POPULAR INC - 10-Q Quarterly Report

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

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

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

Page

Part I – Financial Information

Item 1

Financial Statements

Unaudited Consolidated Statements of Condition as of June 30, 2003, December 31, 2002 and June 30, 2002

Unaudited Consolidated Statements of Income for the quarters and six months ended June 30, 2003 and 2002

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2003 and 2002

Unaudited Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2003 and 2002

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002

Notes to Unaudited Consolidated Financial Statements

8-28

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29-44

Item 3

Quantitative and Qualitative Disclosures about Market Risk

Item 4

Controls and Procedures

Part II – Other Information

Item 1

Legal Proceedings

Item 4

Submission of Matters to a Vote of Security Holders

Item 6

Exhibits and Reports on Form 8-K

Signatures

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.


				June 30,			December 31,			June 30,
(In thousands, except share information)				2003			2002			2002

ASSETS
Cash and due from banks				$	905,412		$	652,556		$	1,102,933

Money market investments:
			Federal funds sold and securities purchased under agreements to resell		779,076			1,091,435			1,067,764
			Time deposits with other banks		4,190			3,057			3,056
			Bankers’ acceptances		12			154			838

					783,278			1,094,646			1,071,658

Investment securities available-for-sale, at market value:
			Pledged securities with creditors’ right to repledge		5,000,695			4,397,974			4,182,150
			Other investment securities available-for-sale		6,413,269			6,133,929			5,936,069
Investment securities held-to-maturity, at amortized cost					194,266			180,751			225,070
Trading account securities, at market value:
			Pledged securities with creditors’ right to repledge		540,549			416,979			230,145
			Other trading securities		109,904			93,367			77,701
Loans held-for-sale, at lower of cost or market					333,334			1,092,927			910,006

Loans:
Loans pledged with creditors’ right to repledge					478,998			420,724			483,686
Other loans					20,339,646			18,355,123			17,819,028
Less – Unearned income					279,902			286,655			311,578
			Allowance for loan losses		397,503			372,797			347,230

					20,141,239			18,116,395			17,643,906

Premises and equipment					473,520			461,177			404,382
Other real estate					47,863			39,399			35,193
Accrued income receivable					182,349			184,549			190,612
Other assets					728,973			578,091			516,726
Goodwill					188,310			182,965			178,739
Other intangible assets					30,593			34,647			35,432

				$	36,073,554		$	33,660,352		$	32,740,722

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposits:
		Non-interest bearing		$	4,216,227		$	3,367,385		$	4,012,168
		Interest bearing			14,059,196			14,247,355			13,817,119

					18,275,423			17,614,740			17,829,287
	Federal funds purchased and securities sold under agreements to repurchase				7,655,105			6,684,551			5,829,016
	Other short-term borrowings				1,171,063			1,703,562			1,944,642
	Notes payable				5,276,081			4,298,853			4,135,749
	Other liabilities				612,610			677,605			524,447

					32,990,282			30,979,311			30,263,141

	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					1,401			1,162			964

Stockholders’ equity:
	Preferred stock, $25 liquidation value; 10,000,000 shares authorized (7,475,000 issued and outstanding at June 30, 2003)				186,875			—			—
	Common stock, $6 par value; 180,000,000 shares authorized; 139,355,728 shares issued (December 31, 2002 – 139,133,156; June 30, 2002 – 138,945,303) and 132,653,378 shares outstanding (December 31, 2002 – 132,439,047; June 30, 2002 – 132,251,194)				836,134			834,799			833,672
	Surplus				280,526			278,366			272,761
	Retained earnings				1,467,833			1,300,437			1,186,814
	Treasury stock – at cost, 6,702,350 shares (December 31, 2002 – 6,694,109; June 30, 2002 – 6,694,109)				(205,527	)		(205,210	)		(205,210	)
	Accumulated other comprehensive income, net of tax of $73,166 (December 31, 2002 – $53,070; June 30, 2002 – $38,910)				247,030			202,487			119,580

					2,812,871			2,410,879			2,207,617

				$	36,073,554		$	33,660,352		$	32,740,722

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


		Quarters ended						Six months ended
		June 30,						June 30,
(Dollars in thousands, except per share information)		2003			2002			2003			2002

INTEREST INCOME:
Loans		$	385,547		$	380,166		$	763,480		$	752,388
Money market investments			6,455			7,370			13,817			15,155
Investment securities			110,689			115,377			220,490			227,688
Trading account securities			8,968			3,086			17,153			6,587

			511,659			505,999			1,014,940			1,001,818

INTEREST EXPENSE:
Deposits			85,621			110,356			179,816			223,286
Short-term borrowings			37,804			45,274			78,593			89,718
Long-term debt			61,087			55,691			119,623			108,721

			184,512			211,321			378,032			421,725

Net interest income			327,147			294,678			636,908			580,093
Provision for loan losses			49,325			50,075			97,534			104,529

Net interest income after provision for loan losses			277,822			244,603			539,374			475,564
Service charges on deposit accounts			39,669			39,507			79,508			78,480
Other service fees			69,016			66,037			135,442			127,724
Gain (loss) on sale of securities			29,875			85			31,289			(3,925	)
Trading account loss			(4,243	)		(359	)		(5,180	)		(1,389	)
Derivatives gains (losses)			2,548			(855	)		(8,107	)		(344	)
Gain on sales of loans			15,367			11,599			34,883			29,543
Other operating income			19,940			18,974			36,497			35,307

			449,994			379,591			843,706			740,960

OPERATING EXPENSES:
Personnel costs:
	Salaries		94,333			90,746			190,369			179,307
	Profit sharing		4,918			5,368			11,163			10,308
	Pension and other benefits		30,517			26,469			60,585			53,270

			129,768			122,583			262,117			242,885
Net occupancy expenses			20,742			20,048			41,202			39,078
Equipment expenses			26,056			24,376			52,406			49,141
Other taxes			9,302			9,285			18,854			18,833
Professional fees			20,113			19,724			38,889			37,231
Communications			14,312			13,111			29,009			26,384
Business promotion			17,010			16,831			32,980			30,199
Printing and supplies			5,004			5,078			9,747			9,587
Other operating expenses			34,943			17,061			53,661			34,382
Amortization of intangibles			2,028			2,556			4,055			5,099

			279,278			250,653			542,920			492,819

Income before income tax and minority interest			170,716			128,938			300,786			248,141
Income tax			35,946			32,594			66,849			62,742
Net gain of minority interest			(163	)		(39	)		(241	)		(50	)

NET INCOME		$	134,607		$	96,305		$	233,696		$	185,349

NET INCOME APPLICABLE TO COMMON STOCK		$	131,594		$	96,305		$	229,734		$	182,839

EARNINGS PER COMMON SHARE (BASIC AND DILUTED)		$	0.99		$	0.72		$	1.73		$	1.35

DIVIDENDS DECLARED PER COMMON SHARE		$	0.27		$	0.20		$	0.47		$	0.40

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

POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)


			Six months ended June 30,
(In thousands)			2003			2002

Preferred stock:
	Balance at beginning of year			—		$	100,000
	Issuance (redemption) of preferred stock		$	186,875			(100,000	)

		Balance at end of period		186,875			—

Common stock:
	Balance at beginning of year			834,799			832,498
	Common stock issued under dividend reinvestment plan			1,319			1,174
	Options exercised			16			—

		Balance at end of period		836,134			833,672

Surplus:
	Balance at beginning of year			278,366			268,544
	Common stock issued under dividend reinvestment plan			5,769			4,217
	Issuance cost of preferred stock			(4,735	)		—
	Options granted			1,043			—
	Options exercised			83			—

		Balance at end of period		280,526			272,761

Retained earnings:
	Balance at beginning of year			1,300,437			1,057,724
	Net income			233,696			185,349
	Cash dividends declared on common stock			(62,338	)		(53,749	)
	Cash dividends declared on preferred stock			(3,962	)		(510	)
	Redemption of preferred stock			—			(2,000	)

		Balance at end of period		1,467,833			1,186,814

Accumulated other comprehensive income:
	Balance at beginning of year			202,487			80,188
	Other comprehensive income, net of tax			44,543			39,392

		Balance at end of period		247,030			119,580

Treasury stock – at cost:
	Balance at beginning of year			(205,210	)		(66,136	)
	Purchase of common stock			(317	)		(139,074	)

		Balance at end of period		(205,527	)		(205,210	)

Total stockholders’ equity			$	2,812,871		$	2,207,617

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


			Quarters ended						Six months ended
			June 30,						June 30,
(In thousands)			2003			2002			2003			2002

Net Income			$	134,607		$	96,305		$	233,696		$	185,349

Other comprehensive income, net of tax:
	Foreign currency translation adjustment			(5,367	)		(245	)		(13,156	)		(382	)
	Unrealized gains on securities:
		Unrealized holding gains arising during the period, net of tax of $23,556 (2002 - $22,128) for the quarter and $25,234 (2002 - $10,465) for the six-month period		72,830			90,109			85,641			38,985
		Less: reclassification adjustment for gains (losses) included in net income, net of tax of $3,919 (2002 - $40) for the quarter and $4,458 (2002 - ($1,522)) for the six-month period		25,956			(19	)		26,831			(2,466	)
		Net loss on cash flow hedges		(2,040	)		(1,326	)		(4,342	)		(2,454	)
		Less: reclassification adjustment for losses included in net income, net of tax of ($993) (2002 – ($451)) for the quarter and ($2,052) (2002 – ($514)) for the six-month period		(1,571	)		(683	)		(3,249	)		(783	)
		Cumulative effect of accounting change
		Less: reclassification adjustment for gains included in net income		18			—			18			6

		Total other comprehensive income, net of tax	$	41,020		$	89,240		$	44,543		$	39,392

		Comprehensive income	$	175,627		$	185,545		$	278,239		$	224,741

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


			For the six months ended
			June 30,
(In thousands)			2003			2002

Cash flows from operating activities:
	Net income		$	233,696		$	185,349

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization of premises and equipment		36,897			38,042
		Provision for loan losses		97,534			104,529
		Amortization of intangibles		4,055			5,099
		Net (gain) loss on sales of investment securities		(31,289	)		3,925
		Net loss on derivatives		8,107			344
		Net loss on disposition of premises and equipment		106			223
		Net gain on sales of loans, excluding loans held-for-sale		(3,444	)		(5,838	)
		Net amortization of premiums and accretion of discounts on investments		11,394			7,521
		Net amortization of deferred loan fees and costs		20,045			17,365
		Earnings from investments under the equity method		(2,964	)		(3,045	)
		Stock options expense		1,066			—
		Net decrease in loans held-for-sale		121,669			29,482
		Net increase in trading securities		(223,111	)		(37,660	)
		Net decrease (increase) in accrued income receivable		2,200			(4,469	)
		Net (increase) decrease in other assets		(109,908	)		5,919
		Net decrease in interest payable		(9,872	)		(2,255	)
		Net decrease in deferred and current taxes		(21,471	)		(30,785	)
		Net increase in postretirement benefit obligation		5,622			1,533
		Net (decrease) increase in other liabilities		(73,725	)		13,938

