-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VqeHNunybeDD2MvK2l0Wvwa6pqnIJZOCFqu0tRL7MXpq5g9PJrziXzbelV4XybiV TaSvMhlqte2ZQlpEZZRhlg== 0000950144-03-006989.txt : 20030515 0000950144-03-006989.hdr.sgml : 20030515 20030515164457 ACCESSION NUMBER: 0000950144-03-006989 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POPULAR INC CENTRAL INDEX KEY: 0000763901 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 660416582 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13818 FILM NUMBER: 03705623 BUSINESS ADDRESS: STREET 1: 209 MUNOZ RIVERA AVE STREET 2: POPULAR CENTER BUILDING CITY: HATO REY STATE: PR ZIP: 00918 BUSINESS PHONE: 7877659800 MAIL ADDRESS: STREET 1: P.O. BOX 362708 CITY: SAN JUAN STATE: PR ZIP: 00936-2708 FORMER COMPANY: FORMER CONFORMED NAME: BANPONCE CORP DATE OF NAME CHANGE: 19920703 10-Q 1 g82759e10vq.txt POPULAR, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2003 Commission file number 0 - 13818 POPULAR, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Puerto Rico 66-041-6582 (State of incorporation) (I.R.S. Employer Identification No.) Popular Center Building 209 Munoz Rivera Avenue, Hato Rey San Juan, Puerto Rico 00918 ---------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (787) 765-9800 Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock $6.00 Par value 132,650,737 ---------------------------- --------------------------------------- (Title of Class) (Shares Outstanding as of May 14, 2003) POPULAR, INC. INDEX
Part I - Financial Information Page - ------------------------------ ---- Item 1. Financial Statements Unaudited Consolidated Statements of Condition as of March 31, 2003, December 31, 2002 and March 31, 2002 3 Unaudited Consolidated Statements of Income for the quarters ended March 31, 2003 and 2002 4 Unaudited Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2003 and 2002 5 Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2003 and 2002 6 Notes to Unaudited Consolidated Financial Statements 7-25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26-39 Item 3. Quantitative and Qualitative Disclosures about Market Risk 39 Item 4. Controls and Procedures 42 Part II - Other Information Item 1. Legal Proceedings 42 Item 2. Changes in Securities and Use of Proceeds 43 Item 3. Defaults upon Senior Securities - None N/A Item 4. Submission of Matters to a Vote of Security Holders - None N/A Item 5. Other Information 43 Item 6. Exhibits and Reports on Form 8-K 43 --- Signatures 45 Certifications 46-47
FORWARD-LOOKING INFORMATION. This Quarterly Report on Form 10-Q contains certain forward-looking statements with respect to the adequacy of the allowance for loan losses, the Corporation's market and liquidity risks and the effect of legal proceedings on Popular, Inc.'s financial condition and results of operations, among others. These forward-looking statements involve certain risks, uncertainties, estimates and assumptions by management. Various factors could cause actual results to differ from those contemplated by such forward-looking statements. With respect to the adequacy of the allowance for loan losses and market risk, these factors include, among others, the rate of growth in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, the performance of the stock and bond market and the magnitude of interest rate and foreign currency exchange rate changes. Moreover, the outcome of litigation, as discussed in "Part II, Item I. Legal Proceedings," is inherently uncertain and depends on judicial interpretations of law and the findings of judges and juries. 2 ITEM 1. FINANCIAL STATEMENTS POPULAR, INC. CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(In thousands, except share information) MARCH 31, December 31, March 31, 2003 2002 2002 ------------- ------------- ------------- ASSETS Cash and due from banks $ 689,090 $ 652,556 $ 383,927 ------------- ------------- ------------- Money market investments: Federal funds sold and securities purchased under agreements to resell 1,004,353 1,091,435 716,123 Time deposits with other banks 4,056 3,057 3,056 Bankers' acceptances 51 154 409 ------------- ------------- ------------- 1,008,460 1,094,646 719,588 ------------- ------------- ------------- Investment securities available-for-sale, at market value: Pledged securities with creditors' right to repledge 4,366,111 4,397,974 3,339,022 Other investment securities available-for-sale 5,766,363 6,133,929 6,062,136 Investment securities held-to-maturity, at amortized cost 179,737 180,751 202,022 Trading account securities, at market value: Pledged securities with creditors' right to repledge 464,278 416,979 225,978 Other trading securities 116,723 93,367 73,437 Loans held-for-sale, at lower of cost or market 317,041 1,092,927 900,461 ------------- ------------- ------------- Loans: Loans pledged with creditors' right to repledge 373,034 420,724 233,442 Other loans 19,446,487 18,355,123 17,442,558 Less - Unearned income 274,680 286,655 319,537 Allowance for loan losses 383,517 372,797 341,744 ------------- ------------- ------------- 19,161,324 18,116,395 17,014,719 ------------- ------------- ------------- Premises and equipment 471,777 461,177 404,842 Other real estate 45,759 39,399 34,550 Accrued income receivable 202,491 184,549 191,118 Other assets 689,449 578,091 549,324 Goodwill 184,068 182,965 178,501 Other intangible assets 32,620 34,647 37,741 ------------- ------------- ------------- $ 33,695,291 $ 33,660,352 $ 30,317,366 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,453,971 $ 3,367,385 $ 3,100,625 Interest bearing 14,183,876 14,247,355 13,423,529 ------------- ------------- ------------- 17,637,847 17,614,740 16,524,154 Federal funds purchased and securities sold under agreements to repurchase 6,642,379 6,684,551 4,564,815 Other short-term borrowings 1,296,394 1,703,562 2,252,679 Notes payable 4,566,492 4,298,853 3,996,616 Other liabilities 609,343 677,605 524,350 ------------- ------------- ------------- 30,752,455 30,979,311 27,862,614 ------------- ------------- ------------- Subordinated notes 125,000 125,000 125,000 ------------- ------------- ------------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 144,000 144,000 144,000 ------------- ------------- ------------- Commitments and contingencies (See Note 8) ------------- ------------- ------------- Minority interest in consolidated subsidiaries 1,240 1,162 925 ------------- ------------- ------------- Stockholders' equity: Preferred stock, $25 liquidation value; 10,000,000 shares authorized (7,475,000 issued and outstanding at March 31, 2003) 186,875 -- -- Common stock, $6 par value; 180,000,000 shares authorized; 139,254,639 shares issued (December 31, 2002 - 139,133,156; March 31, 2002 - 138,853,580) and 132,552,289 shares outstanding (December 31, 2002 - 132,439,047; March 31, 2002 - 136,459,471) 835,528 834,799 833,121 Surplus 277,649 278,366 270,766 Retained earnings 1,372,061 1,300,437 1,116,963 Treasury stock - at cost, 6,702,350 shares (December 31, 2002 - 6,694,109; March 31, 2002 - 2,394,109) (205,527) (205,210) (66,363) Accumulated other comprehensive income, net of tax of $53,785 (December 31, 2002 - $53,070; March 31, 2002 - $17,197) 206,010 202,487 30,340 ------------- ------------- ------------- 2,672,596 2,410,879 2,184,827 ------------- ------------- ------------- $ 33,695,291 $ 33,660,352 $ 30,317,366 ============= ============= =============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 POPULAR, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarters ended March 31, (Dollars in thousands, except per share information) ---------------------- 2003 2002 --------- --------- INTEREST INCOME: Loans $ 377,933 $ 372,221 Money market investments 7,363 7,785 Investment securities 109,801 112,311 Trading account securities 8,185 3,502 --------- --------- 503,282 495,819 --------- --------- INTEREST EXPENSE: Deposits 94,195 112,931 Short-term borrowings 40,789 44,443 Long-term debt 58,537 53,030 --------- --------- 193,521 210,404 --------- --------- Net interest income 309,761 285,415 Provision for loan losses 48,209 54,454 --------- --------- Net interest income after provision for loan losses 261,552 230,961 Service charges on deposit accounts 39,839 38,973 Other service fees 66,426 61,687 Gain (loss) on sale of securities 1,414 (4,010) Trading account loss (937) (1,030) Derivatives (losses) gains (10,655) 511 Gain on sales of loans 19,516 17,943 Other operating income 16,557 16,334 --------- --------- 393,712 361,369 --------- --------- OPERATING EXPENSES: Personnel costs: Salaries 96,036 88,561 Profit sharing 6,245 4,940 Pension and other benefits 30,068 26,801 --------- --------- 132,349 120,302 Net occupancy expenses 20,460 19,030 Equipment expenses 26,350 24,765 Other taxes 9,552 9,549 Professional fees 18,776 17,507 Communications 14,697 13,273 Business promotion 15,970 13,367 Printing and supplies 4,743 4,509 Other operating expenses 18,718 17,321 Amortization of intangibles 2,027 2,543 --------- --------- 263,642 242,166 --------- --------- Income before income tax and minority interest 130,070 119,203 Income tax 30,903 30,148 Net gain of minority interest (78) (11) --------- --------- NET INCOME $ 99,089 $ 89,044 ========= ========= NET INCOME APPLICABLE TO COMMON STOCK $ 98,140 $ 86,534 ========= ========= EARNINGS PER COMMON SHARE (BASIC AND DILUTED) $ 0.74 $ 0.63 ========= ========= DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ 0.20 ========= =========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Quarters ended March 31, (In thousands) ---------------------- 2003 2002 --------- --------- Net Income $ 99,089 $ 89,044 --------- --------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (7,789) (137) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period, net of tax of $1,678 (2002 - ($11,663)) 12,811 (51,124) Less: reclassification adjustment for gains (losses) included in net income, net of tax of $539 (2002 - ($1,562)) 875 (2,447) Net loss on cash flow hedges (2,302) (1,128) Less: reclassification adjustment for losses included in net income, net of tax of ($1,059) (2002 - ($63)) (1,678) (100) Cumulative effect of accounting change -- -- Less: reclassification adjustment for gains included in net income -- 6 --------- --------- Total other comprehensive income (loss), net of tax $ 3,523 ($ 49,848) --------- --------- Comprehensive income $ 102,612 $ 39,196 ========= ========= DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME: (In thousands) MARCH 31, December 31, March 31, 2003 2002 2002 --------- ------------ --------- Foreign currency translation adjustment ($ 10,025) ($ 2,236) ($ 1,593) Unrealized gains on securities 219,561 207,625 32,499 Unrealized losses on derivatives (3,910) (3,286) (950) Cumulative effect of accounting change 384 384 384 --------- --------- --------- Accumulated other comprehensive income $ 206,010 $ 202,487 $ 30,340 ========= ========= =========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the quarters ended March 31, (In thousands) -------------------------- 2003 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 99,089 $ 89,044 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 18,726 19,208 Provision for loan losses 48,209 54,454 Amortization of intangibles 2,027 2,543 Net (gain) loss on sales of investment securities (1,414) 4,010 Net loss (gain) on derivatives 10,655 (511) Net loss (gain) on disposition of premises and equipment 397 (11) Net gain on sales of loans, excluding loans held-for-sale (8,566) (2,826) Net amortization of premiums and accretion of discounts 5,071 4,309 on investments Net amortization of deferred loan fees and costs 9,402 4,556 Stock options expense 727 -- Net decrease in loans held-for-sale 138,281 39,027 Net increase in trading securities (119,365) (29,229) Net increase in accrued income receivable (17,942) (4,975) Net increase in other assets 183 (29,473) Net decrease in interest payable (12,945) (9,834) Net increase in deferred and current taxes 9,440 11,936 Net increase in postretirement benefit obligation 2,477 1,494 Net (decrease) increase in other liabilities (48,643) 9,166 ----------- ----------- Total adjustments (47,680) 73,844 ----------- ----------- Net cash provided by operating activities 51,409 162,888 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments 86,186 104,202 Purchases of investment securities held-to-maturity (140,522) (132,401) Maturities of investment securities held-to-maturity 141,628 524,322 Purchases of investment securities available-for-sale (1,433,982) (2,113,882) Maturities of investment securities available-for-sale 1,720,429 1,111,094 Proceeds from sales of investment securities available-for-sale 38,083 809,302 Net disbursements on loans (266,668) (209,788) Proceeds from sales of loans 279,750 221,705 Acquisition of loan portfolios (495,712) (210,395) Acquisition of premises and equipment (29,943) (19,837) Proceeds from sales of premises and equipment 220 1,504 ----------- ----------- Net cash (used in) provided by investing activities (16,131) 85,826 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 24,554 161,347 Net decrease in federal funds purchased and securities sold under agreements to repurchase (42,172) (1,186,952) Net (decrease) increase in other short-term borrowings (407,168) 425,437 Net proceeds from notes payable and capital securities 267,639 256,405 Dividends paid (27,440) (27,785) Proceeds from issuance of common stock 3,916 2,846 Proceeds from issuance of preferred stock 182,244 -- Redemption of preferred stock -- (102,000) Treasury stock acquired (317) (227) ----------- ----------- Net cash provided by (used in) financing activities 1,256 (470,929) ----------- ----------- Net increase (decrease) in cash and due from banks 36,534 (222,215) Cash and due from banks at beginning of period 652,556 606,142 ----------- ----------- Cash and due from banks at end of period $ 689,090 $ 383,927 =========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share information) NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION Popular, Inc. (the Corporation) is a financial holding company offering a full range of financial products and services to consumer and corporate customers through its offices in Puerto Rico, the United States, the Caribbean, including the U.S. and British Virgin Islands, and Central America. The Corporation's subsidiaries are engaged in the following businesses: commercial banking, auto loans and lease financing, mortgage and consumer lending, broker/dealer activities, retail financial services, insurance agency services and information technology, ATM and data processing services through its subsidiaries in Puerto Rico, the United States, the Caribbean and Central America. Note 14 to the unaudited consolidated financial statements presents further information about the Corporation's business segments. The unaudited consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. These statements are, in the opinion of management, a fair statement of the results for the periods presented. These results are unaudited, but include all necessary adjustments, of a normal recurring nature, for a fair statement of such results. Certain minor reclassifications have been made to the prior period consolidated financial statements to conform with the 2003 presentation. NOTE 2 - ACCOUNTING CHANGES FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" FASB's Interpretation No. 45 (FIN No. 45) requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions for initial recognition are effective for guarantees that are issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a material impact on the Corporation's financial position and results of operations for the quarter ended March 31, 2003. Refer to Note 8 to the unaudited consolidated financial statements for further information. FIN No. 46 "Consolidation of Variable Interest Entities" FASB's Interpretation No. 46 (FIN No. 46) expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN No. 46 apply to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. The adoption of this Interpretation did not have a significant impact on the Corporation's financial position or results of operations. SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4) amends certain 7 other existing pronouncements. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. In addition, except for certain situations, all provisions of this Statement should be applied prospectively. Also, the provisions related to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. Management is currently evaluating the impact that SFAS No. 149 may have on the Corporation's financial condition or results of operations. NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), and contractual maturities of investment securities available-for-sale as of March 31, 2003, December 31, 2002 and March 31, 2002 were as follows:
AS OF MARCH 31, 2003 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value ----------- ----------- ----------- ----------- U.S. Treasury securities (average maturity of 3 months) $ 354,931 $ 1,783 -- $ 356,714 Obligations of other U.S. Government agencies and corporations (average maturity of 5 years and 9 months) 6,070,056 121,168 $ 244 6,190,980 Obligations of Puerto Rico, States and political subdivisions (average maturity of 7 years and 10 months) 82,541 5,081 2 87,620 Collateralized mortgage obligations (average maturity of 21 years and 1 month) 2,008,239 9,340 1,534 2,016,045 Mortgage-backed securities (average maturity of 21 years and 7 months) 992,061 37,850 49 1,029,862 Equity securities (without contractual maturity) 247,162 101,371 22 348,511 Others (average maturity of 14 years and 11 months) 101,415 1,330 3 102,742 ----------- ----------- ----------- ----------- $ 9,856,405 $ 277,923 $ 1,854 $10,132,474 =========== =========== =========== ===========
