10-Q 1 g65061e10-q.txt POPULAR, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 2000 Commission file number 0-13818 ------------------ ------- POPULAR, INC. ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Puerto Rico 66-041-6582 ------------------------ ------------------- (State of incorporation) (I.R.S. Employer identification No.) Popular Center Building 209 Munoz Rivera Avenue, Hato Rey San Juan, Puerto Rico 00918 ---------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (787) 765-9800 -------------- Not Applicable ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock $6.00 Par value 135,998,617 ---------------------------- --------------------------------------------- (Title of Class) (Shares Outstanding as of November 14, 2000) 2 POPULAR, INC. INDEX
Part I - Financial Information Page ------------------------------ ---- Item 1. Financial Statements Unaudited consolidated statements of condition - September 30, 2000, December 31, 1999 and September 30, 1999 3 -- Unaudited consolidated statements of income - Quarters and nine months ended September 30, 2000 and 1999 4 -- Unaudited consolidated statements of comprehensive income (loss)- Quarters and nine months ended September 30, 2000 and 1999 5 -- Unaudited consolidated statements of cash flows - Nine months ended September 30, 2000 and 1999 6 -- Notes to unaudited consolidated financial statements. 7-22 ---- Item 2. Management's discussion and analysis of financial condition and results of operations 23-39 ----- Item 3. Quantitative and qualitative disclosures about market risk 29 ----- Part II - Other Information Item 1. Legal proceedings 39 ----- Item 2. Changes in securities - None N/A ----- Item 3. Defaults upon senior securities - None N/A ----- Item 4. Submission of matters to a vote of security holders - None N/A ----- Item 5. Other information 39 ----- Item 6. Exhibits and reports on Form 8-K 40 ----- Signature 41 -----
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 risk and the effect of legal proceedings on Popular, Inc.'s financial condition and results of operations. These forward-looking statements involve certain risks, uncertainties, estimates and assumptions by management. Various factors could cause actual results to differ from those contemplated by such forward-looking statements. With respect to the adequacy of the allowance for loan losses and market risk, these factors include, among others, the rate of growth in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, the performance of the stock and bond market and the magnitude of interest rate changes. Moreover, the outcome of litigation, as discussed in "Part II, Item I. Legal Proceedings," is inherently uncertain and depends on judicial interpretations of law and the findings of judges and juries. 2 3 POPULAR, INC. CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
SEPTEMBER 30, December 31, September 30, (In thousands) 2000 1999 1999 ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 573,396 $ 663,696 $ 719,681 ----------------------------------------------------------------------------------------------------------------------------------- Money market investments: Federal funds sold and securities purchased under Agreements to resell 868,513 931,123 789,592 Time deposits with other banks 10,638 54,354 47,501 Banker's acceptances 500 517 507 ----------------------------------------------------------------------------------------------------------------------------------- 879,651 985,994 837,600 ----------------------------------------------------------------------------------------------------------------------------------- Investment securities available-for-sale, at market value 7,979,951 7,324,950 6,938,363 Investment securities held-to-maturity, at amortized cost 376,540 299,312 311,914 Trading account securities, at market value 163,645 236,610 337,300 Loans held-for-sale, at lower of cost or market 682,455 619,298 526,263 ----------------------------------------------------------------------------------------------------------------------------------- Loans 15,908,554 14,659,400 13,945,910 Less - Unearned income 353,322 370,944 375,092 Allowance for loan losses 295,177 292,010 288,382 ----------------------------------------------------------------------------------------------------------------------------------- 15,260,055 13,996,446 13,282,436 ----------------------------------------------------------------------------------------------------------------------------------- Premises and equipment 401,975 440,971 442,162 Other real estate 21,494 29,268 27,926 Customers' liabilities on acceptances 1,904 12,041 10,488 Accrued income receivable 200,638 175,746 159,415 Other assets 401,123 371,421 371,268 Intangible assets 287,436 304,786 310,767 ----------------------------------------------------------------------------------------------------------------------------------- $ 27,230,263 $ 25,460,539 $ 24,275,583 =================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 2,945,057 $ 3,284,949 $ 2,994,189 Interest bearing 11,612,821 10,888,766 10,775,859 ----------------------------------------------------------------------------------------------------------------------------------- 14,557,878 14,173,715 13,770,048 Federal funds purchased and securities sold under agreements to repurchase 5,236,644 4,414,480 4,157,275 Other short-term borrowings 3,444,129 2,612,389 2,294,827 Notes payable 1,434,429 1,852,599 1,659,361 Acceptances outstanding 1,904 12,041 10,488 Other liabilities 443,707 436,718 407,981 ----------------------------------------------------------------------------------------------------------------------------------- 25,118,691 23,501,942 22,299,980 ----------------------------------------------------------------------------------------------------------------------------------- Subordinated notes 125,000 125,000 125,000 ----------------------------------------------------------------------------------------------------------------------------------- Preferred beneficial interests in Popular North America's Junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 150,000 ----------------------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 838 22,611 23,281 ----------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (See Note 5) ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 100,000 100,000 100,000 Common stock 829,729 827,662 827,045 Surplus 249,238 243,855 237,892 Retained earnings 823,418 694,301 656,407 Treasury stock, at cost (66,214) (64,123) (60,151) Accumulated other comprehensive loss, net of deferred taxes of ($26,385) (December 31, 1999 - ($35,993); September 30, 1999 - ($19,437)) (100,437) (140,709) (83,871) ----------------------------------------------------------------------------------------------------------------------------------- 1,835,734 1,660,986 1,677,322 ----------------------------------------------------------------------------------------------------------------------------------- $ 27,230,263 $ 25,460,539 $ 24,275,583 ===================================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 4 POPULAR, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended Nine months ended September 30, September 30, (In thousands, except per share information) 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 414,677 $ 349,295 $1,183,634 $ 1,011,067 Money market investments 18,187 8,272 45,743 23,705 Investment securities 125,109 105,736 351,863 316,581 Trading account securities 3,201 5,229 10,509 14,775 ---------------------------------------------------------------------------------------------------------------------- 561,174 468,532 1,591,749 1,366,128 ---------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 140,811 113,303 392,684 334,273 Short-term borrowings 139,757 84,071 356,266 226,584 Long-term debt 31,750 32,366 105,787 91,390 ---------------------------------------------------------------------------------------------------------------------- 312,318 229,740 854,737 652,247 ---------------------------------------------------------------------------------------------------------------------- Net interest income 248,856 238,792 737,012 713,881 Provision for loan losses 49,666 37,080 148,398 109,482 ---------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 199,190 201,712 588,614 604,399 Service charges on deposit accounts 32,558 29,935 93,612 87,915 Other service fees 58,181 44,374 160,989 121,974 Gain on sale of securities 147 39 13,740 775 Trading account (loss) profit (50) (698) 1,460 (1,561) Other operating income 29,890 23,373 75,936 61,904 ---------------------------------------------------------------------------------------------------------------------- 319,916 298,735 934,351 875,406 ---------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 78,104 75,153 233,999 215,294 Profit sharing 5,197 5,485 14,897 17,888 Pension and other benefits 17,078 18,752 52,918 56,883 ---------------------------------------------------------------------------------------------------------------------- 100,379 99,390 301,814 290,065 Net occupancy expense 17,610 15,469 50,346 44,442 Equipment expenses 25,294 22,908 73,807 65,199 Other taxes 8,507 8,717 25,423 24,923 Professional fees 16,290 17,090 50,794 49,758 Communications 11,661 10,831 34,497 32,240 Business promotion 9,694 11,916 36,353 35,125 Printing and supplies 5,351 5,321 15,836 15,139 Other operating expenses 17,289 14,949 51,952 41,602 Amortization of intangibles 8,829 8,113 25,958 23,319 ---------------------------------------------------------------------------------------------------------------------- 220,904 214,704 666,780 621,812 ---------------------------------------------------------------------------------------------------------------------- Income before income tax and minority interest 99,012 84,031 267,571 253,594 Income tax 27,662 20,887 68,103 63,623 Net loss (gain) of minority interest (58) 1,066 1,136 1,880 ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 71,292 $ 64,210 $ 200,604 $ 191,851 ====================================================================================================================== NET INCOME APPLICABLE TO COMMON STOCK $ 69,205 $ 62,123 $ 194,342 $ 185,589 ====================================================================================================================== EARNINGS PER COMMON SHARE (BASIC AND DILUTED) $ 0.51 $ 0.46 $ 1.43 $ 1.37 ====================================================================================================================== DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ 0.16 $ 0.48 $ 0.44 ======================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 5 POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Quarter ended Nine months ended September 30, September 30, (In thousands) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Net Income $ 71,292 $ 64,210 $ 200,604 $ 191,851 -------------------------------------------------------- Other comprehensive income, net of tax: Foreign currency translation adjustment (855) 2 (1,152) (893) Less: reclassification adjustment for foreign currency translation loss realized upon sale of investment in a foreign entity (1,678) (1,678) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period, net of tax of $12,978 (1999 - ($7,842) ) for the quarter and $13,109 (1999 - ($44,538)) for the nine-month period 50,235 (43,867) 50,398 (158,365) Less: reclassification adjustment for gains included in net income, net of tax of $24 (1999 - $8) for the quarter and $3,501 (1999 - $147) for the nine-month period 122 36 10,652 319 -------------------------------------------------------- Total other comprehensive income (loss) $ 50,936 $(43,901) $ 40,272 $(159,577) -------------------------------------------------------- Comprehensive income $ 122,228 $ 20,309 $ 240,876 $ 32,274 ========================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
SEPTEMBER 30, December 31, September 30, (In thousands) 2000 1999 1999 ------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment $ (739) $ (1,265) $ (1,108) Unrealized losses on securities (99,698) (139,444) (82,763) ----------------------------------------------- Accumulated other comprehensive loss $ (100,437) $ (140,709) $ (83,871) ===============================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 6 POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, (In thousands) 2000 1999 --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 200,604 $ 191,851 -------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment 57,339 51,930 Provision for loan losses 148,398 109,482 Amortization of intangibles 25,958 23,319 Gain on sale of investment securities available-for-sale (13,740) (775) Loss on disposition of premises and equipment 340 188 Gain on sale of loans (13,446) (19,594) Amortization of premiums and accretion of discounts on investments 1,300 5,330 (Increase) decrease in loans held-for-sale (63,157) 119,853 Amortization of deferred loan fees and costs 504 (1,587) Net decrease (increase) in trading securities 72,966 (18,573) Net increase in interest receivable (30,625) (3,083) Net increase in other assets (36,300) (58,391) Net (decrease) increase in interest payable (3,129) 2,519 Net decrease in current and deferred taxes (21,246) (44,639) Net increase in postretirement benefit obligation 4,516 6,370 Net increase (decrease) in other liabilities 17,224 (12,793) -------------------------------------------------------------------------------------------------------------------------- Total adjustments 146,902 159,556 -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 347,506 351,407 -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments 91,664 110,297 Purchases of investment securities held-to-maturity (4,857,246) (4,747,145) Maturities of investment securities held-to-maturity 4,779,569 4,760,946 Purchases of investment securities available-for-sale (2,537,407) (5,164,727) Maturities of investment securities available-for-sale 1,866,852 4,797,381 Sales of investment securities available-for-sale 89,611 156,383 Net disbursements on loans (1,906,999) (2,027,339) Proceeds from sale of loans 711,375 811,474 Acquisition of loan portfolios (394,632) (5,945) Assets acquired, net of cash (8,831) (2,322) Acquisition of premises and equipment (52,348) (78,465) Proceeds from sale of premises and equipment 12,308 13,337 Cash transferred due to sale of investment in subsidiary (46,899) -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (2,252,983) (1,376,125) -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 564,811 97,835 Net increase in federal funds purchased and securities sold under agreements to repurchase 822,164 80,775 Net increase in other short-term borrowings 869,492 654,912 Proceeds from issuance of notes payable 328,682 474,212 Payments of notes payable (703,910) (124,716) Dividends paid (71,448) (63,187) Proceeds from issuance of common stock 7,450 6,808 Treasury stock acquired (2,064) (49,947) -------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,815,177 1,076,692 -------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and due from banks (90,300) 51,974 Cash and due from banks at beginning of period 663,696 667,707 -------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $ 573,396 $ 719,681 ==========================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 7 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share information) NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION Popular, Inc. (the Corporation) is a bank holding company offering a full range of financial services through banking offices in Puerto Rico, the United States and the U.S. and British Virgin Islands. The Corporation is also engaged in mortgage and consumer finance, lease financing, investment banking and broker/dealer activities, retail financial services, and information technology, ATM and data processing services through its non-banking subsidiaries in Puerto Rico, the United States, and the Caribbean and Central America. Furthermore, effective July 1, 2000, the Corporation entered the insurance business through the creation of Banco Popular, National Association and its subsidiary Popular Insurance, Inc. Refer to note 10 to the consolidated financial statements for further information on the nature of operations of the Corporation by business segments. As part of a merger agreement between Banco Fiduciario (BF) and another local financial institution in the Dominican Republic, the Corporation sold its 57% ownership interest in BF on August 23, 2000. The Corporation retained an option to acquire a minority interest in the resulting new financial institution. BF had total assets of $435,590 as of the end of 1999, including loans amounting to $289,681. BF's deposits totaled $294,980 as of that date. The Corporation realized a gain of $569 in this sale transaction. Moreover, effective August 21, 2000, the Corporation sold its credit card operations in the United States, realizing a pretax gain of $8,499 in the transaction. These gains are included as part of other operating income in the Statement of Income. The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These statements are, in the opinion of management, a fair presentation of the results for the periods presented. These results are unaudited, but include all necessary adjustments, of a normal recurring nature, for a fair presentation of such results. Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2000 presentation. NOTE 2 - ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Later in June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," amending certain provisions of SFAS 133. These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require recognition of all derivatives as either assets or liabilities in the statement of condition measured at fair value. They also establish unique accounting treatment for the following three different types of hedges: fair value hedges, cash flows hedges and foreign currency hedges. The accounting for each of the three types of hedges results in recognizing offsetting changes in value or cash flows of both the derivative instrument and the hedged item in earnings in the same period. Changes in the fair value of derivatives that do not meet the criteria of one of these types of hedges are included in earnings in the period of change. The FASB has delayed the effective date of these statements to fiscal years beginning after June 15, 2000. The Corporation is in the process of determining the impact of the adoption of FAS 133, as amended. In managing its market risk the Corporation enters, to a limited extent, into certain derivatives primarily interest rate swaps, interest rate swaptions and interest-rate caps and floors embedded in interest-bearing contracts. As of September 30, 2000, the Corporation had $50,000 in notional amount of interest rate swaps, which will be accounted for as a hedged instrument based on the pronouncement, as amended. In addition, there are $118,664 in notional amount of interest rate swaptions, which hedge certificates of deposit with returns linked to the Standard and Poor's 500 index through an embedded option which will be bifurcated in accordance with the pronouncement. The interest-rate caps and floors embedded in the interest bearing contracts are clearly and closely related to the economic characteristics of the contract and as stated in the pronouncement will not be bifurcated from the host contract. Although the initial impact of the adoption of this pronouncement will depend on the fair value of the underlying derivative instruments as of December 31, 2000, management estimates that it will have no material effect on the consolidated financial statements, due to its limited derivative activity. 7 8 In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Liabilities - A Replacement of SFAS 125." This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS 125 without reconsideration. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. This statement is also effective for recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management understands that the adoption of this statement will not have a material effect on the consolidated financial statements of the Corporation. NOTE 3 - INVESTMENT SECURITIES The average contractual maturities as of September 30, 2000 and the amortized cost and market value (or fair value for certain investment securities when no market quotations are available) for the following investment securities were as follows: Investment securities available-for-sale:
SEPTEMBER 30, December 31, September 30, ------------- ------------ ------------- 2000 1999 1999 ---- ---- ---- AMORTIZED MARKET Amortized Market Amortized Market COST VALUE Cost Value Cost Value ---------------------------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 1 month) $1,740,923 $1,735,129 $2,018,104 $2,004,177 $2,020,076 $2,020,396 Obligations of other U.S. Government agencies and corporations (average maturity of 4 years and 9 months) 4,184,653 4,078,770 3,516,959 3,367,402 3,128,304 3,024,547 Obligations of Puerto Rico, States and political subdivision (average maturity of 10 years and 3 months) 77,896 77,658 75,712 75,918 76,410 75,534 Collateralized mortgage obligations (average maturity of 23 years) 1,392,624 1,373,623 1,224,095 1,196,062 1,279,323 1,258,911 Mortgage-backed securities (average maturity of 25 years) 503,346 498,219 484,040 489,161 347,661 351,740 Equity securities (without contractual maturity) 137,723 147,344 126,430 141,781 133,241 152,097 Other (average maturity of 10 years and 10 months) 68,869 69,208 55,047 50,449 55,548 55,138 -------------------------------------------------------------------------------- $8,106,034 $7,979,951 $7,500,387 $7,324,950 $7,040,563 $6,938,363 ================================================================================
8 9 Investments securities held to maturity:
SEPTEMBER 30, December 31, September 30, ------------- ------------ ------------- 2000 1999 1999 ---- ---- ---- AMORTIZED MARKET Amortized Market Amortized Market COST VALUE Cost Value Cost Value --------------------------------------------------------------------------- (In thousands) Obligations of other U.S. Government agencies and corporations (average maturity of 4 months) $ 6,445 $ 6,432 Obligations of Puerto Rico, States and political subdivisions (average maturity of 7 years and 8 months) 140,829 138,887 $ 58,779 $ 58,722 $ 62,863 $ 62,794 Collateralized mortgage obligations (average maturity of 12 years and 3 months) 14,696 14,586 18,930 18,924 19,780 19,872 Mortgage-backed securities (average maturity of 9 years and 9 months) 19,930 19,930 23,759 23,920 25,181 25,353 Equity securities (without contractual maturity) 90,711 90,711 89,445 89,445 91,795 91,795 Other (average maturity of 4 years) 103,929 99,200 108,399 104,064 112,295 107,911 --------------------------------------------------------------------------- $ 376,540 $ 369,746 $ 299,312 $ 295,075 $ 311,914 $ 307,725 ===========================================================================
The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities differ from their contractual maturities because they may be subject to prepayments. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank stock, is included as equity securities held-to-maturity and reported at amortized cost. NOTE 4 - PLEDGED ASSETS Investment securities and loans of the Corporation amounting to $6,341,550 (December 31, 1999 - $6,319,366; September 30, 1999 - $4,777,406) are pledged to secure public and trust deposits and securities sold under repurchase agreements. NOTE 5 - COMMITMENTS In the normal course of business there are letters of credit outstanding and stand-by letters of credit which at September 30, 2000, amounted to $13,894 and $69,568, respectively (September 31, 1999 - $26,997 and $66,980; December 31, 1999 - $22,926 and $62,022). There are also outstanding other commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the accompanying financial statements. No losses are anticipated as a result of these transactions. NOTE 6 - SUBORDINATED NOTES AND PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED BY THE CORPORATION Subordinated notes of $125,000 consist of notes issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semi-annually at 6.75%. On February 5, 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware that is wholly-owned by Popular North America, Inc. (PNA) and indirectly wholly-owned by the Corporation, sold to institutional investors $150,000 of its 8.327% Capital Securities Series A (liquidation amount $1,000 per Capital Security) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by PNA of $4,640 of its 8.327% common securities (liquidation amount $1,000 per common security) were used to purchase $154,640 aggregate principal amount of PNA 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated Debentures"). These capital securities qualify as Tier 1 capital, are fully and unconditionally guaranteed by the Corporation, and are presented in the Consolidated Statements 9 10 of Condition as "Guaranteed Preferred Beneficial Interest in Popular North America's Subordinated Debentures." The obligations of PNA under the Junior Subordinated Debentures and its guarantees of the obligations of BanPonce Trust 1 are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust 1 consisted of $154,640 of Junior Subordinated Debentures and a related accrued interest receivable of $1,073. The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures (which shortening would result in a mandatory redemption of the Capital Securities) may be shortened. NOTE 7 - STOCKHOLDERS' EQUITY Authorized common stock is 180,000,000 shares with a par value of $6 per share. At September 30, 2000, there were 138,288,062 (September 30,1999 - 137,840,858; December 31, 1999 - 137,943,619) shares issued and 135,893,857 (September 30, 1999 - 135,700,258; December 31, 1999 - 135,654,292) shares outstanding. As of September 30, 2000, a total of 2,394,205 (September 30, 1999 - 2,140,600; December 31, 1999 - 2,289,327) common shares with a total cost of $66,214 (September 30, 1999 - $60,151; December 31, 1999 - $64,123) were maintained as treasury stock. Authorized preferred stock consists of 10,000,000 shares without par value of which 4,000,000, non-cumulative with a dividend rate of 8.35% and a liquidation preference value of $25 per share, were issued and outstanding at September 30, 2000, September 30, 1999 and December 31, 1999. NOTE 8 - EARNINGS PER COMMON SHARE Earnings per common share (EPS) are calculated based on net income applicable to common stockholders which amounted to $69,205 for the third quarter of 2000 (1999 - $62,123) and $194,342 for the nine months ended September 30, 2000 (1999 - $185,589), after deducting the dividends on preferred stock. EPS are based on 135,971,955 average shares outstanding for the third quarter of 2000 (1999 - 135,379,215), and 135,871,832 average shares outstanding for the first nine months of 2000 (1999 - 135,525,400). NOTE 9 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS During the nine-month period ended September 30, 2000, the Corporation paid interest and income taxes amounting to $857,867 and $83,038, respectively (1999 - $642,876 and $110,175). In addition, the loans receivable transferred to other real estate and other property for the nine-month period ended September 30, 2000, amounted to $23,609 and $18,814, respectively (1999 - $8,470 and $9,991). In connection with the sale of its investment in BF, the Corporation received a note receivable (denominated in U.S. dollars) for $22,500, which earns interest at 9.5%. NOTE 10 - SEGMENT REPORTING Popular, Inc. operates three major reportable segments: commercial banking, mortgage and consumer lending, and lease financing. Management has determined its reportable segments based on legal entity, which is the way that operating decisions and performance is measured. These entities have then been aggregated by products, services and markets with similar characteristics. The Corporation's commercial banking segment includes all banking subsidiaries engaged in business in Puerto Rico and the U.S. mainland, which provide individuals, corporations and institutions with commercial and retail banking services, including loans and deposits, trusts, 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, New York, Illinois, California, Florida, Texas and New Jersey. 10 11 The Corporation's mortgage and consumer finance 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 lease financing segment provides financing for vehicles and equipment through Popular Leasing and Rental, Inc. in Puerto Rico and Popular Leasing, USA in the U.S. mainland. The "Other" category includes all holding companies and non-banking subsidiaries which provide insurance agency services, retail financial services, investment banking and broker/dealer activities, as well as those providing ATM processing services, electronic data processing and consulting services, sale and rental of electronic data processing equipment and selling and maintenance of computer software. As of September 30, 1999 it also included the banking operations of Banco Fiduciario in the Dominican Republic. The accounting policies of the segments are the same as those followed by the Corporation in the ordinary course of business and conform with generally accepted accounting principles and with general practices within the financial industry. Following are the results of operations and selected financial information by operating segments for the third quarter and the nine-month period ended September 30, 2000 and 1999.