Total adjustments				(167,089	)		143,868

Net cash provided by operating activities				66,607			329,217

Cash flows from investing activities:
	Net decrease (increase) in money market investments			311,368			(247,868	)
	Purchases of investment securities held-to-maturity			(338,878	)		(230,173	)
	Maturities of investment securities held-to-maturity			325,555			591,427
	Purchases of investment securities available-for-sale			(4,633,860	)		(3,956,630	)
	Maturities of investment securities available-for-sale			3,658,466			2,137,502
	Proceeds from sales of investment securities available-for-sale			258,093			1,029,857
	Net disbursements on loans			(479,973	)		(684,660	)
	Proceeds from sales of loans			98,596			294,422
	Acquisition of loan portfolios			(1,170,573	)		(513,668	)
	Acquisition of premises and equipment			(50,413	)		(43,874	)
	Proceeds from sales of premises and equipment			1,067			6,932

Net cash used in investing activities				(2,020,552	)		(1,616,733	)

Cash flows from financing activities:
	Net increase in deposits			659,500			1,484,884
	Net increase in federal funds purchased and securities sold under agreements to repurchase			970,554			77,248
	Net (decrease) increase in other short-term borrowings			(532,499	)		117,400
	Net proceeds from notes payable and capital securities			977,228			395,538
	Dividends paid			(56,969	)		(55,080	)
	Proceeds from issuance of common stock			7,164			5,391
	Proceeds from issuance of preferred stock			182,140			—
	Redemption of preferred stock			—			(102,000	)
	Treasury stock acquired			(317	)		(139,074	)

Net cash provided by financing activities				2,206,801			1,784,307

Net increase in cash and due from banks				252,856			496,791
Cash and due from banks at beginning of period				652,556			606,142

Cash and due from banks at end of period			$	905,412		$	1,102,933

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

Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share information)

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, in the opinion of management, 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.

Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission and, accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2002, included in the Corporation’s Annual Report on Form 10-K.

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 and six months ended June 30, 2003. Refer to Note 8 to the unaudited consolidated financial statements for further information.

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. As of June 30, 2003 the adoption of this Interpretation has not have an 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 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.

SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”

SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Management is currently evaluating the impact that SFAS No. 150 may have on the Corporation’s financial statements.

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 June 30, 2003, December 31, 2002 and June 30, 2002 were as follows:

AS OF JUNE 30, 2003

Gross

Amortized

Unrealized

Market

(In thousands)

Cost

Gains

Losses

Value

U.S. Treasury securities (average maturity of 11 years and 1 month)

599,792

787

5,653

594,926

Obligations of other U.S. Government agencies and corporations (average maturity of 6 years and 8 months)

6,710,004

201,667

150

6,911,521

Obligations of Puerto Rico, States and political subdivisions (average maturity of 8 years and 9 months)

77,784

7,608

85,390

Collateralized mortgage obligations (average maturity of 23 years and 4 months)

2,288,704

7,421

1,477

2,294,648

Mortgage-backed securities (average maturity of 20 years and 8 months)

1,044,165

36,423

1,080,552

Equity securities (without contractual maturity)

252,097

94,789

—

346,886

Others (average maturity of 14 years and 11 months)

98,857

1,187

100,041

11,071,403

349,882

7,321

11,413,964


	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


	AS OF JUNE 30, 2002
			Gross		Gross
	Amortized		Unrealized		Unrealized		Market
(In thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities (average maturity of 11 months)	$	360,010	$	10,088		—	$	370,098
Obligations of other U.S. Government agencies and corporations (average maturity of 4 years and 4 months)		6,017,891		84,398	$	4,401		6,097,888
Obligations of Puerto Rico, states and political subdivisions (average maturity of 7 years and 2 months)		90,241		4,069		65		94,245
Collateralized mortgage obligations (average maturity of 20 years and 7 months)		2,499,615		11,894		11,557		2,499,952
Mortgage-backed securities (average maturity of 24 years and 3 months)		645,308		12,720		1,960		656,068
Equity securities (without contractual maturity)		248,497		58,301		17		306,781
Others (average maturity of 17 years and 8 months)		92,322		869		4		93,187

	$	9,953,884	$	182,339	$	18,004	$	10,118,219

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 contractual 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.

The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), and contractual maturities of investment securities held-to-maturity as of June 30, 2003, December 31, 2002 and June 30, 2002 were as follows:

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 contractual maturity.

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:

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.

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. During the quarter ended June 30, 2003, there were no significant changes in derivative instruments and hedging activities since December 31, 2002, except for the cancellation of certain interest rate contracts as described below.

The Corporation uses interest rate swaps to convert floating rate debt to fixed rate debt in order to fix the future cost of the portfolio of short-term borrowings. The specific terms and notional amounts of the swaps are determined based on management’s assessment of future interest rates, as well as other factors. During this quarter, the Corporation terminated the interest rate contracts outstanding with a notional amount of $500,000 and recognized a gain of $1,565. These swaps did not qualify as hedges in accordance with SFAS No. 133, as amended.

For the quarters ended June 30, 2003 and June 30, 2002, the Corporation recognized a gain of $2,548 and a loss of $855, respectively, as a result of the changes in fair value of the non-hedging derivatives.

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 six months ended June 30, 2003, are as follows:

As of June 30, 2003, December 31, 2002 and June 30, 2002, goodwill totaled $188,310, $182,965 and $178,739, 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 June 30, 2003, December 31, 2002 and June 30, 2002:

During the quarter ended June 30, 2003, the Corporation recognized $2,028 in amortization expense related to other intangible assets with definite lives (June 30, 2002 – $2,556). For the six months ended June 30, 2003, the amortization expense totaled $4,055 (June 30, 2002 – $5,099).

Certain core deposits were fully amortized as of June 30, 2003, and as such, their gross amount and accumulated amortization were excluded from the accounting records and the tabular disclosure presented above for June 30, 2003.

The following table presents the estimated aggregate amortization expense of the intangible assets with definite lives that the Corporation has as of June 30, 2003, for each of the following fiscal years:

No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.

In the normal course of business there are commercial letters of credit and stand-by letters of credit outstanding, which contract amounts at June 30, 2003 were $22,832 and $138,821, respectively (June 30, 2002 – $11,972 and $87,356; 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 six months ended June 30, 2003, the Corporation recorded a liability of $267, 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 June 30, 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 generally 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 June 30, 2003, the Corporation has two outstanding commitments to purchase mortgage loans from other institutions at market. 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 June 30, 2003, $50,000 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 June 30, 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 $3,587,000 at June 30, 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.

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 and six months ended June 30, 2003, the Corporation recognized $339 and $1,066, respectively, in stock option expense.

The following table summarizes information about stock options outstanding at June 30, 2003:

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

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 3.75% (2002 – 4.91%). The weighted average fair value of options granted during 2003 was $9.04 per option (2002 – $9.80).

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 June 30, 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 June 30, 2003 (June 30, 2002 – $148,640; December 31, 2002 – $148,640) and a related accrued interest receivable of $4,126 (June 30, 2002 – $4,177; 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).

The Corporation declared cash dividends on common stock amounting to $62,338 for the six-month period ended June 30, 2003 (June 30, 2002 – $53,749).

During the first quarter of 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 $182,140. Dividends declared on the preferred stock during the six months ended June 30, 2003 amounted to $3,962.

These shares of preferred stock are nonconvertible and are redeemable at the option of the Corporation. The redemption price per share is $25.50 from March 31, 2008 through March 30, 2009, $25.25 from March 31, 2009 through March 30, 2010 and $25.00 from March 31, 2010 and thereafter. Dividends on the Series A preferred stock are noncumulative and are payable monthly at an annual rate of 6.375% of the liquidation preference value of $25.00 per share.

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. Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share.

During the second quarter of 2003 there were 470,985 weighted average antidilutive stock options outstanding (2002 – 422,243) and for the six months ended on June 30, 2003 there were 444,969 weighted average antidilutive stock options outstanding (2002 – 325,527).

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

During the six-month period ended June 30, 2003, the Corporation paid interest and income taxes amounting to $387,904 and $84,803, respectively (2002 – $423,980 and $72,245). In addition, loans receivable transferred to other real estate and other property for the six months ended June 30, 2003 amounted to $38,046 and $13,555, respectively (2002 – $20,192 and $16,184).

During the first quarter of 2003, the Corporation transferred $637,925 of loans held-for-sale to the loan portfolio (held-for-investment) based on management intent and ability.

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 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 segment for the quarters and six-month periods ended June 30, 2003 and 2002.

Quarter ended June 30, 2003

Mortgage and

Auto and

Commercial

Consumer

Lease

(In thousands)

Banking

Lending

Financing

Other

Eliminations

Total

Net interest income

239,314

64,844

19,821

1,778

1,390

327,147

Provision for loan losses

30,621

13,729

4,975

49,325

Other income

66,739

19,209

5,247

86,509

(5,532

)

172,172

Amortization of intangibles

1,938

2,028

Depreciation expense

12,263

1,100

2,859

1,949

18,171

Other operating expenses

178,890

34,741

8,172

37,537

(261

)

259,079

Net gain of minority interest

(163

)

(163

)

Income tax

12,140

11,971

3,394

9,434

(993

)

35,946

Net income

70,201

22,349

5,668

39,277

(2,888

)

134,607

Segment Assets

28,326,802

6,735,142

1,445,719

7,597,555

(8,031,664

)

36,073,554

Six-months ended June 30, 2003

Mortgage and

Auto and

Commercial

Consumer

Lease

(In thousands)

Banking

Lending

Financing

Other

Eliminations

Total

Net interest income

467,546

126,390

38,503

2,205

2,264

636,908

Provision for loan losses

61,644

25,940

9,950

97,534

Other income

136,429

41,323

10,419

128,438

(12,277

)

304,332

Amortization of intangibles

3,875

180

4,055

Depreciation expense

25,031

2,284

5,757

3,825

36,897

Other operating expenses

342,493

69,102

15,993

74,932

(552

)

501,968

Net gain of minority interest

(241

)

(241

)

Income tax

28,657

24,887

6,603

9,395

(2,693

)

66,849

Net income

142,275

45,259

10,619

42,311

(6,768

)

233,696

Segment Assets

28,326,802

6,735,142

1,445,719

7,597,555

(8,031,664

)

36,073,554

During the quarter ended June 30, 2003, the Corporation’s parent holding company realized gains on the sale of marketable securities approximating $29,300 ($25,700 after-tax). These gains are included in “other income” within the “other” reportable segment category.

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 June 30, 2003, December 31, 2002 and June 30, 2002, and the results of their operations and cash flows for the periods ended June 30, 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 May 31, 2003, November 30, 2002 and May 31, 2002, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of June 30, 2003, December 31, 2002 and June 30, 2002, respectively.

PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under various shelf registrations filed with the SEC.

PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica, CreST, S.A., Popular Insurance, V.I., Inc. and PNA.

PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries, Popular Cash Express, Inc., Equity One, Inc., BPNA, including its wholly-owned 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 June 30, 2003, BPPR could have declared a dividend of approximately $105,306 without the approval of the Federal Reserve Board.

