POPULAR INC - 10-Q Quarterly Report

a) Exhibit No.

Exhibit Description

Quarterly Report to Shareholders for the period ended June 30, 2002

Exhibit “A”

b) One report on Form 8-K was filed for the quarter ended June 30, 2002:

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10 – Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For Quarter Ended June 30, 2002		Commission file number 0 – 13818

POPULAR, INC.

(Exact name of registrant as specified in its charter)


Puerto Rico		66-041-6582

(State of incorporation)		(I.R.S. Employer
		identification No.)

Popular Center Building
209 Muñoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico 00918

(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code (787) 765-9800

Not Applicable

(Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Common Stock $6.00 Par value		132,350,118

(Title of Class)		(Shares Outstanding as of August 14, 2002)

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
	CONSOLIDATED STATEMENTS OF CONDITION
	CONSOLIDATED STATEMENTS OF INCOME
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to Unaudited Consolidated Financial Statements
PART II - OTHER INFORMATION
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Quarterly report to Shareholders

POPULAR, INC.

INDEX


				Page

Part I – Financial Information
	Item 1.	Financial Statements
			Unaudited Consolidated Statements of Condition as of June 30, 2002, December 31, 2001 and June 30, 2001		3
			Unaudited Consolidated Statements of Income for the quarters and six months ended June 30, 2002 and 2001		4
			Unaudited Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2002 and 2001		5
			Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001		6
			Notes to unaudited Consolidated Financial Statements		7-28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			29-46
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk			43
Part II – Other Information
	Item 1.	Legal proceedings			46
	Item 2.	Changes in securities – None			N/A
	Item 3.	Defaults upon senior securities – None			N/A
	Item 4.	Submission of matters to a vote of security holders			46
	Item 5.	Other information			46
	Item 6.	Exhibits and reports on Form 8-K			47
	—	Signature			47

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.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(UNAUDITED)


					June 30,			December 31,			June 30,
(In thousands)					2002			2001			2001

ASSETS
Cash and due from banks					$	1,102,933		$	606,142		$	580,592

Money market investments:
			Federal funds sold and securities purchased under agreements to resell			1,067,764			820,332			1,052,960
			Time deposits with other banks			3,056			3,056			10,424
			Bankers’ acceptances			838			402			470

						1,071,658			823,790			1,063,854

Investment securities available-for-sale, at market value:
			Pledged securities with creditors’ right to repledge			4,182,150			4,056,655			2,505,223
			Other investment securities available-for-sale			5,936,069			5,227,746			4,958,437
Investment securities held-to-maturity, at amortized cost						225,070			592,360			247,812
Trading account securities, at market value:
			Pledged securities with creditors’ right to repledge			230,145			244,916			217,776
			Other trading securities			77,701			25,270			61,910
Loans held-for-sale, at lower of cost or market						910,006			939,488			914,071

Loans:
			Loans pledged with creditors’ right to repledge			483,686			301,706			—
			Other loans			17,819,028			17,254,323			16,604,911
			Less – Unearned income			311,578			326,966			326,736
				Allowance for loan losses		347,230			336,632			313,337

						17,643,906			16,892,431			15,964,838

Premises and equipment						404,382			405,705			395,804
Other real estate						35,193			31,533			28,741
Accrued income receivable						190,612			186,143			190,013
Other assets						516,726			496,855			493,473
Goodwill						178,739			177,842			185,108
Other intangible assets						35,432			37,800			42,982

					$	32,740,722		$	30,744,676		$	27,850,634

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposits:
		Non-interest bearing			$	4,012,168		$	3,281,841		$	3,144,623
		Interest bearing				13,817,119			13,088,201			12,425,162

						17,829,287			16,370,042			15,569,785
	Federal funds purchased and securities sold under agreements to repurchase					5,829,016			5,751,768			4,157,279
	Other short-term borrowings					1,944,642			1,827,242			2,828,347
	Notes payable					4,135,749			3,735,131			2,379,030
	Other liabilities					524,447			512,686			473,626

						30,263,141			28,196,869			25,408,067

	Subordinated notes					125,000			125,000			125,000

	Preferred beneficial interest in Popular North America’s junior subordinated deferrable interest debentures guaranteed by the Corporation					144,000			149,080			150,000

	Commitments and contingencies (See Note 8)

Minority interest in consolidated subsidiaries						964			909			915

Stockholders’ equity:
	Preferred stock (See Note 11)					—			100,000			100,000
	Common stock (See Note 11)					833,672			832,498			831,408
	Surplus					272,761			268,544			264,414
	Retained earnings					1,186,814			1,057,724			963,605
	Treasury stock – at cost (See Note 11)					(205,210	)		(66,136	)		(66,136	)
	Accumulated other comprehensive income, net of tax of $38,910 (December 31, 2001 - $27,918; June 30, 2001 - $23,619)					119,580			80,188			73,361

						2,207,617			2,272,818			2,166,652

					$	32,740,722		$	30,744,676		$	27,850,634

The accompanying notes are an integral part of these unaudited consolidated financial statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


		Quarter ended						Six months ended
		June 30,						June 30,

(Dollars in thousands, except per share information)		2002			2001			2002			2001

INTEREST INCOME:
Loans		$	380,166		$	391,841		$	752,388		$	785,406
Money market investments			7,370			13,026			15,155			28,332
Investment securities			115,377			114,243			227,688			252,302
Trading account securities			3,086			4,297			6,587			7,818

			505,999			523,407			1,001,818			1,073,858

INTEREST EXPENSE:
Deposits			110,356			131,022			223,286			263,799
Short-term borrowings			45,274			84,493			89,718			203,611
Long-term debt			55,691			42,374			108,721			85,213

			211,321			257,889			421,725			552,623

Net interest income			294,678			265,518			580,093			521,235
Provision for loan losses			50,075			49,462			104,529			99,496

Net interest income after provision for loan losses			244,603			216,056			475,564			421,739
Service charges on deposit accounts			39,507			36,310			78,480			70,968
Other service fees			66,037			60,349			127,724			119,043
Gain (loss) on sale of securities			85			(2,152	)		(3,925	)		(1,862	)
Trading account loss			(359	)		(816	)		(1,389	)		(628	)
Derivatives (losses) gains			(855	)		1,652			(344	)		1,021
Gain on sales of loans			11,242			11,708			28,808			20,857
Other operating income			19,331			15,691			36,042			28,864

			379,591			338,798			740,960			660,002

OPERATING EXPENSES:
Personnel costs:
	Salaries		90,746			78,884			179,307			156,662
	Profit sharing		5,368			4,018			10,308			9,115
	Pension and other benefits		26,469			23,841			53,270			45,860

			122,583			106,743			242,885			211,637
Net occupancy expenses			20,048			17,726			39,078			34,921
Equipment expenses			24,376			24,575			49,141			48,702
Other taxes			9,285			9,809			18,833			18,619
Professional fees			19,724			18,284			37,231			34,223
Communications			13,111			12,085			26,384			23,972
Business promotion			16,831			13,159			30,199			23,704
Printing and supplies			5,078			4,490			9,587			8,809
Other operating expenses			17,061			20,189			34,382			36,120
Amortization of intangibles			2,556			6,860			5,099			13,736

			250,653			233,920			492,819			454,443

Income before income tax, minority interest and cumulative effect of accounting change			128,938			104,878			248,141			205,559
Income tax			32,594			27,337			62,742			54,488
Net (gain) loss of minority interest			(39	)		(4	)		(50	)		12

Income before cumulative effect of accounting change			96,305			77,537			185,349			151,083
Cumulative effect of accounting change, net of tax			—			—			—			686

NET INCOME		$	96,305		$	77,537		$	185,349		$	151,769

NET INCOME APPLICABLE TO COMMON STOCK		$	96,305		$	75,450		$	182,839		$	147,595

EARNINGS PER COMMON SHARE (Basic and Diluted)		$	0.72		$	0.55		$	1.35		$	1.08

DIVIDENDS DECLARED PER COMMON SHARE		$	0.20		$	0.20		$	0.40		$	0.36

The accompanying notes are an integral part of these unaudited consolidated financial statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


			Quarter ended						Six months ended
			June 30,						June 30,
(In thousands)			2002			2001			2002			2001

Net Income			$	96,305		$	77,537		$	185,349		$	151,769

Other comprehensive income (loss) net of tax:
	Foreign currency translation adjustment			(245	)		(124	)		(382	)		(250	)
	Unrealized gains (losses) on securities:
		Unrealized holding gains (losses) arising during the period, net of tax of $22,128 (2001- ($3,936)) for the quarter and $10,465 (2001- $21,967) for the six-month period		90,109			(9,659	)		38,985			67,439
		Less: reclassification adjustment for losses included in net income, net of tax of $40 (2001-($797)) for the quarter and ($1,522) (2001- ($719)) for the six-month period		(19	)		(2,610	)		(2,466	)		(2,398	)
		Net (loss) gain on derivatives		(1,326	)		135			(2,454	)		(517	)
		Less: reclassification adjustment for losses included in net income, net of tax of ($451) (2001-($148)) for the quarter and ($514) (2001-($260)) for the six-month period		(683	)		(290	)		(783	)		(465	)
		Cumulative effect of accounting change											254
		Less: reclassification adjustment for (losses) gains included in net income, net of tax of ($40) for the quarter in 2001 and ($77) for the six-month period in 2001		—			(75	)		6			(136	)

		Total other comprehensive income (loss)	$	89,240			($6,673	)	$	39,392		$	69,925

		Comprehensive income	$	185,545		$	70,864		$	224,741		$	221,694

Disclosure of accumulated other comprehensive income:


	June 30,			December 31,			June 30,
(In thousands)	2002			2001			2001

Foreign currency translation adjustment		($1,838	)		($1,456	)		($1,134	)
Unrealized gains on securities		122,627			81,176			74,157
Unrealized (losses) gains on derivatives		(1,593	)		78			(52	)
Cumulative effect of accounting change		384			390			390

Accumulated other comprehensive income	$	119,580		$	80,188		$	73,361

The accompanying notes are an integral part of these unaudited consolidated financial statements.

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


			For the six months ended
			June 30,
(In thousands)			2002			2001

Cash flows from operating activities:
	Net income		$	185,349		$	151,769

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization of premises and equipment		38,042			38,210
		Provision for loan losses		104,529			99,496
		Amortization of intangibles		5,099			13,736
		Net loss on sales of investment securities		3,925			1,862
		Net loss (gain) on derivatives		344			(1,021	)
		Net loss on disposition of premises and equipment		223			312
		Net (gain) loss on sales of loans, excluding loans held-for-sale		(5,838	)		192
		Net amortization of premiums and accretion of discounts on investments		7,521			1,484
		Net decrease (increase) in loans held-for-sale		29,482			(90,170	)
		Net amortization of deferred loan fees and costs		17,365			20,500
		Net increase in trading securities		(37,660	)		(126,613	)
		Net (increase) decrease in accrued income receivable		(4,469	)		12,527
		Net decrease (increase) in other assets		2,874			(11,396	)
		Net decrease in interest payable		(2,255	)		(27,879	)
		Net increase in deferred and current taxes		(30,785	)		(1,750	)
		Net increase in postretirement benefit obligation		1,533			6,094
		Net increase (decrease) in other liabilities		13,938			(16,289	)

Total adjustments				143,868			(80,705	)

Net cash provided by operating activities				329,217			71,064

Cash flows from investing activities:
	Net (increase) decrease in money market investments			(247,868	)		4,764
	Purchases of investment securities held-to-maturity			(230,173	)		(2,615,536	)
	Maturities of investment securities held-to-maturity			591,427			2,717,702
	Purchases of investment securities available-for-sale			(3,956,630	)		(2,085,501	)
	Maturities of investment securities available-for-sale			2,137,502			2,805,546
	Proceeds from sales of investment securities available-for-sale			1,029,857			606,075
	Net disbursements on loans			(684,660	)		(1,031,875	)
	Proceeds from sales of loans			294,422			244,336
	Acquisition of loan portfolios			(513,668	)		(388,389	)
	Acquisition of premises and equipment			(43,874	)		(31,770	)
	Proceeds from sales of premises and equipment			6,932			3,216

Net cash (used in) provided by investing activities				(1,616,733	)		228,568

Cash flows from financing activities:
	Net increase in deposits			1,484,884			743,647
	Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase			77,248			(806,836	)
	Net increase (decrease) in other short-term borrowings			117,400			(1,540,865	)
	Net proceeds from notes payable and capital securities			395,538			1,202,118
	Dividends paid			(55,080	)		(47,715	)
	Proceeds from issuance of common stock			5,391			4,482
	Redemption of preferred stock			(102,000	)		—
	Treasury stock (acquired) sold			(139,074	)		78

Net cash provided by (used in) financing activities				1,784,307			(445,091	)

Net increase (decrease) in cash and due from banks				496,791			(145,459	)
Cash and due from banks at beginning of period				606,142			726,051

Cash and due from banks at end of period			$	1,102,933		$	580,592

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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 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 year consolidated financial statements to conform with the 2002 presentation.

Note 2 – Accounting Changes

Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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.

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 present the reconciliation of reported net income and earnings per share (EPS) (basic and diluted) adjusted to exclude the amortization expense recognized in the period prior to the adoption of SFAS No. 142.


	Quarter ended		Six-months ended
(In thousands, except per share information)	June 30, 2001		June 30, 2001

Reported Net Income	$	77,537	$	151,769
Add back: Goodwill amortization, including impact on profit sharing expense and related tax		4,126		8,267

Adjusted Net Income	$	81,663	$	160,036

Reported EPS	$	0.55	$	1.08
Add: Goodwill amortization, including impact on profit sharing expense and related tax		0.03		0.06

Adjusted EPS	$	0.58	$	1.14

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 FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the requirements of Statement 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. This Statement removes goodwill from its scope and, therefore, eliminates the requirement of Statement 121 to allocate goodwill to long-lived assets to be tested for impairment. Also, the Statement requires that a long-lived asset to be abandoned, exchanged for a similar productive asset, or distributed to owners in a 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 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 Statement No. 13, and Technical Corrections.” This Statement rescinds SFAS Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS Statement 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 Statement 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.