Mortgage and Commercial consumer Lease banking finance financing Other Eliminations Total ---------------------------------------------------------------------------------------------------------------------------- (In thousands) Quarter ended September 30, 2000 ---------------------------------------------------------------------------------------------------------------------------- Net interest income $ 213,184 $ 23,627 $ 10,482 $ 1,599 $ (36) $ 248,856 Provision for loan losses 33,929 9,944 4,930 863 49,666 Other income 67,936 12,836 4,777 38,681 (3,504) 120,726 Amortization expense 7,222 201 188 1,218 8,829 Depreciation expense 14,578 553 2,247 1,473 18,851 Other operating expenses 136,169 18,897 5,448 33,087 (377) 193,224 Minority interest 10 (68) (58) Income tax 24,407 2,210 964 893 (812) 27,662 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 64,815 $ 4,668 $ 1,482 $ 2,678 $ (2,351) $ 71,292 ============================================================================================================================ Segment Assets $ 23,191,642 $ 2,663,259 $ 938,230 $ 6,174,048 $ (5,736,916) $ 27,230,263 ============================================================================================================================ Mortgage and Commercial consumer Lease banking finance financing Other Eliminations Total ---------------------------------------------------------------------------------------------------------------------------- (In thousands) Nine-month period ended September 30, 2000 ---------------------------------------------------------------------------------------------------------------------------- Net interest income $ 632,749 $ 69,312 $ 31,990 $ 3,065 $ (104) $ 737,012 Provision for loan losses 107,003 22,632 14,273 4,490 148,398 Other income 193,224 32,923 16,125 111,837 (8,372) 345,737 Amortization expense 21,215 523 565 3,655 25,958 Depreciation expense 43,326 1,867 6,974 5,172 57,339 Other operating expenses 424,772 56,906 17,158 86,989 (2,342) 583,483 Minority interest 32 1,104 1,136 Income tax 56,949 6,771 3,462 2,520 (1,599) 68,103 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 172,708 $ 13,568 $ 5,683 $ 13,180 $ (4,535) $ 200,604 ============================================================================================================================ Segment Assets $ 23,191,642 $ 2,663,259 $ 938,230 $ 6,174,048 $ (5,736,916) $ 27,230,263 ============================================================================================================================
11 12
Mortgage and Commercial consumer Lease banking finance financing Other Eliminations Total ---------------------------------------------------------------------------------------------------------------------------- (In thousands) Quarter ended September 30, 1999 ---------------------------------------------------------------------------------------------------------------------------- Net interest income $ 204,616 $ 23,751 $ 10,680 $ (233) $ (22) $ 238,792 Provision for loan losses 28,758 5,870 1,855 597 37,080 Other income 62,357 12,305 4,853 18,738 (1,230) 97,023 Amortization expense 7,042 109 188 774 8,113 Depreciation expense 13,553 489 2,123 928 17,093 Other operating expenses 146,315 18,561 6,721 18,572 (671) 189,498 Minority interest 6 1,060 1,066 Income tax 16,048 3,978 1,863 (853) (149) 20,887 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 55,257 $ 7,055 $ 2,783 $ (453) $ (432) $ 64,210 ============================================================================================================================ Segment Assets $ 20,698,974 $ 1,878,820 $ 734,328 $ 6,064,867 $ (5,101,406) $ 24,275,583 ============================================================================================================================ Mortgage and Commercial consumer Lease banking finance financing Other Eliminations Total ---------------------------------------------------------------------------------------------------------------------------- (In thousands) Nine-month period ended September 30, 1999 ---------------------------------------------------------------------------------------------------------------------------- Net interest income $ 610,815 $ 67,852 $ 32,027 $ 3,222 (35) $ 713,881 Provision for loan losses 83,830 18,374 6,298 980 109,482 Other income 181,365 35,144 15,105 43,064 (3,671) 271,007 Amortization expense 21,161 277 566 1,315 23,319 Depreciation expense 40,962 1,279 6,536 3,153 51,930 Other operating expenses 432,292 53,268 18,483 43,414 (894) 546,563 Minority interest 6 1,874 1,880 Income tax 48,525 10,653 5,833 (669) (719) 63,623 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 165,410 $ 19,151 $ 9,416 $ (33) $ (2,093) 191,851 ============================================================================================================================ Segment Assets $ 20,698,974 $ 1,878,820 $ 734,328 $ 6,064,867 $ (5,101,406) $ 24,275,583 ============================================================================================================================
During the quarter ended March 31, 2000, the Corporation's Bank Holding Company exercised its conversion right and exchanged its investment in preferred stock of a financial corporation in Puerto Rico for common stock of the same entity, resulting in a $13,415 gain. This gain is included in "other income" within the "other" reportable segment category. GEOGRAPHIC INFORMATION
Quarter ended Nine-month period ended September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------- (In thousands) (In thousands) Revenues* Puerto Rico $ 462,488 $ 391,434 $1,326,671 $1,137,322 United States 186,584 145,954 514,328 413,894 Other 32,828 28,167 96,487 85,919 ---------------------------------------------------------------------------------------------------- Total consolidated revenues $ 681,900 $ 565,555 $1,937,486 $1,637,135 ----------------------------------------------------------------------------------------------------
* Total revenues include interest income, service charges on deposit accounts, other service fees, gain on sale of securities, trading account profit, and other income. 12 13
SEPTEMBER 30, December 31, September 30, 2000 1999 1999 ---------------------------------------------------------------------------------------------- (IN THOUSANDS) Selected Balance Sheet Information: Puerto Rico Total assets $ 19,386,613 $ 18,064,388 $ 17,156,171 Loans 9,616,626 8,767,843 8,457,194 Deposits 9,851,236 9,792,128 9,523,739 United States Total assets $ 7,188,144 $ 6,407,217 $ 6,138,067 Loans 6,201,331 5,460,696 4,973,344 Deposits 4,004,726 3,472,840 3,380,518 Other Total assets $ 655,506 $ 988,934 $ 981,345 Loans 419,730 679,215 666,543 Deposits 701,916 908,747 865,791
NOTE 11 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR AND ISSUERS OF GUARANTEED SECURITIES REGISTERED: The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (PIHC), Popular International Bank, Inc. (PIB), Popular North America, Inc. (PNA) and all other subsidiaries of the Corporation as of September 30, 2000, December 31, 1999 and September 30, 1999, and the results of their operations and cash flows for quarters and nine-month periods ended September 30, 2000 and 1999. PIB, 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 PIB and PNA as of August 31, 2000, November 30, 1999 and August 31, 1999, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of September 30, 2000, December 31, 1999 and September 30, 1999, respectively. PIHC, PIB and PNA are authorized issuers of debt securities and preferred stock under a shelf registration filed with the SEC that became effective on August 4, 1999. PIB is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica, CreST, S.A., and PNA. Effective August 23, 2000 the Corporation sold its ownership in Banco Fiduciario to another financial institution in the Dominican Republic. PNA is an operating subsidiary of PIB and is the holding company of its wholly-owned subsidiaries, Popular Cash Express, Inc., Equity One, Inc., BPNA 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 PIB and PNA. The principal source of cash flows for PIHC consists of dividends from Banco Popular de Puerto Rico (BPPR). As a member subject to the regulations of the Federal Reserve Board, BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its net profits for that year, as defined by the Federal Reserve Board, combined with its retained net profits for the preceding two years. The payment of dividends may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. At September 30, 2000, BPPR could have declared a dividend of approximately $173,113 without the approval of the Federal Reserve Board. 13 14 POPULAR, INC. STATEMENT OF CONDITION AS OF SEPTEMBER 30, 2000 (UNAUDITED)
Popular, Inc. PIB PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 239 $ 41 $ 758 $ 655,513 $ (83,155) $ 573,396 Money market investments 8,937 303 47 1,752,507 (882,143) 879,651 Investment securities available-for-sale, at market value 155,128 13,021 5,587 7,806,215 7,979,951 Investment securities held-to-maturity, at amortized cost 531,180 (154,640) 376,540 Trading account securities, at market value 163,645 163,645 Investment in subsidiaries, at equity 1,848,621 530,448 726,066 125,284 (3,230,419) Loans held-for-sale, at lower of cost or market 682,455 682,455 ---------------------------------------------------------------------------------------------------------------------------------- Loans 627,678 22,500 1,740,515 15,897,859 (2,379,998) 15,908,554 Less - Unearned income 353,322 353,322 Allowance for loan losses 2,000 293,177 295,177 ---------------------------------------------------------------------------------------------------------------------------------- 625,678 22,500 1,740,515 15,251,360 (2,379,998) 15,260,055 ---------------------------------------------------------------------------------------------------------------------------------- Premises and equipment 401,975 401,975 Other real estate 21,494 21,494 Customers' liabilities on acceptances 1,904 1,904 Accrued income receivable 1,819 49 11,120 206,074 (18,424) 200,638 Other assets 19,813 798 6,636 374,558 (682) 401,123 Intangible assets 287,920 (484) 287,436 ---------------------------------------------------------------------------------------------------------------------------------- $ 2,660,235 $567,160 $ 2,490,729 $ 28,262,084 $ (6,749,945) $ 27,230,263 ================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,028,107 ($ 83,050) $ 2,945,057 Interest bearing 11,776,868 (164,047) 11,612,821 ---------------------------------------------------------------------------------------------------------------------------------- 14,804,975 (247,097) 14,557,878 Federal funds purchased and securities sold under agreements to repurchase $ 17,800 $ 50,400 5,309,504 (141,060) 5,236,644 Other short-term borrowings 390,828 $ 5,414 978,840 3,480,691 (1,411,644) 3,444,129 Notes payable 251,440 913,589 1,955,542 (1,686,142) 1,434,429 Acceptances outstanding 1,904 1,904 Other liabilities 39,433 198 27,889 398,500 (22,313) 443,707 ---------------------------------------------------------------------------------------------------------------------------------- 699,501 5,612 1,970,718 25,951,116 (3,508,256) 25,118,691 ---------------------------------------------------------------------------------------------------------------------------------- Subordinated notes 125,000 125,000 ---------------------------------------------------------------------------------------------------------------------------------- Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed y the Corporation 150,000 150,000 ---------------------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 838 838 ---------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 100,000 100,000 Common stock 829,729 3,962 2 33,363 (37,327) 829,729 Surplus 249,238 485,676 439,964 1,335,995 (2,261,635) 249,238 Retained earnings 823,418 73,371 80,241 900,131 (1,053,743) 823,418 Treasury stock, at cost (66,214) (314) 314 (66,214) Accumulated other comprehensive income (loss), net of deferred taxes (100,437) (1,461) (196) (108,207) 109,864 (100,437) ---------------------------------------------------------------------------------------------------------------------------------- 1,835,734 561,548 520,011 2,160,968 (3,242,527) 1,835,734 ---------------------------------------------------------------------------------------------------------------------------------- $ 2,660,235 $567,160 $ 2,490,729 $ 28,262,084 $ (6,749,945) $ 27,230,263 ==================================================================================================================================
14 15 STATEMENTS OF CONDITION AS OF DECEMBER 31, 1999 (UNAUDITED)
Popular, Inc. PIB PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. subsidiaries Entries Consolidated ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 332 $ 227 $ 664 $ 693,238 $ (30,765) $ 663,696 Money market investments 35,500 3,258 21,503 1,720,305 (794,572) 985,994 Investment securities available-for-sale, at market value 126,716 13,525 5,330 7,180,179 (800) 7,324,950 Investment securities held-to-maturity, at amortized cost 453,952 (154,640) 299,312 Trading account securities, at market value 236,610 236,610 Investment in subsidiaries, at equity 1,665,674 539,288 620,332 113,145 (2,938,439) Loans held-for-sale, at lower of cost or market 619,298 619,298 ------------------------------------------------------------------------------------------------------------------------------------ Loans 895,448 16,961 1,427,775 14,706,699 (2,387,483) 14,659,400 Less - Unearned income 370,944 370,944 Allowance for loan losses 292,010 292,010 ------------------------------------------------------------------------------------------------------------------------------------ 895,448 16,961 1,427,775 14,043,745 (2,387,483) 13,996,446 ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment 440,971 440,971 Other real estate 29,268 29,268 Customers' liabilities on acceptances 12,041 12,041 Accrued income receivable 122 196 672 187,232 (12,476) 175,746 Other assets 9,935 593 4,782 357,057 (946) 371,421 Intangible assets 305,373 (587) 304,786 ------------------------------------------------------------------------------------------------------------------------------------ $ 2,733,727 $574,048 $2,081,058 $26,392,414 $(6,320,708) $25,460,539 ==================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,315,609 $ (30,660) $ 3,284,949 Interest bearing 11,510,011 (621,245) 10,888,766 ------------------------------------------------------------------------------------------------------------------------------------ 14,825,620 (651,905) 14,173,715 Federal funds purchased and securities sold under agreements to repurchase 4,521,700 (107,220) 4,414,480 Other short-term borrowings $ 431,050 $ 25,719 $ 324,657 2,950,906 (1,119,943) 2,612,389 Notes payable 484,715 7,007 1,201,412 1,622,821 (1,463,356) 1,852,599 Acceptances outstanding 12,041 12,041 Other liabilities 31,976 455 42,582 376,593 (14,888) 436,718 ------------------------------------------------------------------------------------------------------------------------------------ 947,741 33,181 1,568,651 24,309,681 (3,357,312) 23,501,942 ------------------------------------------------------------------------------------------------------------------------------------ Subordinated notes 125,000 125,000 ------------------------------------------------------------------------------------------------------------------------------------ Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 ------------------------------------------------------------------------------------------------------------------------------------ Minority interest in consolidated subsidiaries 22,611 22,611 ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity: Preferred stock 100,000 100,000 Common stock 827,662 3,962 2 62,445 (66,409) 827,662 Surplus 243,855 470,226 439,964 1,273,797 (2,183,987) 243,855 Retained earnings 694,301 69,529 74,005 750,111 (893,645) 694,301 Treasury stock, at cost (64,123) (287) 287 (64,123) Accumulated other comprehensive income (loss), net of deferred taxes (140,709) (2,850) (1,564) (153,333) 157,747 (140,709) ------------------------------------------------------------------------------------------------------------------------------------ 1,660,986 540,867 512,407 1,932,733 (2,986,007) 1,660,986 ------------------------------------------------------------------------------------------------------------------------------------ $2,733,727 $574,048 $2,081,058 $26,392,414 $(6,320,708) $25,460,539 ====================================================================================================================================
