155,521 154,755 766
Fees and other income 117,494 118,910 (1,416) 382,890 357,173 25,717
Other expenses, net of minority interest 277,703 259,855 17,848 833,314 768,775 64,539
Cumulative effect of accounting change, net of tax - - - - 686 (686)
Net income $85,754 $77,216 $8,538 $271,103 $228,984 $42,119
Net income applicable to common stock $85,754 $75,129 $10,625 $268,593 $222,722 $45,871
Earnings per common share $0.65 $0.55 $0.10 $2.00 $1.63 $0.37
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER NINE MONTHS
----------------------------------------------------
SELECTED STATISTICAL INFORMATION 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA - Market price
High $35.85 $36.26 $35.85 $36.26
Low 30.11 27.42 27.50 25.25
End 31.60 31.20 31.60 31.20
Book value at period end 17.52 16.14 17.52 16.14
Dividends declared 0.20 0.20 0.60 0.56
Dividend payout ratio 30.85% 36.26% 30.10% 31.78%
Price/earnings ratio 12.44X 14.38x 12.44X 14.38x
- ------------------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS - Return on assets 1.07% 1.10% 1.16% 1.11%
Return on common equity 16.03 14.71 16.92 15.10
Net interest spread (taxable equivalent) 3.81 3.79 3.81 3.63
Net interest yield (taxable equivalent) 4.26 4.47 4.29 4.37
Effective tax rate 21.65 26.58 24.17 26.53
Overhead ratio 45.92 41.33 41.48 41.42
Efficiency ratio 58.60 58.20 58.30 59.20
- ------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION RATIOS - Equity to assets 6.66% 7.63% 6.84% 7.51%
Tangible equity to assets 6.03 6.87 6.19 6.72
Equity to loans 11.14 12.22 11.53 12.33
Internal capital generation 11.18 9.01 11.80 9.42
Tier I capital to risk - adjusted assets 9.93 10.70 9.93 10.70
Total capital to risk - adjusted assets 11.70 12.68 11.70 12.68
Leverage ratio 6.36 6.91 6.36 6.91
- ------------------------------------------------------------------------------------------------------------------------
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial review contains an analysis of the consolidated financial
position and financial performance of Popular, Inc. and its subsidiaries (the
Corporation). All accompanying tables, financial statements and notes included
elsewhere in this report should be considered an integral part of this analysis.
The Corporation is a financial holding company which 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 Levitt Mortgage Corporation.
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., Popular Insurance Agency
U.S.A., Inc. and Popular Insurance V.I., Inc.
CRITICAL ACCOUNTING POLICIES
The Corporation has identified as critical accounting policies those related to
the allowance for loan losses and investment securities. These accounting
policies involve subjective or complex judgments associated with estimates about
the effect of matters that are inherently uncertain. For a summary of the
Corporation's critical accounting policies, refer to that particular section in
the Management's 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 for the year ended
December 31, 2001. Also, refer to Note 1 to the consolidated financial
statements included in said report for a summary of the Corporation's
significant accounting policies, as well as to the accompanying notes to the
unaudited consolidated financial statements included in this Form 10-Q.
NET INCOME
The Corporation reported net income of $85.8 million for the third quarter of
2002, compared with $77.2 million for the same quarter of 2001, an increase of
$8.6 million, or 11%. Earnings per common share (EPS), basic and diluted, for
the quarter ended September 30, 2002, were $0.65, compared with $0.55 for the
same period in 2001, representing an increase of 18%. The EPS was positively
impacted by the repurchase of 4.3 million shares of the Corporation's common
stock in May 2002 and the redemption of $100 million of its preferred stock in
January 2002. Refer to Note 12 to the consolidated financial statements for a
detail 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 third quarter
of 2002 were 1.07% and 16.03%, respectively, compared with 1.10% and 14.71% for
the same period in 2001.
Results of operations for the quarter ended September 30, 2002, reflected an
increase of $23.5 million in net interest income and $12.2 million in
non-interest income, excluding derivatives losses, compared with the same
quarter in the previous year. The provision for loan losses and income taxes
decreased by $4.3 million each. These favorable variances were partially offset
by rises of $21.9 million in operating expenses and $13.6 million in derivatives
losses.
For the first nine months of 2002, the Corporation's net income rose to $271.1
million, compared with $229.0 million
31
for the same period in 2001. EPS, basic and diluted, for the first nine months
of 2002 and 2001 were $2.00 and $1.63, respectively. ROA and ROE for the nine
months ended September 30, 2002 were 1.16% and 16.92%, respectively. For the
same period of 2001, these ratios were 1.11% and 15.10%.
NET INTEREST INCOME
Net interest income for the quarter ended September 30, 2002 rose to $297.0
million, an increase of $23.5 million, or 9%, over the third quarter of 2001. On
a taxable equivalent basis, net interest income increased to $321.8 million from
$294.2 million in the same quarter of 2001.
The improvement of $27.6 million in net interest income on a taxable equivalent
basis from the third quarter of 2001 resulted from a $23.4 million increase due
to a higher volume of earning assets and a $4.2 million increase due to a higher
net interest spread.
Table B presents the different components of the Corporation's net interest
income for the third quarter of 2002, as compared with the same quarter in 2001
segregated by major categories of earning assets and interest bearing
liabilities. Some of the assets, mostly investments in obligations of the U.S.
Government and the Puerto Rico Commonwealth and its agencies, generate interest,
which is exempt for income tax purposes, principally in Puerto Rico. Therefore,
to facilitate the comparison of all interest data related to these assets, the
interest income has been converted to a taxable equivalent basis, using the
applicable statutory income tax rates.
