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 June 30, 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 136,277,273 ---------------------------- ------------------------------------------ (Title of Class) (Shares Outstanding as of August 14, 2001)
2 POPULAR, INC. INDEX <TABLE> <CAPTION> Page ----- <S> <C> Part I - Financial Information Item 1. Financial Statements Unaudited Consolidated Statements of Condition as of June 30, 2001, December 31, 2000 and June 30, 2000 3 ----- Unaudited Consolidated Statements of Income for the quarters and six months ended June 30, 2001 and 2000 4 ----- Unaudited Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2001 and 2000 5 ----- Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 6 ----- Notes to unaudited Consolidated Financial Statements 7-26 ----- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27-41 ----- Item 3. Quantitative and Qualitative Disclosures about Market Risk 31 ----- Part II - Other Information Item 1. Legal proceedings 41 ----- 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 41 ----- Item 5. Other information - None N/A ----- Item 6. Exhibits and reports on Form 8-K 41 ----- --- Signature 42 ----- </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> JUNE 30, December 31, June 30, (In thousands) 2001 2000 2000 ------------ ------------ ------------ <S> <C> <C> <C> ASSETS Cash and due from banks $ 580,592 $ 726,051 $ 698,012 ------------ ------------ ------------ Money market investments: Federal funds sold and securities purchased under agreements to resell 1,052,960 1,057,320 1,159,754 Time deposits with other banks 10,424 10,908 31,206 Banker's acceptances 470 390 551 ------------ ------------ ------------ 1,063,854 1,068,618 1,191,511 ============ ============ ============ Investment securities available-for-sale, at market value: Pledged securities with creditors' right to repledge 2,505,223 3,657,729 3,159,544 Other investment securities available-for-sale 4,958,437 5,138,195 4,069,282 Investment securities held-to-maturity, at amortized cost 247,812 264,731 292,249 Trading account securities, at market value: Pledged securities with creditors' right to repledge 217,776 124,016 159,161 Other trading securities 61,910 29,057 31,297 Loans held-for-sale, at lower of cost or market 914,071 823,901 790,831 ------------ ------------ ------------ Loans 16,604,911 15,580,379 15,335,791 Less - Unearned income 326,736 347,195 352,018 Allowance for loan losses 313,337 290,653 305,526 ------------ ------------ ------------ 15,964,838 14,942,531 14,678,247 ------------ ------------ ------------ Premises and equipment 395,804 405,772 437,181 Other real estate 28,741 23,518 36,426 Customers' liabilities on acceptances 1,673 1,647 5,735 Accrued income receivable 190,013 202,540 176,540 Other assets 450,832 367,150 429,584 Intangible assets 269,058 281,595 295,646 ------------ ------------ ------------ $ 27,850,634 $ 28,057,051 $ 26,451,246 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,144,623 $ 3,109,885 $ 3,067,579 Interest bearing 12,425,162 11,695,022 11,392,875 ------------ ------------ ------------ 15,569,785 14,804,907 14,460,454 Federal funds purchased and securities sold under agreements to repurchase 4,157,279 4,964,115 4,937,816 Other short-term borrowings 2,828,347 4,369,212 2,854,035 Notes payable 2,379,030 1,176,912 1,752,722 Acceptances outstanding 1,673 1,647 5,735 Other liabilities 471,953 470,687 407,260 ------------ ------------ ------------ 25,408,067 25,787,480 24,418,022 ------------ ------------ ------------ 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 ------------ ------------ ------------ Minority interest in consolidated subsidiaries 915 927 21,334 ------------ ------------ ------------ Stockholders' equity: Preferred stock 100,000 100,000 100,000 Common stock 831,408 830,356 828,959 Surplus 264,414 260,984 247,479 Retained earnings 963,605 865,082 775,975 Treasury stock-at cost (66,136) (66,214) (64,150) Accumulated other comprehensive income (loss), net of tax of $23,619 (December 31, 2000 - $1,683; June 30, 2000 - ($39,339)) 73,361 3,436 (151,373) ------------ ------------ ------------ 2,166,652 1,993,644 1,736,890 ------------ ------------ ------------ $ 27,850,634 $ 28,057,051 $ 26,451,246 ============ ============ ============ </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> Quarter ended Six months ended June 30, June 30, (Dollars in thousands, except per share information) 2001 2000 2001 2000 ---------- ------------ ------------ ---------- <S> <C> <C> <C> <C> INTEREST INCOME: Loans $ 391,841 $ 392,437 $ 785,406 $ 768,957 Money market investments 13,026 14,308 28,332 27,556 Investment securities 114,243 114,624 252,302 226,754 Trading account securities 4,297 3,405 7,818 7,308 ---------- ------------ ------------ ---------- 523,407 524,774 1,073,858 1,030,575 ---------- ------------ ------------ ---------- INTEREST EXPENSE: Deposits 131,022 129,399 263,799 251,873 Short-term borrowings 84,493 113,684 203,611 216,509 Long-term debt 42,374 35,775 85,213 74,037 ---------- ------------ ------------ ---------- 257,889 278,858 552,623 542,419 ---------- ------------ ------------ ---------- Net interest income 265,518 245,916 521,235 488,156 Provision for loan losses 49,462 48,719 99,496 98,732 ---------- ------------ ------------ ---------- Net interest income after provision for loan losses 216,056 197,197 421,739 389,424 Service charges on deposit accounts 36,310 30,831 70,968 61,054 Other service fees 58,907 55,443 117,082 102,808 (Loss) gain on sale of securities (2,152) 329 (1,862) 13,593 Trading account profit 945 693 1,254 1,510 Gain on derivatives 1,652 1,021 Other operating income 25,638 21,989 47,804 46,046 ---------- ------------ ------------ ---------- 337,356 306,482 658,006 614,435 ---------- ------------ ------------ ---------- OPERATING EXPENSES: Personnel costs: Salaries 78,884 77,301 156,662 155,895 Profit sharing 4,018 5,569 9,115 9,701 Pension and other benefits 23,841 15,341 45,860 35,839 ---------- ------------ ------------ ---------- 106,743 98,211 211,637 201,435 Net occupancy expenses 17,726 16,177 34,921 32,736 Equipment expenses 24,575 25,079 48,702 48,513 Other taxes 9,809 8,341 18,619 16,916 Professional fees 16,842 16,826 32,227 34,504 Communications 12,085 12,034 23,972 22,836 Business promotion 13,159 12,572 23,704 26,659 Printing and supplies 4,490 5,313 8,809 10,485 Other operating expenses 20,189 16,282 36,120 34,663 Amortization of intangibles 6,860 8,537 13,736 17,129 ---------- ------------ ------------ ---------- 232,478 219,372 452,447 445,876 ---------- ------------ ------------ ---------- Income before income tax, minority interest and cumulative effect of accounting changes 104,878 87,110 205,559 168,559 Income tax 27,337 21,684 54,488 40,440 Net (gain) loss of minority interest (4) (303) 12 1,193 ---------- ------------ ------------ ---------- Income before cumulative effect of accounting changes 77,537 65,123 151,083 129,312 Cumulative effect of accounting changes, net of tax 686 ---------- ------------ ------------ ---------- NET INCOME $ 77,537 $ 65,123 $ 151,769 $ 129,312 ========== ============ ============ ========== NET INCOME APPLICABLE TO COMMON STOCK $ 75,450 $ 63,036 $ 147,594 $ 125,137 ========== ============ ============ ========== EARNINGS PER COMMON SHARE (BASIC AND DILUTED) (BEFORE AND AFTER CUMULATIVE EFFECT OF ACCOUNTING $ 0.55 $ 0.46 $ 1.08 $ 0.92 CHANGES) ========== ============ ============ ========== DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ 0.16 $ 0.36 $ 0.32 ========== ============ ============ ========== </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> Quarter ended Six months ended June 30, June 30, (In thousands) 2001 2000 2001 2000 -------- -------- ---------- ---------- <S> <C> <C> <C> <C> Net Income $ 77,537 $ 65,123 $ 151,769 $ 129,312 -------- -------- ---------- ---------- Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment (124) 88 (250) (297) Unrealized gains (losses) on securities: Unrealized holding (losses) gains arising during the period, net of tax of ($3,936) (2000 - $1,458) for the quarter and $21,967 (2000- $131) for the six-month period (9,659) 10,991 67,439 163 Less: reclassification adjustment for (losses) gains included in net income, net of tax of ($797) (2000- $88) for the quarter and ($719) (2000- $3,477) for the six-month period (2,610) 241 (2,398) 10,530 Net gain (loss) on cash flow hedges 135 (517) Less: reclassification adjustment for losses included in net income, net of tax of ($148) for the quarter and ($260) for the six-month period in 2001 (290) (465) Cumulative effect of accounting change 254 Less: reclassification adjustment for losses included in net income, net of tax of ($40) for the quarter and ($77) for the six-month period in 2001 (75) (136) -------- -------- ---------- ---------- Total other comprehensive (loss) income $ (6,673) $ 10,838 $ 69,925 $ (10,664) -------- -------- ---------- ---------- Comprehensive income $ 70,864 $ 75,961 $ 221,694 $ 118,648 ======== ======== ========== ========== </TABLE> DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): <TABLE> <CAPTION> JUNE 30, December 31, June 30, (In thousands) 2001 2000 2000 -------- ------------ ---------- <S> <C> <C> <C> Foreign currency translation adjustment $ (1,134) $ (884) $ (1,562) Unrealized gains (losses) on securities 74,157 4,320 (149,811) Unrealized losses on derivatives (52) Cumulative effect of accounting change 390 -------- -------- ---------- Accumulated other comprehensive income (loss) $ 73,361 $ 3,436 $ (151,373) ======== ======== ========== </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 six months ended June 30, (In thousands) 2001 2000 ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 151,769 $ 129,312 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 38,210 38,488 Provision for loan losses 99,496 98,732 Amortization of intangibles 13,736 17,129 Loss (gain) on sale of investment securities available-for-sale 1,862 (13,593) Gain on derivatives (1,021) Loss on disposition of premises and equipment 283 47 Loss (gain) on sale of loans 192 (3,631) Net amortization of premiums and accretion of discounts on investments 1,151 1,088 Net increase in loans held-for-sale (90,170) (171,533) Net amortization of deferred loan fees and costs (10,267) (2,104) Net (increase) decrease in trading securities (126,613) 46,152 Net decrease (increase) in interest receivable 12,527 (794) Net increase in other assets (11,396) (26,831) Net decrease in interest payable (27,879) (8,751) Net decrease in deferred and current taxes (1,750) (24,514) Net increase in postretirement benefit obligation 6,094 3,447 Net decrease in other liabilities (16,289) (20,106) ------------ ------------ Total adjustments (111,834) (66,774) ------------ ------------ Net cash provided by operating activities 39,935 62,538 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in money market investments 4,764 (205,517) Purchases of investment securities held-to-maturity (2,615,536) (4,735,460) Maturities of investment securities held-to-maturity 2,717,702 4,649,771 Purchases of investment securities available-for-sale (2,085,169) (1,463,371) Maturities of investment securities available-for-sale 2,805,546 1,565,792 Proceeds from sales of investment securities available-for-sale 606,075 89,648 Net disbursements on loans (1,001,107) (1,010,056) Proceeds from sale of loans 244,336 349,896 Acquisition of loan portfolios (388,389) (144,925) Cash received in acquisition 715 Acquisition of premises and equipment (31,741) (37,996) Proceeds from sale of premises and equipment 3,216 4,600 ------------ ------------ Net cash provided by (used in) investing activities 259,697 (936,903) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 743,647 286,739 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (806,836) 523,336 Net (decrease) increase in other short-term borrowings (1,540,865) 241,209 Net proceeds (payments) of notes payable 1,202,118 (99,877) Dividends paid (47,715) (47,620) Proceeds from issuance of common stock 4,482 4,921 Treasury stock sold (acquired) 78 (27) ------------ ------------ Net cash (used in) provided by financing activities (445,091) 908,681 ------------ ------------ Net (decrease) increase in cash and due from banks (145,459) 34,316 Cash and due from banks at beginning of period 726,051 663,696 ------------ ------------ Cash and due from banks at end of period $ 580,592 $ 698,012 ============ ============ </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, the Caribbean and Central America. Note 12 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 statement requires the recognition of all derivatives on the balance sheet at 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. 7
