1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2001 Commission file number 0-13818 -------------- ------- POPULAR, INC. ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Puerto Rico 66-041-6582 - ------------------------ ------------------- (State of incorporation) (I.R.S. Employer identification No.) Popular Center Building 209 Munoz Rivera Avenue, Hato Rey San Juan, Puerto Rico 00918 ------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (787) 765-9800 -------------- Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock $6.00 Par value 136,189,956 - ------------------------------ --------------------------------------- (Title of Class) (Shares Outstanding as of May 15, 2001)
2 POPULAR, INC. INDEX <TABLE> <CAPTION> Part I - Financial Information Page - ------------------------------ ----- <S> <C> Item 1. Financial Statements Unaudited Consolidated Statements of Condition as of March 31, 2001, December 31, 2000 and March 31, 2000 3 Unaudited Consolidated Statements of Income for the quarters ended March 31, 2001 and 2000 4 Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2001 and 2000 5 Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2001 and 2000 6 Notes to unaudited Consolidated Financial Statements 7-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-33 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 Part II - Other Information Item 1. Legal proceedings 33 Item 2. Changes in securities - None N/A Item 3. Defaults upon senior securities - None N/A Item 4. Submission of matters to a vote of security holders - None N/A Item 5. Other information 33 Item 6. Exhibits and reports on Form 8-K 33 Signature 34 </TABLE> FORWARD-LOOKING INFORMATION. This Quarterly Report on Form 10-Q contains certain forward-looking statements with respect to the adequacy of the allowance for loan losses, the Corporation's market risk and the effect of legal proceedings on Popular, Inc.'s financial condition and results of operations. These forward-looking statements involve certain risks, uncertainties, estimates and assumptions by management. Various factors could cause actual results to differ from those contemplated by such forward-looking statements. With respect to the adequacy of the allowance for loan losses and market risk, these factors include, among others, the rate of growth in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, the performance of the stock and bond market and the magnitude of interest rate changes. Moreover, the outcome of litigation, as discussed in "Part II, Item I. Legal Proceedings," is inherently uncertain and depends on judicial interpretations of law and the findings of judges and juries. 2
3 POPULAR, INC. CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) <TABLE> <CAPTION> MARCH 31, December 31, March 31, (In thousands) 2001 2000 2000 ------------ ------------ ------------ <S> <C> <C> <C> ASSETS Cash and due from banks $ 639,808 $ 726,051 $ 606,383 ------------ ------------ ------------ Money market investments: Federal funds sold and securities purchased under agreements to resell 961,126 1,057,320 850,216 Time deposits with other banks 8,397 10,908 41,692 Banker's acceptances 776 390 744 ------------ ------------ ------------ 970,299 1,068,618 892,652 ------------ ------------ ------------ Investment securities available-for-sale, at market value: Pledged securities with creditors' right to repledge 2,996,080 3,657,729 2,661,273 Other investment securities available-for-sale 4,685,210 5,138,195 4,346,297 Investment securities held-to-maturity, at cost 312,170 264,731 293,177 Trading account securities, at market value: Pledged securities with creditors' right to repledge 148,149 124,016 182,126 Other trading securities 69,721 29,057 26,347 Loans held-for-sale 834,242 823,901 556,813 ------------ ------------ ------------ Loans 16,016,458 15,580,379 15,001,946 Less - Unearned income 341,223 347,195 357,828 Allowance for loan losses 305,295 290,653 293,442 ------------ ------------ ------------ 15,369,940 14,942,531 14,350,676 ------------ ------------ ------------ Premises and equipment 403,263 405,772 437,932 Other real estate 27,638 23,518 32,448 Customers' liabilities on acceptances 1,941 1,647 8,308 Accrued income receivable 202,088 202,540 167,853 Other assets 376,801 367,150 438,706 Intangible assets 274,808 281,595 301,034 ------------ ------------ ------------ $ 27,312,158 $ 28,057,051 $ 25,302,025 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,001,269 $ 3,109,885 $ 2,998,252 Interest bearing 12,091,910 11,695,022 11,339,609 ------------ ------------ ------------ 15,093,179 14,804,907 14,337,861 Federal funds purchased and securities sold under agreements to repurchase 4,053,012 4,964,115 4,151,527 Other short-term borrowings 3,067,197 4,369,212 2,441,885 Notes payable 2,233,968 1,176,912 1,965,160 Acceptances outstanding 1,941 1,647 8,308 Other liabilities 463,976 470,687 418,985 ------------ ------------ ------------ 24,913,273 25,787,480 23,323,726 ------------ ------------ ------------ Subordinated notes 125,000 125,000 125,000 ------------ ------------ ------------ Preferred beneficial interests in Popular North America's Junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 150,000 ------------ ------------ ------------ Commitments and contingencies (See Note 6) ------------ ------------ ------------ Minority interest in consolidated subsidiaries 911 927 21,006 ------------ ------------ ------------ Stockholders' equity: Preferred stock 100,000 100,000 100,000 Common stock 830,934 830,356 828,254 Surplus 262,748 260,984 245,719 Retained earnings 915,394 865,082 734,681 Treasury stock-at cost (66,136) (66,214) (64,150) Accumulated other comprehensive income (loss), net of tax of $27,283 (December 31, 2000 - $1,683; March 31, 2000 - ($40,709)) 80,034 3,436 (162,211) ------------ ------------ ------------ 2,122,974 1,993,644 1,682,293 ------------ ------------ ------------ $ 27,312,158 $ 28,057,051 $ 25,302,025 ============ ============ ============ </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements. 3
4 POPULAR, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Quarters ended March 31, (In thousands, except per share information) 2001 2000 -------- -------- <S> <C> <C> INTEREST INCOME: Loans $393,565 $376,520 Money market investments 15,306 13,248 Investment securities 138,059 112,130 Trading account securities 3,521 3,903 -------- -------- 550,451 505,801 -------- -------- INTEREST EXPENSE: Deposits 132,777 122,474 Short-term borrowings 120,521 102,825 Long-term debt 41,436 38,262 -------- -------- 294,734 263,561 -------- -------- Net interest income 255,717 242,240 Provision for loan losses 50,034 50,013 -------- -------- Net interest income after provision for loan losses 205,683 192,227 Service charges on deposit accounts 34,658 30,223 Other service fees 58,175 47,365 Gain on sale of securities 290 13,264 Trading account profit 309 817 Other operating income 21,535 24,057 -------- -------- 320,650 307,953 -------- -------- OPERATING EXPENSES: Personnel costs: Salaries 77,778 78,594 Profit sharing 5,097 4,132 Pension and other benefits 22,019 20,498 -------- -------- 104,894 103,224 Net occupancy expenses 17,195 16,559 Equipment expenses 24,127 23,434 Other taxes 8,810 8,575 Professional fees 15,385 17,678 Communications 11,887 10,802 Business promotion 10,545 14,087 Printing and supplies 4,319 5,172 Other operating expenses 15,931 18,381 Amortization of intangibles 6,876 8,592 -------- -------- 219,969 226,504 -------- -------- Income before income tax, minority interest and cumulative effect of accounting changes 100,681 81,449 Income tax 27,151 18,756 Net loss of minority interest 16 1,496 -------- -------- Income before cumulative effect of accounting changes 73,546 64,189 Cumulative effect of accounting changes, net of tax 686 -------- -------- NET INCOME $ 74,232 $ 64,189 ======== ======== NET INCOME APPLICABLE TO COMMON STOCK $ 72,145 $ 62,102 ======== ======== EARNINGS PER COMMON SHARE (BASIC AND DILUTED) (BEFORE AND AFTER CUMULATIVE EFFECT OF ACCOUNTING CHANGES) $ 0.53 $ 0.46 ======== ======== DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ 0.16 ======== ======== </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements. 4
5 POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Quarters ended March 31, (In thousands) 2001 2000 -------- -------- <S> <C> <C> Net Income $ 74,232 $ 64,189 -------- -------- Other comprehensive Income (loss), net of tax: Foreign currency translation adjustment (126) (385) Unrealized gains (losses) on securities: Unrealized holding gains (loss) arising during the period, net of tax of $25,903 (2000 - ($1,327)) for the quarter 77,098 (10,828) Less: reclassification adjustment for gains included in net income, net of tax of $78 (2000 - $3,389) 212 10,290 Net loss on cash flow hedges, net of tax of ($255) in 2001 (652) Less: reclassification adjustment for losses included in net income, net of tax of ($112) in 2001 (175) Cumulative effect of accounting change 254 Less: reclassification adjustment for losses included in net income, net of tax of ($37) in 2001 (61) -------- -------- Total other comprehensive income (loss) $ 76,598 ($21,503) -------- -------- Comprehensive income $150,830 $ 42,686 ======== ======== </TABLE> DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): <TABLE> <CAPTION> MARCH 31, December 31, March 31, (In thousands) 2001 2000 2000 --------- ------------ --------- <S> <C> <C> <C> Foreign currency translation adjustment $ (1,010) $ (884) $ (1,650) Unrealized gains (losses) on securities 81,206 4,320 (160,561) Unrealized losses on derivatives (477) Cumulative effect of accounting change 315 -------- -------- --------- Accumulated other comprehensive income (loss) $ 80,034 $ 3,436 $(162,211) ======== ======== ========= </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements. 5
6 POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> For the Quarters ended March 31, (In thousands) 2001 2000 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 74,232 $ 64,189 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 19,187 18,921 Provision for loan losses 50,034 50,013 Net amortization of intangibles 6,876 8,592 Net gain on sale of investment securities available-for-sale (290) (13,264) Net gain on disposition of premises and equipment (51) (2) Net loss (gain) on sale of loans 75 (1,833) Net amortization of premiums and accretion of discounts on investments 345 788 Net (increase) decrease in loans held-for-sale (10,341) 62,485 Net amortization of deferred loan fees and costs (4,444) (117) Net (increase) decrease in trading securities (64,797) 28,137 Net decrease in interest receivable 452 7,893 Net decrease (increase) in other assets 11,635 (47,352) Net decrease in interest payable (33,536) (33,207) Net increase in deferred and current taxes 18,202 7,700 Net increase in postretirement benefit obligation 5,190 2,433 Net increase (decrease) in other liabilities 8,482 (9,849) ----------- ----------- Total adjustments 7,019 81,338 ----------- ----------- Net cash provided by operating activities 81,251 145,527 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments 98,319 93,342 Purchases of investment securities held-to-maturity (1,275,544) (4,517,627) Maturities of investment securities held-to-maturity 1,318,287 4,036,370 Purchases of investment securities available-for-sale (774,340) (513,212) Maturities of investment securities available-for-sale 1,675,535 1,232,543 Proceeds from sales of investment securities available-for-sale 217,115 77,078 Net disbursements on loans (468,242) (632,163) Proceeds from sale of loans 104,922 214,533 Acquisition of loan portfolios (157,698) Cash received in acquisition 715 Acquisition of premises and equipment (18,132) (18,657) Proceeds from sale of premises and equipment 1,505 2,779 ----------- ----------- Net cash provided by (used in) investing activities 721,727 (24,299) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 288,272 164,146 Net decrease in federal funds purchased and securities sold under agreements to repurchase (911,103) (262,953) Net decrease in other short-term borrowings (1,302,015) (170,941) Net proceeds of notes payable 1,057,056 112,560 Dividends paid (23,850) (23,810) Proceeds from issuance of common stock 2,342 2,457 Treasury stock sold 77 ----------- ----------- Net cash used in financing activities (889,221) (178,541) ----------- ----------- Net decrease in cash and due from banks (86,243) (57,313) Cash and due from banks at beginning of period 726,051 663,696 ----------- ----------- Cash and due from banks at end of period $ 639,808 $ 606,383 =========== =========== </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements. 6