15 16 POPULAR, INC. STATEMENT OF CONDITION AS OF SEPTEMBER 30, 1999 (UNAUDITED)
Popular, Inc. PIB PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 451 $ 414 $ 191 $ 726,245 $ (7,620) $ 719,681 Money market investments 19,000 3,203 213,263 1,256,400 (654,266) 837,600 Investment securities available-for-sale, at market value 130,159 14,201 4,050 6,789,953 6,938,363 Investment securities held-to-maturity, at amortized cost 466,554 (154,640) 311,914 Trading account securities, at market value 337,300 337,300 Investment in subsidiaries, at equity 1,688,368 543,296 618,576 109,947 (2,960,187) Loans held-for-sale, at lower of cost or market 526,263 526,263 ------------------------------------------------------------------------------------------------------------------------------------ Loans 868,947 17,557 1,171,172 14,022,804 (2,134,570) 13,945,910 Less - Unearned income 375,092 375,092 Allowance for loan losses 288,382 288,382 ------------------------------------------------------------------------------------------------------------------------------------ 868,947 17,557 1,171,172 13,359,330 (2,134,570) 13,282,436 ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment 442,162 442,162 Other real estate 27,926 27,926 Customers' liabilities on acceptances 10,488 10,488 Accrued income receivable 164 11 315 170,784 (11,859) 159,415 Other assets 7,737 713 3,795 368,400 (9,377) 371,268 Intangible assets 311,390 (623) 310,767 ------------------------------------------------------------------------------------------------------------------------------------ $2,714,826 $579,395 $2,011,362 $24,903,142 $(5,933,142) $24,275,583 ==================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,000,958 $ (6,769) $ 2,994,189 Interest bearing 11,028,850 (252,991) 10,775,859 ------------------------------------------------------------------------------------------------------------------------------------ 14,029,808 (259,760) 13,770,048 Federal funds purchased and securities sold under agreements to repurchase $ 199,852 4,052,707 (95,284) 4,157,275 Other short-term borrowings $ 346,370 $ 29,966 301,357 2,822,111 (1,204,977) 2,294,827 Notes payable 524,330 2,312 968,824 1,550,086 (1,386,191) 1,659,361 Acceptances outstanding 10,488 10,488 Other liabilities 41,804 251 24,842 364,123 (23,039) 407,981 ------------------------------------------------------------------------------------------------------------------------------------ 912,504 32,529 1,494,875 22,829,323 (2,969,251) 22,299,980 ------------------------------------------------------------------------------------------------------------------------------------ Subordinated notes 125,000 125,000 ------------------------------------------------------------------------------------------------------------------------------------ Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 ------------------------------------------------------------------------------------------------------------------------------------ Minority interest in consolidated subsidiaries 23,281 23,281 ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity: Preferred stock 100,000 100,000 Common stock 827,045 3,962 2 73,138 (77,102) 827,045 Surplus 237,892 470,226 439,964 1,241,678 (2,151,868) 237,892 Retained earnings 656,407 74,015 77,387 707,711 (859,113) 656,407 Treasury stock, at cost (60,151) (60,151) Accumulated other comprehensive income (loss) net of deferred taxes (83,871) (1,337) (866) (98,708) 100,911 (83,871) ------------------------------------------------------------------------------------------------------------------------------------ 1,677,322 546,866 516,487 1,923,819 (2,987,172) 1,677,322 ------------------------------------------------------------------------------------------------------------------------------------ $2,714,826 $579,395 $2,011,362 $24,903,142 $(5,933,142) $24,275,583 ====================================================================================================================================
16 17 POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED SEPTEMBER 30, 2000 (UNAUDITED)
Popular, Inc. PIB PNA Other Elimination Popular, Inc. Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 11,712 $ 47 $ 31,544 $ 415,715 $ (44,341) $ 414,677 Money market investments 292 8 37 33,691 (15,841) 18,187 Investment securities 678 1 178 127,514 (3,262) 125,109 Trading account securities 3,201 3,201 -------------------------------------------------------------------------------------------------------------------------------- 12,682 56 31,759 580,121 (63,444) 561,174 -------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 146,356 (5,545) 140,811 Short-term borrowings 7,856 91 15,807 141,600 (25,597) 139,757 Long-term debt 6,492 17,523 40,002 (32,267) 31,750 -------------------------------------------------------------------------------------------------------------------------------- 14,348 91 33,330 327,958 (63,409) 312,318 -------------------------------------------------------------------------------------------------------------------------------- Net interest income (1,666) (35) (1,571) 252,163 (35) 248,856 Provision for loan losses 49,666 49,666 -------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan (1,666) (35) (1,571) 202,497 (35) 199,190 losses Service charges on deposit accounts 32,558 32,558 Other service fees 58,323 (142) 58,181 Gain on sale of securities 147 147 Trading account loss (50) (50) Other operating income 2,668 757 29,826 (3,361) 29,890 -------------------------------------------------------------------------------------------------------------------------------- 1,002 722 (1,571) 323,301 (3,538) 319,916 -------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 70 78,034 78,104 Profit sharing 5,197 5,197 Pension and other benefits 10 17,068 17,078 -------------------------------------------------------------------------------------------------------------------------------- 80 100,299 100,379 Net occupancy expenses 3 17,607 17,610 Equipment expenses 1 25,354 (61) 25,294 Other taxes 452 8,055 8,507 Professional fees 95 3 174 16,297 (279) 16,290 Communications 4 11,657 11,661 Business promotion 9,694 9,694 Printing and supplies 5,351 5,351 Other operating expenses 21 14 17,290 (36) 17,289 Amortization of intangibles 8,829 8,829 -------------------------------------------------------------------------------------------------------------------------------- 572 101 174 220,433 (376) 220,904 -------------------------------------------------------------------------------------------------------------------------------- Income before income tax and equity in earnings of subsidiaries 430 621 (1,745) 102,868 (3,162) 99,012 Income tax (236) (611) 29,322 (813) 27,662 Net (gain) loss of minority interest (58) (58) -------------------------------------------------------------------------------------------------------------------------------- Income before equity in earnings of 666 621 (1,134) 73,488 (2,349) 71,292 subsidiaries Equity in earnings of subsidiaries 70,626 5,963 7,604 4,066 (88,259) -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 71,292 $ 6,584 $ 6,470 $ 77,554 $ (90,608) $ 71,292 ================================================================================================================================
17 18 POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Popular, Inc. PIB PNA Other Elimination Popular, Inc. Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME: Loans $ 14,712 $ 193 $20,709 $ 349,779 $ (36,098) $ 349,295 Money market investments 233 95 264 17,299 (9,619) 8,272 Investment securities 766 15 214 107,960 (3,219) 105,736 Trading account securities 5,229 5,229 --------------------------------------------------------------------------------------------------------------------------------- 15,711 303 21,187 480,267 (48,936) 468,532 --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 113,861 (558) 113,303 Short-term borrowings 6,250 359 5,911 95,865 (24,314) 84,071 Long-term debt 10,607 16,871 28,931 (24,043) 32,366 --------------------------------------------------------------------------------------------------------------------------------- 16,857 359 22,782 238,657 (48,915) 229,740 --------------------------------------------------------------------------------------------------------------------------------- Net interest income (1,146) (56) (1,595) 241,610 (21) 238,792 Provision for loan losses 37,080 37,080 --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (1,146) (56) (1,595) 204,530 (21) 201,712 Service charges on deposit accounts 29,935 29,935 Other service fees 44,881 (507) 44,374 Gain on sale of securities 39 39 Trading account loss (698) (698) Other operating income 2,504 167 21,425 (723) 23,373 --------------------------------------------------------------------------------------------------------------------------------- 1,358 111 (1,595) 300,112 (1,251) 298,735 --------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 58 75,095 75,153 Profit sharing 5,485 5,485 Pension and other benefits 10 18,742 18,752 --------------------------------------------------------------------------------------------------------------------------------- 68 99,322 99,390 Net occupancy expenses 3 15,466 15,469 Equipment expenses 22,908 22,908 Other taxes 224 8,493 8,717 Professional fees 262 5 184 17,289 (650) 17,090 Communications 1 10,830 10,831 Business promotion 11,916 11,916 Printing and supplies 4 5,317 5,321 Other operating expenses 15 14,955 (21) 14,949 Amortization of intangibles 8,113 8,113 --------------------------------------------------------------------------------------------------------------------------------- 491 91 184 214,609 (671) 214,704 --------------------------------------------------------------------------------------------------------------------------------- Income before income tax and equity in earnings of subsidiaries 867 20 (1,779) 85,503 (580) 84,031 Income tax (623) 21,658 (148) 20,887 Net loss of minority interest 1,066 1,066 --------------------------------------------------------------------------------------------------------------------------------- Income before equity in earnings of subsidiaries 867 20 (1,156) 64,911 (432) 64,210 Equity in earnings of subsidiaries 63,343 3,871 6,661 3,453 (77,328) --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 64,210 $ 3,891 $ 5,505 $ 68,364 $ (77,760) $ 64,210 =================================================================================================================================
18 19 POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 (UNAUDITED)
Popular Inc. PIB PNA Other Elimination Popular, Inc. Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 40,364 $ 336 $ 85,165 $1,186,945 $(129,176) $1,183,634 Money market investments 643 77 178 86,177 (41,332) 45,743 Investment securities 1,624 1 533 359,421 (9,716) 351,863 Trading account securities 10,509 10,509 --------------------------------------------------------------------------------------------------------------------------------- 42,631 414 85,876 1,643,052 (180,224) 1,591,749 --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 414,487 (21,803) 392,684 Short-term borrowings 24,223 467 29,883 370,565 (68,872) 356,266 Long-term debt 23,330 142 60,793 110,967 (89,445) 105,787 --------------------------------------------------------------------------------------------------------------------------------- 47,553 609 90,676 896,019 (180,120) 854,737 --------------------------------------------------------------------------------------------------------------------------------- Net interest income (4,922) (195) (4,800) 747,033 (104) 737,012 Provision for loan losses 148,398 148,398 --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (4,922) (195) (4,800) 598,635 (104) 588,614 Service charges on deposit accounts 93,612 93,612 Other service fees 162,691 (1,702) 160,989 Gain on sale of securities 13,000 740 13,740 Trading account profit 1,460 1,460 Other operating income 8,066 1,082 73,458 (6,670) 75,936 --------------------------------------------------------------------------------------------------------------------------------- 16,144 887 (4,800) 930,596 (8,476) 934,351 --------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 210 233,789 233,999 Profit sharing 14,897 14,897 Pension and other benefits 36 52,882 52,918 --------------------------------------------------------------------------------------------------------------------------------- 246 301,568 301,814 Net occupancy expenses 9 50,337 50,346 Equipment expenses 1 73,923 (117) 73,807 Other taxes 898 24,525 25,423 Professional fees 296 6 480 52,130 (2,118) 50,794 Communications 7 34,490 34,497 Business promotion 36,353 36,353 Printing and supplies 15,836 15,836 Other operating expenses 70 39 51,949 (106) 51,952 Amortization of intangibles 25,958 25,958 --------------------------------------------------------------------------------------------------------------------------------- 1,271 301 480 667,069 (2,341) 666,780 --------------------------------------------------------------------------------------------------------------------------------- Income before income tax and equity in earnings of subsidiaries 14,873 586 (5,280) 263,527 (6,135) 267,571 Income tax 3,492 (1,848) 68,059 (1,600) 68,103 Net loss of minority interest 1,136 1,136 --------------------------------------------------------------------------------------------------------------------------------- Income before equity in earnings of subsidiaries 11,381 586 (3,432) 196,604 (4,535) 200,604 Equity in earnings of subsidiaries 189,223 3,256 9,668 10,639 (212,786) --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $200,604 $3,842 $ 6,236 $ 207,243 $(217,321) $ 200,604 =================================================================================================================================