8 As of June 30, 2001, the Corporation had $390 in accumulated other comprehensive income pertaining to the cumulative effect of adopting SFAS No. 133. This amount pertains to the reclassification of $29,526 of held-to-maturity securities as available-for-sale. Therefore, the Corporation does not expect reclassification of this transition adjustment included in other comprehensive income, within the next twelve months. 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. The adoption of these provisions did not have a material impact on the Corporation's financial condition or results of operations. Business Combinations In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations." This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 changes the accounting for business combinations in Opinion 16 in the following significant respects: SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating the use of the pooling-of-interests method. In contrast to Opinion 16, which required separate recognition of intangible assets that can be identified and named, SFAS No. 141 requires that they be recognized as assets apart from goodwill if they meet one of two criteria--the contractual-legal criterion or the separability criterion. In addition to the disclosure requirements in Opinion 16, SFAS No. 141 requires disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. When the amounts of goodwill and intangible assets acquired are significant in relation to the purchase price paid, disclosure of other information about those assets is required, such as the amount of goodwill by reportable segment and the amount of the purchase price assigned to each major intangible asset class. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. Goodwill and Intangible Assets In June 2001, the Financial Accounting Standards Board issued SFAS No. 142 "Goodwill and Other Intangible Assets." This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. 8
9 SFAS No. 142 changes the subsequent accounting for goodwill and other intangible assets in the following significant respects: Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without the constraint of an arbitrary ceiling. Opinion 17 mandated an arbitrary ceiling of 40 years for that amortization. SFAS No. 142 provides specific guidance for testing goodwill for impairment. Goodwill will be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. In addition, this Statement provides specific guidance on testing intangible assets that will not be amortized for impairment and thus removes those intangible assets from the scope of other impairment guidance. Intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets with their recorded amounts. SFAS No. 142 requires disclosure of information about goodwill and other intangible assets in the years subsequent to their acquisition that was not previously required. Required disclosures include information about the changes in the carrying amount of goodwill from period to period (in the aggregate and by reportable segment), the carrying amount of intangible assets by major intangible asset class for those assets subject to amortization and for those not subject to amortization, and the estimated intangible asset amortization expense for the next five years. The provisions of this statement are required to start with fiscal years beginning after December 15, 2001. This statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of this statement (resulting from a transitional impairment test) are to be reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the nonamortization and amortization provisions of SFAS No. 142. The annualized goodwill amortization for the year 2001 is estimated at approximately $17,000. Management is still in the process of determining the full impact of the provisions of SFAS 142. 9
10 NOTE 3 - INVESTMENT SECURITIES The average contractual maturities as of June 30, 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> JUNE 30, December 31, June 30, ---------------------- ---------------------- ---------------------- 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 3 months) $ 716,000 $ 730,112 $1,140,544 $1,146,744 $1,736,034 $1,721,602 Obligations of other U.S. Government agencies and corporations (average maturity of 3 years) 4,097,067 4,113,549 5,001,672 4,977,669 3,513,201 3,372,838 Obligations of Puerto Rico, States and political subdivisions (average maturity of 8 years and 9 months) 103,356 106,000 70,678 71,278 78,784 78,233 Collateralized mortgage obligations (average maturity of 23 years and 2 months) 1,652,425 1,655,012 1,552,544 1,553,285 1,301,343 1,272,453 Mortgage-backed securities (average maturity of 24 years) 460,670 465,530 700,844 695,987 489,265 489,018 Equity securities (without contractual maturity) 250,235 304,913 229,547 255,651 229,927 228,211 Others (average maturity of 15 years and 8 months) 85,707 88,544 94,092 95,310 69,422 66,471 ---------- ---------- ---------- ---------- ---------- ---------- $7,365,460 $7,463,660 $8,789,921 $8,795,924 $7,417,976 $7,228,826 ========== ========== ========== ========== ========== ========== </TABLE> Investment securities held-to-maturity: <TABLE> <CAPTION> JUNE 30, December 31, June 30, -------------------- -------------------- -------------------- 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) $ 66,643 $ 66,652 $ 11,061 $ 11,095 9,130 9,140 Obligations of Puerto Rico, States and political subdivisions (average maturity of 11 years and 6 months) 85,197 89,091 118,595 117,467 139,386 138,567 Collateralized mortgage obligations (average maturity of 22 years and 11 months) 1,538 1,515 12,369 12,228 16,196 16,089 Mortgage-backed securities 18,744 19,110 21,077 20,826 Others (average maturity of 3 years and 4 months) 94,434 92,276 103,962 98,672 106,460 101,657 -------- -------- -------- -------- -------- -------- $247,812 $249,534 $264,731 $258,572 $292,249 $286,279 ======== ======== ======== ======== ======== ======== </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. 10
11 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 June 30, 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> JUNE 30, December 31, June 30, (In thousands) 2001 2000 2000 ---------- ------------ ---------- <S> <C> <C> <C> Investment securities available-for-sale $1,801,458 $1,617,134 $1,605,334 Investment securities held-to-maturity 5,971 6,798 9,877 Loans 1,571,385 777,118 674,532 ---------- ---------- ---------- $3,378,814 $2,401,050 $2,289,743 ========== ========== ========== </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. 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 June 30, 2001 the total amount (net of tax) included in accumulated other comprehensive income pertaining to future and forward contracts was an unrealized loss of $129. These contracts have a maximum maturity of 123 days. The Corporation purchased interest rate caps as part of a securitization in order to limit the interest rate payable to the security holders. These contracts qualify for cash flow hedge accounting in accordance with SFAS 133. As of June 30, 2001, the fair market value of this interest rate cap was $4,760 included in other assets. These contracts mature in 8.6 years. 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 June 30, 2001, the Corporation included $13 and $13 in other assets and other liabilities, respectively, pertaining to the fair value of these contracts. The interest-rate caps, floors and put options 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. 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. 11
12 As of June 30, 2001, the Corporation had recognized a derivative asset of $20,030 based on the fair value of the swaptions, a derivative liability of $44,588 based on the fair value of the bifurcated option, and a related discount of $23,477, these amounts are included in other assets and deposits, respectively. The Corporation uses interest rate swaps to convert floating rate debt to fixed rate debt in order to fix the future cost of the portfolio of short-term borrowings. The specific 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 do not qualify for hedge accounting in accordance with SFAS 133 and therefore changes in the fair value of the derivatives are recorded in the income statement. For the quarter and six months ended June 30, 2001, the Corporation recognized a gain of $1,652 and $1,021, respectively, as a result of the changes in fair value of the non-hedging derivatives included as part of the gain on derivatives. 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 June 30, 2001, amounted to $9,182 and $112,959, respectively (June 30, 2000 - $19,562 and $66,162; December 31, 2000 - $13,962 and $103,705). 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 - STOCK OPTION PLAN In April 2001, the shareholders of the Corporation approved the 2001 Stock Option Plan (the Plan), which permits the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. Any employee or director of the Corporation or of any of its subsidiaries is eligible to participate in the Plan. The selection of individuals eligible to participate is within the discretion of the Board of Directors, or an appointed committee. The Plan provides for the issuance of Popular, Inc.'s common stock at a price equal to its fair market value at the date of grant, subject to certain Plan provisions. The aggregate number of shares of common stock, which may be issued under the Plan, is limited to 5,000,000 shares, subject to adjustment for stock splits, recapitalizations and similar events. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The maximum option term is generally ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year. SFAS No. 123, "Accounting for Stock-Based Compensation" established a fair value based method of accounting for stock-based compensation plans and encourages entities to adopt that method of accounting for their employee stock compensation plans. This pronouncement also allows an entity to continue to measure compensation cost for those plans based on Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees" and disclose the pro forma net income and net income per share as if the fair value method had been applied in measuring cost. The Corporation has elected APB 25 and related interpretations in accounting for stock-based compensation plans. During the second quarter of 2001, options for 8,384 common shares were awarded under the Plan with a weighted average exercise price of $30.56, which equaled the share's market price at the date of grant. The weighted average remaining contractual life of all options at June 30, 2001 was 9.8 years. No compensation cost was recognized by the Corporation during the period ended June 30, 2001 related to these stock options. Had the Corporation elected to recognize compensation cost for options granted in 2001, consistent with the fair value method of accounting of SFAS 123, the pro forma net income and pro forma earnings per share would have been as follows: 12