32
TABLE B
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
QUARTER ENDED SEPTEMBER 30,
VARIANCE
AVERAGE VOLUME AVERAGE YIELDS INTEREST ATTRIBUTABLE TO
2002 2001 VARIANCE 2002 2001 VARIANCE 2002 2001 VARIANCE RATE VOLUME
- ---------------------------------------------------- -----------------------------------------------
($ IN MILLIONS) (IN THOUSANDS)
$877 $920 ($43) 3.49% 4.46% (0.97%) Money market investments $7,716 $10,351 ($2,635) ($2,074) ($561)
9,985 7,729 2,256 5.11 6.67 (1.56) Investment securities 127,697 128,898 (1,201) (32,987) 31,786
343 274 69 4.49 5.53 (1.04) Trading securities 3,885 3,824 61 (803) 864
- ---------------------------------------------------- -----------------------------------------------
11,205 8,923 2,282 4.97 6.40 (1.43) 139,298 143,073 (3,775) (35,864) 32,089
- ---------------------------------------------------- -----------------------------------------------
Loans:
7,784 7,547 237 6.71 7.84 (1.13) Commercial and construction 131,671 149,182 (17,511) (22,066) 4,555
888 846 42 11.08 11.82 (0.74) Leasing 24,599 24,994 (395) (1,614) 1,219
7,222 5,790 1,432 7.78 8.04 (0.26) Mortgage 140,525 116,388 24,137 (3,834) 27,971
3,150 3,215 (65) 12.26 12.90 (0.64) Consumer 96,909 104,095 (7,186) (3,772) (3,414)
- ---------------------------------------------------- -----------------------------------------------
19,044 17,398 1,646 8.24 9.04 (0.80) 393,704 394,659 (955) (31,286) 30,331
- ---------------------------------------------------- -----------------------------------------------
$30,249 $26,321 $3,928 7.03% 8.14% (1.11%) TOTAL EARNING ASSETS $533,002 $537,732 ($4,730) ($67,150) $62,420
==================================================== ===============================================
Interest-bearing deposits:
$2,472 $2,096 $376 2.07% 3.03% (0.96%) NOW and money market $12,871 $16,004 ($3,133) ($5,488) $2,355
4,857 4,182 675 2.13 2.78 (0.65) Savings 26,062 29,308 (3,246) (7,444) 4,198
6,444 6,478 (34) 4.13 5.20 (1.07) Time deposits 67,130 84,942 (17,812) (18,020) 208
- ---------------------------------------------------- -----------------------------------------------
13,773 12,756 1,017 3.06 4.05 (0.99) 106,063 130,254 (24,191) (30,952) 6,761
- ---------------------------------------------------- -----------------------------------------------
7,626 6,941 685 2.40 4.15 (1.75) Short-term borrowings 46,185 72,664 (26,479) (31,005) 4,526
4,655 2,508 2,147 5.02 6.44 (1.42) Medium and long-term debt 58,907 40,644 18,263 (9,405) 27,668
- ---------------------------------------------------- -----------------------------------------------
TOTAL INTEREST-BEARING
26,054 22,205 3,849 3.22 4.35 (1.13) LIABILITIES 211,155 243,562 (32,407) (71,362) 38,955
3,189 3,048 141 Demand deposits
1,006 1,068 (62) Other sources of funds
- ---------------------------------------------------- -----------------------------------------------
$30,249 $26,321 $3,928 2.77% 3.67% (0.90%)
====================================================
4.26% 4.47% (0.21%) NET INTEREST MARGIN AND
========================
NET INTEREST INCOME ON A
TAXABLE EQUIVALENT BASIS 321,847 294,170 27,677 $4,212 $23,465
==================
3.81% 3.79% 0.02% NET INTEREST SPREAD
========================
TAXABLE EQUIVALENT ADJUSTMENT 24,892 20,750 4,142
-----------------------------
NET INTEREST INCOME $296,955 $273,420 $23,535
=============================
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.
- ---------------------------------------------------------------------------------------------------------------------------------
Comparing the results of the third quarter of 2002 with the same period in 2001,
earning assets increased in average by $3.9 billion, or 15%. The average loan
portfolio grew by $1.6 billion, or 9%. Mortgage loans increased in average by
$1.4 billion, while the commercial loan portfolio increased by $237 million. The
interest rate environment has stimulated mortgage originations and the
refinancing through mortgage loans. On the other hand, consumer loans decreased
in average by $65 million mainly related to lower demand for personal loans and
to the shifting of consumer credit to mortgage credit. The average volume of
consumer loans was also reduced by the sale of approximately $20 million in
ending balances of small loans by Popular Finance in the second quarter of 2002
as a result of the sale of 15 branches. Investment securities also rose in
average by $2.3 billion, or 29%, mostly in collateralized mortgage obligations
and U.S. Agency securities.
33
The average yield on earning assets, on a taxable equivalent basis, declined 111
basis points from 8.14% in the third quarter of 2001 to 7.03% during the third
quarter of 2002. The average yield on the investment portfolio decreased by 156
basis points, due to the growth of the portfolio, and to the maturities of
securities with higher yields that were replaced, during a lower interest rate
scenario. The average yield on the loan portfolio decreased by 80 basis points.
Commercial and construction loans, which yield declined by 113 basis points, had
the major impact, due to their repricing characteristics and to the origination
of new loans in a lower rate environment. As of September 30, 2002,
approximately 53% of the commercial and construction portfolios had floating or
adjustable rates.
A mix of funding sources supported the increase in the volume of earning assets.
Interest-bearing liabilities for the third quarter of 2002, increased in average
by $3.8 billion, or 17%, compared with the same quarter in 2001. The average of
interest-bearing deposits increased by $1.0 billion, or 8%, while average
borrowings rose by $2.8 billion, or 30%. NOW and money market accounts and
savings deposits increased in average by $376 million and $675 million,
respectively, while time deposits experienced a slight decrease of $34 million.
Within the latter category, brokered deposits decreased by $7 million.
Average short-term borrowings, comprised mostly of Fed funds, repurchase
agreements and commercial paper, increased by $685 million or 10% in the third
quarter of 2002, compared with the same quarter last year, while longer-term
borrowings increased by $2.1 billion or 86%. 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, as well as decrease the volume of short-term
debt.
The average cost of interest-bearing liabilities decreased 113 basis points when
compared with the same quarter of 2001. The decline is mostly attributed to a
lower cost of short-term borrowed money by 175 basis points and to the lower
cost of interest-bearing deposits by 99 basis points. The latter resulted from
interest adjustments in deposits rates coupled with the prevailing lower
interest rate scenario.
The Corporation's net interest margin, on a taxable equivalent basis, for the
third quarter of 2002 decreased 21 basis points to 4.26%, compared with 4.47% in
the same quarter of 2001. The decrease resulted mostly from the higher level of
arbitrage activities, on which the Corporation earns a lower margin, and the
impact of the declining interest rate scenario during the second half of 2001,
on commercial loans with floating rates and on the investment portfolio. This
was partially offset by a decline in the cost of borrowed money and adjustments
in deposit rates, as explained above. In addition, the redemption and repurchase
of capital stock since December 31, 2001, also had an impact on the net interest
margin, since these funds do not carry an interest cost. Notwithstanding the
above, the Corporation's spread, which is the difference between the yield on
earning assets and the cost of interest-bearing liabilities, improved slightly
by 2 basis points.
For the nine-month period ended September 30, 2002, net interest income, on a
taxable equivalent basis, rose $96.3 million, or 11%, compared with the same
period of 2001. The improvement resulted from a $62.2 million increase due to a
higher average volume of earning assets and a $34.1 million increase due to a
higher net interest spread.
As shown in Table C, average earning assets increased by $3.6 billion for the
nine-month period ended September 30, 2002, compared with the same period of
2001, mainly related to mortgage loans and investment securities. These
increases were funded by higher interest-bearing liabilities, which increased in
average by $3.4 billion, and demand deposits, which rose in average by $181
million.
The net interest margin, on a taxable equivalent basis, for the nine-month
period ended September 30, 2002 decreased to 4.29%, from 4.37% in the same
period the previous year.