19 20 POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Popular Inc. PIB PNA Other Elimination Popular, Inc. Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 42,256 $ 213 $ 58,592 $1,013,110 $(103,104) $1,011,067 Money market investments 520 201 1,369 44,706 (23,091) 23,705 Investment securities 2,825 15 557 322,841 (9,657) 316,581 Trading account securities 14,775 14,775 ----------------------------------------------------------------------------------------------------------------------------------- 45,601 429 60,518 1,395,432 (135,852) 1,366,128 ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 335,011 (738) 334,273 Short-term borrowings 16,383 540 18,853 254,837 (64,029) 226,584 Long-term debt 31,597 45,095 85,749 (71,051) 91,390 ----------------------------------------------------------------------------------------------------------------------------------- 47,980 540 63,948 675,597 (135,818) 652,247 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (2,379) (111) (3,430) 719,835 (34) 713,881 Provision for loan losses 109,482 109,482 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (2,379) (111) (3,430) 610,353 (34) 604,399 Service charges on deposit accounts 87,915 87,915 Other service fees 122,403 (429) 121,974 Gain on sale of securities 216 559 775 Trading account loss (1,561) (1,561) Other operating income 4,930 428 59,787 (3,241) 61,904 ----------------------------------------------------------------------------------------------------------------------------------- 2,551 317 (3,214) 879,456 (3,704) 875,406 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 172 215,122 215,294 Profit sharing 17,888 17,888 Pension and other benefits 32 56,851 56,883 ----------------------------------------------------------------------------------------------------------------------------------- 204 289,861 290,065 Net occupancy expense 9 44,433 44,442 Equipment expenses 65,212 (13) 65,199 Other taxes 612 24,311 24,923 Professional fees 967 8 541 49,102 (860) 49,758 Communications 2 32,238 32,240 Business promotion 35,125 35,125 Printing and supplies 7 15,132 15,139 Other operating expenses 28 41,595 (21) 41,602 Amortization of intangibles 23,319 23,319 ----------------------------------------------------------------------------------------------------------------------------------- 1,588 249 541 620,328 (894) 621,812 ----------------------------------------------------------------------------------------------------------------------------------- Income before income tax and equity in earnings of subsidiaries 963 68 (3,755) 259,128 (2,810) 253,594 Income tax (1,308) 65,649 (718) 63,623 Net loss of minority interest 1,880 1,880 ----------------------------------------------------------------------------------------------------------------------------------- Income before equity in earnings of subsidiaries 963 68 (2,447) 195,359 (2,092) 191,851 Equity in earnings of subsidiaries 190,888 9,268 14,781 13,307 (228,244) ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 191,851 $ 9,336 $ 12,334 $ 208,666 $(230,336) $ 191,851 ===================================================================================================================================
20 21 POPULAR, INC. STATEMENT OF CASH FLOWS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000
Popular, Inc. PIB PNA Holding Holding Holding Other Elimination Consolidated (In thousands) Co. Co. Co. Subsidiaries Entries Popular, Inc ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 200,604 $ 3,842 $ 6,236 $207,243 $(217,321) $ 200,604 ------------------------------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed earnings of subsidiaries (189,223) (3,256) (9,668) (10,639) 212,786 Depreciation and amortization of premises and equipment 57,339 57,339 Provision for loan losses 148,398 148,398 Amortization of intangibles 25,958 25,958 Gain on sale of investment securities (13,000) (740) (13,740) available-for-sale Loss on disposition of premises and equipment 340 340 Gain on sale of loans (13,446) (13,446) Amortization of premiums and accretion of discounts on investments 170 1,130 1,300 Increase in loans held-for-sale (63,157) (63,157) Amortization of deferred loan fees and costs 504 504 Net decrease in trading securities 72,966 72,966 Net (increase) decrease in interest receivable (1,697) 146 (10,448) (24,574) 5,948 (30,625) Net increase in other assets (8,485) (205) (1,854) (25,389) (367) (36,300) Net increase (decrease) in interest payable 5,664 (127) (16,787) 8,121 (3,129) Net (decrease) increase in current and deferred taxes (1,393) 170 (20,023) (21,246) Net increase in postretirement benefit obligation 4,516 4,516 Net increase (decrease) in other liabilities 3,057 (129) 1,923 19,777 (7,404) 17,224 ------------------------------------------------------------------------------------------------------------------------------------ Total adjustments (205,077) (3,571) (36,494) 181,081 210,963 146,902 ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in ) operating activities (4,473) 271 (30,258) 388,324 (6,358) 347,506 ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Net decrease (increase) in money market investments 26,563 2,955 21,456 (46,881) 87,571 91,664 Purchases of investment securities held-to-maturity (4,857,246) (4,857,246) Maturities of investment securities held-to-maturity 4,779,569 4,779,569 Purchases of investment securities available-for-sale (108,576) (257) (2,428,574) (2,537,407) Maturities of investment securities available-for-sale 87,956 1,779,696 (800) 1,866,852 Sales of investment securities available-for-sale 89,611 89,611 Net repayments (disbursements) on loans 269,771 16,392 (312,741) (1,872,936) (7,485) (1,906,999) Proceeds from sale of loans 711,375 711,375 Acquisition of loan portfolios (394,632) (394,632) Capital contribution to subsidiary (15,574) (7,943) (94,868) 118,385 Assets acquired, net of cash (8,831) (8,831) Acquisition of premises and equipment (52,348) (52,348) Proceeds from sale of premises and equipment 12,308 12,308 Cash transferred due to sale of investment in subsidiary (46,899) (46,899) Dividends received from subsidiary 66,000 (66,000) ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 326,140 11,404 (386,410) (2,335,788) 131,671 (2,252,983) ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase in deposits 160,003 404,808 564,811 Net increase in federal funds purchased and Securities sold under agreements to repurchase 17,800 50,400 787,804 (33,840) 822,164 Net (decrease) increase in other short-term borrowings (40,222) (20,304) 654,184 567,534 (291,700) 869,492 Proceeds from issuance of notes payable 328,682 328,682 Payments of notes payable (233,276) (7,007) (287,822) 46,981 (222,786) (703,910) Dividends paid to parent company (66,000) 66,000 Dividends paid (71,448) (71,448) Proceeds from issuance of common stock 7,450 7,450 Treasury stock acquired (2,064) (2,064) Capital contribution from parent 15,450 84,735 (100,185) ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (321,760) (11,861) 416,762 1,909,739 (177,703) 1,815,177 ------------------------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and due from banks (93) (186) 94 (37,725) (52,390) (90,300) Cash and due from banks at beginning of period 332 227 664 693,238 (30,765) 663,696 ------------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks at end of period $ 239 $ 41 $ 758 $ 655,513 $ (83,155) $ 573,396 ====================================================================================================================================
21 22 POPULAR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
Popular, Inc. PIB PNA Holding Holding Holding Other Elimination Consolidated (In thousands) Co. Co. Co. subsidiaries Entries Popular, Inc ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 191,851 $ 9,336 $ 12,334 $ 208,666 $(230,336) $ 191,851 ----------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed earnings (190,888) (9,268) (14,781) (13,307) 228,244 Depreciation and amortization of premises and equipment 51,930 51,930 Provision for loan losses 109,482 109,482 Amortization of intangibles 23,319 23,319 Gain on sale of investment securities available-for-sale (216) (559) (775) Loss on disposition of premises and equipment 188 188 Gain on sale of loans (19,594) (19,594) Amortization of premiums and accretion of discounts on investments 16 5,314 5,330 Decrease in loans held-for-sale 119,853 119,853 Amortization of deferred loan fees and costs (1,587) (1,587) Net increase in trading securities (18,573) (18,573) Net decrease (increase) in interest receivable 1,021 (2) (10,079) 5,977 (3,083) Net increase in other assets (5,110) (297) (1,177) (52,213) 406 (58,391) Net increase (decrease) in interest payable 10,402 209 (7,048) (1,044) 2,519 Net decrease in current and deferred taxes (750) (211) (43,678) (44,639) Net increase in postretirement benefit obligation 6,370 6,370 Net increase (decrease) in other liabilities 1,041 9 2,342 (9,118) (7,067) (12,793) ----------------------------------------------------------------------------------------------------------------------------------- Total adjustments (184,268) (9,349) (21,091) 146,704 227,560 159,556 ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 7,583 (13) (8,757) 355,370 (2,776) 351,407 ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Net (increase) decrease in money market investments (15,300) (1,738) (117,834) 59,067 186,102 110,297 Purchases of investment securities held-to-maturity (4,747,145) (4,747,145) Maturities of investment securities held-to-maturity 4,760,946 4,760,946 Purchases of investment securities available-for-sale (92,286) (8,515) (5,063,926) (5,164,727) Maturities of investment securities available-for-sale 50,000 140 4,747,241 4,797,381 Sales of investment securities available-for-sale 100 156,283 156,383 Net (disbursements) repayments on loans (99,541) (17,557) (66,563) (1,914,262) 70,584 (2,027,339) Proceeds from sale of loans 811,474 811,474 Acquisition of loan portfolios (5,945) (5,945) Capital Contribution to Subsidiary (5,101) (124,485) (157,797) 287,383 Assets acquired, net of cash (2,322) (2,322) Acquisition of premises and equipment (78,465) (78,465) Proceeds from sale of premises and equipment 13,337 13,337 Dividends received from subsidiary 290,000 (290,000) ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 127,872 (152,295) (342,054) (1,263,717) 254,069 (1,376,125) ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 210,442 (112,607) 97,835 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (51,438) (141,848) 208,283 65,778 80,775 Net (decrease) increase in other short-term borrowings (65,217) 24,966 50,497 743,452 (98,786) 654,912 Proceeds from issuance of notes payable 87,453 2,312 314,427 70,020 474,212 Payments of notes payable (29,507) (95,209) (124,716) Dividends paid (63,187) (63,187) Dividends paid to Parent Company (290,000) 290,000 Proceeds from issuance of common stock 6,808 6,808 Treasury stock, acquired (49,947) (49,947) Capital contribution from parent 125,421 125,421 36,541 (287,383) ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (135,528) 152,699 348,497 949,231 (238,207) 1,076,692 ----------------------------------------------------------------------------------------------------------------------------------- Net decrease (increase) in cash and due from banks (73) 391 (2,314) 40,884 13,086 51,974 Cash and due from banks at beginning of period 524 23 2,505 685,361 (20,706) 667,707 ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $ 451 $ 414 $ 191 $ 726,245 $ (7,620) $ 719,681 ===================================================================================================================================
22 23 TABLE A ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------------------------- AT SEPTEMBER 30, AVERAGE FOR THE NINE MONTHS --------------------------------------------------------------------------------------- BALANCE SHEET HIGHLIGHTS 2000 1999 Change 2000 1999 Change (In thousands) ----------------------------------------------------------------------------------------------------------------------------------- Money market investments $ 879,651 $ 837,600 $ 42,051 $ 932,578 $ 683,173 $ 249,405 Investment and trading securities 8,520,136 7,587,577 932,559 7,945,071 7,612,418 332,653 Loans 16,237,687 14,097,081 2,140,606 15,674,947 13,674,777 2,000,170 Total assets 27,230,263 24,275,583 2,954,680 26,240,525 23,493,991 2,746,534 Deposits 14,557,878 13,770,048 787,830 14,447,585 13,732,917 714,668 Borrowings 10,390,202 8,386,463 2,003,739 9,434,291 7,597,218 1,837,073 Stockholders' equity 1,835,734 1,677,322 158,412 1,859,882 1,691,540 168,342 -----------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER NINE MONTHS ------------------------------------------------------------------------------------ OPERATING HIGHLIGHTS 2000 1999 Change 2000 1999 Change (In thousands, except per share information) ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $248,856 $238,792 $10,064 $737,012 $713,881 $23,131 Provision for loan losses 49,666 37,080 12,586 148,398 109,482 38,916 Fees and other income 120,726 97,023 23,703 345,737 271,007 74,730 Other expenses, net of minority interest 248,624 234,525 14,099 733,747 683,555 50,192 Net income $ 71,292 $ 64,210 $ 7,082 $200,604 $191,851 $ 8,753 Net income applicable to common stock $ 69,205 $ 62,123 $ 7,082 $194,342 $185,589 $ 8,753 Earnings per common share $ 0.51 $ 0.46 $ 0.05 $ 1.43 $ 1.37 $ 0.06 -----------------------------------------------------------------------------------------------------------------------------------
SELECTED STATISTICAL THIRD QUARTER NINE MONTHS ---------------------------------------------------- INFORMATION 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK DATA - Market price High $27.06 $31.00 $27.06 $37.88 Low 19.63 25.81 18.63 25.81 End 27.06 27.75 27.06 27.75 Book value at period end 12.77 11.62 12.77 11.62 Dividends declared 0.16 0.16 0.48 0.44 Dividends payout ratio 31.42% 30.48% 33.54% 30.67% Price/earnings ratio 14.24 X 15.33 x 14.24 X 15.33 x ------------------------------------------------------------------------------------------------------------------------------------ PROFITABILITY RATIOS - Return on assets 1.04% 1.06% 1.02% 1.09% Return on common equity 15.24 15.23 14.75 15.59 Net interest spread (taxable equivalent) 3.33 3.80 3.41 3.84 Net interest yield (taxable equivalent) 4.16 4.59 4.25 4.65 Effective tax rate 27.94 24.86 25.45 25.09 Overhead ratio 40.26 49.28 43.56 49.14 Efficiency ratio 61.29 63.81 62.99 63.09 ------------------------------------------------------------------------------------------------------------------------------------ CAPITALIZATION RATIOS - Equity to assets 6.99% 7.12% 7.09% 7.20% Tangible equity to assets 5.99 6.01 6.02 6.11 Equity to loans 11.69 12.15 11.87 12.37 Internal capital generation 9.95 9.40 9.26 9.93 Tier I capital to risk - adjusted assets 10.29 10.32 10.29 10.32 Total capital to risk - adjusted assets 12.33 12.49 12.33 12.49 Leverage ratio 6.29 6.36 6.29 6.36 ------------------------------------------------------------------------------------------------------------------------------------