7 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share information) NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION Popular, Inc. (the Corporation) is a bank holding company offering a full range of financial services through banking offices in Puerto Rico, the United States and the U.S. and British Virgin Islands. The Corporation is also engaged in mortgage and consumer lending, lease financing, investment banking and broker/dealer activities, retail financial services, insurance agency services and information technology, ATM and data processing services through its non-banking subsidiaries in Puerto Rico, the United States, and the Caribbean and Central America. Note 11 to the consolidated financial statements presents further information about the Corporation's business segments. The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These statements are, in the opinion of management, a fair presentation of the results for the periods presented. These results are unaudited, but include all necessary adjustments, of a normal recurring nature, for a fair presentation of such results. Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2001 presentation. NOTE 2 - ACCOUNTING CHANGES Accounting for derivative and hedging activities. On January 1, 2001 the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," as amended. SFAS 133 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statements require the recognition of all derivatives on the balance sheet at their fair value. On the date that a derivative contract is entered into, it may be designated as (1) a hedge of (a) the fair value of a recognized asset or liability or (b) an unrecognized firm commitment (a fair value hedge); (2) a hedge of (a) a forecasted transaction or (b) the variability of cash flows associated with a recognized asset or liability (a "cash flow" hedge); (3) a foreign -currency fair-value or cash flow hedge (a "foreign currency" hedge); (4) a hedge of a net investment in a foreign operation; or (5) an instrument that is held for trading or non-hedging purposes ( a "trading" or "non-hedging" instrument). Changes in the fair value of a derivative that is highly effective as - and that is designated and qualifies as - a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as - and that is designated and qualifies as - a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness is recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as - and that is designated and qualifies as - - a foreign-currency hedge is recorded in either current-period earnings or other comprehensive income, depending on whether the hedging relationship satisfies the criteria for a fair-value or cash-flow hedge. If, however, a derivative is used as a hedge of a net investment in a foreign operation, the changes in the derivative's fair value, to the extent that the derivative is effective as a hedge, are recorded in the cumulative-translation-adjustment account within other comprehensive income. Changes in the fair value of derivatives not designated as hedges or that do not meet the hedging criteria are reported in current-period earnings. Certain derivative instruments contain embedded derivatives. When (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and may be designated as either (1) a fair-value, cash flow, or foreign-currency hedge or (2) a trading or non-hedging derivative instrument. In accordance with the transition provisions of SFAS 133, the Corporation recorded a $686 net-of-tax cumulative effect adjustment in earnings as of January 1, 2001. In addition, the Corporation recorded $254 net-of-tax cumulative-effect adjustment in other comprehensive income as of January 1, 2001. 7
8 The Corporation expects that within the next twelve months it will reclassify as a loss $61 of the transition adjustment that was recorded in accumulated other comprehensive income. Upon adopting FAS 133, the Corporation also reclassified $29,526 of held-to-maturity securities as available-for-sale securities recognizing a gain of $390 included as a cumulative effect in other comprehensive income. Under the provisions of SFAS 133, such a reclassification does not call into question the Corporation's intent to hold current or future debt securities until their maturity. Transfer and Servicing of Financial Assets and Liabilities In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of SFAS 125," was issued by the Financial Accounting Standard Board. The statement's provisions requiring the recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral were adopted by the Corporation in the year ended December 31, 2000. SFAS 140 also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The latter provisions are effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. Management believes that the adoption of these provisions will not have a material impact on the Corporation's financial condition or results of operations. NOTE 3 - INVESTMENT SECURITIES The average contractual maturities as of March 31, 2001 and the amortized cost and market value (or fair value for certain investment securities when no market quotations are available) for the following investment securities were as follows: Investment securities available-for-sale: <TABLE> <CAPTION> MARCH 31, December 31, March 31, 2001 2000 2000 ----------------------- ----------------------- ----------------------- AMORTIZED MARKET Amortized Market Amortized Market COST VALUE Cost Value Cost Value ---------- ---------- ---------- ---------- ---------- ---------- (In thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Treasury (average maturity of 1 year and 5 months) $ 737,645 $ 753,179 $1,140,544 $1,146,744 $1,716,151 $1,698,684 Obligations of other U.S. Government Agencies and corporations (average Maturity of 4 years and 8 months) 4,304,337 4,337,142 5,001,672 4,977,669 3,292,509 3,145,455 Obligations of Puerto Rico, states and Political subdivisions (average maturity of 9 years and 7 months) 65,780 67,843 70,678 71,278 77,330 76,896 Collateralized mortgage obligations (average Maturity of 23 years and 8 months) 1,634,808 1,642,109 1,552,544 1,553,285 1,350,727 1,318,300 Mortgage-backed securities (average maturity of 24 years and 1 month) 486,585 493,796 700,844 695,987 470,304 473,110 Equity securities (without contractual maturity) 233,808 275,902 229,547 255,651 228,117 225,723 Others (average maturity of 15 years and 7 months) 109,142 111,319 94,092 95,310 73,702 69,402 ---------- ---------- ---------- ---------- ---------- ---------- $7,572,105 $7,681,290 $8,789,921 $8,795,924 $7,208,840 $7,007,570 ========== ========== ========== ========== ========== ========== </TABLE> 8
9 Investment securities held-to-maturity: <TABLE> <CAPTION> MARCH 31, December 31, March 31, 2001 2000 2000 -------------------- -------------------- -------------------- AMORTIZED MARKET Amortized Market Amortized Market COST VALUE Cost Value Cost Value -------- -------- -------- -------- -------- -------- (In thousands) <S> <C> <C> <C> <C> <C> <C> Obligations of other U.S. Government agencies and Corporations (average maturity of 1 month) $ 18,483 $ 18,524 $ 11,061 $ 11,095 Obligations of Puerto Rico, states and Political subdivisions (average maturity of 1 month) 99,958 99,958 118,595 117,467 $147,114 $147,781 Collateralized mortgage obligations (average Maturity of 11 years and 6 months) 89,782 93,385 12,369 12,228 17,396 17,188 Mortgage-backed securities 18,744 19,110 22,250 22,164 Others (average maturity of 3 years and 5 months) 103,947 101,008 103,962 98,672 106,417 101,349 -------- -------- -------- -------- -------- -------- $312,170 $312,875 $264,731 $258,572 $293,177 $288,482 ======== ======== ======== ======== ======== ======== </TABLE> The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities differ from their contractual maturities because they may be subject to prepayments. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank stock, is included as equity securities available-for-sale. NOTE 4 - PLEDGED ASSETS At March 31, 2001 and 2000, securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase and other borrowings. The classification and carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge the collateral were as follows: <TABLE> <CAPTION> MARCH 31, December 31, March 31, (In thousands) 2001 2000 2000 ---------- ------------ ---------- <S> <C> <C> <C> Investment securities available-for-sale $1,517,743 $1,617,134 $1,590,008 Investment securities held-to-maturity 5,975 6,798 9,884 Loans 929,658 777,118 665,761 ---------- ---------- ---------- $2,453,376 $2,401,050 $2,265,653 ========== ========== ========== </TABLE> Securities that the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition. NOTE 5 - 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 swaptions, foreign exchange contracts and interest-rate caps, floors and put options embedded in interest bearing contracts. The Corporation uses interest rate swaps to convert floating rate debt to fixed rate debt. The specific terms and notional amounts of the swaps are determined based on management's assessment of future interest rates, as well as other factors. These swaps qualify for cash flow hedge accounting in accordance with SFAS 133 and therefore changes in the fair value of the derivative are recorded in other comprehensive income. As of March 31, 2001 the total amount 9
10 (net of tax) included in accumulated other comprehensive income pertaining to a swap that matures on May 2002, was an unrealized loss of $451. Futures and forwards are contracts for the delayed delivery of securities in which the seller agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. These contracts qualify for cash flow hedge accounting in accordance with SFAS 133 and therefore changes in the fair value of the derivative are recorded in other comprehensive income. As of March 31, 2001 the total amount (net of tax) included in accumulated other comprehensive income pertaining to future and forward contracts was an unrealized loss of $101. These contracts have a maximum maturity of 120 days. To satisfy the needs of its customers, from time to time, the Corporation enters into foreign exchange contracts in the spot or futures market and at the same time into foreign exchange contracts with third parties under the same terms and conditions. As of March 31, 2001, the Corporation included $14 and $14 in other assets and other liabilities, respectively, pertaining to the fair value of these contracts. The Corporation enters into options on swaps ("swaption") derivative securities, which combine the characteristics of interest rate swaps and options. These swaptions are related to certificates of deposit with returns linked to the Standard and Poor's 500 index through an embedded option which has been bifurcated from the host contract, and in accordance with the pronouncement does not qualify for hedge accounting. As of March 31, 2001, the Corporation had recognized a derivative asset of $15,103 based on the fair value of the swaptions and a derivative liability of $14,609 based on the fair value of the bifurcated option, these amounts are included in other assets and deposits, respectively. For the quarter ended March 31, 2001, the Corporation recognized a loss of $631 as a result of the changes in fair value of the non-hedging derivatives included in other income. The interest-rate caps and floors embedded in the interest bearing contracts are clearly and closely related to the economic characteristics of the contract and therefore as stated in FAS 133, are not bifurcated from the host contract. NOTE 6 - COMMITMENTS AND CONTINGENCIES In the normal course of business there are letters of credit outstanding and stand-by letters of credit which at March 31, 2001, amounted to $11,049 and $118,846, respectively (March 31, 2000 - $18,190 and $69,568; December 31, 2000 - - $13,962 and $103,175). There are also outstanding other commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the accompanying financial statements. No losses are anticipated as a result of these transactions. The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. NOTE 7 - SUBORDINATED NOTES AND PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED BY THE CORPORATION Subordinated notes of $125,000 consist of notes issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semi-annually at 6.75%. On February 5, 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware that is wholly-owned by Popular North America, Inc. (PNA) and indirectly wholly-owned by the Corporation, sold to institutional investors $150,000 of its 8.327% Capital Securities Series A (liquidation amount $1,000 per Capital Security) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by PNA of $4,640 of its 8.327% common securities (liquidation amount $1,000 per common security) were used to purchase $154,640 aggregate principal amount of PNA 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated Debentures"). These capital securities qualify as Tier 1 capital, are fully and unconditionally guaranteed by the Corporation, and are presented in the Consolidated Statements 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 1 are fully and unconditionally guaranteed by the Corporation. The assets of 10