34
TABLE C
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
NINE MONTHS ENDED SEPTEMBER 30,
VARIANCE
AVERAGE VOLUME AVERAGE YIELDS INTEREST ATTRIBUTABLE TO
2002 2001 VARIANCE 2002 2001 VARIANCE 2002 2001 VARIANCE RATE VOLUME
- ---------------------------------------------------- --------------------------------------------------
($ IN MILLIONS) (IN THOUSANDS)
$877 $940 ($63) 3.49% 5.50% (2.01%) Money market investments $22,871 $38,682 ($15,811) ($12,968) ($2,843)
9,918 8,056 1,862 5.39 6.91 (1.52) Investment securities 400,747 417,431 (16,684) (95,876) 79,192
325 255 70 4.40 6.18 (1.78) Trading securities 10,708 11,770 (1,062) (3,869) 2,807
- ---------------------------------------------------- --------------------------------------------------
11,120 9,251 1,869 5.21 6.75 (1.54) 434,326 467,883 (33,557) (112,713) 79,156
- ---------------------------------------------------- --------------------------------------------------
Loans:
7,673 7,430 243 6.74 8.45 (1.71) Commercial and construction 386,802 469,392 (82,590) (97,514) 14,924
873 840 33 11.21 11.68 (0.47) Leasing 73,370 73,565 (195) (2,988) 2,793
6,853 5,279 1,574 7.78 8.21 (0.43) Mortgage 400,093 324,900 75,193 (17,406) 92,599
3,118 3,251 (133) 12.41 12.97 (0.56) Consumer 289,854 315,691 (25,837) (11,162) (14,675)
- ---------------------------------------------------- --------------------------------------------------
18,517 16,800 1,717 8.29 9.41 (1.12) 1,150,119 1,183,548 (33,429) (129,070) 95,641
- ---------------------------------------------------- --------------------------------------------------
$29,637 $26,051 $3,586 7.14% 8.46% (1.32%) TOTAL EARNING ASSETS $1,584,445 $1,651,431 ($66,986)($241,783) $174,797
==================================================== ==================================================
Interest-bearing deposits:
$2,521 $2,025 $496 2.24% 3.25% (1.01%) NOW and money market $42,304 $49,203 ($6,899) ($16,585) $9,686
4,685 4,135 550 2.36 2.82 (0.46) Savings 82,563 87,322 (4,759) (15,315) 10,556
6,445 6,128 317 4.24 5.62 (1.38) Time deposits 204,482 257,528 (53,046) (66,728) 13,682
- ---------------------------------------------------- --------------------------------------------------
13,651 12,288 1,363 3.23 4.29 (1.06) 329,349 394,053 (64,704) (98,628) 33,924
- ---------------------------------------------------- --------------------------------------------------
7,428 7,234 194 2.45 5.11 (2.66) Short-term borrowings 135,902 276,275 (140,373) (145,464) 5,091
4,340 2,499 1,841 5.16 6.73 (1.57) Medium and long-term debt 167,629 125,857 41,772 (31,833) 73,605
- ---------------------------------------------------- --------------------------------------------------
TOTAL INTEREST-BEARING
25,419 22,021 3,398 3.33 4.83 (1.50) LIABILITIES 632,880 796,185 (163,305) (275,925) 112,620
3,209 3,028 181 Demand deposits
1,009 1,002 7 Other sources of funds
- ---------------------------------------------------- --------------------------------------------------
$29,637 $26,051 $3,586 2.85% 4.09% (1.24%)
====================================================
4.29% 4.37% (0.08%) NET INTEREST MARGIN AND
=======================
NET INTEREST INCOME ON A
TAXABLE EQUIVALENT BASIS 951,565 855,246 96,319 $34,142 $62,177
===================
3.81% 3.63% 0.18% NET INTEREST SPREAD
=======================
TAXABLE EQUIVALENT ADJUSTMENT 74,517 60,591 13,926
-------------------------------
NET INTEREST INCOME $877,048 $794,655 $82,393
===============================
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.
- ------------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses is a charge to earnings to maintain the reserve
for loan losses at a level consistent with management's assessment of
probable loss in the loan portfolio taking into consideration current risk
management strategies, economic conditions, portfolio composition and market
trends, among other factors. The provision for loan losses totaled $51.0 million
for the third quarter of 2002, a decrease of $4.3 million, compared with $55.3
million for the same period in 2001 and represented 115% and 131% of net
charge-offs as of each respective date. The decline in the amount of provision
is influenced by the composition of the Corporation's loan portfolio, as its
growth has been mostly in the mortgage loan portfolio, which historically has
represented a lower-risk portfolio coupled with the continuous decrease in the
consumer portfolio. Mortgage loans, which increased by $1.4 billion, or 22%,
from September 30, 2001, comprised 38% of the total loan portfolio at September
30, 2002, compared with 34% at the same date in the previous year. Refer to
table G for a breakdown of the Corporation's loan portfolio by major categories.
The decline in the provision was also influenced by lower non-performing
commercial loans. Refer to Table E for a summary of non-performing assets by
loan categories. For the nine-month period ended September 30, 2002, the
provision for loan
35
losses amounted to $155.5 million, compared with $154.8 million for the same
period in 2001, and represented 111% and 129% of net charge-offs, respectively.
Table D summarizes the movement in the allowance for loan losses and presents
several loan loss statistics for the quarters and nine months ended September
30, 2002 and 2001.
TABLE D
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
THIRD QUARTER NINE MONTHS
(Dollars in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $347,230 $313,337 $336,632 $290,653
Allowance Purchased 429 259 1,956 1,263
Provision for loan losses 50,992 55,259 155,521 154,755
- ----------------------------------------------------------------------------------------------------------------------
398,651 368,855 494,109 446,671
- ----------------------------------------------------------------------------------------------------------------------
Losses charged to the allowance:
Commercial 23,586 20,213 68,772 54,207
Construction 511 4 3,833 2,623
Lease financing 5,973 12,685 25,989 32,565
Mortgage 3,526 2,286 9,731 5,873
Consumer 26,415 24,596 78,479 75,268
- ----------------------------------------------------------------------------------------------------------------------
60,011 59,784 186,804 170,536
- ----------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 4,863 4,241 13,073 12,019
Construction 827 0 1,069 0
Lease financing 3,721 7,040 14,077 19,774
Mortgage 108 242 542 440
Consumer 6,123 6,036 18,216 18,262
- ----------------------------------------------------------------------------------------------------------------------
15,642 17,559 46,977 50,495
- ----------------------------------------------------------------------------------------------------------------------
Net loans charged-off (recovered):
Commercial 18,723 15,972 55,699 42,188
Construction (316) 4 2,764 2,623
Lease financing 2,252 5,645 11,912 12,791
Mortgage 3,418 2,044 9,189 5,433
Consumer 20,292 18,560 60,263 57,006
- ----------------------------------------------------------------------------------------------------------------------
44,369 42,225 139,827 120,041
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of period $354,282 $326,630 $354,282 $326,630
======================================================================================================================
Ratios:
Allowance for losses to loans 1.84% 1.85% 1.84% 1.85%
Allowance to non-performing assets 67.24 74.88 67.24 74.88
Allowance to non-performing loans 71.84 80.27 71.84 80.27
Non-performing assets to loans 2.74 2.47 2.74 2.47
Non-performing assets to total assets 1.60 1.53 1.60 1.53
Net charge-offs to average loans 0.93 0.97 1.01 0.95
Provision to net charge-offs 1.15X 1.31x 1.11X 1.29x
Net charge-offs earnings coverage 3.62 3.80 3.67 3.88
Net charge-offs for the quarter ended September 30, 2002 were $44.4 million or
0.93% of average loans compared with $42.2 million or 0.97% for the third
quarter of 2001. For the nine months ended September 30, 2002, net charge-offs
were $139.8 million or 1.01% of average loans, compared with $120.0 million or
0.95% for the same period in 2001.