13 <TABLE> <CAPTION> Quarter ended Six-months ended June 30, June 30, 2001 2000 2001 2000 -------- -------- --------- --------- (In thousands, except per share information) <S> <C> <C> <C> <C> Net income applicable to common stock As reported $ 75,450 $ 63,036 $ 147,594 $ 125,137 Pro forma $ 75,447 $ 63,036 $ 147,591 $ 125,137 Basic earnings per common share As reported $ 0.55 $ 0.46 $ 1.08 $ 0.92 Pro forma $ 0.55 $ 0.46 $ 1.08 $ 0.92 Diluted earnings per common share As reported $ 0.55 $ 0.46 $ 1.08 $ 0.92 Pro forma $ 0.55 $ 0.46 $ 1.08 $ 0.92 </TABLE> The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model, with the following assumptions: an expected dividend yield of 2.23%, a weighted average expected life of the options of 10 years, an expected volatility of 33.0% and a risk-free interest rate of 5.23%. The weighted average fair value of options granted during this quarter was $11.92 per stock option. NOTE 8 - 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 I are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust I consisted of $154,640 of Junior Subordinated Debentures and a related accrued interest receivable of $4,292. 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 9 - STOCKHOLDERS' EQUITY Authorized common stock is 180,000,000 shares with a par value of $6 per share. At June 30, 2001, there were 138,567,996 (June 30, 2000 - 138,159,859; December 31, 2000 - 138,392,822) shares issued and 136,180,713 (June 30, 2000 - 135,865,104; December 31, 2000 - 135,998,617) shares outstanding. As of June 30, 2001, a total of 2,387,283 (June 30, 2000 - 2,294,755; December 31, 2000 - 2,394,205) common shares with a total cost of $66,136 (June 30, 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 June 30, 2001, June 30, 2000 and December 31, 2000. 13
14 NOTE 10 - EARNINGS PER COMMON SHARE <TABLE> <CAPTION> Quarter ended Six-months ended June 30, June 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> (In thousands, except per share information) Net income $ 77,537 $ 65,123 $ 151,769 $ 129,312 Less: Preferred stock dividends 2,087 2,087 4,175 4,175 ------------ ------------ ------------ ------------ Net income applicable to common stock $ 75,450 $ 63,036 $ 147,594 $ 125,137 ============ ============ ============ ============ Average common shares outstanding 136,189,956 135,878,677 136,150,709 135,821,221 Average potential common shares - stock options 130 65 ------------ ------------ ------------ ------------ Average common shares outstanding - assuming dilution 136,190,086 135,878,677 136,150,774 135,821,221 ============ ============ ============ ============ Basic earnings per common share $ 0.55 $ 0.46 $ 1.08 $ 0.92 ============ ============ ============ ============ Diluted earnings per common share $ 0.55 $ 0.46 $ 1.08 $ 0.92 ============ ============ ============ ============ </TABLE> NOTE 11 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS During the six-month period ended June 30, 2001, the Corporation paid interest and income taxes amounting to $580,503 and $46,976, respectively (2000 - $551,170 and $61,781). In addition, the loans receivable transferred to other real estate and other property for the six-month period ended June 30, 2001, amounted to $18,404 and $15,028, respectively (2000 - $17,653 and $12,634). In connection with the requirements of SFAS No. 133, the statement of condition includes in the categories of other assets, other liabilities and deposits, $26,366, $99 and $21,231, respectively, in derivative instruments as of June 30, 2001. NOTE 12 - 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 June 30, 2000 it also included the banking operations of Banco Fiduciario in the Dominican Republic. 14
15 The accounting policies of the segments are the same as those followed by the Corporation in the ordinary course of business and conform with generally accepted accounting principles and with general practices within the financial industry. Following are the results of operations and selected financial information by operating segments for the quarters and six months ended June 30, 2001 and 2000. <TABLE> <CAPTION> MORTGAGE AND COMMERCIAL CONSUMER LEASE BANKING LENDING FINANCING OTHER ELIMINATIONS TOTAL ------------ ------------ --------- ------------ ------------ ------------ (IN THOUSANDS) QUARTER ENDED JUNE 30, 2001 ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> NET INTEREST INCOME $ 220,575 $ 31,751 $ 13,642 $ (415) $ (35) $ 265,518 PROVISION FOR LOAN LOSSES 34,893 9,731 4,838 49,462 OTHER INCOME 59,615 15,395 5,147 44,123 (2,980) 121,300 AMORTIZATION EXPENSE 5,461 182 188 1,029 6,860 DEPRECIATION EXPENSE 14,459 893 2,499 1,172 19,023 OTHER OPERATING EXPENSES 145,378 22,791 6,642 31,985 (201) 206,595 MINORITY INTEREST (4) (4) INCOME TAX 18,956 5,088 1,767 2,225 (699) 27,337 ------------ ------------ -------- ------------ ------------ ------------ NET INCOME $ 61,043 $ 8,457 $ 2,855 $ 7,297 $ (2,115) $ 77,537 ------------ ------------ -------- ------------ ------------ ------------ SEGMENT ASSETS $ 23,137,758 $ 3,710,693 $992,957 $ 6,618,653 $ (6,609,427) $ 27,850,634 ------------ ------------ -------- ------------ ------------ ------------ <CAPTION> MORTGAGE AND COMMERCIAL CONSUMER LEASE BANKING LENDING FINANCING OTHER ELIMINATIONS TOTAL ------------ ------------ -------- ------------ ------------ ------------ (IN THOUSANDS) FOR THE SIX-MONTHS ENDED JUNE 30, 2001 --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> NET INTEREST INCOME $ 440,439 $ 57,775 $ 24,733 $ (1,640) $ (72) $ 521,235 PROVISION FOR LOAN LOSSES 71,220 19,070 9,206 99,496 OTHER INCOME 118,616 27,969 10,110 84,334 (4,762) 236,267 AMORTIZATION EXPENSE 10,922 364 377 2,073 13,736 DEPRECIATION EXPENSE 29,033 1,809 5,144 2,224 38,210 OTHER OPERATING EXPENSES 282,025 43,973 11,500 63,404 (401) 400,501 MINORITY INTEREST 12 12 INCOME TAX 40,344 7,605 3,243 4,390 (1,094) 54,488 CUMULATIVE EFFECT OF ACCOUNTING CHANGES 686 686 ------------ ---------- -------- ------------ ------------ ------------ NET INCOME $ 126,197 $ 12,935 $ 5,373 $ 10,603 $ (3,339) $ 151,769 ------------ ---------- -------- ------------ ------------ ------------ SEGMENT ASSETS $ 23,137,758 $3,710,693 $992,957 $ 6,618,653 $ (6,609,427) $ 27,850,634 ------------ ---------- -------- ------------ ------------ ------------ <CAPTION> Mortgage and Commercial Consumer Lease banking Lending financing Other Eliminations Total ------------ ------------ --------- ------------ ------------ ------------ (In thousands) Quarter ended June 30, 2000 -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net interest income $ 211,211 $ 23,119 $ 10,498 $ 1,123 $ (35) $ 245,916 Provision for loan losses 34,631 7,205 4,948 1,935 48,719 Other income 60,871 9,500 5,038 36,740 (2,864) 109,285 Amortization expense 6,971 161 189 1,216 8,537 Depreciation expense 14,532 843 2,305 1,887 19,567 Other operating expenses 137,816 18,470 5,603 30,294 (915) 191,268 Minority interest 22 (325) (303) Income tax 20,191 1,977 894 (856) (522) 21,684 ------------ ---------- -------- ------------ ------------ ------------ Net income $ 57,941 $ 3,985 $ 1,597 $ 3,062 $ (1,462) $ 65,123 ------------ ---------- -------- ------------ ------------ ------------ Segment Assets $ 22,275,886 $2,512,861 $875,729 $ 6,645,141 $ (5,858,371) $ 26,451,246 ------------ ---------- -------- ------------ ------------ ------------ </TABLE> 15
16 <TABLE> <CAPTION> Mortgage and Commercial Consumer Lease banking Lending financing Other Eliminations Total ------------ ---------- --------- ---------- ------------ ------------ (In thousands) For the six-months ended June 30, 2000 ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Net interest income $ 419,565 $ 45,685 $ 21,508 $ 1,466 $ (68) $ 488,156 Provision for loan losses 73,074 12,688 9,343 3,627 98,732 Other income 125,288 20,087 11,348 73,156 (4,868) 225,011 Amortization expense 13,993 322 377 2,437 17,129 Depreciation expense 28,748 1,314 4,727 3,699 38,488 Other operating expenses 288,603 38,009 11,710 53,902 (1,965) 390,259 Minority interest 22 1,171 1,193 Income tax 32,542 4,561 2,498 1,626 (787) 40,440 ------------ ---------- -------- ---------- ------------ ------------ Net income $ 107,893 $ 8,900 $ 4,201 $ 10,502 $ (2,184) $ 129,312 ------------ ---------- -------- ---------- ------------ ------------ Segment Assets $ 22,275,886 $2,512,861 $875,729 $6,645,141 $ (5,858,371) $ 26,451,246 ------------ ---------- -------- ---------- ------------ ------------ <CAPTION> GEOGRAPHIC INFORMATION Quarter ended Six-month period ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 -------- -------- ---------- ---------- (In thousands) <S> <C> <C> <C> <C> Revenues* Puerto Rico $442,741 $433,611 $ 917,431 $ 864,183 United States 185,882 167,891 360,589 327,744 Other 16,084 32,557 32,105 63,659 -------- -------- ---------- ---------- Total consolidated revenues $644,707 $634,059 $1,310,125 $1,255,586 -------- -------- ---------- ---------- </TABLE> * Total revenues include interest income, service charges on deposit accounts, other service fees, gain (loss) on sale of securities, trading account profit, gain on derivatives and other operating income. <TABLE> <CAPTION> JUNE 30, December 31, June 30, 2001 2000 2000 ------------ ------------ ------------ (In thousands) <S> <C> <C> <C> Selected Balance Sheet Information: Puerto Rico Total assets $ 18,924,935 $ 20,146,184 $ 18,289,327 Loans 9,602,554 9,370,627 8,954,743 Deposits 10,488,993 9,974,677 9,631,099 United States Total assets $ 8,195,716 $ 7,246,259 $ 7,097,333 Loans 7,168,268 6,264,014 6,113,555 Deposits 4,228,090 4,107,994 3,829,456 Other Total assets $ 729,983 $ 664,608 $ 1,064,586 Loans 421,424 422,444 706,306 Deposits 852,702 722,236 999,899 </TABLE> 16
17 NOTE 13 - 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 June 30, 2001, December 31, 2000 and June 30, 2000, and the results of their operations and cash flows for the periods ended June 30, 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 May 31, 2001, November 30, 2000 and May 31, 2000, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of June 30, 2001, December 31, 2000 and June 30, 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, including its wholly-owned subsidiary Popular Leasing, U.S.A.; and BP, N.A., including its wholly-owned subsidiary Popular Insurance, Inc. PIHC fully and unconditionally guarantees all registered debt securities and preferred stock issued by PIBI and PNA. The principal source of cash flows for PIHC consists of dividends from Banco Popular de Puerto Rico (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 June 30, 2001, BPPR could have declared a dividend of approximately $159,254 without the approval of the Federal Reserve Board. 17
18 POPULAR, INC. CONSOLIDATED STATEMENT OF CONDITION JUNE 30, 2001 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Eliminations 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 $ 124 $ 24 $ 215 $ 661,598 $ (81,369) $ 580,592 Money market investments 17,237 302 42 1,254,767 (208,494) 1,063,854 Investment securities available-for-sale, at market value 188,973 20,231 6,347 7,250,109 (2,000) 7,463,660 Investment securities held-to-maturity, at amortized cost 402,452 (154,640) 247,812 Trading account securities, at market value 279,686 279,686 Investment in subsidiaries, at equity 2,167,008 553,702 753,695 147,366 (3,621,771) Loans held-for-sale, at lower of cost or market 914,071 914,071 ------------ -------- ------------ ------------ ----------- ------------ Loans 235,517 2,360,932 17,899,844 (3,891,382) 16,604,911 Less - Unearned income 326,736 326,736 Allowance for loan losses 313,337 313,337 ------------ -------- ------------ ------------ ----------- ------------ 235,517 2,360,932 17,259,771 (3,891,382) 15,964,838 ------------ -------- ------------ ------------ ----------- ------------ Premises and equipment 395,804 395,804 Other real estate 28,741 28,741 Customers' liabilities on acceptances 1,673 1,673 Accrued income receivable 319 530 13,533 199,665 (24,034) 190,013 Other assets 10,707 23,596 6,330 410,941 (742) 450,832 Intangible assets 269,450 (392) 269,058 ------------ -------- ------------ ------------ ----------- ------------ $ 2,619,885 $598,385 $ 3,141,094 $ 29,476,094 $(7,984,824) $ 27,850,634 ============ ======== ============ ============ =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,225,934 $ (81,311) $ 3,144,623 Interest bearing 12,486,070 (60,908) 12,425,162 ------------ -------- ------------ ------------ ----------- ------------ 15,712,004 (142,219) 15,569,785 Federal funds purchased and securities sold under agreements to repurchase $ 17,500 $ 76,175 4,188,190 (124,586) 4,157,279 Other short-term borrowings 2,279 $ 4,330 1,286,332 3,172,786 (1,637,380) 2,828,347 Notes payable 264,212 1,192,331 3,338,846 (2,416,359) 2,379,030 Acceptances outstanding 1,673 1,673 Other liabilities 44,242 275 41,397 415,608 (29,569) 471,953 ------------ -------- ------------ ------------ ----------- ------------ 328,233 4,605 2,596,235 26,829,107 (4,350,113) 25,408,067 ------------ -------- ------------ ------------ ----------- ------------ 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 105 810 915 ------------ -------- ------------ ------------ ----------- ------------ Stockholders' equity: Preferred stock 100,000 100,000 Common stock 831,408 3,962 2 72,575 (76,539) 831,408 Surplus 264,414 485,676 439,964 1,333,919 (2,259,559) 264,414 Retained earnings 963,605 93,874 99,993 1,059,653 (1,253,520) 963,605 Treasury stock-at cost (66,136) (1,343) 1,343 (66,136) Accumulated other comprehensive income, net of taxes 73,361 10,268 4,900 32,078 (47,246) 73,361 ------------ -------- ------------ ------------ ----------- ------------ 2,166,652 593,780 544,859 2,496,882 (3,635,521) 2,166,652 ------------ -------- ------------ ------------ ----------- ------------ $ 2,619,885 $598,385 $ 3,141,094 $ 29,476,094 $(7,984,824) $ 27,850,634 ============ ======== ============ ============ =========== ============ </TABLE> 18