11 BanPonce Trust 1 consisted of $154,640 of Junior Subordinated Debentures and a related accrued interest receivable of $1,073. The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures (which shortening would result in a mandatory redemption of the Capital Securities) may be shortened. NOTE 8 - STOCKHOLDERS' EQUITY Authorized common stock is 180,000,000 shares with a par value of $6 per share. At March 31, 2001, there were 138,489,075 (March 31, 2000 - 138,042,365; December 31, 2000 - 138,392,822) shares issued and 136,101,782 (March 31, 2000 - 135,747,610; December 31, 2000 - 135,998,617) shares outstanding. As of March 31, 2001, a total of 2,387,293 (March 31, 2000 - 2,294,755; December 31, 2000 - 2,394,205) common shares with a total cost of $66,136 (March 31, 2000 - $64,150; December 31, 2000 - $66,214) were maintained as treasury stock. Authorized preferred stock consists of 10,000,000 shares without par value of which 4,000,000 shares, non-cumulative with a dividend rate of 8.35% and a liquidation preference value of $25 per share, were issued and outstanding at March 31, 2001, March 31, 2000 and December 31, 2000. NOTE 9 - EARNINGS PER COMMON SHARE Earnings per common share (EPS) are calculated based on net income applicable to common stockholders which amounted to $72,145 for the first quarter of 2001 (2000 - $62,102), after deducting the dividends on preferred stock. EPS are based on 136,111,025 average shares outstanding for the first quarter of 2001 (2000 - 135,763,765). NOTE 10 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS During the three-month period ended March 31, 2001, the Corporation paid interest and income taxes amounting to $328,270 and $3,068, respectively (2000 - $296,768 and $4,157). In addition, the loans receivable transferred to other real estate and other property for the three-month period ended March 31, 2001, amounted to $11,474 and $7,621, respectively (2000 - $9,872 and $5,464). NOTE 11 - SEGMENT REPORTING Popular, Inc. operates three major reportable segments: commercial banking, mortgage and consumer lending, and lease financing. Management has determined its reportable segments based on legal entity, which is the way that operating decisions and performance is measured. These entities have then been aggregated by products, services and markets with similar characteristics. The Corporation's commercial banking segment includes all banking subsidiaries, 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 lease financing segment provides financing for vehicles and equipment through Popular Leasing and Rental, Inc. in Puerto Rico and Popular Leasing, USA in the U.S. mainland. The "Other" category includes all holding companies and non-banking subsidiaries which provide insurance agency services, retail financial services, investment banking and broker/dealer activities, as well as those providing ATM processing services, electronic data processing and consulting services, sale and rental of electronic data processing equipment and selling and maintenance of computer software. As of March 31, 2000 it also included the banking operations of Banco Fiduciario in the Dominican Republic. The accounting policies of the segments are the same as those followed by the Corporation in the ordinary course of business and conform with generally accepted accounting principles and with general practices within the financial 11
12 industry. Following are the results of operations and selected financial information by operating segments for the quarter ended March 31, 2001 and 2000. <TABLE> <CAPTION> MORTGAGE COMMERCIAL CONSUMER LEASE BANKING LENDING FINANCING OTHER ELIMINATIONS TOTAL ----------- ---------- --------- ---------- ------------ ----------- (IN THOUSANDS) MARCH 31, 2001 ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net interest income (loss) $ 219,864 $ 26,024 $ 11,091 $ (1,225) $ (37) $ 255,717 Provision for loan losses 36,327 9,339 4,368 50,034 Other income 59,001 12,574 4,963 40,211 (1,782) 114,967 Amortization expense 5,461 182 189 1,044 6,876 Depreciation expense 14,574 916 2,645 1,052 19,187 Other operating expenses 136,647 21,182 4,858 31,419 (200) 193,906 Minority interest 16 16 Income tax 21,388 2,517 1,476 2,165 (395) 27,151 Cumulative effect of accounting changes 686 686 ----------- ---------- -------- ---------- ----------- ----------- Net income $ 65,154 $ 4,478 $ 2,518 $ 3,306 $ (1,224) $ 74,232 =========== ========== ======== ========== =========== =========== Segment assets $22,845,084 $3,186,191 $999,771 $6,486,056 $(6,204,944) $27,312,158 =========== ========== ======== ========== =========== =========== <CAPTION> MORTGAGE COMMERCIAL CONSUMER LEASE BANKING LENDING FINANCING OTHER ELIMINATIONS TOTAL ----------- ---------- --------- ---------- ------------ ----------- (IN THOUSANDS) MARCH 31, 2001 ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net interest income $ 208,354 $ 22,566 $ 11,010 $ 343 $ (33) $ 242,240 Provision for loan losses 38,443 5,483 4,395 1,692 50,013 Other income 64,417 10,587 6,310 36,416 (2,004) 115,726 Amortization expense 7,022 161 188 1,221 8,592 Depreciation expense 14,216 471 2,422 1,812 18,921 Other operating expenses 150,787 19,539 6,107 23,608 (1,050) 198,991 Minority interest 1,496 1,496 Income tax 12,351 2,584 1,604 2,482 (265) 18,756 ----------- ---------- -------- ---------- ----------- ----------- Net income $ 49,952 $ 4,915 $ 2,604 $ 7,440 $ (722) $ 64,189 =========== ========== ======== ========== =========== =========== Segment Assets $21,465,088 $2,235,598 $859,451 $6,332,797 $(5,590,909) $25,302,025 =========== ========== ======== ========== =========== =========== </TABLE> GEOGRAPHIC INFORMATION <TABLE> <CAPTION> MARCH 31, March 31, 2001 2000 --------- --------- (In thousands) <S> <C> <C> Revenues* Puerto Rico $474,690 $430,572 United States 174,707 159,853 Other 16,021 31,102 -------- -------- Total consolidated revenues $665,418 $621,527 ======== ======== </TABLE> * Total revenues include interest income, service charges on deposit accounts, other service fees, gain on sale of securities, trading account profit, and other income. 12
13 <TABLE> <CAPTION> MARCH 31, December 31, March 31, 2001 2000 2000 ----------- ------------ ----------- (In thousands) <S> <C> <C> <C> Selected Balance Sheet Information: Puerto Rico Total assets $19,027,161 $20,146,184 $17,533,379 Loans 9,438,485 9,370,627 8,782,436 Deposits 10,115,789 9,974,677 9,734,120 United States Total assets $ 7,606,022 $ 7,246,259 $ 6,736,396 Loans 6,651,016 6,264,014 5,742,799 Deposits 4,171,534 4,107,994 3,624,759 Other Total assets $ 678,975 $ 664,608 $ 1,032,250 Loans 419,976 422,444 675,696 Deposits 805,856 722,236 978,982 </TABLE> NOTE 12 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR AND ISSUERS OF GUARANTEED REGISTERED SECURITIES: The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (PIHC), Popular International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and all other subsidiaries of the Corporation as of March 31, 2001, December 31, 2000 and March 31, 2000, and the results of their operations and cash flows for the quarters ended March 31, 2001 and 2000. 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, 2001, November 30, 2000 and February 29, 2000, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of March 31, 2001, December 31, 2000 and March 31, 2000, respectively. PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under various shelf registrations filed with the SEC. PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica, CreST, S.A., 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 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 (BPPR). As a member subject to the regulations of the Federal Reserve Board, BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its net profits for that year, as defined by the Federal Reserve Board, combined with its retained net profits for the preceding two years. The payment of dividends may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. At March 31, 2001, BPPR could have declared a dividend of approximately $116,465 without the approval of the Federal Reserve Board. 13
14 POPULAR, INC. CONSOLIDATING STATEMENT OF CONDITION MARCH 31, 2001 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All Other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------- ----------- ----------- ------------ ----------- ------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Cash and due from banks $ 179 $ 22 $ 151 $ 711,407 $ (71,951) $ 639,808 Money market investments 15,217 311 2,668 1,955,547 (1,003,444) 970,299 Investment securities available-for-sale, at market value 163,864 16,433 6,565 7,497,477 (3,049) 7,681,290 Investment securities held-to-maturity, at amortized cost 466,810 (154,640) 312,170 Trading account securities, at market value 217,870 217,870 Investment in subsidiaries, at equity 2,125,613 546,648 747,446 135,481 (3,555,188) Loans held-for-sale, at lower of cost or market 834,242 834,242 ----------- ----------- ----------- ----------- ----------- ----------- Loans 479,444 22,500 2,132,294 16,094,386 (2,712,166) 16,016,458 Less - Unearned income 341,223 341,223 Allowance for loan losses 305,295 305,295 ----------- ----------- ----------- ----------- ----------- ----------- 479,444 22,500 2,132,294 15,447,868 (2,712,166) 15,369,940 ----------- ----------- ----------- ----------- ----------- ----------- Premises and equipment 403,263 403,263 Other real estate 27,638 27,638 Customers' liabilities on acceptances 1,941 1,941 Accrued income receivable 1,084 1,124 11,899 205,367 (17,386) 202,088 Other assets 23,923 993 4,984 348,259 (1,358) 376,801 Intangible assets 275,230 (422) 274,808 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,809,324 $ 588,031 $ 2,906,007 $28,528,400 $(7,519,604) $27,312,158 =========== =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,073,163 $ (71,894) $ 3,001,269 Interest bearing 12,150,044 (58,134) 12,091,910 ----------- ----------- ----------- ----------- ----------- ----------- 15,223,207 (130,028) 15,093,179 Federal funds purchased and securities sold under Agreements to repurchase $ 79,000 4,127,355 (153,343) 4,053,012 Other short-term borrowings $ 12,184 $ 5,693 1,055,433 3,524,039 (1,530,152) 3,067,197 Notes payable 504,861 1,207,049 2,639,290 (2,117,232) 2,233,968 Acceptances outstanding 1,941 1,941 Other liabilities 44,305 283 27,298 414,926 (22,836) 463,976 ----------- ----------- ----------- ----------- ----------- ----------- 561,350 5,976 2,368,780 25,930,758 (3,953,591) 24,913,273 ----------- ----------- ----------- ----------- ----------- ----------- Subordinated notes 125,000 125,000 ----------- ----------- ----------- ----------- ----------- ----------- Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 ----------- ----------- ----------- ----------- ----------- ----------- Minority interest in consolidated subsidiaries 105 806 911 ----------- ----------- ----------- ----------- ----------- ----------- Stockholders' equity: Preferred stock 100,000 100,000 Common stock 830,934 3,962 2 72,575 (76,539) 830,934 Surplus 262,748 485,676 439,964 1,328,072 (2,253,712) 262,748 Retained earnings 915,394 86,892 93,381 998,901 (1,179,174) 915,394 Treasury stock - at cost (66,136) (236) 236 (66,136) Accumulated other comprehensive income, net of tax 80,034 5,525 3,880 48,225 (57,630) 80,034 ----------- ----------- ----------- ----------- ----------- ----------- 2,122,974 582,055 537,227 2,447,537 (3,566,819) 2,122,974 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,809,324 $ 588,031 $ 2,906,007 $28,528,400 $(7,519,604) $27,312,158 =========== =========== =========== =========== =========== =========== </TABLE> 14