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 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				$	4,272		$	3,443	$	440	$	951,693		$	(54,436	)	$	905,412
Money market investments					53,837			301		80,277		1,064,191			(415,328	)		783,278
Investment securities available-for-sale, at market value					229,332			33,842		7,229		11,148,761			(5,200	)		11,413,964
Investment securities held-to-maturity, at amortized cost												342,906			(148,640	)		194,266
Trading account securities, at market value												650,453						650,453
Investment in subsidiaries					2,682,206			842,505		894,595		194,365			(4,613,671	)
Loans held-for-sale, at lower of cost or market												347,348			(14,014	)		333,334

Loans					111,509					2,847,890		22,618,274			(4,759,029	)		20,818,644
Less – Unearned income												279,902						279,902
			Allowance for loan losses									397,503						397,503

					111,509					2,847,890		21,940,869			(4,759,029	)		20,141,239

Premises and equipment					10,785							462,735						473,520
Other real estate												47,863						47,863
Accrued income receivable					173			1		12,808		192,222			(22,855	)		182,349
Other assets					22,744			27,582		1,614		668,379			8,654			728,973
Goodwill												188,310						188,310
Other intangible assets												30,593						30,593

				$	3,114,858		$	907,674	$	3,844,853	$	38,230,688		$	(10,024,519	)	$	36,073,554

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Deposits:
		Non-interest bearing									$	4,270,601		$	(54,374	)	$	4,216,227
		Interest bearing										14,268,875			(209,679	)		14,059,196

												18,539,476			(264,053	)		18,275,423
	Federal funds purchased and securities sold under agreements to repurchase			$	1,000				$	484,185		7,360,568			(190,648	)		7,655,105
	Other short-term borrowings				3,723		$	125		161,716		2,140,197			(1,134,698	)		1,171,063
	Notes payable				119,116			8,788		2,341,877		6,541,177			(3,734,877	)		5,276,081
	Other liabilities				53,148			1,625		22,822		591,591			(56,576	)		612,610

					176,987			10,538		3,010,600		35,173,009			(5,380,852	)		32,990,282

	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												108			1,293			1,401

Stockholders’ equity:
Preferred stock					186,875													186,875
Common stock					836,134			3,962		2		72,577			(76,541	)		836,134
Surplus					278,933			678,038		619,964		1,335,998			(2,632,407	)		280,526
Retained earnings					1,469,426			210,436		207,929		1,323,101			(1,743,059	)		1,467,833
Treasury stock, at cost					(205,527	)						(780	)		780			(205,527	)
Accumulated other comprehensive income, net of tax					247,030			4,700		6,358		182,675			(193,733	)		247,030

					2,812,871			897,136		834,253		2,913,571			(4,644,960	)		2,812,871

				$	3,114,858		$	907,674	$	3,844,853	$	38,230,688		$	(10,024,519	)	$	36,073,554

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

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


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

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

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

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

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

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

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

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

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

	Subordinated notes				125,000													125,000

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

Minority interest in consolidated subsidiary												110			854			964

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

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

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

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 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		$	605					$	37,288		$	401,104		$	(53,450	)	$	385,547
Money market investments			111			1			548			16,715			(10,920	)		6,455
Investment securities			313						208			113,100			(2,932	)		110,689
Trading account securities												8,968						8,968

			1,029			1			38,044			539,887			(67,302	)		511,659

INTEREST EXPENSE:
Deposits												85,839			(218	)		85,621
Short-term borrowings			47						3,647			51,045			(16,935	)		37,804
Long-term debt			4,212			58			33,179			75,175			(51,537	)		61,087

			4,259			58			36,826			212,059			(68,690	)		184,512

Net interest (loss) income			(3,230	)		(57	)		1,218			327,828			1,388			327,147
Provision for loan losses												49,325						49,325

Net interest (loss) income after provision for loan losses			(3,230	)		(57	)		1,218			278,503			1,388			277,822
Service charges on deposit accounts												39,669						39,669
Other service fees												69,262			(246	)		69,016
Gain (loss) on sale of securities			29,196						(2	)		681						29,875
Trading account loss												(4,243	)					(4,243	)
Derivatives gains (losses)									2,703			(155	)					2,548
Gain on sales of loans												20,331			(4,964	)		15,367
Other operating income			8,841			805						10,616			(322	)		19,940

			34,807			748			3,919			414,664			(4,144	)		449,994

OPERATING EXPENSES:
Personnel costs:
	Salaries					82						94,251						94,333
	Profit sharing											4,918						4,918
	Pension and other benefits					14						30,503						30,517

						96						129,672						129,768
Net occupancy expenses						4						20,738						20,742
Equipment expenses												26,056						26,056
Other taxes			291									9,011						9,302
Professional fees			208			5			79			19,943			(122	)		20,113
Communications			12									14,300						14,312
Business promotion												17,010						17,010
Printing and supplies												5,004						5,004
Other operating expenses			99			25			444			34,514			(139	)		34,943
Amortization of intangibles												2,028						2,028

			610			130			523			278,276			(261	)		279,278

Income before income tax, minority interest and equity in earnings of subsidiaries			34,197			618			3,396			136,388			(3,883	)		170,716
Income tax			3,667						2,693			30,580			(994	)		35,946
Net gain of minority interest												(163	)					(163	)

Income before equity in earnings of subsidiaries			30,530			618			703			105,645			(2,889	)		134,607
Equity in earnings of subsidiaries			104,077			23,552			22,605			12,873			(163,107	)		—

NET INCOME		$	134,607		$	24,170		$	23,308		$	118,518		$	(165,996	)	$	134,607

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


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

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

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

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

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

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

Net interest (loss) income after provision for loan losses			(1,785	)		(36	)		624		245,728			72			244,603
Service charges on deposit accounts											39,507						39,507
Other service fees											66,089			(52	)		66,037
(Loss) gain on sale of securities			(1,078	)							1,163						85
Trading account loss											(429	)		70			(359	)
Derivatives gains (losses)									69		(924	)					(855	)
Gain on sales of loans											13,570			(1,971	)		11,599
Other operating income			4,163			1,039			169		13,834			(231	)		18,974

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

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

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

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

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

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

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

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 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		$	2,143					$	73,738		$	795,346		$	(107,747	)	$	763,480
Money market investments			158		$	3			587			35,240			(22,171	)		13,817
Investment securities			757						405			225,197			(5,869	)		220,490
Trading account securities												17,153						17,153

			3,058			3			74,730			1,072,936			(135,787	)		1,014,940

INTEREST EXPENSE:
Deposits												180,189			(373	)		179,816
Short-term borrowings			250			1			8,740			105,855			(36,253	)		78,593
Long-term debt			8,794			116			65,270			146,867			(101,424	)		119,623

			9,044			117			74,010			432,911			(138,050	)		378,032

Net interest (loss) income			(5,986	)		(114	)		720			640,025			2,263			636,908
Provision for loan losses												97,534						97,534

Net interest (loss) income after provision for loan losses			(5,986	)		(114	)		720			542,491			2,263			539,374
Service charges on deposit accounts												79,521			(13	)		79,508
Other service fees												136,850			(1,408	)		135,442
Gain (loss) on sale of securities			29,196						(29	)		2,122						31,289
Trading account loss												(5,180	)					(5,180	)
Derivatives (losses) gains									(8,110	)		3						(8,107	)
Gain on sales of loans												44,036			(9,153	)		34,883
Other operating income			13,161			2,438						22,601			(1,703	)		36,497

			36,371			2,324			(7,419	)		822,444			(10,014	)		843,706

OPERATING EXPENSES:
Personnel costs:
	Salaries					160						190,208			1			190,369
	Profit sharing											11,163						11,163
	Pension and other benefits					31						60,554						60,585

						191						261,925			1			262,117
Net occupancy expenses						6						41,196						41,202
Equipment expenses												52,406						52,406
Other taxes			581									18,273						18,854
Professional fees			417			9			150			38,510			(197	)		38,889
Communications			21									28,988						29,009
Business promotion												32,980						32,980
Printing and supplies												9,747						9,747
Other operating expenses			165			48			575			53,229			(356	)		53,661
Amortization of intangibles												4,055						4,055

			1,184			254			725			541,309			(552	)		542,920

Income (loss) before income tax, minority interest and equity in earnings of subsidiaries			35,187			2,070			(8,144	)		281,135			(9,462	)		300,786
Income tax			3,667						(1,358	)		67,233			(2,693	)		66,849
Net gain of minority interest												(241	)					(241	)

Income (loss) before equity in earnings of subsidiaries			31,520			2,070			(6,786	)		213,661			(6,769	)		233,696
Equity in earnings of subsidiaries			202,176			37,491			43,759			24,979			(308,405	)		—

NET INCOME		$	233,696		$	39,561		$	36,973		$	238,640		$	(315,174	)	$	233,696

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


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

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

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

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

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

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

Net interest (loss) income after provision for loan losses			(3,593	)		(55	)		215		478,867			130			475,564
Service charges on deposit accounts											78,480						78,480
Other service fees											127,839			(115	)		127,724
Loss on sale of securities			(1,078	)							(2,847	)					(3,925	)
Trading account loss											(1,459	)		70			(1,389	)
Gain (loss) on derivatives									714		(1,058	)					(344	)
Gain on sales of loans											34,171			(4,628	)		29,543
Other operating income			6,299			2,653			169		27,249			(1,063	)		35,307

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

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

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

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

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

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

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

POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED JUNE 30, 2003
(UNAUDITED)


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

Cash flows from operating activities:
	Net income		$	233,696		$	39,561		$	36,973		$	238,640		$	(315,174	)	$	233,696

	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Equity in undistributed earnings of subsidiaries		(202,176	)		(37,491	)		(43,759	)		(24,979	)		308,405
		Depreciation and amortization of premises and equipment		407									36,490						36,897
		Provision for loan losses											97,534						97,534
		Amortization of intangibles											4,055						4,055
		Net (gain) loss on sales of investment securities		(29,196	)					29			(2,122	)					(31,289	)
		Net derivatives losses (gains)								8,110			(3	)					8,107
		Net loss on disposition of premises and equipment											106						106
		Net gain on sales of loans, excluding loans held-for-sale											(3,444	)					(3,444	)
		Net amortization of premiums and accretion of discounts on investments											11,394						11,394
		Net amortization of deferred loan fees and costs											20,045						20,045
		Earnings from investments under the equity method		(736	)		(2,228	)											(2,964	)
		Stock options expense		71									995						1,066
		Net decrease in loans held-for-sale											123,889			(2,220	)		121,669
		Net increase in trading securities											(223,111	)					(223,111	)
		Net decrease (increase) in accrued income receivable		121			1			(917	)		2,150			845			2,200
		Net decrease (increase) in other assets		1,451			(1,714	)		(171	)		(107,679	)		(1,795	)		(109,908	)
		Net (decrease) increase in interest payable		(172	)		116			3,202			(12,107	)		(911	)		(9,872	)
		Net increase (decrease) in deferred and current taxes		3,667						9,552			(29,396	)		(5,294	)		(21,471	)
		Net increase in postretirement benefit obligation											5,622						5,622
		Net increase (decrease) in other liabilities		939			1,344			(49,300	)		(32,173	)		5,465			(73,725	)

Total adjustments				(225,624	)		(39,972	)		(73,254	)		(132,734	)		304,495			(167,089	)