36
Mortgage loans net charge-offs amounted to $3.4 million for the quarter ended
September 30, 2002, compared with $2.0 million for the same period in the
previous year, an increase of $1.4 million or 67%. Mortgage loans net
charge-offs represented 0.19% of average mortgage loans for the third quarter of
2002, compared with 0.14% for the quarter ended September 30, 2001. These net
charge-offs amounted to $9.2 million for the nine-month period ended September
30, 2002, compared with $5.4 million for the same period in the previous year,
an increase of $3.8 million or 69%. As a percentage of average mortgage loans,
net charge-offs were 0.18% for the first nine months of 2002, compared with
0.14% for the same period of 2001. The rise in mortgage loans net charge-offs
was partly as a result of the growth in the portfolio and the impact of the
current economic conditions in the U.S. markets, mainly in the U.S. mainland,
where the Corporation has experienced its greatest growth in mortgage loans.
Equity One contributed a slightly higher level of net losses to the mortgage
portfolio at 27 basis points (as a percent of Equity One's average mortgage
loans) for the nine months ended September 30, 2002, compared with 24 basis
points for the comparable period in 2001. This level of losses reflects the
different credit quality composition of Equity One's portfolio.
Commercial and construction loans net charge-offs amounted to $18.4 million in
the third quarter of 2002, compared with $16.0 million for the same period last
year. As a percentage of average commercial and construction loans, these net
credit losses were 0.95% for the quarter ended September 30, 2002 and 0.85% for
the third quarter of 2001. The quarter ended September 30, 2002 included a $5
million charge-off of a commercial loan in the U.S. operations. This loss
resulted from a fraud, which affected various lenders. Commercial and
construction loans net charge-offs amounted to $58.5 million for the nine-month
period ended September 30, 2002, compared with $44.8 million for the same period
last year, an increase of $13.7 million or 30%. As a percentage of average
commercial and construction loans, these net credit losses rose from 0.80% for
the first nine months of 2001, to 1.02% for the same period of 2002. This rise
in commercial loans net charge-offs was mostly related to charge-offs of
commercial loans, including a $3.7 million charge-off on a particular loan
pertaining to Kmart, sold at a discount during the first quarter of 2002, and a
$7 million charge-off during the second quarter of 2002 pertaining to a
commercial client in Puerto Rico that filed for bankruptcy, and the $5 million
charge-off in the U.S. operations explained above.
Consumer loans net charge-offs for the quarters ended September 30, 2002 and
2001 totaled $20.3 million and $18.6 million, respectively, an increase of $1.7
million or 9%. These net charge-offs represented 2.58% of average consumer loans
for the quarter ended September 30, 2002, compared with 2.31% for the same
quarter last year. Consumer loans net charge-offs for the nine-month period
increased by $3.3 million, from $57.0 million in the period ended September 30,
2001 to $60.3 million in 2002. These net charge-offs represented 2.58% of
average consumer loans for the nine months ended September 30, 2002, compared
with 2.34% for the same period in the previous year. In general terms, the
higher charge-offs among consumer loans were a result of the slower economy
since 2001, and were mostly related to the credit card portfolio.
The aforementioned rises in mortgage, commercial and construction, and consumer
loan net charge-offs for the quarter and nine-month periods ended September 30,
2002, were partially offset by a decrease of $3.4 million in lease financing net
charge-offs when comparing the third quarter of 2002 with the same period of
2001, and a decrease of $0.9 million, when comparing the first nine months of
2002 with 2001. Lease financing net charge-offs totaled $2.3 million or 1.01% of
the average lease financing portfolio for the quarter ended September 30, 2002,
compared with $5.6 million or 2.67% for the same period in 2001. For the
nine-month period ended September 30, 2002, lease financing net charge-offs
totaled $11.9 million or 1.82% of the average lease financing portfolio,
compared with $12.8 million or 2.03% for the same period in 2001. The decline
was partly the result of increased focus on the collection function and
tightening in credit granting.
37
CREDIT QUALITY AND ALLOWANCE FOR LOAN LOSSES
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 E.
TABLE E
NON-PERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
2002 2001 2001
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial, construction, industrial and agricultural $191,366 $198,556 $209,354
Lease financing 10,987 10,297 10,243
Mortgage 251,235 176,967 149,204
Consumer 39,591 40,946 38,131
Other real estate 33,713 31,532 29,257
- ------------------------------------------------------------------------------------------------------------------------
Total $526,892 $458,298 $436,189
========================================================================================================================
Accruing loans past-due 90 days or more $23,728 $24,613 $22,789
========================================================================================================================
Non-performing assets to loans 2.74% 2.52% 2.47%
Non-performing assets to assets 1.60% 1.49% 1.53%
It is the Corporation's policy to place commercial loans on non-accrual status
if payments of principal or interest are delinquent 60 days or more rather than
the standard industry practice of 90 days. Financing leases, conventional
mortgages and closed-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, while open-end (revolving credit) consumer
loans are charged-off when payments are delinquent 180 days. Under the standard
industry practice, closed-end consumer loans are charged-off when delinquent 120
days, but are not customarily placed on non-accrual status prior to being
charged-off. 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. Loans past due 90 days or more
and still accruing are not considered as non-performing loans. Unsecured retail
loans to borrowers who declare bankruptcy are charged-off within 60 days of
receipt of notification of filing from the bankruptcy court.
At September 30, 2002, non-performing assets were $527 million or 2.74% of
ending loans, compared with $436 million or 2.47% at the same date last year and
$458 million or 2.52% at December 31, 2001. As of September 30, 2002, the
increase in non-performing assets since September 30, 2001 and December 31,
2001, was mostly reflected in mortgage loans, which rose by $102 million and $74
million, respectively. This rise was principally due to the growth in the loan
portfolio, mainly in the Corporation's consumer and mortgage lending subsidiary
in United States, Equity One, and higher delinquencies. Non-performing mortgage
loans were $251 million or 48% of total non-performing assets and 3% of total
mortgage loans as of September 30, 2002, compared with $149 million or 34% of
total non-performing assets and 2% of total mortgage loans as of September 30,
2001. At the end of 2001, non-performing mortgage loans were $177 million or 39%
of non-performing assets and 3% of total mortgage loans. Of the total
non-performing mortgage loans as of September 30, 2002, 64% or $161 million
pertained to Equity One. Historically, the Corporation has experienced a low
level of losses in its mortgage portfolio, both in the U.S. mainland and Puerto
Rico.
Non-performing consumer loans amounted to $40 million or 1.27% of total consumer
loans as of September 30, 2002, compared with $38 million or 1.20% as of
September 30, 2001 and $41 million or 1.31% as of December 31, 2001.
