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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2003 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 Munoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico 00918
----------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (787) 765-9800
Not Applicable
- --------------------------------------------------------------------------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 132,650,737
---------------------------- ---------------------------------------
(Title of Class) (Shares Outstanding as of May 14, 2003)
POPULAR, INC.
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of March 31, 2003,
December 31, 2002 and March 31, 2002 3
Unaudited Consolidated Statements of Income for the quarters ended
March 31, 2003 and 2002 4
Unaudited Consolidated Statements of Comprehensive Income for
the quarters ended March 31, 2003 and 2002 5
Unaudited Consolidated Statements of Cash Flows for the quarters ended
March 31, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 7-25
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 26-39
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
Item 4. Controls and Procedures 42
Part II - Other Information
Item 1. Legal Proceedings 42
Item 2. Changes in Securities and Use of Proceeds 43
Item 3. Defaults upon Senior Securities - None N/A
Item 4. Submission of Matters to a Vote of Security Holders - None N/A
Item 5. Other Information 43
Item 6. Exhibits and Reports on Form 8-K 43
--- Signatures 45
Certifications 46-47
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 and foreign currency exchange
rate changes. Moreover, the outcome of litigation, as discussed in "Part II,
Item I. Legal Proceedings," is inherently uncertain and depends on judicial
interpretations of law and the findings of judges and juries.
2
ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
(In thousands, except share information) MARCH 31, December 31, March 31,
2003 2002 2002
------------- ------------- -------------
ASSETS
Cash and due from banks $ 689,090 $ 652,556 $ 383,927
------------- ------------- -------------
Money market investments:
Federal funds sold and securities purchased under agreements to resell 1,004,353 1,091,435 716,123
Time deposits with other banks 4,056 3,057 3,056
Bankers' acceptances 51 154 409
------------- ------------- -------------
1,008,460 1,094,646 719,588
------------- ------------- -------------
Investment securities available-for-sale, at market value:
Pledged securities with creditors' right to repledge 4,366,111 4,397,974 3,339,022
Other investment securities available-for-sale 5,766,363 6,133,929 6,062,136
Investment securities held-to-maturity, at amortized cost 179,737 180,751 202,022
Trading account securities, at market value:
Pledged securities with creditors' right to repledge 464,278 416,979 225,978
Other trading securities 116,723 93,367 73,437
Loans held-for-sale, at lower of cost or market 317,041 1,092,927 900,461
------------- ------------- -------------
Loans:
Loans pledged with creditors' right to repledge 373,034 420,724 233,442
Other loans 19,446,487 18,355,123 17,442,558
Less - Unearned income 274,680 286,655 319,537
Allowance for loan losses 383,517 372,797 341,744
------------- ------------- -------------
19,161,324 18,116,395 17,014,719
------------- ------------- -------------
Premises and equipment 471,777 461,177 404,842
Other real estate 45,759 39,399 34,550
Accrued income receivable 202,491 184,549 191,118
Other assets 689,449 578,091 549,324
Goodwill 184,068 182,965 178,501
Other intangible assets 32,620 34,647 37,741
------------- ------------- -------------
$ 33,695,291 $ 33,660,352 $ 30,317,366
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,453,971 $ 3,367,385 $ 3,100,625
Interest bearing 14,183,876 14,247,355 13,423,529
------------- ------------- -------------
17,637,847 17,614,740 16,524,154
Federal funds purchased and securities sold under agreements to repurchase 6,642,379 6,684,551 4,564,815
Other short-term borrowings 1,296,394 1,703,562 2,252,679
Notes payable 4,566,492 4,298,853 3,996,616
Other liabilities 609,343 677,605 524,350
------------- ------------- -------------
30,752,455 30,979,311 27,862,614
------------- ------------- -------------
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 144,000 144,000 144,000
------------- ------------- -------------
Commitments and contingencies (See Note 8)
------------- ------------- -------------
Minority interest in consolidated subsidiaries 1,240 1,162 925
------------- ------------- -------------
Stockholders' equity:
Preferred stock, $25 liquidation value; 10,000,000 shares
authorized (7,475,000 issued and outstanding at March 31, 2003) 186,875 -- --
Common stock, $6 par value; 180,000,000 shares authorized;
139,254,639 shares issued (December 31, 2002 - 139,133,156;
March 31, 2002 - 138,853,580) and 132,552,289 shares outstanding
(December 31, 2002 - 132,439,047; March 31, 2002 - 136,459,471) 835,528 834,799 833,121
Surplus 277,649 278,366 270,766
Retained earnings 1,372,061 1,300,437 1,116,963
Treasury stock - at cost, 6,702,350 shares (December 31, 2002 - 6,694,109;
March 31, 2002 - 2,394,109) (205,527) (205,210) (66,363)
Accumulated other comprehensive income, net of tax of $53,785
(December 31, 2002 - $53,070; March 31, 2002 - $17,197) 206,010 202,487 30,340
------------- ------------- -------------
2,672,596 2,410,879 2,184,827
------------- ------------- -------------
$ 33,695,291 $ 33,660,352 $ 30,317,366
============= ============= =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarters ended
March 31,
(Dollars in thousands, except per share information) ----------------------
2003 2002
--------- ---------
INTEREST INCOME:
Loans $ 377,933 $ 372,221
Money market investments 7,363 7,785
Investment securities 109,801 112,311
Trading account securities 8,185 3,502
--------- ---------
503,282 495,819
--------- ---------
INTEREST EXPENSE:
Deposits 94,195 112,931
Short-term borrowings 40,789 44,443
Long-term debt 58,537 53,030
--------- ---------
193,521 210,404
--------- ---------
Net interest income 309,761 285,415
Provision for loan losses 48,209 54,454
--------- ---------
Net interest income after provision for loan losses 261,552 230,961
Service charges on deposit accounts 39,839 38,973
Other service fees 66,426 61,687
Gain (loss) on sale of securities 1,414 (4,010)
Trading account loss (937) (1,030)
Derivatives (losses) gains (10,655) 511
Gain on sales of loans 19,516 17,943
Other operating income 16,557 16,334
--------- ---------
393,712 361,369
--------- ---------
OPERATING EXPENSES:
Personnel costs:
Salaries 96,036 88,561
Profit sharing 6,245 4,940
Pension and other benefits 30,068 26,801
--------- ---------
132,349 120,302
Net occupancy expenses 20,460 19,030
Equipment expenses 26,350 24,765
Other taxes 9,552 9,549
Professional fees 18,776 17,507
Communications 14,697 13,273
Business promotion 15,970 13,367
Printing and supplies 4,743 4,509
Other operating expenses 18,718 17,321
Amortization of intangibles 2,027 2,543
--------- ---------
263,642 242,166
--------- ---------
Income before income tax and minority interest 130,070 119,203
Income tax 30,903 30,148
Net gain of minority interest (78) (11)
--------- ---------
NET INCOME $ 99,089 $ 89,044
========= =========
NET INCOME APPLICABLE TO COMMON STOCK $ 98,140 $ 86,534
========= =========
EARNINGS PER COMMON SHARE (BASIC AND DILUTED) $ 0.74 $ 0.63
========= =========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ 0.20
========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Quarters ended
March 31,
(In thousands) ----------------------
2003 2002
--------- ---------
Net Income $ 99,089 $ 89,044
--------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (7,789) (137)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the
period, net of tax of $1,678 (2002 - ($11,663)) 12,811 (51,124)
Less: reclassification adjustment for gains (losses)
included in net income, net of tax of $539
(2002 - ($1,562)) 875 (2,447)
Net loss on cash flow hedges (2,302) (1,128)
Less: reclassification adjustment for losses included
in net income, net of tax of ($1,059) (2002 - ($63)) (1,678) (100)
Cumulative effect of accounting change -- --
Less: reclassification adjustment for gains included
in net income -- 6
--------- ---------
Total other comprehensive income (loss), net of tax $ 3,523 ($ 49,848)
--------- ---------
Comprehensive income $ 102,612 $ 39,196
========= =========
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME:
(In thousands) MARCH 31, December 31, March 31,
2003 2002 2002
--------- ------------ ---------
Foreign currency translation adjustment ($ 10,025) ($ 2,236) ($ 1,593)
Unrealized gains on securities 219,561 207,625 32,499
Unrealized losses on derivatives (3,910) (3,286) (950)
Cumulative effect of accounting change 384 384 384
--------- --------- ---------
Accumulated other comprehensive income $ 206,010 $ 202,487 $ 30,340
========= ========= =========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the quarters ended
March 31,
(In thousands) --------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 99,089 $ 89,044
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 18,726 19,208
Provision for loan losses 48,209 54,454
Amortization of intangibles 2,027 2,543
Net (gain) loss on sales of investment securities (1,414) 4,010
Net loss (gain) on derivatives 10,655 (511)
Net loss (gain) on disposition of premises and equipment 397 (11)
Net gain on sales of loans, excluding loans held-for-sale (8,566) (2,826)
Net amortization of premiums and accretion of discounts 5,071 4,309
on investments
Net amortization of deferred loan fees and costs 9,402 4,556
Stock options expense 727 --
Net decrease in loans held-for-sale 138,281 39,027
Net increase in trading securities (119,365) (29,229)
Net increase in accrued income receivable (17,942) (4,975)
Net increase in other assets 183 (29,473)
Net decrease in interest payable (12,945) (9,834)
Net increase in deferred and current taxes 9,440 11,936
Net increase in postretirement benefit obligation 2,477 1,494
Net (decrease) increase in other liabilities (48,643) 9,166
----------- -----------
Total adjustments (47,680) 73,844
----------- -----------
Net cash provided by operating activities 51,409 162,888
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments 86,186 104,202
Purchases of investment securities held-to-maturity (140,522) (132,401)
Maturities of investment securities held-to-maturity 141,628 524,322
Purchases of investment securities available-for-sale (1,433,982) (2,113,882)
Maturities of investment securities available-for-sale 1,720,429 1,111,094
Proceeds from sales of investment securities available-for-sale 38,083 809,302
Net disbursements on loans (266,668) (209,788)
Proceeds from sales of loans 279,750 221,705
Acquisition of loan portfolios (495,712) (210,395)
Acquisition of premises and equipment (29,943) (19,837)
Proceeds from sales of premises and equipment 220 1,504
----------- -----------
Net cash (used in) provided by investing activities (16,131) 85,826
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 24,554 161,347
Net decrease in federal funds purchased and securities
sold under agreements to repurchase (42,172) (1,186,952)
Net (decrease) increase in other short-term borrowings (407,168) 425,437
Net proceeds from notes payable and capital securities 267,639 256,405
Dividends paid (27,440) (27,785)
Proceeds from issuance of common stock 3,916 2,846
Proceeds from issuance of preferred stock 182,244 --
Redemption of preferred stock -- (102,000)
Treasury stock acquired (317) (227)
----------- -----------
Net cash provided by (used in) financing activities 1,256 (470,929)
----------- -----------
Net increase (decrease) in cash and due from banks 36,534 (222,215)
Cash and due from banks at beginning of period 652,556 606,142
----------- -----------
Cash and due from banks at end of period $ 689,090 $ 383,927
=========== ===========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share information)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Popular, Inc. (the Corporation) is a financial holding company offering a full
range of financial products and services to consumer and corporate customers
through its offices in Puerto Rico, the United States, the Caribbean, including
the U.S. and British Virgin Islands, and Central America. The Corporation's
subsidiaries are engaged in the following businesses: commercial banking, auto
loans and lease financing, mortgage and consumer lending, broker/dealer
activities, retail financial services, insurance agency services and information
technology, ATM and data processing services through its subsidiaries in Puerto
Rico, the United States, the Caribbean and Central America. Note 14 to the
unaudited consolidated financial statements presents further information about
the Corporation's business segments.
The unaudited consolidated financial statements include the accounts of Popular,
Inc. and its subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation. These statements are, in the opinion of management,
a fair statement of the results for the periods presented. These results are
unaudited, but include all necessary adjustments, of a normal recurring nature,
for a fair statement of such results. Certain minor reclassifications have been
made to the prior period consolidated financial statements to conform with the
2003 presentation.
NOTE 2 - ACCOUNTING CHANGES
FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
FASB's Interpretation No. 45 (FIN No. 45) requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The provisions for initial recognition are
effective for guarantees that are issued or modified after December 31, 2002.
The adoption of FIN No. 45 did not have a material impact on the Corporation's
financial position and results of operations for the quarter ended March 31,
2003. Refer to Note 8 to the unaudited consolidated financial statements for
further information.
FIN No. 46 "Consolidation of Variable Interest Entities"
FASB's Interpretation No. 46 (FIN No. 46) expands upon and strengthens existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN No.
46 requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN No. 46 apply to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. The adoption of this Interpretation did not have
a significant impact on the Corporation's financial position or results of
operations.
SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities"
SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an underlying to
conform it to language used in FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", and (4) amends certain
7
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003, with
certain exceptions, and for hedging relationships designated after June 30,
2003. In addition, except for certain situations, all provisions of this
Statement should be applied prospectively. Also, the provisions related to
forward purchases or sales of when-issued securities or other securities that do
not yet exist, should be applied to both existing contracts and new contracts
entered into after June 30, 2003. Management is currently evaluating the impact
that SFAS No. 149 may have on the Corporation's financial condition or results
of operations.
NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost, gross unrealized gains and losses, approximate market value
(or fair value for certain investment securities where no market quotations are
available), and contractual maturities of investment securities
available-for-sale as of March 31, 2003, December 31, 2002 and March 31, 2002
were as follows:
AS OF MARCH 31, 2003
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. Treasury securities (average maturity of 3 months) $ 354,931 $ 1,783 -- $ 356,714
Obligations of other U.S. Government agencies and
corporations (average maturity of 5 years and
9 months) 6,070,056 121,168 $ 244 6,190,980
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 7 years and
10 months) 82,541 5,081 2 87,620
Collateralized mortgage obligations (average maturity of
21 years and 1 month) 2,008,239 9,340 1,534 2,016,045
Mortgage-backed securities (average maturity of 21
years and 7 months) 992,061 37,850 49 1,029,862
Equity securities (without contractual maturity) 247,162 101,371 22 348,511
Others (average maturity of 14 years and 11 months) 101,415 1,330 3 102,742
----------- ----------- ----------- -----------
$ 9,856,405 $ 277,923 $ 1,854 $10,132,474
=========== =========== =========== ===========
AS OF DECEMBER 31, 2002
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. Treasury securities (average maturity of 6 months) $ 354,957 $ 5,262 -- $ 360,219
Obligations of other U.S. Government agencies and
corporations (average maturity of 5 years and
4 months) 6,192,871 125,675 $ 388 6,318,158
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 7 years and
10 months) 79,004 4,915 14 83,905
Collateralized mortgage obligations (average maturity of
20 years and 6 months) 2,172,117 11,964 272 2,183,809
Mortgage-backed securities (average maturity of
23 years and 5 months) 1,094,276 36,556 156 1,130,676
Equity securities (without contractual maturity) 263,342 77,677 22 340,997
Others (average maturity of 16 years and 8 months) 112,342 1,800 3 114,139
----------- ----------- ----------- -----------
$10,268,909 $ 263,849 $ 855 $10,531,903
=========== =========== =========== ===========
8
AS OF MARCH 31, 2002
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. Treasury securities (average maturity of 9 months) $ 560,091 $ 11,706 $ 13 $ 571,784
Obligations of other U.S. Government agencies and
corporations (average maturity of 4 years and
8 months) 5,070,786 28,385 66,048 5,033,123
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 8 years and
8 months) 96,806 3,477 188 100,095
Collateralized mortgage obligations (average maturity
of 20 years and 5 months) 2,449,183 12,097 7,392 2,453,888
Mortgage-backed securities (average maturity of 22
years and 5 months) 826,041 9,167 6,706 828,502
Equity securities (without contractual maturity) 258,313 55,705 14 314,004
Others (average maturity of 17 years and 9 months) 97,591 2,175 4 99,762
---------- ---------- ---------- ----------
$9,358,811 $ 122,712 $ 80,365 $9,401,158
========== ========== ========== ==========
Securities not due on a single contractual maturity date, such as
mortgage-backed securities and collateralized mortgage obligations, are
classified in the period of final maturity.