Net cash provided by (used in) operating activities				8,072			(411	)		(36,281	)		105,906			(10,679	)		66,607

Cash flows from investing activities:
		Net (increase) decrease in money market investments		(50,900	)		(1	)		(70,569	)		186,803			246,035			311,368
		Purchases of investment securities held-to-maturity											(338,878	)					(338,878	)
		Maturities of investment securities held-to-maturity											325,555						325,555
		Purchases of investment securities available-for-sale		(38	)		(1,744	)		(17,122	)		(4,614,956	)					(4,633,860	)
		Maturities of investment securities available-for-sale											3,658,266			200			3,658,466
		Proceeds from sales of investment securities available-for-sale		36,880						17,093			204,120						258,093
		Net collections (disbursements) on loans		56,015						(274,668	)		(713,850	)		452,530			(479,973	)
		Proceeds from sales of loans											98,596						98,596
		Acquisition of loan portfolios											(1,170,573	)					(1,170,573	)
		Capital contribution to subsidiary		(185,494	)		(180,000	)								365,494
		Acquisition of premises and equipment											(50,413	)					(50,413	)
		Proceeds from sale of premises and equipment											1,067						1,067
		Dividends received from subsidiary		62,100									32,000			(94,100	)

Net cash used in investing activities				(81,437	)		(181,745	)		(345,266	)		(2,382,263	)		970,159			(2,020,552	)

Cash flows from financing activities:
		Net increase in deposits											857,356			(197,856	)		659,500
		Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(9,300	)					(14,698	)		1,053,080			(58,528	)		970,554
		Net (decrease) increase in other short-term borrowings		(25,468	)		35			(277,336	)		(337,274	)		107,544			(532,499	)
		Net (payments of) proceeds from notes payable and capital securities		(18,661	)					492,860			1,023,191			(520,162	)		977,228
		Dividends paid to parent company											(62,100	)		62,100
		Dividends paid		(56,969	)														(56,969	)
		Proceeds from issuance of common stock		7,164															7,164
		Net proceeds from issuance of preferred stock		180,547												1,593			182,140
		Treasury stock acquired											(317	)					(317	)
		Capital contribution from parent					185,494			180,000						(365,494	)

Net cash provided by financing activities				77,313			185,529			380,826			2,533,936			(970,803	)		2,206,801

Net increase (decrease) in cash and due from banks				3,948			3,373			(721	)		257,579			(11,323	)		252,856
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			$	4,272		$	3,443		$	440		$	951,693		$	(54,436	)	$	905,412

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


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

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

	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in undistributed earnings of subsidiaries		(184,482	)		(34,441	)		(34,201	)		(15,421	)		268,545
		Depreciation and amortization of premises and equipment		407									37,635						38,042
		Provision for loan losses											104,529						104,529
		Amortization of intangibles											5,099						5,099
		Net loss on sales of investment securities		1,078									2,847						3,925
		Net derivatives (gains) losses								(714	)		1,058						344
		Net loss on disposition of premises and equipment											223						223
		Net gain on sales of loans, excluding loans held-for-sale											(5,838	)					(5,838	)
		Net amortization of premiums and accretion of discounts on investments											7,608			(87	)		7,521
		Net amortization of deferred loan fees and costs											17,365						17,365
		Earnings from investments under the equity method		(602	)		(2,443	)											(3,045	)
		Net decrease in loans held-for-sale											30,016			(534	)		29,482
		Net increase in trading securities											(36,739	)		(921	)		(37,660	)
		Net decrease (increase) in accrued income receivable		125			1			(1,458	)		(4,223	)		1,086			(4,469	)
		Net (increase) decrease in other assets		(1,688	)		347			2,034			6,632			(1,406	)		5,919
		Net (decrease) increase in interest payable		(42	)		46			2,068			(4,327	)					(2,255	)
		Net (decrease) increase in deferred and current taxes		(179	)					597			(31,531	)		328			(30,785	)
		Net increase in postretirement benefit obligation											1,533						1,533
		Net increase (decrease) in other liabilities		976			(4	)		(968	)		19,384			(5,450	)		13,938

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

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

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

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

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

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

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

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


				Second Quarter						Six months
*Selected Statistical*
Information				2003			2002			2003			2002

Common Stock Data – Market price
			High	$	40.82		$	33.68		$	40.82		$	33.68
			Low		34.16			28.60			31.95			27.50
			End		38.53			33.68			38.53			33.68
	Book value at period end				19.80			16.69			19.80			16.69
	Dividends declared				0.27			0.20			0.47			0.40
	Dividend payout ratio				20.07	%		28.34	%		23.17	%		29.64	%
	Price/earnings ratio				12.89x			13.80x			12.89x			13.80x

Profitability Ratios – Return on assets					1.58	%		1.23	%		1.40	%		1.21	%
		Return on common equity			22.63			18.14			20.09			17.43
		Net interest spread (taxable equivalent)			4.04			3.81			3.97			3.80
		Net interest yield (taxable equivalent)			4.42			4.28			4.36			4.29
		Effective tax rate			21.06			25.28			22.22			25.28
		Overhead ratio *			32.74			39.25			37.46			39.20
		Efficiency ratio **			59.28			58.69			58.81			58.15

Capitalization Ratios – Equity to assets					7.38	%		6.78	%		7.19	%		6.93	%
		Tangible equity to assets			6.79			6.14			6.59			6.27
		Equity to loans			12.55			11.55			12.21			11.74
		Internal capital generation			15.23			13.12			13.74			12.17
		Tier I capital to risk – adjusted assets			10.88			9.36			10.88			9.36
		Total capital to risk – adjusted assets			12.56			11.13			12.56			11.13
		Leverage ratio			7.01			5.99			7.01			5.99

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.

Processing and Information Technology Services and Products – GM Group, ATH Costa Rica and CreST, S.A.

Insurance Agency- Popular Insurance, Inc., Popular Insurance Agency U.S.A., Inc. and Popular Insurance V.I., Inc.

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 the allowance for loan losses, investment securities, the assessment of fair market value, goodwill and other intangible assets, and pension and post retirement benefit obligations. These 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.

The Corporation’s net income reached $134.6 million for the second quarter of 2003, a 40% increase compared with $96.3 million for the same quarter of 2002. Earnings per common share (EPS), basic and diluted, for the quarter ended June 30, 2003, were $0.99, compared with $0.72 in the same period of 2002. Refer to Note 12 to the unaudited 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 second quarter of 2003 were 1.58% and 22.63%, respectively, compared with 1.23% and 18.14%, respectively, for the same period in 2002.

The Corporation’s net income for the second quarter of 2003, when compared with the same period in the previous year, reflected higher net interest income by $32.5 million and non-interest income by $37.2 million. The provision for loan losses decreased by $0.8 million. These items were partially offset by increases in operating expenses of $28.6 million and in income taxes of $3.4 million.

For the first six months of 2003 the Corporation’s net income rose to $233.7 million, compared with $185.3 million for the same period in 2002. EPS for the first six months of 2003 and 2002 were $1.73 and $1.35, respectively. ROA and ROE for the six-month period ended June 30, 2003 were 1.40% and 20.09%, respectively. For the same six-month period in 2002, these ratios were 1.21% and 17.43%.

Net interest income for the quarter ended June 30, 2003 reached $327.2 million, an increase of $32.5 million, or 11%, over the same quarter of 2002. On a taxable equivalent basis, net interest income increased to $358.1 million from $319.2 million in the same quarter of 2002.

The improvement for the second quarter of 2003 of $38.9 million in net interest income, on a taxable equivalent basis, compared with the second quarter of 2002 resulted from a $26.8 million increase due to a higher volume of average earning assets and a $12.1 million increase due to a higher net interest margin.

Tables B and C present the different components of the Corporation’s net interest income for the quarter and six-months ended June 30, 2003, respectively, as compared with the same periods in 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 the Puerto Rico Commonwealth and its agencies, generate interest, which is exempt for income tax purposes, principally in Puerto Rico. Therefore, to facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates (In Puerto Rico the statutory tax rate is 39%).

TABLE B
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Quarter ended June 30, 2003


																										Variance
Average Volume							Average Yields/Costs												Interest							Attributable to
2003		2002		Variance			2003			2002			Variance						2003		2002		Variance			Rate			Volume

($ in millions)																							(In thousands)
$	816	$	826	$	(10	)		3.17	%		3.58	%		(0.41	)%		Money market investments		$	6,454	$	7,370	$	(916	)	$	(877	)	$	(39	)
	10,800		10,238		562			5.14			5.38			(0.24	)		Investment securities			138,649		137,761		888			(11,122	)		12,010
	624		287		337			6.20			4.54			1.66			Trading			9,640		3,240		6,400			1,518			4,882

	12,240		11,351		889			5.06			5.23			(0.17	)					154,743		148,371		6,372			(10,481	)		16,853

																	Loans:
	8,101		7,665		436			6.14			6.69			(0.55	)			Commercial		124,031		127,828		(3,797	)		(10,826	)		7,029
	904		869		35			10.33			11.34			(1.01	)			Leasing		23,340		24,634		(1,294	)		(2,254	)		960
	7,962		6,813		1,149			7.46			7.80			(0.34	)			Mortgage		148,454		132,928		15,526			(6,100	)		21,626
	3,175		3,092		83			11.63			12.54			(0.91	)			Consumer		92,117		96,808		(4,691	)		(4,692	)		1

	20,142		18,439		1,703			7.71			8.30			(0.59	)					387,942		382,198		5,744			(23,872	)		29,616

$	32,382	$	29,790	$	2,592			6.71	%		7.13	%		(0.42	)%		Total earning assets		$	542,685	$	530,569	$	12,116		$	(34,353	)	$	46,469

																	Interest bearing deposits:
$	2,527	$	2,598	$	(71	)		1.34	%		2.25	%		(0.91	)%			NOW and money market	$	8,414	$	14,592	$	(6,178	)	$	(5,862	)	$	(316	)
	5,204		4,723		481			1.29			2.38			(1.09	)			Savings		16,690		28,066		(11,376	)		(13,806	)		2,430
	6,553		6,511		42			3.70			4.17			(0.47	)			Time deposits		60,517		67,698		(7,181	)		(8,952	)		1,771

	14,284		13,832		452			2.40			3.20			(0.80	)					85,621		110,356		(24,735	)		(28,620	)		3,885

	8,209		7,392		817			1.85			2.46			(0.61	)		Short-term borrowings			37,804		45,274		(7,470	)		(13,162	)		5,692
	5,206		4,337		869			4.71			5.15			(0.44	)		Medium and long-term debt			61,086		55,691		5,395			(4,693	)		10,088

	27,699		25,561		2,138			2.67			3.32			(0.65	)		Total interest bearing liabilities			184,511		211,321		(26,810	)		(46,475	)		19,665
	3,528		3,254		274												Demand deposits
	1,155		975		180												Other sources of funds

$	32,382	$	29,790	$	2,592			2.29	%		2.85	%		(0.56	)%

								4.42	%		4.28	%		0.14	%		Net interest margin and

																	Net interest income on a taxable equivalent basis			358,174		319,248		38,926		$	12,122		$	26,804

								4.04	%		3.81	%		0.23	%		Net interest spread

																Taxable equivalent adjustment				31,027		24,570		6,457

																Net interest income			$	327,147	$	294,678	$	32,469

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 average earning assets for the quarter ended June 30, 2003 of $2.6 billion, compared with the second quarter of 2002, was driven principally by a $1.7 billion increase in the average loan portfolio and a $0.9 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 $436 million, respectively. The interest rate environment has stimulated mortgage loan originations and the refinancing through mortgage loans. Investment securities rose in average by $562 million, or 5%, mostly in U.S. Agency securities, while the trading portfolio increased in average by $337 million, mainly in mortgage-backed securities.