Commercial and construction non-performing loans totaled $191 million as of
September 30, 2002, decreasing by $18 million and $7 million, compared with
September 30, 2001 and December 31, 2001, respectively. Non-performing
commercial and construction loans represented 2.44% of the total commercial and
construction loan portfolio as of September 30, 2002, compared with 2.77% and
2.59% as of September 30, 2001 and December 31, 2001, respectively.
38
Non-performing lease financings amounted to $11 million or 1.24% of the lease
financing portfolio as of September 30, 2002, compared with $10 million or 1.20%
as of September 30, 2001 and December 31, 2001.
Other real estate amounted to $34 million as of September 30, 2002, an increase
of $4.5 million and $2.2 million, compared with September 30, 2001 and December
31, 2001, respectively. The increase was related to the growth in the mortgage
loan portfolio and higher delinquencies in the housing sector.
The allowance for loan losses amounted to $354 million as of September 30, 2002,
or 1.84% of loans, compared with $327 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. At September 30, 2002, the allowance for loan losses as a
percentage of non-performing loans was 71.84% compared with 80.27% at September
30, 2001 and 78.88% at December 31, 2001. The lower allowance to non-performing
loans ratio reflects the changing composition of the loan portfolio, which, as
previously mentioned includes a higher proportion of mortgage loans and a lower
amount of consumer loans. The Corporation, based on historical experience, does
not foresee significant losses in the mortgage portfolio.
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
has been incurred and the amount can be reasonably estimated. The adequacy of
the allowance for loan losses is evaluated on a monthly basis.
Impaired loans, as defined by the Corporation, are loans with interest and/or
principal payments past due 90 days or more and other specific loans for which,
based on current information and events, it is probable that the debtor will be
unable to pay all amounts due according to the contractual terms of the loan
agreement. Loan impairment is measured based on the present value of the
expected future cash flows discounted at the loan's effective rate, on the
observable market price of the loan, or on the fair value of the collateral if
the loan is collateral dependent. Large groups of smaller balance homogeneous
loans are collectively evaluated for impairment based on past experience
adjusted for current conditions. Larger balance commercial loans are evaluated
on a loan-by-loan basis. Once a specific measurement methodology is chosen, it
is consistently applied unless there is a significant change in the financial
position of the borrower. An impaired loan for which the discounted cash flows,
collateral value or market price is less than its carrying value requires an
allowance. The allowance for impaired loans is part of the Corporation's overall
allowance for loan losses.
The following table shows the Corporation's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 (as
amended by SFAS No. 118) at September 30, 2002, December 31, 2001 and September
30, 2001.
39
SEPTEMBER 30, 2002 December 31, 2001 September 30, 2001
(In millions)
Recorded Valuation Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance Investment Allowance
- ---------------------------------------------------------------------------------------------------------------------
Impaired loans:
Valuation allowance required $87.4 $30.7 $90.9 $36.8 $110.9 $45.9
No valuation allowance required 50.8 - 53.1 - 53.3 -
- ---------------------------------------------------------------------------------------------------------------------
Total impaired loans $138.2 $30.7 $144.0 $36.8 $164.2 $45.9
- ---------------------------------------------------------------------------------------------------------------------
Average impaired loans during the third quarters of 2002 and 2001 were $139
million and $174 million, respectively. The Corporation recognized interest
income on impaired loans of $0.8 million for the quarters ended September 30,
2002 and 2001.
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, management considers that the Corporation's level of the allowance is
adequate.
Assuming the standard industry practice of placing commercial loans on
non-accrual status when payments of principal and interest are past due 90 days
or more and excluding the closed-end consumer loans from non-accruing, the
Corporation's non-performing assets as of September 30, 2002 would have been
$455 million or 2.36% of loans, and the allowance for loan losses would have
been 84.13% of non-performing loans. At September 30, 2001 and December 31,
2001, adjusted non-performing assets would have been $350 million or 1.98% of
loans and $389 million or 2.14% of loans, respectively; the allowance for loan
losses as a percentage of non-performing loans would have been 101.86% and
94.21%, respectively.
OPERATING INCOME
For the quarter ended September 30, 2002, operating income, excluding
securities, trading and derivative transactions, amounted to $136.8 million, a
9% increase from $125.0 million reported in the third quarter of 2001. For a
detail of operating income by its major categories refer to Table F.
TABLE F
OPERATING INCOME
Third Quarter Year-to-date
- --------------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 2001 Change 2002 2001 Change
- --------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $39,484 $37,537 $1,947 $117,964 $108,505 $9,459
- --------------------------------------------------------------------------------------------------------------------------
Other service fees:
Credit card fees and discounts 15,064 14,782 282 44,156 42,040 2,116
Debit card fees 10,664 9,192 1,472 31,158 28,123 3,035
Processing fees 9,046 9,411 (365) 27,713 27,836 (123)
Other fees 7,627 7,676 (49) 23,847 23,700 147
Insurance fees 6,957 4,989 1,968 17,497 13,558 3,939
Sale and administration of investment products 5,049 5,320 (271) 15,299 15,027 272
Check cashing fees 5,026 4,517 509 15,978 13,883 2,095
Mortgage servicing fees, net of amortization 2,421 2,966 (545) 8,809 8,982 (173)
Trust fees 2,087 2,341 (254) 7,209 7,088 121
- --------------------------------------------------------------------------------------------------------------------------
Total other service fees 63,941 61,194 2,747 191,666 180,237 11,429
- --------------------------------------------------------------------------------------------------------------------------
Other operating income 18,370 15,225 3,145 53,677 44,089 9,588
- --------------------------------------------------------------------------------------------------------------------------
Gain on sales of loans 14,960 11,068 3,892 44,502 31,925 12,577
- --------------------------------------------------------------------------------------------------------------------------
Total operating income $136,755 $125,024 $11,731 $407,809 $364,756 $43,053
==========================================================================================================================
Note: For purposes of this management discussion and analysis, operating income excludes securities, trading and
derivative gains/losses.
- --------------------------------------------------------------------------------------------------------------------------
40
Service charges on deposit accounts rose to $39.4 million for the quarter ended
September 30, 2002, an increase of $1.9 million, or 5%, from $37.5 million in
the same quarter of 2001. This rise was mostly related to commercial accounts,
particularly commercial account analysis fees, which have been favorably
impacted by a lower earnings credit on compensatory balances in the current
interest rate scenario.
Other service fees increased to $63.9 million for the third quarter of 2002,
$2.7 million, or 4%, higher than the $61.2 million reported for the same period
the previous year. The increase was mainly due to higher insurance agency
commissions derived from new products and services, and through the expansion of
the delivery channels and client base. The Corporation established Popular
Insurance Agency, U.S.A. at the beginning of 2002, acquired an insurance agency
in Puerto Rico in mid-2002 and incorporated Popular Insurance, V.I., Inc. Also,
contributing to the rise in other service fees are higher debit card fees, which
resulted from higher transactional activity. Average debit card transactions
processed by the Corporation's subsidiaries in Puerto Rico increased to
9,263,000 as of September 30, 2002, from 6,695,000 during the same period in
2001. Check cashing fees rose due to the continuous expansion of the
Corporation's retail financial services subsidiary in the United States. These
favorable variances were partially offset by lower mortgage servicing fees, due
to an adjustment in the fair value of mortgage servicing rights by approximately
$1 million, based on the most recent fair value analysis, taking into
consideration the acceleration in prepayments due to the high refinancing
activity in the current interest rate scenario.