AS OF DECEMBER 31, 2002 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value ----------- ----------- ----------- ----------- U.S. Treasury securities (average maturity of 6 months) $ 354,957 $ 5,262 -- $ 360,219 Obligations of other U.S. Government agencies and corporations (average maturity of 5 years and 4 months) 6,192,871 125,675 $ 388 6,318,158 Obligations of Puerto Rico, States and political subdivisions (average maturity of 7 years and 10 months) 79,004 4,915 14 83,905 Collateralized mortgage obligations (average maturity of 20 years and 6 months) 2,172,117 11,964 272 2,183,809 Mortgage-backed securities (average maturity of 23 years and 5 months) 1,094,276 36,556 156 1,130,676 Equity securities (without contractual maturity) 263,342 77,677 22 340,997 Others (average maturity of 16 years and 8 months) 112,342 1,800 3 114,139 ----------- ----------- ----------- ----------- $10,268,909 $ 263,849 $ 855 $10,531,903 =========== =========== =========== ===========
8
AS OF MARCH 31, 2002 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value ----------- ----------- ----------- ----------- U.S. Treasury securities (average maturity of 9 months) $ 560,091 $ 11,706 $ 13 $ 571,784 Obligations of other U.S. Government agencies and corporations (average maturity of 4 years and 8 months) 5,070,786 28,385 66,048 5,033,123 Obligations of Puerto Rico, States and political subdivisions (average maturity of 8 years and 8 months) 96,806 3,477 188 100,095 Collateralized mortgage obligations (average maturity of 20 years and 5 months) 2,449,183 12,097 7,392 2,453,888 Mortgage-backed securities (average maturity of 22 years and 5 months) 826,041 9,167 6,706 828,502 Equity securities (without contractual maturity) 258,313 55,705 14 314,004 Others (average maturity of 17 years and 9 months) 97,591 2,175 4 99,762 ---------- ---------- ---------- ---------- $9,358,811 $ 122,712 $ 80,365 $9,401,158 ========== ========== ========== ==========
Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or callable features. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank stock, is included as equity securities available-for-sale, at cost. NOTE 4 - INVESTMENT SECURITIES HELD-TO-MATURITY The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), and contractual maturities of investment securities held-to-maturity as of March 31, 2003, December 31, 2002 and March 31, 2002 were as follows:
AS OF MARCH 31, 2003 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value ----------- ----------- ----------- ----------- Obligations of other U.S. Government agencies and corporations (average maturity of 1 month) $ 37,996 -- -- $ 37,996 Obligations of Puerto Rico, States and political subdivisions (average maturity of 11 years and 2 months) 69,809 $ 344 $ 836 69,317 Collateralized mortgage obligations (average maturity of 21 years and 5 months) 1,073 -- 107 966 Others (average maturity of 3 years and 11 months) 70,859 351 45 71,165 -------- -------- -------- -------- $179,737 $ 695 $ 988 $179,444 ======== ======== ======== ========
9
AS OF DECEMBER 31, 2002 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value ----------- ----------- ----------- ----------- Obligations of other U.S. Government agencies and corporations (average maturity of 1 month) $ 28,618 $ 4 -- $ 28,622 Obligations of Puerto Rico, States and political subdivisions (average maturity of 10 years and 1 month) 80,174 933 $ 186 80,921 Collateralized mortgage obligations (average maturity of 21 years and 7 months) 1,126 -- 112 1,014 Others (average maturity of 2 years and 9 months) 70,833 793 -- 71,626 -------- -------- -------- -------- $180,751 $ 1,730 $ 298 $182,183 ======== ======== ======== ========
AS OF MARCH 31, 2002 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value ----------- ----------- ----------- ----------- Obligations of other U.S. Government agencies and corporations (average maturity of 1 month) $ 19,902 -- $ 4 $ 19,898 Obligations of Puerto Rico, States and political subdivisions (average maturity of 9 years and 10 months) 99,144 $ 2,049 34 101,159 Collateralized mortgage obligations (average maturity of 22 years and 5 months) 1,354 -- 82 1,272 Others (average maturity of 3 years) 81,622 639 291 81,970 -------- -------- -------- -------- $202,022 $ 2,688 $ 411 $204,299 ======== ======== ======== ========
Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or callable features. NOTE 5 - PLEDGED ASSETS Securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of the Corporation's pledged assets, which the secured parties are not permitted to sell or repledge the collateral, were as follows:
MARCH 31, December 31, March 31, (In thousands) 2003 2002 2002 ---------- ---------- ---------- Investment securities available-for-sale $2,264,548 $2,046,100 $1,939,364 Investment securities held-to-maturity 2,309 3,278 4,215 Loans 3,829,097 3,402,042 2,347,455 ---------- ---------- ---------- $6,095,954 $5,451,420 $4,291,034 ========== ========== ==========
Pledged securities and loans that the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition. 10 NOTE 6 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In managing its market risk the Corporation enters, to a limited extent, into certain derivatives primarily interest rate swaps, interest rate forwards and future contracts, interest rate caps, swaptions, foreign exchange contracts and interest-rate caps, floors and options embedded in financial contracts. Futures and forwards are contracts for the delayed delivery of securities in which the seller agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. The Corporation's use of these contracts qualifies for cash flow hedge accounting in accordance with SFAS No. 133, as amended, and therefore changes in the fair value of the derivative are recorded in other comprehensive income. As of March 31, 2003 the total amount (net of tax) included in accumulated other comprehensive income pertaining to forward contracts was an unrealized loss of $367. These contracts have a maximum maturity of 49 days. As of March 31, 2002, the total amount (net of tax) included in accumulated other comprehensive income pertaining to forward contracts was an unrealized loss of $379. The Corporation purchased interest rate caps as part of securitization transactions in order to limit the interest rate payable to the security holders. The Corporation's use of these contracts qualifies for cash flow hedge accounting in accordance with SFAS No. 133, as amended. As of March 31, 2003, the fair market value of these interest rate caps was $2,140 included in other assets and the amount included in accumulated other comprehensive income was a loss of $3,362. These contracts have a maximum maturity of 6.8 years. As part of these contracts, during the first quarter of 2003 the Corporation reclassified a loss of $414 from other comprehensive income into earnings related to the ineffective portion of changes in fair value of the cash flow hedge and $440 pertaining to the caplets expiration, as referred to in DIG G20, both amounts are included as an increase to interest expense. Assuming no change in interest rates, $1,920 net of tax, of accumulated other comprehensive loss is expected to be reclassified to earnings over the next twelve months as contractual payments are made. As of March 31, 2002, the fair market value of these interest rate caps included in other assets was $3,370, and the amount included in accumulated other comprehensive income was a loss of $571. During the last quarter of 2002, the Corporation entered into a $25,000 notional amount interest rate swap to convert floating rate debt to fixed rate debt in order to fix the cost of short-term borrowings. This contract qualified for cash flow hedge accounting in accordance with SFAS No. 133, as amended. As of March 31, 2003, the fair market value of the interest rate swap included in other liabilities was a loss of $390, and the amount included in accumulated other comprehensive income was a loss of $181. This contract matures on October 17, 2005. For cash flow hedges, gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income to current-period earnings are included in the line item in which the hedged item is recorded and in the same period in which the forecasted transaction affects earnings. The Corporation enters into options on swaps ("swaption") derivative securities, which combine the characteristics of interest rate swaps and options. These swaptions are related to certificates of deposit with returns linked to the Standard & Poor's 500 index through an embedded option, which has been bifurcated from the host contract, and in accordance with SFAS No. 133, as amended, does not qualify for hedge accounting. As of March 31, 2003, the Corporation had a derivative liability of $15,812 representing the fair value of the swaptions, which is included in other liabilities. Also, a derivative liability of $968 which is the fair value of the embedded option and a discount on the certificates of deposit of $13,920 are included in deposits and the changes in the value of these derivatives are recorded in the Statement of Income. As of March 31, 2002, the Corporation had recognized a derivative asset of $5,901 based on the fair value of the swaptions and a derivative liability of $7,586 based on the fair value of the bifurcated option; these amounts are included in other assets and deposits, respectively. The Corporation uses interest rate swaps to convert floating rate debt to fixed rate debt in order to fix the future cost of the portfolio of short-term borrowings. The specific term and notional amounts of the swaps are determined based on management's assessment of future interest rates, as well as other factors. These swaps do not qualify as hedges in accordance with SFAS No. 133, as amended, and therefore changes in fair value of the derivatives are recorded in the statement of income. For the quarters ended March 31, 2003 and March 31, 2002, the Corporation recognized a loss of $10,655 and a gain of $511, respectively, as a result of the changes in fair value of the non-hedging derivatives. 11 The interest-rate caps and floors embedded in the interest bearing contracts are clearly and closely related to the economic characteristics of the contracts and therefore, as stated in SFAS No. 133, are not bifurcated from the host contracts. NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS SFAS No. 142 requires that goodwill and other indefinite-life intangible assets be tested for impairment at least annually using a two-step process at each reporting unit level. The Corporation's management has defined the reporting units based on legal entity, which is the way that operating decisions are made and performance is measured. For presentation purposes, these reporting units have been aggregated by reportable segments based on the provisions of SFAS No. 131 "Segment Reporting." These segments have been defined as follows: Commercial Banking, Mortgage and Consumer Lending, Auto and Lease Financing and Other. All the operating segments and components that constitute reporting units were determined evaluating the nature of the products and services offered, types of customers, methods used to distribute their products and provide their services, and the nature of their regulatory environment, as well as other similar economic characteristics. Goodwill is assigned to each reporting unit at the time of acquisition. The changes in the carrying amount of goodwill for the three months ended March 31, 2003, are as follows:
Mortgage Auto and Commercial and Consumer Lease (In thousands) Banking Lending Financing Other Total ---------- ------------ --------- -------- -------- Balance as of January 1, 2003 $110,482 $ 11,247 $ 6,727 $ 54,509 $182,965 Goodwill acquired during the period -- 990 -- 113 1,103 Goodwill written-off during the period -- -- -- -- -- -------- -------- -------- -------- -------- Balance as of March 31, 2003 $110,482 $ 12,237 $ 6,727 $ 54,622 $184,068 ======== ======== ======== ======== ========
As of March 31, 2003, December 31, 2002 and March 31, 2002, goodwill totaled $184,068, $182,965 and $178,501, respectively. The Corporation has no other intangible assets not subject to amortization. The following table reflects the components of other intangible assets subject to amortization as of March 31, 2003, December 31, 2002 and March 31, 2002:
MARCH 31, 2003 December 31, 2002 March 31, 2002 ----------------------- ------------------------ ----------------------- GROSS ACCUMULATED Gross Accumulated Gross Accumulated (In thousands) AMOUNT AMORTIZATION Amount Amortization Amount Amortization ------- ------------ ------- ------------ ------- ------------ Core Deposits $87,739 $58,197 $87,739 $56,263 $87,739 $50,361 Credit-based customer relationships -- -- -- -- 7,946 7,704 Other customer relationships 2,886 192 2,886 120 -- -- Other intangibles 509 125 509 104 202 81 ------- ------- ------- ------- ------- ------- Total $91,134 $58,514 $91,134 $56,487 $95,887 $58,146 ======= ======= ======= ======= ======= =======
During the quarter ended March 31, 2003, the Corporation recognized $2,027 in amortization expense related to other intangible assets with definite lives (March 31, 2002 - $2,543). Certain credit-based customer relationships were fully amortized during the quarter ended June 30, 2002, and as such, their gross amount and accumulated amortization were excluded in that quarter from the accounting records and the tabular disclosure presented above. The following table presents the estimated aggregate amortization expense of the intangible assets with definite lives that the Corporation has as of March 31, 2003, for each of the following fiscal years: 12
(In thousands) 2003 $7,836 2004 7,145 2005 5,543 2006 5,394 2007 3,693
No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount. NOTE 8 - COMMITMENTS AND CONTINGENCIES In the normal course of business there are commercial letters of credit and stand-by letters of credit outstanding, which contract amounts at March 31, 2003 were $28,536 and $139,551, respectively (March 31, 2002 - $13,651 and $78,087; December 31, 2002 - $19,564 and $126,383). There are also other commitments outstanding and contingent liabilities, such as commitments to extend credit, which are not reflected in the accompanying financial statements. In accordance with the recognition provisions of FIN No. 45, during the first quarter of 2003, the Corporation recorded a liability of $300, which represents the fair value of the obligations undertaken in issuing the guarantees under the stand-by letters of credit issued or modified after December 31, 2002. This liability was included as part of "other liabilities" in the Statement of Condition. The stand-by letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in stand-by letters of credit outstanding as of March 31, 2003 and 2002, and December 31, 2002 represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These stand-by letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon, normally within a year. The Corporation's stand-by letters of credit are secured and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others. As of March 31, 2003, the Corporation has two outstanding commitments to purchase mortgage loans from other institutions. In 2002, the Corporation entered into a commitment to purchase $100,000 of mortgage loans with the option of purchasing $75,000 in additional loans. The commitment expires on June 30, 2004. As of March 31, 2003, $25,000 in loans had been purchased under this agreement. The other commitment, entered into by the Corporation during the first quarter of 2003, provides for the purchase of $150,000 of mortgage loans with the option of purchasing $50,000 in additional loans. This commitment expires on September 30, 2004. As of March 31, 2003, $50,000 in loans had been purchased under this agreement. The Corporation fully and unconditionally guarantees certain borrowing obligations issued by certain of the Corporation's wholly-owned subsidiaries approximating $3,491,505 at March 31, 2003 (December 31, 2002 - $3,382,800). The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. Refer to Item 1- Legal Proceedings in Part II - Other Information in this Form 10-Q for further information. NOTE 9 - STOCK OPTION PLAN In September 2002, the Corporation opted to use the fair value method for recording stock options as described in SFAS No. 123 "Accounting for Stock-Based Compensation." During the quarter ended March 31, 2003, the Corporation recognized $727 in stock option expense. 13 The following table summarizes information about stock options outstanding at March 31, 2003:
(Not in thousands) Weighted Average Weighted- Average Weighted Average Exercise Price Options Exercise Price of Remaining Life of Options Exercise Price of Range per Share Outstanding Options Outstanding Options Outstanding Exercisable Options Exercisable --------------- ----------- ------------------- ------------------- ----------- ------------------- $28.78 - $35.65 892,049 $31.38 9.42 years 149,955 $29.97
The following table summarizes the stock option activity and related information:
Options Weighted Average (Not in thousands) Outstanding Exercise Price - ------------------ ----------- ---------------- Outstanding at January 1, 2002 26,416 $ 31.39 Granted 423,647 29.11 Exercised (199) 32.60 Forfeited (4,789) 28.84 ------- --------- Outstanding at December 31, 2002 445,075 29.25 Granted 451,029 33.46 Exercised -- -- Forfeited (4,055) 28.84 ------- --------- Outstanding at March 31, 2003 892,049 $ 31.38 ======= =========
The fair value of these options was estimated on the date of the grants using the Black-Scholes Option Pricing Model. The weighted average assumptions used for the grants issued during 2003 were the following: an expected dividend yield of 2.42% (2002 - 2.16%), an average expected life of options of 10 years (2002 - 10 years), an expected volatility of 24.02% (2002- 26.48%) and a risk-free interest rate of 3.76% (2002 - 4.91%). The weighted average fair value of options granted during 2003 was $9.01 per option (2002 - $9.80). NOTE 10 - SUBORDINATED NOTES AND PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED BY THE CORPORATION Subordinated notes of $125,000 consist of notes issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semi-annually at 6.75%. On February 5, 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware that is wholly-owned by Popular North America, Inc. (PNA) and indirectly wholly-owned by the Corporation, sold to institutional investors $150,000 of BanPonce Trust I's 8.327% Capital Securities Series A (liquidation amount one thousand dollars per Capital Security) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by PNA of $4,640 of BanPonce Trust I's 8.327% common securities (liquidation amount one thousand dollars per common security) were used to purchase $154,640 aggregate principal amount of PNA 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated Debentures"). As of March 31, 2003, the Corporation had reacquired $6,000 of the capital securities. BanPonce Trust I is a 100% owned finance subsidiary of the Corporation. The capital securities qualify as Tier 1 capital, are fully and unconditionally guaranteed by the Corporation, and are presented in the Consolidated Statements of Condition as "Preferred Beneficial Interests in Popular North America's Junior Subordinated Deferrable Interest Debentures Guaranteed by the Corporation." The obligations of PNA under the Junior Subordinated Debentures and its guarantees of the obligations of BanPonce Trust I are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust I consisted of $148,640 of Junior Subordinated Debentures at March 31, 2003 (March 31, 2002 - $154,640; December 31, 2002 - $148,640) and a related accrued interest receivable of $1,031 (March 31, 2002 - $1,073; December 31, 2002 - $4,126). The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures may be shortened (which shortening would result in a mandatory redemption of the Capital Securities). 14 NOTE 11- STOCKHOLDERS' EQUITY During the quarter ended March 31, 2003, the Corporation issued 7,475,000 shares of its 6.375% noncumulative monthly income preferred stock, Series A, at a price of $25 per share. The net proceeds to the Corporation, after the underwriting discounts and expenses, amounted to $182,244. Dividends declared during the quarter on the preferred stock amounted to $949. For the quarter ended March 31, 2003, the Corporation declared cash dividends on common stock amounting to $26,515 (March 31, 2002 - $27,295). NOTE 12 - EARNINGS PER COMMON SHARE A computation of earnings per common share follows:
Quarter ended March 31, ------------------------------- (Dollars in thousands, except share information) 2003 2002 ------------ ------------ Net income $ 99,089 $ 89,044 Less: Preferred stock dividends (and redemption premium in 2002) 949 2,510 ------------ ------------ Net income applicable to common stock $ 98,140 $ 86,534 ============ ============ Average common shares outstanding 132,576,589 136,475,530 Average potential common shares - stock options 16,499 -- ------------ ------------ Average common shares outstanding - assuming dilution 132,593,088 136,475,530 ============ ============ Basic earnings per common share $ 0.74 $ 0.63 ============ ============ Diluted earnings per common share $ 0.74 $ 0.63 ============ ============
Potential common shares consist of common stock issuable under the assumed exercise of stock options granted under the Corporation's stock option plan, using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased will be added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Options with an exercise price greater than the average market price of the Corporation's common stock are antidilutive and, therefore, are not included in the computation of diluted earnings per common share. As of March 31, 2003, there were 415,738 weighted average antidilutive stock options outstanding (2002 - 228,107). No dilutive potential common shares were outstanding during the quarter ended March 31, 2002. NOTE 13 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS During the quarter ended March 31, 2003, the Corporation paid interest and income taxes amounting to $206,466 and $19,815, respectively (2002 - $220,238 and $11,737). In addition, the loans receivable transferred to other real estate and other property for the quarter ended March 31, 2003 amounted to $19,882 and $6,918, respectively (2002 - $10,740 and $9,267). During the quarter ended March 31, 2003, the Corporation transferred $637,605 of loans held-for-sale to the loan portfolio (held-for investment) based on management intent and ability. In addition, $83,345 in mortgage backed securities were sold with a settlement date on April 2003. On the other hand, there were $48,710 in trading securities purchased in March 2003, with a settlement date on April 2003. 15 NOTE 14 - SEGMENT REPORTING Popular, Inc. operates three major reportable segments: commercial banking, mortgage and consumer lending, and auto and lease financing. Management has determined its reporting units based on legal entity, which is the way that operating decisions are made and performance is measured. These reporting units have then been aggregated into segments by products, services and markets with similar characteristics. The Corporation's commercial banking segment includes all banking subsidiaries, which provide individuals, corporations and institutions with commercial and retail banking services, including loans and deposits, trust, mortgage banking and servicing, asset management, credit cards and other financial services. These services are offered through a delivery system of branches throughout Puerto Rico, the U.S. and British Virgin Islands and the United States. The Corporation's mortgage and consumer lending segment includes those non-banking subsidiaries whose principal activity is originating mortgage and consumer loans such as Popular Mortgage, Popular Finance, Equity One and Levitt Mortgage. The Corporation's auto and lease financing segment provides financing for vehicles and equipment through Popular Auto, Inc. in Puerto Rico and Popular Leasing, USA in the U.S. mainland. The "Other" category includes all holding companies and non-banking subsidiaries which provide insurance agency services, retail financial services, broker/dealer activities, as well as those providing ATM processing services, electronic data processing and consulting services, sale and rental of electronic data processing equipment and selling and maintenance of computer software. The accounting policies of the segments are the same as those followed by the Corporation in the ordinary course of business and conform with generally accepted accounting principles and with general practices within the financial industry. Following are the results of operations and selected financial information by operating segments for the quarters ended March 31, 2003 and 2002.
MARCH 31, 2003 ------------------------------------------------------------------------------- Mortgage and Auto and Commercial Consumer Lease (In thousands) Banking Lending Financing Other Eliminations Total ---------- ------------ --------- ---------- ------------ ----------- Net interest income $228,232 $61,546 $18,682 $427 $874 $309,761 Provision for loan losses 31,023 12,211 4,975 48,209 Other income 69,690 22,114 5,172 41,929 (6,745) 132,160 Amortization of intangibles 1,937 90 2,027 Depreciation expense 12,768 1,184 2,898 1,876 18,726 Other operating expenses 163,603 34,361 7,821 37,395 (291) 242,889 Net gain of minority interest (78) (78) Income tax 16,517 12,916 3,209 (39) (1,700) 30,903 ----------- ---------- ---------- ---------- ----------- ----------- Net income $72,074 $22,910 $4,951 $3,034 ($3,880) $99,089 ----------- ---------- ---------- ---------- ----------- ----------- Segment Assets $26,212,292 $6,192,431 $1,294,593 $7,292,138 $(7,296,163) $33,695,291 ----------- ---------- ---------- ---------- ----------- -----------
MARCH 31, 2002 ------------------------------------------------------------------------------- Mortgage and Auto and Commercial Consumer Lease (In thousands) Banking Lending Financing Other Eliminations Total ---------- ------------ ----------- ---------- ------------ ----------- Net interest income (loss) $223,018 $48,034 $15,254 ($950) $59 $285,415 Provision for loan losses 37,441 10,268 6,745 54,454 Other income 66,675 17,096 4,737 45,451 (3,551) 130,408 Amortization of intangibles 2,541 2 2,543 Depreciation expense 13,792 1,026 2,878 1,512 19,208 Other operating expenses 152,091 29,718 7,152 31,673 (219) 220,415 Net gain of minority interest (11) (11) Income tax 18,121 8,331 1,157 3,440 (901) 30,148 ----------- ---------- ---------- ---------- ----------- ----------- Net income $65,707 $15,776 $2,059 $7,874 $(2,372) $89,044 ----------- ---------- ---------- ---------- ----------- ----------- Segment Assets $24,705,291 $4,595,582 $1,089,577 $6,815,654 $(6,888,738) $30,317,366 ----------- ---------- ---------- ---------- ----------- -----------
16 INTERSEGMENT REVENUES *
Three months ended March 31, ---------------------------- (In thousands) 2003 2002 --------- --------- Commercial Banking $ 16,184 $ 17,027 Mortgage and Consumer Lending (38,247) (42,621) Auto and Lease Financing (13,071) (13,153) Other 41,005 42,239 -------- -------- Total Intersegment Revenues $ 5,871 $ 3,492 ======== ========
* For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany transactions, mainly related to gain on sales of loans. GEOGRAPHIC INFORMATION
Three months ended ------------------------ MARCH 31, March 31, (In thousands) 2003 2002 -------- -------- Revenues* Puerto Rico $302,945 $282,936 Mainland United States 126,283 117,140 Other 12,693 15,747 -------- -------- Total consolidated revenues $441,921 $415,823 -------- --------
* Total revenues include net interest income, service charges on deposit accounts, other service fees, gain (loss) on sale of securities, derivatives (losses) gains, trading account loss, gain on sales of loans and other operating income.
MARCH 31, December 31, March 31, (In thousands) 2003 2002 2002 ----------- ----------- ----------- Selected Balance Sheet Information: Puerto Rico Total assets $21,946,636 $22,307,784 $20,095,919 Loans 10,008,443 10,065,646 9,870,630 Deposits 11,978,409 12,036,491 10,970,858 Mainland United States Total assets $11,034,161 $10,637,293 $9,460,601 Loans 9,473,139 9,140,382 8,034,586 Deposits 4,839,951 4,778,234 4,736,838 Other Total assets $714,494 $715,275 $760,846 Loans 380,300 376,091 351,708 Deposits 819,487 800,015 816,458
NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR AND ISSUERS OF REGISTERED GUARANTEED SECURITIES: The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (PIHC), (parent only) Popular International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and all other subsidiaries of the Corporation as of March 31, 2003, December 31, 2002 and March 31, 2002, and the results of their operations and cash flows for periods ended March 31, 2003 and 2002. PIBI, PNA, and their wholly-owned subsidiaries, except Banco Popular North America (BPNA) and Banco Popular, National Association (BP, N.A.), have a fiscal year that ends on November 30. Accordingly, the consolidated financial information of PIBI and PNA as of February 28, 2003, November 30, 2002 and February 28, 2002, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of March 31, 2003, December 31, 2002 and March 31, 2002, respectively. 17 PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under various shelf registrations filed with the SEC. PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica, CreST, S.A., Popular Insurance, V.I., Inc. and PNA. PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries, Popular Cash Express, Inc., Equity One, Inc., BPNA, including its wholly-owned subsidiaries Popular Leasing, U.S.A. and Popular Insurance, U.S.A.; and BP, N.A., including its wholly-owned subsidiary Popular Insurance, Inc. PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA. The principal source of cash flows for PIHC consists of dividends from Banco Popular de Puerto Rico. As a member subject to the regulations of the Federal Reserve Board, BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared in any calendar year would exceed the total of net profits for that year, as defined by the Federal Reserve Board, combined with its retained net profits for the preceding two years. The payment of dividends may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. At March 31, 2003, BPPR could have declared a dividend of approximately $68,885 without the approval of the Federal Reserve Board. 18 POPULAR, INC. CONDENSED CONSOLIDATING STATEMENT OF CONDITION MARCH 31, 2003 (UNAUDITED)
Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ----------- ----------- ----------- ------------ ----------- ------------ ASSETS Cash and due from banks $423 $11 $379 $727,524 ($39,247) $689,090 Money market investments 34,707 300 46,643 1,097,231 (170,421) 1,008,460 Investment securities available-for-sale, at market value 245,047 30,611 7,067 9,852,849 (3,100) 10,132,474 Investment securities held-to-maturity, at amortized cost 328,377 (148,640) 179,737 Trading account securities, at market value 581,001 581,001 Investment in subsidiaries 2,560,556 793,749 869,816 213,593 (4,437,714) Loans held-for-sale, at lower of cost or market 332,080 (15,039) 317,041 ---------- -------- --------- ----------- ---------- ---------- Loans 86,380 2,618,106 21,429,272 (4,314,237) 19,819,521 Less - Unearned income 274,680 274,680 Allowance for loan losses 383,517 383,517 ---------- -------- --------- ----------- ---------- ---------- 86,380 2,618,106 20,771,075 (4,314,237) 19,161,324 ---------- --------- ----------- ---------- ---------- Premises and equipment 10,988 460,789 471,777 Other real estate 45,759 45,759 Accrued income receivable 312 1 11,891 208,656 (18,369) 202,491 Other assets 25,744 30,349 19,084 609,059 5,213 689,449 Goodwill 184,068 184,068 Other intangible assets 32,620 32,620 ---------- -------- --------- ----------- ---------- ---------- $2,964,157 $855,021 $3,572,986 $35,444,681 ($9,141,554) $33,695,291 ========== ======== ========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $3,493,156 ($39,185) $3,453,971 Interest bearing 14,207,144 (23,268) 14,183,876 ----------- ---------- ---------- 17,700,300 (62,453) 17,637,847 Federal funds purchased and securities sold under agreements to repurchase $365,733 6,434,798 (158,152) 6,642,379 Other short-term borrowings $7,496 $115 497,944 1,847,857 (1,057,018) 1,296,394 Notes payable 119,157 8,788 1,850,153 5,987,679 (3,399,285) 4,566,492 Other liabilities 39,908 155 73,599 518,506 (22,825) 609,343 ---------- -------- --------- ----------- ---------- ---------- 166,561 9,058 2,787,429 32,489,140 (4,699,733) 30,752,455 ---------- -------- --------- ----------- ---------- ---------- Subordinated notes 125,000 125,000 ---------- ---------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 144,000 144,000 ----------- ----------- ---------- Minority interest in consolidated subsidiary 110 1,130 1,240 ----------- ---------- ---------- Stockholders' equity: Preferred stock 186,875 186,875 Common stock 835,528 3,962 2 72,577 (76,541) 835,528 Surplus 276,056 649,543 596,964 1,335,998 (2,580,912) 277,649 Retained earnings 1,373,654 186,266 184,622 1,272,421 (1,644,902) 1,372,061 Treasury stock, at cost (205,527) (780) 780 (205,527) Accumulated other comprehensive income, net of tax 206,010 6,192 3,969 131,215 (141,376) 206,010 ---------- -------- --------- ----------- ---------- ---------- 2,672,596 845,963 785,557 2,811,431 (4,442,951) 2,672,596 ---------- -------- --------- ----------- ---------- ---------- $2,964,157 $855,021 $3,572,986 $35,444,681 ($9,141,554) $33,695,291 ========== ======== ========== =========== =========== ===========
19 POPULAR, INC. CONDENSED CONSOLIDATING STATEMENT OF CONDITION DECEMBER 31, 2002 (UNAUDITED)
Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------ ----------- ----------- ------------ ----------- ------------- ASSETS Cash and due from banks $324 $70 $1,161 $694,114 ($43,113) $652,556 Money market investments 2,937 300 9,708 1,250,994 (169,293) 1,094,646 Investment securities available-for-sale, at market value 223,661 28,290 6,720 10,278,232 (5,000) 10,531,903 Investment securities held-to-maturity, at amortized cost 329,391 (148,640) 180,751 Trading account securities, at market value 510,346 510,346 Investment in subsidiaries, at equity 2,322,470 624,306 850,071 199,869 (3,996,716) Loans held-for-sale, at lower of cost or market value 1,109,161 (16,234) 1,092,927 ---------- -------- ---------- ------------ ------------- ------------- Loans 167,523 2,573,222 20,341,601 (4,306,499) 18,775,847 Less - Unearned income 286,655 286,655 Allowance for loan losses 372,797 372,797 ---------- -------- ---------- ------------ ------------- ------------- 167,523 2,573,222 19,682,149 (4,306,499) 18,116,395 ---------- -------- ---------- ------------ ------------- ------------- Premises and equipment 11,192 449,985 461,177 Other real estate 39,399 39,399 Accrued income receivable 294 2 11,891 194,372 (22,010) 184,549 Other assets 21,781 36,409 15,068 503,268 1,565 578,091 Goodwill 182,965 182,965 Other intangible assets 34,647 34,647 ---------- -------- ---------- ------------ ------------- ------------- $2,750,182 $689,377 $3,467,841 $35,458,892 ($8,705,940) $33,660,352 ========== ======== ========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $3,410,409 ($43,024) $3,367,385 Interest bearing 14,270,528 (23,173) 14,247,355 ------------ ------------- ------------- 17,680,937 (66,197) 17,614,740 Federal funds purchased and securities sold under agreements to repurchase $10,300 $498,883 6,307,488 (132,120) 6,684,551 Other short-term borrowings 29,191 $90 439,052 2,477,471 (1,242,242) 1,703,562 Notes payable 137,777 8,788 1,849,017 5,517,986 (3,214,715) 4,298,853 Other liabilities 37,035 166 64,705 604,830 (29,131) 677,605 ---------- -------- ---------- ------------ ------------- ------------- 214,303 9,044 2,851,657 32,588,712 (4,684,405) 30,979,311 ---------- -------- ---------- ------------ ------------- ------------- Subordinated notes 125,000 125,000 ---------- ------------- Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 144,000 144,000 ------------ ------------- ------------- Minority interest in consolidated subsidiaries 110 1,052 1,162 ------------ ------------- ------------- Stockholders' equity: Common stock 834,799 3,962 2 72,577 (76,541) 834,799 Surplus 278,366 492,543 439,964 1,335,498 (2,268,005) 278,366 Retained earnings 1,300,437 170,874 170,956 1,178,321 (1,520,151) 1,300,437 Treasury stock, at cost (205,210) (463) 463 (205,210) Accumulated other comprehensive income, net of tax 202,487 12,954 5,262 140,137 (158,353) 202,487 ---------- -------- ---------- ------------ ------------- ------------- 2,410,879 680,333 616,184 2,726,070 (4,022,587) 2,410,879 ---------- -------- ---------- ------------ ------------- ------------- $2,750,182 $689,377 $3,467,841 $35,458,892 ($8,705,940) $33,660,352 ========== ======== ========== =========== =========== ===========
20 POPULAR, INC. CONDENSED CONSOLIDATING STATEMENT OF CONDITION MARCH 31, 2002 (UNAUDITED)
Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------- ----------- ----------- ------------ ----------- ------------- ASSETS Cash and due from banks $ 319 $ 27 $ 673 $ 429,586 ($46,678) $ 383,927 Money market investments 5,436 301 47 973,980 (260,176) 719,588 Investment securities available-for-sale, at market value 206,696 22,233 6,580 9,173,949 (8,300) 9,401,158 Investment securities held-to-maturity, at amortized cost 356,662 (154,640) 202,022 Trading account securities, at market value 305,415 (6,000) 299,415 Investment in subsidiaries 2,137,166 571,625 784,124 171,229 (3,664,144) Loans held-for-sale, at lower of cost or market value 872,949 27,512 900,461 ----------- ----------- ----------- ----------- ----------- ----------- Loans 261,591 2,603,774 18,978,571 (4,167,936) 17,676,000 Less - Unearned income 319,537 319,537 Allowance for loan losses 341,744 341,744 ----------- ----------- ----------- ----------- ----------- ----------- 261,591 2,603,774 18,317,290 (4,167,936) 17,014,719 ----------- ----------- ----------- ----------- ----------- ----------- Premises and equipment 11,802 393,040 404,842 Other real estate 34,550 34,550 Accrued income receivable 451 1 12,142 197,871 (19,347) 191,118 Other assets 22,489 33,511 9,054 482,751 1,519 549,324 Goodwill 178,501 178,501 Other intangible assets 37,741 37,741 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,645,950 $ 627,698 $ 3,416,394 $31,925,514 ($8,298,190) $30,317,366 =========== =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,147,244 ($46,619) $ 3,100,625 Interest bearing 13,454,116 (30,587) 13,423,529 ----------- ----------- ----------- ----------- ----------- ----------- 16,601,360 (77,206) 16,524,154 Federal funds purchased and securities sold under agreements to repurchase $ 40,300 $ 399,038 4,339,067 (213,590) 4,564,815 Other short-term borrowings 59,975 $ 4,297 426,568 2,812,312 (1,050,473) 2,252,679 Notes payable 191,733 1,980,974 5,065,598 (3,241,689) 3,996,616 Other liabilities 44,115 81 46,582 458,479 (24,907) 524,350 ----------- ----------- ----------- ----------- ----------- ----------- 336,123 4,378 2,853,162 29,276,816 (4,607,865) 27,862,614 ----------- ----------- ----------- ----------- ----------- ----------- Subordinated notes 125,000 125,000 ----------- ----------- ----------- ----------- ----------- ----------- Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 (6,000) 144,000 ----------- ----------- ----------- ----------- ----------- ----------- Minority interest in consolidated subsidiary 110 815 925 ----------- ----------- ----------- ----------- ----------- ----------- Stockholders' equity: Common stock 833,121 3,962 2 72,575 (76,539) 833,121 Surplus 270,766 492,494 439,964 1,335,418 (2,267,876) 270,766 Retained earnings 1,116,963 122,542 125,942 1,101,995 (1,350,479) 1,116,963 Treasury stock, at cost (66,363) (463) 463 (66,363) Accumulated other comprehensive income (loss), net of tax 30,340 4,322 (2,676) (10,937) 9,291 30,340 ----------- ----------- ----------- ----------- ----------- ----------- 2,184,827 623,320 563,232 2,498,588 (3,685,140) 2,184,827 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,645,950 $ 627,698 $ 3,416,394 $31,925,514 ($8,298,190) $30,317,366 =========== =========== =========== =========== =========== ===========
21 POPULAR, INC. CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE QUARTER ENDED MARCH 31, 2003 (UNAUDITED)
Popular,Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated - -------------- ------------ ----------- ----------- ------------ ------- ------------ INTEREST INCOME: Loans $1,538 $ 36,450 $394,242 ($54,297) $377,933 Money market investments 47 $ 2 39 18,525 (11,250) 7,363 Investment securities 444 198 112,096 (2,937) 109,801 Trading account securities 8,185 8,185 ------- ------- -------- -------- --------- ------- 2,029 2 36,687 533,048 (68,484) 503,282 ------- ------- -------- -------- --------- ------- INTEREST EXPENSE: Deposits 94,350 (155) 94,195 Short-term borrowings 203 5,094 54,810 (19,318) 40,789 Long-term debt 4,582 57 32,091 71,693 (49,886) 58,537 ------- ------- -------- -------- --------- ------- 4,785 57 37,185 220,853 (69,359) 193,521 ------- ------- -------- -------- --------- ------- Net interest (loss) income (2,756) (55) (498) 312,195 875 309,761 Provision for loan losses 48,209 48,209 ------- ------- -------- -------- --------- ------- Net interest (loss) income after provision for loan losses (2,756) (55) (498) 263,986 875 261,552 Service charges on deposit accounts 39,851 (12) 39,839 Other service fees 67,588 (1,162) 66,426 (Loss) gain on sale of securities (27) 1,441 1,414 Trading account loss (937) (937) Derivatives (losses) gains (10,813) 158 (10,655) Gain on sales of loans 23,706 (4,190) 19,516 Other operating income 4,320 1,633 11,984 (1,380) 16,557 ------- ------- -------- -------- --------- ------- 1,564 1,578 (11,338) 407,777 (5,869) 393,712 ------- ------- -------- -------- --------- ------- OPERATING EXPENSES: Personnel costs: Salaries 78 95,957 1 96,036 Profit sharing 6,245 6,245 Pension and other benefits 17 30,051 30,068 ------- ------- -------- -------- --------- ------- 95 132,253 1 132,349 Net occupancy expenses 3 20,457 20,460 Equipment expenses 26,350 26,350 Other taxes 291 9,261 9,552 Professional fees 209 5 71 18,567 (76) 18,776 Communications 8 14,689 14,697 Business promotion 15,970 15,970 Printing and supplies 4,743 4,743 Other operating expenses 66 23 131 18,715 (217) 18,718 Amortization of intangibles 2,027 2,027 ------- ------- -------- -------- --------- ------- 574 126 202 263,032 (292) 263,642 ------- ------- -------- -------- --------- ------- Income (loss) before income tax, minority interest and equity in earnings of subsidiaries 990 1,452 (11,540) 144,745 (5,577) 130,070 Income tax (4,051) 36,654 (1,700) 30,903 Net gain of minority interest (78) (78) ------- ------- -------- -------- --------- ------- Income (loss) before equity in earnings of 990 1,452 (7,489) 108,013 (3,877) 99,089 subsidiaries Equity in earnings of subsidiaries 98,099 13,940 21,154 12,105 (145,298) ------- ------- -------- -------- --------- ------- NET INCOME $99,089 $15,392 $ 13,665 $120,118 ($149,175) $99,089 ======= ======= ======== ======== ========= =======
22 POPULAR, INC. CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE QUARTER ENDED MARCH 31, 2002 (UNAUDITED)
Popular, Inc. PIBI PNA Other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated ------------ ----------- ----------- ------------ ----------- -------------- INTEREST INCOME: Loans $ 3,444 $38,186 $388,811 ($58,220) $372,221 Money market investments 121 $ 3 6 18,598 (10,943) 7,785 Investment securities 192 189 115,203 (3,273) 112,311 Trading account securities 3,545 (43) 3,502 ------- ------- ------- -------- --------- ------- 3,757 3 38,381 526,157 (72,479) 495,819 ------- ------- ------- -------- --------- ------- INTEREST EXPENSE: Deposits 113,186 (255) 112,931 Short-term borrowings 317 22 5,776 57,244 (18,916) 44,443 Long-term debt 5,248 33,014 68,135 (53,367) 53,030 ------- ------- ------- -------- --------- ------- 5,565 22 38,790 238,565 (72,538) 210,404 ------- ------- ------- -------- --------- ------- Net interest (loss) income (1,808) (19) (409) 287,592 59 285,415 Provision for loan losses 54,454 54,454 ------- ------- ------- -------- --------- ------- Net interest (loss) income after provision for loan losses (1,808) (19) (409) 233,138 59 230,961 Service charges on deposit accounts 38,973 38,973 Other service fees 61,750 (63) 61,687 Loss on sale of securities (4,010) (4,010) Trading account loss (1,030) (1,030) Derivatives gains (losses) 645 (134) 511 Gain on sales of loans 20,603 (2,660) 17,943 Other operating income 2,135 1,614 13,414 (829) 16,334 ------- ------- ------- -------- --------- ------- 327 1,595 236 362,704 (3,493) 361,369 ------- ------- ------- -------- --------- ------- OPERATING EXPENSES: Personnel costs: Salaries 78 88,483 88,561 Profit sharing 4,940 4,940 Pension and other benefits 16 26,785 26,801 ------- ------- ------- -------- --------- ------- 94 120,208 120,302 Net occupancy expenses 3 19,027 19,030 Equipment expenses 24,765 24,765 Other taxes 245 9,304 9,549 Professional fees 146 4 46 17,391 (80) 17,507 Communications 8 13,265 13,273 Business promotion 13,367 13,367 Printing and supplies 4,509 4,509 Other operating expenses 53 20 107 17,281 (140) 17,321 Amortization of intangibles 2,543 2,543 ------- ------- ------- -------- --------- ------- 452 121 153 241,660 (220) 242,166 ------- ------- ------- -------- --------- ------- (Loss) income before income tax, minority interest and equity in earnings of subsidiaries (125) 1,474 83 121,044 (3,273) 119,203 Income tax (13) 17 31,045 (901) 30,148 Net gain of minority interest (11) (11) ------- ------- ------- -------- --------- ------- (Loss) income before equity in earnings of subsidiaries (112) 1,474 66 89,988 (2,372) 89,044 Equity in earnings of subsidiaries 89,156 15,320 15,189 6,954 (126,619) ------- ------- ------- -------- --------- ------- NET INCOME $89,044 $16,794 $15,255 $ 96,942 ($128,991) $89,044 ======= ======= ======= ======== ========= =======
23 POPULAR, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 2003 (UNAUDITED)
Popular, Inc. PIBI PNA All other Elimination Consolidated (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Popular, Inc. -------------- ----------- ----------- ------------ ------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 99,089 $ 15,392 $ 13,665 $ 120,118 ($149,175) $ 99,089 ---------- --------- -------- ---------- --------- ---------- Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings of subsidiaries (98,099) (13,940) (21,154) (12,105) 145,298 Depreciation and amortization of premises and equipment 203 18,523 18,726 Provision for loan losses 48,209 48,209 Amortization of intangibles 2,027 2,027 Net loss (gain) on sales of investment securities 27 (1,441) (1,414) Net loss (gain) on derivatives 10,813 (158) 10,655 Net loss on disposition of premises and equipment 397 397 Net gain on sales of loans, excluding loans held-for-sale (8,566) (8,566) Net amortization of premiums and accretion of discounts on investments 5,071 5,071 Net amortization of deferred loan fees and costs 9,402 9,402 Stock options expense 33 694 727 Net decrease in loans held-for-sale 139,476 (1,195) 138,281 Net increase in trading securities (119,365) (119,365) Net (increase) decrease in accrued income receivable (18) 1 (14,284) (3,641) (17,942) Net increase in other assets (6,635) (1,525) (28) 9,331 (960) 183 Net increase (decrease) in interest payable 135 57 (1,152) (15,688) 3,703 (12,945) Net increase (decrease) in deferred and current taxes 2,672 (1,076) 10,532 (2,688) 9,440 Net increase in postretirement benefit obligation 2,477 2,477 Net increase (decrease) in other liabilities 734 (69) (3,740) (48,168) 2,600 (48,643) ---------- --------- -------- ---------- --------- ---------- Total adjustments (100,975) (15,476) (16,310) (58,036) 143,117 (47,680) ---------- --------- -------- ---------- --------- ---------- Net cash (used in) provided by operating activities (1,886) (84) (2,645) 62,082 (6,058) 51,409 ---------- --------- -------- ---------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in money market investments (31,770) (36,935) 153,763 1,128 86,186 Purchases of investment securities held-to-maturity (140,522) (140,522) Maturities of investment securities held-to-maturity 141,628 141,628 Purchases of investment securities available-for-sale (13,779) (1,420,203) (1,433,982) Maturities of investment securities available-for-sale 1,722,329 (1,900) 1,720,429 Proceeds from sales of investment securities available-for-sale 13,583 24,500 38,083 Net collections (disbursements) on loans 81,143 (44,884) (310,665) 7,738 (266,668) Proceeds from sales of loans 279,750 279,750 Acquisition of loan portfolios (495,712) (495,712) Capital contribution to subsidiary (180,000) (157,000) 337,000 Acquisition of premises and equipment (29,943) (29,943) Proceeds from sale of premises and equipment 220 220 Dividends received from subsidiary 26,100 (26,100) ---------- --------- -------- ---------- --------- ---------- Net cash (provided by) used in investing activities (104,527) (157,000) (82,015) 9,545 317,866 (16,131) ---------- --------- -------- ---------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 20,811 3,743 24,554 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (10,300) (133,150) 127,310 (26,032) (42,172) Net (decrease) increase in other short-term borrowings (21,695) 25 58,892 (629,614) 185,224 (407,168) Net (payments of) proceeds from notes payable and capital securities (18,620) 1,136 469,693 (184,570) 267,639 Dividends paid to parent company (26,100) 26,100 Dividends paid (27,440) (27,440) Proceeds from issuance of common stock 3,916 3,916 Net proceeds from issuance of preferred stock 180,651 1,593 182,244 Treasury stock acquired (317) (317) Capital contribution from parent 157,000 157,000 (314,000) ---------- --------- -------- ---------- --------- ---------- Net cash provided by (used in) financing activities 106,512 157,025 83,878 (38,217) (307,942) 1,256 ---------- --------- -------- ---------- --------- ---------- Net increase (decrease) in cash and due from banks 99 (59) (782) 33,410 3,866 36,534 Cash and due from banks at beginning of period 324 70 1,161 694,114 (43,113) 652,556 ---------- --------- -------- ---------- --------- ---------- Cash and due from banks at end of period $ 423 $ 11 $ 379 $ 727,524 ($39,247) $ 689,090 ========== ========= ======== ========== ========= ==========
24 POPULAR, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 2002 (UNAUDITED)