19 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 1,997,722 (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> 19
20 POPULAR, INC. CONSOLIDATED STATEMENT OF CONDITION JUNE 30, 2000 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Eliminations 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 $ 429 $ 65 $ 796 $ 761,873 $ (65,151) $ 698,012 Money market investments 45,386 971 10,072 2,001,315 (866,233) 1,191,511 Investment securities available- for-sale, at market value 143,825 11,724 4,579 7,068,698 7,228,826 Investment securities held-to- maturity, at amortized cost 446,889 (154,640) 292,249 Trading account securities, at market value 190,458 190,458 Investment in subsidiaries, at equity 1,753,158 542,829 681,847 112,132 (3,089,966) Loans held-for-sale, at lower of cost or market 790,831 790,831 ---------- -------- ----------- ----------- ----------- ----------- Loans 697,002 1,607,134 15,567,037 (2,535,382) 15,335,791 Less - Unearned income 352,018 352,018 Allowance for loan losses 305,526 305,526 ---------- -------- ----------- ----------- ----------- ----------- 697,002 1,607,134 14,909,493 (2,535,382) 14,678,247 ---------- -------- ----------- ----------- ----------- ----------- Premises and equipment 437,181 437,181 Other real estate 36,426 36,426 Customers' liabilities on acceptances 5,735 5,735 Accrued income receivable 1,073 9 10,350 192,557 (27,449) 176,540 Other assets 17,782 719 6,160 408,737 (3,814) 429,584 Intangible assets 296,163 (517) 295,646 ---------- -------- ----------- ----------- ----------- ----------- $2,658,655 $556,317 $2,320,938 $27,658,488 $(6,743,152) $ 26,451,246 ========== ======== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,132,624 $ (65,045) $ 3,067,579 Interest bearing 11,850,028 (457,153) 11,392,875 ---------- -------- ---------- ----------- ----------- ----------- 14,982,652 (522,198) 14,460,454 Federal funds purchased and securities sold under agreements to repurchase $ 19,975 $ 41,700 5,006,382 (130,241) 4,937,816 Other short-term borrowings 489,002 $ 6,721 540,447 3,039,248 (1,221,383) 2,854,035 Notes payable 256,305 2,312 1,187,468 2,030,224 (1,723,587) 1,752,722 Acceptances outstanding 5,735 5,735 Other liabilities 31,483 303 40,194 368,889 (33,609) 407,260 ---------- -------- ----------- ----------- ----------- ----------- 796,765 9,336 1,809,809 25,433,130 (3,631,018) 24,418,022 ---------- -------- ----------- ----------- ----------- ----------- 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 21,334 21,334 ---------- -------- ----------- ----------- ----------- ----------- Stockholders' equity: Preferred stock 100,000 Common stock 828,959 3,962 2 63,444 100,000 Surplus 247,479 482,226 439,964 1,335,504 (67,408) 828,959 Retained earnings 775,975 66,786 73,771 827,637 (2,257,694) 247,479 Treasury stock-at cost (64,150) (314) (968,194) 775,975 Accumulated other comprehensive 314 (64,150) loss, net of taxes (151,373) (5,993) (2,608) (150,913) 159,514 (151,373) ---------- -------- ----------- ----------- ----------- ----------- 1,736,890 546,981 511,129 2,075,358 (3,133,468) 1,736,890 ---------- -------- ----------- ----------- ----------- ----------- $2,658,655 $556,317 $2,320,938 $27,658,488 $(6,743,152) $26,451,246 ========== ======== =========== =========== =========== =========== </Table> 20
21 POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED JUNE 30, 2001 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Eliminations Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated ------------- ----------- ----------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Loans $ 5,623 $ 534 $ 39,304 $ 408,905 $ (62,525) $ 391,841 Money market investments 259 5 23 20,254 (7,515) 13,026 Investment securities 268 1 189 117,036 (3,251) 114,243 Trading account securities 4,297 4,297 -------- -------- -------- ---------- ---------- ---------- 6,150 540 39,516 550,492 (73,291) 523,407 -------- -------- -------- ---------- ---------- ---------- INTEREST EXPENSE: Deposits 131,233 (211) 131,022 Short-term borrowings 335 62 17,358 97,182 (30,444) 84,493 Long-term debt 8,065 22,073 54,839 (42,603) 42,374 -------- -------- -------- ---------- ---------- ---------- 8,400 62 39,431 283,254 (73,258) 257,889 -------- -------- -------- ---------- ---------- ---------- Net interest income (2,250) 478 85 267,238 (33) 265,518 Provision for loan losses 49,462 49,462 -------- -------- -------- ---------- ---------- ---------- Net interest income after provision for loan losses (2,250) 478 85 217,776 (33) 216,056 Service charges on deposit accounts 36,310 36,310 Other service fees 58,938 (31) 58,907 Loss on sale of securities (50) (2,102) (2,152) Trading account profit 945 945 Gain on derivatives 1,516 136 1,652 Other operating income 2,978 204 25,405 (2,949) 25,638 -------- -------- -------- ---------- ---------- ---------- 728 632 1,601 337,408 (3,013) 337,356 -------- -------- -------- ---------- ---------- ---------- OPERATING EXPENSES: Personnel costs: Salaries 73 78,811 78,884 Profit sharing 4,018 4,018 Pension and other benefits 12 23,829 23,841 -------- -------- -------- ---------- ---------- ---------- 85 106,658 106,743 Net occupancy expenses 3 17,723 17,726 Equipment expenses 24,575 24,575 Other taxes 452 9,357 9,809 Professional fees 740 3 64 16,097 (62) 16,842 Communications 8 12,077 12,085 Business promotion 13,159 13,159 Printing and supplies 4,490 4,490 Other operating expenses 27 18 105 20,180 (141) 20,189 Amortization of intangibles 6,860 6,860 -------- -------- -------- ---------- ---------- ---------- 1,227 109 169 231,176 (203) 232,478 -------- -------- -------- ---------- ---------- ---------- (Loss) income before income tax, minority interest and equity in earnings of subsidiaries (499) 523 1,432 106,232 (2,810) 104,878 Income tax (1,426) 469 28,993 (699) 27,337 Net gain of minority interest (4) (4) -------- -------- -------- ---------- ---------- ---------- Income before equity in earnings of subsidiaries 927 523 963 77,235 (2,111) 77,537 Equity in earnings of subsidiaries 76,610 6,460 5,648 5,685 (94,403) -------- -------- -------- ---------- ---------- ---------- NET INCOME $ 77,537 $ 6,983 $ 6,611 $ 82,920 $ (96,514) $ 77,537 ======== ======== ======== ========== ========== ========== </TABLE> 21
22 POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED JUNE 30, 2000 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Eliminations Popular, Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated ------------- ----------- ----------- ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Loans $ 14,136 $ 27,768 $ 393,833 $ (43,300) $ 392,437 Money market investments 156 $ 17 26 27,370 (13,261) 14,308 Investment securities 745 178 116,932 (3,231) 114,624 Trading account securities 3,405 3,405 -------- -------- -------- ---------- ---------- ---------- 15,037 17 27,972 541,540 (59,792) 524,774 -------- -------- -------- ---------- ---------- ---------- INTEREST EXPENSE: Deposits 137,025 (7,626) 129,399 Short-term borrowings 9,968 97 7,960 117,609 (21,950) 113,684 Long-term debt 6,692 33 21,519 37,713 (30,182) 35,775 -------- -------- -------- ---------- ---------- ---------- 16,660 130 29,479 292,347 (59,758) 278,858 -------- -------- -------- ---------- ---------- ---------- Net interest income (1,623) (113) (1,507) 249,193 (34) 245,916 Provision for loan losses 48,719 48,719 -------- -------- -------- ---------- ---------- ---------- Net interest income after provision for loan losses (1,623) (113) (1,507) 200,474 (34) 197,197 Service charges on deposit accounts 30,831 30,831 Other service fees 56,127 (684) 55,443 Gain on sale of securities 329 329 Trading account profit 693 693 Other operating income 2,918 168 21,083 (2,180) 21,989 -------- -------- -------- ---------- ---------- ---------- 1,295 55 (1,507) 309,537 (2,898) 306,482 -------- -------- -------- ---------- ---------- ---------- OPERATING EXPENSES: Personnel costs: Salaries 70 77,231 77,301 Profit sharing 5,569 5,569 Pension and other benefits 11 15,330 15,341 -------- -------- -------- ---------- ---------- ---------- 81 98,130 98,211 Net occupancy expenses 3 16,174 16,177 Equipment expenses 25,135 (56) 25,079 Other taxes 223 8,118 8,341 Professional fees 76 1 135 17,437 (823) 16,826 Communications 2 12,032 12,034 Business promotion 12,572 12,572 Printing and supplies 5,313 5,313 Other operating expenses 49 12 16,256 (35) 16,282 Amortization of intangibles 8,537 8,537 -------- -------- -------- ---------- ---------- ---------- 350 97 135 219,704 (914) 219,372 -------- -------- -------- ---------- ---------- ---------- Income (loss) before income tax, minority interest and equity in earnings of subsidiaries 945 (42) (1,642) 89,833 (1,984) 87,110 Income tax 176 (575) 22,606 (523) 21,684 Net gain of minority interest (303) (303) -------- -------- -------- ---------- ---------- ---------- Income before equity in earnings (losses) of subsidiaries 769 (42) (1,067) 66,924 (1,461) 65,123 Equity in earnings (losses) of subsidiaries 64,354 (1,057) 75 1,565 (64,937) -------- -------- -------- ---------- ---------- ---------- NET INCOME (LOSS) $ 65,123 $ (1,099) $ (992) $ 68,489 $ (66,398) $ 65,123 ======== ======== ======== ========== ========== ========== </TABLE> 22