The expected maturities of collateralized mortgage obligations, mortgage-backed
securities and certain other securities may differ from their contractual
maturities because they may be subject to prepayments or callable features.
Stock that is owned by the Corporation to comply with regulatory requirements,
such as Federal Reserve Bank and Federal Home Loan Bank stock, is included as
equity securities available-for-sale, at cost.
NOTE 4 - INVESTMENT SECURITIES HELD-TO-MATURITY
The amortized cost, gross unrealized gains and losses, approximate market value
(or fair value for certain investment securities where no market quotations are
available), and contractual maturities of investment securities held-to-maturity
as of March 31, 2003, December 31, 2002 and March 31, 2002 were as follows:
AS OF MARCH 31, 2003
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
----------- ----------- ----------- -----------
Obligations of other U.S. Government agencies and
corporations (average maturity of 1 month) $ 37,996 -- -- $ 37,996
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 11 years and 2
months) 69,809 $ 344 $ 836 69,317
Collateralized mortgage obligations (average maturity of 21
years and 5 months) 1,073 -- 107 966
Others (average maturity of 3 years and 11 months) 70,859 351 45 71,165
-------- -------- -------- --------
$179,737 $ 695 $ 988 $179,444
======== ======== ======== ========
9
AS OF DECEMBER 31, 2002
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
----------- ----------- ----------- -----------
Obligations of other U.S. Government agencies and
corporations (average maturity of 1 month) $ 28,618 $ 4 -- $ 28,622
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 10 years and 1 month) 80,174 933 $ 186 80,921
Collateralized mortgage obligations (average maturity
of 21 years and 7 months) 1,126 -- 112 1,014
Others (average maturity of 2 years and 9 months) 70,833 793 -- 71,626
-------- -------- -------- --------
$180,751 $ 1,730 $ 298 $182,183
======== ======== ======== ========
AS OF MARCH 31, 2002
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
----------- ----------- ----------- -----------
Obligations of other U.S. Government agencies and
corporations (average maturity of 1 month) $ 19,902 -- $ 4 $ 19,898
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 9 years and
10 months) 99,144 $ 2,049 34 101,159
Collateralized mortgage obligations (average maturity of
22 years and 5 months) 1,354 -- 82 1,272
Others (average maturity of 3 years) 81,622 639 291 81,970
-------- -------- -------- --------
$202,022 $ 2,688 $ 411 $204,299
======== ======== ======== ========
Securities not due on a single contractual maturity date, such as
mortgage-backed securities and collateralized mortgage obligations, are
classified in the period of final maturity.
The expected maturities of collateralized mortgage obligations, mortgage-backed
securities and certain other securities may differ from their contractual
maturities because they may be subject to prepayments or callable features.
NOTE 5 - PLEDGED ASSETS
Securities and loans were pledged to secure public and trust deposits,
securities sold under agreements to repurchase, other borrowings and credit
facilities available. The classification and carrying amount of the
Corporation's pledged assets, which the secured parties are not permitted to
sell or repledge the collateral, were as follows:
MARCH 31, December 31, March 31,
(In thousands) 2003 2002 2002
---------- ---------- ----------
Investment securities available-for-sale $2,264,548 $2,046,100 $1,939,364
Investment securities held-to-maturity 2,309 3,278 4,215
Loans 3,829,097 3,402,042 2,347,455
---------- ---------- ----------
$6,095,954 $5,451,420 $4,291,034
========== ========== ==========
Pledged securities and loans that the creditor has the right by custom or
contract to repledge are presented separately in the consolidated statements of
condition.
10
NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In managing its market risk the Corporation enters, to a limited extent, into
certain derivatives primarily interest rate swaps, interest rate forwards and
future contracts, interest rate caps, swaptions, foreign exchange contracts and
interest-rate caps, floors and options embedded in financial contracts.
Futures and forwards are contracts for the delayed delivery of securities in
which the seller agrees to deliver on a specified future date, a specified
instrument, at a specified price or yield. The Corporation's use of these
contracts qualifies for cash flow hedge accounting in accordance with SFAS No.
133, as amended, and therefore changes in the fair value of the derivative are
recorded in other comprehensive income. As of March 31, 2003 the total amount
(net of tax) included in accumulated other comprehensive income pertaining to
forward contracts was an unrealized loss of $367. These contracts have a maximum
maturity of 49 days. As of March 31, 2002, the total amount (net of tax)
included in accumulated other comprehensive income pertaining to forward
contracts was an unrealized loss of $379.
The Corporation purchased interest rate caps as part of securitization
transactions in order to limit the interest rate payable to the security
holders. The Corporation's use of these contracts qualifies for cash flow hedge
accounting in accordance with SFAS No. 133, as amended. As of March 31, 2003,
the fair market value of these interest rate caps was $2,140 included in other
assets and the amount included in accumulated other comprehensive income was a
loss of $3,362. These contracts have a maximum maturity of 6.8 years. As part of
these contracts, during the first quarter of 2003 the Corporation reclassified a
loss of $414 from other comprehensive income into earnings related to the
ineffective portion of changes in fair value of the cash flow hedge and $440
pertaining to the caplets expiration, as referred to in DIG G20, both amounts
are included as an increase to interest expense. Assuming no change in interest
rates, $1,920 net of tax, of accumulated other comprehensive loss is expected to
be reclassified to earnings over the next twelve months as contractual payments
are made. As of March 31, 2002, the fair market value of these interest rate
caps included in other assets was $3,370, and the amount included in accumulated
other comprehensive income was a loss of $571.
During the last quarter of 2002, the Corporation entered into a $25,000 notional
amount interest rate swap to convert floating rate debt to fixed rate debt in
order to fix the cost of short-term borrowings. This contract qualified for cash
flow hedge accounting in accordance with SFAS No. 133, as amended. As of March
31, 2003, the fair market value of the interest rate swap included in other
liabilities was a loss of $390, and the amount included in accumulated other
comprehensive income was a loss of $181. This contract matures on October 17,
2005.
For cash flow hedges, gains and losses on derivative contracts that are
reclassified from accumulated other comprehensive income to current-period
earnings are included in the line item in which the hedged item is recorded and
in the same period in which the forecasted transaction affects earnings.
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 & Poor's 500 index through an embedded option, which has been
bifurcated from the host contract, and in accordance with SFAS No. 133, as
amended, does not qualify for hedge accounting. As of March 31, 2003, the
Corporation had a derivative liability of $15,812 representing the fair value of
the swaptions, which is included in other liabilities. Also, a derivative
liability of $968 which is the fair value of the embedded option and a discount
on the certificates of deposit of $13,920 are included in deposits and the
changes in the value of these derivatives are recorded in the Statement of
Income. As of March 31, 2002, the Corporation had recognized a derivative asset
of $5,901 based on the fair value of the swaptions and a derivative liability of
$7,586 based on the fair value of the bifurcated option; these amounts are
included in other assets and deposits, respectively.
The Corporation uses interest rate swaps to convert floating rate debt to fixed
rate debt in order to fix the future cost of the portfolio of short-term
borrowings. The specific term and notional amounts of the swaps are determined
based on management's assessment of future interest rates, as well as other
factors. These swaps do not qualify as hedges in accordance with SFAS No. 133,
as amended, and therefore changes in fair value of the derivatives are recorded
in the statement of income. For the quarters ended March 31, 2003 and March 31,
2002, the Corporation recognized a loss of $10,655 and a gain of $511,
respectively, as a result of the changes in fair value of the non-hedging
derivatives.
11
The interest-rate caps and floors embedded in the interest bearing contracts are
clearly and closely related to the economic characteristics of the contracts and
therefore, as stated in SFAS No. 133, are not bifurcated from the host
contracts.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142 requires that goodwill and other indefinite-life intangible assets
be tested for impairment at least annually using a two-step process at each
reporting unit level. The 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.
The changes in the carrying amount of goodwill for the three months ended March
31, 2003, are as follows:
Mortgage Auto and
Commercial and Consumer Lease
(In thousands) Banking Lending Financing Other Total
---------- ------------ --------- -------- --------
Balance as of January 1, 2003 $110,482 $ 11,247 $ 6,727 $ 54,509 $182,965
Goodwill acquired during the period -- 990 -- 113 1,103
Goodwill written-off during the period -- -- -- -- --
-------- -------- -------- -------- --------
Balance as of March 31, 2003 $110,482 $ 12,237 $ 6,727 $ 54,622 $184,068
======== ======== ======== ======== ========
As of March 31, 2003, December 31, 2002 and March 31, 2002, goodwill totaled
$184,068, $182,965 and $178,501, respectively. The Corporation has no other
intangible assets not subject to amortization.
The following table reflects the components of other intangible assets subject
to amortization as of March 31, 2003, December 31, 2002 and March 31, 2002:
MARCH 31, 2003 December 31, 2002 March 31, 2002
----------------------- ------------------------ -----------------------
GROSS ACCUMULATED Gross Accumulated Gross Accumulated
(In thousands) AMOUNT AMORTIZATION Amount Amortization Amount Amortization
------- ------------ ------- ------------ ------- ------------
Core Deposits $87,739 $58,197 $87,739 $56,263 $87,739 $50,361
Credit-based customer
relationships -- -- -- -- 7,946 7,704
Other customer
relationships 2,886 192 2,886 120 -- --
Other intangibles 509 125 509 104 202 81
------- ------- ------- ------- ------- -------
Total $91,134 $58,514 $91,134 $56,487 $95,887 $58,146
======= ======= ======= ======= ======= =======
During the quarter ended March 31, 2003, the Corporation recognized $2,027 in
amortization expense related to other intangible assets with definite lives
(March 31, 2002 - $2,543).
Certain credit-based customer relationships were fully amortized during the
quarter ended June 30, 2002, and as such, their gross amount and accumulated
amortization were excluded in that quarter from the accounting records and the
tabular disclosure presented above.
The following table presents the estimated aggregate amortization expense of the
intangible assets with definite lives that the Corporation has as of March 31,
2003, for each of the following fiscal years:
12
(In thousands)
2003 $7,836
2004 7,145
2005 5,543
2006 5,394
2007 3,693
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 commercial letters of credit and
stand-by letters of credit outstanding, which contract amounts at March 31, 2003
were $28,536 and $139,551, respectively (March 31, 2002 - $13,651 and $78,087;
December 31, 2002 - $19,564 and $126,383). There are also other commitments
outstanding and contingent liabilities, such as commitments to extend credit,
which are not reflected in the accompanying financial statements.
In accordance with the recognition provisions of FIN No. 45, during the first
quarter of 2003, the Corporation recorded a liability of $300, which represents
the fair value of the obligations undertaken in issuing the guarantees under the
stand-by letters of credit issued or modified after December 31, 2002. This
liability was included as part of "other liabilities" in the Statement of
Condition. The stand-by letters of credit were issued to guarantee the
performance of various customers to third parties. The contract amounts in
stand-by letters of credit outstanding as of March 31, 2003 and 2002, and
December 31, 2002 represent the maximum potential amount of future payments the
Corporation could be required to make under the guarantees in the event of
nonperformance by the customers. These stand-by letters of credit are used by
the customer as a credit enhancement and typically expire without being drawn
upon, normally within a year. The Corporation's stand-by letters of credit are
secured and in the event of nonperformance by the customers, the Corporation has
rights to the underlying collateral provided, which normally includes cash and
marketable securities, real estate, receivables and others.
As of March 31, 2003, the Corporation has two outstanding commitments to
purchase mortgage loans from other institutions. In 2002, the Corporation
entered into a commitment to purchase $100,000 of mortgage loans with the option
of purchasing $75,000 in additional loans. The commitment expires on June 30,
2004. As of March 31, 2003, $25,000 in loans had been purchased under this
agreement. The other commitment, entered into by the Corporation during the
first quarter of 2003, provides for the purchase of $150,000 of mortgage loans
with the option of purchasing $50,000 in additional loans. This commitment
expires on September 30, 2004. As of March 31, 2003, $50,000 in loans had been
purchased under this agreement.
The Corporation fully and unconditionally guarantees certain borrowing
obligations issued by certain of the Corporation's wholly-owned subsidiaries
approximating $3,491,505 at March 31, 2003 (December 31, 2002 - $3,382,800).
The Corporation is a defendant in a number of legal proceedings arising in the
normal course of business. Based on the opinion of legal counsel, management
believes that the final disposition of these matters will not have a material
adverse effect on the Corporation's financial position or results of operations.
Refer to Item 1- Legal Proceedings in Part II - Other Information in this Form
10-Q for further information.
NOTE 9 - STOCK OPTION PLAN
In September 2002, the Corporation opted to use the fair value method for
recording stock options as described in SFAS No. 123 "Accounting for Stock-Based
Compensation." During the quarter ended March 31, 2003, the Corporation
recognized $727 in stock option expense.
13
The following table summarizes information about stock options outstanding at
March 31, 2003:
(Not in thousands)
Weighted Average Weighted- Average Weighted Average
Exercise Price Options Exercise Price of Remaining Life of Options Exercise Price of
Range per Share Outstanding Options Outstanding Options Outstanding Exercisable Options Exercisable
--------------- ----------- ------------------- ------------------- ----------- -------------------
$28.78 - $35.65 892,049 $31.38 9.42 years 149,955 $29.97
The following table summarizes the stock option activity and related
information:
Options Weighted Average
(Not in thousands) Outstanding Exercise Price
- ------------------ ----------- ----------------
Outstanding at January 1, 2002 26,416 $ 31.39
Granted 423,647 29.11
Exercised (199) 32.60
Forfeited (4,789) 28.84
------- ---------
Outstanding at December 31, 2002 445,075 29.25
Granted 451,029 33.46
Exercised -- --
Forfeited (4,055) 28.84
------- ---------
Outstanding at March 31, 2003 892,049 $ 31.38
======= =========
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 2003 were the following: an expected dividend yield
of 2.42% (2002 - 2.16%), an average expected life of options of 10 years (2002 -
10 years), an expected volatility of 24.02% (2002- 26.48%) and a risk-free
interest rate of 3.76% (2002 - 4.91%). The weighted average fair value of
options granted during 2003 was $9.01 per option (2002 - $9.80).