Gain on sales of loans increased by $3.9 million, from $11.1 million in the
third quarter of 2001, to $15.0 million in the same period of 2002. Other
operating income amounted to $18.4 million for the quarter ended September 30,
2002, an increase of $3.2 million or 21%, compared with $15.2 million in the
same period of 2001. The rise in other operating income resulted mainly from
higher dividend income from Telecomunicaciones de Puerto Rico, Inc. and higher
revenues derived from the Corporation's equity investments, partially offset by
a $1.2 million write-down in the Corporation's interest-only strips, which
decline in the fair value was considered other than temporary.
For the nine-month period ended September 30, 2002, operating income, excluding
securities, trading and derivatives transactions, amounted to $407.8 million,
compared with $364.8 million for the same period in 2001, an increase of $43.0
million or 12%. Service charges on deposit accounts and other service fees
increased $9.5 million or 9%, and $11.4 million or 6%, respectively, compared
with the nine months ended September 30, 2001, mostly attributed to the same
reasons explained above. Also, contributing to the increase in other service
fees were higher credit card fees, associated with increases in merchant
discount income resulting from increased sales volume. Gain on sales of loans
amounted to $44.5 million for the nine months ended September 30, 2002, compared
with $31.9 million for the same period of 2001. Other operating income increased
by $9.6 million or 22%, compared with the same period in 2001. This increase was
mainly due to higher income recorded on the investments carried on the equity
method and to higher underwriting profits derived by the Corporation's
broker/dealer subsidiary. Also, during the first nine months of 2002, the
Corporation recognized in other operating income, non-recurring gains of $3.1
million on the sale of BPNA's trust operations in Chicago, Illinois, and $0.6
million on the sale of 15 branches of Popular Finance, both sold as part of
strategic initiatives at these subsidiaries. The trust operations of BPNA had
contributed approximately $1.0 million in revenues during 2002. These increases
were partially offset by write-downs in the value of interest-only strips of
approximately $3.0 million, impacted by the effects of the prevailing interest
scenario.
SECURITIES, TRADING AND DERIVATIVES GAINS/LOSSES
During the quarter ended September 30, 2002, the Corporation recognized $1.3
million in gain on sales of securities and $1.2 million in trading gains,
compared with gains of $1.2 million and $0.8 million, respectively, for the same
period in 2001. For the nine-month period ended in September 30, 2002, losses on
sales of securities amounted to $2.7 million, compared with losses of $0.6
million in the same period in the previous year. Trading losses for the first
nine months of 2002 totaled $0.1 million, as opposed to trading gains of $0.1
million for the same period in 2001. The losses on sales of securities during
2002 resulted mainly from the sale of $710 million in U.S. Agency Securities, as
part of the asset / liability management strategies followed by the Corporation
due to the interest rate environment. Proceeds from these sales were reinvested
at higher yields.
The results of operations for the quarter ended September 30, 2002, included
pre-tax derivative losses of $21.7 million,
41
compared with losses of $8.1 million in the same quarter in the previous year.
For the nine-month period ended September 30, 2002, derivative losses amounted
to $22.1 million, compared with losses of $7.1 million for the same period in
2001. These losses resulted mostly from adjustments to the market value of the
interest rate swaps and swaptions entered into by the Corporation, which were
negatively impacted by the declines in interest rates.
OPERATING EXPENSES
Operating expenses for the quarter ended September 30, 2002 amounted to $253.9
million, an increase of $21.9 million or 9%, compared with the same period the
previous year. For the nine-month period ended September 30, 2002, operating
expenses totaled $746.7 million, an increase of $60.3 million or 9%, compared
with $686.4 million in the same period of 2001.
Personnel costs, the largest category of operating expenses, rose $15.9 million
or 15%, from $107.6 million reported in the quarter ended September 30, 2001, to
$123.5 million for the same period of 2002. The increase in this category is due
to higher salaries, incentives, profit sharing and pension plan expenses. As of
the end of this quarter, full time equivalent employees (FTE's) totaled 11,147,
compared with 11,088 as of the end of the same period in 2001. During 2002, the
Corporation opted to adopt the fair value method of recording stock options
contained in SFAS No. 123, "Accounting for Stock-Based Compensation." All
employee stock option grants will be expensed over the stock option vesting
period based on the fair value at the date the options are granted. The results
of the third quarter of 2002 included $0.6 million in operating expenses related
to the accounting of the Corporation's stock option plan under the fair value
method. Refer to Note 9 to the unaudited consolidated financial statements for
further information on stock options.
Excluding personnel costs, other operating expenses amounted to $130.3 million
for the quarter ended September 30, 2002, an increase of $6.0 million, or 5%,
compared with the same period in 2001. The principal categories that showed
increases were professional fees, business promotion, communications and net
occupancy expenses. Professional fees rose mainly due to higher collection
costs, legal expenses, marketing research expenses and professional services,
the latter, related in part, to consulting services for the strategic
initiatives being conducted at BPNA's operations. The increase in business
promotion was partly due to higher advertising expenses, mostly associated with
the launching of PREMIA, an innovative rewards program for the Corporation's
customers in Puerto Rico, and a marketing campaign at the Corporation's mortgage
lending subsidiary in Puerto Rico. Communications costs increased mainly due to
higher costs related to the electronic and data network, postage and telephone
expenses. Net occupancy expenses increased mainly due to continued business
expansion. Partially offsetting these rises was the decrease in the amortization
of goodwill associated with the adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets." Goodwill amortization for the quarter ended September 30,
2001 was $4.3 million. Refer to Note 7 to the consolidated financial statements
for further information about the impact of the adoption of SFAS No. 142.
For the nine-month period ended September 30, 2002, operating expenses,
excluding personnel costs, amounted to $380.3 million, compared with $367.1
million for the same period in 2001, an increase of $13.2 million or 4%.
Personnel costs amounted to $366.4 million, an increase of $47.2 million or 15%,
when compared with $319.2 million in the same period of 2001. The same expense
categories and factors mentioned above were the principal reasons for the
increase in operating expenses. Also, contributing to the rise in total
operating expenses for the nine months ended September 30, 2002, were higher
severance, consulting and other costs associated with the strategic initiatives
undertaken at BPNA during the period, which approximated $3.5 million.
INCOME TAX
Income taxes for the quarter ended September 30, 2002 decreased to $23.7
million, from $28.0 million in the same quarter in the previous year,
representing a decline of $4.3 million or 15%. The effective tax rates for these
quarters were 21.65% and 26.58%, respectively. The decline in the effective tax
rate resulted mostly from the tax benefit related to unrealized derivative
losses, principally in the U.S. mainland where the effective tax rate for the
Corporation is higher, and a decrease in the disallowance of expenses attributed
to tax exempt investments, mainly due to lower cost of funds.