The average yield on earning assets, on a taxable equivalent basis, declined 42 basis points from 7.13% in the second quarter of 2002 to 6.71% for the same period in 2003. The average yield on the investment portfolio decreased by 24 basis points, due to the growth of the portfolio, and to the maturities of securities with higher yields that were replaced, during a lower interest rate scenario. On the other hand, the yield in the trading portfolio increased by 166 basis points, mainly due to a higher proportion of mortgage-backed securities in the portfolio. The

average yield on the loan portfolio decreased by 59 basis points. The commercial loans yield, including construction, fell by 55 basis points due to its repricing characteristics and to the origination of new loans in a lower rate environment. As of June 30, 2003, approximately 56% of the commercial and construction loan portfolios had floating or adjustable rates, compared with approximately 50% a year ago. The average yield on mortgage loans also declined 34 basis points, mainly due to the current interest rate scenario and higher loan prepayments/refinancings, while the consumer loans yield declined 91 basis points, due in part to the interest rate scenario, coupled with promotional campaigns with lower rates.

Interest-bearing liabilities for the second quarter of 2003, increased in average by $2.1 billion, or 8%, compared with the same quarter in 2002. Average interest-bearing deposits, mainly savings deposits, increased by $452 million, or 3%, while average borrowings rose by $1.7 billion, or 14%. Also, non-interest bearing sources of funds, including demand deposits and other funds, such as capital raised through the recent preferred stock issuance, rose $274 million and $180 million, respectively.

Average short-term borrowings, comprised mostly of repurchase agreements and federal funds, increased by $817 million, or 11%, in the second quarter of 2003, compared with the same quarter in the previous year, while longer-term borrowings increased by $869 million, or 20%. The latter includes the issuance during the second quarter of 2003 of $500 million in five-year, fixed-rate medium-term notes, and the issuance of secured borrowings arising in securitization transactions.

The average cost of interest-bearing liabilities for the quarter ended June 30, 2003 declined by 65 basis points, compared with the same quarter of 2002. The principal factors to the decrease were revisions made to interest rates on interest-bearing deposits since the last quarter of 2002, and the impact of the current low interest rate environment.

The Corporation’s net interest margin, on a taxable equivalent basis, for the second quarter of 2003 increased by 14 basis points, reaching 4.42%, while the net interest spread, which is the difference between the yield on earning assets and the cost of interest-bearing liabilities, increased by 23 basis points, rising to 4.04%. In addition to the factors described above, the issuance of the preferred stock in 2003 and the increase in the average volume of demand deposits also had an impact on the net interest margin, since these funds do not carry an interest cost. The increase in net interest spread resulted from a decrease in the cost of interest-bearing liabilities, partially offset by a reduction in the yield of earning assets mainly related to the investment portfolio run-off in a declining interest rate environment.

As shown in Table C, for the six-month period ended June 30, 2003, net interest income, on a taxable equivalent basis, rose $66.1 million, or 10%, compared with the same period of 2002. The improvement resulted from a $47.7 million increase due to a higher average volume of earning assets and a $18.4 million increase due to a higher net interest yield.

Average earning assets for the six-month period ended June 30, 2003 increased by $2.6 billion, or 9%, compared with the same period of 2002. Average interest-bearing liabilities increased by $2.3 billion, or 9%, compared with the six-month period ended June 30, 2002. Also, non-interest bearing sources of funds, including demand deposits and other funds, rose $178 million and $114 million, respectively.

The net interest margin, on a taxable equivalent basis, for the six-month period ended June 30, 2003 improved by 7 basis points, compared with the same period in 2002, reaching 4.36%, while the net interest spread increased by 17 basis points, rising to 3.97%. The improvement in margin and spread was mostly associated with similar factors that impacted the outcome of the quarterly results.

TABLE C
ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Six-month period ended June 30, 2003


																										Variance
Average Volume							Average Yields/Costs												Interest							Attributable to
2003		2002		Variance			2003			2002			Variance						2003		2002		Variance			Rate			Volume

($ in millions)							(In thousands)
$	894	$	876	$	18			3.12	%		3.49	%		(0.37	)%		Money market investments		$	13,817	$	15,155	$	(1,338	)	$	(1,678	)	$	340
	10,562		9,884		678			5.19			5.53			(0.34	)		Investment securities			273,799		273,050		749			(23,926	)		24,675
	606		316		290			6.00			4.36			1.64			Trading			18,032		6,824		11,208			3,252			7,956

	12,062		11,076		986			5.07			5.33			(0.26	)					305,648		295,029		10,619			(22,352	)		32,971

																	Loans:
	8,059		7,637		422			6.18			6.74			(0.56	)			Commercial		247,027		255,131		(8,104	)		(21,723	)		13,619
	894		865		29			10.51			11.28			(0.77	)			Leasing		46,995		48,771		(1,776	)		(3,423	)		1,647
	7,738		6,645		1,093			7.52			7.81			(0.29	)			Mortgage		290,835		259,568		31,267			(10,106	)		41,373
	3,141		3,103		38			11.73			12.49			(0.76	)			Consumer		183,323		192,945		(9,622	)		(6,887	)		(2,735	)

	19,832		18,250		1,582			7.78			8.32			(0.54	)					768,180		756,415		11,765			(42,139	)		53,904

$	31,894	$	29,326	$	2,568			6.75	%		7.19	%		(0.44	)%		Total earning assets		$	1,073,828	$	1,051,444	$	22,384		$	(64,491	)	$	86,875

																	Interest bearing deposits:
$	2,540	$	2,546	$	(6	)		1.52	%		2.33	%		(0.81	)%			NOW and money market	$	19,085	$	29,435	$	(10,350	)	$	(10,300	)	$	(50	)
	5,162		4,597		565			1.47			2.47			(1.00	)			Savings		37,652		56,414		(18,762	)		(24,590	)		5,828
	6,571		6,445		126			3.78			4.30			(0.52	)			Time deposits		123,079		137,438		(14,359	)		(19,179	)		4,820

	14,273		13,588		685			2.54			3.31			(0.77	)					179,816		223,287		(43,471	)		(54,069	)		10,598

	8,246		7,328		918			1.92			2.47			(0.55	)		Short-term borrowings			78,593		89,717		(11,124	)		(23,523	)		12,399
	4,853		4,180		673			4.97			5.24			(0.27	)		Medium and long-term debt			119,623		108,721		10,902			(5,272	)		16,174

	27,372		25,096		2,276			2.78			3.39			(0.61	)		Total interest bearing liabilities			378,032		421,725		(43,693	)		(82,864	)		39,171
	3,397		3,219		178												Demand deposits
	1,125		1,011		114												Other sources of funds

$	31,894	$	29,326	$	2,568			2.39	%		2.90	%		(0.51	)%

								4.36	%		4.29	%		0.07	%		Net interest margin and

																	Net interest income on a taxable equivalent basis			695,796		629,719		66,077		$	18,373		$	47,704

								3.97	%		3.80	%		0.17	%		Net interest spread

																Taxable equivalent adjustment				58,888		49,626		9,262

																Net interest income			$	636,908	$	580,093	$	56,815

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 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 amounted to $49.3 million for the second quarter of 2003, a decrease of $0.8 million, compared with $50.1 million in the second quarter of 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 represents a lower-risk portfolio. Net charge-offs for the quarter ended June 30, 2003, were $38.1 million, or 0.76% of average loans, compared with $45.8 million, or 0.99% of average loans for the second quarter of 2002. The provision for loan losses represented 130% of net charge-offs for the quarter ended June 30, 2003, compared with 109% for the same quarter in the previous year. For the six-month period ended June 30, 2003, the provision for loan losses totaled $97.5 million, a decrease of $7.0 million, or 7%, compared with $104.5 million for the same period in 2002.

The allowance for loan losses totaled $398 million at June 30, 2003, or 1.90% of loans, compared with $347 million, or 1.84% of loans, 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 losses based on current economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses. For more information regarding the allowance for loan losses and asset quality information for the period ended June 30, 2003 refer to the Credit Quality section of this report. Also, for information on the Corporation’s allowance for loan losses methodology refer to the Credit Risk and Loan Quality 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.

The Corporation has defined impaired loans as loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective rate, on the observable market price of the loan, or on the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience adjusted for current conditions. Larger balance commercial loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen, it is consistently applied unless there is a significant change in the financial position of the borrower. An impaired loan for which the discounted cash flows, collateral value or market price is less than its carrying value requires an allowance. The allowance for impaired loans is part of the Corporation’s overall allowance for loan losses.

The following table shows the Corporation’s recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 (as amended by SFAS No. 118) at June 30, 2003, December 31, 2002 and June 30, 2002.

Average impaired loans during the second quarter of 2003 and 2002 were $165 million and $144 million, respectively. The Corporation recognized interest income on impaired loans of $1.1 million and $0.7 million for the quarters ended June 30, 2003 and 2002, respectively.

Table D summarizes the movement in the allowance for loan losses and presents several loan loss statistics for the quarters and six months ended June 30, 2003 and 2002.


		Second Quarter									Six Months
(Dollars in thousands)		2003			2002			Change			2003			2002			Change

Balance at beginning of period		$	383,517		$	341,744		$	41,773		$	372,797		$	336,632		$	36,165
Allowance acquired			2,739			1,184			1,555			3,690			1,527			2,163
Provision for loan losses			49,325			50,075			(750	)		97,534			104,529			(6,995	)

			435,581			393,003			42,578			474,021			442,688			31,333

Losses charged to the allowance:
	Commercial		17,054			22,204			(5,150	)		32,607			45,186			(12,579	)
	Construction		—			2			(2	)		135			3,322			(3,187	)
	Lease financing		6,447			10,757			(4,310	)		12,645			20,016			(7,371	)
	Mortgage		7,729			3,694			4,035			12,383			6,205			6,178
	Consumer		23,975			26,581			(2,606	)		47,376			52,064			(4,688	)

			55,205			63,238			(8,033	)		105,146			126,793			(21,647	)

Recoveries:
	Commercial		6,173			4,578			1,595			9,128			8,210			918
	Construction		—			83			(83	)		27			242			(215	)
	Lease financing		3,121			6,231			(3,110	)		5,851			10,356			(4,505	)
	Mortgage		93			216			(123	)		148			434			(286	)
	Consumer		7,740			6,357			1,383			13,474			12,093			1,381

			17,127			17,465			(338	)		28,628			31,335			(2,707	)

Net loans charged-off (recovered):
	Commercial		10,881			17,626			(6,745	)		23,479			36,976			(13,497	)
	Construction		—			(81	)		81			108			3,080			(2,972	)
	Lease financing		3,326			4,526			(1,200	)		6,794			9,660			(2,866	)
	Mortgage		7,636			3,478			4,158			12,235			5,771			6,464
	Consumer		16,235			20,224			(3,989	)		33,902			39,971			(6,069	)

			38,078			45,773			(7,695	)		76,518			95,458			(18,940	)

Balance at end of period		$	397,503		$	347,230		$	50,273		$	397,503		$	347,230		$	50,273

Ratios:
	Allowance for losses to loans		1.90	%		1.84	%					1.90	%		1.84	%
	Allowance to non-performing assets		64.41			69.11						64.41			69.11
	Allowance to non-performing loans		69.83			74.31						69.83			74.31
	Non-performing assets to loans		2.96			2.66						2.96			2.66
	Non-performing assets to total assets		1.71			1.53						1.71			1.53
	Net charge-offs to average loans		0.76			0.99						0.77			1.05
	Provision to net charge-offs		1.30x			1.09x						1.27x			1.10x
	Net charge-offs earnings coverage*		5.78			3.91						5.21			3.69

Also, Table E presents annualized net charge-offs to average loans by loan category for the quarters and six months ended June 30, 2003 and 2002.