15 POPULAR, INC. CONSOLIDATING STATEMENT OF CONDITION DECEMBER 31, 2000 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------- ----------- ----------- ------------ ----------- ------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Cash and due from banks $ 283 $ 18 $ 288 $ 822,672 $ (97,210) $ 726,051 Money market investments 20,837 326 60 1,944,366 (896,971) 1,068,618 Investment securities available-for-sale, at market value 151,413 12,577 6,342 8,625,592 8,795,924 Investment securities held-to-maturity, at amortized cost 419,371 (154,640) 264,731 Trading account securities, at market value 153,073 153,073 Investment in subsidiaries, at equity 2,005,774 542,158 741,505 126,351 (3,415,788) Loans held-for-sale, at lower of cost or market 823,901 823,901 ----------- ----------- ----------- ------------- ----------- ----------- Loans 543,773 22,500 1,842,515 15,629,152 (2,457,561) 15,580,379 Less - Unearned income 347,195 347,195 Allowance for loan losses 290,653 290,653 ----------- ----------- ----------- ------------- ----------- ----------- 543,773 22,500 1,842,515 14,991,304 (2,457,561) 14,942,531 ----------- ----------- ----------- ------------- ----------- ----------- Premises and equipment 405,772 405,772 Other real estate 23,518 23,518 Customers' liabilities on acceptances 1,647 1,647 Accrued income receivable 1,113 590 12,051 209,278 (20,492) 202,540 Other assets 22,023 895 4,937 340,614 (1,319) 367,150 Intangible assets 282,048 (453) 281,595 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,745,216 $ 579,064 $ 2,607,698 $29,169,507 $(7,044,434) $28,057,051 =========== =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,207,037 $ (97,152) $ 3,109,885 Interest bearing 11,738,916 (43,894) 11,695,022 ----------- ----------- ----------- ----------- ----------- ----------- 14,945,953 (141,046) 14,804,907 Federal funds purchased and securities sold under agreements to repurchase $ 68,700 5,033,117 (137,702) 4,964,115 Other short-term borrowings $ 377,713 $ 5,414 1,336,063 4,298,732 (1,648,710) 4,369,212 Notes payable 212,011 633,254 1,997,772 (1,666,075) 1,176,912 Acceptances outstanding 1,647 1,647 Other liabilities 36,848 275 37,267 421,807 (25,510) 470,687 ----------- ----------- ----------- ----------- ----------- ----------- 626,572 5,689 2,075,284 26,698,978 (3,619,043) 25,787,480 ----------- ----------- ----------- ----------- ----------- ----------- Subordinated notes 125,000 125,000 ----------- ----------- ----------- ----------- ----------- ----------- Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 ----------- ----------- ----------- ----------- ----------- ----------- Minority interest in consolidated subsidiaries 105 822 927 ----------- ----------- ----------- ----------- ----------- ----------- Stockholders' equity: Preferred stock 100,000 100,000 Common stock 830,356 3,962 2 72,575 (76,539) 830,356 Surplus 260,984 485,676 439,964 1,328,053 (2,253,693) 260,984 Retained earnings 865,082 83,576 90,434 940,008 (1,114,018) 865,082 Treasury stock - at cost (66,214) (314) 314 (66,214) Accumulated other comprehensive income (loss), net of tax 3,436 161 2,014 (19,898) 17,723 3,436 ----------- ----------- ----------- ----------- ----------- ----------- 1,993,644 573,375 532,414 2,320,424 (3,426,213) 1,993,644 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,745,216 $ 579,064 $ 2,607,698 $29,169,507 $(7,044,434) $28,057,051 =========== =========== =========== =========== =========== =========== </TABLE> 15
16 POPULAR, INC. CONSOLIDATING STATEMENT OF CONDITION MARCH 31, 2000 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------- ----------- ----------- ------------ ----------- ------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Cash and due from banks $ 569 $ 91 $ 679 $ 638,332 $ (33,288) $ 606,383 Money market investments 6,937 938 12,203 1,702,604 (830,030) 892,652 Investment securities available- for-sale, at market value 141,821 11,312 5,360 6,849,077 7,007,570 Investment securities held-to- maturity, at amortized costs 447,817 (154,640) 293,177 Trading account securities, at market value 208,473 208,473 Investment in subsidiaries, at equity 1,700,151 541,607 641,831 110,627 (2,994,216) Loans held-for-sale, at lower of cost or market 556,813 556,813 ----------- ----------- ----------- ----------- ----------- ----------- Loans 847,961 17,570 1,491,048 15,037,265 (2,391,898) 15,001,946 Less - Unearned income 357,828 357,828 Allowance for loan losses 293,442 293,442 ----------- ----------- ----------- ----------- ----------- ----------- 847,961 17,570 1,491,048 14,385,995 (2,391,898) 14,350,676 ----------- ----------- ----------- ----------- ----------- ----------- Premises and equipment 437,932 437,932 Other real estate 32,448 32,448 Customers' liabilities on acceptances 8,308 8,308 Accrued income receivable 519 414 547 182,346 (15,973) 167,853 Other assets 14,429 671 5,705 420,033 (2,132) 438,706 Intangible assets 301,586 (552) 301,034 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,712,387 $ 572,603 $ 2,157,373 $26,282,391 $(6,422,729) $25,302,025 =========== =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,031,435 $ (33,183) $ 2,998,252 Interest bearing 11,848,155 (508,546) 11,339,609 ----------- ----------- ----------- ----------- ----------- ----------- 14,879,590 (541,729) 14,337,861 Federal funds purchased and securities sold under Agreements to repurchase $ 49,008 4,196,341 (93,822) 4,151,527 Other short-term borrowings $ 406,941 $ 18,225 367,111 2,786,087 (1,136,479) 2,441,885 Notes payable 458,738 5,723 1,201,683 1,914,887 (1,615,871) 1,965,160 Acceptances outstanding 8,308 8,308 Other liabilities 39,415 477 26,874 372,160 (19,941) 418,985 ----------- ----------- ----------- ----------- ----------- ----------- 905,094 24,425 1,644,676 24,157,373 (3,407,842) 23,323,726 ----------- ----------- ----------- ----------- ----------- ----------- Subordinated notes 125,000 125,000 ----------- ----------- ----------- ----------- ----------- ----------- Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 ----------- ----------- ----------- ----------- ----------- ----------- Minority interest in consolidated subsidiaries 21,006 21,006 ----------- ----------- ----------- ----------- ----------- ----------- Stockholders' equity: Preferred stock 100,000 100,000 Common stock 828,254 3,962 2 63,444 (67,408) 828,254 Surplus 245,719 482,226 439,964 1,292,716 (2,214,906) 245,719 Retained earnings 734,681 67,885 74,764 780,781 (923,430) 734,681 Treasury stock - at cost (64,150) (314) 314 (64,150) Accumulated other comprehensive loss, net of tax (162,211) (5,895) (2,033) (161,609) 169,537 (162,211) ----------- ----------- ----------- ----------- ----------- ----------- 1,682,293 548,178 512,697 1,975,018 (3,035,893) 1,682,293 ----------- ----------- ----------- ----------- ----------- ----------- $ 2,712,387 $ 572,603 $ 2,157,373 $26,282,391 $(6,422,729) $25,302,025 =========== =========== =========== =========== =========== =========== </TABLE> 16
17 POPULAR, INC. CONSOLIDATING STATEMENT OF INCOME FOR THE QUARTER ENDED MARCH 31, 2001 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------- ----------- ----------- ------------ ----------- ------------- <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Loans $ 8,729 $ 534 $ 36,293 $ 393,548 $ (45,539) $ 393,565 Money market investments 202 6 31 31,010 (15,943) 15,306 Investment securities 617 189 140,503 (3,250) 138,059 Trading account securities 3,521 3,521 ----------- ----------- ----------- ----------- ----------- ----------- 9,548 540 36,513 568,582 (64,732) 550,451 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST EXPENSE: Deposits 133,596 (819) 132,777 Short-term borrowings 534 88 15,857 129,039 (24,997) 120,521 Long-term debt 10,921 21,788 47,606 (38,879) 41,436 ----------- ----------- ----------- ----------- ----------- ----------- 11,455 88 37,645 310,241 (64,695) 294,734 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income (loss) (1,907) 452 (1,132) 258,341 (37) 255,717 Provision for loan losses 50,034 50,034 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income (loss) after provision for loan losses (1,907) 452 (1,132) 208,307 (37) 205,683 Service charges on deposit accounts 34,658 34,658 Other service fees 58,202 (27) 58,175 Gain on sale of securities 290 290 Trading account profit 309 309 Other operating income 2,422 205 20,662 (1,754) 21,535 ----------- ----------- ----------- ----------- ----------- ----------- 515 657 (1,132) 322,428 (1,818) 320,650 ----------- ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES: Personnel costs: Salaries 70 77,708 77,778 Profit sharing 5,097 5,097 Pension and other benefits 12 22,007 22,019 ----------- ----------- ----------- ----------- ----------- ----------- 82 104,812 104,894 Net occupancy expenses 3 17,192 17,195 Equipment expenses 24,127 24,127 Other taxes 452 8,358 8,810 Professional fees 191 2 45 15,203 (56) 15,385 Communications 8 11,879 11,887 Business promotion 10,545 10,545 Printing and supplies 4,319 4,319 Other operating expenses 21 4 108 15,942 (144) 15,931 Amortization of intangibles 6,876 6,876 ----------- ----------- ----------- ----------- ----------- ----------- 672 91 153 219,253 (200) 219,969 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before income tax, minority interest, cumulative effect of accounting changes and equity in earnings of subsidiaries (157) 566 (1,285) 103,175 (1,618) 100,681 Income tax expense (benefit) 40 (482) 27,988 (395) 27,151 Net loss of minority interest 16 16 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before cumulative effect of accounting changes and equity in earnings of subsidiaries (197) 566 (803) 75,203 (1,223) 73,546 Cumulative effect of accounting changes 686 686 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before equity in earnings of subsidiaries (197) 566 (803) 75,889 (1,223) 74,232 Equity in earnings of subsidiaries 74,429 2,750 3,750 5,130 (86,059) -- ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME $ 74,232 $ 3,316 $ 2,947 $ 81,019 $ (87,282) $ 74,232 =========== =========== =========== =========== =========== =========== </TABLE> 17
18 POPULAR, INC. CONSOLIDATING STATEMENT OF INCOME FOR THE QUARTER ENDED MARCH 31, 2000 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Elimination Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated ------------- ----------- ----------- ------------ ----------- ------------- <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Loans $ 14,516 $ 288 $ 25,853 $ 377,398 $ (41,535) $376,520 Money market investments 194 51 116 25,116 (12,229) 13,248 Investment securities 200 178 114,975 (3,223) 112,130 Trading account securities 3,903 3,903 -------- -------- -------- ---------- ---------- -------- 14,910 339 26,147 521,392 (56,987) 505,801 -------- -------- -------- ---------- ---------- -------- INTEREST EXPENSE: Deposits 131,106 (8,632) 122,474 Short-term borrowings 6,400 278 6,117 111,356 (21,326) 102,825 Long-term debt 10,146 109 21,751 33,252 (26,996) 38,262 -------- -------- -------- ---------- ---------- -------- 16,546 387 27,868 275,714 (56,954) 263,561 -------- -------- -------- ---------- ---------- -------- Net interest income (loss) (1,636) (48) (1,721) 245,678 (33) 242,240 Provision for loan losses 50,013 50,013 -------- -------- -------- ---------- ---------- -------- Net interest income after provision for loan losses (1,636) (48) (1,721) 195,665 (33) 192,227 Service charges on deposit accounts 30,223 30,223 Other service fees 48,241 (876) 47,365 Gain on sale of securities 13,000 264 13,264 Trading account profit 817 817 Other operating income 2,482 157 22,547 (1,129) 24,057 -------- -------- -------- ---------- ---------- -------- 13,846 109 (1,721) 297,757 (2,038) 307,953 -------- -------- -------- ---------- ---------- -------- OPERATING EXPENSES: Personnel costs: Salaries 70 78,524 78,594 Profit sharing 4,132 4,132 Pension and other benefits 15 20,483 20,498 -------- -------- -------- ---------- ---------- -------- 85 103,139 103,224 Net occupancy expenses 3 16,556 16,559 Equipment expenses 23,434 23,434 Other taxes 223 8,352 8,575 Professional fees 124 3 171 18,396 (1,016) 17,678 Communications 1 10,801 10,802 Business promotion 14,087 14,087 Printing and supplies 5,172 5,172 Other operating expenses 12 18,403 (34) 18,381 Amortization of intangibles 8,592 8,592 -------- -------- -------- ---------- ---------- -------- 348 103 171 226,932 (1,050) 226,504 -------- -------- -------- ---------- ---------- -------- Income (loss) before income tax and equity in earnings (losses) of subsidiaries 13,498 6 (1,892) 70,825 (988) 81,449 Income tax expense (benefit) 3,552 (662) 16,131 (265) 18,756 Net loss of minority interest 1,496 1,496 -------- -------- -------- ---------- ---------- -------- Income (loss) before equity in earnings (losses) of subsidiaries 9,946 6 (1,230) 56,190 (723) 64,189 Equity in earnings (losses) of subsidiaries 54,243 (1,650) 1,989 2,823 (57,405) -------- -------- -------- ---------- ---------- -------- NET INCOME (LOSS) $ 64,189 $ (1,644) $ 759 $ 59,013 $ (58,128) $ 64,189 ======== ======== ======== ========== ========== ======== </TABLE> 18