NOTE 10 - SUBORDINATED NOTES AND PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH
AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
GUARANTEED BY THE CORPORATION
Subordinated notes of $125,000 consist of notes issued by the Corporation on
December 12, 1995, maturing on December 15, 2005, with interest payable
semi-annually at 6.75%.
On February 5, 1997, BanPonce Trust I, a statutory business trust created under
the laws of the State of Delaware that is wholly-owned by Popular North America,
Inc. (PNA) and indirectly wholly-owned by the Corporation, sold to institutional
investors $150,000 of BanPonce Trust I's 8.327% Capital Securities Series A
(liquidation amount one thousand dollars per Capital Security) through certain
underwriters. The proceeds of the issuance, together with the proceeds of the
purchase by PNA of $4,640 of BanPonce Trust I's 8.327% common securities
(liquidation amount one thousand dollars 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 March 31, 2003, the Corporation had reacquired $6,000 of the capital
securities. BanPonce Trust I is a 100% owned finance subsidiary of the
Corporation. The capital securities qualify as Tier 1 capital, are fully and
unconditionally guaranteed by the Corporation, and are presented in the
Consolidated Statements of Condition as "Preferred Beneficial Interests in
Popular North America's Junior Subordinated Deferrable Interest Debentures
Guaranteed by the Corporation." The obligations of PNA under the Junior
Subordinated Debentures and its guarantees of the obligations of BanPonce Trust
I are fully and unconditionally guaranteed by the Corporation. The assets of
BanPonce Trust I consisted of $148,640 of Junior Subordinated Debentures at
March 31, 2003 (March 31, 2002 - $154,640; December 31, 2002 - $148,640) and a
related accrued interest receivable of $1,031 (March 31, 2002 - $1,073; December
31, 2002 - $4,126). The Junior Subordinated Debentures mature on February 1,
2027; however, under certain circumstances, the maturity of the Junior
Subordinated Debentures may be shortened (which shortening would result in a
mandatory redemption of the Capital Securities).
14
NOTE 11- STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2003, the Corporation issued 7,475,000 shares
of its 6.375% noncumulative monthly income preferred stock, Series A, at a price
of $25 per share. The net proceeds to the Corporation, after the underwriting
discounts and expenses, amounted to $182,244. Dividends declared during the
quarter on the preferred stock amounted to $949.
For the quarter ended March 31, 2003, the Corporation declared cash dividends on
common stock amounting to $26,515 (March 31, 2002 - $27,295).
NOTE 12 - EARNINGS PER COMMON SHARE
A computation of earnings per common share follows:
Quarter ended
March 31,
-------------------------------
(Dollars in thousands, except share information) 2003 2002
------------ ------------
Net income $ 99,089 $ 89,044
Less: Preferred stock dividends (and redemption
premium in 2002) 949 2,510
------------ ------------
Net income applicable to common stock $ 98,140 $ 86,534
============ ============
Average common shares outstanding 132,576,589 136,475,530
Average potential common shares - stock options 16,499 --
------------ ------------
Average common shares outstanding - assuming dilution 132,593,088 136,475,530
============ ============
Basic earnings per common share $ 0.74 $ 0.63
============ ============
Diluted earnings per common share $ 0.74 $ 0.63
============ ============
Potential common shares consist of common stock issuable under the assumed
exercise of stock options granted under the Corporation's stock option plan,
using the treasury stock method. This method assumes that the potential common
shares are issued and the proceeds from exercise in addition to the amount of
compensation cost attributed to future services are used to purchase common
stock at the exercise date. The difference between the number of potential
shares issued and the shares purchased will be added as incremental shares to
the actual number of shares outstanding to compute diluted earnings per share.
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. As of March 31, 2003,
there were 415,738 weighted average antidilutive stock options outstanding
(2002 - 228,107). No dilutive potential common shares were outstanding during
the quarter ended March 31, 2002.
NOTE 13 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the quarter ended March 31, 2003, the Corporation paid interest and
income taxes amounting to $206,466 and $19,815, respectively (2002 - $220,238
and $11,737). In addition, the loans receivable transferred to other real estate
and other property for the quarter ended March 31, 2003 amounted to $19,882 and
$6,918, respectively (2002 - $10,740 and $9,267).
During the quarter ended March 31, 2003, the Corporation transferred $637,605 of
loans held-for-sale to the loan portfolio (held-for investment) based on
management intent and ability.
In addition, $83,345 in mortgage backed securities were sold with a settlement
date on April 2003. On the other hand, there were $48,710 in trading securities
purchased in March 2003, with a settlement date on April 2003.
15
NOTE 14 - SEGMENT REPORTING
Popular, Inc. operates three major reportable segments: commercial banking,
mortgage and consumer lending, and auto and lease financing. Management has
determined its reporting units based on legal entity, which is the way that
operating decisions are made and performance is measured. These reporting units
have then been aggregated into segments by products, services and 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 ended March 31, 2003 and
2002.
MARCH 31, 2003
-------------------------------------------------------------------------------
Mortgage and Auto and
Commercial Consumer Lease
(In thousands) Banking Lending Financing Other Eliminations Total
---------- ------------ --------- ---------- ------------ -----------
Net interest income $228,232 $61,546 $18,682 $427 $874 $309,761
Provision for loan losses 31,023 12,211 4,975 48,209
Other income 69,690 22,114 5,172 41,929 (6,745) 132,160
Amortization of intangibles 1,937 90 2,027
Depreciation expense 12,768 1,184 2,898 1,876 18,726
Other operating expenses 163,603 34,361 7,821 37,395 (291) 242,889
Net gain of minority interest (78) (78)
Income tax 16,517 12,916 3,209 (39) (1,700) 30,903
----------- ---------- ---------- ---------- ----------- -----------
Net income $72,074 $22,910 $4,951 $3,034 ($3,880) $99,089
----------- ---------- ---------- ---------- ----------- -----------
Segment Assets $26,212,292 $6,192,431 $1,294,593 $7,292,138 $(7,296,163) $33,695,291
----------- ---------- ---------- ---------- ----------- -----------
MARCH 31, 2002
-------------------------------------------------------------------------------
Mortgage and Auto and
Commercial Consumer Lease
(In thousands) Banking Lending Financing Other Eliminations Total
---------- ------------ ----------- ---------- ------------ -----------
Net interest income (loss) $223,018 $48,034 $15,254 ($950) $59 $285,415
Provision for loan losses 37,441 10,268 6,745 54,454
Other income 66,675 17,096 4,737 45,451 (3,551) 130,408
Amortization of intangibles 2,541 2 2,543
Depreciation expense 13,792 1,026 2,878 1,512 19,208
Other operating expenses 152,091 29,718 7,152 31,673 (219) 220,415
Net gain of minority interest (11) (11)
Income tax 18,121 8,331 1,157 3,440 (901) 30,148
----------- ---------- ---------- ---------- ----------- -----------
Net income $65,707 $15,776 $2,059 $7,874 $(2,372) $89,044
----------- ---------- ---------- ---------- ----------- -----------
Segment Assets $24,705,291 $4,595,582 $1,089,577 $6,815,654 $(6,888,738) $30,317,366
----------- ---------- ---------- ---------- ----------- -----------
16
INTERSEGMENT REVENUES *
Three months ended March 31,
----------------------------
(In thousands) 2003 2002
--------- ---------
Commercial Banking $ 16,184 $ 17,027
Mortgage and Consumer Lending (38,247) (42,621)
Auto and Lease Financing (13,071) (13,153)
Other 41,005 42,239
-------- --------
Total Intersegment Revenues $ 5,871 $ 3,492
======== ========
* For purposes of the intersegment revenues disclosure, revenues include
interest income (expense) related to internal funding and other income
derived from intercompany transactions, mainly related to gain on sales of
loans.
GEOGRAPHIC INFORMATION
Three months ended
------------------------
MARCH 31, March 31,
(In thousands) 2003 2002
-------- --------
Revenues*
Puerto Rico $302,945 $282,936
Mainland United States 126,283 117,140
Other 12,693 15,747
-------- --------
Total consolidated revenues $441,921 $415,823
-------- --------
* Total revenues include net interest income, service charges on deposit
accounts, other service fees, gain (loss) on sale of securities,
derivatives (losses) gains, trading account loss, gain on sales of
loans and other operating income.
MARCH 31, December 31, March 31,
(In thousands) 2003 2002 2002
----------- ----------- -----------
Selected Balance Sheet Information:
Puerto Rico
Total assets $21,946,636 $22,307,784 $20,095,919
Loans 10,008,443 10,065,646 9,870,630
Deposits 11,978,409 12,036,491 10,970,858
Mainland United States
Total assets $11,034,161 $10,637,293 $9,460,601
Loans 9,473,139 9,140,382 8,034,586
Deposits 4,839,951 4,778,234 4,736,838
Other
Total assets $714,494 $715,275 $760,846
Loans 380,300 376,091 351,708
Deposits 819,487 800,015 816,458
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), (parent only)
Popular International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and
all other subsidiaries of the Corporation as of March 31, 2003, December 31,
2002 and March 31, 2002, and the results of their operations and cash flows for
periods ended March 31, 2003 and 2002. PIBI, PNA, and their wholly-owned
subsidiaries, except Banco Popular North America (BPNA) and Banco Popular,
National Association (BP, N.A.), have a fiscal year that ends on November 30.
Accordingly, the consolidated financial information of PIBI and PNA as of
February 28, 2003, November 30, 2002 and February 28, 2002, corresponds to their
financial information included in the consolidated financial statements of
Popular, Inc. as of March 31, 2003, December 31, 2002 and March 31, 2002,
respectively.
17
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 subsidiaries 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 Banco Popular de Puerto Rico.
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 in any calendar year would exceed the total of net
profits for that year, as defined by the Federal Reserve Board, combined with
its retained net profits for the preceding two years. The payment of dividends
may also be affected by other regulatory requirements and policies, such as the
maintenance of certain minimum capital levels. At March 31, 2003, BPPR could
have declared a dividend of approximately $68,885 without the approval of the
Federal Reserve Board.
18
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
MARCH 31, 2003
(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 $423 $11 $379 $727,524 ($39,247) $689,090
Money market investments 34,707 300 46,643 1,097,231 (170,421) 1,008,460
Investment securities available-for-sale, at market
value 245,047 30,611 7,067 9,852,849 (3,100) 10,132,474
Investment securities held-to-maturity, at
amortized cost 328,377 (148,640) 179,737
Trading account securities, at market value 581,001 581,001
Investment in subsidiaries 2,560,556 793,749 869,816 213,593 (4,437,714)
Loans held-for-sale, at lower of cost or market 332,080 (15,039) 317,041
---------- -------- --------- ----------- ---------- ----------
Loans 86,380 2,618,106 21,429,272 (4,314,237) 19,819,521
Less - Unearned income 274,680 274,680
Allowance for loan losses 383,517 383,517
---------- -------- --------- ----------- ---------- ----------
86,380 2,618,106 20,771,075 (4,314,237) 19,161,324
---------- --------- ----------- ---------- ----------
Premises and equipment 10,988 460,789 471,777
Other real estate 45,759 45,759
Accrued income receivable 312 1 11,891 208,656 (18,369) 202,491
Other assets 25,744 30,349 19,084 609,059 5,213 689,449
Goodwill 184,068 184,068
Other intangible assets 32,620 32,620
---------- -------- --------- ----------- ---------- ----------
$2,964,157 $855,021 $3,572,986 $35,444,681 ($9,141,554) $33,695,291
========== ======== ========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $3,493,156 ($39,185) $3,453,971
Interest bearing 14,207,144 (23,268) 14,183,876
----------- ---------- ----------
17,700,300 (62,453) 17,637,847
Federal funds purchased and securities sold
under agreements to repurchase $365,733 6,434,798 (158,152) 6,642,379
Other short-term borrowings $7,496 $115 497,944 1,847,857 (1,057,018) 1,296,394
Notes payable 119,157 8,788 1,850,153 5,987,679 (3,399,285) 4,566,492
Other liabilities 39,908 155 73,599 518,506 (22,825) 609,343
---------- -------- --------- ----------- ---------- ----------
166,561 9,058 2,787,429 32,489,140 (4,699,733) 30,752,455
---------- -------- --------- ----------- ---------- ----------
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 1,130 1,240
----------- ---------- ----------
Stockholders' equity:
Preferred stock 186,875 186,875
Common stock 835,528 3,962 2 72,577 (76,541) 835,528
Surplus 276,056 649,543 596,964 1,335,998 (2,580,912) 277,649
Retained earnings 1,373,654 186,266 184,622 1,272,421 (1,644,902) 1,372,061
Treasury stock, at cost (205,527) (780) 780 (205,527)
Accumulated other comprehensive income, net of tax 206,010 6,192 3,969 131,215 (141,376) 206,010
---------- -------- --------- ----------- ---------- ----------
2,672,596 845,963 785,557 2,811,431 (4,442,951) 2,672,596
---------- -------- --------- ----------- ---------- ----------
$2,964,157 $855,021 $3,572,986 $35,444,681 ($9,141,554) $33,695,291
========== ======== ========== =========== =========== ===========
19
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 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 $324 $70 $1,161 $694,114 ($43,113) $652,556
Money market investments 2,937 300 9,708 1,250,994 (169,293) 1,094,646
Investment securities available-for-sale,
at market value 223,661 28,290 6,720 10,278,232 (5,000) 10,531,903
Investment securities held-to-maturity,
at amortized cost 329,391 (148,640) 180,751
Trading account securities, at market value 510,346 510,346
Investment in subsidiaries, at equity 2,322,470 624,306 850,071 199,869 (3,996,716)
Loans held-for-sale, at lower of cost or
market value 1,109,161 (16,234) 1,092,927
---------- -------- ---------- ------------ ------------- -------------
Loans 167,523 2,573,222 20,341,601 (4,306,499) 18,775,847
Less - Unearned income 286,655 286,655
Allowance for loan losses 372,797 372,797
---------- -------- ---------- ------------ ------------- -------------
167,523 2,573,222 19,682,149 (4,306,499) 18,116,395
---------- -------- ---------- ------------ ------------- -------------
Premises and equipment 11,192 449,985 461,177
Other real estate 39,399 39,399
Accrued income receivable 294 2 11,891 194,372 (22,010) 184,549
Other assets 21,781 36,409 15,068 503,268 1,565 578,091
Goodwill 182,965 182,965
Other intangible assets 34,647 34,647
---------- -------- ---------- ------------ ------------- -------------