23 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial review contains the analysis of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the Corporation) and should be read in conjunction with the consolidated financial statements, notes and tables included in this report. The Corporation is a diversified bank holding company, which offers a wide range of products and services through its subsidiaries and is engaged in the following businesses: - Commercial Banking-Banco Popular de Puerto Rico (BPPR), Banco Popular North America (BPNA) and Banco Popular, National Association - Lease Financing-Popular Leasing and Rental, Inc. and Popular Leasing, U.S.A. - Consumer and Mortgage Banking-Popular Mortgage, Inc., Equity One, Inc., Popular Finance, Inc. and Levitt Mortgage, Inc. - Broker/Dealer-Popular Securities, Inc. - Processing and Information Technology Services-GM Group, ATH Costa Rica and CreST, S.A. - Retail Financial Services-Popular Cash Express, Inc. - Insurance Services-Popular Insurance, Inc. As part of a merger agreement between Banco Fiduciario (BF) and another local financial institution in the Dominican Republic, the Corporation sold its 57% ownership interest in BF effective on August 23, 2000. The Corporation retained an option to acquire a minority interest in the resulting new financial institution. In addition, effective August 21, 2000, Popular, Inc. sold its credit cards operations in the United States to Metris Companies, Inc. The agreement signed with the buyer enables the Corporation to continue offering credit cards, particularly in the Hispanic market. In addition, during this quarter the Corporation entered the insurance agency business through the creation of Banco Popular, National Association in Orlando, Florida and the establishment of its wholly-owned subsidiary Popular Insurance, Inc. NET INCOME The Corporation's net income amounted to $71.3 million for the third quarter of 2000, compared with $64.2 million for the same quarter of 1999. Earnings per common share (EPS) for the quarter were $0.51, based on 135,971,955 average shares outstanding, compared with $0.46 for the third quarter of 1999, based on 135,379,215 average shares outstanding. Net earnings for the second quarter of 2000 were $65.1 million or $0.46 per common share, based on 135,878,677 average shares outstanding. Return on assets (ROA) and return on common equity (ROE) for the quarter ended September 30, 2000 were 1.04% and 15.24%, respectively, compared with 1.06% and 15.23%, for the same period in 1999. For the second quarter of 2000 these ratios were 1.01% and 14.43%. 24 25 The Corporation's results of operations for the quarter ended September 30, 2000, when compared with the same quarter of 1999, reflected increases of $10.1 million in net interest income and $23.7 million in other income. Higher operating expenses by $6.2 million, coupled with increases of $12.6 million in the provision for loan losses and $6.8 million in the income tax expense, partially offset the aforementioned growth in revenues. For the first nine months of 2000, the Corporation's net income rose to $200.6 million, compared with $191.9 million for the same period in 1999. EPS were $1.43 compared with $1.37 for the same period of 1999. ROA and ROE for the period ended September 30, 2000 were 1.02% and 14.75%, respectively, compared with 1.09% and 15.59% for the same period last year. NET INTEREST INCOME Net interest income for the third quarter of 2000 reached $248.9 million, an increase of $10.1 million or 4.21% when compared with $238.8 million for the same period of 1999. On a taxable equivalent basis, net interest income increased to $265.1 million from $258.5 million in the same quarter of 1999. The growth of $6.6 million in net interest income from the third quarter of 1999, on a taxable equivalent basis, resulted from a higher net interest income of $24.9 million due to higher volume of earning assets, mostly loans, partially offset by a reduction of $18.3 million in net interest income due to a lower net interest yield. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a taxable equivalent basis assuming the applicable statutory income tax rates. Table B summarizes the changes in the composition of average earning assets and interest bearing liabilities, and their respective interest income and expense, yields and costs, on a taxable equivalent basis, for the third quarter of 2000, as compared with the same quarter in 1999. 25 26 TABLE B ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS QUARTER ENDED ON SEPTEMBER 30,
Variance Average Volume Average Yields Interest Attributed to ------------------------------------------------------ -------------------------------------------------- 2000 1999 Variance 2000 1999 Variance 2000 1999 Variance Rate Volume ------------------------------------------------------ -------------------------------------------------- ($ in millions) (in thousands) $ 1,033 $ 674 $ 359 7.00% 4.86% 2.14% Money market investments $ 18,187 $ 8,272 $ 9,915 $ 4,095 $ 5,820 8,035 7,410 625 6.92 6.64 0.28 Investment securities 139,195 123,379 15,816 4,279 11,537 176 330 (154) 7.37 7.24 0.13 Trading 3,255 6,024 (2,769) 95 (2,864) ------------------------------------------------------ -------------------------------------------------- $ 9,244 $ 8,414 $ 830 6.94 6.52 0.42 160,637 137,675 22,962 8,469 14,493 ------------------------------------------------------ -------------------------------------------------- Loans: 7,399 6,467 932 9.88 9.00 0.88 Commercial 183,726 146,735 36,991 14,645 22,346 777 683 94 12.75 13.31 (0.56) Leasing 24,776 22,736 2,040 (985) 3,025 4,559 3,717 842 8.27 8.00 0.27 Mortgage 94,282 74,340 19,942 2,609 17,333 3,574 3,265 309 12.76 13.05 (0.29) Consumer 114,037 106,811 7,226 (3,084) 10,310 ----------------------------------------------------- ------------------------------------------------- 16,309 14,132 2,177 10.20 9.88 0.32 416,821 350,622 66,199 13,185 53,014 ----------------------------------------------------- ------------------------------------------------- $25,553 $22,546 $ 3,007 9.02% 8.63% 0.39% TOTAL EARNING ASSETS $577,458 $488,297 $ 89,161 $ 21,654 $ 67,507 ===================================================== ================================================= Interest bearing deposits: $ 1,932 $ 1,871 $ 61 3.93% 3.69% 0.24% NOW and money market $ 19,098 $17,382 $ 1,716 $ 1,299 $ 417 4,022 4,036 (14) 2.75 2.73 0.02 Savings 27,845 27,756 89 (439) 528 5,812 4,868 944 6.43 5.55 0.88 Time deposits 93,868 68,164 25,704 11,520 14,184 ----------------------------------------------------- ------------------------------------------------- 11,766 10,775 991 4.76 4.17 0.59 140,811 113,302 27,509 12,380 15,129 ----------------------------------------------------- ------------------------------------------------- 8,177 6,199 1,978 6.80 5.38 1.42 Short-term borrowings 139,757 84,072 55,685 27,569 28,116 1,878 1,915 (37) 6.73 6.71 0.02 Medium and long-term debt 31,750 32,366 (616) 4 (620) ----------------------------------------------------- ------------------------------------------------- 21,821 18,889 2,932 5.69 4.83 0.86 TOTAL INTEREST-BEARING 312,318 229,740 82,578 39,953 42,625 LIABILITIES 3,004 3,027 (23) Demand deposits 728 630 98 Other sources of funds ----------------------------------------------------- ------------------------------------------------- $25,553 $22,546 $ 3,007 4.86% 4.04% 0.82% ===================================================== 4.16% 4.59% (0.43%) NET INTEREST MARGIN AND NET INTEREST INCOME $265,140 $258,557 $ 6,583 $ (18,299) $ 24,882 ======================= ==================== 3.33% 3.80% (0.47%) NET INTEREST SPREAD ======================= Taxable equivalent adjustment 16,284 19,765 (3,481) ---------------------------- Net interest income $248,856 $238,792 $ 10,064 ============================
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. 26 27 Average earning assets rose $3.0 billion primarily due to an increase in average loans of $2.2 billion, and in money market and investment securities of $984 million. The increase in average loans was due to the commercial loans and mortgage loans which accounted for 81.5% of the total loan growth during the quarter. The growth in investment securities was comprised principally of U.S. agency securities, which are tax exempt in Puerto Rico. The increase in average interest bearing liabilities for the third quarter of 2000, as compared with the same quarter in 1999, was mostly reflected in average short-term borrowings and time deposits. The increase in borrowed funds was used primarily to fund a portion of the Corporation's loan growth and investment portfolio opportunities. The net interest margin, on a taxable equivalent basis, for the quarter ended September 30, 2000 decreased to 4.16% from 4.59% in the same period of 1999. This reduction resulted primarily due to the higher cost of interest bearing liabilities, as a result of a higher interest rate scenario, together with a higher proportion of borrowed money to interest bearing liabilities. The Federal Reserve started, in June 1999, a tightening cycle increasing the federal funds rate six times since then for a total of 175 basis points. This rising rate scenario has caused the Corporation's cost of interest bearing liabilities to go up by 86 basis points, mainly in the cost of borrowed money. The increase in the cost of funds was partially tempered by a higher average yield on earning assets, which increased by 39 basis points, on a taxable equivalent basis. This improvement is primarily related to the increase of 32 basis points in the average yield on loans and 42 basis points in the return of money market, trading and investment securities. For the nine-month period ended September 30, 2000, net interest income, on a taxable equivalent basis, increased $17.1 million, compared with $772.9 million reported in the same period of 1999. The increase in the average volume of earning assets, partially offset by an increase in the average volume of interest bearing liabilities, resulted in a positive variance of $56.7 million in net interest income. This was offset by a negative variance of $39.6 million due to changes in rates and in the mix of the portfolios. As shown in Table C average earning assets increased by $2.6 billion for the nine-month period ended September 30, 2000, when compared with $22.0 billion reported in the same period of 1999. Loans accounted for 77.4% of the total increase in average earning assets. Average interest bearing liabilities increased $2.5 billion or 13.9% when compared with the nine-month period ended September 30, 1999. 27 28 TABLE C ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS YEAR-TO-DATE SEPTEMBER 30,
Variance Average Volume Average Yields Interest Attributed to ------------------------------------------------------ ---------------------------------------------------- 2000 1999 Variance 2000 1999 Variance 2000 1999 Variance Rate Volume ------------------------------------------------------ ---------------------------------------------------- ($ in millions) (in thousands) $ 933 $ 683 $ 250 6.55% 4.64% 1.91% Money market investments $ 45,743 $ 23,705 $ 22,038 $ 11,604 $ 10,434 7,740 7,287 453 6.82 6.77 0.05 Investment securities 395,661 369,654 26,007 941 25,066 205 325 (120) 7.40 6.64 0.76 Trading 11,340 16,170 (4,830) 1,682 (6,512) ----------------------------------------------------- ---------------------------------------------------- $ 8,878 $ 8,295 $583 6.80 6.59 0.21 452,744 409,529 43,215 14,227 28,988 ----------------------------------------------------- ---------------------------------------------------- Loans: 7,216 6,307 909 9.67 9.06 0.61 Commercial 522,492 427,154 95,338 30,896 64,442 748 641 107 12.24 13.03 (0.79) Leasing 68,614 62,653 5,961 (3,978) 9,939 4,278 3,518 760 8.30 8.05 0.25 Mortgage 266,325 212,462 53,863 6,715 47,148 3,433 3,209 224 13.00 13.03 (0.03) Consumer 334,512 313,338 21,174 50 21,124 ----------------------------------------------------- ------==-------------------------------------------- 15,675 13,675 2,000 10.15 9.92 0.23 1,191,943 1,015,607 176,336 33,683 142,653 ----------------------------------------------------- ---------------------------------------------------- $24,553 $21,970 $ 2,583 8.94% 8.66% 0.28% TOTAL EARNING ASSETS $1,644,687 $1,425,136 $ 219,551 $ 47,910 $171,641 ===================================================== Interest bearing ==================================================== deposits: NOW and money $ 1,783 $ 1,755 $ 28 3.59% 3.32% 0.27% market $ 47,954 $ 43,626 $ 4,328 $ 3,804 $ 524 4,133 4,141 (8) 2.90 2.91 (0.01) Savings 89,572 90,039 (467) (779) 312 5,482 4,803 679 6.22 5.58 0.64 Time deposits 255,158 200,608 54,550 23,683 30,867 ----------------------------------------------------- ---------------------------------------------------- 11,398 10,699 699 4.60 4.18 0.42 392,684 334,273 58,411 26,708 31,703 ----------------------------------------------------- ---------------------------------------------------- 7,375 5,817 1,558 6.45 5.21 1.24 Short-term borrowings 356,266 226,584 129,682 60,493 69,189 2,059 1,780 279 7.38 7.46 (0.08) Medium and long-term debt 105,787 91,390 14,397 338 14,059 ----------------------------------------------------- ---------------------------------------------------- TOTAL INTEREST-BEARING 20,832 18,296 2,536 5.53 4.82 0.71 LIABILITIES 854,737 652,247 202,490 87,539 114,951 3,050 3,034 16 Demand deposits 671 640 31 Other sources of funds ----------------------------------------------------- -------------------------------------------------- $24,553 $21,970 $ 2,583 4.69% 4.01% 0.68% ===================================================== 4.25% 4.65% (0.40)% NET INTEREST MARGIN AND ========================== NET INTEREST INCOME $ 789,950 $ 772,889 $ 17,061 $(39,629) $ 56,690 3.41% 3.84% (0.43)% NET INTEREST SPREAD =================== ========================== Taxable equivalent adjustment 52,938 59,008 (6,070) ------------------------------- Net interest income $ 737,012 $ 713,881 $ 23,131 ===============================
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. 28 29 The increase in the cost of interest bearing liabilities, partially offset by the increase in the yield on earning assets, on a taxable equivalent basis, resulted in a lower net interest yield by 40 basis points. As previously explained, the decline in the net interest margin was mostly the result of a higher interest rate scenario that prevailed during the nine months of 2000 as compared to 1999, and a higher proportion of borrowings and time deposits to interest bearing liabilities, which carry a higher cost. MARKET RISK Market risk is the risk of economic loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity prices, and other relevant market or price changes. The Corporation's primary market risk exposure is that to interest rates, as primarily interest rate volatility and its impact on the repricing of assets and liabilities affect the net interest income. The Corporation maintains a formal asset and liability management process to quantify, monitor and manage interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Corporation uses various techniques to assess the degree of interest rate risk, including static gap analysis, simulation and duration analysis. Each focuses on different aspects of the interest rate risk that is assumed at any point in time, and are therefore used jointly to make informed judgements about the risk levels and the appropriateness of strategies under consideration. An interest rate sensitivity analysis is the primary tool used in expressing the potential loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking choices are only estimates and may be different from what actually may occur in the future. Based on the results of the sensitivity analysis as of September 30, 2000, the change in net interest income on a hypothetical rising rate scenario for the next twelve months was a $5.6 million decrease and the change for the same period utilizing a hypothetical declining rate scenario was an increase of $3.5 million. Both hypothetical rate scenarios consider a gradual change of 150 basis points during the twelve-month period. These estimated changes are well within the policy guidelines established by the Board. In the course of its business, the Corporation occasionally enters into foreign exchange transactions. These transactions are executed as an intermediary primarily for its commercial and retail clients, and any foreign exchange positions assumed by the Corporation as a result are offset in the currency markets. Management therefore believes that the market risk assumed by the Corporation in its foreign currency transactions is not significant. The Corporation conducts business in the Latin American markets through several of its processing and information technology services subsidiaries. Although not significant, some of these businesses are conducted in the country's particular foreign currency. However, management does not expect future exchange volatility between the US dollar and the particular foreign currency to affect significantly the value to the Corporation's investment in these subsidiaries. 