Note 3 — Investment Securities Available-For-Sale

The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investments securities where no market quotations are available), and contractual maturities of investment securities available-for-sale as of June 30, 2002, December 31, 2001 and June 30, 2001 were as follows:

AS OF JUNE 30, 2002

Amortized

Gross Unrealized

Market

(In thousands)

Cost

Gains

Losses

Value

U.S. Treasury securities (average maturity of 11 months)

360,010

10,088

—

370,098

Obligations of other U.S. Government agencies and corporations (average maturity of 4 years and 4 months)

6,017,891

84,398

4,401

6,097,888

Obligations of Puerto Rico, states and political subdivisions (average maturity of 7 years and 2 months)

90,241

4,069

94,245

Collateralized mortgage obligations (average maturity of 20 years and 7 months)

2,499,615

11,894

11,557

2,499,952

Mortgage-backed securities (average maturity of 24 years and 3 months)

645,308

12,720

1,960

656,068

Equity securities (without contractual maturity)

248,497

58,301

306,781

Others (average maturity of 17 years and 8 months)

92,322

869

93,187

9,953,884

182,339

18,004

10,118,219


	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 JUNE 30, 2001
	Amortized		Gross Unrealized		Gross Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities (average maturity of 1 year and 3 months)	$	716,000	$	14,112		—	$	730,112
Obligations of other U.S. Government agencies and Corporations (average maturity of 4 years 6 months)		4,097,067		37,677	$	21,195		4,113,549
Obligations of Puerto Rico, States and political Subdivisions (average maturity of 8 years and 9 months)		103,356		2,795		151		106,000
Collateralized mortgage obligations (average maturity of 23 years and 2 months)		1,652,425		5,386		2,799		1,655,012
Mortgage-backed securities (average maturity of 24 years)		460,670		5,500		640		465,530
Equity securities (without contractual maturity)		250,235		54,678		—		304,913
Others (average maturity of 15 years and 8 months)		85,707		2,841		4		88,544

	$	7,365,460	$	122,989	$	24,789	$	7,463,660

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.

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 June 30, 2002, December 31, 2001 and June 30, 2001 were as follows:

AS OF JUNE 30, 2002

Amortized

Gross Unrealized

Market

(In thousands)

Cost

Gains

Losses

Value

Obligations of other U.S. Government agencies and

Corporations (average maturity of 2 months)

27,388

—

27,388

Obligations of Puerto Rico, States and political Subdivisions (average maturity of 11 years and 5 months)

114,774

1,758

542

115,990

Collateralized mortgage obligations (average maturity of 22 years and 2 months)

1,266

—

1,266

Others (average maturity of 2 years and 9 months)

81,642

857

80,827

225,070

1,800

1,399

225,471


	AS OF DECEMBER 31, 2002
	Amortized		Gross Unrealized		Gross Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

Obligations of other U.S. Government agencies and Corporations (average maturity of 1 month)	$	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 JUNE 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)	$	66,643	$	17	$	8	$	66,652
Obligations of Puerto Rico, States and political Subdivisions (average maturity of 10 years and 7 months)		85,197		4,024		130		89,091
Collateralized mortgage obligations (average maturity of 22 years and 11 months)		1,538		—		23		1,515
Others (average maturity of 3 years and 4 months)		94,434		—		2,158		92,276

	$	247,812	$	4,041	$	2,319	$	249,534

Note 5 – Pledged assets

Securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase and other borrowings. The classification and carrying amount of the Corporation’s pledged assets, which the secured parties are not permitted to sell or repledge the collateral were as follows:


	June 30,		December 31,		June 30,
(In thousands)	2002		2001		2001

Investment securities available-for-sale	$	2,426,862	$	1,973,552	$	1,801,458
Investment securities held-to-maturity		4,211		5,110		5,971
Loans		1,753,373		1,413,789		1,571,385

	$	4,184,446	$	3,392,451	$	3,378,814

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. These contracts qualify for cash flow hedge accounting in accordance with SFAS 133 and therefore changes in the fair value of the derivative are recorded in other comprehensive income. As of June 30, 2002 the total amount (net of tax) included in accumulated other comprehensive income pertaining to forward contracts was an unrealized loss of $466. These contracts have a maximum maturity of 50 days.

To satisfy the needs of its customers, from time to time, the Corporation enters into foreign exchange contracts in the spot or futures market and at the same time into foreign exchange contracts with third parties under the same terms and conditions. As of June 30, 2002, the Corporation included $10 and $10 in other assets and other liabilities, respectively, pertaining to the fair value of these contracts.

The Corporation purchased interest rate caps as part of securitization transactions in order to limit the interest rate payable to the security holders. These contracts qualify for cash flow hedge accounting in accordance with SFAS No. 133, as amended. As of June 30, 2002, the fair market value of these interest rate caps was $4,473 included in other assets and the amount included in accumulated other comprehensive income was a loss of $1,127. These contracts have a maximum maturity of 7.5 years. As part of these contracts, during the second quarter of 2002 the Corporation reclassified a gain of $217 from other comprehensive income into earnings related to the ineffective portion of its hedging instruments.

The Corporation enters into options on swaps (“swaption”) derivative securities, which combine the characteristics of interest rate swaps and options. These swaptions are related to certificates of deposit with returns linked to the Standard and Poor’s 500 index through an embedded option, which has been bifurcated from the host contract, and in accordance with the pronouncement does not qualify for hedge accounting. As of June 30, 2002, the Corporation had a derivative liability of $13,401 representing the fair value of the swaptions, which is included in other liabilities. Also, a derivative liability of $8,493 which is the fair value of the embedded option and a discount on the certificates of deposits of $19,011 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 June 30, 2002, the Corporation recognized a loss of $855 as a result of the changes in fair value of the non-hedging derivatives.

The interest-rate caps and floors embedded in the interest bearing contracts are clearly and closely related to the economic characteristics of the contract and therefore, as stated in SFAS No. 133, are not bifurcated from the host contract.

Note 7 – Goodwill and Other Intangible Assets

SFAS No. 142 requires that goodwill and other indefinite live intangible assets be tested for impairment at least annually using a two-step process at each reporting unit level. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is 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 six-months ended June 30, 2002, are as follows:


	Six-months ended June 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		—		1,202			—		—		1,202
Goodwill written-off during the period		—		(305	)		—		—		(305	)

Balance as of June 30, 2002	$	110,482	$	9,246		$	6,727	$	52,284	$	178,739

As of June 30, 2002, December 31, 2001 and June 30, 2001, goodwill totaled $178,739, $177,842 and $185,108, respectively. The Corporation has no other intangible assets not subject to amortization. Goodwill written-off during the quarter ended June 30, 2002 is related to various branches of Popular Finance sold during this quarter.

The following table reflects the components of other intangible assets subject to amortization as of June 30, 2002, December 31, 2001 and June 30, 2001:


		June 30, 2002				December 31, 2001				June 30, 2001

		Gross		Accumulated		Gross		Accumulated		Gross			Accumulated
(In thousands)		Amount		Amortization		Amount		Amortization		Amount		Amortization

Core Deposits		$	87,711	$	52,395	$	85,034	$	48,101	$	85,034		$	43,682
Covenants not to Compete			202		86		202		76		202			71
Credit-based customer relationships			—		—		8,304		7,563		8,304			6,805

	Total	$	87,913	$	52,481	$	93,540	$	55,740	$	93,540		$	50,558

During the quarter ended June 30, 2002, the Corporation recognized $2,556 in amortization expense related to other intangible assets with definite lives. This expense totaled $2,527 for the quarter ended June 30, 2001, excluding the effect of goodwill amortization. For the six months ended June 30, 2002 and 2001, the Corporation recognized $5,099 and $5,049, respectively, in amortization expense related to other intangible assets with definite lives.

The credit-based customer relationships were fully amortized during the quarters 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 June 30, 2002, for each of the following fiscal years:


	(In thousands)

2002	$	8,969
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 June 30, 2002, amounted to $11,972 and $87,356, respectively (June 30, 2001 — $9,182 and $112,959; 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.

As of June 30, 2002, the Corporation has an outstanding commitment, entered into during 2001, to purchase $100,000 of mortgage loans from another institution with the option of purchasing $75,000 in additional loans. The commitment expires on June 30, 2003. As of June 30, 2002, $75,000 in loans have been purchased under this agreement.

The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations. Refer to Item 1 — Legal Proceedings on Part II — Other Information on 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.

The following table summarizes information about stock options outstanding at June 30, 2002:

Weighted Average

Weighted-Average

Weighted Average

Exercised Price

Options

Exercise Price of

Remaining Life of

Options

Exercise Price

Range per share

Outstanding

Options Outstanding

Exercisable

Options Exercisable

$28.78 - $34.87

430,308

29.06

9.60 years

19,347

29.19

There were no stock options exercisable during 2001.

The following table summarizes the stock option activity and related information:


	Options		Weighted-Average
	Outstanding		Exercise Price

Balance at January 1, 2001		—		—
Granted		8,384	$	30.56

Outstanding at June 30, 2001		8,384		30.56
Granted		18,032		31.77

Outstanding at December 31, 2001		26,416		31.39
Granted		403,892		28.90

Outstanding at June 30, 2002		430,308	$	29.06

No compensation cost was recognized during the period ended June 30, 2002 and 2001 since the exercise price of the stock options equals the market price of the stock on the date of grant. Had the Corporation elected to recognize compensation cost for options granted in 2002 and 2001, consistent with the fair value method of accounting of SFAS No. 123, “Accounting for Stock-Based Compensation”, the pro forma net income and pro forma earnings per share would have been as follows:


		Quarter ended				Six-months ended
		June 30,				June 30,
(In thousands, except per share information)		2002		2001		2002		2001

Net income applicable to common stock
	As reported	$	96,305	$	75,450	$	182,839	$	147,595
	Pro forma	$	96,093	$	75,447	$	182,483	$	147,592
Basic earnings per common share
	As reported	$	0.72	$	0.55	$	1.35	$	1.08
	Pro forma	$	0.71	$	0.55	$	1.35	$	1.08
Diluted earnings per common share
	As reported	$	0.72	$	0.55	$	1.35	$	1.08
	Pro forma	$	0.71	$	0.55	$	1.35	$	1.08

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 26.54% and a risk-free interest rate of 4.96%. The weighted-average fair value of options granted during 2002 was $9.81 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 its 8.327% Capital Securities Series A (liquidation amount $1,000 per Capital Security) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase

by PNA of $4,640 of its 8.327% common securities (liquidation amount $1,000 per common security) were used to purchase $154,640 aggregate principal amount of PNA 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the “Junior Subordinated Debentures”). As of June 30, 2002, the Corporation had reacquired $6,000 of the capital securities. 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 $152,817 of Junior Subordinated Debentures at June 30, 2002 (June 30, 2001 — $154,640; December 31, 2001 — $154,640) and a related accrued interest receivable of $4,177 (June 30, 2001 — $4,292; December 31, 2001 — $4,292). The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures (which shortening would result in a mandatory redemption of the Capital Securities) may be shortened.

Note 11- Stockholders’ Equity

Authorized common stock is 180,000,000 shares with a par value of $6 per share. At June 30, 2002, there were 138,945,303 (June 30, 2001 — 138,567,996; December 31, 2001 — 138,749,647) shares issued and 132,251,194 (June 30, 2001 — 136,180,713; December 31, 2001 — 136,362,364) shares outstanding. As of June 30, 2002, a total of 6,694,109 (June 30, 2001 — 2,387,283; December 31, 2001 — 2,387,283) common shares with a total cost of $205,210 (June 30, 2001 — $66,136; December 31, 2001 — $66,136) were maintained as treasury stock. 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.

Note 12 — Earnings per Common Share

A computation of earnings per common share follows:


	Quarter ended				Six-months ended
	June 30,				June 30,

(In thousands, except share information)	2002		2001		2002		2001

Net income	$	96,305	$	77,537	$	185,349	$	151,769
Less: Preferred stock dividends				2,087		2,510		4,174

Net income applicable to common stock	$	96,305	$	75,450	$	182,839	$	147,595

Average common shares outstanding		134,440,879		136,189,956		135,452,584		136,150,709
Average potential common shares – stock options		25,851		130		14,559		65

Average common shares outstanding – assuming dilution		134,466,730		136,190,086		135,467,143		136,150,774

Basic earnings per common share	$	0.72	$	0.55	$	1.35	$	1.08

Diluted earnings per common share	$	0.72	$	0.55	$	1.35	$	1.08

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.

Options with an exercise price greater than the average market price of the Corporation’s common stock are antidilutive and, therefore, are not included in the computation of diluted earnings per common share. During the second quarter and six-months ended June 30, 2002 there were 7,520 antidilutive stock options outstanding with an exercise price of $34.87.

For the quarter and six months ended June 30, 2001 all stock options outstanding were included in the computation of diluted earnings per common shares.

Note 13 — Supplemental Disclosure on the Consolidated Statements of Cash Flows

During the six-month period ended June 30, 2002, the Corporation paid interest and income taxes amounting to $423,980 and $72,245, respectively (2001 — $580,503 and $46,976). In addition, the loans receivable transferred to other real estate and other property for the six-month period ended June 30, 2002 amounted to $20,192 and $16,184, respectively (2001 — $18,404 and $15,028).

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 reportable segments based on legal entity, which is the way that operating decisions and performance is measured. These entities have then been aggregated by products, services and markets with similar characteristics.

The Corporation’s commercial banking segment includes all banking subsidiaries, which provide individuals, corporations and institutions with commercial and retail banking services, including loans and deposits, trust, mortgage banking and servicing, asset management, credit cards and other financial services. These services are offered through a delivery system of branches throughout Puerto Rico, the U.S. and British Virgin Islands and the United States.

The Corporation’s mortgage and consumer lending segment includes those non-banking subsidiaries whose principal activity is originating mortgage and consumer loans such as Popular Mortgage, Popular Finance, Equity One and Levitt Mortgage.

The Corporation’s auto and lease financing segment provides financing for vehicles and equipment through Popular Auto, Inc. in Puerto Rico and Popular Leasing, USA in the U.S. mainland. The “Other” category includes all holding companies and non-banking subsidiaries which provide insurance agency services, retail financial services, 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 six-months ended June 30, 2002 and 2001.