$2,750,182 $689,377 $3,467,841 $35,458,892 ($8,705,940) $33,660,352
========== ======== ========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $3,410,409 ($43,024) $3,367,385
Interest bearing 14,270,528 (23,173) 14,247,355
------------ ------------- -------------
17,680,937 (66,197) 17,614,740
Federal funds purchased and securities
sold under agreements to repurchase $10,300 $498,883 6,307,488 (132,120) 6,684,551
Other short-term borrowings 29,191 $90 439,052 2,477,471 (1,242,242) 1,703,562
Notes payable 137,777 8,788 1,849,017 5,517,986 (3,214,715) 4,298,853
Other liabilities 37,035 166 64,705 604,830 (29,131) 677,605
---------- -------- ---------- ------------ ------------- -------------
214,303 9,044 2,851,657 32,588,712 (4,684,405) 30,979,311
---------- -------- ---------- ------------ ------------- -------------
Subordinated notes 125,000 125,000
---------- -------------
Preferred beneficial interests in Popular
North America's junior subordinated
deferrable interest debentures guaranteed
by the Corporation 144,000 144,000
------------ ------------- -------------
Minority interest in consolidated subsidiaries 110 1,052 1,162
------------ ------------- -------------
Stockholders' equity:
Common stock 834,799 3,962 2 72,577 (76,541) 834,799
Surplus 278,366 492,543 439,964 1,335,498 (2,268,005) 278,366
Retained earnings 1,300,437 170,874 170,956 1,178,321 (1,520,151) 1,300,437
Treasury stock, at cost (205,210) (463) 463 (205,210)
Accumulated other comprehensive income,
net of tax 202,487 12,954 5,262 140,137 (158,353) 202,487
---------- -------- ---------- ------------ ------------- -------------
2,410,879 680,333 616,184 2,726,070 (4,022,587) 2,410,879
---------- -------- ---------- ------------ ------------- -------------
$2,750,182 $689,377 $3,467,841 $35,458,892 ($8,705,940) $33,660,352
========== ======== ========== =========== =========== ===========
20
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
MARCH 31, 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 $ 319 $ 27 $ 673 $ 429,586 ($46,678) $ 383,927
Money market investments 5,436 301 47 973,980 (260,176) 719,588
Investment securities available-for-sale,
at market value 206,696 22,233 6,580 9,173,949 (8,300) 9,401,158
Investment securities held-to-maturity, at
amortized cost 356,662 (154,640) 202,022
Trading account securities, at market value 305,415 (6,000) 299,415
Investment in subsidiaries 2,137,166 571,625 784,124 171,229 (3,664,144)
Loans held-for-sale, at lower of cost or
market value 872,949 27,512 900,461
----------- ----------- ----------- ----------- ----------- -----------
Loans 261,591 2,603,774 18,978,571 (4,167,936) 17,676,000
Less - Unearned income 319,537 319,537
Allowance for loan losses 341,744 341,744
----------- ----------- ----------- ----------- ----------- -----------
261,591 2,603,774 18,317,290 (4,167,936) 17,014,719
----------- ----------- ----------- ----------- ----------- -----------
Premises and equipment 11,802 393,040 404,842
Other real estate 34,550 34,550
Accrued income receivable 451 1 12,142 197,871 (19,347) 191,118
Other assets 22,489 33,511 9,054 482,751 1,519 549,324
Goodwill 178,501 178,501
Other intangible assets 37,741 37,741
----------- ----------- ----------- ----------- ----------- -----------
$ 2,645,950 $ 627,698 $ 3,416,394 $31,925,514 ($8,298,190) $30,317,366
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,147,244 ($46,619) $ 3,100,625
Interest bearing 13,454,116 (30,587) 13,423,529
----------- ----------- ----------- ----------- ----------- -----------
16,601,360 (77,206) 16,524,154
Federal funds purchased and securities sold
under agreements to repurchase $ 40,300 $ 399,038 4,339,067 (213,590) 4,564,815
Other short-term borrowings 59,975 $ 4,297 426,568 2,812,312 (1,050,473) 2,252,679
Notes payable 191,733 1,980,974 5,065,598 (3,241,689) 3,996,616
Other liabilities 44,115 81 46,582 458,479 (24,907) 524,350
----------- ----------- ----------- ----------- ----------- -----------
336,123 4,378 2,853,162 29,276,816 (4,607,865) 27,862,614
----------- ----------- ----------- ----------- ----------- -----------
Subordinated notes 125,000 125,000
----------- ----------- ----------- ----------- ----------- -----------
Preferred beneficial interests in Popular
North America's junior subordinated
deferrable interest debentures guaranteed
by the Corporation 150,000 (6,000) 144,000
----------- ----------- ----------- ----------- ----------- -----------
Minority interest in consolidated subsidiary 110 815 925
----------- ----------- ----------- ----------- ----------- -----------
Stockholders' equity:
Common stock 833,121 3,962 2 72,575 (76,539) 833,121
Surplus 270,766 492,494 439,964 1,335,418 (2,267,876) 270,766
Retained earnings 1,116,963 122,542 125,942 1,101,995 (1,350,479) 1,116,963
Treasury stock, at cost (66,363) (463) 463 (66,363)
Accumulated other comprehensive income (loss),
net of tax 30,340 4,322 (2,676) (10,937) 9,291 30,340
----------- ----------- ----------- ----------- ----------- -----------
2,184,827 623,320 563,232 2,498,588 (3,685,140) 2,184,827
----------- ----------- ----------- ----------- ----------- -----------
$ 2,645,950 $ 627,698 $ 3,416,394 $31,925,514 ($8,298,190) $30,317,366
=========== =========== =========== =========== =========== ===========
21
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 2003
(UNAUDITED)
Popular,Inc. PIBI PNA All other Elimination Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated
- -------------- ------------ ----------- ----------- ------------ ------- ------------
INTEREST INCOME:
Loans $1,538 $ 36,450 $394,242 ($54,297) $377,933
Money market investments 47 $ 2 39 18,525 (11,250) 7,363
Investment securities 444 198 112,096 (2,937) 109,801
Trading account securities 8,185 8,185
------- ------- -------- -------- --------- -------
2,029 2 36,687 533,048 (68,484) 503,282
------- ------- -------- -------- --------- -------
INTEREST EXPENSE:
Deposits 94,350 (155) 94,195
Short-term borrowings 203 5,094 54,810 (19,318) 40,789
Long-term debt 4,582 57 32,091 71,693 (49,886) 58,537
------- ------- -------- -------- --------- -------
4,785 57 37,185 220,853 (69,359) 193,521
------- ------- -------- -------- --------- -------
Net interest (loss) income (2,756) (55) (498) 312,195 875 309,761
Provision for loan losses 48,209 48,209
------- ------- -------- -------- --------- -------
Net interest (loss) income after provision for
loan losses (2,756) (55) (498) 263,986 875 261,552
Service charges on deposit accounts 39,851 (12) 39,839
Other service fees 67,588 (1,162) 66,426
(Loss) gain on sale of securities (27) 1,441 1,414
Trading account loss (937) (937)
Derivatives (losses) gains (10,813) 158 (10,655)
Gain on sales of loans 23,706 (4,190) 19,516
Other operating income 4,320 1,633 11,984 (1,380) 16,557
------- ------- -------- -------- --------- -------
1,564 1,578 (11,338) 407,777 (5,869) 393,712
------- ------- -------- -------- --------- -------
OPERATING EXPENSES:
Personnel costs:
Salaries 78 95,957 1 96,036
Profit sharing 6,245 6,245
Pension and other benefits 17 30,051 30,068
------- ------- -------- -------- --------- -------
95 132,253 1 132,349
Net occupancy expenses 3 20,457 20,460
Equipment expenses 26,350 26,350
Other taxes 291 9,261 9,552
Professional fees 209 5 71 18,567 (76) 18,776
Communications 8 14,689 14,697
Business promotion 15,970 15,970
Printing and supplies 4,743 4,743
Other operating expenses 66 23 131 18,715 (217) 18,718
Amortization of intangibles 2,027 2,027
------- ------- -------- -------- --------- -------
574 126 202 263,032 (292) 263,642
------- ------- -------- -------- --------- -------
Income (loss) before income tax, minority interest
and equity in earnings of subsidiaries 990 1,452 (11,540) 144,745 (5,577) 130,070
Income tax (4,051) 36,654 (1,700) 30,903
Net gain of minority interest (78) (78)
------- ------- -------- -------- --------- -------
Income (loss) before equity in earnings of 990 1,452 (7,489) 108,013 (3,877) 99,089
subsidiaries
Equity in earnings of subsidiaries 98,099 13,940 21,154 12,105 (145,298)
------- ------- -------- -------- --------- -------
NET INCOME $99,089 $15,392 $ 13,665 $120,118 ($149,175) $99,089
======= ======= ======== ======== ========= =======
22
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED MARCH 31, 2002
(UNAUDITED)
Popular, Inc. PIBI PNA Other Elimination Popular, Inc.
(In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated
------------ ----------- ----------- ------------ ----------- --------------
INTEREST INCOME:
Loans $ 3,444 $38,186 $388,811 ($58,220) $372,221
Money market investments 121 $ 3 6 18,598 (10,943) 7,785
Investment securities 192 189 115,203 (3,273) 112,311
Trading account securities 3,545 (43) 3,502
------- ------- ------- -------- --------- -------
3,757 3 38,381 526,157 (72,479) 495,819
------- ------- ------- -------- --------- -------
INTEREST EXPENSE:
Deposits 113,186 (255) 112,931
Short-term borrowings 317 22 5,776 57,244 (18,916) 44,443
Long-term debt 5,248 33,014 68,135 (53,367) 53,030
------- ------- ------- -------- --------- -------
5,565 22 38,790 238,565 (72,538) 210,404
------- ------- ------- -------- --------- -------
Net interest (loss) income (1,808) (19) (409) 287,592 59 285,415
Provision for loan losses 54,454 54,454
------- ------- ------- -------- --------- -------
Net interest (loss) income after provision
for loan losses (1,808) (19) (409) 233,138 59 230,961
Service charges on deposit accounts 38,973 38,973
Other service fees 61,750 (63) 61,687
Loss on sale of securities (4,010) (4,010)
Trading account loss (1,030) (1,030)
Derivatives gains (losses) 645 (134) 511
Gain on sales of loans 20,603 (2,660) 17,943
Other operating income 2,135 1,614 13,414 (829) 16,334
------- ------- ------- -------- --------- -------
327 1,595 236 362,704 (3,493) 361,369
------- ------- ------- -------- --------- -------
OPERATING EXPENSES:
Personnel costs:
Salaries 78 88,483 88,561
Profit sharing 4,940 4,940
Pension and other benefits 16 26,785 26,801
------- ------- ------- -------- --------- -------
94 120,208 120,302
Net occupancy expenses 3 19,027 19,030
Equipment expenses 24,765 24,765
Other taxes 245 9,304 9,549
Professional fees 146 4 46 17,391 (80) 17,507
Communications 8 13,265 13,273
Business promotion 13,367 13,367
Printing and supplies 4,509 4,509
Other operating expenses 53 20 107 17,281 (140) 17,321
Amortization of intangibles 2,543 2,543
------- ------- ------- -------- --------- -------
452 121 153 241,660 (220) 242,166
------- ------- ------- -------- --------- -------
(Loss) income before income tax, minority
interest and equity in earnings of subsidiaries (125) 1,474 83 121,044 (3,273) 119,203
Income tax (13) 17 31,045 (901) 30,148
Net gain of minority interest (11) (11)
------- ------- ------- -------- --------- -------
(Loss) income before equity in earnings
of subsidiaries (112) 1,474 66 89,988 (2,372) 89,044
Equity in earnings of subsidiaries 89,156 15,320 15,189 6,954 (126,619)
------- ------- ------- -------- --------- -------
NET INCOME $89,044 $16,794 $15,255 $ 96,942 ($128,991) $89,044
======= ======= ======= ======== ========= =======
23
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2003
(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 $ 99,089 $ 15,392 $ 13,665 $ 120,118 ($149,175) $ 99,089
---------- --------- -------- ---------- --------- ----------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in undistributed earnings of
subsidiaries (98,099) (13,940) (21,154) (12,105) 145,298
Depreciation and amortization of premises
and equipment 203 18,523 18,726
Provision for loan losses 48,209 48,209
Amortization of intangibles 2,027 2,027
Net loss (gain) on sales of investment
securities 27 (1,441) (1,414)
Net loss (gain) on derivatives 10,813 (158) 10,655
Net loss on disposition of premises and equipment 397 397
Net gain on sales of loans, excluding loans
held-for-sale (8,566) (8,566)
Net amortization of premiums and accretion of
discounts on investments 5,071 5,071
Net amortization of deferred loan fees and costs 9,402 9,402
Stock options expense 33 694 727
Net decrease in loans held-for-sale 139,476 (1,195) 138,281
Net increase in trading securities (119,365) (119,365)
Net (increase) decrease in accrued income
receivable (18) 1 (14,284) (3,641) (17,942)
Net increase in other assets (6,635) (1,525) (28) 9,331 (960) 183
Net increase (decrease) in interest payable 135 57 (1,152) (15,688) 3,703 (12,945)
Net increase (decrease) in deferred and
current taxes 2,672 (1,076) 10,532 (2,688) 9,440
Net increase in postretirement benefit obligation 2,477 2,477
Net increase (decrease) in other liabilities 734 (69) (3,740) (48,168) 2,600 (48,643)
---------- --------- -------- ---------- --------- ----------
Total adjustments (100,975) (15,476) (16,310) (58,036) 143,117 (47,680)
---------- --------- -------- ---------- --------- ----------
Net cash (used in) provided by operating
activities (1,886) (84) (2,645) 62,082 (6,058) 51,409
---------- --------- -------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in money market
investments (31,770) (36,935) 153,763 1,128 86,186
Purchases of investment securities
held-to-maturity (140,522) (140,522)
Maturities of investment securities
held-to-maturity 141,628 141,628
Purchases of investment securities
available-for-sale (13,779) (1,420,203) (1,433,982)
Maturities of investment securities
available-for-sale 1,722,329 (1,900) 1,720,429
Proceeds from sales of investment securities
available-for-sale 13,583 24,500 38,083
Net collections (disbursements) on loans 81,143 (44,884) (310,665) 7,738 (266,668)
Proceeds from sales of loans 279,750 279,750
Acquisition of loan portfolios (495,712) (495,712)
Capital contribution to subsidiary (180,000) (157,000) 337,000
Acquisition of premises and equipment (29,943) (29,943)
Proceeds from sale of premises and equipment 220 220
Dividends received from subsidiary 26,100 (26,100)
---------- --------- -------- ---------- --------- ----------
Net cash (provided by) used in investing
activities (104,527) (157,000) (82,015) 9,545 317,866 (16,131)
---------- --------- -------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 20,811 3,743 24,554
Net (decrease) increase in federal funds
purchased and securities sold under
agreements to repurchase (10,300) (133,150) 127,310 (26,032) (42,172)
Net (decrease) increase in other short-term
borrowings (21,695) 25 58,892 (629,614) 185,224 (407,168)
Net (payments of) proceeds from notes
payable and capital securities (18,620) 1,136 469,693 (184,570) 267,639
Dividends paid to parent company (26,100) 26,100
Dividends paid (27,440) (27,440)
Proceeds from issuance of common stock 3,916 3,916
Net proceeds from issuance of
preferred stock 180,651 1,593 182,244
Treasury stock acquired (317) (317)
Capital contribution from parent 157,000 157,000 (314,000)
---------- --------- -------- ---------- --------- ----------
Net cash provided by (used in) financing
activities 106,512 157,025 83,878 (38,217) (307,942) 1,256
---------- --------- -------- ---------- --------- ----------
Net increase (decrease) in cash and due
from banks 99 (59) (782) 33,410 3,866 36,534
Cash and due from banks at beginning
of period 324 70 1,161 694,114 (43,113) 652,556
---------- --------- -------- ---------- --------- ----------
Cash and due from banks at end of period $ 423 $ 11 $ 379 $ 727,524 ($39,247) $ 689,090