23 POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) <TABLE> <CAPTION> PIBI PNA (In thousands) Popular, Inc. Holding Holding All other Eliminations Popular, Inc. Holding Co. Co. Co. Subsidiaries entries Consolidated ------------ ---------- ---------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Loans $ 14,352 $ 1,069 $ 75,597 $ 804,321 ($ 109,933) $ 785,406 Money market investments 462 10 55 55,450 (27,645) 28,332 Investment securities 884 1 378 257,540 (6,501) 252,302 Trading account securities 7,818 7,818 ------------ ---------- ---------- ------------ ------------ ------------ 15,698 1,080 76,030 1,125,129 (144,079) 1,073,858 ------------ ---------- ---------- ------------ ------------ ------------ INTEREST EXPENSE: Deposits 264,829 (1,030) 263,799 Short-term borrowings 870 150 33,214 229,268 (59,891) 203,611 Long-term debt 18,985 43,862 105,452 (83,086) 85,213 ------------ ---------- ---------- ------------ ------------ ------------ 19,855 150 77,076 599,549 (144,007) 552,623 ------------ ---------- ---------- ------------ ------------ ------------ Net interest income (4,157) 930 (1,046) 525,580 (72) 521,235 Provision for loan losses 99,496 99,496 ------------ ---------- ---------- ------------ ------------ ------------ Net interest income after provision for loan losses (4,157) 930 (1,046) 426,084 (72) 421,739 Service charges on deposit accounts 70,968 70,968 Other service fees 117,141 (59) 117,082 Loss on sale of securities (50) (1,812) (1,862) Trading account profit 1,254 1,254 Gain (loss) on derivatives 1,516 (495) 1,021 Other operating income 5,400 409 46,698 (4,703) 47,804 ------------ ---------- ---------- ------------ ------------ ------------ 1,243 1,289 470 659,838 (4,834) 658,006 ------------ ---------- ---------- ------------ ------------ ------------ OPERATING EXPENSES: Personnel costs: Salaries 143 156,519 156,662 Profit sharing 9,115 9,115 Pension and other benefits 24 45,836 45,860 ------------ ---------- ---------- ------------ ------------ ------------ 167 211,470 211,637 Net occupancy expenses 6 34,915 34,921 Equipment expenses 48,702 48,702 Other taxes 904 17,715 18,619 Professional fees 930 4 109 31,301 (117) 32,227 Communications 16 23,956 23,972 Business promotion 23,704 23,704 Printing and supplies 8,809 8,809 Other operating expenses 49 22 213 36,121 (285) 36,120 Amortization of intangibles 13,736 13,736 ------------ ---------- ---------- ------------ ------------ ------------ 1,899 199 322 450,429 (402) 452,447 ------------ ---------- ---------- ------------ ------------ ------------ (Loss) income before income tax, minority interest, cumulative effect of accounting changes and equity in earnings of subsidiaries (656) 1,090 148 209,409 (4,432) 205,559 Income tax (1,386) (12) 56,981 (1,095) 54,488 Net loss of minority interest 12 12 ------------ ---------- ---------- ------------ ------------ ------------ Income before cumulative effect of accounting changes and equity in earnings of subsidiaries 730 1,090 160 152,440 (3,337) 151,083 Cumulative effect of accounting changes 686 686 ------------ ---------- ---------- ------------ ------------ ------------ Income before equity in earnings of subsidiaries 730 1,090 160 153,126 (3,337) 151,769 Equity in earnings of subsidiaries 151,039 9,209 9,398 10,688 (180,334) ------------ ---------- ---------- ------------ ------------ ------------ NET INCOME $ 151,769 $ 10,299 $ 9,558 $ 163,814 ($ 183,671) $ 151,769 ============ ========== ========== ============ ============ ============ </TABLE> 23
24 POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) <TABLE> <CAPTION> Popular, Popular, Inc. PIBI PNA All other Eliminations Inc. (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated ---------- ---------- ---------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Loans $ 28,652 $ 288 $ 53,621 $ 771,231 $ (84,835) $ 768,957 Money market investments 351 68 141 52,486 (25,490) 27,556 Investment securities 945 1 355 231,907 (6,454) 226,754 Trading account securities 7,308 7,308 ---------- ---------- ---------- ----------- ------------ ------------ 29,948 357 54,117 1,062,932 (116,779) 1,030,575 ---------- ---------- ---------- ----------- ------------ ------------ INTEREST EXPENSE: Deposits 268,131 (16,258) 251,873 Short-term borrowings 16,367 375 14,076 228,966 (43,275) 216,509 Long-term debt 16,838 142 43,270 70,965 (57,178) 74,037 ---------- ---------- ---------- ----------- ------------ ------------ 33,205 517 57,346 568,062 (116,711) 542,419 ---------- ---------- ---------- ----------- ------------ ------------ Net interest income (3,257) (160) (3,229) 494,870 (68) 488,156 Provision for loan losses 98,732 98,732 ---------- ---------- ---------- ----------- ------------ ------------ Net interest income after provision for loan losses (3,257) (160) (3,229) 396,138 (68) 389,424 Service charges on deposit accounts 61,054 61,054 Other service fees 104,368 (1,560) 102,808 Gain on sale of securities 13,000 593 13,593 Trading account profit 1,510 1,510 Other operating income 5,399 324 43,631 (3,308) 46,046 ---------- ---------- ---------- ----------- ------------ ------------ 15,142 164 (3,229) 607,294 (4,936) 614,435 ---------- ---------- ---------- ----------- ------------ ------------ OPERATING EXPENSES: Personnel costs: Salaries 140 155,755 155,895 Profit sharing 9,701 9,701 Pension and other benefits 26 35,813 35,839 ---------- ---------- ---------- ----------- ------------ ------------ 166 201,269 201,435 Net occupancy expenses 6 32,730 32,736 Equipment expenses 48,569 (56) 48,513 Other taxes 446 16,470 16,916 Professional fees 201 3 305 35,834 (1,839) 34,504 Communications 3 22,833 22,836 Business promotion 26,659 26,659 Printing and supplies 10,485 10,485 Other operating expenses 49 25 34,658 (69) 34,663 Amortization of intangibles 17,129 17,129 ---------- ---------- ---------- ----------- ------------ ------------ 699 200 305 446,636 (1,964) 445,876 ---------- ---------- ---------- ----------- ------------ ------------ Income before income tax, minority interest and equity in earnings (losses) of subsidiaries 14,443 (36) (3,534) 160,658 (2,972) 168,559 Income tax 3,728 (1,237) 38,737 (788) 40,440 Net loss of minority interest 1,193 1,193 ---------- ---------- ---------- ----------- ------------ ------------ Income before equity in earnings (losses) of subsidiaries 10,715 (36) (2,297) 123,114 (2,184) 129,312 Equity in earnings (losses) of subsidiaries 118,597 (2,707) 2,064 4,388 (122,342) ---------- ---------- ---------- ----------- ------------ ------------ NET INCOME (LOSS) $ 129,312 $ (2,743) $ (233) $ 127,502 $ (124,526) $ 129,312 ========== ========== ========== =========== ============ ============ </TABLE> 24
25 POPULAR, INC. STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED JUNE 30, 2001 <TABLE> <CAPTION> Popular, Consolidated Inc. PIBI PNA All other Eliminations Popular, (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Inc ----------- ----------- ----------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 151,769 $ 10,299 $ 9,558 $ 163,814 ($ 183,671) $ 151,769 ----------- ----------- ----------- ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries (151,039) (9,209) (9,398) (10,688) 180,334 Depreciation and amortization of premises and equipment 38,210 38,210 Provision for loan losses 99,496 99,496 Amortization of intangibles 13,736 13,736 Loss on sale of investment securities available- for-sale 50 1,812 1,862 Gain on derivatives (1,517) 496 (1,021) Loss on disposition of premises and equipment 283 283 Loss on sale of loans 192 192 Net amortization of premiums and accretion of discounts on investments 1,151 1,151 Increase in loans held-for-sale (90,170) (90,170) Net amortization of deferred loan fees and costs (10,267) (10,267) Net increase in trading securities (126,613) (126,613) Net decrease (increase) in interest receivable 794 60 (1,482) 10,265 2,890 12,527 Net decrease (increase) in other assets 11,278 (22,701) (379) 1,043 (637) (11,396) Net (decrease) increase in interest payable (2,227) 12 291 (25,955) (27,879) Net (decrease) increase in deferred and current taxes (8) 3,565 (4,485) (822) (1,750) Net increase in postretirement benefit obligation 6,094 6,094 Net increase (decrease) in other liabilities 4,192 (14) 779 (15,011) (6,235) (16,289) ----------- ----------- ----------- ----------- ----------- ----------- Total adjustments (137,010) (31,802) (8,141) (110,411) 175,530 (111,834) ----------- ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities 14,759 (21,503) 1,417 53,403 (8,141) 39,935 ----------- ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Net decrease in money market investments 3,600 25 18 689,600 (688,479) 4,764 Purchases of investment securities held- to-maturity (2,615,536) (2,615,536) Maturities of investment securities held- to-maturity 2,717,702 2,717,702 Purchases of investment securities available- for-sale (21,808) (232) (2,063,129) (2,085,169) Maturities of investment securities available- for-sale 119 2,803,427 2,000 2,805,546 Sales of investment securities available- for-sale 606,075 606,075 Net collections (disbursements) on loans 308,256 22,500 (518,416) (2,136,212) 1,322,765 (1,001,107) Proceeds from sale of loans 244,336 244,336 Acquisition of loan portfolios (388,389) (388,389) Capital contribution to subsidiary (32) 32 Return of investment from subsidiary 300 (300) Acquisition of premises and equipment (31,741) (31,741) Proceeds from sale of premises and equipment 3,216 3,216 Dividends received from subsidiary 44,000 (44,000) ----------- ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities 334,048 22,593 (518,311) (170,651) 592,018 259,697 ----------- ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Net increase in deposits 741,170 2,477 743,647 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 17,500 7,475 (844,927) 13,116 (806,836) Net increase in other short-term borrowings (375,434) (1,084) (49,731) (1,237,003) 122,387 (1,540,865) Net proceeds of notes payable 52,201 559,077 1,341,124 (750,284) 1,202,118 Dividends paid to parent company (44,000) 44,000 Dividends paid (47,715) (47,715) Proceeds from issuance of common stock 4,482 4,482 Treasury stock sold 78 78 Return of investment to parent (300) 300 Capital contribution from parent 32 (32) ----------- ----------- ----------- ----------- ----------- ----------- Net cash (used in) provided by financing activities (348,966) (1,084) 516,821 (43,826) (568,036) (445,091) ----------- ----------- ----------- ----------- ----------- ----------- Net (decrease) increase in cash and due from banks (159) 6 (73) (161,074) 15,841 (145,459) 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 $ 124 $ 24 $ 215 $ 661,598 $ (81,369) $ 580,592 =========== =========== =========== =========== =========== =========== </TABLE> 25
26 POPULAR, INC. STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED JUNE 30, 2000 <TABLE> <CAPTION> Popular, Consolidated Inc. PIBI PNA All other Eliminations Popular, (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Inc ----------- ----------- ----------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 129,312 $ (2,743) $ (233) $ 127,502 $ (124,526) $ 129,312 ----------- ----------- ----------- ------------ ------------ ------------ Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings (losses) of subsidiaries (118,597) 2,707 (2,064) (4,388) 122,342 Depreciation and amortization of premises and equipment 38,488 38,488 Provision for loan losses 98,732 98,732 Amortization of intangibles 17,129 17,129 Gain on sale of investment securities available-for-sale (13,000) (593) (13,593) Loss on disposition of premises and equipment 47 47 Gain on sale of loans (3,631) (3,631) Net amortization of premiums and accretion of discounts on investments 13 1,075 1,088 Net decrease (increase) in loans held-for-sale (171,533) (171,533) Net amortization of deferred loan fees and costs (2,104) (2,104) Net decrease in trading securities 46,152 46,152 Net (increase) decrease in interest receivable (951) 187 (9,679) (5,325) 14,974 (794) Net increase in other assets (7,847) (126) (1,378) (20,276) 2,796 (26,831) Net increase (decrease) in interest payable 27 (159) (3,616) (5,003) (8,751) Net increase in deferred and current taxes 61 (1,237) (26,492) 3,154 (24,514) Net increase in postretirement benefit obligation 3,447 3,447 Net (decrease) increase in other liabilities (596) 7 2,465 1,938 (23,920) (20,106) ----------- ----------- ----------- ------------ ------------ ------------ Total adjustments (140,890) 2,616 (15,509) (32,337) 119,346 (66,774) ----------- ----------- ----------- ------------ ------------ ------------ Net cash (used in) provided by operating activities (11,578) (127) (15,742) 95,165 (5,180) 62,538 ----------- ----------- ----------- ------------ ------------ ------------ Cash flows from investing activities: Net (increase) decrease in money market investments (9,887) 2,287 11,431 (281,010) 71,662 (205,517) Purchases of investment securities held- to-maturity (4,735,460) (4,735,460) Maturities of investment securities held- to-maturity 4,649,771 4,649,771 Purchases of investment securities available- for-sale (60,516) (1,403,109) 254 (1,463,371) Maturities of investment securities available- for-sale 44,931 255 1,521,661 (1,055) 1,565,792 Sales of investment securities available- for-sale 90,456 (808) 89,648 Net disbursements on loans (179,359) (1,177,042) 346,345 (1,010,056) Proceeds from sale of loans 198,446 16,961 332,934 (198,445) 349,896 Acquisition of loan portfolios (144,925) (144,925) Capital Contribution to Subsidiary (12,116) (7,590) (60,000) 79,706 Cash received in acquisition 715 715 Acquisition of premises and equipment (37,996) (37,996) Proceeds from sale of premises and equipment 4,600 4,600 Dividends received from subsidiary 44,000 (44,000) ----------- ----------- ----------- ------------ ------------ ------------ Net cash provided by (used in) investing activities 204,858 11,658 (227,673) (1,179,405) 253,659 (936,903) ----------- ----------- ----------- ------------ ------------ ------------ Cash flows from financing activities: Net increase in deposits 157,032 129,707 286,739 Net increase in federal funds purchased and securities sold under agreements to repurchase 19,975 41,700 484,682 (23,021) 523,336 Net increase (decrease) in other short-term borrowings 57,952 (18,998) 215,791 87,905 (101,441) 241,209 Net (payments) proceeds of notes payable (228,411) (4,695) (13,944) 407,403 (260,230) (99,877) Dividends paid to parent company (44,000) 44,000 Dividends paid (47,620) (47,620) Proceeds from issuance of common stock 4,921 4,921 Treasury stock acquired (27) (27) Capital contribution from parent 12,000 59,880 (71,880) ----------- ----------- ----------- ------------ ------------ ------------ Net cash (used in) provided by financing activities (193,183) (11,693) 243,547 1,152,875 (282,865) 908,681 ----------- ----------- ----------- ------------ ------------ ------------ Net increase (decrease) in cash and due from banks 97 (162) 132 68,635 (34,386) 34,316 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 $ 429 $ 65 $ 796 $ 761,873 $ (65,151) $ 698,012 =========== =========== =========== ============ ============ ============ </TABLE> 26