Mortgage and

Auto and

Commercial

Consumer

Lease

Banking

Lending

Financing

Other

Eliminations

Total

(In thousands)

Quarter ended June 30, 2002

Net interest income

227,789

50,199

16,391

228

294,678

Provision for loan losses

33,441

9,959

6,675

50,075

Other income

69,451

16,160

4,830

46,732

(2,185

)

134,988

Amortization of intangibles

2,548

2,556

Depreciation expense

13,493

1,087

2,695

1,559

18,834

Other operating expenses

160,713

28,596

7,637

32,584

(267

)

229,263

Net gain of minority interest

(39

)

(39

)

Income tax

18,239

9,276

1,524

4,004

(449

)

32,594

Net income

68,806

17,402

2,690

8,805

(1,398

)

96,305

Segment Assets

26,721,751

5,036,978

1,172,300

6,937,713

(7,128,020

)

32,740,722

Mortgage and

Auto and

Commercial

Consumer

Lease

Banking

Lending

Financing

Other

Eliminations

Total

(In thousands)

Six-months ended June 30, 2002

Net interest income

450,807

98,233

31,645

(722

)

130

580,093

Provision for loan losses

70,882

20,227

13,420

104,529

Other income

136,126

33,256

9,567

92,183

(5,736

)

265,396

Amortization of intangibles

5,089

5,099

Depreciation expense

27,285

2,113

5,573

3,071

38,042

Other operating expenses

312,804

58,314

14,789

64,257

(486

)

449,678

Net gain of minority interest

(50

)

(50

)

Income tax

36,360

17,607

2,681

7,444

(1,350

)

62,742

Net income

134,513

33,178

4,749

16,679

(3,770

)

185,349

Segment Assets

26,721,751

5,036,978

1,172,300

6,937,713

(7,128,020

)

32,740,722


				Mortgage and			Auto and
		Commercial		Consumer			Lease
		Banking		Lending			Financing		Other			Eliminations			Total

(In thousands)		Quarter ended June 30, 2001
Net interest income		$	221,364	$	31,751		$	12,853	$	(415	)	$	(35	)	$	265,518
Provision for loan losses			35,128		9,731			4,603								49,462
Other income			59,627		17,134			5,135		43,826			(2,980	)		122,742
Amortization of intangibles			5,461		182			188		1,029						6,860
Depreciation expense			14,458		893			2,500		1,172						19,023
Other operating expenses			146,087		24,530			5,933		31,688			(201	)		208,037
Net gain of minority interest					(4	)										(4	)
Income tax			18,897		5,088			1,826		2,225			(699	)		27,337

	Net income	$	60,960	$	8,457		$	2,938	$	7,297		$	(2,115	)	$	77,537

	Segment Assets	$	23,137,758	$	3,710,693		$	992,957	$	6,618,653		$	(6,609,427	)	$	27,850,634


				Mortgage and		Auto and
		Commercial		Consumer		Lease
		Banking		Lending		Financing		Other			Eliminations			Total

(In thousands)		Six-months ended June 30, 2001
Net interest income		$	440,439	$	57,775	$	24,733	$	(1,640	)	$	(72	)	$	521,235
Provision for loan losses			71,220		19,070		9,206								99,496
Other income			118,616		30,918		10,110		83,381			(4,762	)		238,263
Amortization of intangibles			10,922		364		377		2,073						13,736
Depreciation expense			29,033		1,809		5,144		2,224						38,210
Other operating expenses			282,025		46,922		11,500		62,451			(401	)		402,497
Net loss of minority interest					12										12
Income tax			40,344		7,605		3,243		4,390			(1,094	)		54,488
Cumulative effect of accounting change			686												686

	Net income	$	126,197	$	12,935	$	5,373	$	10,603		$	(3,339	)	$	151,769

	Segment Assets	$	23,137,758	$	3,710,693	$	992,957	$	6,618,653		$	(6,609,427	)	$	27,850,634


Geographic Information	Quarter ended				Six-months ended

	June 30,		June 30,		June 30,		June 30,
(In thousands)	2002		2001		2002		2001

Revenues* Puerto Rico	$	291,475	$	275,605	$	575,759	$	546,675
United States		126,060		101,093		241,865		189,496
Other		12,131		11,562		27,865		23,327

Total consolidated revenues	$	429,666	$	388,260	$	845,489	$	759,498

Total revenues include net interest income, service charges on deposit accounts, other service fees, gain (loss) on sale of investment securities, derivatives (losses) gains, trading account profit (loss), and other operating income.


		June 30,		December 31,		June 30,
(In thousands)		2002		2001		2001

Selected Balance Sheet Information:
Puerto Rico
	Total assets	$	22,094,448	$	20,800,728	$	18,924,935
	Loans		9,966,695		9,879,632		9,602,554
	Deposits		12,264,302		10,874,829		10,488,993
United States
	Total assets	$	9,844,387	$	9,174,050	$	8,195,716
	Loans		8,578,291		7,868,729		7,168,268
	Deposits		4,702,432		4,718,692		4,228,090
Other
	Total assets	$	801,887	$	769,898	$	729,983
	Loans		356,156		420,190		421,424
	Deposits		862,553		776,521		852,702


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 June 30, 2002, December 31, 2001 and June 30, 2001, and the results of their operations and cash flows for periods ended June 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 May 31, 2002, November 30, 2001 and May 31, 2001, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of June 30, 2002, December 31, 2001 and June 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.

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 June 30, 2002, BPPR could have declared a dividend of approximately $96,493 without the approval of the Federal Reserve Board.

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
AS OF JUNE 30, 2002
(UNAUDITED)


				Popular, Inc.			PIBI		PNA		All other			Elimination			Popular, Inc.
(In thousands)				Holding Co.			Holding Co.		Holding Co.		Subsidiaries			entries			Consolidated

ASSETS
Cash and due from banks				$	290		$	67	$	1,135	$	1,156,727			($55,286	)	$	1,102,933
Money market investments					21,236			301		103		1,257,743			(207,725	)		1,071,658
Investment securities available-for-sale, at market value					203,973			30,744		6,523		9,881,979			(5,000	)		10,118,219
Investment securities held-to-maturity, at amortized cost												373,710			(148,640	)		225,070
Trading account securities, at market value												307,846						307,846
Investment in subsidiaries					2,155,177			595,515		808,186		180,079			(3,738,957	)
Loans held-for-sale, at lower of cost or market												927,387			(17,381	)		910,006

Loans					238,424					2,788,008		19,693,428			(4,417,146	)		18,302,714
Less — Unearned income												311,578						311,578
			Allowance for loan losses									347,230						347,230

					238,424					2,788,008		19,034,620			(4,417,146	)		17,643,906

Premises and equipment					11,599							392,783						404,382
Other real estate												35,193						35,193
Accrued income receivable					198					13,721		200,508			(23,815	)		190,612
Other assets					23,232			34,107		8,206		449,467			1,714			516,726
Goodwill												178,739						178,739
Other intangible assets												35,432						35,432

				$	2,654,129		$	660,734	$	3,625,882	$	34,412,213			($8,612,236	)	$	32,740,722

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposits:
		Non-interest bearing									$	4,067,396			($55,228	)	$	4,012,168
		Interest bearing										13,838,793			(21,674	)		13,817,119

												17,906,189			(76,902	)		17,829,287
	Federal funds purchased and securities sold under agreements to repurchase								$	562,771		5,442,296			(176,051	)		5,829,016
	Other short-term borrowings			$	98,961		$	8,687		489,926		2,606,886			(1,259,818	)		1,944,642
	Notes payable				180,386					1,935,688		5,328,948			(3,309,273	)		4,135,749
	Other liabilities				42,165			116		50,192		461,628			(29,654	)		524,447

					321,512			8,803		3,038,577		31,745,947			(4,851,698	)		30,263,141

	Subordinated notes				125,000													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			854			964

Stockholders’ equity:
Common stock					833,672			3,962		2		72,576			(76,540	)		833,672
Surplus					272,761			492,543		439,964		1,335,419			(2,267,926	)		272,761
Retained earnings					1,186,814			142,544		145,001		1,038,796			(1,326,341	)		1,186,814
Treasury stock, at cost					(205,210	)						(463	)		463			(205,210	)
Accumulated other comprehensive income, net of taxes					119,580			12,882		2,338		75,828			(91,048	)		119,580

					2,207,617			651,931		587,305		2,522,156			(3,761,392	)		2,207,617

				$	2,654,129		$	660,734	$	3,625,882	$	34,412,213			($8,612,236	)	$	32,740,722

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2001
(UNAUDITED)


					Popular, Inc.			PIBI		PNA		All other			Elimination			Popular, Inc.
(In thousands)					Holding Co.			Holding Co.		Holding Co.		Subsidiaries			Entries			Consolidated

ASSETS
Cash and due from banks					$	263		$	18	$	252	$	659,094		$	(53,485	)	$	606,142
Money market investments						112,937			302		442		1,075,301			(365,192	)		823,790
Investment securities available-for-sale, at market value						166,193			20,781		6,473		9,101,954			(11,000	)		9,284,401
Investment securities held-to-maturity, at amortized cost													747,000			(154,640	)		592,360
Trading account securities, at market value													271,106			(920	)		270,186
Investment in subsidiaries, at equity						2,129,890			559,658		772,220		164,146			(3,625,914	)
Loans held-for-sale, at lower of cost or market value													957,403			(17,915	)		939,488

Loans						196,412					2,537,021		18,870,993			(4,048,397	)		17,556,029
Less — Unearned income													326,966						326,966
				Allowance for loan losses									336,632						336,632

						196,412					2,537,021		18,207,395			(4,048,397	)		16,892,431

Premises and equipment						12,006							393,699						405,705
Other real estate													31,533						31,533
Accrued income receivable						323			2		12,263		196,277			(22,722	)		186,143
Other assets						20,795			32,010		9,994		434,248			(192	)		496,855
Goodwill													177,842						177,842
Other intangible assets													37,800						37,800

					$	2,638,819		$	612,771	$	3,338,665	$	32,454,798		$	(8,300,377	)	$	30,744,676

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposits:
			Non-interest bearing									$	3,335,268		$	(53,427	)	$	3,281,841
			Interest bearing										13,099,160			(10,959	)		13,088,201

													16,434,428			(64,386	)		16,370,042
	Federal funds purchased and securities sold under
		Agreements to repurchase								$	421,618		5,561,883			(231,733	)		5,751,768
	Other short-term borrowings							$	4,272		536,443		2,663,575			(1,377,048	)		1,827,242
	Notes payable				$	198,918					1,780,452		4,709,260			(2,953,499	)		3,735,131
	Other liabilities					42,083			72		48,959		450,637			(29,065	)		512,686

						241,001			4,344		2,787,472		29,819,783			(4,655,731	)		28,196,869

	Subordinated notes					125,000													125,000

	Preferred beneficial interests in Popular North America’s Junior subordinated deferrable interest debentures guaranteed by the Corporation												150,000			(920	)		149,080

Minority interest in consolidated subsidiaries													105			804			909

Stockholders’ equity:
Preferred stock						100,000													100,000
Common stock						832,498			3,962		2		72,575			(76,539	)		832,498
Surplus						268,544			492,494		439,964		1,334,918			(2,267,376	)		268,544
Retained earnings						1,057,724			105,748		110,687		1,032,542			(1,248,977	)		1,057,724
Treasury stock — at cost						(66,136	)						(236	)		236			(66,136	)
Accumulated other comprehensive income, net of taxes						80,188			6,223		540		45,111			(51,874	)		80,188

						2,272,818			608,427		551,193		2,484,910			(3,644,530	)		2,272,818

					$	2,638,819		$	612,771	$	3,338,665	$	32,454,798		$	(8,300,377	)	$	30,744,676

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2001
(UNAUDITED)


				Popular, Inc.			PIBI		PNA		All other			Elimination			Popular, Inc.
(In thousands)				Holding Co.			Holding Co.		Holding Co.		Subsidiaries			Entries			Consolidated

ASSETS
Cash and due from banks				$	124		$	24	$	215	$	661,598			($81,369	)	$	580,592
Money market investments					17,237			302		42		1,254,767			(208,494	)		1,063,854
Investment securities available-for-sale, at market value					188,973			20,231		6,347		7,250,109			(2,000	)		7,463,660
Investment securities held-to-maturity, at amortized cost												402,452			(154,640	)		247,812
Trading account securities, at market value												279,686						279,686
Investment in subsidiaries, at equity					2,167,008			553,702		753,695		147,366			(3,621,771	)
Loans held-for-sale, at lower of cost or market												914,071						914,071

Loans					235,517					2,360,932		17,899,844			(3,891,382	)		16,604,911
Less — Unearned income												326,736						326,736
			Allowance for loan losses									313,337						313,337

					235,517					2,360,932		17,259,771			(3,891,382	)		15,964,838

Premises and equipment												395,804						395,804
Other real estate												28,741						28,741
Accrued income receivable					319			530		13,533		199,665			(24,034	)		190,013
Other assets					10,707			23,596		6,330		453,974			(1,134	)		493,473
Goodwill												185,108						185,108
Other intangible assets												42,982						42,982

				$	2,619,885		$	598,385	$	3,141,094	$	29,476,094		$	(7,984,824	)	$	27,850,634

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposits:
		Non-interest bearing									$	3,225,934		$	(81,311	)	$	3,144,623
		Interest bearing										12,486,070			(60,908	)		12,425,162

												15,712,004			(142,219	)		15,569,785
	Federal funds purchased and securities sold under Agreements to repurchase			$	17,500				$	76,175		4,188,190			(124,586	)		4,157,279
	Other short-term borrowings				2,279		$	4,330		1,286,332		3,172,786			(1,637,380	)		2,828,347
	Notes payable				264,212					1,192,331		3,338,846			(2,416,359	)		2,379,030
	Other liabilities				44,242			275		41,397		417,281			(29,569	)		473,626

					328,233			4,605		2,596,235		26,829,107			(4,350,113	)		25,408,067

	Subordinated notes				125,000													125,000

	Preferred beneficial interests in Popular North America’s Junior subordinated deferrable interest debentures guaranteed by the Corporation											150,000						150,000

Minority interest in consolidated subsidiaries												105			810			915

Stockholders’ equity:
Preferred stock					100,000													100,000
Common stock					831,408			3,962		2		72,575			(76,539	)		831,408
Surplus					264,414			485,676		439,964		1,333,919			(2,259,559	)		264,414
Retained earnings					963,605			93,874		99,993		1,059,653			(1,253,520	)		963,605
Treasury stock-at cost					(66,136	)						(236	)		236			(66,136	)
Accumulated other comprehensive income, net of taxes					73,361			10,268		4,900		30,971			(46,139	)		73,361