========== ========= ======== ========== ========= ==========
24
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 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 $ 89,044 $ 16,794 $ 15,255 $ 96,942 ($128,991) $ 89,044
--------- -------- --------- ---------- --------- -----------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in undistributed earnings of
subsidiaries (89,156) (15,320) (15,189) (6,954) 126,619
Depreciation and amortization of premises
and equipment 203 19,005 19,208
Provision for loan losses 54,454 54,454
Amortization of intangibles 2,543 2,543
Net loss on sale of investment securities 4,010 4,010
Net (gain) loss on derivatives (645) 134 (511)
Net gain on disposition of premises and equipment (11) (11)
Net gain on sale of loans, excluding loans
held-for-sale (2,826) (2,826)
Net amortization of premiums and accretion of
discounts on investments 4,309 4,309
Net decrease in loans held-for-sale 84,453 (45,426) 39,027
Net amortization of deferred loan fees and costs 4,556 4,556
Net increase in trading securities (34,309) 5,080 (29,229)
Net (increase) decrease in accrued income
receivable (127) 1 121 (1,573) (3,397) (4,975)
Net (increase) decrease in other assets (1,663) (1,501) 261 (25,361) (1,209) (29,473)
Net increase (decrease) in interest payable 754 14 (1,709) (8,893) (9,834)
Net increase (decrease) in deferred and
current taxes (45) (54) 11,826 209 11,936
Net increase in postretirement benefit obligation 1,494 1,494
Net increase (decrease) in other liabilities 1,271 (5) 709 (554) 7,745 9,166
--------- -------- --------- ---------- --------- -----------
Total adjustments (88,763) (16,811) (16,506) 106,303 89,621 73,844
--------- -------- --------- ---------- --------- -----------
Net cash provided by (used in) operating activities 281 (17) (1,251) 203,245 (39,370) 162,888
--------- -------- --------- ---------- --------- -----------
Cash flows from investing activities:
Net decrease in money market
investments 107,500 1 395 101,322 (105,016) 104,202
Purchases of investment securities
held-to-maturity (132,401) (132,401)
Maturities of investment securities
held-to-maturity 524,322 524,322
Purchases of investment securities
available-for-sale (36,197) (38) (2,076,987) (660) (2,113,882)
Maturities of investment securities
available-for-sale 1,113,794 (2,700) 1,111,094
Proceeds from sales of investment securities
available-for-sale 809,302 809,302
Net disbursements on loans (65,180) (66,753) (196,196) 118,341 (209,788)
Proceeds from sale of loans 221,705 221,705
Acquisition of loan portfolios (210,395) (210,395)
Acquisition of premises and equipment (19,837) (19,837)
Proceeds from sale of premises and equipment 1,504 1,504
Dividends received from subsidiary 27,500 (27,500)
--------- -------- --------- ---------- --------- -----------
Net cash provided by (used in) investing
activities 33,623 1 (66,396) 136,133 (17,535) 85,826
--------- -------- --------- ---------- --------- -----------
Cash flows from financing activities:
Net increase in deposits 177,783 (16,436) 161,347
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase 40,300 (22,580) (1,222,816) 18,144 (1,186,952)
Net increase (decrease) in other short-term
borrowings 59,975 25 (109,874) 147,536 327,775 425,437
Net (payments) proceeds from issuance
of notes payable and capital securities (7,184) 200,522 356,338 (293,271) 256,405
Dividends paid (27,785) (27,500) 27,500 (27,785)
Proceeds from issuance of common stock 2,846 2,846
Redemption of preferred stock (102,000) (102,000)
Treasury stock acquired (227) (227)
--------- -------- --------- ---------- --------- -----------
Net cash (used in) provided by financing
activities (33,848) 25 68,068 (568,886) 63,712 (470,929)
--------- -------- --------- ---------- --------- -----------
Net increase (decrease) in cash and due from
banks 56 9 421 (229,508) 6,807 (222,215)
Cash and due from banks at beginning of year 263 18 252 659,094 (53,485) 606,142
--------- -------- --------- ---------- --------- -----------
Cash and due from banks at end of year $ 319 $ 27 $ 673 $ 429,586 ($46,678) $ 383,927
========= ======== ========= ========== ========= ===========
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TABLE A
FINANCIAL HIGHLIGHTS
AVERAGE FOR THE THREE
AT MARCH 31, MONTHS ENDED MARCH 31,
--------------------------------------- ---------------------------------------
BALANCE SHEET HIGHLIGHTS 2003 2002 Change 2003 2002 Change
----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Money market investments $ 1,008,460 $ 719,588 $ 288,872 $ 972,373 $ 927,038 $ 45,335
Investment and trading securities 10,893,212 9,902,595 990,617 10,909,397 9,871,684 1,037,713
Loans 19,861,882 18,256,924 1,604,958 19,537,968 18,058,011 1,479,957
Total assets 33,695,291 30,317,366 3,377,925 33,158,518 30,417,589 2,740,929
Deposits 17,637,847 16,524,154 1,113,693 17,526,977 16,526,180 1,000,797
Borrowings 12,774,265 11,083,110 1,691,155 12,797,395 11,283,963 1,513,432
Stockholders' equity 2,672,596 2,184,827 487,769 2,314,620 2,154,243 160,377
FIRST QUARTER
--------------------------------------
OPERATING HIGHLIGHTS 2003 2002 Change
-------- -------- --------
(In thousands, except per share
information)
Net interest income $309,761 $285,415 $ 24,346
Provision for loan losses 48,209 54,454 (6,245)
Fees and other income 132,160 130,408 1,752
Other expenses, net of minority interest 294,623 272,325 22,298
Net income $ 99,089 $ 89,044 $ 10,045
Net income applicable to common stock $ 98,140 $ 86,534 $ 11,606
Earnings per common share (basic and diluted) $ 0.74 $ 0.63 $ 0.11
SELECTED STATISTICAL FIRST QUARTER
INFORMATION --------------------
2003 2002
------ ------
COMMON STOCK DATA - Market price
High $34.97 $29.94
Low 31.95 27.50
End 33.99 29.22
Book value at period end 18.75 16.01
Dividends declared 0.20 0.20
Dividend payout ratio 27.45% 30.85%
Price/earnings ratio 12.50x 12.87x
PROFITABILITY RATIOS - Return on assets 1.21% 1.19%
Return on common equity 17.39 16.83
Net interest spread
(taxable equivalent) 3.90 3.80
Net interest yield
(taxable equivalent) 4.30 4.30
Effective tax rate 23.76 25.29
Overhead ratio * 42.45 39.16
Efficiency ratio ** 58.32 57.61
CAPITALIZATION RATIOS - Equity to assets 6.98% 7.08%
Tangible equity to assets 6.42 6.29
Equity to loans 11.85 11.93
Internal capital generation 12.09 11.35
Tier I capital to risk -
adjusted assets 10.96 10.20
Total capital to risk -
adjusted assets 12.67 11.99
Leverage ratio 7.02 6.34
* Non-interest expense less non-interest income divided by net interest
income.
** Non-interest expense divided by net interest income plus recurring fee
income.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial review contains an analysis of the consolidated financial
position and financial performance of Popular, Inc. and its subsidiaries (the
Corporation). All accompanying tables, financial statements and notes included
elsewhere in this report should be considered an integral part of this analysis.
The Corporation is a financial holding company, which offers a wide range of
products and services to consumer and corporate customers in Puerto Rico, the
United States, the Caribbean and Central America. The Corporation's subsidiaries
are engaged in the following businesses:
Commercial Banking - Banco Popular de Puerto Rico (BPPR), Banco Popular
North America (BPNA) and Banco Popular, National Association (BP, N.A.)
Auto Loans and Lease Financing - Popular Auto, Inc. and Popular
Leasing, U.S.A.
Mortgage and Consumer Lending - Popular Mortgage, Inc., Equity One,
Inc., Popular Finance, Inc. and Levitt Mortgage Corporation
Broker / Dealer - Popular Securities, Inc.
Processing and Information Technology Services and Products - GM Group,
ATH Costa Rica and CreST, S.A.
Retail Financial Services - Popular Cash Express, Inc.
Insurance Agency- Popular Insurance, Inc., Popular Insurance Agency
U.S.A., Inc. and Popular Insurance V.I., Inc.
CRITICAL ACCOUNTING POLICIES
The Corporation's accounting policies are essential to the understanding of its
financial statements. The Corporation has identified as critical accounting
policies those related to loans and allowance for loan losses, investment
securities, the assessment of fair value, income taxes, goodwill and other
intangible assets, stock options and pension and post retirement benefit
obligations. The critical accounting policies involve significant management
judgment associated with estimates about the effect of matters that are
inherently uncertain and that involve a high degree of subjectivity. For a
summary of the Corporation's critical accounting policies, refer to that
particular section in the Management's Discussion and Analysis included in
Popular, Inc.'s 2002 Financial Review and Supplementary Information to
Stockholders, incorporated by reference in Popular, Inc.'s Annual Report on Form
10-K for the year ended December 31, 2002. Also, refer to Note 1 to the
consolidated financial statements included in said report for a summary of the
Corporation's significant accounting policies, as well as to the accompanying
notes to the unaudited consolidated financial statements included in this Form
10-Q. No significant changes in critical accounting policies have occurred since
year-end 2002.
NET INCOME
The Corporation reported net income of $99.1 million for the first quarter of
2003, compared with $89.0 million for the same quarter of 2002, an increase of
$10.1 million, or 11%. Earnings per common share (EPS), basic and diluted, for
the quarter ended March 31, 2003, were $0.74, compared with $0.63 for the same
period in 2002. Refer to Note 12 to the consolidated financial statements for a
detail of the average shares used in the computation of basic and diluted EPS.
Return on assets (ROA) and return on common equity (ROE) for the first quarter
of 2003 were 1.21% and 17.39%, respectively, compared with 1.19% and 16.83% for
the same period in 2002.
The Corporation's net income for the first quarter of 2003, when compared with
the same period a year ago, reflected higher net interest income by $24.4
million and non-interest income by $1.8 million, and a lower provision for loan
losses by $6.2 million. These variances were partially offset by a rise in
operating expenses of $21.4 million and an increase in income tax of $0.8
million.
27
NET INTEREST INCOME
Net interest income for the quarter ended March 31, 2003 rose to $309.8 million,
an increase of $24.4 million, or 9%, over the same quarter of 2002. On a taxable
equivalent basis, net interest income increased to $337.6 million from $310.4
million in the same quarter of 2002.
The improvement of $27.2 million in net interest income on a taxable equivalent
basis from the first quarter of 2002 resulted from a $21.4 million increase due
to a higher volume of average earning assets and a $5.8 million increase due to
a higher net interest spread.
Table B presents the different components of the Corporation's net interest
income for the first quarter of 2003, as compared with the same quarter of 2002,
segregated by major categories of earning assets and interest bearing
liabilities. Some of the assets, mostly investments in obligations of the U.S.
Government and its agencies and the Puerto Rico Commonwealth, generate interest,
which is exempt for income tax purposes, principally in Puerto Rico. Therefore,
to facilitate the comparison of all interest data related to these assets, the
interest income has been converted to a taxable equivalent basis, using the
applicable statutory income tax rates (statutory tax rate of 39%).
28
TABLE B
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
PERIOD ENDED MARCH 31, 2003
VARIANCE
AVERAGE VOLUME AVERAGE YIELDS INTEREST ATTRIBUTABLE TO
- -------------------------- -------------- -------- ---------------------------- -----------------
2003 2002 VARIANCE 2003 2002 VARIANCE 2003 2002 VARIANCE RATE VOLUME
- ------- ------- -------- ----- ---- -------- -------- -------- -------- ------- --------
($ IN MILLIONS) (IN THOUSANDS)
$ 972 $ 927 $ 45 3.07% 3.41% (0.34%) Money market investments $ 7,363 $ 7,785 $ (422) $ (785) $ 363
10,321 9,526 795 5.24 5.69 (0.45) Investment securities 135,150 135,289 (139) (12,696) 12,557
589 346 243 5.78 4.21 1.57 Trading 8,392 3,583 4,809 1,669 3,140
- ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- --------
11,882 10,799 1,083 5.09 5.44 (0.35) 150,905 146,657 4,248 (11,812) 16,060
- ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- --------
Loans:
8,025 7,611 414 6.22 6.78 (0.56) Commercial 122,996 127,300 (4,304) (11,000) 6,696
885 860 25 10.69 11.23 (0.54) Leasing 23,655 24,137 (482) (1,169) 687
7,521 6,474 1,047 7.57 7.82 (0.25) Mortgage 142,381 126,634 15,747 (4,183) 19,930
3,107 3,113 (6) 11.84 12.45 (0.61) Consumer 91,206 96,147 (4,941) (2,758) (2,183)
- ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- --------
19,538 18,058 1,480 7.84 8.35 (0.51) 380,238 374,218 6,020 (19,110) 25,130
- ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- --------
$31,420 $28,857 $2,563 6.80% 7.26% (0.46%) TOTAL EARNING ASSETS $531,143 $520,875 $ 10,268 $(30,922) $41,190
======= ======= ====== ===== ==== ====== ======== ======== ======= ========= =======
Interest bearing
deposits:
$2,553 $2,493 $60 1.69% 2.41% (0.72%) NOW and money market $10,662 $14,844 $ (4,182) ($4,510) $328
5,119 4,470 649 1.66 2.58 (0.92) Savings 20,972 28,459 (7,487) (10,947) 3,460
6,590 6,378 212 3.85 4.43 (0.58) Time deposits 62,561 69,628 (7,067) (10,117) 3,050
- ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- --------
14,262 13,341 921 2.68 3.43 (0.75) 94,195 112,931 (18,736) (25,574) 6,838
- ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- --------
8,284 7,263 1,021 2.00 2.48 (0.48) Short-term borrowings 40,789 44,443 (3,654) (10,464) 6,810
4,513 4,021 492 5.25 5.34 (0.09) Medium and long-term debt 58,537 53,030 5,507 (653) 6,160
- ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- --------
TOTAL INTEREST BEARING
27,059 24,625 2,434 2.90 3.46 (0.56) LIABILITIES 193,521 210,404 (16,883) (36,691) 19,808
3,265 3,185 80 Demand deposits
1,096 1,047 49 Other sources of funds
- ------- ------- ------ ---- ---- ----- -------- -------- -------- -------- --------
$31,420 $28,857 $2,563 2.50% 2.96% (0.46%)
======= ======= ====== ==== ==== =====
4.30% 4.30% 0.00% NET INTEREST MARGIN AND
==== ==== ==== NET INTEREST INCOME ON A
TAXABLE EQUIVALENT BASIS 337,622 310,471 27,151 $ 5,769 $21,382
======== =======
3.90% 3.80% 0.10% NET INTEREST SPREAD
==== ==== ====
TAXABLE EQUIVALENT
ADJUSTMENT 27,861 25,056 2,805
-------- -------- -------
NET INTEREST INCOME $309,761 $285,415 $ 24,346
======== ======== =======
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 increase in earning assets of $2.6 billion, compared with the first quarter
of 2002, was driven principally by a $1.5 billion increase in the average loan
portfolio and a $1.1 billion increase in money market, trading and investment
securities. The rise in the average loan portfolio was primarily in mortgage and
commercial loans, which rose $1.1 billion and $414 million, respectively. The
interest rate environment has stimulated mortgage originations and the
refinancing through mortgage loans. On the other hand, consumer loans remained
almost flat on average mainly due to lower demand for personal loans. Investment
securities also rose on average by $795 million, or 8%, mostly in U.S. Agency
securities.