27 TABLE A ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS <TABLE> <CAPTION> AT JUNE 30, AVERAGE FOR THE SIX MONTHS ---------------------------------------------------------------------------------------- BALANCE SHEET HIGHLIGHTS 2001 2000 Change 2001 2000 Change (In thousands) - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Money market investments $ 1,063,854 $ 1,191,511 $ (127,657) $ 949,489 $ 882,850 $ 66,639 Investment and trading securities 7,991,158 7,711,533 279,625 8,466,557 7,810,596 655,961 Loans 17,192,246 15,774,604 1,417,642 16,496,421 15,354,380 1,142,041 Total assets 27,850,634 26,451,246 1,399,388 27,448,384 25,719,423 1,728,961 Deposits 15,569,785 14,460,454 1,109,331 15,068,602 14,284,696 783,906 Borrowings 9,639,656 9,819,573 (179,917) 9,876,743 9,120,375 756,368 Stockholders' equity 2,166,652 1,736,890 429,762 2,044,659 1,836,261 208,398 </TABLE> <TABLE> <CAPTION> SECOND QUARTER SIX MONTHS -------------------------------- --------------------------------- OPERATING HIGHLIGHTS 2001 2000 Change 2001 2000 Change (In thousands, except per share information) - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net interest income $ 265,518 $ 245,916 $ 19,602 $ 521,235 $ 488,156 $ 33,079 Provision for loan losses 49,462 48,719 743 99,496 98,732 764 Fees and other income 121,300 109,285 12,015 236,267 225,011 11,256 Other expenses, net of minority interest 259,819 241,359 18,460 506,923 485,123 21,800 Cumulative effect of accounting changes, net of tax 686 686 Net income $ 77,537 $ 65,123 $ 12,414 $ 151,769 $ 129,312 $ 22,457 Net income applicable to common stock $ 75,450 $ 63,036 $ 12,414 $ 147,594 $ 125,137 $ 22,457 Earnings per common share $ 0.55 $ 0.46 $ 0.09 $ 1.08 $ 0.92 $ 0.16 </TABLE> <TABLE> <CAPTION> SELECTED STATISTICAL SECOND QUARTER SIX MONTHS INFORMATION ----------------- ---------------- 2001 2000 2001 2000 <S> <C> <C> <C> <C> COMMON STOCK DATA - Market price High $ 32.94 $ 23.56 $ 32.94 $ 26.88 Low 28.44 19.06 25.25 18.63 End 32.94 19.06 32.94 19.06 Book value at period end 15.18 12.05 15.18 12.05 Dividends declared 0.20 0.16 0.36 0.32 Dividend payout ratio 28.86% 34.46% 29.50% 34.72% Price/earnings ratio 15.46X 10.30x 15.46X 10.30x - ---------------------------------------------------------------------------------------------------------- PROFITABILITY RATIOS - Return on assets 1.14% 1.01% 1.12% 1.01% Return on common equity 15.36 14.43 15.31 14.50 Net interest spread (taxable equivalent) 3.69 3.46 3.55 3.54 Net interest yield (taxable equivalent) 4.44 4.30 4.33 4.36 Effective tax rate 26.07 24.89 26.51 23.99 Overhead ratio 41.87 44.77 41.47 45.24 Efficiency ratio 60.17 61.94 59.76 63.87 - ---------------------------------------------------------------------------------------------------------- CAPITALIZATION RATIOS - Equity to assets 7.62% 7.15% 7.45% 7.14% Tangible equity to assets 6.68 6.08 6.51 6.05 Equity to loans 12.34 11.85 12.39 11.96 Internal capital generation 9.32 8.89 9.64 8.90 Tier I capital to risk - adjusted assets 10.60 10.09 10.60 10.09 Total capital to risk - adjusted assets 12.57 12.12 12.57 12.12 Leverage ratio 6.89 6.42 6.89 6.42 - ---------------------------------------------------------------------------------------------------------- </TABLE> 27
28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial discussion contains the analysis of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the Corporation) and should be read in conjunction with the consolidated financial statements, 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 $77.5 million for the second quarter of 2001, an increase of 19.1% when compared with $65.1 million for the same quarter of 2000. Basic earnings per common share (EPS) for the quarter were $0.55, based on 136,189,956 average shares outstanding, compared with $0.46 reported on the second quarter of 2000, based on 135,878,677 average shares outstanding. Net earnings for the first quarter of 2001 were $74.2 million or $0.53 per common share, based on 136,111,025 average shares outstanding. Return on assets (ROA) and return on common equity (ROE) for the quarter ended June 30, 2001 were 1.14% and 15.36%, respectively, compared with 1.01% and 14.43% for the same period in 2000. For the first quarter of 2001 these ratios were 1.09% and 15.25%. The Corporation's results of operations for the quarter ended June 30, 2001 reflected a rise of $19.6 million in net interest income as well as an increase of $12.0 million in other revenues from the same quarter in 2000. These improvements were partially offset by rises of $0.7 million in the provision for loan losses, $13.1 million in operating expenses and $5.7 million in income taxes. For the first six months of 2001, the Corporation's net earnings rose to $151.8 million, compared with $129.3 million for the same period in 2000, an increase of 17.4%. Basic EPS for the first six months of 2001 and 2000 were $1.08 and $0.92, respectively. ROA and ROE for the six-month period ended June 30, 2001 were 1.12% and 15.31% respectively, compared with 1.01% and 14.50% for the same period last year. NET INTEREST INCOME Net interest income for the second quarter of 2001 reached $265.5 million, an increase of $19.6 million or 8.0%, compared with $245.9 million in the same period of 2000. On a taxable equivalent basis, net interest income increased to $285.1 million from $262.1 million in the same quarter of 2000. Net interest income on a taxable equivalent basis amounted to $276.0 million in the first quarter of 2001. 28
29 The improvement of $23.0 million in net interest income on a taxable equivalent basis from the second quarter of 2000 resulted from a favorable variance of $10.3 million due to volume and $12.7 million due to a higher net interest yield. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a taxable equivalent basis assuming the applicable statutory income tax rates. Table B summarizes the changes in the composition of average earning assets and interest bearing liabilities, and their respective interest income and expense and yields and costs, on a taxable equivalent basis, for the second quarter of 2001, as compared with the same quarter in 2000. TABLE B ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS QUARTER ENDED ON JUNE 30, <TABLE> <CAPTION> Variance Average Volume Average Yields Interest Attributable to - --------------------------------------------------- ----------------------------------------------------- 2001 2000 Variance 2001 2000 Variance 2001 2000 Variance Rate Volume - --------------------------------------------------- ----------------------------------------------------- ($ in millions) (In thousands) <C> <C> <C> <C> <C> <C> <S> <C> <C> <C> <C> <C> $ 939 $ 912 $ 27 5.56% 6.31% (0.75)% Money market investments $ 13,026 $ 14,308 $ (1,282) $ (1,461) $ 179 7,671 7,537 134 6.89 6.88 0.01 Investment securities 132,163 129,393 2,770 (262) 3,032 275 207 68 6.32 6.63 (0.31) Trading 4,324 3,413 911 (160) 1,071 - ------------------------------------------------- ----------------------------------------------------- 8,885 8,656 229 6.73 6.81 (0.08) 149,513 147,114 2,399 (1,883) 4,282 - ------------------------------------------------- ----------------------------------------------------- Loans: 7,453 7,226 227 8.40 9.67 (1.27) Commercial 156,067 173,744 (17,677) (22,996) 5,319 840 794 46 11.60 11.20 0.40 Leasing 24,348 22,228 2,120 805 1,315 5,234 4,261 973 8.25 8.11 0.14 Mortgage 108,010 86,407 21,603 1,552 20,051 3,248 3,400 (152) 12.95 13.14 (0.19) Consumer 105,050 111,454 (6,404) 564 (6,968) - ------------------------------------------------- ----------------------------------------------------- 16,775 15,681 1,094 9.40 10.08 (0.68) 393,475 393,833 (358) (20,075) 19,717 - ------------------------------------------------- ----------------------------------------------------- $25,660 $24,337 $ 1,323 8.47% 8.91% (0.44)% TOTAL EARNING ASSETS $ 542,988 $ 540,947 $ 2,041 $ (21,958) $23,999 ================================================= ===================================================== Interest bearing deposits: $ 2,010 $ 1,728 $ 282 3.26% 3.43% (0.17)% NOW and money market $ 16,321 $ 14,757 $ 1,564 $ (763) $ 2,327 4,152 4,210 (58) 2.82 3.04 (0.22) Savings 29,216 31,841 (2,625) (2,319) (306) 6,118 5,411 707 5.60 6.15 (0.55) Time deposits 85,485 82,801 2,684 (8,877) 11,561 - ------------------------------------------------- ----------------------------------------------------- 12,280 11,349 931 4.28 4.59 (0.31) 131,022 129,399 1,623 (11,959) 13,582 - ------------------------------------------------- ----------------------------------------------------- 6,794 7,114 (320) 4.99 6.43 (1.44) Short-term borrowings 84,493 113,684 (29,191) (21,877) (7,314) Medium and long-term 2,557 2,102 455 6.65 6.84 (0.19) debt 42,374 35,775 6,599 (784) 7,383 - ------------------------------------------------- ---------------------------------------------------- TOTAL INTEREST-BEARING 21,631 20,565 1,066 4.78 5.45 (0.67) LIABILITIES 257,889 278,858 (20,969) (34,620) 13,651 3,041 3,073 (32) Demand deposits 988 699 289 Other sources of funds - ------------------------------------------------- ----------------------------------------------------- $25,660 $24,337 $ 1,323 4.03% 4.61% (0.58)% ================================================= 4.44% 4.30% 0.14% NET INTEREST MARGIN ======================== NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS 285,099 262,089 23,010 $ 12,662 $10,348 ==================== 3.69% 3.46% 0.23% NET INTEREST SPREAD ======================== Taxable equivalent adjustment 19,581 16,173 3,408 ------------------------------ Net interest income $ 265,518 $ 245,916 $ 19,602 ============================== </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 by $1.3 billion or 5.4% from $24.3 billion in the second quarter of 2000 to $25.6 billion in 2001. Average loans grew $1.1 billion notwithstanding the sale of Popular Inc.'s ownership interest in Banco Fiduciario (BF) and the sale of the credit cards operations in the United States in the third quarter of 2000. Mortgage loans accounted for almost 89% of the total rise in average loans for the quarter. Excluding the average balance of BF's commercial loans from the second quarter of 2000, which approximated $237 million, the Corporation's average commercial loan portfolio increased by $464 million compared with the second quarter of 2000. The rise resulted from the Corporation's sustained business growth in both the retail and middle markets. 29