The decrease in commercial and construction loans net charge-offs for the quarter ended June 30, 2003, compared with the same period of 2002, was partly attributed to a $7 million charge-off of a commercial loan pertaining to a client who filed for bankruptcy in the second quarter of 2002. Also, the results for the six-month period ended June 30, 2002 were impacted by a $3.7 million charge-off of a participation loan pertaining to a large commercial relationship. Excluding these items, and notwithstanding the economic conditions that have prevailed in the U.S. and Puerto Rico, the decrease in the net charge-offs to average loan ratio was also influenced by the continuing identification and monitoring of potential problem loans.

The decline in consumer loans net charge-offs is partly due to the Corporation’s tightening of its credit criteria for consumer borrowings prompted by the current economic environment, coupled with improved collection and recovery initiatives. Also, it is partly due to the fact that most of the Corporation’s growth in the consumer portfolio has been in auto loans, a secured portfolio.

Lease financing net charge-offs declined partly as a result of better portfolio credit quality, coupled with collection efforts.

The increase in mortgage loans net charge-offs for the quarter and six-month period ended June 30, 2003, compared with the same periods in the previous year was mostly the result of portfolio growth coupled with increased delinquency due to current economic conditions. Equity One, the Corporation’s mortgage and consumer lending subsidiary in the United States, which caters to non-prime mortgage borrowers, experienced an increase of $5.0 million in mortgage net charge-offs for the six-months ended June 30, 2003, as compared with the same period in 2002. The mortgage loans net charge-offs to average loans ratio at this subsidiary was 0.41% for the first six months of 2003, compared with 0.26% for the same period in the previous year. This increase is associated with a general economic slowdown, which has resulted in a stateside recession that has lasted longer than expected. As a result of this, the job market has continued deteriorating, and bankruptcy levels have increased, thus adversely affecting the market segment that this subsidiary caters to.

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.

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 F.

The increase in non-performing assets since June 30, 2002 was primarily associated with mortgage loans, which rose by $102 million, or 46%. Non-performing mortgage loans represented 52% of total non-performing assets and 3.87% of total mortgage loans as of June 30, 2003, compared with 44% of total non-performing assets and 3.10% of total mortgage loans as of June 30, 2002. At December 31, 2002, non-performing mortgage loans were $279 million or 52% of total non-performing assets and 3.74% of total mortgage loans. The increase in non-performing mortgage loans was primarily driven by portfolio growth, coupled with increased delinquency due to current economic conditions. This growth in mortgage non-performing loans was mostly reflected in the Corporation’s consumer and mortgage-banking subsidiary in the United States, Equity One. Of the total mortgage non-performing loans at June 30, 2003, 69% or $223 million pertained to Equity One, compared with 61% or $135 million at June 30, 2002, and 66% or $186 million at December 31, 2002.

Non-performing commercial and construction loans represented 2.42% of that loan portfolio as of June 30, 2003, compared with 2.58% at June 30, 2002 and 2.09% at December 31, 2002. The increase in non-performing commercial and construction loans since the end of 2002 reflects the impact of the current economic conditions. The Corporation continues identifying and monitoring potential problem loans to reduce eventual charge-offs.

Non-performing consumer loans were 1.13% of consumer loans at June 30, 2003, compared with 1.16% at June 30, 2002 and 1.29% at December 31, 2002. The decline was principally the result of a better credit quality mix, coupled with collection initiatives and strategies. Also, there has been a partial shift in loan originations from personal loans to mortgage loans.

Non-performing financing leases represented 0.91% of the lease financing portfolio at June 30, 2003, compared with 1.11% at June 30, 2002, and 1.20% at December 31, 2002. The decline in non-performing leases was the result of lower delinquency levels, better portfolio credit quality and collection strategies.

Other real estate assets, which are recorded at fair value less estimated costs to sell, reached $48 million at June 30, 2003, or 8% of non-performing assets, compared with $35 million, or 7%, respectively, at June 30, 2002, and $39 million, or 7%, respectively, at December 31, 2002. The increase in other real estate assets was associated with the growth in the non-performing mortgage loan portfolio due mostly to higher delinquencies in the housing sector prompted by the economic slowdown.

The allowance for loan losses as a percentage of non-performing loans was 69.83% at June 30, 2003, compared with 74.31% at June 30, 2002 and 74.58% at December 31, 2002. The lower allowance to non-performing loans ratio reflects the changing composition of the loan portfolio and the non-performing loans, as most of the growth was realized in mortgage loans, which represents a lower-risk portfolio.

Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation’s non-performing assets as of June 30, 2003 would have been $542 million or 2.60% of loans, and the allowance for loan losses would have been 80.44% of non-performing loans. At June 30, 2002 and December 31, 2002, adjusted non-performing assets would have been $434 million or 2.30% of loans and $478 million or 2.44% of loans, respectively. The allowance to non-performing loans would have been 86.99% and 85.01% at June 30, 2002 and December 31, 2002, respectively.

In addition to the non-performing loans discussed earlier, there was $55 million of loans at June 30, 2003, which in management’s opinion are currently subject to potential future classification as non-performing, and therefore are considered impaired under SFAS No. 114. At December 31, 2002 and June 30, 2002, these potential problem loans approximated $36 million and $29 million, respectively.

Non-interest income reached $172.2 million for the quarter ended June 30, 2003, compared with $135.0 million in the same period of 2002, an increase of $37.2 million, or 28%.

For the quarter ended June 30, 2002, service charges on deposit accounts totaled $39.7 million, a slight increase of $0.2 million, compared with the same quarter of 2002. This non-interest income category has benefited from higher commercial account analysis fees, compensated by lower charges derived from consumer accounts, including account charges, ATM service fees and returned checks, due in part to higher deposit balances and campaigns to attract depositors.

Other service fees for the quarter ended June 30, 2003 rose $3.0 million, or 5%, compared with the quarter ended June 30, 2002. Table G provides a breakdown of other service fees by major categories. Commissions derived from the insurance agency business, rose 28% compared with the same quarter in 2002, mostly associated with business expansion and by capitalizing on the Corporation’s broad delivery channels and client base. Another driver for the growth in other service fees was higher debit card fees that resulted mostly from higher transactional volume. The rise in check cashing fees is mostly related to the Corporation’s retail financial services subsidiary in the United States, Popular Cash Express (PCE). These favorable variances were partially offset by lower trust fees, mostly due to the sale of the Corporation’s U.S. trust operations during the second quarter of 2002. These operations contributed approximately $0.5 million in trust fees for the quarter ended June 30, 2002. Also, mortgage servicing fees declined due in part to the recording of $0.3 million in write-downs in the value of mortgage servicing rights.


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

(In thousands)		2003		2002		Change			2003		2002		Change

Other service fees:
	Credit card fees and discounts	$	14,953	$	14,624	$	329		$	30,218	$	29,092	$	1,126
	Debit card fees		11,226		10,423		803			22,898		20,494		2,404
	Processing fees		9,872		9,497		375			19,586		18,666		920
	Other fees		8,432		8,389		43			15,370		16,220		(850	)
	Insurance fees		7,514		5,863		1,651			13,777		10,540		3,237
	Check cashing fees		6,457		5,690		767			13,033		10,952		2,081
	Sale and administration of investment products		5,685		5,545		140			10,241		10,250		(9	)
	Mortgage servicing fees, net of amortization		3,009		3,494		(485	)		6,439		6,388		51
	Trust fees		1,868		2,512		(644	)		3,880		5,122		(1,242	)

	Total other service fees	$	69,016	$	66,037	$	2,979		$	135,442	$	127,724	$	7,718

Gain on sale of securities for the quarter ended June 30, 2003 amounted to $29.9 million, an increase of $29.8 million over the $85 thousand reported for the same period in 2002. These gains arose mainly from the sale of marketable equity securities held by the Corporation. Derivative gains for the second quarter of 2003 totaled $2.5 million, compared with losses of $0.9 million for the same period in 2002. The derivative gains were principally attributed to changes in the fair value of the Corporation’s interest rate swaps. These contracts with notional amounts totaling $500 million were cancelled during the second quarter of 2003 as part of the Corporation’s risk management strategies. The aforementioned gains were partially offset by trading losses of $4.2 million in the second quarter of 2003, compared with losses of $0.4 million in the same period of the previous year.

Gain on sales of loans, including loans held-for-sale, totaled $15.4 million for the quarter ended June 30, 2003, compared with $11.6 million for the same period in 2002, an increase of $3.8 million, or 32%.

Other operating income amounted to $19.9 million for the quarter ended June 30, 2003, an increase of $1.0 million, or 5%, compared with the amounts reported in the same period of the previous year. The rise in other operating income was due in part to higher dividend income derived from the Corporation’s ownership participation in Telecomunicaciones de Puerto Rico, Inc., which amounted to $6.5 million for the second quarter of 2003, compared with $1.5 million in the second quarter of 2002. In the second quarter of 2002, the Corporation had gains of approximately $3.7 million on the sale of Banco Popular North America’s trust operations and the sale of 15 branches of Popular Finance.

For the six-month period ended June 30, 2003, non-interest income amounted to $304.3 million, compared with $265.4 million, an increase of $38.9 million, or 15%. Service charges on deposit accounts contributed with $1.0 million of this increase, mainly due to higher commercial account analysis fees, while other services fees rose by $7.7 million, or 6%, driven by higher insurance agency fees, debit card fees, check cashing fees and credit card fees and discounts. These increases were partially offset by lower trust fees, mostly due to the sale of the Corporation’s trust operations in the United States during 2002.

Gain on sale of securities amounted to $31.3 million for the first six months of 2003, compared with losses of $3.9 million, for the same period in 2002. As explained before, these gains resulted mostly from the sale of marketable equity securities. These gains were partially offset by increases in trading and derivatives losses of $3.8 million and $7.8 million, respectively, the latter mainly arising from adjustments to the market value of the interest rate swaps.

Gain on sale of loans totaled $34.9 million for the six-month period ended June 30, 2003, an increase of $5.3 million, or 18%, compared with the same period in 2002. This rise resulted from the sale of mortgage loans, partially offset by lower gains on sale of loans guaranteed by the Small Business Administration by $2.2 million, since no transactions of this type have taken place in 2003.