Popular, Inc. PIBI PNA All other Elimination Consolidated (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Popular, Inc. ------------ ----------- ----------- ------------ ----------- ------------- Cash flows from operating activities: Net income $ 89,044 $ 16,794 $ 15,255 $ 96,942 ($128,991) $ 89,044 --------- -------- --------- ---------- --------- ----------- Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings of subsidiaries (89,156) (15,320) (15,189) (6,954) 126,619 Depreciation and amortization of premises and equipment 203 19,005 19,208 Provision for loan losses 54,454 54,454 Amortization of intangibles 2,543 2,543 Net loss on sale of investment securities 4,010 4,010 Net (gain) loss on derivatives (645) 134 (511) Net gain on disposition of premises and equipment (11) (11) Net gain on sale of loans, excluding loans held-for-sale (2,826) (2,826) Net amortization of premiums and accretion of discounts on investments 4,309 4,309 Net decrease in loans held-for-sale 84,453 (45,426) 39,027 Net amortization of deferred loan fees and costs 4,556 4,556 Net increase in trading securities (34,309) 5,080 (29,229) Net (increase) decrease in accrued income receivable (127) 1 121 (1,573) (3,397) (4,975) Net (increase) decrease in other assets (1,663) (1,501) 261 (25,361) (1,209) (29,473) Net increase (decrease) in interest payable 754 14 (1,709) (8,893) (9,834) Net increase (decrease) in deferred and current taxes (45) (54) 11,826 209 11,936 Net increase in postretirement benefit obligation 1,494 1,494 Net increase (decrease) in other liabilities 1,271 (5) 709 (554) 7,745 9,166 --------- -------- --------- ---------- --------- ----------- Total adjustments (88,763) (16,811) (16,506) 106,303 89,621 73,844 --------- -------- --------- ---------- --------- ----------- Net cash provided by (used in) operating activities 281 (17) (1,251) 203,245 (39,370) 162,888 --------- -------- --------- ---------- --------- ----------- Cash flows from investing activities: Net decrease in money market investments 107,500 1 395 101,322 (105,016) 104,202 Purchases of investment securities held-to-maturity (132,401) (132,401) Maturities of investment securities held-to-maturity 524,322 524,322 Purchases of investment securities available-for-sale (36,197) (38) (2,076,987) (660) (2,113,882) Maturities of investment securities available-for-sale 1,113,794 (2,700) 1,111,094 Proceeds from sales of investment securities available-for-sale 809,302 809,302 Net disbursements on loans (65,180) (66,753) (196,196) 118,341 (209,788) Proceeds from sale of loans 221,705 221,705 Acquisition of loan portfolios (210,395) (210,395) Acquisition of premises and equipment (19,837) (19,837) Proceeds from sale of premises and equipment 1,504 1,504 Dividends received from subsidiary 27,500 (27,500) --------- -------- --------- ---------- --------- ----------- Net cash provided by (used in) investing activities 33,623 1 (66,396) 136,133 (17,535) 85,826 --------- -------- --------- ---------- --------- ----------- Cash flows from financing activities: Net increase in deposits 177,783 (16,436) 161,347 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 40,300 (22,580) (1,222,816) 18,144 (1,186,952) Net increase (decrease) in other short-term borrowings 59,975 25 (109,874) 147,536 327,775 425,437 Net (payments) proceeds from issuance of notes payable and capital securities (7,184) 200,522 356,338 (293,271) 256,405 Dividends paid (27,785) (27,500) 27,500 (27,785) Proceeds from issuance of common stock 2,846 2,846 Redemption of preferred stock (102,000) (102,000) Treasury stock acquired (227) (227) --------- -------- --------- ---------- --------- ----------- Net cash (used in) provided by financing activities (33,848) 25 68,068 (568,886) 63,712 (470,929) --------- -------- --------- ---------- --------- ----------- Net increase (decrease) in cash and due from banks 56 9 421 (229,508) 6,807 (222,215) Cash and due from banks at beginning of year 263 18 252 659,094 (53,485) 606,142 --------- -------- --------- ---------- --------- ----------- Cash and due from banks at end of year $ 319 $ 27 $ 673 $ 429,586 ($46,678) $ 383,927 ========= ======== ========= ========== ========= ===========
25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE A FINANCIAL HIGHLIGHTS
AVERAGE FOR THE THREE AT MARCH 31, MONTHS ENDED MARCH 31, --------------------------------------- --------------------------------------- BALANCE SHEET HIGHLIGHTS 2003 2002 Change 2003 2002 Change ----------- ----------- ----------- ----------- ----------- ----------- (In thousands) Money market investments $ 1,008,460 $ 719,588 $ 288,872 $ 972,373 $ 927,038 $ 45,335 Investment and trading securities 10,893,212 9,902,595 990,617 10,909,397 9,871,684 1,037,713 Loans 19,861,882 18,256,924 1,604,958 19,537,968 18,058,011 1,479,957 Total assets 33,695,291 30,317,366 3,377,925 33,158,518 30,417,589 2,740,929 Deposits 17,637,847 16,524,154 1,113,693 17,526,977 16,526,180 1,000,797 Borrowings 12,774,265 11,083,110 1,691,155 12,797,395 11,283,963 1,513,432 Stockholders' equity 2,672,596 2,184,827 487,769 2,314,620 2,154,243 160,377 FIRST QUARTER -------------------------------------- OPERATING HIGHLIGHTS 2003 2002 Change -------- -------- -------- (In thousands, except per share information) Net interest income $309,761 $285,415 $ 24,346 Provision for loan losses 48,209 54,454 (6,245) Fees and other income 132,160 130,408 1,752 Other expenses, net of minority interest 294,623 272,325 22,298 Net income $ 99,089 $ 89,044 $ 10,045 Net income applicable to common stock $ 98,140 $ 86,534 $ 11,606 Earnings per common share (basic and diluted) $ 0.74 $ 0.63 $ 0.11
SELECTED STATISTICAL FIRST QUARTER INFORMATION -------------------- 2003 2002 ------ ------ COMMON STOCK DATA - Market price High $34.97 $29.94 Low 31.95 27.50 End 33.99 29.22 Book value at period end 18.75 16.01 Dividends declared 0.20 0.20 Dividend payout ratio 27.45% 30.85% Price/earnings ratio 12.50x 12.87x PROFITABILITY RATIOS - Return on assets 1.21% 1.19% Return on common equity 17.39 16.83 Net interest spread (taxable equivalent) 3.90 3.80 Net interest yield (taxable equivalent) 4.30 4.30 Effective tax rate 23.76 25.29 Overhead ratio * 42.45 39.16 Efficiency ratio ** 58.32 57.61 CAPITALIZATION RATIOS - Equity to assets 6.98% 7.08% Tangible equity to assets 6.42 6.29 Equity to loans 11.85 11.93 Internal capital generation 12.09 11.35 Tier I capital to risk - adjusted assets 10.96 10.20 Total capital to risk - adjusted assets 12.67 11.99 Leverage ratio 7.02 6.34
* Non-interest expense less non-interest income divided by net interest income. ** Non-interest expense divided by net interest income plus recurring fee income. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial review contains an analysis of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the Corporation). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis. The Corporation is a financial holding company, which offers a wide range of products and services to consumer and corporate customers in Puerto Rico, the United States, the Caribbean and Central America. The Corporation's subsidiaries are engaged in the following businesses: Commercial Banking - Banco Popular de Puerto Rico (BPPR), Banco Popular North America (BPNA) and Banco Popular, National Association (BP, N.A.) Auto Loans and Lease Financing - Popular Auto, Inc. and Popular Leasing, U.S.A. Mortgage and Consumer Lending - Popular Mortgage, Inc., Equity One, Inc., Popular Finance, Inc. and Levitt Mortgage Corporation Broker / Dealer - Popular Securities, Inc. Processing and Information Technology Services and Products - GM Group, ATH Costa Rica and CreST, S.A. Retail Financial Services - Popular Cash Express, Inc. Insurance Agency- Popular Insurance, Inc., Popular Insurance Agency U.S.A., Inc. and Popular Insurance V.I., Inc. CRITICAL ACCOUNTING POLICIES The Corporation's accounting policies are essential to the understanding of its financial statements. The Corporation has identified as critical accounting policies those related to loans and allowance for loan losses, investment securities, the assessment of fair value, income taxes, goodwill and other intangible assets, stock options and pension and post retirement benefit obligations. The critical accounting policies involve significant management judgment associated with estimates about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. For a summary of the Corporation's critical accounting policies, refer to that particular section in the Management's Discussion and Analysis included in Popular, Inc.'s 2002 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002. Also, refer to Note 1 to the consolidated financial statements included in said report for a summary of the Corporation's significant accounting policies, as well as to the accompanying notes to the unaudited consolidated financial statements included in this Form 10-Q. No significant changes in critical accounting policies have occurred since year-end 2002. NET INCOME The Corporation reported net income of $99.1 million for the first quarter of 2003, compared with $89.0 million for the same quarter of 2002, an increase of $10.1 million, or 11%. Earnings per common share (EPS), basic and diluted, for the quarter ended March 31, 2003, were $0.74, compared with $0.63 for the same period in 2002. Refer to Note 12 to the consolidated financial statements for a detail of the average shares used in the computation of basic and diluted EPS. Return on assets (ROA) and return on common equity (ROE) for the first quarter of 2003 were 1.21% and 17.39%, respectively, compared with 1.19% and 16.83% for the same period in 2002. The Corporation's net income for the first quarter of 2003, when compared with the same period a year ago, reflected higher net interest income by $24.4 million and non-interest income by $1.8 million, and a lower provision for loan losses by $6.2 million. These variances were partially offset by a rise in operating expenses of $21.4 million and an increase in income tax of $0.8 million. 27 NET INTEREST INCOME Net interest income for the quarter ended March 31, 2003 rose to $309.8 million, an increase of $24.4 million, or 9%, over the same quarter of 2002. On a taxable equivalent basis, net interest income increased to $337.6 million from $310.4 million in the same quarter of 2002. The improvement of $27.2 million in net interest income on a taxable equivalent basis from the first quarter of 2002 resulted from a $21.4 million increase due to a higher volume of average earning assets and a $5.8 million increase due to a higher net interest spread. Table B presents the different components of the Corporation's net interest income for the first quarter of 2003, as compared with the same quarter of 2002, segregated by major categories of earning assets and interest bearing liabilities. Some of the assets, mostly investments in obligations of the U.S. Government and its agencies and the Puerto Rico Commonwealth, generate interest, which is exempt for income tax purposes, principally in Puerto Rico. Therefore, to facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates (statutory tax rate of 39%). 28 TABLE B ANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS PERIOD ENDED MARCH 31, 2003
VARIANCE AVERAGE VOLUME AVERAGE YIELDS INTEREST ATTRIBUTABLE TO - -------------------------- -------------- -------- ---------------------------- ----------------- 2003 2002 VARIANCE 2003 2002 VARIANCE 2003 2002 VARIANCE RATE VOLUME - ------- ------- -------- ----- ---- -------- -------- -------- -------- ------- -------- ($ IN MILLIONS) (IN THOUSANDS) $ 972 $ 927 $ 45 3.07% 3.41% (0.34%) Money market investments $ 7,363 $ 7,785 $ (422) $ (785) $ 363 10,321 9,526 795 5.24 5.69 (0.45) Investment securities 135,150 135,289 (139) (12,696) 12,557 589 346 243 5.78 4.21 1.57 Trading 8,392 3,583 4,809 1,669 3,140 - ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- -------- 11,882 10,799 1,083 5.09 5.44 (0.35) 150,905 146,657 4,248 (11,812) 16,060 - ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- -------- Loans: 8,025 7,611 414 6.22 6.78 (0.56) Commercial 122,996 127,300 (4,304) (11,000) 6,696 885 860 25 10.69 11.23 (0.54) Leasing 23,655 24,137 (482) (1,169) 687 7,521 6,474 1,047 7.57 7.82 (0.25) Mortgage 142,381 126,634 15,747 (4,183) 19,930 3,107 3,113 (6) 11.84 12.45 (0.61) Consumer 91,206 96,147 (4,941) (2,758) (2,183) - ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- -------- 19,538 18,058 1,480 7.84 8.35 (0.51) 380,238 374,218 6,020 (19,110) 25,130 - ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- -------- $31,420 $28,857 $2,563 6.80% 7.26% (0.46%) TOTAL EARNING ASSETS $531,143 $520,875 $ 10,268 $(30,922) $41,190 ======= ======= ====== ===== ==== ====== ======== ======== ======= ========= ======= Interest bearing deposits: $2,553 $2,493 $60 1.69% 2.41% (0.72%) NOW and money market $10,662 $14,844 $ (4,182) ($4,510) $328 5,119 4,470 649 1.66 2.58 (0.92) Savings 20,972 28,459 (7,487) (10,947) 3,460 6,590 6,378 212 3.85 4.43 (0.58) Time deposits 62,561 69,628 (7,067) (10,117) 3,050 - ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- -------- 14,262 13,341 921 2.68 3.43 (0.75) 94,195 112,931 (18,736) (25,574) 6,838 - ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- -------- 8,284 7,263 1,021 2.00 2.48 (0.48) Short-term borrowings 40,789 44,443 (3,654) (10,464) 6,810 4,513 4,021 492 5.25 5.34 (0.09) Medium and long-term debt 58,537 53,030 5,507 (653) 6,160 - ------- ------- ------ ----- ---- ------ -------- -------- -------- ------- -------- TOTAL INTEREST BEARING 27,059 24,625 2,434 2.90 3.46 (0.56) LIABILITIES 193,521 210,404 (16,883) (36,691) 19,808 3,265 3,185 80 Demand deposits 1,096 1,047 49 Other sources of funds - ------- ------- ------ ---- ---- ----- -------- -------- -------- -------- -------- $31,420 $28,857 $2,563 2.50% 2.96% (0.46%) ======= ======= ====== ==== ==== ===== 4.30% 4.30% 0.00% NET INTEREST MARGIN AND ==== ==== ==== NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS 337,622 310,471 27,151 $ 5,769 $21,382 ======== ======= 3.90% 3.80% 0.10% NET INTEREST SPREAD ==== ==== ==== TAXABLE EQUIVALENT ADJUSTMENT 27,861 25,056 2,805 -------- -------- ------- NET INTEREST INCOME $309,761 $285,415 $ 24,346 ======== ======== =======
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. The increase in earning assets of $2.6 billion, compared with the first quarter of 2002, was driven principally by a $1.5 billion increase in the average loan portfolio and a $1.1 billion increase in money market, trading and investment securities. The rise in the average loan portfolio was primarily in mortgage and commercial loans, which rose $1.1 billion and $414 million, respectively. The interest rate environment has stimulated mortgage originations and the refinancing through mortgage loans. On the other hand, consumer loans remained almost flat on average mainly due to lower demand for personal loans. Investment securities also rose on average by $795 million, or 8%, mostly in U.S. Agency securities. The average yield on earning assets, on a taxable equivalent basis, declined 46 basis points from 7.26% in the first quarter of 2002 to 6.80% during the same period in 2003. The average yield on the investment portfolio decreased by 45 basis points, due to the growth of the portfolio, the runoff of securities with higher yields that were replaced in a declining interest rate scenario, and a higher level of prepayments on the Corporation's mortgage-backed 29 securities and collateralized mortgage obligations. The average yield in the trading portfolio rose to 5.78% for the quarter ended March 31, 2003, from 4.21% for the same quarter in the previous year, mainly due to a higher proportion of mortgage-backed securities, carrying a higher yield. The average yield on the loan portfolio decreased by 51 basis points. Commercial and construction loans yield fell by 56 basis points due to their repricing characteristics and to the origination of new loans in a lower rate environment. As of March 31, 2003, approximately 56% of the commercial and construction portfolios had floating or adjustable rates. A mix of funding sources supported the increase in the volume of earning assets. Interest bearing liabilities for the first quarter of 2003 increased on average by $2.4 billion, or 10%, compared with the same quarter in 2002. Average interest bearing deposits increased by $921 million, or 7%, while average borrowings rose by $1.5 billion, or 13%. Savings deposits increased on average by $649 million and time deposits experienced an increase of $212 million. Within the latter category, brokered deposits increased on average by $109 million. Average short-term borrowings, comprised mostly of repurchase agreements and federal funds, increased by $1.0 billion, or 14%, in the first quarter of 2003, compared with the same quarter in the previous year, while longer-term borrowings increased by $492 million, or 12%. The increase in long-term debt, which is debt with an original maturity of more than one year, was principally due to the issuance of secured borrowings arising in securitization transactions. The average cost of interest bearing liabilities diminished by 56 basis points when compared with the same quarter of 2002. The principal factor for this decrease were revisions made to interest rates on interest-bearing deposits since the last quarter of 2002. Also, the lower cost of borrowed money was influenced by the current low interest rate environment. The Corporation's net interest margin, on a taxable equivalent basis, for the first quarter of 2003 remained stable at 4.30%, compared with the same quarter in the previous year, while the net interest spread increased by 10 basis points. The increase in net interest spread which is the difference between the yield on earning assets and the interest rate paid on interest-bearing liabilities, resulted in part from a decrease in the cost of interest-bearing liabilities, partially offset by a reduction in the yield on earning assets. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses reflects management's assessment of the adequacy of the allowance for loan losses to cover probable losses inherent in the loan portfolio after taking into account loan impairment and net charge-offs for the current period. The provision for loan losses totaled $48.2 million, or 125% of net charge-offs, for the first quarter of 2003, compared with $54.4 million or 110%, respectively, for the same period in 2002. The decrease in the provision is due in part to lower net charge-offs and to the fact that most of the growth in the loan portfolio was in mortgage loans which have a low net charge-off ratio. Net charge-offs for the quarter ended March 31, 2003, were $38.4 million or 0.79% of average loans, compared with $49.7 million or 1.10% for the first quarter of 2002. 30 Table C summarizes the movement in the allowance for loan losses and presents several loan loss statistics for the quarters ended March 31, 2002 and 2003. TABLE C ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