30 The average consumer loan portfolio declined $152 million or 4.5% from the second quarter of 2000. This was mostly due to the aforementioned sale of the U.S. credit card portfolio, which approximated $180 million in average balances for the quarter ended June 30, 2000, and to lower demand for personal loans, partly offset by higher average volume of auto loans. The increase in average investment securities, when compared with the second quarter of 2000, mostly related to higher investment in U.S. Government Agency obligations and other securities, partly offset by lower U.S Treasury Securities. The change in the composition of the portfolio is due in part to investment strategies followed by the Corporation based on the current and expected interest rate environment. The average yield on earning assets, on a taxable equivalent basis, declined 44 basis points from 8.91% for the second quarter of 2000 to 8.47% during the second quarter of 2001. The reduction is mostly attributed to the lower interest rate scenario that has prevailed during the three months ended June 30, 2001 as compared with the same period last year, which affects principally commercial loans due to their volatility related to interest rates. Also the decrease in yield is related to lower credit card volume as a result of the sale of the U.S. credit card portfolio and to the higher proportion of mortgages, which carry a lower yield. Partially offsetting these decreases was the higher rate in the investment portfolio mainly due to the investment in longer-term agency securities, which carry a higher after tax yield, despite the lower interest rates. Income derived from U.S. Government Agency securities is tax-exempt in Puerto Rico. The increase of $1.1 billion in the average balance of interest bearing liabilities for the second quarter of 2001, as compared with the same quarter in 2000, was mostly reflected in average interest bearing deposits, mainly time deposits. Within this category, brokered deposits grew $554 million, from an average of $101 million in the second quarter of 2000. The average cost of interest bearing liabilities decreased 67 basis points when compared with the same quarter of 2000. The decline is mostly attributed to the lower interest rate scenario, which caused a reduction in the cost of short-term borrowed money of 144 basis points or $21.9 million and to the lower cost of time deposits by 55 basis points or $8.9 million. The Corporation's net interest margin, on a taxable equivalent basis, for the second quarter of 2001 was 4.44% compared with 4.30% in the same quarter of 2000 and 4.20% in the first quarter of 2001. The increase was mostly attributed to a larger reduction in the cost of funding earning assets compared with the reduction in their yields, principally as a result of the Corporation's assets and liabilities repricing at the beginning of the Federal Reserve's easing cycle. For the six-month period ended June 30, 2001, net interest income, on a taxable equivalent basis, rose to $561.1 million, an increase of $36.3 million or 6.9%, compared with the same period of 2000. The improvement resulted from a $25.9 million increase due to volume and a $10.4 million increase due to a higher net interest yield. As shown in Table C average earning assets increased by $1.9 billion for the six-month period ended June 30, 2001, when compared with $24.0 billion reported in the same period of 2000. Average interest bearing liabilities increased by $1.6 billion when compared with the six-month period ended June 30, 2000. The yield on earning assets and the cost of interest bearing liabilities declined by 27 and 28 basis points, respectively, compared with the six months ended June 30, 2000. The composition and the mix of earning assets and their related funding caused a lesser net interest margin, on a taxable equivalent basis, by three basis points from 4.36% in the first half of 2000 to 4.33% in 2001. 30
31 TABLE C ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS YEAR-TO-DATE JUNE 30, <TABLE> <CAPTION> Variance Average Volume Average Yields Interest Attributable to - ------------------------------------------------------ ------------------------------------------------- 2001 2000 Variance 2001 2000 Variance 2001 2000 Variance Rate Volume - ------------------------------------------------------ ------------------------------------------------- ($ in millions) (In thousands) <C> <C> <C> <C> <C> <C> <S> <C> <C> <C> <C> <C> $ 949 $ 882 $ 67 6.02% 6.28% (0.26%) Money market investments $ 28,332 $ 27,556 $ 776 $ (1,177) $ 1,953 8,222 7,591 631 7.02 6.77 0.25 Investment securities 288,533 256,466 32,067 7,251 24,816 245 220 25 6.55 7.41 (0.86) Trading 7,945 8,085 (140) (1,004) 864 - ------------------------------------------------------ -------------------------------------------------- 9,416 8,693 723 6.91 6.73 0.18 324,810 292,107 32,703 5,070 27,633 - ------------------------------------------------------ -------------------------------------------------- Loans: 7,371 7,124 247 8.76 9.56 (0.80) Commercial 320,209 338,555 (18,346) (29,806) 11,460 837 732 105 11.61 12.03 (0.42) Leasing 48,571 44,049 4,522 (1,593) 6,115 5,019 4,136 883 8.31 8.32 (0.01) Mortgage 208,513 172,042 36,471 (665) 37,136 3,269 3,362 (93) 12.99 13.14 (0.15) Consumer 211,597 220,476 (8,879) 1,011 (9,890) - ------------------------------------------------------ -------------------------------------------------- 16,496 15,354 1,142 9.61 10.13 (0.52) 788,890 775,122 13,768 (31,053) 44,821 - ------------------------------------------------------ -------------------------------------------------- $25,912 $24,047 $ 1,865 8.63% 8.90% (0.27%) TOTAL EARNING $1,113,700 $1,067,229 $46,471 $(25,983) $72,454 ASSETS ====================================================== ================================================== Interest bearing deposits: $ 2,003 $1,708 $ 295 3.35% 3.40% (0.05%) NOW and money $ 33,320 $ 28,856 $ 4,464 ($441) $ 4,905 market 4,111 4,189 (78) 2.85 2.96 (0.11) Savings 58,013 61,727 (3,714) (2,909) (805) 5,935 5,315 620 5.86 6.10 (0.24) Time deposits 172,466 161,290 11,176 (6,709) 17,885 - ------------------------------------------------------ -------------------------------------------------- 12,049 11,212 837 4.41 4.52 (0.11) 263,799 251,873 11,926 (10,059) 21,985 - ------------------------------------------------------ -------------------------------------------------- 7,344 6,969 375 5.59 6.25 (0.66) Short-term borrowings 203,611 216,509 (12,898) (24,802) 11,904 2,533 2,151 382 6.78 6.92 (0.14) Medium and long-term 85,213 74,037 11,176 (1,456) 12,632 debt - ------------------------------------------------------ -------------------------------------------------- TOTAL INTEREST-BEARING 21,926 20,332 1,594 5.08 5.36 (0.28) LIABILITIES 552,623 542,419 10,204 (36,317) 46,521 3,019 3,073 (54) Demand deposits 967 642 325 Other sources of funds - ------------------------------------------------------ -------------------------------------------------- $25,912 $24,047 $ 1,865 4.30% 4.54% (0.24%) ====================================================== 4.33% 4.36% (0.03%) NET INTEREST MARGIN ========================= NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS 561,077 524,810 36,267 $10,334 $25,933 ================== 3.55% 3.54% 0.01% NET INTEREST SPREAD ========================= Taxable equivalent adjustment 39,842 36,654 3,188 ------------------------------ Net interest income $ 521,235 $ 488,156 $33,079 ============================== </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. 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 31
32 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. Based on the results of the sensitivity analysis as of June 30, 2001, the change in net interest income on a hypothetical rising rate scenario for the next twelve months was a $6.6 million increase and the change for the same period utilizing a hypothetical declining rate scenario was a decrease of $3.2 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. Also, it holds an equity interest in ATH Dominicana and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country's particular foreign currency. 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 second quarter of 2001 was $49.5 million, representing an increase of $0.7 million when compared with the same quarter of 2000. During the first quarter of 2001 the provision amounted to $50.0 million. For the six-month period ended June 30, 2001 the provision totaled $99.5 million, compared with $98.7 million in the same period of 2000. 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 D summarizes the movement in the allowance for loan losses and presents selected loan loss statistics for the quarter and six-month periods ended June 30, 2001 and 2000. Additional information regarding the allowance and asset quality appears in the Credit Quality section. Net charge-offs for the second quarter of 2001 totaled $41.7 million, an increase of $3.6 million or 9.4%, compared with $38.1 million in the same period of 2000. Net charge-offs for the quarter ended March 31, 2001 totaled $36.1 million. Net charge-offs represented 0.99% of average loans for the second quarter of 2001, compared with 0.97% and 0.89% for the quarters ended June 30, 2000 and March 31, 2001, respectively. Commercial and construction loans net charge-offs increased $7.3 million in the quarter ended June 30, 2001, when compared with the same quarter of 2000. As a percentage of average commercial and construction loans, these net charge-offs increased from 0.56% in the second quarter of 2000, to 0.93% in 2001. This increase is mostly associated to the growth in the portfolio and to weaker economic conditions, which have impacted some of the Corporation's customer margins and cash flows. 32
33 The aforementioned rises in net charge-offs in the commercial and construction loan portfolios for the quarter ended June 30, 2001, were partially tempered by declines in net charge-offs in the consumer and lease financing portfolios. Consumer loans net charge-offs decreased $3.2 million for the quarter ended June 30, 2001 from $23.5 million in the same quarter of 2000. Consumer loans net charge-offs represented 2.49% of average consumer loans for the quarter ended June 30, 2001, compared with 2.76% for the same quarter last year. The decline was mostly due to the fact that in the second quarter of 2000 there were approximately $3.5 million in net charge-offs corresponding to the U.S. credit card portfolio sold later. Lease financing net charge-offs totaled $2.2 million or 1.03% of the average lease financing portfolio for the quarter ended June 30, 2001, compared with $3.2 million or 1.61% for the same period in 2000. Mortgage loans net charge-offs increased to $2.0 million or 0.15% of average mortgage loans for the second quarter of 2001, from $1.4 million or 0.13% in the same period a year earlier. Net charge-offs for the six-month period ended June 30, 2001, reached $77.8 million or 0.94% of average loans, compared with $86.7 million or 1.13% for the same period in 2000. The decrease in net credit losses for the six-month period ended June 30, 2001 was mostly reflected in the consumer portfolio. Consumer loans net charge-offs totaled $38.4 million or 2.35% of average consumer loans for the six-month period ended June 30, 2001 compared with $49.7 million or 2.95% in the same period of 2000. The U.S. credit card operations portfolio had $6.5 million in net charge-offs in the six-month period ended June 30, 2000. Also, the Corporation has tightened its credit criteria for unsecured consumer loans. Commercial and construction loans net charge-offs represented 0.78% of the average balance of those loans for the six-months ended June 30, 2001, compared with 0.75% for the same period last year. Mortgage loans net charge-offs increased to $3.4 million or 0.14% of average mortgage loans for the first half of 2001, from $2.0 million or 0.10% in the same period in prior year. Lease financing net charge-offs totaled $7.1 million or 1.71% of the average lease financing portfolio for the first six months of 2001, compared with $8.2 million or 2.25% for the same period last year. The decrease in net charge-offs when compared with prior year is due in part to the external fraud scheme unveiled in the U.S. operations during the second quarter of 2000, which represented $2.5 million in charge-offs for that period. The above was partly offset by an increase in net charge-offs in 2001 resulting from the increase in the portfolio and higher delinquencies due to economic conditions. 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. The allowance for loan losses increased to $313 million or 1.82% of loans as of June 30, 2001, compared with $306 million or 1.94% one year earlier, and $291 million or 1.81% as of December 31, 2000. The decrease in the allowance to loans ratio from June 30, 2000 resulted mostly from the sale of BF, which had a higher ratio of allowance to total loans to cover potential losses. The lower allowance to loans ratio is also influenced by 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 33