Other operating income rose by $1.2 million, or 3%, compared with the first six months of 2002, mainly due to higher dividend income of $8.8 million derived from the Corporation’s ownership participation in Telecomunicaciones de Puerto Rico, Inc., compared with $1.6 million for the first six months of 2002. This favorable variance was partially offset by lower underwriting profits derived from the Corporation’s broker/dealer subsidiary. Also, the results for 2002 include the gains realized on the sale of the U.S. trust operations and the branches of Popular Finance.

Operating expenses totaled $279.3 million, an increase of $28.6 million, or 11%, compared with $250.7 million reported in the same period of 2002. Refer to the unaudited consolidated statements of income for a breakdown of operating expenses by major categories.

Personnel costs, the largest category of operating expenses, totaled $129.8 million in the second quarter of 2003, an increase of $7.2 million, or 6%, compared with the same period in the previous year. Salaries, pension and incentive compensation were among the principal contributors to this increase. The increase in salaries is partly due to merit increases and higher headcount. As of the end of this quarter, full time equivalent employees (FTE’s) totaled 11,379, compared with 11,207 as of the end of the same period in 2002. At December 31, 2002, the Corporation lowered the assumed discount rate for 2003 from 6.75% to 6.50%, and the expected rate of return on its pension plan assets from 8.50% to 8.00%. It also increased the rate of salary compensation assumption in calculating the cost for the pension plan. All these changes resulted in an increase of $2.5 million in the pension plan expense for the quarter ended June 30, 2003, compared with the same period in the previous year. For further information on this topic 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.

Operating expenses, excluding personnel costs, totaled $149.5 million for the second quarter of 2003, an increase of $21.4 million, or 17%, compared to the same period in 2002. This rise was mainly reflected in the categories of equipment, communications and other operating expenses. Equipment expenses increased mainly due to higher amortization of software packages to support the Corporation’s internal technology infrastructure and higher maintenance and repairs charges for data processing and other equipment. The rise in communications expenses was mainly related to additional data lines to support business applications, and higher postage expenses. The other operating expenses category rose, mainly due to an increase in sundry losses of $15 million. These losses resulted mostly from unauthorized credit card transactions conducted on credit cards issued by Banco Popular de Puerto Rico. The Bank has taken remedial action to prevent further losses from this illegal external scheme.

For the six-month period ended June 30, 2003, operating expenses amounted to $542.9 million, an increase of $50.1 million, or 10%, compared with the same period in 2002. Personnel costs rose $19.2 million, or 8%, mostly associated with salaries, incentive compensation, bonuses, and stock options. Operating expenses, excluding personnel costs, increased $30.9 million, or 12%, for the six-months ended June 30, 2003 compared with the amounts reported for the same period in the previous year. Equipment and communication expenses increased due to the same reasons explained above. The rise in net occupancy expenses resulted mostly from higher rental expenses, related in part to business expansion and the new headquarters offices in BPNA, higher property taxes and electricity expenses, partly offset by higher building rental and parking income. The increase in business promotion was associated with the PREMIA rewards program, launched in the second quarter of 2002, partially offset by lower public relations expenses. The increase in professional fees was mostly associated with legal costs and programming services, while the rise in other operating expenses was mainly the result of higher sundry losses, as described above, and other real estate and credit card interchange expenses. These increases were offset in part by lower amortization of intangible assets as a result of some intangibles that became fully amortized during 2002.

Income tax expense for the quarter ended June 30, 2003 amounted to $35.9 million, an increase of $3.3 million, or 10%, from $32.6 million in the same quarter of 2002. The increase was primarily due to higher pretax earnings for the current period, partially offset by a decrease in the disallowance of expenses attributed to tax exempt investments in Puerto Rico and by an increase in gains on sale of securities subject to a lower tax rate. The effective tax rate for these quarters were 21.06% and 25.28% respectively.

Income tax expense for the six-month period ended June 30, 2003 amounted to $66.8 million, an increase of $4.1 million, or 7%, over the $62.7 million reported for the same period in 2002. The effective tax rate for the first six months of 2003 was 22.22%, compared with 25.28% in 2002. The decline in the effective tax rate resulted mostly from the preferential tax rate on capital gains.

The Corporation’s total assets at June 30, 2003 reached $36.1 billion, an increase of $2.4 billion, or 7%, compared with $33.7 billion at December 31, 2002. Total assets at June 30, 2002 amounted to $32.7 billion. Earning assets totaled $33.9 billion at June 30, 2003, compared with $31.9 billion at December 31, 2002 and $30.6 billion at June 30, 2002.

Investment and trading securities reached $12.3 billion at June 30, 2003, an increase of $1.1 billion compared with $11.2 billion at December 31, 2002. The Corporation has increased its securities portfolio as part of its asset / liability management strategies. This growth has been mostly in the form of U.S. Government obligations, which as mentioned earlier, are tax-exempt in Puerto Rico. Investment and trading securities at June 30, 2002 totaled $10.7 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. At June 30, 2003, money market investments totaled $783 million, a decrease of $311 million, or 28%, over the $1.1 billion at December 31, 2002. At June 30, 2002, money market investments amounted to $1.1 billion. The decrease from December 31, 2002 was mostly in the form of federal funds sold by the banking subsidiaries and resale agreements.

A breakdown of the Corporation’s loan portfolio is presented in Table H. At June 30, 2003, total loans amounted to $20.9 billion, resulting in an increase of $1.3 billion, or 7%, from December 31, 2002. This increase resulted from higher mortgage loans by $874 million, or 12%, while commercial loans, including construction, rose by $168 million, or 2%. The lease financing portfolio also grew by $164 million, or 18%, mostly associated with the acquisition of certain lease portfolios of medical and communications equipment by the Corporation’s banking and lease financing subsidiaries in the United States during this quarter. Moreover, the consumer loan portfolio also increased by $85 million, or 3%, mainly due to strong sales efforts in the auto loan market. When compared with June 30, 2002, the loan portfolio grew by $2.0 billion, or 10% at June 30, 2003. The mortgage and commercial loan portfolios, including construction loans, accounted for the largest increases, rising $1.2 billion and $560 million, respectively, from June 30, 2002. The growth in mortgage loans was associated with strong sales efforts, the prevailing low interest rate environment and portfolio acquisitions, while the growth in the commercial loan portfolio resulted in part from higher working capital needs from borrowers in the current economic environment. The consumer and lease financing portfolios increased by $35 million and $164 million, respectively, from June 30, 2002, mostly associated with the same factors previously discussed.

Cash and due from banks amounted to $905 million at June 30, 2003, compared with $653 million at the end of 2002. The increase was partly associated with funds received at the end of June 2003 from deposits in trust from governmental sources.

Premises and equipment totaled $474 million at June 30, 2003, compared with $461 million at December 31, 2002 and $404 million at June 30, 2002. The increase of $70 million since June 30, 2002 is mostly associated with office remodeling and building acquisitions, as well as premises under construction for business expansion or relocations.

Other assets amounted to $729 million at June 30, 2003, compared with $578 million at December 31, 2002, an increase of $151 million or 26%. Beginning in 2003, the Corporation has $76 million in bank owned life insurance, which is included in other assets in the statement of condition. The increase in other assets since the end of 2002 was also associated with advances on securitizations. The rise since June 30, 2002 of $212 million, or 41%, was also associated with the factors described above.

At June 30, 2003, total deposits amounted to $18.3 billion, an increase of $661 million, or 4%, compared with December 31, 2002. Demand deposits rose by $849 million, while time deposits decreased by $215 million, of which $127 million were in brokered certificates of deposit. The increase in demand deposits is partly due to deposits in trust from governmental sources used to repay government obligations on July 1st 2003, and higher deposits from public funds. When compared with June 30, 2002, total deposits rose $446 million, or 3%. Savings and demand deposits accounted for the largest increases, rising $397 million and $204 million, respectively, from June 30, 2002. Time deposits, which include brokered certificates of deposits, decreased by $155 million, or 2%, since June 30, 2002.

Borrowed funds, including subordinated notes and capital securities, increased by $1.4 billion, or 11% since December 31, 2002, reaching $14.4 billion at June 30, 2003. This increase in borrowed funds was used primarily to fund the Corporation’s loan growth and investment activities. Borrowed funds at June 30, 2002 were $12.2 billion. Further information related to the composition of the Corporation’s funding sources is available in the Liquidity section of this report.

The Corporation’s stockholders’ equity at June 30, 2003 was $2.8 billion, compared with $2.4 billion at December 31, 2002 and $2.2 billion at June 30, 2002. The increase of $402 million since the end of 2002 reflects in part the issuance of the Corporation’s preferred stock during 2003. Also, contributing to the increase in stockholders’ equity were earnings retention and higher unrealized gains in the securities available-for-sale portfolio. The increase in stockholders’ equity of $605 million from June 30, 2002 is also related to these factors. Refer to the consolidated statement of condition and the consolidated statement of comprehensive income for detailed information on these particular items.

The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage as of June 30, 2003 and 2002, and December 31, 2002 are presented on Table I. Also, at June 30, 2003, December 31, 2002 and June 30, 2002, BPPR, BPNA and BP, N.A. were all well-capitalized.

The Corporation’s common and preferred stocks are traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) under the symbols BPOP and BPOPO, respectively. Table A presents limited data on the Corporation’s common stock for the quarters and six-month periods ended June 30, 2002 and 2003. The Corporation’s market capitalization at June 30, 2003 was $5.1 billion, compared with $4.5 billion at June 30, 2002 and at December 31, 2002.

In the ordinary course of business, the Corporation has conducted asset securitizations involving the transfer of mortgage loans to a qualifying special purpose entity (QSPE), which in turned has transferred the assets, including their titles, to different trusts, thus isolating those loans from the Corporation’s assets. The transactions qualified for sale accounting based on the provisions of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, as such trusts are not consolidated in the Corporation’s financial statements. As of June 30, 2003, these trusts held approximately $202 million in assets in the form of mortgage loans. Their liabilities in the form of debt principal due to investors approximated $193 million at the end of the second quarter of 2003. In these securitizations, the Corporation retained servicing responsibilities and certain subordinated interest in the form of interest-only securities. The investors and the securitization trusts have no recourse to the Corporation’s assets. The servicing rights and the interest-only securities retained by the

Corporation are recorded in the statement of condition at the lower of amortized cost or market, and fair value, respectively. During the quarter ended June 30, 2003 the Corporation recorded approximately $1.7 million of write-downs related to interest-only strips, in which the decline in fair value was considered other than temporary. For the six-months ended June 30, 2003, these write-downs amounted to $2.1 million.

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.

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 June 30, 2003, the change in net interest income, on a hypothetical rising rate scenario, for the next twelve months is an estimated decrease of $0.3 million and the change for the same period, utilizing a hypothetical declining rate scenario, is an estimated increase of $4.2 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 June 30, 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. Refer to Note 6 to the consolidated financial statements for further information on the Corporation’s limited involvement in derivative instruments and hedging activities. The Corporation was a participant in certain interest rate swaps with an aggregate notional amount of $500 million. In such agreements, the Corporation converted floating rate debt to fixed rate debt. These contracts were cancelled during the second quarter of 2003 as part of the Corporation’s risk management strategies.