Income taxes for the nine-month period ended September 30, 2002, amounted to
$86.5 million, an increase of $4.1 million, or 5%, from $82.4 million in the
same period of 2001. The increase was primarily due to higher pretax earnings
for the current period, partially offset by higher benefits from tax-exempt
interest income and an increase
42
in the deferred tax asset related to the derivative losses principally in the
U.S. mainland. The effective tax rate for the nine months ended September 30,
2002 decreased to 24.17%, compared with 26.53% in the previous year, mostly as a
result of a decrease in the disallowance of interest expense attributed to
tax-exempt investments in Puerto Rico due to lower cost of funds. Also, the
decline in the effective tax rate resulted from the elimination of the
amortization of goodwill from the books of the Corporation upon adoption of SFAS
No. 142 in January 2002. These favorable variances were partially offset by
higher taxable income in the U.S. operations, which is subject to a higher tax
rate that includes federal and state taxes.
BALANCE SHEET COMMENTS
The Corporation's total assets as of September 30, 2002 reached $32.8 billion,
an increase of $4.3 billion, or 15.1%, compared with $28.5 billion a year
earlier. At December 31, 2001, total assets were $30.7 billion. Earning assets
totaled $31.2 billion at September 30, 2002, compared with $26.9 billion and
$29.1 billion at September 30, 2001 and December 31, 2001, respectively.
The investment portfolio reached $10.3 billion at September 30, 2002, an
increase of $2.3 billion or 28%, compared with $8.0 billion at September 30,
2001. Investment securities at December 31, 2001 were $9.9 billion. The growth
was mostly related to higher arbitrage activities undertaken by the Corporation
during the end of 2001 and first part of 2002. For a breakdown of the
Corporation's investment portfolio refer to Notes 3 and 4 to the unaudited
consolidated financial statements. Trading account securities totaled $473
million at September 30, 2002, compared with $278 million and $270 million at
September 30, 2001 and December 31, 2001, respectively. The increase was related
to mortgage banking activities and to trading portfolio opportunities, the
latter undertaken by the Corporation's broker / dealer subsidiary, mainly in
U.S. Agency securities.
Table G presents the composition of the Corporation's loan portfolio. Total
loans amounted to $19.3 billion at September 30, 2002, an increase of $1.6
billion, or 9%, compared with September 30, 2001, and $1.1 billion, or 6%,
compared with December 31, 2001. The mortgage and commercial loan portfolios,
including construction loans, accounted for the largest increases, rising $1.4
billion and $287 million, respectively, from September 30, 2001. These same
portfolios rose $908 million and $173 million, respectively, compared with
December 31, 2001. The rise in the mortgage loan portfolio resulted principally
from strong sales efforts and the impact of the low interest rate scenario,
which has stimulated higher demand for mortgage loans. The growth in the
commercial loan portfolio was attained principally from the continued marketing
efforts towards the retail and middle market notwithstanding the slowdown in the
economy. The lease financing portfolio reflected an increase of $34 million from
September 30, 2001 and $26 million from the end of 2001. On the other hand, the
consumer loan portfolio decreased by $45 million and $11 million, compared with
September 30, 2001 and December 31, 2001, respectively. This decrease was partly
due to lower demand for personal loans, which declined by $166 million and $116
million since September 30, 2001 and December 31, 2001, respectively.
The decrease was also due to the sale during the second quarter of 2002 of
approximately $20 million in small consumer loans, as part of the sale of 15
branches of Popular Finance, Inc. Subsequent to the sale, this subsidiary is
still operating a network of 36 branches, including mortgage centers. The
decline in personal loans was offset by higher volume of auto loans by $109
million, compared with September 30, 2001, and $99 million from December 31,
2001, mostly due to sales efforts and synergies from the merger of BPPR's auto
loan division with Popular Auto.
43
TABLE G
LOANS ENDING BALANCES
- -----------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
2002 2001 2001
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial, industrial and agricultural $7,602,916 $7,420,738 $7,308,894
Construction 249,485 258,453 256,686
Lease financing 884,707 859,119 850,949
Mortgage * 7,405,007 6,497,459 6,049,448
Consumer 3,121,393 3,132,782 3,166,297
- -----------------------------------------------------------------------------------------------------
Total $19,263,508 $18,168,551 $17,632,274
=====================================================================================================
* Includes loans held-for-sale
Other assets were $546 million at September 30, 2002, an increase of $50 million
or 10%, compared with December 31, 2001. The increase in other assets is mainly
related to advances on securitizations and deferred taxes. Other assets totaled
$467 million at September 30, 2001. The increase since that date is mostly
related to similar factors.
At September 30, 2002, total deposits amounted to $17.1 billion, compared with
$16.0 billion a year earlier, representing an increase of $1.1 billion or 7%.
Total deposits as of December 31, 2001 amounted to $16.4 billion. Savings and
demand deposits increased $1.0 billion and $236 million, respectively, since
September 30, 2001, while time deposits decreased by $191 million. Included in
time deposits are brokered certificates of deposit, which increased $72 million
or 9%, from $759 million at September 30, 2001 to $831 million at the same date
in 2002. Compared with December 31, 2001, savings and time deposits increased by
$581 million and $113 million, respectively, while demand deposits decreased $6
million. Brokered CD's totaled $752 million at year-end 2001.
Borrowed funds, including subordinated notes and capital securities increased
$3.1 billion, from $9.7 billion at September 30, 2001, to $12.8 billion at the
same date in 2002. Borrowed funds at December 31, 2001 were $11.6 billion. Notes
payable, a component of borrowed funds, rose $2.3 billion from September 30,
2001, and $894 million since December 31, 2001. This increase was mostly in the
form of term notes, as a result of the issuance of medium-term notes during the
fourth quarter of 2001 and early 2002, and obligations issued during the period
in the asset-backed securities market. The increase in borrowed funds was used
primarily to fund the Corporation's loan and investment portfolio growth. Refer
to the Liquidity section for further information as to the composition of the
Corporation's funding sources.
Other liabilities were $632 million at September 30, 2002, an increase of $120
million or 23%, compared with December 31, 2001. This increase in other
liabilities is mainly related to securities trades in the broker / dealer
subsidiary and to derivative instruments. Other liabilities totaled $482 million
at September 30, 2001.
The Corporation's stockholders' equity at September 30, 2002, September 30, 2001
and December 31, 2001 was $2.3 billion. Subsequent to December 31, 2001, the
Corporation redeemed $100 million of its preferred stock in January 2002 and
repurchased 4.3 million shares of its common stock from Banco Popular de Puerto
Rico Retirement Plan in May 2002. These decreases since the end of 2001 were
offset mostly by earnings retention and favorable changes in the market value of
securities available-for-sale.
The Corporation continues to exceed the well-capitalized guidelines under the
federal banking regulations. Ratios and amounts of total risk-based capital,
Tier I risk-based capital and Tier I leverage as of September 30, 2002 and 2001,
and December 31, 2001 are presented in Table H.