The average yield on earning assets, on a taxable equivalent basis, declined 46
basis points from 7.26% in the first quarter of 2002 to 6.80% during the same
period in 2003. The average yield on the investment portfolio decreased by 45
basis points, due to the growth of the portfolio, the runoff of securities with
higher yields that were replaced in a declining interest rate scenario, and a
higher level of prepayments on the Corporation's mortgage-backed
29
securities and collateralized mortgage obligations. The average yield in the
trading portfolio rose to 5.78% for the quarter ended March 31, 2003, from 4.21%
for the same quarter in the previous year, mainly due to a higher proportion of
mortgage-backed securities, carrying a higher yield. The average yield on the
loan portfolio decreased by 51 basis points. Commercial and construction loans
yield fell by 56 basis points due to their repricing characteristics and to the
origination of new loans in a lower rate environment. As of March 31, 2003,
approximately 56% of the commercial and construction portfolios had floating or
adjustable rates.
A mix of funding sources supported the increase in the volume of earning assets.
Interest bearing liabilities for the first quarter of 2003 increased on average
by $2.4 billion, or 10%, compared with the same quarter in 2002. Average
interest bearing deposits increased by $921 million, or 7%, while average
borrowings rose by $1.5 billion, or 13%. Savings deposits increased on average
by $649 million and time deposits experienced an increase of $212 million.
Within the latter category, brokered deposits increased on average by $109
million.
Average short-term borrowings, comprised mostly of repurchase agreements and
federal funds, increased by $1.0 billion, or 14%, in the first quarter of 2003,
compared with the same quarter in the previous year, while longer-term
borrowings increased by $492 million, or 12%. 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 secured borrowings arising in securitization
transactions.
The average cost of interest bearing liabilities diminished by 56 basis points
when compared with the same quarter of 2002. The principal factor for this
decrease were revisions made to interest rates on interest-bearing deposits
since the last quarter of 2002. Also, the lower cost of borrowed money was
influenced by the current low interest rate environment.
The Corporation's net interest margin, on a taxable equivalent basis, for the
first quarter of 2003 remained stable at 4.30%, compared with the same quarter
in the previous year, while the net interest spread increased by 10 basis
points. The increase in net interest spread which is the difference between the
yield on earning assets and the interest rate paid on interest-bearing
liabilities, resulted in part from a decrease in the cost of interest-bearing
liabilities, partially offset by a reduction in the yield on earning assets.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses reflects management's assessment of the adequacy
of the allowance for loan losses to cover probable losses inherent in the loan
portfolio after taking into account loan impairment and net charge-offs for the
current period. The provision for loan losses totaled $48.2 million, or 125% of
net charge-offs, for the first quarter of 2003, compared with $54.4 million or
110%, respectively, for the same period in 2002. The decrease in the provision
is due in part to lower net charge-offs and to the fact that most of the growth
in the loan portfolio was in mortgage loans which have a low net charge-off
ratio. Net charge-offs for the quarter ended March 31, 2003, were $38.4 million
or 0.79% of average loans, compared with $49.7 million or 1.10% for the first
quarter of 2002.
30
Table C summarizes the movement in the allowance for loan losses and presents
several loan loss statistics for the quarters ended March 31, 2002 and 2003.
TABLE C
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
FIRST QUARTER
-----------------------
(Dollars in thousands) 2003 2002
-------- --------
Balance at beginning of period $372,797 $336,632
Allowance purchased 951 343
Provision for loan losses 48,209 54,454
-------- --------
421,957 391,429
-------- --------
Losses charged to the allowance:
Commercial 15,553 22,983
Construction 135 3,320
Lease financing 6,198 9,259
Mortgage 4,654 2,511
Consumer 23,401 25,483
-------- --------
49,941 63,556
-------- --------
Recoveries:
Commercial 2,955 3,632
Construction 27 159
Lease financing 2,730 4,126
Mortgage 55 218
Consumer 5,734 5,736
-------- --------
11,501 13,871
-------- --------
Net loans charged-off:
Commercial 12,598 19,351
Construction 108 3,161
Lease financing 3,468 5,133
Mortgage 4,599 2,293
Consumer 17,667 19,747
-------- --------
38,440 49,685
-------- --------
Balance at end of period $383,517 $341,744
======== ========
Ratios:
Allowance for losses to loans 1.93% 1.87%
Allowance to non-performing assets 64.25 69.24
Allowance to non-performing loans 69.58 74.45
Non-performing assets to loans 3.01 2.70
Non-performing assets to total assets 1.77 1.63
Net charge-offs to average loans 0.79 1.10
Provision to net charge-offs 1.25x 1.10x
Net charge-offs earnings coverage 4.64 3.50
Mortgage loans net charge-offs amounted to $4.6 million for the quarter ended
March 31, 2003, compared with $2.3 million for the same period in 2002, an
increase of $2.3 million or 101%, mostly as a result of the growth in the
portfolio coupled with increased delinquency due to current economic conditions.
These net charge-offs represented 0.24% of average mortgage loans for the first
quarter of 2003, compared with 0.14% for the same quarter in the previous year.
Commercial and construction loans net charge-offs amounted to $12.7 million for
the first quarter of 2003, compared with $22.5 million for the same period in
2002, a decline of $9.8 million or 44%. As a percentage of average commercial
and construction loans, net credit losses were 0.63% for the quarter ended March
31, 2003,
31
compared with 1.18% in the first quarter of 2002. The results for 2002 were
impacted by the $3.7 million charge-off of a participation loan pertaining to a
large commercial relationship. Also, the decrease in net charge-offs is
influenced in part by an aggressive identification and monitoring of potential
problem loans.
Consumer loans net charge-offs for the quarters ended March 31, 2003 and 2002,
totaled $17.7 million and $19.7 million, respectively. These net charge-offs
represented 2.27% of average consumer loans for the quarter ended March 31,
2003, compared with 2.54% for the same quarter in the previous year. The current
economic environment has prompted the Corporation to tighten its credit criteria
for consumer borrowings.
Lease financing net charge-offs decreased $1.6 million, or 32%, for the quarter
ended March 31, 2003, compared with the same period in 2002. These net
charge-offs totaled $3.5 million or 1.57% of the average lease financing
portfolio for the quarter ended March 31, 2003, compared with $5.1 million or
2.39% for the same period in 2002. The decline was partly the result of stronger
portfolio quality, coupled with improved collection strategies.
Management's review of quantitative 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, prior loss experience, current economic conditions, regulatory
requirements 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 and test 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 for a group of homogeneous loans, which are not
individually evaluated under SFAS No. 114, when it is probable that a loss has
been incurred and the amount can be reasonably estimated. To calculate the
allowance for loan losses under SFAS No. 5, the Corporation uses historical net
charge-offs experience segregated by type of loan and legal entity.
The result of the exercise described above is compared with stress-related
levels of historic losses over a period of time, recent tendencies of losses and
industry trends. Management considers all indicators derived from the process
described herein, along with qualitative factors that may cause estimated credit
losses associated with the loan portfolio to differ from historical loss
experience.
The Corporation has defined impaired loans as loans with interest and/or
principal past due 90 days or more and other specific loans for which, based on
current information and events, it is probable that the debtor will be unable to
pay all amounts due according to the contractual terms of the loan agreement.
Loan impairment is measured based on the present value of the expected future
cash flows discounted at the loan's effective rate, on the observable market
price of the loan, or on the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment based on past experience adjusted for
current conditions. Larger balance commercial loans are evaluated on a
loan-by-loan basis. Once a specific measurement methodology is chosen, it is
consistently applied unless there is a significant change in the financial
position of the borrower. An impaired loan for which the discounted cash flows,
collateral value or market price is less than its carrying value requires an
allowance. The allowance for impaired loans is part of the Corporation's overall
allowance for loan losses.
32
The following table shows the Corporation's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 (as
amended by SFAS No. 118) at March 31, 2003, December 31, 2002 and March 31,
2002.
MARCH 31, 2003 December 31, 2002 March 31, 2002
------------------------- ----------------------- -----------------------
RECORDED VALUATION Recorded Valuation Recorded Valuation
(In millions) INVESTMENT ALLOWANCE Investment Allowance Investment Allowance
---------- --------- ---------- --------- ---------- ---------
Impaired loans:
Valuation allowance required $104.0 $47.6 $87.9 $34.9 $95.6 $38.3
No valuation allowance required 53.1 54.1 52.7
------ ----- ------ ----- ------ -----
Total impaired loans $157.1 $47.6 $142.0 $34.9 $148.3 $38.3
====== ===== ====== ===== ====== =====
Average impaired loans during the first quarter of 2003 and 2002 were $150
million and $146 million, respectively. The Corporation recognized interest
income on impaired loans of $0.8 million for the quarters ended March 31, 2003
and 2002.
The allowance for loan losses amounted to $384 million as of March 31, 2003, or
1.93% of loans, compared with $342 million or 1.87% at the same date in 2002. At
December 31, 2002, the allowance for loan losses totaled $373 million or 1.90%
of loans. The Corporation's management considers the allowance for loan losses
to be at a level sufficient to provide for inherent loan losses in the
portfolio. For more information regarding the allowance for loan losses and
asset quality refer to the Credit Quality section of this Management's
Discussion and Analysis.
CREDIT QUALITY
Non-performing assets consist of past-due loans that are no longer accruing
interest, renegotiated loans and real estate property acquired through
foreclosure. A summary of non-performing assets by loan categories and related
ratios is presented in Table D.
TABLE D
NON-PERFORMING ASSETS
MARCH 31, December 31, March 31,
(Dollars in thousands) 2003 2002 2002
-------- ------------ ---------
Commercial, construction, industrial and agricultural $203,175 $170,039 $199,290
Lease financing 8,210 10,648 11,366
Mortgage 302,753 279,150 208,682
Consumer 37,030 40,019 39,687
Other real estate 45,759 39,399 34,550
-------- -------- --------
Total $596,927 $539,255 $493,575
======== ======== ========
Accruing loans past-due 90 days or more $ 24,019 $ 26,178 $ 24,771
======== ======== ========
Non-performing assets to loans 3.01% 2.75% 2.70%
Non-performing assets to assets 1.77 1.60 1.63
The Corporation places commercial loans and commercial leases on non-accrual
status if payments of principal or interest are delinquent 60 days rather than
the standard industry practice of 90 days. Consumer financing leases,
conventional mortgages and closed-end consumer loans are placed on non-accrual
status if payments are delinquent 90 days or four scheduled payments in arrears.
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. 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. Unsecured retail
loans to borrowers who declare bankruptcy are charged-off within 60 days of
receipt of notification of filing from the bankruptcy court. Under the standard
industry practice, closed-end consumer loans are charged-off when delinquent 120
days, but are not customarily placed on non-accrual status prior to being
charged-off.
33
At March 31, 2003, non-performing assets were $597 million or 3.01% of ending
loans, compared with $494 million or 2.70% at the same date in the previous
year, and $539 million or 2.75% at December 31, 2002. The allowance as a
percentage of non-performing loans was 69.58% as of March 31, 2003, compared
with 74.45% at the end of the first quarter of 2002 and 74.58% at December 31,
2002.
The increase in non-performing assets since March 31, 2002 was primarily
associated with mortgage loans, which rose by $94 million, or 45%.
Non-performing mortgage loans were $303 million or 51% of non-performing assets
and 3.87% of total mortgage loans as of March 31, 2003, compared with $209
million or 42% of non-performing assets and 3.13% of total mortgage loans as of
March 31, 2002. The increase in non-performing mortgage loans was primarily
driven by portfolio growth, coupled with increased delinquency due to
deteriorating economic conditions. This growth in mortgage non-performing loans
was mostly reflected in our consumer and mortgage-banking subsidiary in the
United States, Equity One. Of the total mortgage non-performing loans as of
March 31, 2003, 68% or $206 million pertained to Equity One.
Since December 31, 2002, non-performing assets increased by $58 million, or 11%,
mainly in the commercial and mortgage loans categories, which rose by $33
million and $24 million, respectively. At the end of 2002, non-performing
mortgage loans were $279 million or 52% of non-performing assets and 3.74% of
total mortgage loans. Non-performing commercial and construction loans
represented 2.54% of that loan portfolio as of March 31, 2003, compared with
2.09% at December 31, 2002. The increase in non-performing commercial loans
reflects the impact of the continued deteriorating economic conditions, as
reflected by higher unemployment and higher crude oil costs, coupled with the
economic uncertainty caused by the war in Iraq.
Non-performing consumer loans amounted to $37 million or 1.18% of consumer loans
as of March 31, 2003, compared with $40 million or 1.29% as of March 31, 2002
and December 31, 2002. The decline was the result of portfolio quality and
improved collection efforts.
Non-performing financing leases amounted to $8.2 million or 0.93% of the lease
financing portfolio as of March 31, 2003, compared with $11.4 million or 1.32%
as of March 31, 2002, and $10.6 million or 1.20% as of December 31, 2002. The
decline was the result of portfolio quality, coupled with improved collection
efforts.
Other real estate assets, which are recorded at fair value less estimated costs
to sell, reached $46 million at March 31, 2003, compared with $35 million at
March 31, 2002, and $39 million at December 31, 2002. The increase was related
to the growth in the mortgage loan portfolio and higher delinquencies in the
housing sector prompted by the economic slowdown.
Assuming the standard industry practice of placing commercial loans on
non-accrual status when payments of principal and interest are past due 90 days
or more and excluding the closed-end consumer loans from non-accruing, the
Corporation's non-performing assets as of March 31, 2003 would have been $516
million or 2.60% of loans, and the allowance for loan losses would have been
81.64% of non-performing loans. At March 31, 2002 and December 31, 2002,
adjusted non-performing assets would have been $425 million or 2.33% of loans,
and $478 million or 2.44% of loans, respectively. The allowance to
non-performing loans would have been 87.49% and 85.01% at March 31, 2002 and
December 31, 2002, respectively.
In addition to the non-performing loans discussed earlier, there was $46 million
of loans at March 31, 2003, which in management's opinion are currently subject
to potential future classification as non-performing, and therefore are
considered impaired for our calculation of the allowance for loan losses under
SFAS No. 114. At December 31, 2002 and March 31, 2002, these potential problem
loans approximated $36 million and $30 million, respectively.