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. At June 30, 2003 the Corporation had $15 million in foreign currency translation adjustment as part of accumulated other comprehensive 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.

The Corporation believes that there have been no significant changes in market risk compared with the disclosures in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002.

The Corporation manages liquidity to provide adequate funds to meet its anticipated financial obligations, including withdrawals by depositors and debt service requirements, as well as to fund customer’s demand for credit.

Core deposits are one of the Corporation’s primary sources of funding. 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 of New York 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.

Liquidity is provided also by the regularly scheduled maturities of the Corporation’s investment portfolio. Refer to Notes 3 and 4 to the consolidated financial statements for further information as to the composition of the available-for-sale and held-to-maturity investment portfolios. Liquid U.S. Treasury and Agency securities can be used to raise funds in the repo markets. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, and to a lesser extent commercial loans, have highly developed secondary markets. In addition, other sources of liquidity include maturities of money market investments, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services.

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. At June 30, 2003, the Corporation had available approximately $1.3 billion under this shelf registration.

During the six-month period ended June 30, 2003 the Corporation issued preferred stock under this shelf registration, which net proceeds, after the underwriting discounts and expenses, amounted to $182 million. These proceeds were used to fund operations. Also, the Corporation issued $500 million of medium-term notes under this same shelf registration.

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 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 prolonged recession in the U.S.) 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.

The Corporation believes that there have been no significant changes in liquidity risk compared with the disclosures in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002.

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act.

Except as disclosed below, there have been no changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the second quarter of 2003 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

In connection with credit card losses incurred during the second quarter, BPPR has implemented various measures designed to enhance its systems for the detection and prevention of credit card fraud including changes to its authorization procedures and the parameters for issuing cards to its customers.

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 report 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 complaint 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.

The Annual Stockholders Meeting of Popular, Inc. was held on April 30, 2003. A quorum was obtained with 111,164,119 shares represented in person or by proxy, which represented approximately 83.85% of all votes eligible to be cast at the meeting. Five Directors of the Corporation, Juan J. Bermúdez, Richard L. Carrión, Jorge A. Junquera, Francisco M. Rexach Jr and Frederic V. Salerno, were elected for a three-year term. The following directors were not up for reelection and continued to hold office after the meeting: David H. Chafey Jr, Antonio Luis Ferré, Félix J. Serrallés Jr, José B. Carrión Jr, Héctor R. González, Manuel Morales Jr and Julio E. Vizcarrondo Jr. The ratification of PricewaterhouseCoopers LLP as the Corporation’s independent auditors for 2003 was also approved at the Annual Meeting. The result of the voting on each of the proposals is set forth below:

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.


Puerto Rico		66-041-6582

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


Common Stock $6.00 Par value		132,775,308

(Title of Class)		(Shares Outstanding as of August 14, 2003)


	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED STATEMENTS OF CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes to Unaudited Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II — Other Information
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-12.1 COMPUTATION OF THE RATIOS OF EARNINGS
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
SECTION 906 CERTIFICATION OF CEO
SECTION 906 CERTIFICATION OF CFO


	Six months ended June 30, 2003

			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		3,639		2,099		—		(393	)		5,345

Balance as of June 30, 2003	$	114,121	$	13,346	$	6,727	$	54,116		$	188,310


		June 30, 2003				December 31, 2002				June 30, 2002

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

Core Deposits		$	78,317	$	50,708	$	87,739	$	56,263	$	87,711	$	52,395
Other customer relationships			2,886		265		2,886		120		—		—
Other intangibles			509		146		509		104		202		86

	Total	$	81,712	$	51,119	$	91,134	$	56,487	$	87,913	$	52,481


For Quarter Ended June 30, 2003		Commission file number 0 — 13818


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


	(In thousands)

2003	$	7,836
2004		7,145
2005		5,543
2006		5,394
2007		3,693


	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		465,844			33.57
Exercised		(2,641	)		28.84
Forfeited		(5,353	)		28.84

Outstanding at June 30, 2003		902,925		$	31.48


Note 10 –		Subordinated Notes and Preferred Beneficial Interest in Popular North America’s Junior Subordinated Deferrable Interest Debentures Guaranteed by the Corporation


	Quarter ended				Six-months ended
	June 30,				June 30,
(In thousands, except share information)	2003		2002		2003		2002

Net income	$	134,607	$	96,305	$	233,696	$	185,349
Less: Preferred stock dividends and amount paid on redemption of preferred stock in 2002		3,013		—		3,962		2,510

Net income applicable to common stock	$	131,594	$	96,305	$	229,734	$	182,839

Average common shares outstanding		132,675,459		134,440,879		132,626,297		135,452,584
Average potential common shares – stock options		36,953		91		26,653		49

Average common shares outstanding – assuming dilution		132,712,412		134,440,970		132,652,950		135,452,633

Basic earnings per common share	$	0.99	$	0.72	$	1.73	$	1.35

Diluted earnings per common share	$	0.99	$	0.72	$	1.73	$	1.35


		Quarter ended June 30, 2002

				Mortgage and			Auto and
		Commercial		Consumer			Lease
(In thousands)		Banking		Lending			Financing		Other		Eliminations			Total

Net interest income		$	227,789	$	50,199		$	16,391	$	228	$	71		$	294,678
Provision for loan losses			33,441		9,959			6,675							50,075
Other income			69,451		16,160			4,830		46,732		(2,185	)		134,988
Amortization of intangibles			2,548							8					2,556
Depreciation expense			13,493		1,087			2,695		1,559					18,834
Other operating expenses			160,713		28,596			7,637		32,584		(267	)		229,263
Net gain of minority interest					(39	)									(39	)
Income tax			18,239		9,276			1,524		4,004		(449	)		32,594

	Net income	$	68,806	$	17,402		$	2,690	$	8,805	$	(1,398	)	$	96,305

	Segment Assets	$	26,721,751	$	5,036,978		$	1,172,300	$	6,937,713	$	(7,128,020	)	$	32,740,722


		Six-months ended June 30, 2002

				Mortgage and			Auto and
		Commercial		Consumer			Lease
(In thousands)		Banking		Lending			Financing		Other			Eliminations			Total

Net interest income		$	450,807	$	98,233		$	31,645	$	(722	)	$	130		$	580,093
Provision for loan losses			70,882		20,227			13,420								104,529
Other income			136,126		33,256			9,567		92,183			(5,736	)		265,396
Amortization of intangibles			5,089							10						5,099
Depreciation expense			27,285		2,113			5,573		3,071						38,042
Other operating expenses			312,804		58,314			14,789		64,257			(486	)		449,678
Net gain of minority interest					(50	)										(50	)
Income tax			36,360		17,607			2,681		7,444			(1,350	)		62,742

	Net income	$	134,513	$	33,178		$	4,749	$	16,679		$	(3,770	)	$	185,349

	Segment Assets	$	26,721,751	$	5,036,978		$	1,172,300	$	6,937,713		$	(7,128,020	)	$	32,740,722


Note 15 –		Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities:


	At June 30,							Average for the six months

*Balance Sheet Highlights*	2003		2002		Change			2003		2002		Change
(In thousands)

Money market investments	$	783,278	$	1,071,658	$	(288,380	)	$	893,847	$	876,091	$	17,756
Investment and trading securities		12,258,683		10,651,135		1,607,548			11,168,137		10,200,184		967,953
Loans		20,872,076		18,901,142		1,970,934			19,832,452		18,249,592		1,582,860
Total assets		36,073,554		32,740,722		3,332,832			33,712,699		30,915,430		2,797,269
Deposits		18,275,423		17,829,287		446,136			17,669,845		16,807,732		862,113
Borrowings		14,371,249		12,178,407		2,192,842			13,099,270		11,507,639		1,591,631
Stockholders’ equity		2,812,871		2,207,617		605,254			2,422,320		2,141,750		280,570


			June 30,		December 31,		June 30,
(In thousands)			2003		2002		2002

Selected Balance Sheet Information:
Puerto Rico
	Total assets		$	23,566,694	$	22,307,784	$	22,094,448
		Loans		10,333,550		10,065,646		9,966,695
		Deposits		12,657,126		12,036,491		12,264,302
Mainland United States
	Total assets		$	11,829,565	$	10,637,293	$	9,844,387
		Loans		10,163,772		9,140,382		8,578,291
		Deposits		4,761,462		4,778,234		4,702,432
Other
	Total assets		$	677,295	$	715,275	$	801,887
		Loans		374,754		376,091		356,156
		Deposits		856,835		800,015		862,553


	Second Quarter							Six months

*Operating Highlights*	2003		2002		Change			2003		2002		Change
(In thousands, except per share information)

Net interest income	$	327,147	$	294,678	$	32,469		$	636,908	$	580,093	$	56,815
Provision for loan losses		49,325		50,075		(750	)		97,534		104,529		(6,995	)
Fees and other income		172,172		134,988		37,184			304,332		265,396		38,936
Other expenses, net of minority interest		315,387		283,286		32,101			610,010		555,611		54,399
Net income	$	134,607	$	96,305	$	38,302		$	233,696	$	185,349	$	48,347
Net income applicable to common stock	$	131,594	$	96,305	$	35,289		$	229,734	$	182,839	$	46,895
Earnings per common share (basic and diluted)	$	0.99	$	0.72	$	0.27		$	1.73	$	1.35	$	0.38

*		Non-interest expense less non-interest income divided by net interest income.

**		Non-interest expense divided by net interest income plus recurring fee income.


Nominees for			Votes
Three-year term	Votes For		Withheld

Juan J. Bermúdez		109,518,231		1,645,888
Richard L. Carrión		105,862,449		5,301,670
Jorge A. Junquera		110,720,627		443,492
Francisco M. Rexach Jr		109,519,696		1,644,423
Frederic V. Salerno		110,631,914		532,205


Issue 2:		Ratification of the appointment of PricewaterhouseCoopers LLP as the Corporation’s independent auditors for 2003:


	Exhibit
a)	No.		Exhibit Description

		12.1	Computation of the ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends.

		31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Dated:		April 11, 2003

Items reported:		Item 5 – Other Events (Operational results for the quarter ended March 31, 2003)

Dated:		April 17, 2003

Items reported:		Item 9 – Regulation FD Disclosure (Amends Form 8-K [filed on April 11, 2003] which was furnished under Item 5 – Other Events, instead of Item 9 – Regulation FD Disclosure, which includes information required under Item 12 and furnished under this item in accordance with SEC Release No. 33-8216)

Dated:		April 30, 2003

Items reported:		Item 9 – Regulation FD Disclosure (Quarterly Report to Shareholders for the quarter ended March 31, 2003 and notice of availability on Popular, Inc.’s web page of a financial presentation that contains additional quarterly information)


		POPULAR, INC.
		(Registrant)

Date: August 14, 2003	By:	/s/ Jorge A. Junquera

		Jorge A. Junquera
	Senior Executive Vice President

Date: August 14, 2003	By:	/s/ Amílcar L. Jordán

		Amílcar L. Jordán, Esq.
	Senior Vice President & Comptroller