19 POPULAR, INC. STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED MARCH 31, 2001 <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Eliminations Consolidated (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Popular, Inc. ------------- ---------- ----------- ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 74,232 $ 3,316 $ 2,947 81,019 $ (87,282) $ 74,232 ---------- ---------- ---------- ------------ ---------- ------------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries (74,429) (2,750) (3,750) (5,130) 86,059 Depreciation and amortization of premises and equipment 19,187 19,187 Provision for loan losses 50,034 50,034 Net amortization of intangibles 6,876 6,876 Net gain on sale of investment securities available-for-sale (290) (290) Net gain on disposition of premises and equipment (51) (51) Net loss on sale of loans 75 75 Net amortization of premiums and accretion of discounts on investments 345 345 Net increase in loans held-for-sale (10,341) (10,341) Net amortization of deferred loan fees and costs (4,444) (4,444) Net increase in trading securities (64,797) (64,797) Net decrease (increase) in interest receivable 29 (534) 152 3,911 (3,106) 452 Net (increase) decrease in other assets (1,914) (99) (250) 13,889 9 11,635 Net increase (decrease) in interest payable 1,639 34 (10,118) (25,091) (33,536) Net increase (decrease) in deferred and current taxes 19 (725) 24,116 (5,208) 18,202 Net increase in postretirement benefit obligation 5,190 5,190 Net increase (decrease) in other liabilities 5,801 (25) 626 (5,801) 7,881 8,482 ---------- ---------- ---------- ------------ ---------- ------------ Total adjustments (68,855) (3,374) (14,065) 7,678 85,635 7,019 ---------- ---------- ---------- ------------ ---------- ------------ Net cash provided by (used in) operating activities 5,377 (58) (11,118) 88,697 (1,647) 81,251 ---------- ---------- ---------- ------------ ---------- ------------ Cash flows from investing activities: Net decrease (increase) in money market investments 5,620 15 (2,608) (11,181) 106,473 98,319 Purchases of investment securities held-to-maturity (1,275,544) (1,275,544) Maturities of investment securities held-to-maturity 1,318,287 1,318,287 Purchases of investment securities available-for-sale (3,243) (232) (76) (771,021) (774,572) Maturities of investment securities available-for-sale 1,672,485 3,050 1,675,535 Sales of investment securities available-for-sale 217,347 217,347 Net collections (disbursements) on loans 64,329 (289,779) (497,397) 254,605 (468,242) Proceeds from sale of loans 104,922 104,922 Acquisition of loan portfolios (21) (157,698) 21 (157,698) Acquisition of premises and equipment (18,132) (18,132) Proceeds from sale of premises and equipment 1,505 1,505 Dividends received from subsidiary 22,000 (22,000) ---------- ---------- ---------- ------------ ---------- ------------ Net cash provided by (used in) investing activities 88,706 (217) (292,484) 583,573 342,149 721,727 ---------- ---------- ---------- ------------ ---------- ------------ Cash flows from financing activities: Net increase in deposits 277,254 11,018 288,272 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 10,300 (905,762) (15,641) (911,103) Net (decrease) increase in other short-term borrowings (365,529) 279 (280,630) (774,693) 118,558 (1,302,015) Net proceeds of notes payable 292,850 573,795 641,568 (451,157) 1,057,056 Dividends paid to parent company (22,000) 22,000 Dividends paid (23,850) (23,850) Proceeds from issuance of common stock 2,342 2,342 Treasury stock sold 77 77 Capital contribution from parent 21 (21) ---------- ---------- ---------- ------------ ---------- ------------ Net cash (used in) provided by financing activities (94,187) 279 303,465 (783,535) (315,243) (889,221) ---------- ---------- ---------- ------------ ---------- ------------ Net (decrease) increase in cash and due from banks (104) 4 (137) (111,265) 25,259 (86,243) Cash and due from banks at beginning of period 283 18 288 822,672 (97,210) 726,051 ---------- ---------- ---------- ------------ ---------- ------------ Cash and due from banks at end of period $ 179 $ 22 $ 151 $ 711,407 $ (71,951) $ 639,808 ========== ========== ========== ============ ========== ============ </TABLE> 19
20 POPULAR, INC. STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED MARCH 31, 2000 <TABLE> <CAPTION> Popular, Inc. PNA (In thousands) Holding PIBI Holding All other Eliminations Consolidated Co. Holding Co. Co. Subsidiaries Entries Popular, Inc. -------- ----------- ------- ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 64,189 $ (1,644) $ 759 $ 59,013 $ (58,128) $ 64,189 -------- -------- ------- ------------ ---------- ------------ Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings of subsidiaries (54,243) 1,650 (1,989) (2,823) 57,405 Depreciation and amortization of premises and equipment 18,921 18,921 Provision for loan losses 50,013 50,013 Net amortization of intangibles 8,592 8,592 Net gain on sale of investment securities available-for-sale (13,000) (264) (13,264) Net gain on disposition of premises and equipment (2) (2) Net gain on sale of loans (1,833) (1,833) Net amortization of premiums and accretion of discounts on investments 3 785 788 Net decrease in loans held-for-sale 62,485 62,485 Net amortization of deferred loan fees and costs (117) (117) Net decrease in trading securities 28,137 28,137 Net (increase) decrease in interest receivable (397) (218) 125 4,886 3,497 7,893 Net increase in other assets (3,003) (77) (922) (44,499) 1,149 (47,352) Net increase (decrease) in interest payable 8,197 (15,894) (25,510) (33,207) Net (decrease) increase in deferred taxes (2,019) (662) 9,503 878 7,700 Net increase in postretirement benefit obligation 2,433 2,433 Net (decrease) increase in other liabilities (229) 22 849 (922) (9,569) (9,849) -------- -------- -------- ------------ ---------- ------------ Total adjustments (64,691) 1,377 (18,493) 109,785 53,360 81,338 -------- -------- -------- ------------ ---------- ------------ Net cash (used in) provided by operating activities (502) (267) (17,734) 168,798 (4,768) 145,527 -------- -------- -------- ------------ ---------- ------------ Cash flows from investing activities: Net decrease in money market investments 28,563 2,320 9,300 17,700 35,459 93,342 Purchases of investment securities held-to-maturity (4,517,627) (4,517,627) Maturities of investment securities held-to-maturity 4,036,370 4,036,370 Purchases of investment securities available-for-sale (13,956) (10) (499,266) 20 (513,212) Maturities of investment securities available-for-sale 200 1,232,343 1,232,543 Sales of investment securities available-for-sale 77,078 77,078 Net collections (disbursements) on loans 47,487 (608) (63,274) (620,183) 4,415 (632,163) Proceeds from sale of loans 214,533 214,533 Acquisition of loan portfolios Capital Contribution to Subsidiary (12,116) (4,802) (20,000) 36,918 Cash received in acquisition 715 715 Acquisition of premises and equipment (18,657) (18,657) Proceeds from sale of premises and equipment 2,779 2,779 Dividends received from subsidiary 22,000 (22,000) -------- -------- -------- ------------ ---------- ------------ Net cash provided by (used in) investing activities 72,178 (3,090) (73,984) (74,215) 54,812 (24,299) -------- -------- -------- ------------ ---------- ------------ Cash flows from financing activities: Net increase in deposits 53,969 110,177 164,146 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 49,008 (325,359) 13,398 (262,953) Net (decrease) increase in other short-term borrowings (24,109) (7,494) 42,454 (165,257) (16,535) (170,941) Net (disbursement) proceeds of notes payable (25,977) (1,285) 271 292,066 (152,515) 112,560 Dividends paid to parent company (22,000) 22,000 Dividends paid (23,810) (23,810) Proceeds from issuance of common stock 2,457 2,457 Capital contribution from parent 12,000 17,092 (29,092) -------- -------- -------- ------------ ---------- ------------ Net cash (used in) provided by financing activities (71,439) 3,221 91,733 (149,489) (52,567) (178,541) -------- -------- -------- ------------ ---------- ------------ Net increase (decrease) in cash and due from banks 237 (136) 15 (54,906) (2,523) (57,313) Cash and due from banks at beginning of period 332 227 664 693,238 (30,765) 663,696 -------- -------- -------- ------------ ---------- ------------ Cash and due from banks at end of period $ 569 $ 91 $ 679 $ 638,332 $ (33,288) $ 606,383 ======== ======== ======== ============ ========== ============ </TABLE> 20
21 TABLE A ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS <TABLE> <CAPTION> AT MARCH 31, AVERAGE FOR THE QUARTER BALANCE SHEET HIGHLIGHTS 2001 2000 Change 2001 2000 Change (In thousands) ------------ ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Money market investments $ 970,299 $ 892,652 $ 77,647 $ 959,452 $ 851,516 $ 107,936 Investment and trading securities 8,211,330 7,509,220 702,110 8,993,341 7,877,471 1,115,870 Loans 16,509,477 15,200,931 1,308,546 16,215,424 15,027,521 1,187,903 Total assets 27,312,158 25,302,025 2,010,133 27,714,226 25,466,481 2,247,745 Deposits 15,093,179 14,337,861 755,318 14,831,555 14,147,519 684,036 Borrowings 9,629,177 8,833,572 795,605 10,409,114 9,024,486 1,384,628 Stockholders' equity 2,122,974 1,682,293 440,681 2,018,788 1,815,021 203,767 <CAPTION> FIRST QUARTER OPERATING HIGHLIGHTS 2001 2000 Change (In thousands, except per share information) -------- -------- -------- <S> <C> <C> <C> Net interest income $255,717 $242,240 $ 13,477 Provision for loan losses 50,034 50,013 21 Fees and other income 114,967 115,726 (759) Other expenses, net of minority interest 247,104 243,764 3,340 Cumulative effect of accounting changes, net of tax 686 -- 686 Net income $ 74,232 $ 64,189 $ 10,043 Net income applicable to common stock $ 72,145 $ 62,102 $ 10,043 Earnings per common share (basic and diluted) (before and after cumulative effect of accounting changes) $ 0.53 $ 0.46 $ 0.07 <CAPTION> SELECTED STATISTICAL INFORMATION FIRST QUARTER 2001 2000 ------ ------ <S> <C> <C> COMMON STOCK DATA - Market price High $29.45 $26.88 Low 25.25 18.63 End 29.45 22.19 Book value at period end 14.86 11.66 Dividends declared 0.16 0.16 Dividends payout ratio 30.16% 34.98% Price/earnings ratio 14.44X 11.99x PROFITABILITY RATIOS - Return on assets 1.09% 1.01% Return on common equity 15.25 14.57 Net interest spread (taxable equivalent) 3.40 3.61 Net interest yield (taxable equivalent) 4.20 4.42 Effective tax rate 26.97 23.03 Overhead ratio 41.06 45.73 Efficiency ratio 59.44 65.87 CAPITALIZATION RATIOS - Equity to assets 7.28% 7.13% Tangible equity to assets 6.34 6.01 Equity to loans 12.45 12.08 Internal capital generation 9.98 8.90 Tier I capital to risk - adjusted assets 10.63 10.04 Total capital to risk - adjusted assets 12.59 12.09 Leverage ratio 6.59 6.32 </TABLE> 21