FIRST QUARTER ----------------------- (Dollars in thousands) 2003 2002 -------- -------- Balance at beginning of period $372,797 $336,632 Allowance purchased 951 343 Provision for loan losses 48,209 54,454 -------- -------- 421,957 391,429 -------- -------- Losses charged to the allowance: Commercial 15,553 22,983 Construction 135 3,320 Lease financing 6,198 9,259 Mortgage 4,654 2,511 Consumer 23,401 25,483 -------- -------- 49,941 63,556 -------- -------- Recoveries: Commercial 2,955 3,632 Construction 27 159 Lease financing 2,730 4,126 Mortgage 55 218 Consumer 5,734 5,736 -------- -------- 11,501 13,871 -------- -------- Net loans charged-off: Commercial 12,598 19,351 Construction 108 3,161 Lease financing 3,468 5,133 Mortgage 4,599 2,293 Consumer 17,667 19,747 -------- -------- 38,440 49,685 -------- -------- Balance at end of period $383,517 $341,744 ======== ======== Ratios: Allowance for losses to loans 1.93% 1.87% Allowance to non-performing assets 64.25 69.24 Allowance to non-performing loans 69.58 74.45 Non-performing assets to loans 3.01 2.70 Non-performing assets to total assets 1.77 1.63 Net charge-offs to average loans 0.79 1.10 Provision to net charge-offs 1.25x 1.10x Net charge-offs earnings coverage 4.64 3.50
Mortgage loans net charge-offs amounted to $4.6 million for the quarter ended March 31, 2003, compared with $2.3 million for the same period in 2002, an increase of $2.3 million or 101%, mostly as a result of the growth in the portfolio coupled with increased delinquency due to current economic conditions. These net charge-offs represented 0.24% of average mortgage loans for the first quarter of 2003, compared with 0.14% for the same quarter in the previous year. Commercial and construction loans net charge-offs amounted to $12.7 million for the first quarter of 2003, compared with $22.5 million for the same period in 2002, a decline of $9.8 million or 44%. As a percentage of average commercial and construction loans, net credit losses were 0.63% for the quarter ended March 31, 2003, 31 compared with 1.18% in the first quarter of 2002. The results for 2002 were impacted by the $3.7 million charge-off of a participation loan pertaining to a large commercial relationship. Also, the decrease in net charge-offs is influenced in part by an aggressive identification and monitoring of potential problem loans. Consumer loans net charge-offs for the quarters ended March 31, 2003 and 2002, totaled $17.7 million and $19.7 million, respectively. These net charge-offs represented 2.27% of average consumer loans for the quarter ended March 31, 2003, compared with 2.54% for the same quarter in the previous year. The current economic environment has prompted the Corporation to tighten its credit criteria for consumer borrowings. Lease financing net charge-offs decreased $1.6 million, or 32%, for the quarter ended March 31, 2003, compared with the same period in 2002. These net charge-offs totaled $3.5 million or 1.57% of the average lease financing portfolio for the quarter ended March 31, 2003, compared with $5.1 million or 2.39% for the same period in 2002. The decline was partly the result of stronger portfolio quality, coupled with improved collection strategies. Management's review of quantitative and qualitative factors affecting the performance of the credit portfolio results in the final determination of the provision for loan losses intended to maintain an adequate level of allowance for loan losses. In determining the allowance, management considers the portfolio risk characteristics, the results of periodic credit reviews of individual loans, prior loss experience, current economic conditions, regulatory requirements and loan impairment measurements, among other factors. The adequacy of the allowance for loan losses is evaluated on a monthly basis. The methodology used to establish and test the allowance for loan losses is based on SFAS No. 114 "Accounting by Creditors for Impairment of a Loan," and SFAS No. 5 "Accounting for Contingencies." Under SFAS No. 114, certain commercial loans are identified for evaluation on an individual basis, and specific reserves are calculated based on impairment. SFAS No. 5 provides for the recognition of a loss for a group of homogeneous loans, which are not individually evaluated under SFAS No. 114, when it is probable that a loss has been incurred and the amount can be reasonably estimated. To calculate the allowance for loan losses under SFAS No. 5, the Corporation uses historical net charge-offs experience segregated by type of loan and legal entity. The result of the exercise described above is compared with stress-related levels of historic losses over a period of time, recent tendencies of losses and industry trends. Management considers all indicators derived from the process described herein, along with qualitative factors that may cause estimated credit losses associated with the loan portfolio to differ from historical loss experience. The Corporation has defined impaired loans as loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of the expected future cash flows discounted at the loan's effective rate, on the observable market price of the loan, or on the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience adjusted for current conditions. Larger balance commercial loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen, it is consistently applied unless there is a significant change in the financial position of the borrower. An impaired loan for which the discounted cash flows, collateral value or market price is less than its carrying value requires an allowance. The allowance for impaired loans is part of the Corporation's overall allowance for loan losses. 32 The following table shows the Corporation's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 (as amended by SFAS No. 118) at March 31, 2003, December 31, 2002 and March 31, 2002.
MARCH 31, 2003 December 31, 2002 March 31, 2002 ------------------------- ----------------------- ----------------------- RECORDED VALUATION Recorded Valuation Recorded Valuation (In millions) INVESTMENT ALLOWANCE Investment Allowance Investment Allowance ---------- --------- ---------- --------- ---------- --------- Impaired loans: Valuation allowance required $104.0 $47.6 $87.9 $34.9 $95.6 $38.3 No valuation allowance required 53.1 54.1 52.7 ------ ----- ------ ----- ------ ----- Total impaired loans $157.1 $47.6 $142.0 $34.9 $148.3 $38.3 ====== ===== ====== ===== ====== =====
Average impaired loans during the first quarter of 2003 and 2002 were $150 million and $146 million, respectively. The Corporation recognized interest income on impaired loans of $0.8 million for the quarters ended March 31, 2003 and 2002. The allowance for loan losses amounted to $384 million as of March 31, 2003, or 1.93% of loans, compared with $342 million or 1.87% at the same date in 2002. At December 31, 2002, the allowance for loan losses totaled $373 million or 1.90% of loans. The Corporation's management considers the allowance for loan losses to be at a level sufficient to provide for inherent loan losses in the portfolio. For more information regarding the allowance for loan losses and asset quality refer to the Credit Quality section of this Management's Discussion and Analysis. CREDIT QUALITY Non-performing assets consist of past-due loans that are no longer accruing interest, renegotiated loans and real estate property acquired through foreclosure. A summary of non-performing assets by loan categories and related ratios is presented in Table D. TABLE D NON-PERFORMING ASSETS
MARCH 31, December 31, March 31, (Dollars in thousands) 2003 2002 2002 -------- ------------ --------- Commercial, construction, industrial and agricultural $203,175 $170,039 $199,290 Lease financing 8,210 10,648 11,366 Mortgage 302,753 279,150 208,682 Consumer 37,030 40,019 39,687 Other real estate 45,759 39,399 34,550 -------- -------- -------- Total $596,927 $539,255 $493,575 ======== ======== ======== Accruing loans past-due 90 days or more $ 24,019 $ 26,178 $ 24,771 ======== ======== ======== Non-performing assets to loans 3.01% 2.75% 2.70% Non-performing assets to assets 1.77 1.60 1.63
The Corporation places commercial loans and commercial leases on non-accrual status if payments of principal or interest are delinquent 60 days rather than the standard industry practice of 90 days. Consumer financing leases, conventional mortgages and closed-end consumer loans are placed on non-accrual status if payments are delinquent 90 days or four scheduled payments in arrears. Closed-end consumer loans are charged-off when payments are delinquent 120 days, while open-end (revolving credit) consumer loans are charged-off when payments are delinquent 180 days. Certain loans, which would be treated as non-accrual loans pursuant to the foregoing policy, are treated as accruing loans if they are considered well-secured and in the process of collection. Unsecured retail loans to borrowers who declare bankruptcy are charged-off within 60 days of receipt of notification of filing from the bankruptcy court. Under the standard industry practice, closed-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. 33 At March 31, 2003, non-performing assets were $597 million or 3.01% of ending loans, compared with $494 million or 2.70% at the same date in the previous year, and $539 million or 2.75% at December 31, 2002. The allowance as a percentage of non-performing loans was 69.58% as of March 31, 2003, compared with 74.45% at the end of the first quarter of 2002 and 74.58% at December 31, 2002. The increase in non-performing assets since March 31, 2002 was primarily associated with mortgage loans, which rose by $94 million, or 45%. Non-performing mortgage loans were $303 million or 51% of non-performing assets and 3.87% of total mortgage loans as of March 31, 2003, compared with $209 million or 42% of non-performing assets and 3.13% of total mortgage loans as of March 31, 2002. The increase in non-performing mortgage loans was primarily driven by portfolio growth, coupled with increased delinquency due to deteriorating economic conditions. This growth in mortgage non-performing loans was mostly reflected in our consumer and mortgage-banking subsidiary in the United States, Equity One. Of the total mortgage non-performing loans as of March 31, 2003, 68% or $206 million pertained to Equity One. Since December 31, 2002, non-performing assets increased by $58 million, or 11%, mainly in the commercial and mortgage loans categories, which rose by $33 million and $24 million, respectively. At the end of 2002, non-performing mortgage loans were $279 million or 52% of non-performing assets and 3.74% of total mortgage loans. Non-performing commercial and construction loans represented 2.54% of that loan portfolio as of March 31, 2003, compared with 2.09% at December 31, 2002. The increase in non-performing commercial loans reflects the impact of the continued deteriorating economic conditions, as reflected by higher unemployment and higher crude oil costs, coupled with the economic uncertainty caused by the war in Iraq. Non-performing consumer loans amounted to $37 million or 1.18% of consumer loans as of March 31, 2003, compared with $40 million or 1.29% as of March 31, 2002 and December 31, 2002. The decline was the result of portfolio quality and improved collection efforts. Non-performing financing leases amounted to $8.2 million or 0.93% of the lease financing portfolio as of March 31, 2003, compared with $11.4 million or 1.32% as of March 31, 2002, and $10.6 million or 1.20% as of December 31, 2002. The decline was the result of portfolio quality, coupled with improved collection efforts. Other real estate assets, which are recorded at fair value less estimated costs to sell, reached $46 million at March 31, 2003, compared with $35 million at March 31, 2002, and $39 million at December 31, 2002. The increase was related to the growth in the mortgage loan portfolio and higher delinquencies in the housing sector prompted by the economic slowdown. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation's non-performing assets as of March 31, 2003 would have been $516 million or 2.60% of loans, and the allowance for loan losses would have been 81.64% of non-performing loans. At March 31, 2002 and December 31, 2002, adjusted non-performing assets would have been $425 million or 2.33% of loans, and $478 million or 2.44% of loans, respectively. The allowance to non-performing loans would have been 87.49% and 85.01% at March 31, 2002 and December 31, 2002, respectively. In addition to the non-performing loans discussed earlier, there was $46 million of loans at March 31, 2003, which in management's opinion are currently subject to potential future classification as non-performing, and therefore are considered impaired for our calculation of the allowance for loan losses under SFAS No. 114. At December 31, 2002 and March 31, 2002, these potential problem loans approximated $36 million and $30 million, respectively. NON-INTEREST INCOME Non-interest income totaled $132.2 million for the quarter ended March 31, 2003, compared with $130.4 million in the same period of 2002. Non-interest income continues to be an increasingly important contributor to the growth in the Corporation's total revenues. 34 Service charges on deposit accounts reached $39.8 million in the first quarter of 2003, an increase of $0.8 million or 2%, compared with $39.0 million in the first quarter of 2002. This increase was mostly related to commercial accounts, particularly commercial account analysis fees, which have been favorably impacted by lower earnings credit on compensatory balances in the current interest rate scenario. For the first quarter of 2003, other service fees rose by $4.7 million, or 8%, compared with $61.7 million in the first quarter of 2002. Refer to Table E for a breakdown of other service fees by major categories. Debit card fees rose by $1.6 million, or 16%, mainly as a result of the continued growth in the point-of-sale terminals and the automated teller machines network, and to higher transactional volume. Insurance agency commissions also increased by $1.6 million, or 34%, driven by business expansion, the offering of new products and services and broader delivery channels and client base. Check cashing fees increased by $1.3 million, or 25%, mostly related to the expansion of Popular Cash Express, the Corporation's retail financial services subsidiary in the United States. Credit card fees and discounts rose $0.8 million, or 6%, mostly associated with increases in merchant discount income resulting from higher sales volume. On the other hand, the Corporation's trust fees for the quarter ended March 31, 2003 declined by $0.6 million, or 23%, compared with the same quarter in 2002, mostly due to the sale of our U.S. trust operations during the second quarter of 2002. These U.S. operations contributed approximately $0.5 million in trust fees for the quarter ended March 31, 2002. The category of other fees decreased by $0.9 million, or 11%, mainly due to lower income derived from credit cards issued by Metris under the Banco Popular name. This income results from the agreement reached with Metris at the time the U.S. credit card operations were sold to that institution several years ago. Also, the decrease in other fees relates to lower fees derived by the mortgage and consumer lending subsidiary in the U.S. TABLE E OTHER SERVICE FEES
First Quarter ----------------------------------- (Dollars in thousands) 2003 2002 Change ------- ------- ------ Other service fees: Credit card fees and discounts $15,265 $14,468 $ 797 Debit card fees 11,672 10,071 1,601 Processing fees 9,713 9,169 544 Other fees 6,937 7,831 (894) Check cashing fees 6,576 5,262 1,314 Insurance fees 6,263 4,677 1,586 Sale and administration of investment products 4,556 4,705 (149) Mortgage servicing fees, net of amortization 3,431 2,894 537 Trust fees 2,013 2,610 (597) ------- ------- ------ Total other service fees $66,426 $61,687 $4,739 ======= ======= ======