					2,166,652			593,780		544,859		2,496,882			(3,635,521	)		2,166,652

				$	2,619,885		$	598,385	$	3,141,094	$	29,476,094		$	(7,984,824	)	$	27,850,634

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2002
(UNAUDITED)


		Popular, Inc.			PIBI			PNA		All other			Elimination			Popular, Inc.
(In thousands)		Holding Co.			Holding Co.			Holding Co.		Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans		$	3,542					$	40,112	$	396,792		$	(60,280	)	$	380,166
Money market investments			51		$	2			14		18,160			(10,857	)		7,370
Investment securities			285						189		118,153			(3,250	)		115,377
Trading account securities											3,206			(120	)		3,086

			3,878			2			40,315		536,311			(74,507	)		505,999

INTEREST EXPENSE:
Deposits											110,523			(167	)		110,356
Short-term borrowings			656			38			5,347		58,006			(18,773	)		45,274
Long-term debt			5,007						34,344		71,979			(55,639	)		55,691

			5,663			38			39,691		240,508			(74,579	)		211,321

Net interest (loss) income			(1,785	)		(36	)		624		295,803			72			294,678
Provision for loan losses											50,075						50,075

Net interest (loss) income after provision for loan losses			(1,785	)		(36	)		624		245,728			72			244,603
Service charges on deposit accounts											39,507						39,507
Other service fees											66,089			(52	)		66,037
(Loss) gain on sale of securities			(1,078	)							1,163						85
Trading account loss											(429	)		70			(359	)
Derivatives gains (losses)									69		(924	)					(855	)
Gain on sales of loans											13,213			(1,971	)		11,242
Other operating income			4,163			1,039			169		14,191			(231	)		19,331

			1,300			1,003			862		378,538			(2,112	)		379,591

OPERATING EXPENSES:
Personnel costs:
	Salaries					77					90,669						90,746
	Profit sharing										5,368						5,368
	Pension and other benefits					14					26,455						26,469

						91					122,492						122,583
Net occupancy expenses						3					20,045						20,048
Equipment expenses											24,376						24,376
Other taxes			245								9,040						9,285
Professional fees			145			3			49		19,588			(61	)		19,724
Communications			11								13,100						13,111
Business promotion											16,831						16,831
Printing and supplies											5,078						5,078
Other operating expenses			55			26			163		17,023			(206	)		17,061
Amortization of intangibles											2,556						2,556

			456			123			212		250,129			(267	)		250,653

Income before income tax, minority interest and equity in earnings of subsidiaries			844			880			650		128,409			(1,845	)		128,938
Income tax			(135	)					602		32,574			(447	)		32,594
Net gain of minority interest											(39	)					(39	)

Income before equity in earnings of subsidiaries			979			880			48		95,796			(1,398	)		96,305
Equity in earnings of subsidiaries			95,326			19,121			19,011		8,467			(141,925	)

NET INCOME		$	96,305		$	20,001		$	19,059	$	104,263		$	(143,323	)	$	96,305

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2001
(UNAUDITED)


		Popular, Inc.			PIBI			PNA		All other			Elimination			Popular, Inc.
(In thousands)		Holding Co.			Holding Co.			Holding Co.		Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans		$	5,623		$	534		$	39,304	$	408,905			($62,525	)	$	391,841
Money market investments			259			5			23		20,254			(7,515	)		13,026
Investment securities			268			1			189		117,036			(3,251	)		114,243
Trading account securities											4,297						4,297

			6,150			540			39,516		550,492			(73,291	)		523,407

INTEREST EXPENSE:
Deposits											131,233			(211	)		131,022
Short-term borrowings			335			62			17,358		97,182			(30,444	)		84,493
Long-term debt			8,065						22,073		54,839			(42,603	)		42,374

			8,400			62			39,431		283,254			(73,258	)		257,889

Net interest (loss) income			(2,250	)		478			85		267,238			(33	)		265,518
Provision for loan losses											49,462						49,462

Net interest (loss) income after provision for loan losses			(2,250	)		478			85		217,776			(33	)		216,056
Service charges on deposit accounts											36,310						36,310
Other service fees											60,380			(31	)		60,349
Loss on sale of securities						(50	)				(2,102	)					(2,152	)
Trading account loss											(816	)					(816	)
Gain on derivatives									1,516		136						1,652
Gain on sales of loans											14,552			(2,844	)		11,708
Other operating income			2,978			204					12,614			(105	)		15,691

			728			632			1,601		338,850			(3,013	)		338,798

OPERATING EXPENSES:
Personnel costs:
	Salaries					73					78,811						78,884
	Profit sharing										4,018						4,018
	Pension and other benefits					12					23,829						23,841

						85					106,658						106,743
Net occupancy expenses						3					17,723						17,726
Equipment expenses											24,575						24,575
Other taxes			452								9,357						9,809
Professional fees			740			3			64		17,539			(62	)		18,284
Communications			8								12,077						12,085
Business promotion											13,159						13,159
Printing and supplies											4,490						4,490
Other operating expenses			27			18			105		20,180			(141	)		20,189
Amortization of intangibles											6,860						6,860

			1,227			109			169		232,618			(203	)		233,920

(Loss) income before income tax, minority interest and equity in earnings of subsidiaries			(499	)		523			1,432		106,232			(2,810	)		104,878
Income tax			(1,426	)					469		28,993			(699	)		27,337
Net gain of minority interest											(4	)					(4	)

Income before equity in earnings of subsidiaries			927			523			963		77,235			(2,111	)		77,537
Equity in earnings of subsidiaries			76,610			6,460			5,648		5,685			(94,403	)

NET INCOME		$	77,537		$	6,983		$	6,611	$	82,920			($96,514	)	$	77,537

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)


		Popular,
		Inc.			PIBI			PNA		All other			Elimination			Popular, Inc.
(In thousands)		Holding Co.			Holding Co.			Holding Co.		Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans		$	6,986					$	78,299	$	785,603			($118,500	)	$	752,388
Money market investments			172		$	6			19		36,757			(21,799	)		15,155
Investment securities			477						378		233,356			(6,523	)		227,688
Trading account securities											6,751			(164	)		6,587

			7,635			6			78,696		1,062,467			(146,986	)		1,001,818

INTEREST EXPENSE:
Deposits											223,708			(422	)		223,286
Short-term borrowings			972			61			11,123		115,250			(37,688	)		89,718
Long-term debt			10,256						67,358		140,113			(109,006	)		108,721

			11,228			61			78,481		479,071			(147,116	)		421,725

Net interest (loss) income			(3,593	)		(55	)		215		583,396			130			580,093
Provision for loan losses											104,529						104,529

Net interest (loss) income after provision for loan losses			(3,593	)		(55	)		215		478,867			130			475,564
Service charges on deposit accounts											78,480						78,480
Other service fees											127,839			(115	)		127,724
Loss on sale of securities			(1,078	)							(2,847	)					(3,925	)
Trading account loss											(1,459	)		70			(1,389	)
Gain (loss) on derivatives									714		(1,058	)					(344	)
Gain on sales of loans											33,436			(4,628	)		28,808
Other operating income			6,299			2,653			169		27,984			(1,063	)		36,042

			1,628			2,598			1,098		741,242			(5,606	)		740,960

OPERATING EXPENSES:
Personnel costs:
	Salaries					154					179,153						179,307
	Profit sharing										10,308						10,308
	Pension and other benefits					29					53,241						53,270

						183					242,702						242,885
Net occupancy expenses						7					39,071						39,078
Equipment expenses											49,141						49,141
Other taxes			490								18,343						18,833
Professional fees			291			6			95		36,979			(140	)		37,231
Communications			19								26,365						26,384
Business promotion											30,199						30,199
Printing and supplies											9,587						9,587
Other operating expenses			108			45			270		34,304			(345	)		34,382
Amortization of intangibles											5,099						5,099

			908			241			365		491,790			(485	)		492,819

Income before income tax, minority interest and equity in earnings of subsidiaries			720			2,357			733		249,452			(5,121	)		248,141
Income tax			(147	)					619		63,619			(1,349	)		62,742
Net gain of minority interest											(50	)					(50	)

Income before equity in earnings of subsidiaries			867			2,357			114		185,783			(3,772	)		185,349
Equity in earnings of subsidiaries			184,482			34,441			34,201		15,421			(268,545	)

NET INCOME		$	185,349		$	36,798		$	34,315	$	201,204			($272,317	)	$	185,349

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)


		Popular, Inc.			PIBI			PNA			All other			Elimination			Popular, Inc.
(In thousands)		Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Consolidated

INTEREST INCOME:
Loans		$	14,352		$	1,069		$	75,597		$	804,321		$	(109,933	)	$	785,406
Money market investments			462			10			55			55,450			(27,645	)		28,332
Investment securities			884			1			378			257,540			(6,501	)		252,302
Trading account securities												7,818						7,818

			15,698			1,080			76,030			1,125,129			(144,079	)		1,073,858

INTEREST EXPENSE:
Deposits												264,829			(1,030	)		263,799
Short-term borrowings			870			150			33,214			229,268			(59,891	)		203,611
Long-term debt			18,985						43,862			105,452			(83,086	)		85,213

			19,855			150			77,076			599,549			(144,007	)		552,623

Net interest (loss) income			(4,157	)		930			(1,046	)		525,580			(72	)		521,235
Provision for loan losses												99,496						99,496

Net interest (loss) income after provision for loan losses			(4,157	)		930			(1,046	)		426,084			(72	)		421,739
Service charges on deposit accounts												70,968						70,968
Other service fees												119,102			(59	)		119,043
Loss on sale of securities						(50	)					(1,812	)					(1,862	)
Trading account loss												(628	)					(628	)
Gain (loss) on derivatives									1,516			(495	)					1,021
Gain on sales of loans												25,351			(4,494	)		20,857
Other operating income			5,400			409						23,264			(209	)		28,864

			1,243			1,289			470			661,834			(4,834	)		660,002

OPERATING EXPENSES:
Personnel costs:
	Salaries					143						156,519						156,662
	Profit sharing											9,115						9,115
	Pension and other benefits					24						45,836						45,860

						167						211,470						211,637
Net occupancy expenses						6						34,915						34,921
Equipment expenses												48,702						48,702
Other taxes			904									17,715						18,619
Professional fees			930			4			109			33,297			(117	)		34,223
Communications			16									23,956						23,972
Business promotion												23,704						23,704
Printing and supplies												8,809						8,809
Other operating expenses			49			22			213			36,121			(285	)		36,120
Amortization of intangibles												13,736						13,736

			1,899			199			322			452,425			(402	)		454,443

(Loss) income before income tax, minority interest, cumulative effect of accounting change and equity in earnings of Subsidiaries			(656	)		1,090			148			209,409			(4,432	)		205,559
Income tax			(1,386	)					(12	)		56,981			(1,095	)		54,488
Net loss of minority interest												12						12

Income before cumulative effect of accounting change and equity in earnings of subsidiaries			730			1,090			160			152,440			(3,337	)		151,083
Cumulative effect of accounting change												686						686

Income before equity in earnings of subsidiaries			730			1,090			160			153,126			(3,337	)		151,769
Equity in earnings of subsidiaries			151,039			9,209			9,398			10,688			(180,334	)

NET INCOME		$	151,769		$	10,299		$	9,558		$	163,814		$	(183,671	)	$	151,769

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED JUNE 30, 2002
(UNAUDITED)


			Popular, Inc.			PIBI			PNA			All other			Elimination			Consolidated
(In thousands)			Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Popular, Inc

Cash flows from operating activities:
	Net income		$	185,349		$	36,798		$	34,315		$	201,204		$	(272,317	)	$	185,349

	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in undistributed earnings of subsidiaries		(184,482	)		(34,441	)		(34,201	)		(15,421	)		268,545
		Depreciation and amortization of premises and equipment		407									37,635						38,042
		Provision for loan losses											104,529						104,529
		Amortization of intangibles											5,099						5,099
		Net loss on sales of investment securities		1,078									2,847						3,925
		Net (gain) loss on derivatives								(714	)		1,058						344
		Net loss on disposition of premises and equipment											223						223
		Net gain on sales of loans, excluding loans held-for-sale											(5,838	)					(5,838	)
		Net amortization of premiums and accretion of discounts on investments											7,608			(87	)		7,521
		Net decrease in loans held-for-sale											30,016			(534	)		29,482
		Net amortization of deferred loan fees and costs											17,365						17,365
		Net increase in trading securities											(36,739	)		(921	)		(37,660	)
		Net decrease (increase) in accrued income receivable		125			1			(1,458	)		(4,223	)		1,086			(4,469	)
		Net (increase) decrease in other assets		(2,290	)		(2,096	)		2,034			6,632			(1,406	)		2,874
		Net (decrease) increase in interest payable		(42	)		46			2,068			(4,327	)					(2,255	)
		Net (decrease) increase in deferred and current taxes		(179	)					597			(31,531	)		328			(30,785	)
		Net increase in postretirement benefit obligation											1,533						1,533
		Net increase (decrease) in other liabilities		976			(4	)		(968	)		19,384			(5,450	)		13,938

Total adjustments				(184,407	)		(36,494	)		(32,642	)		135,850			261,561			143,868

Net cash provided by operating activities				942			304			1,673			337,054			(10,756	)		329,217

Cash flows from investing activities:
		Net decrease (increase) in money market investments		91,700			1			339			(182,441	)		(157,467	)		(247,868	)
		Purchases of investment securities held-to-maturity											(230,173	)					(230,173	)
		Maturities of investment securities held-to-maturity											597,427			(6,000	)		591,427
		Purchases of investment securities available-for-sale		(35,446	)		(9,963	)		(17	)		(3,919,150	)		7,946			(3,956,630	)
		Maturities of investment securities available-for-sale					5,242						2,138,191			(5,931	)		2,137,502
		Proceeds from sales of investment securities available-for-sale											1,029,857						1,029,857
		Net disbursements on loans		(42,012	)					(250,986	)		(753,335	)		361,673			(684,660	)
		Proceeds from sales of loans											294,422						294,422
		Acquisition of loan portfolios											(513,668	)					(513,668	)
		Capital contribution to subsidiary		(50	)											50
		Acquisition of premises and equipment											(43,874	)					(43,874	)
		Proceeds from sales of premises and equipment											6,932						6,932
		Dividends received from subsidiary		195,000												(195,000	)