29 30 PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses for the third quarter of 2000, increased $12.6 million or 33.9% when compared with the same period of 1999. For the nine-month period ended September 30, 2000 the provision totaled $148.4 million, an increase of $38.9 million or 35.5% compared with the same period in 1999. The rise in the provision for loan losses was mostly due to the growth of $2.1 billion in the Corporation's loan portfolio from September 30, 1999, coupled with increases in non-performing assets and net charge-offs. Net charge-offs for the quarter ended September 30, 2000, reached $42.5 million or 1.04% of average loans, compared with $31.6 million or 0.89% reported for the same quarter in 1999. Table D summarizes the movement in the allowance for loan losses and presents selected loan loss statistics for the quarters and nine-month periods ended September 30, 2000 and 1999. Additional information regarding the allowance and asset quality appears in the Credit Quality section. Commercial loans net charge-offs, including construction loans, increased $10 million for the quarter ended September 30, 2000, when compared with the same quarter of 1999. Commercial loans net charge-offs, including construction loans, represented 0.86% of average commercial loans for the quarter ended September 30, 2000, compared with 0.37% for the same quarter last year. This increase is mostly related to the growth in the commercial loan portfolio, as well as the charge-off of a limited number of commercial relationships in Puerto Rico and the United States. 30 31 TABLE D ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
THIRD QUARTER FIRST NINE MONTHS (Dollars in thousands) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 305,526 $ 282,590 $ 292,010 $ 267,249 Allowance purchased (sold) (17,468) 325 (15,987) 325 Provision for loan losses 49,666 37,080 148,398 109,482 ------------------------------------------------------------------------- 337,724 319,995 424,421 377,056 ------------------------------------------------------------------------- Losses charged to the allowance: Commercial 19,940 10,495 55,064 35,817 Construction 151 145 651 Lease financing 6,617 5,408 22,589 17,049 Mortgage 1,188 1,086 3,380 2,939 Consumer 30,615 28,368 92,324 75,120 ------------------------------------------------------------------------- 58,360 45,508 173,502 131,576 ------------------------------------------------------------------------- Recoveries: Commercial 3,969 4,660 12,430 13,418 Construction 6 30 6 121 Lease financing 5,462 2,990 13,217 11,455 Mortgage 214 242 395 624 Consumer 6,162 5,973 18,210 17,284 ------------------------------------------------------------------------- 15,813 13,895 44,258 42,902 ------------------------------------------------------------------------- Net loans charged-off (recovered): Commercial 15,971 5,835 42,634 22,399 Construction (6) 121 139 530 Lease financing 1,155 2,418 9,372 5,594 Mortgage 974 844 2,985 2,315 Consumer 24,453 22,395 74,114 57,836 ------------------------------------------------------------------------- 42,547 31,613 129,244 88,674 ------------------------------------------------------------------------- Balance at end of period $ 295,177 $ 288,382 $ 295,177 $ 288,382 ========================================================================= Ratios: Allowance for losses to loans 1.82% 2.05% 1.82% 2.05% Allowance to non-performing assets 85.85 86.56 85.85 86.56 Allowance to non-performing loans 91.57 94.48 91.57 94.48 Non-performing assets to loans 2.12 2.36 2.12 2.36 Non-performing assets to total assets 1.26 1.37 1.26 1.37 Net charge-offs to average loans 1.04 0.89 1.10 0.86 Provision to net charge-offs 1.17X 1.17x 1.15x 1.23x Net charge-offs earnings coverage 3.49 3.83 3.22 4.09
Consumer loans net charge-offs rose $2.1 million when compared with the third quarter of 1999. Net charge-offs as a percentage of average consumer loans amounted to 2.74% for both quarters ended September 30, 2000 and 1999. 31 32 The aforementioned rises in net charge-offs in the commercial and consumer loan portfolios for the quarter ended September 30, 2000, were partially tempered by a decline of $1.3 million in lease financing loans. The latter totaled $1.1 million or 0.59% of the average lease financing portfolio compared with $2.4 million or 1.42% for the same quarter last year. The improvement is partly as a result of higher recovery activity during this quarter. Net charge-offs for the nine-month period ended September 30, 2000, reached $129.2 million or 1.10% of average loans, compared with $88.7 million or 0.86% for the same period in 1999. The increase in net credit losses for the nine-month period ended September 30, 2000 was mostly reflected in the commercial and consumer portfolios. The rise of $19.8 million in commercial loans net charge-offs, including construction loans, when compared to the same nine-month period last year, was related to the growth of the commercial loan portfolio, as well as the deterioration of the credit quality of a limited number of commercial relationships. Commercial and construction loans net charge-offs represented 0.79% of the average balance of those loans for the nine months ended September 30, 2000, compared with 0.48% for the same period last year. Consumer loans net charge-offs totaled $74.1 million or 2.88% of average consumer loans in the nine-month period ended September 30, 2000 compared with $57.8 million or 2.40% in the same period of 1999. Factors such as increase in personal delinquencies as well as the growth in the consumer loan portfolio contributed to the rise in net charge-offs for the period. At September 30, 2000, the allowance for loan losses was $295.2 million, representing 1.82% of loans, as compared with $288.4 million or 2.05% one year earlier, and $292.0 million or 1.96% at December 31, 1999. The decrease in this coverage ratio resulted mostly from the sale of our investment in BF in the Dominican Republic, which had a higher ratio of allowance to loans. The allowance for loan losses is maintained at a level, which is considered by management to be sufficient to provide for estimated losses based on evaluations of known and inherent risks in the loan portfolio. The Corporation's management evaluates the adequacy of the allowance for loan losses on a monthly basis. In determining the allowance, management considers the portfolio risk characteristics, the results of periodic credit reviews of individual loans, prior loss experience, and prevailing economic conditions and loan impairment measurement. The Corporation has defined impaired loans to which FAS 114 applies, as all 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 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. All other loans are evaluated on a loan-by-loan basis. Impaired loans for which the discounted cash flows, collateral value or market price equals or exceeds its carrying value do not require an allowance. The allowance for impaired loans is a component of the Corporation's allowance for loan losses. The following table shows the Corporation's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 (as amended by SFAS No. 118) at September 30, 2000 and September 30, 1999. 32 33
SEPTEMBER 30, 2000 December 31, 1999 September 30, 1999 (In millions) RECORDED VALUATION Recorded Valuation Recorded Valuation INVESTMENT ALLOWANCE Investment Allowance Investment Allowance ---------------------------------------------------------------------------------- Impaired loans: Valuation allowance required $137 $32 $150 $51 $142 $51 No valuation allowance required 39 30 36 ---------------------------------------------------------------------------------- Total impaired loans $176 $32 $180 $51 $178 $51 ----------------------------------------------------------------------------------
Average impaired loans during the third quarter of 2000 and 1999 were $171 million and $162 million, respectively. The Corporation recognized interest income on impaired loans of $1.0 million and $1.7 million, respectively, for the quarters ended September 30, 2000 and 1999. CREDIT QUALITY Non-performing assets consist of past-due loans on which no interest income is being accrued and other real estate. A summary of non-performing assets by loan categories and related ratios is presented in Table E. The Corporation's policy is to place commercial loans on non-accrual status if payments of principal or interest are delinquent 60 days rather than the industry practice for most U.S. banks which is 90 days. Financing leases, conventional mortgages and close-end consumer loans are placed on non-accrual status if payments are delinquent 90 days. Closed-end consumer loans are charged-off when payments are delinquent 120 days. Open-end (revolving credit) consumer loans are charged-off if payments are delinquent 180 days. Certain loans which would be treated as non-accrual loans pursuant to the foregoing policy, are treated as accruing loans if they are considered well-secured and in the process of collection. Under the industry practice for most U.S. banks, close-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. As shown in Table E, non-performing assets as a percentage of total loans amounted to 2.12% at September 30, 2000, compared with 2.36% at the same date in 1999 and 2.19% at December 31, 1999. The rise in non-performing assets since September 30, 1999, excluding the non-performing assets of BF as of that date, was mostly reflected in non-performing commercial and mortgage loans, which grew $33 million and $20 million, respectively. BF had $56.7 million in non-performing assets as of September 30, 1999. When compared to December 31, 1999, excluding the non-performing assets of BF, the rise in non-performing assets as of September 30, 2000 was also experienced in the commercial and mortgage loan portfolios, which increased $48 million and $23 million, respectively. BF had $65.5 million in non-performing assets at year end of 1999. 33 34
TABLE E NON-PERFORMING ASSETS -------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, 2000 1999 1999 ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Commercial, construction, industrial and agricultural $168,039 $165,472 $176,641 Lease financing 12,987 3,820 3,619 Mortgage 93,047 70,038 72,802 Consumer 48,269 57,515 52,181 Other real estate 21,494 29,268 27,926 ------------------------------------------------------------------- Total $343,836 $326,113 $333,169 =================================================================== Accruing loans past-due 90 days or more $ 24,960 $28,731 $ 25,028 =================================================================== Non-performing assets to loans 2.12% 2.19% 2.36% Non-performing assets to total assets 1.26 1.28 1.37
The rise in commercial non-performing loans since December 31, 1999 corresponded principally to the classification on non-accrual of a limited number of commercial loan relationships in Puerto Rico and the United States, as well as the growth in the portfolio. Moreover, the rise in non-performing mortgage loans from December 31, 1999 was mostly associated to the growth in the mortgage loan portfolio and higher delinquency levels. Also, non-performing leases increased, principally due to $6 million that became delinquent due to an external fraud scheme which was unveiled in the second quarter of 2000. The Corporation has already confirmed coverage from the insurance companies. These rises were partly offset by lower balances in other real estate properties, mostly attributed to the operations of BF, which had $9.4 million in other real estate as of December 31, 1999. At September 30, 2000, the allowance for loan losses as a percentage of non-performing assets was 85.85% compared with 86.56% at September 30, 1999 and 89.54% at December 31, 1999. 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 at September 30, 2000, would have been $266 million or 1.64% of loans, and the allowance for loan losses would have been 111.09% of non-performing assets. At September 30, 1999 and December 31, 1999, adjusted non-performing assets would have been $238 million or 1.69% of loans and $247 million or 1.66% of loans, respectively, and the allowance to non-performing assets would have been 120.9% and 118.2%, respectively. NON-INTEREST INCOME Non-interest income, excluding securities and trading gains, amounted to $120.6 million for the quarter ended September 30, 2000, compared with $97.7 million for the same period in 1999. As seen on Table F, this rise was driven by an increase of $13.8 million in other service fees, $6.5 million in other operating income and $2.6 million in service charges on deposit accounts. 34 35 TABLE F NON-INTEREST INCOME
Third Quarter First Nine Months ----------------------------------------------------------------------------------------------------------------------------- 2000 1999 Change 2000 1999 Change ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Service charges on deposit accounts $ 32,558 $ 29,935 $ 2,623 $ 93,612 $ 87,915 $ 5,697 Other service fees: Credit cards fees and discounts 15,652 12,805 2,847 48,327 35,809 12,518 Debit card fees 8,115 5,829 2,286 20,306 16,246 4,060 Processing fees 8,006 3,333 4,673 21,034 3,333 17,701 Other fees 7,913 7,020 893 20,722 19,491 1,231 Sale and administration of investment products 4,173 4,688 (515) 12,669 13,214 (545) Insurance fees 3,533 1,648 1,885 6,355 5,303 1,052 Check cashing fees 3,523 2,601 922 10,734 9,203 1,531 Mortgage servicing fees, net of amortization 3,449 2,717 732 9,162 8,285 877 Trust fees 2,332 2,543 (211) 7,069 7,599 (530) External payments 1,485 1,190 295 4,611 3,491 1,120 -------------------------------------------------------------------------- Subtotal 58,181 44,374 13,807 160,989 121,974 39,015 Other income 29,890 23,373 6,517 75,936 61,904 14,032 -------------------------------------------------------------------------- Total $120,629 $ 97,682 $22,947 $330,537 $271,793 $58,744 ==========================================================================