For the first quarter of 2003, the Corporation reported gains of $1.4 million on the sale of securities, mainly mortgage-backed securities, compared with losses of $4.0 million for the same period in 2002. The aforementioned gains were partially offset by trading and derivative losses of $0.9 million and $10.7 million, respectively, for the quarter ended March 31, 2003. For the same period in the previous year, trading losses amounted to $1.0 million, while derivative gains totaled $0.5 million. Derivative losses for the quarter ended March 31, 2003 were principally attributed to changes in the fair value of the Corporation's interest rate swaps. Subsequent to the quarter ended March 31, 2003, the Corporation cancelled these interest swap contracts as part of its risk management strategies. Gain on sales of loans, including loans held-for-sale, totaled $19.5 million for the quarter ended March 31, 2003, compared with $17.9 million for the same period in 2002, an increase of $1.6 million or 9%. This increase was mostly the result of higher gains on sales of mortgage loans, which derived in part from higher mortgage loan origination volume and subsequent sales of these loans. This rise was partially offset by lower gains on sale of loans guaranteed by the Small Business Administration since no transactions of this type have taken place in 2003. 35 Other operating income amounted to $16.6 million for the quarter ended March 31, 2003, reflecting a slight increase of $0.3 million from the $16.3 million reported in the first quarter of 2002. OPERATING EXPENSES During the first quarter of 2003, operating expenses totaled $263.6 million, an increase of $21.4 million or 9%, compared with $242.2 million in the same period of 2002. Personnel costs, the largest category of operating expenses, totaled $132.3 million in the first quarter of 2003, an increase of $12.0 million or 10%, compared with $120.3 million in the same period last year. The increase in personnel costs is mostly due to higher salaries resulting mostly from merit increases, incentive compensation, pension and profit sharing expenses. Several changes were made to the assumptions followed in determining pension costs. The Corporation lowered the assumed discount rate at December 31, 2002 and rate of return for the pension plan in 2003 from 6.75% to 6.50%, and from 8.50% to 8.00%, respectively. Refer to the critical accounting policies section in the Management's Discussion and Analysis included in Popular, Inc.'s 2002 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002 for a discussion on this latter topic. Other operating expenses, excluding personnel costs, amounted to $131.3 million for the first quarter of 2003, an increase of $9.4 million or 8%, when compared to the same period in 2002. This rise was mainly reflected in the categories of business promotion, equipment expenses, net occupancy expenses, communications, professional fees and other operating expenses, offset in part by lower amortization of intangible assets as a result of some intangibles that became fully amortized during 2002. The increase in business promotion of $2.6 million was mostly associated with the PREMIA rewards program, an innovative program targeted to the Corporation's customers in Puerto Rico, which was launched during the second quarter of 2002. This increase was partially offset by other reductions in advertising and public relations expenses. Equipment expenses increased by $1.6 million, mainly due to higher amortization of software packages to support the Corporation's internal technology infrastructure, as well as its electronic delivery channels. Net occupancy expenses rose by $1.4 million, mainly due to rental and other expenses related to the new headquarter facilities for the U.S. operations and the continued expansion of the retail financial services business. Communications costs also rose by $1.4 million, mainly due to higher depreciation expenses on communication equipment, as well as higher postage and telephone expenses for business support. The increase in professional fees of $1.3 million was mostly associated with legal costs and programming services, while the rise of $1.4 million in other operating expenses was mainly the result of higher other real estate and credit card interchange expenses. INCOME TAX Income tax expense for the quarter ended March 31, 2003 amounted to $30.9 million, an increase of $0.8 million, or 3%, from $30.1 million in the same quarter of 2002. The increase was primarily due to higher pretax earnings for the current period, partially offset by an increase in the deferred tax asset related to the derivative losses in the U.S. mainland and by a decrease in the disallowance of expenses attributed to tax exempt investments in Puerto Rico. The effective tax rates for these quarters were 23.76% and 25.29%, respectively. The decline in the effective tax rate resulted mostly from the tax benefit related to unrealized derivative losses. BALANCE SHEET COMMENTS The Corporation's total assets at March 31, 2003 reached $33.7 billion, remaining at the same level as December 31, 2002, and increasing by $3.4 billion, or 11%, compared with $30.3 billion at March 31, 2002. Earning assets totaled $31.8 billion at March 31, 2003, compared with $28.9 billion at March 31, 2002 and $31.9 billion at December 31, 2002. Investment and trading securities reached $10.9 billion at March 31, 2003, a decrease of $0.3 billion or 3%, when compared with $11.2 billion at December 31, 2002. The decrease since the end of 2002 is partly attributed to higher prepayment in the collateralized mortgage obligations and mortgage-backed securities portfolios. Investment and trading securities at March 31, 2002 totaled $9.9 billion. For a breakdown of the Corporation's available-for-sale and held-to-maturity investment portfolios refer to Notes 3 and 4 to the unaudited consolidated financial statements. 36 At March 31, 2003, money market investments totaled $1.0 billion, an increase of $289 million, or 40%, over the $720 million reported at March 31, 2002, and a decrease of $86 million, or 8% lower than the amount reported at December 31, 2002. The increase from March 31, 2002 was mostly in federal funds sold by the banking subsidiaries. A breakdown of the Corporation's loan portfolio is presented in Table F. At March 31, 2003, total loans amounted to $19.9 billion, reflecting a slight increase of $280 million, or 1%, from December 31, 2002. This increase resulted from higher volume of mortgage loans by $353 million, while consumer loans rose by $44 million, mainly due to strong sales efforts in the auto market. These favorable variances were partially offset by a decrease in commercial loans, including construction, of $115 million. When compared with March 31, 2002, the loan portfolio grew by $1.6 billion, or 9%. The mortgage and commercial loan portfolios, including construction loans, accounted for the largest increases, rising $1.1 billion and $384 million, respectively, from March 31, 2002. The growth in mortgage loans was associated with strong sales efforts and the prevailing low interest rate environment, while the growth in the commercial loan portfolio resulted principally from the continued marketing efforts towards the retail and middle market, notwithstanding the slowdown experienced in the economy. The consumer and lease financing portfolios increased by $57 million and $21 million, respectively, from March 31, 2002. The rise in consumer loans was mainly reflected in the auto loans category, offset by lower demand for personal loans and the sale of approximately $20 million of small loans by Popular Finance in the second quarter of 2002. TABLE F LOANS ENDING BALANCES
MARCH 31, December 31, March 31, (Dollars in thousands) 2003 2002 2002 ----------- ------------ ----------- Commercial, industrial and agricultural $ 7,768,938 $ 7,883,381 $ 7,379,137 Construction 245,289 245,926 251,003 Lease financing 885,286 886,731 864,008 Mortgage * 7,819,121 7,466,531 6,676,227 Consumer 3,143,249 3,099,550 3,086,549 ----------- ----------- ----------- Total $19,861,883 $19,582,119 $18,256,924 =========== =========== ===========
* Includes loans held-for-sale Premises and equipment totaled $472 million at March 31, 2003, compared with $461 million at December 31, 2002 and $405 million at March 31, 2002. The increase of $67 million since March 31, 2002 is mostly associated with office remodelings and building acquisitions, as well as premises under construction for business expansion or relocations. Other assets amounted to $689 million at March 31, 2003, compared with $578 million at December 31, 2002, an increase of $111 million or 19%. This increase was mostly associated with the sale of approximately $83 million in mortgage-backed securities, which were accounted at trade date, but settlement did not take place until April 2003. The rise since December 31, 2002 was also associated with advances on securitizations and insurance premium receivables, among other factors. At March 31, 2002, other assets amounted to $549 million, and the variance from March 31, 2003 was mostly related to the same factors described above. At March 31, 2003, total deposits amounted to $17.6 billion, remaining at the same levels at December 31, 2002. When compared with March 31, 2002, total deposits rose $1.1 billion, or 7%, from $16.5 billion. Savings and demand deposits accounted for the largest increases, rising $707 million and $353 million, respectively. Time deposits, which include brokered certificates of deposits, increased by $53 million since March 31, 2002. Borrowed funds, including subordinated notes and capital securities, increased by $1.7 billion, from $11.1 billion as of March 31, 2002 to $12.8 billion at the end of the first quarter of 2003. The increase in borrowed funds was used primarily to fund the Corporation's loan growth and investment activities. Borrowed funds at December 31, 2002 were $13.0 billion. 37 Other liabilities were $609 million at March 31, 2003, a decrease of $68 million, or 10%, compared with December 31, 2002. This decrease in other liabilities was mainly related to payables to broker/dealers and counterparties related to transactions accounted at trade date, lower accrued interest expense, and the forfeiture payable under the Deferred Prosecution Agreement, among others. Other liabilities totaled $524 million at March 31, 2002. The increase from that date is partly associated with accrued taxes and derivative liabilities, among other factors. The Corporation's stockholders' equity at March 31, 2003 was $2.7 billion, compared with $2.2 billion at March 31, 2002 and $2.4 billion at the end of 2002. The increase of $488 million since the first quarter of 2002 reflects the issuance of 7,475,000 shares of the Corporation's 6.375% Non-cumulative Monthly Income Preferred Stock, 2003 Series A, during the first quarter of 2003. This issuance, net of related costs, contributed approximately $182 million in additional capital, which qualifies as Tier 1 capital for regulatory purposes. Also, contributing to the increase in stockholders' equity were earnings retention and higher unrealized gains in the securities available-for-sale portfolio. Partially offsetting these increases was the repurchase of $139 million in common stock from Banco Popular Retirement Plan in May 2002. The increase in stockholders' equity of $262 million from December 31, 2002 is also related to the preferred stock issuance and earnings retention. Dividends declared per common share for both quarters ended March 31, 2003 and 2002 were $0.20. The dividend payout ratio to common stockholders for the quarters ended March 31, 2003 and 2002 was 27.45% and 30.85%, respectively. The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage for the quarters ended March 31, 2003 and 2002, as well as for December 31, 2002, are presented in Table G. Also, at March 31, 2003, December 31, 2002 and March 31, 2002, BPPR, BPNA and BP, N.A. were all well-capitalized. Book value per common share was $18.75 at March 31, 2003, compared with $16.01 at the end of the first quarter of 2002, and $18.20 at December 31, 2002. The Corporation's market capitalization at March 31, 2003 and 2002, and at December 31, 2002, was $4.5 billion, $4.0 billion, and $4.5 billion, respectively. The market value of Popular, Inc.'s common stock at March 31, 2003 was $33.99 per common share, compared with $29.22 at March 31, 2002 and $33.80 at December 31, 2002. The Corporation's common and preferred stocks are traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbols BPOP and BPOPO, respectively. 38 TABLE G CAPITAL ADEQUACY DATA
MARCH 31, December 31, March 31, (Dollars in thousands) 2003 2002 2002 ----------- ------------ ----------- Risk-based capital Tier I capital $ 2,300,050 $ 2,054,027 $ 1,903,589 Supplementary (Tier II) capital 359,524 346,531 334,747 ----------- ----------- ----------- Total capital $ 2,659,574 $ 2,400,558 $ 2,238,336 =========== =========== =========== Risk-weighted assets Balance sheet items 19,593,522 19,487,339 18,197,827 Off-balance sheet items 1,399,447 1,355,430 469,492 ----------- ----------- ----------- Total risk-weighted assets $20,992,969 $20,842,769 $18,667,319 =========== =========== =========== Average assets $32,784,813 $33,196,101 $30,022,671 =========== =========== =========== Ratios: Tier I capital (minimum required - 4.00%) 10.96% 9.85% 10.20% Total capital (minimum required - 8.00%) 12.67% 11.52% 11.99% Leverage ratio * 7.02% 6.19% 6.34%
* All banks are required to have a minimum Tier I leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank's classification. OFF-BALANCE SHEET ACTIVITIES In past years, in the ordinary course of business, the Corporation conducted asset securitizations involving the transfer of mortgage loans to a qualifying special purpose entity (QSPE), which in turn transferred the assets, including their titles, to different trusts, thus isolating those loans from the Corporation's assets. The transactions qualified for sale accounting based on the provisions of SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", and as such, these trusts are not consolidated in the Corporation's financial statements. As of March 31, 2003, these trusts held approximately $225 million in assets in the form of mortgage loans. Their liabilities in the form of debt principal due to investors approximated $217 million at the end of the first quarter of 2003. In these securitizations, the Corporation retained servicing responsibilities and certain subordinated interests in the form of interest-only securities. The investors and the securitization trusts have no recourse to the Corporation's assets. The servicing rights and the interest-only securities retained by the Corporation are recorded in the statement of condition at the lower of amortized cost or market, and fair value, respectively. During the three months ended March 31, 2003, the Corporation recorded approximately $0.4 million of write-downs related to interest-only strips, in which the decline in fair value was considered other than temporary. Item 3. Quantitative and Qualitative Disclosures About Market Risk MARKET RISK Market risk refers to the impact of changes in interest rates on the Corporation's net interest income, market value of equity and trading operations. It also arises from fluctuations in the value of some foreign currencies against the U.S. dollar. Despite the varied nature of market risks, the primary source of this risk at the Corporation is the impact of changes in interest rates. Depending on the duration and repricing characteristics of the Corporation's assets, liabilities and derivatives instruments, changes in interest rates could either increase or decrease the level of net interest income. The Corporation maintains a formal asset and liability management process to quantify, monitor and control interest rate risk (IRR) and to assist management in maintaining stability in the net interest margin under varying interest rate environments. 39 The Corporation uses various techniques to assess the degree of interest rate risk, including simulation analysis and static gap estimates for measuring short-term IRR, and duration analysis to quantify the level of long-term IRR. These techniques focus on different aspects of the interest rate risk that is assumed at any point in time, and are therefore used jointly to make informed judgments about the risk levels and the appropriateness of strategies under consideration. An interest rate sensitivity analysis performed at the Corporation level is the primary tool used in expressing the potential loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model, which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what actually may occur in the future. Based on the results of the sensitivity analysis as of March 31, 2003, the change in net interest income, on a hypothetical rising rate scenario, for the next twelve months is an estimated increase of $3.2 million and the change for the same period, utilizing a hypothetical declining rate scenario, is an estimated decrease of $0.3 million. Both hypothetical rate scenarios consider a gradual change of 100 basis points up and down during the twelve-month period from the prevailing rates at March 31, 2003. These estimated changes are within the policy guidelines established by the Board of Directors. The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income that are caused by interest rate volatility. The Corporation's goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. Derivative instruments that are used, to a limited extent, include interest rate swaps, interest rate forwards and future contracts, interest rate swaptions, foreign exchange contracts, and interest rate caps, floors and put options embedded in interest rate contracts. As a matter of policy, the Corporation does not use highly leveraged derivative instruments for interest rate risk management. Hedging strategies are developed through analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into Popular, Inc.'s overall interest rate risk management and trading strategies. Several derivative contracts that the Corporation has entered into do not qualify for accounting as hedges as defined in SFAS No. 133, and their changes in market value are recognized in current earnings. Refer to Note 6 to the consolidated financial statements for further information on the Corporation's involvement in derivative instruments and hedging activities. The Corporation's trading activities are another source of market risk and are subject to strict guidelines approved by the Board of Directors. Most of the Corporation's trading