22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial discussion contains an analysis of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the Corporation) and should be read in conjunction with the consolidated financial statements, tables and notes included in this report. The Corporation is a bank holding company, which offers a wide range of products and services through its subsidiaries and is engaged in the following businesses: - Commercial Banking - Banco Popular de Puerto Rico (BPPR), Banco Popular North America (BPNA) and Banco Popular, National Association (BP,NA) - Lease Financing - Popular Leasing and Rental, Inc. and Popular Leasing, U.S.A. - Mortgage and Consumer Lending - Popular Mortgage, Inc., Equity One, Inc., Popular Finance, Inc. and Newco Mortgage Holding Company (d/b/a Levitt Mortgage) - 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. NET INCOME The Corporation reported net income of $74.2 million for the first quarter of 2001, compared with $64.2 million for the same quarter of 2000. Earnings per common share (EPS) for the quarter were $0.53, based on 136,111,025 average shares outstanding, compared with $0.46 in the first quarter of 2000, based on 135,763,765 average shares outstanding. Net income for the last quarter of 2000 were $75.5 million or $0.54 per common share, based on 136,013,633 average shares outstanding. Return on assets (ROA) and return on common equity (ROE) for the quarter ended March 31, 2001 were 1.09% and 15.25%, respectively, compared with 1.01% and 14.57% for the same period in 2000. For the last quarter of 2000 these ratios were 1.09% and 15.72%. The Corporation's net income for the first quarter of 2001, when compared with the same period a year ago, reflected higher net interest income by $13.5 million and lower operating expenses by $6.5 million. Non-interest income, excluding gain on sale of securities and trading account profits, rose $12.7 million. These favorable variances were partially offset by decreases in the gain on sale of securities and trading activities of $13.5 million and an increase in income tax of $8.4 million. NET INTEREST INCOME Net interest income reached $255.7 million for the first quarter of 2001, an increase of 5.6% when compared with $242.2 million reported during the same period of 2000. On a taxable equivalent basis, net interest income increased to $276.0 million from $262.7 million in the same quarter of 2000. The improvement of $13.3 million in net interest income on a taxable equivalent basis from the first quarter of 2000 resulted from a $17.1 million increase attributable to volume, partially offset by a $3.8 million decrease due to a lower net interest margin. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a taxable equivalent basis assuming the applicable statutory income tax rates. 22
23 Table B summarizes the changes in the composition of average earning assets and interest-bearing liabilities, and their respective interest income and expense, yields and costs, on a taxable equivalent basis, for the first quarter of 2001, as compared with the same quarter last year. Non-accrual loans have been included in the respective average loan and lease balances. Average securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. TABLE B ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS QUARTER ENDED ON MARCH 31, <TABLE> <CAPTION> Variance Average Volume Average Yields Interest Attributable to - ------------------------------------------------------ ------------------------------------------------- 2001 2000 Variance 2001 2000 Variance 2001 2000 Variance Rate Volume - ------------------------------------------------------ ------------------------------------------------- ($ in millions) (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> $ 959 $ 852 $ 107 6.47% 6.26% 0.21% Money market investments $ 15,306 $ 13,248 $ 2,058 $ 341 $ 1,717 8,779 7,645 1,134 7.13 6.66 0.47 Investment securities 156,370 127,073 29,297 7,129 22,168 214 232 (18) 6.86 8.10 (1.24) Trading 3,621 4,672 (1,051) (705) (346) - ---------------------------------------------------- ------------------------------------------------- 9,952 8,729 1,223 7.06 6.66 0.40 175,297 144,993 30,304 6,765 23,539 - ---------------------------------------------------- ------------------------------------------------- Loans: 7,280 6,980 300 9.15 9.50 (0.35) Commercial 164,318 164,917 (599) (7,521) 6,922 834 713 121 11.61 12.19 (0.58) Leasing 24,223 21,715 2,508 (1,066) 3,574 4,805 4,011 794 8.37 8.54 (0.17) Mortgage 100,502 85,635 14,867 (1,942) 16,809 3,297 3,324 (27) 12.97 13.14 (0.17) Consumer 106,371 109,022 (2,651) 238 (2,889) - ---------------------------------------------------- ------------------------------------------------- 16,216 15,028 1,188 9.82 10.18 (0.36) 395,414 381,289 14,125 (10,291) 24,416 - ---------------------------------------------------- ------------------------------------------------- $26,168 $ 23,757 $ 2,411 8.77% 8.88% (0.11)% TOTAL EARNING ASSETS $570,711 $ 526,282 $ 44,429 $ (3,526) $ 47,955 ==================================================== ================================================= Interest bearing deposits: $ 1,966 $ 1,688 $ 278 3.51% 3.36% 0.15% NOW and money market $ 16,998 $ 14,099 $ 2,899 $ 522 $ 2,377 4,076 4,167 (91) 2.87 2.88 (0.01) Savings 28,798 29,887 (1,089) (662) (427) 5,793 5,220 573 6.09 6.05 0.04 Time deposits 86,981 78,488 8,493 925 7,568 - ---------------------------------------------------- ------------------------------------------------- 11,835 11,075 760 4.55 4.45 0.10 132,777 122,474 10,303 785 9,518 - ---------------------------------------------------- ------------------------------------------------- 7,978 6,825 1,153 6.13 6.06 0.07 Short-term borrowings 120,521 102,825 17,696 256 17,440 2,431 2,200 231 6.90 6.99 (0.09) Medium and long-term debt 41,436 38,262 3,174 (705) 3,879 - ---------------------------------------------------- ------------------------------------------------- TOTAL INTEREST-BEARING 22,244 20,100 2,144 5.37 5.27 0.10 LIABILITIES 294,734 263,561 31,173 336 30,837 2,997 3,072 (75) Demand deposits 927 585 342 Other sources of funds - ---------------------------------------------------- ------------------------------------------------- $26,168 $ 23,757 $ 2,411 4.57% 4.46% 0.11% ==================================================== ================================================= 4.20% 4.42% (0.22)% NET INTEREST MARGIN AND ====================== NET INTEREST INCOME 275,977 262,721 13,256 $ (3,862) $ 17,118 ================== 3.40% 3.61% (0.21)% NET INTEREST SPREAD ====================== TAXABLE EQUIVALENT ADJUSTMENT 20,260 20,481 (221) ----------------------------- NET INTEREST INCOME $255,717 $ 242,240 $ 13,477 ============================= </TABLE> 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. Average earning assets rose $2.4 billion primarily due to higher average loans by $1.2 billion and investment securities by $1.1 billion. The rise occurred despite the fact that during the third quarter of 2000 the Corporation sold its ownership interest in Banco Fiduciario (BF) and its credit card operations in the United States. These two operations had $477 million in average earning assets during the first quarter of 2000. The increase in average mortgage loans accounted for 66.8% of the total increase in loans when compared to the first quarter of 2000. Excluding the average balance of BF's commercial loans from the first quarter of 2000 of $231 million, the average commercial loan portfolio increased by $530 million. The rise resulted from the Corporation's sustained business growth in both the retail and middle markets. The average consumer loan portfolio did not reflect growth from the first quarter of 2000, due to the aforementioned sale of the U.S. credit card portfolio, which approximated $161 million in average balances for the quarter ended March 31, 2000. 23
24 The increase in average investment securities was comprised principally of US Government Agency securities, which are tax-exempt in Puerto Rico. The increase in the average volume of earning assets was funded mainly through a higher average volume of short-term borrowings and interest-bearing deposits, which rose $1.2 billion and $760 million, respectively, when compared to the first quarter of 2000. The net interest margin for the quarter ended March 31, 2001, was 4.20% compared with 4.42% for the first quarter of 2000. The average yield on earning assets, on a taxable equivalent basis, decreased 11 basis points from 8.88% to 8.77% during the first quarter of 2001. The average yield on loans declined 36 basis points. The decrease in the loan yield was due to lower credit card income as a result of the sale of the U.S. credit card portfolio, higher proportion of mortgages in the total loan portfolio, the negative impact of the declining interest rate scenario at the beginning of 2001 in commercial loans with floating rates and the new loans originated during a lower interest rate scenario. Partially offsetting these decreases was a rise in the yield on investment securities. The reduction in the net interest margin also resulted from an increase of 10 basis points in the average cost of interest-bearing liabilities mainly attributed to the more expensive, longer-term time deposits and the increase in short-term borrowings. For the last quarter ended December 31, 2000, the Corporation had a net interest margin of 4.06%. The improvement in the net interest margin since the last quarter of 2000 stems principally from a reduction of 22 basis points in the cost of funding earning assets. The declining rate scenario in the first quarter of 2001 had a positive impact in the Corporation's net interest income due to a slightly negative gap, in which a larger proportion of liabilities reprise faster than assets. MARKET RISK Market risk is the risk of economic loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity prices, and other relevant market or price changes. The Corporation's primary market risk exposure is that to interest rates, as primarily interest rate volatility and its impact on the repricing of assets and liabilities affect the net interest income. The Corporation maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Corporation uses various techniques to assess the degree of interest rate risk, including static gap analysis, simulation and duration analysis. Each focuses on different aspects of the interest rate risk that is assumed at any point in time, and are therefore used jointly to make informed judgements about the risk levels and the appropriateness of strategies under consideration. An interest rate sensitivity analysis, performed at the Corporation level, is the primary tool used in expressing the potential loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking choices are only estimates and may be different from what actually may occur in the future. 24
25 Based on the results of the sensitivity analysis as of March 31, 2001. The change in net interest income on a hypothetical rising rate scenario for the next twelve months was a $2.1 million increase and the change for the same period utilizing a hypothetical declining rate scenario was an increase of $0.9 million. Both hypothetical rate scenarios consider a gradual change of 150 basis points during the twelve-month period. These estimated changes are well within the policy guidelines established by the Board. In 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 swaptions, foreign exchange contracts and interest-rate caps, floors and put options embedded in interest bearing contracts. Refer to Note 5 to the consolidated financial statements for further information on the Corporation's derivative transactions. The Corporation conducts business in the Latin American markets through several of its processing and information technology services and products subsidiaries. Although not significant, some of these businesses are conducted in the country's particular foreign currency. However, management does not expect future exchange volatility between the U.S. dollar and the particular foreign currency to affect significantly the value to the Corporation's investment in these subsidiaries. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses for the first quarters of 2000 and 2001 was $50.0 million. During the fourth quarter of 2000 the provision amounted to $46.2 million. The amount of provision for loan losses is dependent upon many factors including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, loan impairment, management's assessment of loan portfolio quality, the value of the collateral and general economic conditions. Table C summarizes the movement in the allowance for loan losses and presents selected loan loss statistics for the quarters ended March 31, 2001 and 2000. Additional information regarding the allowance and asset quality appears in the Credit Quality section. Net charge-offs for the first quarter of 2001 totaled $36.1 million, a decrease of $12.5 million or 25.6%, compared with $48.6 million recorded in the same period of 2000. Net charge-offs for the quarter ended December 31, 2000 totaled $50.9 million. Net charge-offs represented 0.89% of average loans for the quarter ended March 31, 2001, compared with 1.29% for the same period in 2000 and 1.25% for the quarter ended December 31, 2000. As shown in Table C, the consumer and commercial portfolios had lower losses. Consumer loans net charge-offs decreased $8.0 million for the quarter ended March 31, 2001, when compared with the same quarter of 2000. Consumer loans net charge-offs represented 2.21% of average consumer loans for the quarter ended March 31, 2001, compared with 3.15% for the same quarter last year. The decline was mostly due to the fact that in the first quarter of 2000 there were approximately $3.0 million in net charge-offs corresponding to the U.S. credit card operations, sold in the second half of 2000. Also, the Corporation has tightened its credit criteria for unsecured consumer loans. Commercial and construction loans net charge-offs decreased $5.2 million in the quarter ended March 31, 2001, when compared with the same quarter of 2000. As a percentage of average commercial and construction loans, these net charge-offs decreased from 0.96% in the first quarter of 2000, to 0.63% in 2001. The decrease in commercial net charge-offs is mostly associated to the commercial net charge-offs of BF, which approximated $3.3 million in the first quarter of 2000. Lease financing net charge-offs totaled $5.0 million or 2.39% of the average lease financing portfolio for the quarter ended March 31, 2001, compared with $5.0 million or 2.82% for the same period in 2000. Mortgage loans net charge-offs increased to $1.4 million or 0.12% of average mortgage loans for the first quarter of 2001, from $0.6 million or 0.06% in the same period a year earlier. The allowance for credit losses is maintained at a level considered sufficient to provide for estimated loan losses based on evaluations of known and inherent risks in the loan portfolio. In determining the allowance, management considers portfolio risk characteristics, prior loss experience, the results of periodic credit reviews of individual loans, prevailing conditions and loan impairment measurement. 25
26 The allowance for loan losses increased to $305 million or 1.85% of loans at the end of March 31, 2001, compared with $293 million or 1.93% one year earlier, and $291 million or 1.81% at December 31, 2000. The decrease in the allowance to loans ratio from March 31, 2000 resulted from the sale of BF, which had a higher ratio of allowance to total loans to cover potential losses. Moreover, the decrease in the ratio was also attributed to the composition of the loan portfolio, as most of its growth was realized in mortgage loans, comprising a relatively low-risk portfolio. The Corporation has defined impaired loans as all loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective rate, on the observable market price of the loan or on the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience adjusted for current conditions. Larger balance commercial loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen, it is consistently applied unless there is a significant change in the financial position of the borrower. An impaired loan for which the discounted cash flows, collateral value or market price is less than its carrying value requires an allowance. The allowance for impaired loans is part of the Corporation's overall allowance for loan losses. The Corporation's management evaluates the adequacy of the allowance for loan losses on a monthly basis. 26
27 TABLE C ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS <TABLE> <CAPTION> FIRST QUARTER (Dollars in thousands) 2001 2000 ---------- ---------- <S> <C> <C> Balance at beginning of period $ 290,653 $ 292,010 Allowance purchased 738 Provision for loan losses 50,034 50,013 ---------- ---------- 341,425 342,023 ---------- ---------- Losses charged to the allowance: Commercial 14,370 19,488 Construction 1,000 141 Lease financing 7,255 7,398 Mortgage 1,500 642 Consumer 24,361 32,198 ---------- ---------- 48,486 59,867 ---------- ---------- Recoveries: Commercial 3,825 2,861 Lease financing 2,272 2,371 Mortgage 116 61 Consumer 6,143 5,993 ---------- ---------- 12,356 11,286 ---------- ---------- Net loans charged-off (recovered): Commercial 10,545 16,627 Construction 1,000 141 Lease financing 4,983 5,027 Mortgage 1,384 581 Consumer 18,218 26,205 ---------- ---------- 36,130 48,581 ---------- ---------- Balance at end of period $ 305,295 $ 293,442 ========== ========== Ratios: Allowance for losses to loans 1.85% 1.93% Allowance to non-performing assets 83.01 81.23 Allowance to non-performing loans 89.76 89.25 Non-performing assets to loans 2.23 2.38 Non-performing assets to total assets 1.35 1.43 Net charge-offs to average loans 0.89 1.29 Provision to net charge-offs 1.38X 1.03x Net charge-offs earnings coverage 4.17 2.71 </TABLE> 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, 2001, December 31, 2000 and March 31, 2000. 27
28 <TABLE> <CAPTION> MARCH 31, 2001 December 31, 2000 March 31, 2000 (In millions) RECORDED VALUATION Recorded Valuation Recorded Valuation INVESTMENT ALLOWANCE Investment Allowance Investment Allowance ---------- --------- ---------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Impaired loans: Valuation allowance required $ 118.4 $ 28.7 $ 112.5 $ 27.3 $ 152.9 $ 55.3 No valuation allowance required 49.2 42.5 39.1 -------- ------- -------- ------- -------- ------- Total impaired loans $ 167.6 $ 28.7 $ 155.0 $ 27.3 $ 192.0 $ 55.3 -------- ------- -------- ------- -------- ------- </TABLE> Average impaired loans during the first quarter of 2001 and 2000 were $161 million and $178 million, respectively. The Corporation recognized interest income on impaired loans of $0.9 million and $1.2 million, respectively, for the quarters ended March 31, 2001 and 2000. CREDIT QUALITY Non-performing assets consist of past-due loans that are no longer accruing interest and real estate and other property acquired through foreclosure. A summary of non-performing assets by loan categories and related ratios is presented in Table D. The Corporation's policy is to place commercial loans on non-accrual status if payments of principal or interest are delinquent 60 days rather than the standard industry practice of 90 days. Financing leases, conventional mortgages and close-end consumer loans are placed on non-accrual status if payments are delinquent 90 days. Closed-end consumer loans are charged-off when payments are delinquent 120 days. 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. Under the standard industry practice, close-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. During 2000 the Corporation adopted the revised Uniform Retail Credit Classification and Account Management Policy issued by the Federal Financial Institutions Examination Council (FFIEC) on February 10, 1999. The revised policy requires that unsecured retail loans to borrowers who declare bankruptcy are charged-off within 60 days of receipt of notification of filing from the bankruptcy court, or within the charge-off time frames adopted in the classification policy, whichever is shorter. Also, the revised policy details criteria that must be met before the Corporation may consider a delinquent open-end loan current, such as in the process of account re-aging, extension and deferral. Non-performing assets increased by $6.5 million or 1.8% from March 31, 2000 to $367.8 million. On the other hand, non-performing assets as a percentage of total loans decreased when compared with the same period in 2000 from 2.38% as of March 31, 2000, to 2.23% at the same date in 2001. The allowance for loan losses as a percentage of non-performing assets, as of March 31, 2001 and 2000, was 83.01% and 81.23%, respectively. Excluding the non-performing assets of BF as of March 31, 2000, the Corporation's non-performing assets grew $64.8 million from the first quarter of 2000 to the same period in 2001. The increase in non-performing assets since March 31, 2000, excluding the non-performing assets of BF as of that date, was mostly reflected in non-performing commercial and mortgage loans, which grew $32.6 million and $24.2 million, respectively. BF had $58.3 million in non-performing assets as of March 31, 2000. When compared to December 31, 2000, the rise in non-performing assets as of March 31, 2001 was mostly experienced in commercial, which increased $19.1 million or 11.1%. Non-performing commercial loans represented 2.60% of that portfolio at March 31, 2001, compared with 2.37% at the end of 2000. The increase was partly associated to the growth in these portfolios and to the general deteriorating economic conditions which have negatively impacted some of the Corporation's customer margins and cash flows. Non-performing financing leases amounted to $11.3 million or 1.35% of leases as of March 31, 2001, compared with $7.2 million or 0.88% as of December 31, 2000, reflecting the growth in the portfolio and higher delinquencies. On the other hand, non-performing mortgage loans, which reflected a decline of $1.4 million since 28
29 December 31, 2000, represented 1.95% of mortgage loans as of the end of the first quarter of 2001, compared with 2.15% at the end of 2000. Non-performing consumer loans totaled $38.9 million or 1.19% of consumer loans at March 31, 2001, compared with $43.8 million or 1.32% of consumer loans at December 31, 2000. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation's non-performing assets at March 31, 2001, would have been $292 million or 1.77% of loans, and the allowance for loan losses would have been 104.65% of non-performing assets. At March 31, 2000 and December 31, 2000, adjusted non-performing assets would have been $274 million or 1.80% of loans and $273 million or 1.70% of loans, respectively, and the allowance to non-performing assets would have been 107.2% and 106.49%, respectively. TABLE D NON-PERFORMING ASSETS <TABLE> <CAPTION> MARCH 31, December 31, March 31, 2001 2000 2000 ---------- ------------ ---------- (Dollars in thousands) <S> <C> <C> <C> Commercial, construction, industrial and agricultural $ 191,464 $ 172,402 $ 196,457 Lease financing 11,308 7,152 3,818 Mortgage 98,430 99,861 74,493 Consumer 38,921 43,814 54,031 Other real estate 27,638 23,518 32,448 ---------- ---------- ---------- Total $ 367,761 $ 346,747 $ 361,247 ========== ========== ========== Accruing loans past-due 90 days or more $ 21,700 $ 21,599 $ 29,434 ========== ========== ========== Non-performing assets to loans 2.23% 2.16% 2.38% Non-performing assets to assets 1.35 1.24 1.43 </TABLE> NON-INTEREST INCOME Non-interest income, excluding securities and trading gains, amounted to $114.3 million for the quarter ended March 31, 2001, compared with $101.6 million for the same period in 2000. As shown on Table E, the rise in non-interest income was principally driven by an increase of $10.8 million in other service fees and $4.4 million in service charges on deposit accounts, partially offset by a decrease of $2.5 million in other income. 29