NON-INTEREST INCOME
Non-interest income totaled $132.2 million for the quarter ended March 31, 2003,
compared with $130.4 million in the same period of 2002. Non-interest income
continues to be an increasingly important contributor to the growth in the
Corporation's total revenues.
34
Service charges on deposit accounts reached $39.8 million in the first quarter
of 2003, an increase of $0.8 million or 2%, compared with $39.0 million in the
first quarter of 2002. This increase was mostly related to commercial accounts,
particularly commercial account analysis fees, which have been favorably
impacted by lower earnings credit on compensatory balances in the current
interest rate scenario.
For the first quarter of 2003, other service fees rose by $4.7 million, or 8%,
compared with $61.7 million in the first quarter of 2002. Refer to Table E for a
breakdown of other service fees by major categories. Debit card fees rose by
$1.6 million, or 16%, mainly as a result of the continued growth in the
point-of-sale terminals and the automated teller machines network, and to higher
transactional volume. Insurance agency commissions also increased by $1.6
million, or 34%, driven by business expansion, the offering of new products and
services and broader delivery channels and client base. Check cashing fees
increased by $1.3 million, or 25%, mostly related to the expansion of Popular
Cash Express, the Corporation's retail financial services subsidiary in the
United States. Credit card fees and discounts rose $0.8 million, or 6%, mostly
associated with increases in merchant discount income resulting from higher
sales volume. On the other hand, the Corporation's trust fees for the quarter
ended March 31, 2003 declined by $0.6 million, or 23%, compared with the same
quarter in 2002, mostly due to the sale of our U.S. trust operations during the
second quarter of 2002. These U.S. operations contributed approximately $0.5
million in trust fees for the quarter ended March 31, 2002. The category of
other fees decreased by $0.9 million, or 11%, mainly due to lower income derived
from credit cards issued by Metris under the Banco Popular name. This income
results from the agreement reached with Metris at the time the U.S. credit card
operations were sold to that institution several years ago. Also, the decrease
in other fees relates to lower fees derived by the mortgage and consumer lending
subsidiary in the U.S.
TABLE E
OTHER SERVICE FEES
First Quarter
-----------------------------------
(Dollars in thousands) 2003 2002 Change
------- ------- ------
Other service fees:
Credit card fees and discounts $15,265 $14,468 $ 797
Debit card fees 11,672 10,071 1,601
Processing fees 9,713 9,169 544
Other fees 6,937 7,831 (894)
Check cashing fees 6,576 5,262 1,314
Insurance fees 6,263 4,677 1,586
Sale and administration of investment products 4,556 4,705 (149)
Mortgage servicing fees, net of amortization 3,431 2,894 537
Trust fees 2,013 2,610 (597)
------- ------- ------
Total other service fees $66,426 $61,687 $4,739
======= ======= ======
For the first quarter of 2003, the Corporation reported gains of $1.4 million on
the sale of securities, mainly mortgage-backed securities, compared with losses
of $4.0 million for the same period in 2002.
The aforementioned gains were partially offset by trading and derivative losses
of $0.9 million and $10.7 million, respectively, for the quarter ended March 31,
2003. For the same period in the previous year, trading losses amounted to $1.0
million, while derivative gains totaled $0.5 million. Derivative losses for the
quarter ended March 31, 2003 were principally attributed to changes in the fair
value of the Corporation's interest rate swaps. Subsequent to the quarter ended
March 31, 2003, the Corporation cancelled these interest swap contracts as part
of its risk management strategies.
Gain on sales of loans, including loans held-for-sale, totaled $19.5 million for
the quarter ended March 31, 2003, compared with $17.9 million for the same
period in 2002, an increase of $1.6 million or 9%. This increase was mostly the
result of higher gains on sales of mortgage loans, which derived in part from
higher mortgage loan origination volume and subsequent sales of these loans.
This rise was partially offset by lower gains on sale of loans guaranteed by the
Small Business Administration since no transactions of this type have taken
place in 2003.
35
Other operating income amounted to $16.6 million for the quarter ended March 31,
2003, reflecting a slight increase of $0.3 million from the $16.3 million
reported in the first quarter of 2002.
OPERATING EXPENSES
During the first quarter of 2003, operating expenses totaled $263.6 million, an
increase of $21.4 million or 9%, compared with $242.2 million in the same period
of 2002.
Personnel costs, the largest category of operating expenses, totaled $132.3
million in the first quarter of 2003, an increase of $12.0 million or 10%,
compared with $120.3 million in the same period last year. The increase in
personnel costs is mostly due to higher salaries resulting mostly from merit
increases, incentive compensation, pension and profit sharing expenses. Several
changes were made to the assumptions followed in determining pension costs. The
Corporation lowered the assumed discount rate at December 31, 2002 and rate of
return for the pension plan in 2003 from 6.75% to 6.50%, and from 8.50% to
8.00%, respectively. Refer to the critical accounting policies section in the
Management's Discussion and Analysis included in Popular, Inc.'s 2002 Financial
Review and Supplementary Information to Stockholders, incorporated by reference
in Popular, Inc.'s Annual Report on Form 10-K for the year ended December 31,
2002 for a discussion on this latter topic.
Other operating expenses, excluding personnel costs, amounted to $131.3 million
for the first quarter of 2003, an increase of $9.4 million or 8%, when compared
to the same period in 2002. This rise was mainly reflected in the categories of
business promotion, equipment expenses, net occupancy expenses, communications,
professional fees and other operating expenses, offset in part by lower
amortization of intangible assets as a result of some intangibles that became
fully amortized during 2002. The increase in business promotion of $2.6 million
was mostly associated with the PREMIA rewards program, an innovative program
targeted to the Corporation's customers in Puerto Rico, which was launched
during the second quarter of 2002. This increase was partially offset by other
reductions in advertising and public relations expenses. Equipment expenses
increased by $1.6 million, mainly due to higher amortization of software
packages to support the Corporation's internal technology infrastructure, as
well as its electronic delivery channels. Net occupancy expenses rose by $1.4
million, mainly due to rental and other expenses related to the new headquarter
facilities for the U.S. operations and the continued expansion of the retail
financial services business. Communications costs also rose by $1.4 million,
mainly due to higher depreciation expenses on communication equipment, as well
as higher postage and telephone expenses for business support. The increase in
professional fees of $1.3 million was mostly associated with legal costs and
programming services, while the rise of $1.4 million in other operating expenses
was mainly the result of higher other real estate and credit card interchange
expenses.
INCOME TAX
Income tax expense for the quarter ended March 31, 2003 amounted to $30.9
million, an increase of $0.8 million, or 3%, from $30.1 million in the same
quarter of 2002. The increase was primarily due to higher pretax earnings for
the current period, partially offset by an increase in the deferred tax asset
related to the derivative losses in the U.S. mainland and by a decrease in the
disallowance of expenses attributed to tax exempt investments in Puerto Rico.
The effective tax rates for these quarters were 23.76% and 25.29%, respectively.
The decline in the effective tax rate resulted mostly from the tax benefit
related to unrealized derivative losses.
BALANCE SHEET COMMENTS
The Corporation's total assets at March 31, 2003 reached $33.7 billion,
remaining at the same level as December 31, 2002, and increasing by $3.4
billion, or 11%, compared with $30.3 billion at March 31, 2002. Earning assets
totaled $31.8 billion at March 31, 2003, compared with $28.9 billion at March
31, 2002 and $31.9 billion at December 31, 2002.
Investment and trading securities reached $10.9 billion at March 31, 2003, a
decrease of $0.3 billion or 3%, when compared with $11.2 billion at December 31,
2002. The decrease since the end of 2002 is partly attributed to higher
prepayment in the collateralized mortgage obligations and mortgage-backed
securities portfolios. Investment and trading securities at March 31, 2002
totaled $9.9 billion. For a breakdown of the Corporation's available-for-sale
and held-to-maturity investment portfolios refer to Notes 3 and 4 to the
unaudited consolidated financial statements.
36
At March 31, 2003, money market investments totaled $1.0 billion, an increase of
$289 million, or 40%, over the $720 million reported at March 31, 2002, and a
decrease of $86 million, or 8% lower than the amount reported at December 31,
2002. The increase from March 31, 2002 was mostly in federal funds sold by the
banking subsidiaries.
A breakdown of the Corporation's loan portfolio is presented in Table F. At
March 31, 2003, total loans amounted to $19.9 billion, reflecting a slight
increase of $280 million, or 1%, from December 31, 2002. This increase resulted
from higher volume of mortgage loans by $353 million, while consumer loans rose
by $44 million, mainly due to strong sales efforts in the auto market. These
favorable variances were partially offset by a decrease in commercial loans,
including construction, of $115 million. When compared with March 31, 2002, the
loan portfolio grew by $1.6 billion, or 9%. The mortgage and commercial loan
portfolios, including construction loans, accounted for the largest increases,
rising $1.1 billion and $384 million, respectively, from March 31, 2002. The
growth in mortgage loans was associated with strong sales efforts and the
prevailing low interest rate environment, while the growth in the commercial
loan portfolio resulted principally from the continued marketing efforts towards
the retail and middle market, notwithstanding the slowdown experienced in the
economy. The consumer and lease financing portfolios increased by $57 million
and $21 million, respectively, from March 31, 2002. The rise in consumer loans
was mainly reflected in the auto loans category, offset by lower demand for
personal loans and the sale of approximately $20 million of small loans by
Popular Finance in the second quarter of 2002.
TABLE F
LOANS ENDING BALANCES
MARCH 31, December 31, March 31,
(Dollars in thousands) 2003 2002 2002
----------- ------------ -----------
Commercial, industrial and agricultural $ 7,768,938 $ 7,883,381 $ 7,379,137
Construction 245,289 245,926 251,003
Lease financing 885,286 886,731 864,008
Mortgage * 7,819,121 7,466,531 6,676,227
Consumer 3,143,249 3,099,550 3,086,549
----------- ----------- -----------
Total $19,861,883 $19,582,119 $18,256,924
=========== =========== ===========
* Includes loans held-for-sale
Premises and equipment totaled $472 million at March 31, 2003, compared with
$461 million at December 31, 2002 and $405 million at March 31, 2002. The
increase of $67 million since March 31, 2002 is mostly associated with office
remodelings and building acquisitions, as well as premises under construction
for business expansion or relocations.
Other assets amounted to $689 million at March 31, 2003, compared with $578
million at December 31, 2002, an increase of $111 million or 19%. This increase
was mostly associated with the sale of approximately $83 million in
mortgage-backed securities, which were accounted at trade date, but settlement
did not take place until April 2003. The rise since December 31, 2002 was also
associated with advances on securitizations and insurance premium receivables,
among other factors. At March 31, 2002, other assets amounted to $549 million,
and the variance from March 31, 2003 was mostly related to the same factors
described above.
At March 31, 2003, total deposits amounted to $17.6 billion, remaining at the
same levels at December 31, 2002. When compared with March 31, 2002, total
deposits rose $1.1 billion, or 7%, from $16.5 billion. Savings and demand
deposits accounted for the largest increases, rising $707 million and $353
million, respectively. Time deposits, which include brokered certificates of
deposits, increased by $53 million since March 31, 2002.
Borrowed funds, including subordinated notes and capital securities, increased
by $1.7 billion, from $11.1 billion as of March 31, 2002 to $12.8 billion at the
end of the first quarter of 2003. The increase in borrowed funds was used
primarily to fund the Corporation's loan growth and investment activities.
Borrowed funds at December 31, 2002 were $13.0 billion.
37
Other liabilities were $609 million at March 31, 2003, a decrease of $68
million, or 10%, compared with December 31, 2002. This decrease in other
liabilities was mainly related to payables to broker/dealers and counterparties
related to transactions accounted at trade date, lower accrued interest expense,
and the forfeiture payable under the Deferred Prosecution Agreement, among
others. Other liabilities totaled $524 million at March 31, 2002. The increase
from that date is partly associated with accrued taxes and derivative
liabilities, among other factors.
The Corporation's stockholders' equity at March 31, 2003 was $2.7 billion,
compared with $2.2 billion at March 31, 2002 and $2.4 billion at the end of
2002. The increase of $488 million since the first quarter of 2002 reflects the
issuance of 7,475,000 shares of the Corporation's 6.375% Non-cumulative Monthly
Income Preferred Stock, 2003 Series A, during the first quarter of 2003. This
issuance, net of related costs, contributed approximately $182 million in
additional capital, which qualifies as Tier 1 capital for regulatory purposes.
Also, contributing to the increase in stockholders' equity were earnings
retention and higher unrealized gains in the securities available-for-sale
portfolio. Partially offsetting these increases was the repurchase of $139
million in common stock from Banco Popular Retirement Plan in May 2002. The
increase in stockholders' equity of $262 million from December 31, 2002 is also
related to the preferred stock issuance and earnings retention.
Dividends declared per common share for both quarters ended March 31, 2003 and
2002 were $0.20. The dividend payout ratio to common stockholders for the
quarters ended March 31, 2003 and 2002 was 27.45% and 30.85%, respectively.
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 for the quarters ended March 31,
2003 and 2002, as well as for December 31, 2002, are presented in Table G. Also,
at March 31, 2003, December 31, 2002 and March 31, 2002, BPPR, BPNA and BP, N.A.
were all well-capitalized.
Book value per common share was $18.75 at March 31, 2003, compared with $16.01
at the end of the first quarter of 2002, and $18.20 at December 31, 2002. The
Corporation's market capitalization at March 31, 2003 and 2002, and at December
31, 2002, was $4.5 billion, $4.0 billion, and $4.5 billion, respectively.
The market value of Popular, Inc.'s common stock at March 31, 2003 was $33.99
per common share, compared with $29.22 at March 31, 2002 and $33.80 at December
31, 2002. The Corporation's common and preferred stocks are traded on the
National Association of Securities Dealers Automated Quotation (NASDAQ) National
Market System under the symbols BPOP and BPOPO, respectively.
38
TABLE G
CAPITAL ADEQUACY DATA
MARCH 31, December 31, March 31,
(Dollars in thousands) 2003 2002 2002
----------- ------------ -----------
Risk-based capital
Tier I capital $ 2,300,050 $ 2,054,027 $ 1,903,589
Supplementary (Tier II) capital 359,524 346,531 334,747
----------- ----------- -----------
Total capital $ 2,659,574 $ 2,400,558 $ 2,238,336
=========== =========== ===========
Risk-weighted assets
Balance sheet items 19,593,522 19,487,339 18,197,827
Off-balance sheet items 1,399,447 1,355,430 469,492
----------- ----------- -----------
Total risk-weighted assets $20,992,969 $20,842,769 $18,667,319
=========== =========== ===========
Average assets $32,784,813 $33,196,101 $30,022,671
=========== =========== ===========
Ratios:
Tier I capital (minimum required - 4.00%) 10.96% 9.85% 10.20%
Total capital (minimum required - 8.00%) 12.67% 11.52% 11.99%
Leverage ratio * 7.02% 6.19% 6.34%
* All banks are required to have a minimum Tier I leverage ratio of 3% or
4% of adjusted quarterly average assets, depending on the bank's
classification.