activities are limited to mortgage banking activities, the purchase of debt securities for the purpose of selling them in the near term and positioning securities for resale to retail customers. As the trading instruments are recognized at market value, the changes resulting from fluctuations in market prices, interest rates or exchange rates directly affect current earnings. In the opinion of management, the size and composition of the trading portfolio as of March 31, 2003 do not represent a potentially significant source of market risk for the Corporation. The Corporation does not participate in any trading activities involving commodity contracts. The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country's particular foreign currency. As of March 31, 2003 the Corporation had $10 million in foreign currency translation adjustment as part of accumulated other comprehensive 40 income, compared with $2 million at December 31, 2002. The increase was mostly associated with a devaluation of the Dominican peso. However, management does not expect future exchange rate volatility between the U.S. dollar and the particular foreign currency to affect significantly the Corporation's consolidated financial condition or results of operations. LIQUIDITY Liquidity refers to the ability to fund current operations, including the cash flow requirements of depositors and borrowers as well as future growth. This can be accomplished by generating profits, attracting new depositors, converting assets to cash through sales or securitizations and increasing borrowings. The Corporation utilizes various sources of funding to maintain adequate levels of liquidity. The Corporation raises its funding from a combination of retail and wholesale markets. Core deposits are one of the Corporation's primary sources of funding. Deposits tend to be less volatile than institutional borrowings, and their cost is less sensitive to changes in market rates. The extensive branch network of the Corporation in the Puerto Rico market and its expanding network in major U.S. markets, have enabled it to maintain a significant and stable base of deposits. The Corporation has established borrowing relationships with the Federal Home Loan Bank (FHLB), the Federal Reserve Bank and other correspondent banks, which further support and enhance liquidity. Wholesale or institutional sources of funds are comprised primarily of other financial intermediaries such as commercial banks, securities dealers, investment companies, insurance companies, as well as non-financial corporations. Wholesale or institutional sources of funding include the repo, federal funds and Eurodollar markets, commercial paper, medium-term notes, senior debentures and asset securitizations. Another important liquidity source to the Corporation is its assets, particularly the investment and loan portfolios. Refer to Notes 3 and 4 to the consolidated financial statements for further information as to the composition of the available-for-sale and held-to-maturity investment portfolios. Liquid U.S. Treasury and Agency securities can be used to raise funds in the repo markets. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, and to a lesser extent commercial loans, have highly developed secondary markets. In addition, other sources of liquidity include maturities of money market investments, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services. Also, the Corporation obtains liquidity in the capital markets through the sale of its debt and equity securities. The Corporation has a shelf registration with the Securities and Exchange Commission, which is intended to permit the Corporation to raise funds through sales of preferred stock, medium-term notes or other debt securities with a relatively short lead-time. As of March 31, 2003, the Corporation had available approximately $1.8 billion under this shelf registration. RISKS TO LIQUIDITY The Corporation's ability to compete successfully in the marketplace for deposits depends on various factors, including service, convenience and financial stability as reflected by operating results and credit ratings. Although a downgrade in the credit rating of the Corporation may impact its ability to raise deposits, the fact that most deposits at the Corporation's banking subsidiaries are federally insured, is expected to mitigate the effect of a downgrade in credit rating. Although the Corporation raises the majority of its financing from retail deposits, it still borrows a material amount of funds from institutional sources. Institutional lenders tend to be sensitive to the perceived credit risk of the entities to which they lend and this exposes the Corporation to the possibility of having its access to funding affected by how the market perceives its credit quality; this in part, may be due to factors beyond its control. Changes in the credit rating of the Corporation or any of its subsidiaries to a level below "investment grade" may affect the Corporation's access to the capital markets. The Corporation's counterparties are sensitive to the risk of a rating downgrade. In the event of a downgrade, it may be expected that the cost of borrowing funds in the institutional market would increase. In addition, the ability of the Corporation to raise new funds or renew maturing 41 debt may be more difficult. Management does not anticipate changes in the credit ratings of the Corporation based on its expected outlook for the P.R./U.S. economy, interest rates and expected financial results of the Corporation. In the course of borrowing from institutional lenders, the Corporation has entered into contractual agreements to maintain certain levels of debt, capital and non-performing loans, among other financial covenants. If the Corporation does not comply with those agreements, an event of default may occur. Such failure may accelerate the repayment of the related borrowings. It could also affect the ability of the Corporation to raise new funds or renew maturing borrowings. The Corporation is currently in full compliance with all financial covenants in effect and expects to remain so in the future. The Corporation's non-banking subsidiaries may be subject to a higher degree of liquidity risk than the banking subsidiaries, due to the latter's access to federally-insured deposits and the Federal Reserve Discount Window. A higher proportion of the funding of the non-banking subsidiaries is from institutional sources, as compared to the banking subsidiaries, and these are more sensitive to the perceived credit risk of the Corporation than providers of deposits. In the event of a downgrade in the credit ratings of the Corporation, the non-banking subsidiaries may experience an increase in their cost of funds and reduced availability of financing. Management does not anticipate such a scenario developing in the foreseeable future. The importance of the Puerto Rico market for the Corporation is an additional risk factor that could affect its financing activities. In the case of an extended economic slowdown in Puerto Rico, the credit quality of the Corporation could be affected as a result of higher credit costs and possible decreases in profitability. The substantial integration of Puerto Rico with the U.S. economy should limit the probability of a prolonged recession in Puerto Rico (except if there is a U.S. national recession) and its related risks to the Corporation. Management intends to finance the future operations of the Corporation with a combination of retail and commercial deposits, and to a lesser extent, short and long-term borrowed funds. The sources and the maturities of these borrowings will be diversified to avoid undue reliance on any single source and maintain an orderly volume of borrowings maturing in the future. Factors that the Corporation does not control, such as the economic outlook of its principal markets, could affect its ability to obtain funding. In order to prepare for the possibility of such a scenario, management has adopted contingency plans for raising financing under stress scenarios, where important sources of funds that are usually fully available are temporarily not willing to lend to the Corporation. These plans provide for using alternate funding mechanisms such as the pledging or securitization of certain asset classes, committed credit lines, and loan facilities implemented with the Federal Home Loan Bank of New York and the Federal Reserve Bank of New York. The Corporation has a substantial amount of assets available for raising funds through non-traditional channels. ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of Popular, Inc.'s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the financial position and results of operations of the Corporation. As disclosed on page 15 of the 10-K, on January 16, 2003 the U.S. District Court for the District of Puerto Rico approved a Deferred Prosecution Agreement (the "Agreement") among Banco Popular, the U.S. Department of Justice, the Board of Governors of the Federal Reserve System, and the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"). The Agreement concludes an investigation related principally to the circumstances surrounding the activities of a former customer of the Bank, including Banco Popular's reporting and compliance efforts, as well as certain other customers. The former customer has pleaded guilty to money laundering, including in connection with transactions made through an account at Banco Popular. No current or former Bank officer, director or employee has been charged with a crime or accused of benefiting financially from the transactions described in the Agreement. Under the Agreement, Banco Popular agreed to the filing of a one-count information charging it with failure to file suspicious activity reports in a timely and complete manner. The Agreement provides for Banco Popular to forfeit $21.6 million to the United States, and resolves all claims the United States, FinCEN or the Federal Reserve may have against Banco Popular arising from the matters that were subject to investigation. This settlement also terminates the Written Agreement Banco Popular signed with the Federal Reserve Bank of New York on March 9, 2000, which required enhancements to Banco Popular's anti-money laundering and Bank Secrecy Act program. The Federal Reserve found Banco Popular to be fully compliant with the Written Agreement on November 26, 2001. Finally, the Agreement provides that the court will dismiss the information and the Deferred Prosecution Agreement will expire 12 months following the settlement, provided that Banco Popular complies with its obligations under the Agreement. 42 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On February 26, 2003 and March 24, 2003, Popular, Inc. issued 6,500,000 shares and 975,000 shares, respectively, of its 6.375% Noncumulative Monthly Income Preferred Stock, 2003 Series A (the "Series A Preferred Stock") having a liquidation preference value of $25 per share. The Series A Preferred Stock ranks senior to Popular, Inc.'s outstanding Series A Participating Cumulative Preferred Stock, with respect to dividend rights and rights on liquidation. The terms of the Series A Preferred Stock do not permit Popular, Inc. to declare or pay any dividends on the Common Stock (1) unless all accrued and unpaid dividends on Series A Preferred Stock for the 12 dividend periods preceding the dividend payment have been paid and the full dividend on the Series A Preferred Stock for the current monthly dividend period is contemporaneously declared and paid or set aside for payment or (2) if Popular, Inc. has defaulted in the payment of the redemption price of any shares of Series A Preferred Stock called for redemption. ITEM 5. OTHER INFORMATION Sale of Medium-term Notes After the first quarter end of 2003, Popular North America issued and sold $500 million in five-year, fixed-rate medium-term notes under the shelf registration filed with the Securities and Exchange Commission in November 2001. The funds will be used to pay existing short-term debt and to finance the growth of the Corporation's operations in the United States. Declaration of Cash Dividend On April 30, 2003, the Board of Directors of Popular, Inc. also voted to declare a cash dividend of $0.27 per common share for the second quarter of 2003, payable on July 1, 2003, to shareholders of record on June 13, 2003. The dividend represents a 35% increase in the Company's quarterly dividend. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Exhibit Description Reference - -------------- ------------------- --------- 3.1 Certificate of Designation designating the terms of the 2003 Series A Preferred Stock. (Incorporated by reference to Exhibit 3.3 to Form 8-A of the Company filed on February 25, 2003). 4.29 Form of 2003 Series A Preferred Stock Certificate. (Incorporated by reference to Exhibit 4.1 to Form 8-A of the Company filed on February 25, 2003). 12.1 Computation of the ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends. Exhibit "A" 99.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes -Oxley Act of 2002. Exhibit "B"
b) Five reports on Form 8-K were filed for the quarter ended March 31, 2003: Dated: January 17, 2003 Items reported: Item 5 - Other Events (Operational results for the quarter and year ended December 31, 2002). 43 Dated: February 6, 2003 Items reported: Item 5 - Other Events (Deferred Prosecution Agreement between Popular, Inc and the U.S. Justice Department, the Board of Governors of the Federal Reserve System and the Financial Crimes Enforcement Network of the U.S. Department of the Treasury. Also includes the filing of the computation of the ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends for the nine month period ended September 30, 2002 and for the five years ended December 31, 2001). Dated: February 26, 2003 Items reported: Item 5 - Other Events (Filing of the Underwriting Agreement, as well as various legal opinions relating to the offering and sale of 6,500,000 shares of the Corporation's 6.375% Noncumulative Monthly Income Preferred Stock, 2003 Series A). Dated: March 19, 2003 Items reported: Item 9 - Regulation FD Disclosure (Certification of the Chief Executive Officer and Chief Financial Officer required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002). Dated: March 26, 2003 Items reported: Item 5 - Other Events (Filing of documents relating to the issuance by Popular North America of $500 million in five-year, fixed-rate medium-term notes under the shelf registration filed with the Securities and Exchange Commission in November 2001). 44 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POPULAR, INC. (Registrant) Date: May 14, 2003 By: /s/ Jorge A. Junquera ----------------------------------- Jorge A. Junquera Senior Executive Vice President Date: May 14, 2003 By: /s/ Amilcar L. Jordan ----------------------------------- Amilcar L. Jordan, Esq. Senior Vice President & Comptroller 45 CERTIFICATION I, Richard L. Carrion, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Popular, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 By: /s/ Richard L. Carrion ----------------------------------- Richard L. Carrion Chief Executive Officer 46 CERTIFICATION I, Jorge A. Junquera, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Popular, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 By: /s/ Jorge A. Junquera ----------------------------------- Jorge A. Junquera Chief Financial Officer 47 EX-12.1 3 g82759exv12w1.txt EX-12.1 COMPUTATION OF RATIOS OF EARNINGS EXHIBIT 12.1 Exhibit A POPULAR, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands)
Year Ended December 31, ------------------------------------------------------------ First Quarter 2003 2002 2001 2000 1999 ------------------------------------------------------------ Income before income taxes $130,070 $ 469,436 $ 409,114 $ 375,748 $ 340,224 Fixed charges : Interest expense 193,521 843,467 1,018,877 1,167,396 897,932 Estimated interest component of net rental payments 4,075 15,123 14,176 13,110 10,970 Total fixed charges including interest on deposits 197,596 858,590 1,033,053 1,180,506 908,902 Less: Interest on deposits 94,195 431,128 518,168 529,373 452,215 Total fixed charges excluding interest on deposits 103,401 427,462 514,885 651,133 456,687 Income before income taxes and fixed charges(including interest on deposits) $327,666 $1,328,026 $1,442,167 $1,556,254 $1,249,126 Income before income taxes and fixed charges(excluding interest on deposits) $233,471 $ 896,898 $ 923,999 $1,026,881 $ 796,911 Preferred stock dividends 949 2,510 8,350 8,350 8,350 Ratio of earnings to fixed charges Including Interest on Deposits 1.7 1.5 1.4 1.3 1.4 Excluding Interest on Deposits 2.3 2.1 1.8 1.6 1.7 Ratio of earnings to fixed charges & Preferred Stock Dividends Including Interest on Deposits 1.7 1.5 1.4 1.3 1.4 Excluding Interest on Deposits 2.2 2.1 1.8 1.6 1.7
EX-99.1 4 g82759exv99w1.txt EX-99.1 CERTIFICATIONS OF CEO AND CFO EXHIBIT 99.1 Exhibit B CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. ss. 1350, the undersigned officers of Popular, Inc. (the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities and Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 14, 2003 S/ Richard L. Carrion ----------------------- Richard L. Carrion Chief Executive Officer S/ Jorge A. Junquera -------------------- Jorge A. Junquera Chief Financial Officer This foregoing certification is being furnished solely pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----