Service charges on deposit accounts increased $2.6 million or 8.8% when compared to the third quarter of 1999, mainly as a result of higher activity on commercial accounts, together with new account and transactional charges implemented during the quarter in commercial and retail deposit accounts. Measured as a percentage of average deposits, annualized service charges were 0.88% in the third quarter of 2000, compared with 0.87% in the same quarter of 1999. Other service fees represented 48.2% of non-interest income, excluding securities and trading gains, for the third quarter of 2000, an increase of $13.8 million or 31.1% from the amount reported in 1999. The rise was led by higher processing fees, mostly related to fees generated by GM Group, and to an increase in debit card fees, mainly in higher rental income from point-of-sale terminals and the sustained growth in the volume of electronic transactions. Credit card fees and discounts also grew when compared with the third quarter of 1999, principally due to late payment and cash advance fees implemented during March 2000 in Puerto Rico and to the growth in credit card sales. Moreover, insurance fees grew during the quarter, reflecting the commission income derived from the recently created subsidiary Popular Insurance. Also, contributing to the increase in other service fees are higher check cashing fees, basically driven by the expansion of the Corporation's retail financial services subsidiary in the United States. The rise in other income was mostly attributed to the gain of $8.5 million realized on the sale of the Corporation's credit card operations in the U.S. mainland, as well as the $0.6 million gain realized on the sale of the Corporation's ownership interest in BF, in the Dominican Republic. The revenues associated with these transactions were partly tempered by lower gains on the sale of loans and lower investment banking fees derived from the Corporation's institutional brokerage division of Popular Securities. The latter has been mostly associated to lower economic activity and the absence of major government deals and issuances of mutual funds managed by the subsidiary. 35 36 For the nine-month period ended September 30, 2000 and 1999, non-interest income, excluding securities and trading gains, were $330.5 million and $271.8 million, respectively, reflecting a growth of $58.7 million or 21.6%. Processing fees, credit card fees and discounts, debit card fees and service charges on deposit accounts all reflected significant growth when compared with the nine-month period ended September 30, 1999, mainly due to the same reasons explained above. Moreover, other operating income rose $14.0 million when compared to the same nine-months in 1999, mostly reflecting the gains on the sale of BF and the credit card operations, as well as higher management fees derived from the Corporation's investment in Telecomunicaciones de Puerto Rico, Inc. (TELPRI). Also, contributing to the rise are other revenues derived by GM Group, mainly associated with consulting services for new technology, sale of equipment and other system engineering services. These positive variances were partly offset by lower other income derived from the Corporation's broker/dealer subsidiary due to lower activity for the year. Gains on sale of securities amounted to $13.7 million as of September 30, 2000, compared with $0.8 million for the same nine-month period in 1999. A $13.4 million gain was realized in the first quarter of 2000 upon the Corporation's exercise of its conversion right to exchange its investment in preferred stock of a financial corporation in Puerto Rico for common stock of the same entity. OPERATING EXPENSES Operating expenses for the third quarter of 2000 were $220.9 million compared with $214.7 million for the same quarter in 1999, an increase of $6.2 million or 2.9%. For the first nine months of 2000, operating expenses rose to $666.8 million from $621.8 million for the same period in 1999, an increase of $45.0 million or 7.2%. Personnel costs, the largest category of operating expenses, totaled $100.4 million for the third quarter of 2000, an increase of $1 million when compared with the same period of 1999. Salaries accounted for the largest portion of the increase in personnel costs rising $3.0 million. This increase was principally impacted by the Corporation's business expansion and normal merit increases. Partially offsetting the increase in salaries was a decrease of $1.7 million in pension and other benefits, mostly associated with lower pension and post-retirement benefit expenses. Full-time equivalent employees (FTE's) totaled 10,696 at the end of this quarter, a decrease of 659 employees from the 11,355 employees reported at the same date in 1999. This reduction in headcount was mostly attributed to employees of BF and the credit cards operations in the U.S., which decreased due to the sale of these operations. These operations had approximately 888 FTE's as of June 30, 2000. Other operating expenses, excluding personnel costs, increased $5.2 million, reaching $120.5 million for the third quarter of 2000, compared with $115.3 million for the same period in 1999. This increase was mostly reflected in equipment, net occupancy and other operating expenses, partially offset by a decrease in business promotion expenses. The rise in equipment expenses, led by depreciation of software packages, reflected the continued investment in technology and system enhancements. In addition, net occupancy expenses rose largely reflecting increased operating costs associated with the Corporation's growth and continued business expansion. Higher interchange expenses related to the growing volume of credit card transactions mostly drove the increase in other operating expenses. These rises were partially tempered by lower business promotion expenses mainly due to cost control measures and to lower advertising costs resulting from the sale of the U.S. credit card operations. Income tax expense rose $6.8 million from $20.9 million in the third quarter of 1999, to $27.7 million in the same quarter this year, primarily as a result of higher pre-tax earnings. The effective tax rate for the third quarter of 2000 increased to 27.9% compared with 24.9% for the same period in 1999, mostly as a result of higher taxable income at the U.S. banking operations, associated to the gain on the sale of the credit card operations. This income is subject to a higher tax rate, which includes federal and state taxes. In addition, the disallowance of interest expense attributed to tax-exempt investments in Puerto Rico has increased due to the higher cost of funds. For the first nine months of 2000, operating expenses rose to $666.8 million, from $621.8 million for the same period in 1999. On a year-to-date basis the categories that reflected significant growth were salaries, equipment 36 37 expenses, net occupancy expenses and other operating expenses mostly for the same reasons explained above. Higher sundry losses, other real estate expenses and other miscellaneous expenses contributed to the increase in other operating expenses. Moreover, communication expenses rose mostly due to the business growth of GM Group. Business promotion grew primarily due to business promotional efforts launched at Equity One during the year. The increase in the amortization of intangibles was mainly associated with the acquisition of GM Group in the third quarter of 1999. These rises were partly tempered by lower pension and other benefit expenses and to lower profit sharing expenses at the Corporation's banking subsidiaries. BALANCE SHEET COMMENTS Total assets at September 30, 2000 reached $27.2 billion compared with $24.3 billion at the same date a year earlier and $25.5 billion as of December 31, 1999. Despite the sale of BF and the credit cards operations in the United States, the Corporation experienced a 7% increase since December 31, 1999 mostly due to the Corporation's business growth, mainly in its banking operations in Puerto Rico. This increase is mostly associated to loan growth and investment portfolio opportunities. Total assets of BF and the U.S. credit card operations approximated $436 million and $153 million, respectively, at December 31,1999. The Corporation's earning assets reached $25.6 billion at September 30, 2000, compared with $22.5 billion at September 30, 1999 and $23.8 billion at December 31, 1999. The investment portfolio, including trading securities, reached $8.5 billion at September 30, 2000 compared with $7.6 billion at September 30, 1999 and $7.9 billion at December 31, 1999. Money market investments at September 30, 2000 decreased $42 million and $106 million, respectively, when compared with September 30, 1999 and December 31, 1999. As presented in Table G, the loan portfolio increased $2.1 billion and $1.3 billion, respectively, when compared to the amounts reported at September 30, 1999 and December 31, 1999. The most significant increases in the loan portfolio were reflected in commercial, including construction, and mortgage loans, which contributed with a $1.2 billion or 92.4% of the increase since December 31, 1999. The growth in the commercial loan portfolio resulted principally from the continued marketing efforts directed to the retail and middle market and the sustained growth in Puerto Rico and United States. The consumer loan category reflected only a slight increase from December 31, 1999, but was partly as a result of the sale of the U.S. credit card portfolio during this quarter. The latter totaled $156 million at December 31, 1999. The growth in loans was also impacted by the sale of BF, which had $290 million in total loans as of the end of 1999. The increase in the loan portfolio compared with September 30, 1999 was also reflected in the commercial, including construction, and mortgage loan portfolios, which increased $854 million and $1.1 billion, respectively. TABLE G LOANS ENDING BALANCES
------------------------------------------------------------------------------------------ SEPTEMBER 30, December 31, September 30, 2000 1999 1999 ------------------------------------------------------------------------------------------ (Dollars in thousands) Commercial, industrial and agricultural $ 7,038,558 $ 6,656,411 $ 6,169,886 Construction 293,702 247,288 308,148 Lease financing 820,320 728,644 712,258 Mortgage * 4,733,684 3,933,663 3,638,853 Consumer 3,351,423 3,341,748 3,267,936 ---------------------------------------------- Total $ 16,237,687 $ 14,907,754 $ 14,097,081 ==============================================
* Includes loans held-for-sale 37 38 The increase of $29.7 million in other assets when compared with December 31, 1999, was mainly due to an increase in deferred taxes, other assets from businesses acquired during the year, and other accounts receivables. Intangible assets decreased by $17.4 million from December 31, 1999 due to the amortization of the intangibles in the normal course of business and to the exclusion of the intangible assets of BF, which amounted to $10 million as of that date. Total deposits were $14.6 billion at September 30, 2000, or $384 million higher than the amount reported at December 31, 1999. At September 30, 1999 total deposits amounted to $13.8 billion. Savings and time deposits continued their growth, increasing $164 million and $566 million, respectively, when compared with December 31, 1999. Demand deposits decreased $345.7 million when compared to December 31, 1999, mostly attributed to a reduction in the funds held in trust for the benefit of third parties and lower commercial checking account balances. The growth in deposits was partially affected by the sale of BF, which had $295 million in total deposits as of the end of 1999. Borrowed funds, including subordinated notes and capital securities, increased to $10.4 billion at September 30, 2000, from $9.2 billion at December 31, 1999 and $8.4 billion at September 30, 1999. The increase in borrowed funds was used primarily to fund the Corporation's business expansion and loan growth. The reduction in the minority interest resulted from the aforementioned sale of BF. The Corporation's stockholder's equity at September 30, 2000 and December 31, 1999 was $1.84 billion and $1.66 billion, respectively, compared with $1.68 billion at September 30, 1999. Included in stockholders' equity at September 30, 2000 were $100 million in unrealized losses on securities available-for-sale, net of taxes, compared with $139 million and $83 million in unrealized losses on securities available-for-sale, net of taxes, as of December 31, 1999 and September 30, 1999, respectively. Also, for the nine-month period ended September 30, 2000, the Corporation repurchased a total of 99,450 shares of its common stock under the stock repurchase program at a cost of $2.1 million. Under the regulatory framework for prompt corrective action, banks which meet or exceed a Tier I ratio of 6%, a total capital ratio of 10% and a leverage ratio of 5%, are considered well capitalized. Information pertained to the Corporation's regulatory risk-based capital requirements is shown on Table H. The market value of the Corporation's common stock at September 30, 2000 was $27.06, compared with $27.94 at December 31, 1999 and $27.75 at September 30, 1999. The Corporation's market capitalization at September 30, 2000 was $3.7 billion, compared with $3.8 billion at December 31, 1999 and September 30, 1999. 38 39 TABLE H CAPITAL ADEQUACY DATA
------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, 2000 1999 1999 ------------------------------------------------------------------------------------------------- (Dollars in thousands) Risk-based capital Tier I capital $ 1,690,399 $ 1,557,096 $ 1,506,356 Supplementary (Tier II) capital 336,095 324,519 316,948 ---------------------------------------------------------- Total capital $ 2,026,494 $ 1,881,615 $ 1,823,304 ========================================================== Risk-weighted assets Balance sheet items $ 16,005,655 $ 14,878,731 $ 14,137,776 Off-balance sheet items 425,716 428,780 454,816 ---------------------------------------------------------- Total risk-weighted assets $ 16,431,371 $ 15,307,511 $ 14,592,592 ========================================================== Ratios: Tier I capital (minimum required - 4.00%) 10.29% 10.17% 10.32% Total capital (minimum required - 8.00%) 12.33 12.29 12.49 Leverage ratio (minimum required - 3.00%) 6.29 6.40 6.36
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. ITEM 5. OTHER INFORMATION As part of a merger agreement between Banco Fiduciario (BF) and another local financial institution in the Dominican Republic, the Corporation sold its 57% ownership interest on BF effective on August 23, 2000. The Corporation retained an option to acquire a minority interest in the merged financial institution. In addition, effective August 21, 2000, Popular, Inc. sold its credit cards operations in the United States to Metris Companies, Inc. The agreement signed with the buyer enables the Corporation to continue offering credit cards, particularly in the Hispanic market. In addition, during this quarter the Corporation entered the competitive insurance business through the creation of Banco Popular, National Association in Orlando, Florida and the establishment of its wholly-owned subsidiary Popular Insurance, Inc. 39 40 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Exhibit Description Reference -------------- ------------------- --------- 19 Quarterly Report to Shareholders for the Exhibit "A" period ended September 30, 2000 27 Financial Data Schedule (for SEC use only) Exhibit "B"
b) One report on Form 8-K was filed for the quarter ended September 30, 2000: Dated: July 12, 2000 Items reported: Item 5 - Other Events 40 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be filed on its behalf by the undersigned thereunto duly authorized. POPULAR, INC. ------------- (Registrant) Date: November 14, 2000 By: /s/ Jorge A. Junquera ----------------------- -------------------------------------- Jorge A. Junquera Senior Executive Vice President Date: November 14, 2000 By: /s/ Amilcar L. Jordan ----------------------- -------------------------------------- Amilcar L. Jordan, Esq. Senior Vice President & Comptroller 41