44
TABLE H
CAPITAL ADEQUACY DATA
- -----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(Dollars in thousands) 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------
Risk-based capital
Tier I capital $2,002,456 $1,849,305 $1,900,169
Supplementary (Tier II) capital 357,194 330,213 351,937
- -----------------------------------------------------------------------------------------------------------------
Total capital $2,359,650 $2,179,518 $2,252,106
=================================================================================================================
Risk-weighted assets
Balance sheet items $19,101,890 $18,087,672 $17,309,296
Off-balance sheet items 1,068,319 479,691 456,249
- -----------------------------------------------------------------------------------------------------------------
Total risk-weighted assets $20,170,209 $18,567,363 $17,765,545
=================================================================================================================
Ratios:
Tier I capital (minimum required - 4.00%) 9.93% 9.96% 10.70%
Total capital (minimum required - 8.00%) 11.70% 11.74% 12.68%
Leverage ratio (minimum required - 3.00%) 6.36% 6.46% 6.91%
The Corporation's market capitalization at September 30, 2002 was $4.2 billion,
compared with $4.3 billion at September 30, 2001. The market value of the
Corporation's common stock at September 30, 2002 was $31.60 per share, compared
with $31.20 per share at September 30, 2001 and $29.08 per share at December 31,
2001. The Corporation's stock is traded on the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market System under the
symbol BPOP.
OFF-BALANCE SHEET ACTIVITIES
In past years, in the ordinary course of business, the Corporation conducted
asset securitizations involving the transfer of mortgage loans to a qualifying
special purpose entity (QSPE), which in turn transferred the assets, including
their titles, to different trusts, thus isolating those loans from the
Corporation's assets. 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, these trusts are
not consolidated in the Corporation's financial statements. As of September 30,
2002, these trusts held approximately $269 million in assets in the form of
mortgage loans. Their liabilities in the form of debt principal due to investors
approximated $264 million at the end of the third quarter of 2002. In these
securitizations, the Corporation retained servicing responsibilities and certain
subordinated interests 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. During the nine-month period ended
September 30, 2002, the Corporation recorded approximately $3.0 million of
write-downs related to interest only strips, in which the decline in the fair
value was considered other than temporary.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 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.
45
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 computations are only estimates and may be
different from what actually may occur in the future.
Based on the results of the sensitivity analysis as of September 30, 2002, the
change in net interest income, on a hypothetical rising rate scenario, for the
next twelve months is an estimated decrease of $13.7 million and the change for
the same period, utilizing a hypothetical declining rate scenario, is an
estimated increase of $1.9 million. Both hypothetical rate scenarios consider a
gradual change of 150 basis points during the twelve-month period from the
prevailing rates at September 30, 2002. 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 net interest income 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 current earnings. In the opinion of
management, the size and composition of the trading portfolio as of September
30, 2002 do not represent a potentially significant source of market risk for
the Corporation. The Corporation does not participate in any trading activities
involving commodity contracts. Several derivative contracts that the Corporation
has entered into, do not qualify for accounting as hedges as defined in FASB No.
133, and their changes in market are recognized in current earnings.
The Corporation conducts business in certain Latin American markets through
several of its processing and information technology services and products
subsidiaries. Also, it holds an interest in Consorcio de Tarjetas Dominicanas,
S.A.
46
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 rate
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. This can
be accomplished 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 markets where the Corporation competes, which over the past several years
have 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 established borrowing relationships with the Federal Home
Loan Bank (FHLB), the Federal Reserve Bank and other correspondent banks, which
further support and enhance liquidity. Wholesale or institutional sources of
funds are comprised primarily of 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 securities 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 securities 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 extend 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.
Most of the Corporation's banking subsidiaries have borrowing facilities
available with the Federal Reserve Bank of New York Discount Window. These
facilities are collateralized sources of credit that are highly reliable even
under difficult market conditions.
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. In addition,
as mentioned above, the Corporation's banking subsidiaries maintain borrowing
facilities at the Discount Window of the Federal Reserve Bank of New York, and
have a considerable amount of collateral that can be used to raise funds under
these facilities.
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
47
difficult. Management does not anticipate changes in the credit ratings of the
Corporation based on its expected outlook for the Puerto Rico / 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 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. If there is an event of default, the lenders may accelerate the
maturity of the related borrowings. An event of default could also affect the
ability of the Corporation to raise new funds or renew maturing borrowings. The
Corporation is currently in full compliance with all financial covenants in
effect and expects to remain so in the future.
The Corporation's non-banking subsidiaries may be subject to a higher degree of
liquidity risk than the banking subsidiaries, due to the latter's access to
federally-insured deposits and the Federal Reserve Discount Window. 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.
During the quarter ended September 30, 2002, a nationally recognized credit
rating agency changed the Corporation's rating outlook from "stable" to
"negative". In the opinion of management, this does not necessarily imply that a
change in the actual rating of the Corporation is imminent, but does suggest
that the agency has identified financial trends, which if left unchanged, may
result in a ratings change. Management anticipates that all concerns will be
fully addressed and resolved, and does not anticipate any change in ratings.
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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report on Form
10-Q, an evaluation was carried out under the supervision and with the
participation of Popular, Inc.'s management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective. No significant changes were made in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
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.
48
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Equity One, Inc. Savings and Retirement Plan for employees of Equity One,
Inc. (the "Plan") has offered shares of the Corporation's common stock, at
market prices, as an investment option for employee and employer contributions
since May 1999. Since that time, the Plan Trustee has acquired approximately
41,000 shares of the Corporation's common stock in the open market on behalf of
Plan participants. The offer was not registered with the Securities and Exchange
Commission under the Securities Act of 1933. The Corporation subsequently
determined that the Plan's offer of the Corporation's common stock and interests
in the Plan were not exempt from registration under the Securities Act. The
Corporation is considering alternatives to address the unregistered offer that
occurred.
ITEM 5. OTHER INFORMATION
On March 9, 2000, Banco Popular entered into a written agreement with the
Federal Reserve Bank of New York, which imposed a number of compliance,
reporting and control requirements. All of these compliance, reporting and
control requirements are now in place.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Exhibit Description Reference
----------- ------------------- ---------
19 Quarterly Report to Shareholders for Exhibit "A"
the period ended September 30, 2002
b) Two reports on Form 8-K were filed for the quarter ended September 30,
2002:
Dated: July 10, 2002
Items reported: Item 5 - Other Events (Operational results for the
quarters and six month period ended June 30, 2002)
Dated: August 15, 2002
Items reported: Item 5 - Other Events (Sworn statements pursuant to SEC
order No 4-460)
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
POPULAR, INC.
-------------
(Registrant)
Date: November 1, 2002 By: S/ Jorge A. Junquera
-------------------------- --------------------
Jorge A. Junquera
Senior Executive Vice President
Date: November 1, 2002 By: S/ Amilcar L. Jordan
-------------------------- --------------------
Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller
50
- --------------------------------------------------------------------------------
CERTIFICATION
I, Richard L. Carrion, Chief Executive Officer of Popular, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Popular, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
By: S/ Richard L. Carrion
-----------------------
Richard L. Carrion
Chief Executive Officer
51
- --------------------------------------------------------------------------------
CERTIFICATION
I, Jorge A. Junquera , Chief Financial Officer of Popular, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Popular, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
By: S/ Jorge A. Junquera
----------------------
Jorge A. Junquera
Chief Financial Officer
52