Net cash provided by (used in) investing activities				209,192			(4,720	)		(250,664	)		(1,575,812	)		5,271			(1,616,733	)

Cash flows from financing activities:
		Net increase in deposits											1,501,284			(16,400	)		1,484,884
		Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase								141,153			(119,586	)		55,681			77,248
		Net increase (decrease) in other short-term borrowings		98,961			4,415			(46,516	)		(63,767	)		124,307			117,400
		Net (payments of) proceeds from notes payable and capital securities		(18,532	)					155,237			613,687			(354,854	)		395,538
		Dividends paid to parent company											(195,000	)		195,000
		Dividends paid		(55,080	)														(55,080	)
		Proceeds from issuance of common stock		5,391															5,391
		Redemption of preferred stock		(102,000	)														(102,000	)
		Treasury stock acquired		(138,847	)								(227	)					(139,074	)
		Capital contribution from parent					50									(50	)

Net cash (used in) provided by financing activities				(210,107	)		4,465			249,874			1,736,391			3,684			1,784,307

Net increase in cash and due from banks				27			49			883			497,633			(1,801	)		496,791
Cash and due from banks at beginning of period				263			18			252			659,094			(53,485	)		606,142

Cash and due from banks at end of period			$	290		$	67		$	1,135		$	1,156,727		$	(55,286	)	$	1,102,933

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED JUNE 30, 2001
(UNAUDITED)


			Popular, Inc.			PIBI			PNA			All other			Eliminations			Consolidated
(In thousands)			Holding Co.			Holding Co.			Holding Co.			Subsidiaries			Entries			Popular, Inc

Cash flows from operating activities:
	Net income		$	151,769		$	10,299		$	9,558		$	163,814		$	(183,671	)	$	151,769

	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Equity in undistributed earnings of subsidiaries		(151,039	)		(9,209	)		(9,398	)		(10,688	)		180,334
		Depreciation and amortization of premises and equipment											38,210						38,210
		Provision for loan losses											99,496						99,496
		Amortization of intangibles											13,736						13,736
		Net loss on sales of investment securities					50						1,812						1,862
		Net (gain) loss on derivatives								(1,517	)		496						(1,021	)
		Loss on disposition of premises and equipment											312						312
		Net loss on sales of loans, excluding loans held-for-sale											192						192
		Net amortization of premiums and accretion of discounts on investments											1,484						1,484
		Increase in loans held-for-sale											(90,170	)					(90,170	)
		Net amortization of deferred loan fees and costs											20,500						20,500
		Net increase in trading securities											(126,613	)					(126,613	)
		Net decrease (increase) in accrued income receivable		794			60			(1,482	)		10,265			2,890			12,527
		Net decrease (increase) in other assets		11,278			(22,701	)		(379	)		1,043			(637	)		(11,396	)
		Net (decrease) increase in interest payable		(2,227	)		12			291			(25,955	)					(27,879	)
		Net (decrease) increase in deferred and current taxes		(8	)					3,565			(4,485	)		(822	)		(1,750	)
		Net increase in postretirement benefit obligation											6,094						6,094
		Net increase (decrease) in other liabilities		4,192			(14	)		779			(15,011	)		(6,235	)		(16,289	)

Total adjustments				(137,010	)		(31,802	)		(8,141	)		(79,282	)		175,530			(80,705	)

Net cash provided by (used in) operating activities				14,759			(21,503	)		1,417			84,532			(8,141	)		71,064

Cash flows from investing activities:
		Net decrease in money market investments		3,600			25			18			689,600			(688,479	)		4,764
		Purchases of investment securities held-to-maturity											(2,615,536	)					(2,615,536	)
		Maturities of investment securities held-to-maturity											2,717,702						2,717,702
		Purchases of investment securities available-for-sale		(21,808	)		(232	)					(2,063,461	)					(2,085,501	)
		Maturities of investment securities available-for-sale								119			2,803,427			2,000			2,805,546
		Proceeds from sales of investment securities available-for-sale											606,075						606,075
		Net repayments (disbursements) on loans		308,256			22,500			(518,416	)		(2,166,980	)		1,322,765			(1,031,875	)
		Proceeds from sales of loans											244,336						244,336
		Acquisition of loan portfolios											(388,389	)					(388,389	)
		Capital contribution to subsidiary								(32	)					32
		Return of investment from subsidiary					300									(300	)
		Acquisition of premises and equipment											(31,770	)					(31,770	)
		Proceeds from sales of premises and equipment											3,216						3,216
		Dividends received from subsidiary		44,000												(44,000	)

Net cash provided by (used in) investing activities				334,048			22,593			(518,311	)		(201,780	)		592,018			228,568

Cash flows from financing activities:
		Net increase in deposits											741,170			2,477			743,647
		Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		17,500						7,475			(844,927	)		13,116			(806,836	)
		Net decrease in other short-term borrowings		(375,434	)		(1,084	)		(49,731	)		(1,237,003	)		122,387			(1,540,865	)
		Net proceeds from issuance of notes payable		52,201						559,077			1,341,124			(750,284	)		1,202,118
		Dividends paid to parent company											(44,000	)		44,000
		Dividends paid		(47,715	)														(47,715	)
		Proceeds from issuance of common stock		4,482															4,482
		Treasury stock sold											78						78
		Return of investment to parent											(300	)		300
		Capital contribution from parent											32			(32	)

Net cash (used in) provided by financing activities				(348,966	)		(1,084	)		516,821			(43,826	)		(568,036	)		(445,091	)

Net (decrease) increase in cash and due from banks				(159	)		6			(73	)		(161,074	)		15,841			(145,459	)
Cash and due from banks at beginning of period				283			18			288			822,672			(97,210	)		726,051

Cash and due from banks at end of period			$	124		$	24		$	215		$	661,598		$	(81,369	)	$	580,592

TABLE A
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Highlights


	At June 30,						Average for the six months

Balance Sheet Highlights	2002		2001		Change		2002		2001		Change
(In thousands)
Money market investments	$	1,071,658	$	1,063,854	$	7,804	$	876,091	$	949,489	$	(73,398	)
Investment and trading securities		10,651,135		7,991,158		2,659,977		10,200,184		8,466,557		1,733,627
Loans		18,901,142		17,192,246		1,708,896		18,249,592		16,496,421		1,753,171
Total assets		32,740,722		27,850,634		4,890,088		30,915,430		27,448,384		3,467,046
Deposits		17,829,287		15,569,785		2,259,502		16,807,732		15,068,602		1,739,130
Borrowings		12,178,407		9,639,656		2,538,751		11,507,639		9,876,743		1,630,896
Stockholders’ equity		2,207,617		2,166,652		40,965		2,141,750		2,044,659		97,091


	Second Quarter						Six months

Operating Highlights	2002		2001		Change		2002		2001		Change
(In thousands, except per share information)
Net interest income	$	294,678	$	265,518	$	29,160	$	580,093	$	521,235	$	58,858
Provision for loan losses		50,075		49,462		613		104,529		99,496		5,033
Fees and other income		134,988		122,742		12,246		265,396		238,263		27,133
Other expenses, net of minority interest		283,286		261,261		22,025		555,611		508,919		46,692
Cumulative effect of accounting change, net of tax		—		—		—		—		686		(686	)
Net income	$	96,305	$	77,537	$	18,768	$	185,349	$	151,769	$	33,580
Net income applicable to common stock	$	96,305	$	75,450	$	20,855	$	182,839	$	147,595	$	35,244
Earnings per common share (basic and diluted)	$	0.72	$	0.55	$	0.17	$	1.35	$	1.08	$	0.27


Selected Statistical			Second Quarter						Six Months
Information			2002			2001			2002			2001

Common Stock Data -	Market price
		High	$	33.68		$	32.94		$	33.68		$	32.94
		Low		28.60			28.44			27.50			25.25
		End		33.68			32.94			33.68			32.94
	Book value at period end			16.69			15.18			16.69			15.18
	Dividends declared			0.20			0.20			0.40			0.36
	Dividend payout ratio			28.34	%		28.86	%		29.48	%		29.50	%
	Price/earnings ratio			13.80	x		15.46	x		13.80	x		15.46	x

Profitability Ratios -	Return on assets			1.23	%		1.14	%		1.21	%		1.12	%
	Return on common equity			18.14			15.36			17.43			15.31
	Net interest spread (taxable equivalent)			3.81			3.69			3.80			3.55
	Net interest yield (taxable equivalent)			4.28			4.44			4.29			4.33
	Effective tax rate			25.28			26.07			25.28			26.51
	Overhead ratio			39.25			41.87			39.20			41.47
	Efficiency ratio			58.18			60.05			57.90			59.72

Capitalization Ratios -	Equity to assets			6.78	%		7.62	%		6.93	%		7.45	%
	Tangible equity to assets			6.14			6.82			6.27			6.65
	Equity to loans			11.55			12.34			11.74			12.39
	Internal capital generation			13.12			9.32			12.17			9.64
	Tier I capital to risk — adjusted assets			9.36			10.60			9.36			10.60
	Total capital to risk — adjusted assets			11.13			12.57			11.13			12.57
	Leverage ratio			5.99			6.89			5.99			6.89

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.

NET INCOME

The Corporation reported net income of $96.3 million for the second quarter of 2002, compared with $77.5 million for the same quarter in 2001. Basic and diluted earnings per common share (EPS) for the quarter were $0.72, compared with $0.55 in the second quarter of 2001. 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. Net earnings for the first quarter of 2002 were $89.0 million or $0.63 per common share, basic and diluted. Return on assets (ROA) and return on common equity (ROE) for the quarter ended June 30, 2002 were 1.23% and 18.14%, respectively, compared with 1.14% and 15.36% for the same period in 2001. For the first quarter of 2002 these ratios were 1.19% and 16.83%.

The Corporation’s results of operations for the quarter ended June 30, 2002 reflected an increase of $29.2 million in net interest income and $14.8 million in other income, excluding derivatives, compared with the same quarter in 2001. These improvements were partially offset by rises of $16.7 million in operating expenses and $5.3 million in income taxes. Derivative losses for the quarter amounted to $0.9 million compared with gains of $1.7 million for the same quarter in 2001. The results for this quarter benefited from the reduction of $4.3 million in the amortization of goodwill when compared with the quarter ended June 30, 2001, associated with the adoption in year 2002 of SFAS No. 142 “Goodwill and Other Intangible Assets.”

For the six months ended June 30, 2002, the Corporation’s net income rose to $185.3 million, compared with $151.8 million for the same period in 2001. Basic and diluted EPS for the first six months of 2002 and 2001 were $1.35 and $1.08, respectively. ROA and ROE for the six-month period ended June 30, 2002 were 1.21% and 17.43%, respectively. For the same period in 2001, these ratios were 1.12% and 15.31%.

CRITICAL ACCOUNTING POLICIES

For a summary of the Corporation’s Critical Accounting Policies, refer to that particular section in the Management Discussion and Analysis included in Popular, Inc.’s 2001 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K. Also, refer to Note 1 to the consolidated financial statements included in said report for a summary of the Corporation’s significant accounting policies. There were no new critical accounting policies or any changes to existing ones during 2002.

NET INTEREST INCOME

Net interest income for the quarter ended June 30, 2002 rose $29.2 million to $294.7 million, an increase of 11% over the second quarter of 2001. On a taxable equivalent basis, net interest income increased to $319.2 million from $285.1 million in the same quarter of 2001.

The improvement of $34.1 million in net interest income, on a taxable equivalent basis, from the second quarter of 2001 resulted from a $23.1 million increase due to a higher volume of earning assets and an $11.0 million increase due to higher spreads.

Table B presents the different components of the Corporation’s net interest income for the second 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.

Earning assets increased in average by $4.1 billion due to higher average loan volume of $1.7 billion, mainly mortgage loans, and a $2.4 billion increase in the average volume of money market, trading and investment securities.

The increase in mortgage loans was principally achieved through our consumer and mortgage-banking subsidiary, Equity One, as well as from higher mortgage loan activity in Puerto Rico. The commercial loan portfolio increased in average by $212 million compared with the second quarter of 2001. On the other hand, consumer loans decreased by $156 million, mostly related to the lower demand for personal loans and to the shifting of consumer credit to mortgage credit.

The average yield on earning assets, on a taxable equivalent basis, declined 134 basis points from 8.47% for the second quarter of 2001 to 7.13% for the second quarter of 2002. The reduction is attributed to the lower interest rate scenario, resulting from the Federal Reserve easing cycle, that prevailed during the year 2001. Commercial loans experienced the largest impact due to the floating rate characteristics of a portion of the portfolio and the origination of new loans in the lower rate environment. As of June 30, 2002, approximately 50% of the Corporation’s commercial and construction loans portfolio had floating or adjustable rates. The decrease in yield in this category for the quarter ended June 30, 2002 amounted to 171 basis points, compared with the same quarter in 2001. Furthermore, the average yield on the investment portfolio decreased by 151 basis points, due to the increase in volume of the portfolio, and to the maturities of securities with higher yields that were replaced, during a lower interest rate scenario.

The increase of $3.9 billion in the average balance of interest-bearing liabilities for the second quarter of 2002, as compared with the same quarter in 2001, was partly due to higher average levels of interest-bearing deposits. NOW and money market accounts and savings deposits increased in average by $588 million and $571 million, respectively, while time deposits increased by $393 million. Within the latter category, brokered deposits increased by $64 million.

Average short-term borrowings, comprised mostly of Fed funds, repurchase agreements and commercial paper, increased by $598 million or 9% in the second quarter of 2002, compared with the same quarter last year, while

longer-term borrowings increased by $1.8 billion or 70%. 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 the Corporation is positioning itself against the event of a rising rate scenario.