30 TABLE E NON-INTEREST INCOME <TABLE> <CAPTION> FIRST QUARTER -------------------------------------------------- 2001 2000 Change ---------- ---------- ---------- <S> <C> <C> <C> (Dollars in thousands) Service charges on deposit accounts $ 34,658 $ 30,223 $ 4,435 ---------- ---------- ---------- Other service fees: Credit cards fees and discounts 13,568 14,370 (802) Debit card fees 9,518 4,891 4,627 Processing fees 9,140 6,169 2,971 Other fees 6,282 7,580 (1,298) Insurance fees 5,088 1,751 3,337 Check cashing fees 4,581 3,530 1,051 Sale and administration of investment products 4,401 3,914 487 Mortgage servicing fees, net of amortization 3,079 2,746 333 Trust fees 2,518 2,414 104 ---------- ---------- ---------- Total other service fees 58,175 47,365 10,810 ---------- ---------- ---------- Other income 21,535 24,057 (2,522) ---------- ---------- ---------- Total $ 114,368 $ 101,645 $ 12,723 ========== ========== ========== </TABLE> The increase in service charges on deposit accounts when compared to the first quarter of 2000 was mostly due to higher commercial account activity and the implementation during 2000 of new fees in deposit accounts, including charges for electronic transaction overdrafts, accounts without activity, and others. Also, the increase relates to some fees, including external payments, which were previously accounted for as other service fees and beginning in 2001 are charged through account analysis for certain commercial accounts. The increase in other service fees is mostly attributed to processing fees generated by GM Group and to debit card fees mainly as a result of the growing volume of point-of-sale terminals and transactions. Also, contributing to the growth in non-interest income were insurance commission income derived from Popular Insurance, which began operations in the second half of 2000, and higher check cashing fees, basically driven by the expansion of the Corporation's retail financial subsidiary in the United States. The latter added 33 new offices (including 13 mobile units) to its network since March 31, 2000. On the other hand, credit card fees and discounts declined when compared to the first quarter of 2000 due to the aforementioned sale of the U.S. credit card operations. For the quarter ended March 31, 2000, these operations contributed with approximately $4.6 million in other service fees. The decrease in other fees was associated to the reclassification of some external payment fees to service charges on deposit accounts as previously described. The decrease in other operating income was mostly due to lower revenues from the Corporation's leasing subsidiary and to income no longer derived as a result of the sale of BF. Also, included in other income was a pretax loss of $0.6 million on the fair market value of derivatives pursuant to Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities", which was adopted during this quarter. For the first quarter of 2001, the Corporation recognized net gains of $0.6 million in the sale of securities and trading account profits, compared with $14.1 million in the same period last year. During the first quarter of 2000, the Corporation exercised its conversion right and exchanged its investment in preferred stock of a financial corporation in Puerto Rico for common stock of the same entity, resulting in a pretax gain of $13.4 million. 30
31 OPERATING EXPENSES Operating expenses for the first quarter of 2001 were $220.0 million compared with $226.5 million for the same quarter in 2000, a decrease of $6.5 million or 2.9%. Personnel costs, the largest category of operating expenses, totaled $104.9 million for the first quarter of 2001 compared with $103.2 million in the same period of 2000. Profit sharing and pension and other benefits accounted for the major increase in this category, rising $2.5 million. Partially offsetting this increase was a decrease in salaries of $0.8 million due to a lower headcount as a result of the sale of BF and the U.S. credit card operations and employees from Banco Popular who retired at the end of 2000. This was partly offset by annual merit increases and the impact of continued expansion in other business areas. Full-time equivalent employees (FTE's) totaled 10,826 at the end of this quarter compared with 11,591 employees at the same date in 2000. Other operating expenses, excluding personnel costs, were $115.1 million for the quarter ended March 31, 2001, a decrease of $8.2 million when compared to the same period in 2000. This decline was mostly reflected in business promotion, other operating expenses, professional fees and amortization of intangibles. Business promotion declined mostly due to the fact that the Corporation is no longer incurring substantial advertising efforts to market its credit cards in the U.S. Other operating expenses declined mostly due to the sale of BF and lower sundry losses. Moreover, professional fees declined due to lower legal and consulting services, data processing and other professional services. The decrease in the amortization of intangibles relates to the core deposits intangible recorded on the merger with BanPonce Corporation in 1990, which was fully amortized at the end of 2000. Income tax expense rose $8.4 million from $18.8 million in the first quarter of 2000, to $27.2 million in the same quarter this year, primarily as a result of higher pre-tax earnings and lower income subject to capital gains tax. The effective tax rate for the first quarter of 2001 was 26.97% compared with 23.03% for the same period in 2000. On January 1, 2001, the Corporation adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which requires the recognition of derivatives as either assets or liabilities in the statement of condition measured at fair value. At the adoption, the Corporation recognized $0.7 million (net of tax) in income as a cumulative effect of accounting changes. BALANCE SHEET COMMENTS Total assets as of March 31, 2001 reached $27.3 billion compared with $25.3 billion as of the same date a year earlier. Total assets at December 31, 2000, were $28.1 billion. Earning assets totaled $25.7 billion at March 31, 2001, compared with $26.3 billion at December 31, 2000 and $23.6 billion at March 31, 2000. The investment portfolio reached $8.0 billion as of March 31, 2001, a decrease of $1.1 billion when compared with $9.1 billion as of December 31, 2000. This decline is mostly due to lower arbitrage activity as of the end of the quarter resulting from management's objective of reducing the reliance on borrowings. Investment securities as of March 31, 2000 amounted to $7.3 billion. The increase since March 31, 2000 was mostly in U.S. Government Agency securities. As shown in Table F, the loan portfolio increased $452 million compared with December 31, 2000, of which $394 million were in mortgage and $96 million in commercial loans (including construction loans). The mortgage loan portfolio increased from December 31, 2000 due to an aggressive marketing campaign and to the impact of the declining interest rate scenario which generally results in a higher demand for mortgage loans. The growth in the commercial loan portfolio resulted principally from the continued marketing efforts directed to the retail and middle market. The increase in the loan portfolio compared with the same date last year was also reflected in the mortgage and commercial loan portfolios (including construction loans), which increased $1.1 billion and $238 million, respectively. The consumer loan portfolio decreased $61 million since the end of 2000, mainly personal loans, as a result of a lower demand for this type of loan, principally due to the impact of the declining interest rate scenario, which is favorable for the refinancing of mortgage loans and the consolidation of personal debt. Consumer loans declined $96 million since March 31, 2000 mainly resulting from the sale of the U.S. credit card portfolio, which had a portfolio totaling $169 million at March 31, 2000. 31
32 TABLE F LOANS ENDING BALANCES <TABLE> <CAPTION> MARCH 31, December 31, March 31, 2001 2000 2000 ------------- ------------- ------------- <S> <C> <C> <C> (Dollars in thousands) Commercial, industrial and agricultural $ 7,096,712 $ 7,013,834 $ 6,872,173 Construction 271,715 258,197 257,888 Lease financing 839,721 816,714 731,803 Mortgage * 5,037,862 4,643,646 3,979,474 Consumer * 3,263,467 3,324,694 3,359,593 ------------- ------------- ------------- Total $ 16,509,477 $ 16,057,085 $ 15,200,931 ============= ============= ============= </TABLE> * Includes loans held-for-sale Total deposits were $15.1 billion at March 31, 2001, or $288 million higher than the $14.8 billion reported at December 31, 2000. Time and savings deposits increased $229 million and $170 million, respectively, when compared with December 31, 2000. The increase in time deposits is mainly due to higher broker CD's, which consist of certificate of deposits purchased from a broker acting as an agent for depositors, and which serve as an alternative source of funding the Corporation's operations at somewhat lower rates than other debt. Also, retail time deposits increased during the quarter. Demand deposits had a decrease of $111 million compared with the amount at December 31, 2000 mainly attributable to commercial accounts. At March 31, 2000, total deposits amounted to $14.3 billion and included $287 million in deposits of BF. Borrowed funds, including subordinated notes and capital securities, amounted to $9.6 billion at March 31, 2001, from $10.8 billion as of December 31, 2000 and $8.8 billion at March 31, 2000. As part of the investment in subsidiaries, the Corporation had a minority interest of $0.9 million as of March 31, 2001 and December 31, 2000, which mostly represented the beneficial interest of the minority investors of Levitt Mortgage. As of March 31, 2000 the Corporation had a minority interest of $21.0 million. The decrease from the same quarter last year was mainly attributed to the sale of BF. The Corporation's stockholders' equity at March 31, 2001 and December 31, 2000 was $2.1 billion and $2.0 billion, respectively, compared with $1.7 billion at March 31, 2000. Included in stockholders' equity at March 31, 2001 was $81 million in unrealized gains on securities available-for-sale, net of tax, compared with unrealized gains of $4 million as of December 31, 2000 and $161 million in unrealized losses at March 31, 2000. The dividend payout ratio to common stockholders for the quarter ended March 31, 2001, was 30.16% compared with 34.98% for the same quarter last year and 32.47% for the year ended December 31, 2000. The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Management has determined that as of the periods presented, the Corporation exceeded all capital adequacy requirements to which it is subject. The Corporation's ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage, as of March 31, 2001, March 31, 2000 and December 31, 2000 are presented on Table G. The market value of the Corporation's common stock at March 31, 2001 was $29.45, compared with $26.31 at December 31, 2000 and $22.19 at March 31, 2000. The Corporation's market capitalization at March 31, 2001, was $4.0 billion compared with $3.6 billion as of December 31, 2000 and $3.0 billion at March 31, 2000. 32
33 TABLE G CAPITAL ADEQUACY DATA <TABLE> <CAPTION> MARCH 31, December 31, March 31, 2001 2000 2000 ------------- ------------- ------------- <S> <C> <C> <C> (Dollars in thousands) Risk-based capital Tier I capital $ 1,801,296 $ 1,741,004 $ 1,583,637 Supplementary (Tier II) capital 332,511 321,627 323,358 ------------- ------------- ------------- Total capital $ 2,133,807 $ 2,062,631 $ 1,906,995 ============= ============= ============= Risk-weighted assets Balance sheet items 16,452,469 16,173,005 $ 15,258,355 Off-balance sheet items 490,034 496,735 515,180 ------------- ------------- ------------- Total risk-weighted assets $ 16,942,503 $ 16,669,740 $ 15,773,535 ============= ============= ============= Ratios: Tier I capital (minimum required - 4.00%) 10.63% 10.44% 10.04% Total capital (minimum required - 8.00%) 12.59% 12.37% 12.09% Leverage ratio (minimum required - 3.00%) 6.59% 6.40% 6.32% </TABLE> PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. ITEM 5. OTHER INFORMATION On May 9, 2001, the Board of Directors of Popular, Inc. declared a cash dividend of $0.20 per common share for the second quarter of 2001. This represents a 25.0 percent increase over the $0.16 per share paid in previous quarterly cash dividends. The dividend is payable on July 2, 2001 to shareholders of record on June 8, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K <TABLE> <CAPTION> a) Exhibit No. Exhibit Description Reference ----------- ------------------- --------- <S> <C> <C> 19 Quarterly Report to Shareholders for the Exhibit "A" period ended March 31, 2001 </TABLE> b) One report on Form 8-K was filed for the quarter ended March 31, 2001: Dated: January 10, 2001 Items reported: Item 5 - Other Events 33
34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be filed on its behalf by the undersigned thereunto duly authorized. POPULAR, INC. (Registrant) Date: May 15, 2001 By: /s/ Jorge A. Junquera -------------- ------------------------------------- Jorge A. Junquera Senior Executive Vice President Date: May 15, 2001 By: /s/ Amilcar L. Jordan -------------- ------------------------------------- Amilcar L. Jordan, Esq. Senior Vice President & Comptroller 34