OFF-BALANCE SHEET ACTIVITIES
In past years, in the ordinary course of business, the Corporation conducted
asset securitizations involving the transfer of mortgage loans to a qualifying
special purpose entity (QSPE), which in turn transferred the assets, including
their titles, to different trusts, thus isolating those loans from the
Corporation's assets. The transactions qualified for sale accounting based on
the provisions of SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", and as such, these trusts
are not consolidated in the Corporation's financial statements. As of March 31,
2003, these trusts held approximately $225 million in assets in the form of
mortgage loans. Their liabilities in the form of debt principal due to investors
approximated $217 million at the end of the first quarter of 2003. In these
securitizations, the Corporation retained servicing responsibilities and certain
subordinated interests in the form of interest-only securities. The investors
and the securitization trusts have no recourse to the Corporation's assets. The
servicing rights and the interest-only securities retained by the Corporation
are recorded in the statement of condition at the lower of amortized cost or
market, and fair value, respectively. During the three months ended March 31,
2003, the Corporation recorded approximately $0.4 million of write-downs related
to interest-only strips, in which the decline in fair value was considered other
than temporary.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Market risk refers to the impact of changes in interest rates on the
Corporation's net interest income, market value of equity and trading
operations. It also arises from fluctuations in the value of some foreign
currencies against the U.S. dollar. Despite the varied nature of market risks,
the primary source of this risk at the Corporation is the impact of changes in
interest rates. Depending on the duration and repricing characteristics of the
Corporation's assets, liabilities and derivatives instruments, changes in
interest rates could either increase or decrease the level of net interest
income. The Corporation maintains a formal asset and liability management
process to quantify, monitor and control interest rate risk (IRR) and to assist
management in maintaining stability in the net interest margin under varying
interest rate environments.
39
The Corporation uses various techniques to assess the degree of interest rate
risk, including simulation analysis and static gap estimates for measuring
short-term IRR, and duration analysis to quantify the level of long-term IRR.
These techniques focus on different aspects of the interest rate risk that is
assumed at any point in time, and are therefore used jointly to make informed
judgments about the risk levels and the appropriateness of strategies under
consideration.
An interest rate sensitivity analysis performed at the Corporation level is the
primary tool used in expressing the potential loss in future earnings resulting
from selected hypothetical changes in interest rates. Sensitivity analysis is
calculated on a monthly basis using a simulation model, which incorporates
actual balance sheet figures detailed by maturity and interest yields or costs,
the expected balance sheet dynamics, reinvestments, and other non-interest
related data. Simulations are processed using various interest rate scenarios to
determine potential changes to the future earnings of the Corporation.
Computations of the prospective effects of hypothetical interest rate changes
are based on many assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay. They should not be relied upon as
indicative of actual results. Further, the computations do not contemplate
actions that management could take to respond to changes in interest rates. By
their nature, these forward-looking computations are only estimates and may be
different from what actually may occur in the future.
Based on the results of the sensitivity analysis as of March 31, 2003, the
change in net interest income, on a hypothetical rising rate scenario, for the
next twelve months is an estimated increase of $3.2 million and the change for
the same period, utilizing a hypothetical declining rate scenario, is an
estimated decrease of $0.3 million. Both hypothetical rate scenarios consider a
gradual change of 100 basis points up and down during the twelve-month period
from the prevailing rates at March 31, 2003. These estimated changes are within
the policy guidelines established by the Board of Directors.
The Corporation maintains an overall interest rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned
fluctuations in net interest income that are caused by interest rate volatility.
The Corporation's goal is to manage interest rate sensitivity by modifying the
repricing or maturity characteristics of certain balance sheet assets and
liabilities so that the net interest margin is not, on a material basis,
adversely affected by movements in interest rates. Derivative instruments that
are used, to a limited extent, include interest rate swaps, interest rate
forwards and future contracts, interest rate swaptions, foreign exchange
contracts, and interest rate caps, floors and put options embedded in interest
rate contracts.
As a matter of policy, the Corporation does not use highly leveraged derivative
instruments for interest rate risk management. Hedging strategies are developed
through analysis of data derived from financial simulation models and other
internal and industry sources. The resulting hedging strategies are then
incorporated into Popular, Inc.'s overall interest rate risk management and
trading strategies. Several derivative contracts that the Corporation has
entered into do not qualify for accounting as hedges as defined in SFAS No. 133,
and their changes in market value are recognized in current earnings. 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 mortgage banking activities, the
purchase of debt securities for the purpose of selling them in the near term and
positioning securities for resale to retail customers. As the trading
instruments are recognized at market value, the changes resulting from
fluctuations in market prices, interest rates or exchange rates directly affect
current earnings. In the opinion of management, the size and composition of the
trading portfolio as of March 31, 2003 do not represent a potentially
significant source of market risk for the Corporation. The Corporation does not
participate in any trading activities involving commodity contracts.
The Corporation conducts business in certain Latin American markets through
several of its processing and information technology services and products
subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas,
S.A. 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. As of March 31, 2003 the Corporation had $10 million in
foreign currency translation adjustment as part of accumulated other
comprehensive
40
income, compared with $2 million at December 31, 2002. The increase was mostly
associated with a devaluation of the Dominican peso. However, management does
not expect future exchange rate volatility between the U.S. dollar and the
particular foreign currency to affect significantly the Corporation's
consolidated financial condition or results of operations.
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 maintain adequate levels of
liquidity.
The Corporation raises its funding from a combination of retail and wholesale
markets. Core deposits are one of the Corporation's primary sources of funding.
Deposits tend to be less volatile than institutional borrowings, and their cost
is less sensitive to changes in market rates. The extensive branch network of
the Corporation in the Puerto Rico market and its expanding network in major
U.S. markets, have enabled it to maintain a significant and stable base of
deposits.
The Corporation has established borrowing relationships with the Federal Home
Loan Bank (FHLB), the Federal Reserve Bank and other correspondent banks, which
further support and enhance liquidity. Wholesale or institutional sources of
funds are comprised primarily of other financial intermediaries such as
commercial banks, securities dealers, investment companies, insurance companies,
as well as non-financial corporations. Wholesale or institutional sources of
funding include the repo, federal funds and Eurodollar markets, commercial
paper, medium-term notes, senior debentures and asset securitizations.
Another important liquidity source to the Corporation is its assets,
particularly the investment and loan portfolios. Refer to Notes 3 and 4 to the
consolidated financial statements for further information as to the composition
of the available-for-sale and held-to-maturity investment portfolios. Liquid
U.S. Treasury and Agency securities can be used to raise funds in the repo
markets. The loan portfolio can also be used to obtain funding in the capital
markets. In particular, mortgage loans and some types of consumer loans, and to
a lesser extent commercial loans, have highly developed secondary markets. In
addition, other sources of liquidity include maturities of money market
investments, repayments of loans and investment securities, and cash generated
from operations, such as fees collected for services.
Also, the Corporation obtains liquidity in the capital markets through the sale
of its debt and equity securities. The Corporation has a shelf registration with
the Securities and Exchange Commission, which is intended to permit the
Corporation to raise funds through sales of preferred stock, medium-term notes
or other debt securities with a relatively short lead-time. As of March 31,
2003, the Corporation had available approximately $1.8 billion under this shelf
registration.
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.
Although a downgrade in the credit rating of the Corporation may impact its
ability to raise deposits, the fact that most deposits at the Corporation's
banking subsidiaries are federally insured, is expected to mitigate the effect
of a downgrade in credit rating.
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
41
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
does not comply with those agreements, an event of default may occur. 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 and the Federal Reserve Discount Window. A higher
proportion of the funding of the non-banking subsidiaries is from institutional
sources, as compared to the banking subsidiaries, and these are more sensitive
to the perceived credit risk of the Corporation than providers of deposits. In
the event of a downgrade in the credit ratings of the Corporation, the
non-banking subsidiaries may experience an increase in their cost of funds and
reduced availability of financing. Management does not anticipate such a
scenario developing in the foreseeable future.
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 (except if
there is a U.S. national recession) and its related risks to the Corporation.
Management intends to finance the future operations of the Corporation with a
combination of retail and commercial deposits, and to a lesser extent, short and
long-term borrowed funds. The sources and the maturities of these borrowings
will be diversified to avoid undue reliance on any single source and maintain an
orderly volume of borrowings maturing in the future.
Factors that the Corporation does not control, such as the economic outlook of
its principal markets, could affect its ability to obtain funding. In order to
prepare for the possibility of such a scenario, management has adopted
contingency plans for raising financing under stress scenarios, where important
sources of funds that are usually fully available are temporarily not willing to
lend to the Corporation.
These plans provide for using alternate funding mechanisms such as the pledging
or securitization of certain asset classes, committed credit lines, and loan
facilities implemented with the Federal Home Loan Bank of New York and the
Federal Reserve Bank of New York. The Corporation has a substantial amount of
assets available for raising funds through non-traditional channels.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report on Form
10-Q, an evaluation was carried out under the supervision and with the
participation of Popular, Inc.'s management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective. No significant changes were made in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various lawsuits arising
in the ordinary course of business. Management believes, based on the opinion of
legal counsel, that the aggregate liabilities, if any, arising from such actions
would not have a material adverse effect on the financial position and results
of operations of the Corporation.
As disclosed on page 15 of the 10-K, on January 16, 2003 the U.S. District
Court for the District of Puerto Rico approved a Deferred Prosecution Agreement
(the "Agreement") among Banco Popular, the U.S. Department of Justice, the
Board of Governors of the Federal Reserve System, and the Financial Crimes
Enforcement Network of the U.S. Department of the Treasury ("FinCEN"). The
Agreement concludes an investigation related principally to the circumstances
surrounding the activities of a former customer of the Bank, including Banco
Popular's reporting and compliance efforts, as well as certain other customers.
The former customer has pleaded guilty to money laundering, including in
connection with transactions made through an account at Banco Popular. No
current or former Bank officer, director or employee has been charged with a
crime or accused of benefiting financially from the transactions described in
the Agreement.
Under the Agreement, Banco Popular agreed to the filing of a one-count
information charging it with failure to file suspicious activity reports in a
timely and complete manner. The Agreement provides for Banco Popular to forfeit
$21.6 million to the United States, and resolves all claims the United States,
FinCEN or the Federal Reserve may have against Banco Popular arising from the
matters that were subject to investigation.
This settlement also terminates the Written Agreement Banco Popular signed with
the Federal Reserve Bank of New York on March 9, 2000, which required
enhancements to Banco Popular's anti-money laundering and Bank Secrecy Act
program. The Federal Reserve found Banco Popular to be fully compliant with the
Written Agreement on November 26, 2001. Finally, the Agreement provides that
the court will dismiss the information and the Deferred Prosecution Agreement
will expire 12 months following the settlement, provided that Banco Popular
complies with its obligations under the Agreement.
42
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 26, 2003 and March 24, 2003, Popular, Inc. issued 6,500,000 shares
and 975,000 shares, respectively, of its 6.375% Noncumulative Monthly Income
Preferred Stock, 2003 Series A (the "Series A Preferred Stock") having a
liquidation preference value of $25 per share. The Series A Preferred Stock
ranks senior to Popular, Inc.'s outstanding Series A Participating Cumulative
Preferred Stock, with respect to dividend rights and rights on liquidation. The
terms of the Series A Preferred Stock do not permit Popular, Inc. to declare or
pay any dividends on the Common Stock (1) unless all accrued and unpaid
dividends on Series A Preferred Stock for the 12 dividend periods preceding the
dividend payment have been paid and the full dividend on the Series A Preferred
Stock for the current monthly dividend period is contemporaneously declared and
paid or set aside for payment or (2) if Popular, Inc. has defaulted in the
payment of the redemption price of any shares of Series A Preferred Stock called
for redemption.
ITEM 5. OTHER INFORMATION
Sale of Medium-term Notes
After the first quarter end of 2003, Popular North America issued and sold $500
million in five-year, fixed-rate medium-term notes under the shelf registration
filed with the Securities and Exchange Commission in November 2001. The funds
will be used to pay existing short-term debt and to finance the growth of the
Corporation's operations in the United States.
Declaration of Cash Dividend
On April 30, 2003, the Board of Directors of Popular, Inc. also voted to declare
a cash dividend of $0.27 per common share for the second quarter of 2003,
payable on July 1, 2003, to shareholders of record on June 13, 2003. The
dividend represents a 35% increase in the Company's quarterly dividend.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Exhibit Description Reference
- -------------- ------------------- ---------
3.1 Certificate of Designation designating the terms of
the 2003 Series A Preferred Stock. (Incorporated by
reference to Exhibit 3.3 to Form 8-A of the Company
filed on February 25, 2003).
4.29 Form of 2003 Series A Preferred Stock Certificate. (Incorporated
by reference to Exhibit 4.1 to Form 8-A of the Company filed on
February 25, 2003).
12.1 Computation of the ratios of earnings to fixed charges
and earnings to fixed charges and preferred stock dividends. Exhibit "A"
99.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes -Oxley Act of 2002. Exhibit "B"
b) Five reports on Form 8-K were filed for the quarter ended March 31,
2003:
Dated: January 17, 2003
Items reported: Item 5 - Other Events (Operational results
for the quarter and year ended December 31, 2002).
43
Dated: February 6, 2003
Items reported: Item 5 - Other Events (Deferred Prosecution
Agreement between Popular, Inc and the U.S. Justice
Department, the Board of Governors of the Federal
Reserve System and the Financial Crimes Enforcement
Network of the U.S. Department of the Treasury. Also
includes the filing of the computation of the ratios
of earnings to fixed charges and earnings to fixed
charges and preferred stock dividends for the nine
month period ended September 30, 2002 and for the
five years ended December 31, 2001).
Dated: February 26, 2003
Items reported: Item 5 - Other Events (Filing of the Underwriting
Agreement, as well as various legal opinions
relating to the offering and sale of 6,500,000
shares of the Corporation's 6.375% Noncumulative
Monthly Income Preferred Stock, 2003 Series A).
Dated: March 19, 2003
Items reported: Item 9 - Regulation FD Disclosure (Certification of
the Chief Executive Officer and Chief Financial
Officer required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002).
Dated: March 26, 2003
Items reported: Item 5 - Other Events (Filing of documents relating
to the issuance by Popular North America of $500
million in five-year, fixed-rate medium-term notes
under the shelf registration filed with the
Securities and Exchange Commission in November
2001).
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POPULAR, INC.
(Registrant)
Date: May 14, 2003 By: /s/ Jorge A. Junquera
-----------------------------------
Jorge A. Junquera
Senior Executive Vice President
Date: May 14, 2003 By: /s/ Amilcar L. Jordan
-----------------------------------
Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller
45
CERTIFICATION
I, Richard L. Carrion, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Popular, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
By: /s/ Richard L. Carrion
-----------------------------------
Richard L. Carrion
Chief Executive Officer
46
CERTIFICATION
I, Jorge A. Junquera, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Popular, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
By: /s/ Jorge A. Junquera
-----------------------------------
Jorge A. Junquera
Chief Financial Officer
47