TABLE B
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Quarter ended June 30,


																								Variance
		Average Volume					Average Yields/Costs												Interest					Attributable to
2002		2001		Variance			2002			2001			Variance				2002		2001		Variance			Rate			Volume

		($ in millions)															(In thousands)

$	826	$	939		($113	)		3.58	%		5.56	%		(1.98	%)	Money market investments	$	7,370	$	13,026		($5,656	)		($4,098	)		($1,558	)
	10,238		7,671		2,567			5.38			6.89			(1.51	)	Investment securities		137,761		132,163		5,598			(30,173	)		35,771
	287		275		12			4.54			6.32			(1.78	)	Trading securities		3,240		4,324		(1,084	)		(1,264	)		180

	11,351		8,885		2,466			5.23			6.73			(1.50	)			148,371		149,513		(1,142	)		(35,535	)		34,393

																Loans:
	7,665		7,453		212			6.69			8.40			(1.71	)	Commercial and construction		127,828		156,067		(28,239	)		(32,560	)		4,321
	869		840		29			11.34			11.60			(0.26	)	Leasing		24,634		24,348		286			(558	)		844
	6,813		5,234		1,579			7.80			8.25			(0.45	)	Mortgage		132,928		108,010		24,918			(6,165	)		31,083
	3,092		3,248		(156	)		12.54			12.95			(0.41	)	Consumer		96,808		105,050		(8,242	)		(2,183	)		(6,059	)

	18,439		16,775		1,664			8.30			9.40			(1.10	)			382,198		393,475		(11,277	)		(41,466	)		30,189

$	29,790	$	25,660	$	4,130			7.13	%		8.47	%		(1.34	%)	Total earning assets	$	530,569	$	542,988		($12,419	)		($77,001	)	$	64,582

																Interest-bearing deposits:
$	2,598	$	2,010	$	588			2.25	%		3.26	%		(1.01	%)	NOW and money market	$	14,592	$	16,321		($1,729	)		($5,515	)	$	3,786
	4,723		4,152		571			2.38			2.82			(0.44	)	Savings		28,066		29,216		(1,150	)		(4,785	)		3,635
	6,511		6,118		393			4.17			5.60			(1.43	)	Time deposits		67,698		85,485		(17,787	)		(23,068	)		5,281

	13,832		12,280		1,552			3.20			4.28			(1.08	)			110,356		131,022		(20,666	)		(33,368	)		12,702

	7,392		6,794		598			2.46			4.99			(2.53	)	Short-term borrowings		45,274		84,493		(39,219	)		(44,417	)		5,198
	4,337		2,557		1,780			5.15			6.65			(1.50	)	Medium and long-term debt		55,691		42,374		13,317			(10,274	)		23,591

																Total interest-bearing
	25,561		21,631		3,930			3.32			4.78			(1.46	)	liabilities		211,321		257,889		(46,568	)		(88,059	)		41,491
	3,254		3,041		213											Demand deposits
	975		988		(13	)										Other sources of funds

$	29,790	$	25,660	$	4,130			2.85	%		4.03	%		(1.18	%)

								4.28	%		4.44	%		(0.16	%)	Net interest margin and

																Net interest income on a taxable equivalent basis		319,248		285,099		34,149		$	11,058		$	23,091

								3.81	%		3.69	%		0.12	%	Net interest spread

																Taxable equivalent adjustment		24,570		19,581		4,989

																Net interest income	$	294,678	$	265,518	$	29,160

Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category.

The average cost of interest-bearing liabilities for the quarter ended June 30, 2002 decreased by 146 basis points, compared with the same quarter of 2001. The decline is mostly attributed to a lower cost of short-term borrowed money by 253 basis points and to the lower cost of time deposits by 143 basis points; both attributed to the lower interest rate scenario prevailing since mid 2001.

The Corporation’s net interest margin, on a taxable equivalent basis, for the second quarter of 2002 was 4.28%, resulting in a 16 basis points reduction from 4.44% in the same quarter of 2001. The net interest margin for the first quarter of 2002 was 4.29%. 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. 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 by 12 basis points.

For the six-month period ended June 30, 2002, net interest income, on a taxable equivalent basis, rose $68.6 million, or 12%, compared with the same period of 2001. The improvement resulted from a $42.1 million increase due to a higher average volume of earning assets and a $26.5 million increase due to a higher net interest spread.

TABLE C
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Period ended June 30


																				Variance
Average Volume						Average Yields/Costs										Interest				Attributable to
2002		2001		Variance		2002		2001		Variance				2002		2001		Variance		Rate		Volume

($ in millions)													(In thousands)

$	876	$	949		($73)		3.49%		6.02%		(2.53%)	Money market investments		$	15,155	$	28,332		($13,177)		($10,883)		($2,294	)
	9,884		8,222		1,662		5.53		7.02		(1.49)	Investment securities			273,050		288,533		(15,483)		(62,562)		47,079
	316		245		71		4.36		6.55		(2.19)	Trading securities			6,824		7,945		(1,121)		(3,078)		1,957

	11,076		9,416		1,660		5.33		6.91		(1.58)				295,029		324,810		(29,781)		(76,523)		46,742

												Loans:
	7,637		7,371		266		6.74		8.76		(2.02)	Commercial and construction			255,131		320,209		(65,078)		(76,279)		11,201
	865		837		28		11.28		11.60		(0.32)	Leasing			48,771		48,571		200		(1,372)		1,572
	6,645		5,019		1,626		7.81		8.31		(0.50)	Mortgage			259,568		208,513		51,055		(15,075)		66,130
	3,103		3,269		(166)		12.48		13.00		(0.52)	Consumer			192,945		211,597		(18,652)		(7,184)		(11,468	)

	18,250		16,496		1,754		8.32		9.61		(1.29)				756,415		788,890		(32,475)		(99,910)		67,435

$	29,326	$	25,912	$	3,414		7.19%		8.63%		(1.44%)	Total earning assets			$1,051,444	$	1,113,700		($62,256)		($176,433)	$	114,177

												Interest-bearing deposits:
$	2,546	$	2,003	$	543		2.33%		3.35%		(1.02%)	NOW and money market			$29,435	$	33,320		($3,885)		($11,103)	$	7,218
	4,597		4,111		486		2.47		2.85		(0.38)	Savings			56,414		58,013		(1,599)		(7,964)		6,365
	6,445		5,935		510		4.30		5.86		(1.56)	Time deposits			137,438		172,466		(35,028)		(48,962)		13,934

	13,588		12,049		1,539		3.31		4.41		(1.10)				223,287		263,799		(40,512)		(68,029)		27,517

	7,328		7,344		(16)		2.47		5.59		(3.12)	Short-term borrowings			89,717		203,611		(113,894)		(113,951)		57
	4,180		2,533		1,647		5.24		6.78		(1.54)	Medium and long-term debt			108,721		85,213		23,508		(20,960)		44,468

	25,096		21,926		3,170		3.39		5.08		(1.69)	Total interest-bearing Liabilities			421,725		552,623		(130,898)		(202,940)		72,042
	3,219		3,019		200							Demand deposits
	1,011		967		44							Other sources of funds

$	29,326	$	25,912	$	3,414		2.90%		4.30%		(1.40%)

							4.29%		4.33%		(0.04%)	Net interest margin and

												Net interest income on a Taxable equivalent basis			629,719		561,077		68,642	$	26,507	$	42,135

							3.80%		3.55%		0.25%	Net interest spread

												Taxable equivalent adjustment			49,625		39,842		9,783

												Net interest income			$580,094	$	521,235	$	58,859

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.

As shown in Table C, average earning assets increased by $3.4 billion for the six-month period ended June 30, 2002, compared with an average of $25.9 billion in the same period of 2001. This increase was derived mainly from a higher mortgage loan portfolio and investment activities, which were funded mainly through interest-bearing deposits and long-term borrowings. Interest-bearing liabilities for the six months ended June 30, 2002 increased in average by $3.2 billion compared with the same period of 2001.

The net interest margin, on a taxable equivalent basis, for the six-month period ended June 30, 2002 was 4.29% compared with 4.33% for the same period in 2001.

PROVISION AND ALLOWANCE FOR LOAN LOSSES

For the second quarter of 2002 the provision for loan losses amounted to $50.1 million, compared with $49.5 million for the same period in 2001, an increase of $0.6 million. The provision for loan losses represented 109% of net charge-offs for the quarter ended June 30, 2002 and 119% for the same quarter in 2001. For the six-month period ended June 30, 2002, the provision for loan losses amounted to $104.5 million, an increase of $5.0 million or 5% compared with $99.5 million for the same period in prior year.

The provision for loan losses reflects management’s assessment of the adequacy of the allowance for loan losses to cover probable losses in the loan portfolio after taking into account loan impairment and net charge-offs for the current period. Management’s review of quantitative factors and qualitative factors affecting the performance of the credit portfolio results in the final determination of the provision for loan losses intended to maintain an adequate level of allowance for loan losses. In determining the allowance, management considers the portfolio risk characteristics, the results of periodic credit reviews of individual loans, the value of the collateral, prior loss experience, current economic conditions and loan impairment measurements, among other factors. The adequacy of the allowance for loan losses is evaluated on a monthly basis.

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 allowance for loan losses amounted to $347 million as of June 30, 2002, or 1.84% of loans, compared with $313 million or 1.82% at the same date in 2001. At December 31, 2001, the allowance for loan losses totaled $337 million or 1.85% of loans. The Corporation’s management considers the allowance for loan losses to be at a level sufficient to provide for estimated losses based on current economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses. For more information regarding the allowance for loan losses and asset quality refer to the Credit Quality section.

The Corporation has defined impaired loans as loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective rate, on the observable market price of the loan, or on the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience adjusted for current conditions. Larger balance commercial loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen for evaluating a loan, 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 June 30, 2002, December 31, 2001 and June 31, 2001.


			June 30, 2002				December 31, 2001				June 30, 2001
(In millions)
			Recorded		Valuation		Recorded		Valuation		Recorded		Valuation
			Investment		Allowance		Investment		Allowance		Investment		Allowance

Impaired loans:
	Valuation allowance required		$	93.3	$	35.8	$	90.9	$	36.8	$	125.5	$	33.4
	No valuation allowance required			45.4		—		53.1		—		53.1		—

		Total impaired loans	$	138.7	$	35.8	$	144.0	$	36.8	$	178.6	$	33.4

Average impaired loans during the second quarter of 2002 and 2001 were $144 million and $175 million, respectively. The Corporation recognized interest income on impaired loans of $0.7 million and $1.0 million for the quarters ended June 30, 2002 and 2001, respectively.

Table D summarizes the movement in the allowance for loan losses and presents several loan loss statistics for the quarters and six months ended June 30, 2002 and 2001. Net charge-offs for the quarter ended June 30, 2002 were $45.8 million or 0.99% of average loans, compared with $41.7 million or 0.99% for the second quarter of 2001. Net charge-offs for the six months ended June 30, 2002 were $95.5 million or 1.05% of average loans, compared with $77.8 million or 0.94% for the same period in 2001.

TABLE D
Allowance for Loan Losses and Selected Loan Losses Statistics


		Second Quarter						Six Months

(Dollars in thousands)		2002			2001			2002			2001

Balance at beginning of period		$	341,744		$	305,295		$	336,632		$	290,653
Allowance acquired			1,184			266			1,527			1,004
Provision for loan losses			50,075			49,462			104,529			99,496

			393,003			355,023			442,688			391,153

Losses charged to the allowance:
	Commercial		22,204			19,624			45,186			33,994
	Construction		2			1,619			3,322			2,619
	Lease financing		14,049			7,932			25,662			19,880
	Mortgage		3,694			2,087			6,205			3,587
	Consumer		26,581			26,311			52,064			50,672

			66,530			57,573			132,439			110,752

Recoveries:
	Commercial		4,578			3,953			8,210			7,778
	Construction		83			—			242			—
	Lease financing		9,523			5,769			16,002			12,734
	Mortgage		216			82			434			198
	Consumer		6,357			6,083			12,093			12,226

			20,757			15,887			36,981			32,936

Net loans charged-off (recovered):
	Commercial		17,626			15,671			36,976			26,216
	Construction		(81	)		1,619			3,080			2,619
	Lease financing		4,526			2,163			9,660			7,146
	Mortgage		3,478			2,005			5,771			3,389
	Consumer		20,224			20,228			39,971			38,446

			45,773			41,686			95,458			77,816

Balance at end of period		$	347,230		$	313,337		$	347,230		$	313,337

Ratios:
	Allowance for losses to loans		1.84	%		1.82	%		1.84	%		1.82	%
	Allowance to non-performing assets		69.11			81.90			69.11			81.90
	Allowance to non-performing loans		74.31			88.56			74.31			88.56
	Non-performing assets to loans		2.66			2.23			2.66			2.23
	Non-performing assets to total assets		1.53			1.37			1.53			1.37
	Net charge-offs to average loans		0.99			0.99			1.05			0.94
	Provision to net charge-offs		1.09x			1.19x			1.10x			1.28x
	Net charge-offs earnings coverage		3.91			3.70			3.69			3.92

Mortgage loans net charge-offs amounted to $3.5 million for the quarter ended June 30, 2002, compared with $2.0 million for the same quarter in prior year, an increase of $1.5 million or 73%, mainly as a result of the growth in the portfolio. These net charge-offs represented 0.20% of the average mortgage loan portfolio for the quarter ended June 30, 2002, compared with 0.15% in the second quarter of 2001. Mortgage loans net charge-offs reached $5.8 million for the six months ended June 30, 2002, compared with $3.4 million for the same period in 2001. Mortgage loans net charge-offs represented 0.17% of the average mortgage loan portfolio for the six months ended June 30, 2002, compared with 0.14% in the first half of 2001.

Lease financing net charge-offs increased $2.4 million for the quarter ended June 30, 2002, compared with the same period in prior year. These net charge-offs totaled $4.5 million or 2.08% of the average lease financing portfolio for the quarter ended June 30, 2002, compared with $2.2 million or 1.03% for the same period in 2001.

This increase is mostly related to higher delinquencies. Lease financing net charge-offs totaled $9.7 million for the six-month period ended June 30, 2002, representing 2.23% of the average lease financing portfolio, compared with $7.1 million or 1.71% for the same period in 2001.

Commercial and construction loans net charge-offs amounted to $17.5 million or 0.92% of the average balance of those loans for the quarter ended June 30, 2002, compared with $17.3 million or 0.93% for the same quarter last year. For the six months ended June 30, 2002 these net charge-offs reached $40.1 million, compared with $28.8 million for the same period in 2001. As a percentage of average commercial and construction loans, these net credit losses rose from 0.78% in the six-month period ended June 30, 2001 to 1.05% for the same period in the current year. This latter rise in commercial loans net charge-offs was mostly related to the growth in the commercial loan portfolio, as well as the charge-off 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 in the second quarter of a commercial loan in our Puerto Rico operations pertaining to a client who filed for bankruptcy.

Consumer loans net charge-offs for the quarters ended June 30, 2002 and 2001 totaled $20.2 million, and represented 2.62% and 2.49% of the average consumer loan portfolio at each respective date. Consumer loans net charge-offs amounted to $40.0 million for the six months ended June 30, 2002, an increase of $1.6 million from $38.4 million in the same period of 2001. They represented 2.58% and 2.35% of the average consumer loan portfolio for the six-month periods ended June 30, 2002 and 2001, respectively. The increase in consumer net charge-offs from 2001 was mostly related to higher delinquencies in the credit card portfolio.

CREDIT QUALITY

Non-performing assets consist of past-due loans that are no longer accruing interest, renegotiated loans and real estate property acquired through foreclosure. A summary of non-performing assets by loan categories and related ratios is presented in Table E.

TABLE E
Non-Performing Assets


		June 30,			December 31,			June 30,
(Dollars in thousands)		2002			2001			2001

Commercial, construction, industrial and agricultural		$	199,876		$	198,556		$	187,308
Lease financing			9,885			10,297			11,313
Mortgage			220,900			176,967			118,831
Consumer			36,609			40,946			36,370
Other real estate			35,193			31,532			28,741

	Total	$	502,463		$	458,298		$	382,563

Accruing loans past-due 90 days or more		$	24,627		$	24,613		$	22,159

Non-performing assets to loans			2.66	%		2.52	%		2.23	%
Non-performing assets to assets			1.53	%		1.49	%		1.37	%

The Corporation places 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 close-end consumer loans are placed on non-accrual status if payments are delinquent 90 days. Closed-end consumer loans are charged-off when payments are delinquent 120 days, while open-end (revolving credit) consumer loans are charged-off when payments are delinquent 180 days. Under the standard industry practice, close-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. 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 file for bankruptcy are charged-off within 60 days of receipt of notification of filing from the bankruptcy court.

At June 30, 2002, non-performing assets were $502 million or 2.66% of ending loans, compared with $383 million or 2.23% at the same date last year and $458 million or 2.52% at December 31, 2001. The increase in non-performing assets since June 30, 2001 and December 31, 2001 was mostly reflected in mortgage loans, which rose by $102 million and $44 million, from each respective date, principally as a result of the growth in the loan portfolio and higher delinquency rates. Non-performing mortgage loans were $221 million or 44% of non-performing assets and 3.10% of total mortgage loans as of June 30, 2002, compared with $119 million or 31% of non-performing assets and 2.12% of total mortgage loans as of June 30, 2001. At the end of 2001, non-performing mortgage loans were $177 million or 39% of non-performing assets and 2.72% of total mortgage loans. Historically, the Corporation has experienced a low level of losses in its mortgage portfolio, both in the U.S. mainland and Puerto Rico.

At June 30, 2002, commercial non-performing loans, including construction, reflected increases of $13 million and $1 million when compared with June 30, 2001 and December 31, 2001, respectively. Non-performing commercial and construction loans represented 2.58% of the total commercial and construction loan portfolio as of June 30, 2002, compared with 2.50% and 2.59% at June 30, 2001 and December 31, 2001, respectively. The increase since June 30, 2001 was principally due to the economic slowdown that has prevailed since mid 2001 and the growth of $242 million in the portfolio since June 30, 2001.

Non-performing consumer loans amounted to $37 million or 1.16% of consumer loans as of June 30, 2002, compared with $36 million or 1.12% as of June 30, 2001, and $41 million or 1.31% as of December 31, 2001.

Non-performing financing leases amounted to $10 million or 1.11% of the lease financing portfolio as of June 30, 2002, compared with $11 million or 1.34% as of June 30, 2001 and $10 million or 1.20% as of December 31, 2001.

Other real estate amounted to $35 million as of June 30, 2002, an increase of $6 million and $4 million compared with June 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.

At June 30, 2002, the allowance for loan losses as a percentage of non-performing loans was 74.31% compared with 88.56% at June 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, as most of its growth was realized in mortgage loans, which historically has represented a low-risk portfolio with minimal losses. Mortgage loans comprised 88% of total loan growth since June 30, 2001. The Corporation, based on historical experience and current economic conditions, does not foresee significant losses in the mortgage portfolio. Excluding non-performing mortgage loans, the total allowance for loan losses to non-performing loans was 140.94% as of June 30, 2002, compared with 133.34% and 134.76% as of June 31, 2001 and December 31, 2001, respectively.

Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation’s non-performing assets as of June 30, 2002 would have been $434 million or 2.30% of loans, and the allowance for loan losses would have been 86.99% of non-performing loans. At June 30, 2001 and December 31, 2001, adjusted non-performing assets would have been $313 million or 1.82% of loans and $389 million or 2.14% of loans, respectively, and the allowance to non-performing loans would have been 110.22% and 94.21%, respectively.

OPERATING INCOME

Operating income, excluding derivatives, securities and trading transactions, reached $136.1 million for the second quarter of 2002, increasing $12.1 million or 10%, compared with $124.0 million for the same quarter in 2001. Refer to Table F for a detail of operating income by its major categories.

TABLE F

OPERATING INCOME


			Second quarter									Year-to-date

(In thousands)			2002		2001		Change			2002		2001		Change

Service charges on deposit accounts			$	39,507	$	36,310	$	3,197		$	78,480	$	70,968	$	7,512

Other service fees:
		Credit card fees and discounts		14,624		13,689		935			29,092		27,258		1,834
		Debit card fees		10,423		9,408		1,015			20,494		18,930		1,564
		Processing fees		9,497		9,319		178			18,666		18,425		241
		Other fees		8,389		8,540		(151	)		16,220		16,025		195
		Check cashing fees		5,690		4,785		905			10,952		9,366		1,586
		Sale and administration of investment products		5,545		5,306		239			10,250		9,707		543
		Insurance fees		5,863		4,137		1,726			10,540		8,569		1,971
		Mortgage servicing fees, net of amortization		3,494		2,937		557			6,388		6,015		373
		Trust fees		2,512		2,228		284			5,122		4,748		374
		Total other service fees		66,037		60,349		5,688			127,724		119,043		8,681

Other operating income				19,331		15,691		3,640			36,042		28,864		7,178

Gain on sale of loans				11,242		11,708		(466	)		28,808		20,857		7,951

	Total operating income		$	136,117	$	124,058	$	12,059		$	271,054	$	239,732	$	31,322

Note: For purposes of this management discussion and analysis, operating income excludes securities, trading and derivative gains/losses.

Service charges on deposit accounts rose to $39.5 million for the quarter ended June 30, 2002, contributing with a rise of $3.2 million or 9% compared with $36.3 million for the same quarter in 2001. This increase was primarily the result of higher commercial account charges, and new charges implemented during mid-2001.

Other service fees rose $5.7 million or 9%, compared with $60.3 million in the second quarter of 2001. This increase was mainly due to higher insurance agency commissions and debit card, credit card and check cashing fees, which resulted from higher activity and business growth. The growth in insurance agency commissions was partly attained through the launching of new products and programs, and by capitalizing on the Corporation’s broad delivery channels and client base. The Corporation established Popular Insurance Agency, U.S.A. at the beginning of 2002, incorporated Popular Insurance V.I., Inc., and acquired an insurance agency in Puerto Rico during this quarter. The increase in debit card fees is mainly due to higher volume of transactions. Average debit card transactions processed by the Corporation’s subsidiaries in Puerto Rico increased to 9,032,000 as of June 30, 2002, from 6,570,000 a year earlier. The rise in credit card fees was due to higher charges of merchant discounts and late payment fees. Furthermore, the increase in check-cashing fees was driven by the continuous expansion of Popular Cash Express (PCE), which as of June 30, 2002, operated 110 offices, including 54 mobile units, compared with 89 offices, including 52 mobile units, at same date a year earlier.

Other operating income, including gain on sales of loans, amounted to $30.6 million for the quarter ended 2002, an increase of $3.2 million or 12% compared with the second quarter of 2001. The rise in other operating income resulted from a non-recurring gain of $3.1 million on the sale of Banco Popular North America’s (BPNA) trust operations in Chicago, Illinois and a $0.6 million gain on the sale of 15 branches of Popular Finance during this quarter. These transactions were held as part of strategic initiatives at these subsidiaries. The trust operations of BPNA had contributed approximately $1.0 million in revenues during the six-month period ended June 30, 2002.

For the six-month period ended June 30, 2002, operating income, excluding derivatives, securities and trading transactions, amounted to $271.1 million, compared with $239.7 million for the same period of 2001, an increase of $31.4 million or 13%. Service charges on deposit accounts and other service fees increased $7.5 million, or 11%, and $8.7 million, or 7%, respectively, compared with the six months ended June 30, 2001, mostly attributed to the same reasons explained above. Other operating income, including gain on sales of loans, increased by $15

million or 30% compared with the same period in 2001 due to the non-recurring gains explained above and to higher gains on the sales of mortgage loans and loans guaranteed by the Small Business Administration (SBA). Also, higher underwriting profits derived by the Corporation’s broker/dealer subsidiary and higher income recorded on the investments carried on the equity method contributed to the increase in other operating income for the period.

SECURITIES, TRADING AND DERIVATIVES GAINS/LOSSES

Gain on sales of securities during the quarter ended June 30, 2002, resulted in moderate gains of $85 thousand compared with losses of $2.2 million in the same period of 2001. Trading losses amounted to $0.4 million for the second quarter of 2002 as compared with losses of $0.8 million for the same period a year earlier. For the six-month period ended in June 30, 2002, there were losses on sale of securities of $3.9 million and trading losses of $1.4 million as compared with losses of $1.9 million and $0.6 million, respectively, for the first six months of 2001. The loss on sales of securities experienced in the first half of 2002, resulted mainly from the sale of $710 million in U.S. Agency Securities, as part of the positioning strategies followed by the Corporation in the current interest rate environment. Proceeds from these sales were reinvested at higher yields.

Derivative losses for the quarter ended June 30, 2002, amounted to $0.9 million compared with gains of $1.7 million for the same quarter in 2001. For the first six months of 2002, derivative losses amounted to $0.3 million compared with gains of $1.0 million for the same period in 2001. These losses on derivatives resulted from adjustments to the market value of the interest rate swaps and swaptions entered into by the Corporation.

OPERATING EXPENSES/INCOME TAX

For the quarter ended June 30, 2002, operating expenses totaled $250.7 million, an increase of $16.7 million or 7%, compared with $233.9 for the same quarter in 2001. For the six-month period ended June 30, 2002, operating expenses amounted to $492.8 million compared with $454.4 million for the same period of 2001, an increase of $38.4 million or 8%.

Personnel costs, the largest category of operating expenses, rose $15.8 million or 15%, from $106.7 million for the quarter ended June 30, 2001, to $122.6 million for the same period of 2002. This increase is partly due to higher salaries, resulting from merit increases and headcount, higher pension plan costs, incentives, and other costs associated with the previously mentioned strategic initiatives. As of the end of this quarter, full time equivalent employees (FTE’s) totaled 11,207, compared with 11,041 as of the end of the same period in 2001.

Excluding personnel costs, other operating expenses amounted to $128.1 million, a moderate increase of $0.9 million or 1%, compared with the same period in 2001. Contributing to this increase were higher business promotion, net occupancy, professional fees and communication expenses. The increase in business promotion was partly due to higher advertising and public relation expenses mostly associated with the launching of PREMIA, an innovative rewards program for our customers in Puerto Rico, and to programs related with the Corporation’s involvement and contributions to the community. Net occupancy expenses increased due to higher rental expenses resulting from continued business expansion, and to higher depreciation expenses and demolition costs of various buildings, in preparation for the construction of new office buildings for the relocation of various of the Corporation’s head offices and subsidiaries. Professional fees rose mainly due to higher expenses incurred for consulting services in the strategic initiatives of BPNA’s operations. Communications costs increased mainly due to higher costs related to our electronic and data network. 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 June 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. The Corporation did not have any impairment of goodwill or a cumulative effect of accounting change in connection with the adoption provisions of SFAS NO. 142. Also, offsetting the rise in operating expenses were lower sundry losses, which are included as part of other operating expenses in the statement of income.

For the six-month period ended June 30, 2002, operating expenses, excluding personnel costs, amounted to $249.9 million, compared with $242.8 million for the same period in 2001, an increase of $7.1 million or 3%. Personnel costs amounted to $242.9 million, an increase of $31.2 million or 15%, when compared with the $211.6 million

reported for the same period of 2001.The same expense categories and factors mentioned above were the principal contributors to the net increase in other operating expenses.

Income tax expense increased $5.3 million or 19%, from $27.3 million in the quarter ended June 30, 2001, to $32.6 million in the same quarter this year. The effective tax rates for these quarters were 26.07% and 25.28%, respectively. Income tax expense for the six-month period ended June 30, 2002 amounted to $62.7 million, an increase of $8.3 million or 15%, over the $54.5 million reported for the same period in 2001. The effective tax rate for the first six months of 2002 was 25.28%, compared with 26.51% a year ago.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

Upon the adoption of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” on January 1st, 2001, the Corporation recognized $0.7 million (net of tax) in income as a cumulative effect of accounting change.

During the first quarter of 2002, the Corporation adopted the provisions of SFAS No. 142 “Goodwill and Other Intangibles Assets.” As further discussed in Notes 1 and 7 to the consolidated financial statements, the Corporation did not record any cumulative effect of accounting change in connection with the adoption provisions of this statement.

BALANCE SHEET COMMENTS

The Corporation’s total assets as of June 30, 2002 reached $32.7 billion, representing an increase of $4.8 billion or 18% when compared with $27.9 billion a year earlier. At December 31, 2001, total assets were $30.7 billion. Earning assets totaled $30.6 billion at June 30, 2002, compared with $26.2 billion and $29.1 billion at June 30, 2001 and December 31, 2001, respectively.

The investment portfolio reached $10.3 billion, an increase of $2.6 billion or 34%, compared with $7.7 billion at June 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 consolidated financial statements.

Table G presents the Corporation’s loan portfolio broken down by major categories. Total loans amounted to $18.9 billion at June 30, 2002, an increase of $732 million or 4% from December 31, 2001. Mortgage loans accounted for the largest increase in the portfolio, rising $630 million since the end of 2001. The growth in the mortgage loan portfolio was principally achieved through strong sales efforts and to the impact of the low interest rate scenario, which has stimulated higher demand for these loans. Total loans rose $1.7 billion or 10% since June 30, 2001, when the portfolio reached $17.2 billion. Mortgage and commercial, including construction, loans were the principal contributors to this rise, with $1.5 billion and $242 million, respectively. The leasing portfolio also increased $45 million compared with June 30, 2001. On the other hand, consumer loans decreased by $87 million since June 30, 2001, partly due to a lower demand for personal loans, which decreased by $166 million, as a result of the declining interest rate scenario, which tends to favor the refinancing of mortgage loans and the personal debt consolidation. Also, it is due to the sale of approximately $20 million in small consumer loans, as part of the sale of 15 branches of Popular Finance, Inc. during this quarter. Subsequent to the sale, this subsidiary still operated a network of 36 branches, including mortgage centers. The decline in personal loans was compensated by higher volume of auto loans by $86 million when compared with June 30, 2001.

TABLE G

Loans Ending Balances


		June 30,		December 31,		June 30,
(Dollars in thousands)		2002		2001		2001

Commercial, industrial and agricultural		$	7,475,939	$	7,420,738	$	7,230,614
Construction			261,375		258,453		264,880
Lease financing			886,892		859,119		842,337
Mortgage *			7,127,220		6,497,459		5,617,441
Consumer			3,149,716		3,132,782		3,236,974

	Total	$	18,901,142	$	18,168,551	$	17,192,246

*	Includes loans held-for-sale

Cash and due from banks amounted to $1.1 billion at June 30, 2002, compared with $506 million at the end of 2001. The increase of $497 million is associated to funds received at the end of June 2002 from deposits in trust from governmental sources.

At June 30, 2002, total deposits amounted to $17.8 billion compared with $16.4 billion at December 31, 2001, an increase of $1.4 billion or 9%. Demand, savings and time deposits increased $732 million, $577 million and $151 million, respectively. The increase in demand deposits is partly due to deposits in trust from governmental sources used to repay government bond redemptions on July 1st 2002. The increase in savings and time deposits is associated with both, retail and commercial accounts. Brokered CDs which are included as part of time deposits, decreased by $45 million since the end of 2001. Deposits totaled $15.6 billion at June 30, 2001. The growth in the deposit base from June 30, 2001 to 2002 was reflected in all deposit categories. Savings, demand and time deposits increased $1.1 billion, $873 million and $319 million, respectively, from June 30, 2001. Brokered certificates of deposits, also included as part of time deposits, decreased $34 million since June 30, 2001.

Borrowed funds, including subordinated notes and capital securities, increased $2.6 billion, from $9.6 billion on June 30, 2001 to $12.2 billion at the end of the second quarter of 2002. Borrowed funds at December 31, 2001 were $11.6 billion. 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.

The Corporation’s stockholders’ equity at June 30, 2002 and 2001 was $2.2 billion, compared with $2.3 billion at the end of 2001. The decrease from the end of 2001 is related to the $100 million redemption of the Corporation’s preferred stock in January 2002 and the repurchase of 4,300,000 shares of the Corporation’s common stock from Banco Popular de Puerto Rico Retirement Plan in May 2002, at a cost of $139 million. These declines from December 31, 2001 were offset by earnings retention and by an increase of $41 million in unrealized gains on securities available-for-sale, net of taxes.

Dividends declared per common share for the second quarter of 2002 and 2001 were $0.20. Year-to-date dividends declared per common share amounted to $0.40 at June 30, 2002 and $0.36 at the same date in 2001. The dividend payout ratio to common stockholders for the quarter ended June 30, 2002 was 28.34%, compared with 28.86% in June 30, 2001.

The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage as of June 30, 2002 and 2001, and December 31, 2001 are presented on Table H.

TABLE H

Capital Adequacy Data


			June 30,			December 31,			June 30,
(Dollars in thousands)			2002			2001			2001

Risk-based capital Tier I capital			$	1,854,810		$	1,849,305		$	1,845,648
	Supplementary (Tier II) capital			350,724			330,213			343,388

		Total capital	$	2,205,534		$	2,179,518		$	2,189,036

Risk-weighted assets
	Balance sheet items		$	18,833,184		$	18,087,672		$	16,965,111
	Off-balance sheet items			974,916			479,691			442,958

		Total risk-weighted assets	$	19,808,100		$	18,567,363		$	17,408,069

Ratios:
	Tier I capital (minimum required - 4.00%)			9.36	%		9.96	%		10.60	%
	Total capital (minimum required - 8.00%)			11.13	%		11.74	%		12.57	%
	Leverage ratio (minimum required - 3.00%)			5.99	%		6.46	%		6.89	%

Book value per common share was $16.69 at June 30, 2002, compared with $15.93 at December 31, 2001 and $15.18 at the end of the second quarter of 2001. The Corporation’s market capitalization was $4.5 billion at June 30, 2002 and 2001, and $4.0 billion at December 31, 2001.

Popular, Inc.’s common stock had a market price at June 30, 2002 and 2001 of $33.68 and $32.94 per share, respectively. At December 31, 2001, the market price was $29.08 per share. The Corporation’s stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol BPOP.

MARKET RISK

Market risk refers to the impact of changes in interest rates on the Corporation’s net interest income, market value of equity and trading operations. It also arises from fluctuations in the value of some foreign currencies against the U.S. dollar. Despite the varied nature of market risks, the primary source of this risk at the Corporation is the impact of changes in interest rates. Depending on the duration and repricing characteristics of the Corporation’s assets, liabilities and derivatives instruments, changes in interest rates could either increase or decrease the level of net interest income. The Corporation maintains a formal asset and liability management process to quantify, monitor and control interest rate risk (IRR) and to assist management in maintaining stability in the net interest margin under varying interest rate environments.

The Corporation uses various techniques to assess the degree of interest rate risk, including simulation analysis and static gap estimates for measuring short-term IRR, and duration analysis to quantify the level of long-term IRR. These techniques focus on different aspects of the interest rate risk that is assumed at any point in time, and are therefore used jointly to make informed judgments about the risk levels and the appropriateness of strategies under consideration.

An interest rate sensitivity analysis performed at the Corporation level is the primary tool used in expressing the potential loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity analysis

is calculated on a monthly basis using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation.

Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking choices are only estimates and may be different from what actually may occur in the future.

Based on the results of the sensitivity analysis as of June 30, 2002, the change in net interest income, on a hypothetical rising rate scenario, for the next twelve months was a $1.9 million decrease and the change for the same period, utilizing a hypothetical declining rate scenario, was a decrease of $0.6 million. Both hypothetical rate scenarios consider a gradual change of 150 basis points during the twelve-month period. These estimated changes are within the policy guidelines established by the Board of Directors.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Corporation’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. Derivative instruments that are used, to a limited extent, include interest rate swaps, interest rate forwards and future contracts, interest rate swaptions, foreign exchange contracts, and interest rate caps, floors and put options embedded in interest rate contracts.

As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management. Hedging strategies are developed through analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into Popular Inc.’s overall interest rate risk management and trading strategies. These hedging strategies are managed by the Market Risk Committee, composed of members from management, and monitored by the Board’s Risk Management Committee. Refer to Note 6 to the consolidated financial statements for further information on the Corporation’s involvement in derivative instruments and hedging activities.

The Corporation’s trading activities are another source of market risk and are subject to strict guidelines approved by the Board of Directors. Most of the Corporation’s trading activities are limited to the purchase of debt securities for the purpose of selling them in the near term and positioning securities for resale to retail customers. As the trading instruments are recognized at market value, the changes resulting from fluctuations in market prices, interest rates or exchange rates directly affect reported income. In the opinion of management, the size and composition of the trading portfolio as of June 30, 2002 does not represent a potentially significant source of market risk for the Corporation. The Corporation does not participate in any trading activities involving commodity contracts.

The Corporation conducts business in 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. and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s particular foreign currency. However, management does not expect future exchange volatility between the U.S. dollar and the particular foreign currency to affect significantly the value of the Corporation’s investment in these companies.

LIQUIDITY

Liquidity refers to the ability to fund current operations, including the cash flow requirements of depositors and borrowers as well as future growth. 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 has become more geographically diverse as a result of acquisitions and expansion of the Corporation’s business. Deposits tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates.

The Corporation has established borrowing relationships with the FHLB and other correspondent banks, which further support and enhance liquidity. Wholesale or institutional sources of funds comprise 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 portfolio. Refer to Notes 3 and 4 to the consolidated financial statements for further information as to the composition of the available-for-sale and held-to-maturity investment portfolios. Liquid U.S. Treasury and Agency securities can be used to raise funds in the repo markets. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans and to a lesser 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.

Risks to Liquidity

The Corporation’s ability to compete successfully in the marketplace for deposits depends on various factors, including service, convenience and financial stability as reflected by operating results and credit ratings (by one of the nationally recognized credit rating agencies). Although a downgrade in the credit rating of the Corporation may impact its ability to raise deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured and this is expected to mitigate the effect of a downgrade in credit ratings.

Although the Corporation raises the majority of its financing from retail deposits, it still borrows a material amount of funds from institutional sources. Institutional lenders tend to be sensitive to the perceived credit risk of the entities to which they lend and this exposes the Corporation to the possibility of having its access to funding affected by how the market perceives its credit quality; this in part, may be due to factors beyond its control.

Changes in the credit rating of the Corporation or any of its subsidiaries to a level below “investment grade” may affect the Corporation’s access to the capital markets. The Corporation’s counterparties are sensitive to the risk of a rating downgrade. In the event of a downgrade, it may be expected that the cost of borrowing funds in the institutional market would increase. In addition, the ability of the Corporation to raise new funds or renew maturing debt may be more difficult. Management does not anticipate changes in the credit ratings of the Corporation based on its expected outlook for the P.R. / U.S. economy, interest rates and expected financial results of the Corporation.

In the course of borrowing from institutional lenders, the Corporation has entered into contractual agreements to maintain certain levels of debt, capital and non-performing loans, among other financial covenants. If the Corporation were to fail to comply with those agreements, it may incur in an event of default. Such failure may accelerate the repayment of the related borrowings. It could also affect the ability of the Corporation to raise new funds or renew maturing borrowings. The Corporation is currently in full compliance with all financial covenants in effect and expects to remain so in the future.

The Corporation’s non-banking subsidiaries may be subject to a higher degree of liquidity risk than the banking subsidiaries, due to the latter’s access to federally-insured deposits. A higher proportion of the funding of the non-banking subsidiaries is from institutional sources, as compared to the banking subsidiaries, and these are more sensitive to the perceived credit risk of the Corporation than providers of deposits. In the event of a downgrade in the credit ratings of the Corporation, the non-banking subsidiaries may experience an increase in their cost of

funds and reduced availability of financing. Management does not anticipate such a scenario developing in the foreseeable future.

The importance of the Puerto Rico market for the Corporation is an additional risk factor that could affect its financing activities. In the case of an extended economic slowdown in Puerto Rico, the credit quality of the Corporation could be affected as a result of higher credit costs and possible decreases in profitability. The substantial integration of Puerto Rico with the U.S. economy should limit the probability of a prolonged recession in Puerto Rico and the resulting risks to the Corporation.

OFF-BALANCE SHEET ACTIVITIES

In past years, 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 has transferred the assets 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 June 30, 2002, these trusts held approximately $295 million in assets in the form of mortgage loans. Liabilities in the form of debt principal due to investors approximated $292 million at the end of the second quarter of 2002. In these securitizations, the Corporation retained servicing responsibilities and certain subordinated interest in the form of interest-only securities. The investors and the securitization trusts have no recourse to the Corporation’s assets. The servicing rights and the interest-only securities retained by the Corporation are recorded in the statement of condition at the lower of amortized cost or market, and fair value, respectively.

Part II — Other Information

Item 1. Legal Proceedings

The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the financial position and results of operations of the Corporation.

BPPR has been cooperating fully with an investigation by federal law enforcement authorities. The investigation relates principally to the circumstances surrounding the activities of a former customer of BPPR, including BPPR reporting and compliance efforts. The former customer has been indicted for money laundering, including in connection with transactions through an account at BPPR. BPPR believes based on the information available to it that there was no knowing participation by BPPR or any BPPR employee in the former customer’s activities. The law enforcement investigation could result in adverse consequences to the Corporation and BPPR including the possibility of civil and criminal claims being brought against BPPR. The Corporation cannot predict when or on what basis the investigation will conclude or its effects, if any, on the Corporation or BPPR.

Item 4. Submission of Matters to a Vote of Security Holders

The Corporation held its Annual Stockholder’s Meeting on April 30, 2002, at which common stockholders elected the following three directors: David H. Chafey Jr., Antonio Luis Ferré and Félix J. Serrallés Jr.

All three directors were elected for a three-year term with favorable votes ranging from 83.03% to 83.53% of the voting shares issued and outstanding which amounted to 136,475,530 as of the record date, March 11, 2002. Also, PricewaterhouseCoopers LLP was ratified as the independent public accountants of the Corporation for the year 2002. A 86.23% of the common shares issued an outstanding as of the mentioned record date, were represented at the meeting, which complied with the quorum required by law.

Item 5. Other Information

Election to become a Financial Holding Company

Under the Gramm-Leach-Bliley Act, bank holding companies, whose depository institution subsidiaries are “well

capitalized” as defined under the Federal Deposit Insurance Act and “well managed” as defined under Regulation Y under the Bank Holding Company Act and which obtain at least a “satisfactory” rating under the Community Reinvestment Act, have the ability to declare themselves to be financial holding companies and engage in a broader range of activities than those traditionally permissible for U.S. bank holding companies. Popular, Inc.’s declaration to become a financial holding company became effective on April 30, 2002.

As a financial holding company, Popular, Inc. may engage in activities that are “financial in nature,” as well as additional activities that the Federal Reserve Board, in coordination with the Secretary of the Treasury, determines are incidental or complementary to financial activities, generally without Federal Reserve Board approval. Under the Gramm-Leach-Bliley Act, activities that are financial in nature include insurance, securities underwriting and dealing, merchant banking, and lending activities.

General

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


Dated:		April 10, 2002

Items reported:		Item 5 — Other Events

Dated:		May 16, 2002

Items reported:		Item 5 — Other Events

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be filed on its behalf by the undersigned thereunto duly authorized.


			POPULAR, INC. (Registrant)



Date:	August 14, 2002	By:	S/ Jorge A. Junquera Jorge A. Junquerav Senior Executive Vice President



Date:	August 14, 2002	By:	S/ Amílcar L. Jordán Amílcar L. Jordán, Esq. Senior Vice President & Comptroller

			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.