34 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. TABLE D ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS <TABLE> <CAPTION> SECOND QUARTER FIRST SIX MONTHS (Dollars in thousands) 2001 2000 2001 2000 ---------------------------------------------------- <S> <C> <C> <C> <C> Balance at beginning of period $ 305,295 $ 293,442 $ 290,653 $ 292,010 Allowance purchased 266 $ 1,481 1,004 $ 1,481 Provision for loan losses 49,462 48,719 99,496 98,732 ---------------------------------------------------- 355,023 343,642 391,153 392,223 ---------------------------------------------------- Losses charged to the allowance: Commercial 19,624 15,636 33,994 35,124 Construction 1,619 4 2,619 145 Lease financing 7,932 8,574 19,880 15,972 Mortgage 2,087 1,550 3,587 2,192 Consumer 26,311 29,511 50,672 61,709 ---------------------------------------------------- 57,573 55,275 110,752 115,142 ---------------------------------------------------- Recoveries: Commercial 3,953 5,600 7,778 8,461 Lease financing 5,769 5,384 12,734 7,755 Mortgage 82 120 198 181 Consumer 6,083 6,055 12,226 12,048 ---------------------------------------------------- 15,887 17,159 32,936 28,445 ---------------------------------------------------- Net loans charged-off: Commercial 15,671 10,036 26,216 26,663 Construction 1,619 4 2,619 145 Lease financing 2,163 3,190 7,146 8,217 Mortgage 2,005 1,430 3,389 2,011 Consumer 20,228 23,456 38,446 49,661 ---------------------------------------------------- 41,686 38,116 77,816 86,697 ---------------------------------------------------- Balance at end of period $ 313,337 $ 305,526 $ 313,337 $ 305,526 ==================================================== Ratios: Allowance for loan losses to loans 1.82% 1.94% 1.82% 1.94% Allowance to non-performing assets 81.90 80.30 81.90 80.30 Allowance to non-performing loans 88.56 88.80 88.56 88.80 Non-performing assets to loans 2.23 2.41 2.23 2.41 Non-performing assets to total 1.37 1.44 1.37 1.44 assets Net charge-offs to average loans 0.99 0.97 0.94 1.13 Provision to net charge-offs 1.19X 1.28x 1.28x 1.14x Net charge-offs earnings coverage 3.70 3.56 3.92 3.08 </TABLE> 34
35 The following table shows the Corporation's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 (as amended by SFAS No. 118) at June 30, 2001, December 31, 2000 and June 30, 2000. <TABLE> <CAPTION> JUNE 30, 2001 December 31, 2000 June 30, 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 $ 126 $ 33 $ 113 $ 27 $ 156 $ 53 No valuation allowance required 53 42 37 ---------- ---------- ---------- ---------- ---------- ---------- Total impaired loans $ 179 $ 33 $ 155 $ 27 $ 193 $ 53 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> Average impaired loans during the second quarter of 2001 and 2000 were $175 million and $188 million, respectively. The Corporation recognized interest income on impaired loans of $1.0 million and $1.3 million, respectively, for the quarters ended June 30, 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 E. The Corporation's policy is to place commercial loans on non-accrual status if payments of principal or interest are delinquent 60 days rather than the 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 $2.1 million from $380.5 million as of June 30, 2000, to $382.6 million a year later. On the other hand, non-performing assets as a percentage of total loans decreased when compared with the same period in 2000 from 2.41% as of June 30, 2000, to 2.23% as of the same date in 2001. The allowance for loan losses as a percentage of non-performing assets, as of June 30, 2001 and 2000, was 81.90% and 80.30%, respectively. Excluding the non-performing assets of BF as of June 30, 2000, the Corporation's non-performing assets grew $67 million from the second quarter of 2000 to the same period in 2001. The increase in non-performing assets since June 30, 2000, excluding the non-performing assets of BF as of that date, was mostly reflected in non-performing mortgage and commercial loans, which grew $45 million and $27 million, respectively. BF had $64 million in non-performing assets as of June 30, 2000. When compared with December 31, 2000, the rise in non-performing assets as of June 30, 2001 was mostly experienced in mortgage and commercial non-performing loans, which increased $19 million and $15 million, respectively. Non-performing assets as a percentage of total loans were 2.16% as of December 31, 2000. The allowance for loan losses as a percentage of non-performing assets, as of the end of 2000, was 83.82%. 35
36 Non-performing commercial loans represented 2.50% of that portfolio at June 30, 2001, compared with 2.37% at the end of 2000. The increase was partly associated to the general deteriorating economic conditions. Non-performing mortgage loans represented 2.12% of mortgage loans as of the end of the second quarter of 2001, compared with 2.15% at the end of 2000. Non-performing consumer loans totaled $36 million or 1.12% of consumer loans as of June 30, 2001, compared with $44 million or 1.32% as of December 31, 2000. The decrease in the ratio results partly due to a tightening in the Corporation's credit criteria for unsecured consumer loans. Non-performing financing leases amounted to $11 million or 1.34% of the lease financing portfolio as of June 30, 2001, compared with $7 million or 0.88% as of December 31, 2000, reflecting higher delinquencies. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation's non-performing assets as of June 30, 2001, would have been $313 million or 1.82% of loans, and the allowance for loan losses would have been 100.1% of non-performing assets. At June 30, 2000 and December 31, 2000, adjusted non-performing assets would have been $310 million or 1.96% of loans and $273 million or 1.70% of loans, respectively, and the allowance to non-performing assets would have been 98.7% and 106.49%, respectively. TABLE E NON-PERFORMING ASSETS <TABLE> <CAPTION> JUNE 30, December 31, June 30, 2001 2000 2000 -------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> Commercial, construction, industrial and agricultural $ 187,308 $ 172,402 $ 199,289 Lease financing 11,313 7,152 15,674 Mortgage 118,831 99,861 74,333 Consumer 36,370 43,814 54,756 Other real estate 28,741 23,518 36,426 -------------------------------------------- Total $ 382,563 $ 346,747 $ 380,478 ============================================ Accruing loans past-due 90 days or more $ 22,159 $ 21,599 $ 29,954 ============================================ Non-performing assets to loans 2.23% 2.16% 2.41% Non-performing assets to assets 1.37 1.24 1.44 </TABLE> During the last 12 months, the New York City taxicab medallion industry has experienced high volatility in the market value of the taxicab medallions. Popular, Inc., through BPNA, is one of the largest lenders to this industry sector with an aggregate exposure of $289 million, representing approximately 1.7% of the Corporation's loan portfolio. Although some of the Corporation's taxi medallion loans have from time to time been in arrears or in default, no losses in principal have been experienced to date nor do the Corporation anticipates loss exposure for this portfolio. These loans were in accrual status as of June 30, 2001. However, due to the noted volatility in the market values of the medallions, and consistent with the Corporation's Internal Risk Classification System, as of June 30, 2001 a segment of the New York City taxicab medallion loan portfolio was downgraded and included in the criticized assets of the Corporation. 36
37 NON-INTEREST INCOME Non-interest income amounted to $121.3 million for the quarter ended June 30, 2001, compared with $109.3 million for the same period in 2000, and $115.0 million as of March 31, 2001. Table F presents a breakdown of non-interest income by major categories. TABLE F NON-INTEREST INCOME <TABLE> <CAPTION> Second Quarter Year-to-Date - ---------------------------------------------------------------------------------------------------------------------- 2001 2000 Change 2001 2000 Change - ---------------------------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> <C> Service charges on deposit accounts $ 36,310 $ 30,831 $ 5,479 $ 70,968 $ 61,054 $ 9,914 ------------------------------------------------------------------ Other service fees: Credit cards fees and discounts 13,688 18,305 (4,617) 27,256 32,675 (5,419) Debit card fees 9,409 7,300 2,109 18,927 12,191 6,736 Processing fees 9,318 6,859 2,459 18,458 13,028 5,430 Other fees 6,802 8,355 (1,553) 13,084 15,935 (2,851) Sale and administration of investment products 5,306 4,582 724 9,707 8,496 1,211 Check cashing fees 4,784 3,681 1,103 9,365 7,211 2,154 Insurance fees 4,431 1,071 3,360 9,519 2,822 6,697 Mortgage servicing fees, net of amortization 2,937 2,967 (30) 6,016 5,713 303 Trust fees 2,232 2,323 (91) 4,750 4,737 13 ------------------------------------------------------------------ Subtotal other services fees $ 58,907 $ 55,443 $ 3,464 $117,082 $102,808 $ 14,274 ------------------------------------------------------------------ Other operating income $ 25,638 $ 21,989 $ 3,649 $ 47,804 $ 46,046 $ 1,758 ------------------------------------------------------------------ Total operating income $120,855 $108,263 $12,592 $235,854 $209,908 $ 25,946 ------------------------------------------------------------------ (Loss) gain on sale of securities $ (2,152) $ 329 $(2,481) $ (1,862) $ 13,593 $(15,455) Trading account profit 945 693 252 1,254 1,510 (256) Gain on derivatives 1,652 1,652 1,021 1,021 ------------------------------------------------------------------ Total non-interest income $121,300 $109,285 $12,015 $236,267 $225,011 $ 11,256 ================================================================== </TABLE> Service charges on deposit accounts increased by $5.5 million or 17.8% when compared with the second quarter of 2000, reflecting higher activity on commercial accounts and the impact of newly implemented fees during the latter part of 2000, 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 being charged through account analysis for commercial accounts. Other service fees rose by $3.5 million or 6.2% compared with the second quarter of 2000. The growth in insurance fees was mostly associated to commissions generated by Popular Insurance, which began operations in the third quarter of 2000. Processing and debit card fees also grew, associated in part to higher volume of transactions resulting from the Electronic Bank Transaction (EBT) program, services which are managed by GM Group, and from the growing number of point-of-sale terminals and automated teller machines. Moreover, the increase in check cashing fees was driven by the expansion of PCE, the Corporation's retail financial services subsidiary in the United States. PCE operated 89 offices, including 52 mobile units, as of June 30, 2001, compared with 70 offices, including 41 mobile units, as of the same date in 2000. On the other hand, credit card fees and discounts decreased mainly due to income no longer derived as a result of the sale of the U.S. credit card operations. For the quarter ended June 30, 2000, these operations contributed with approximately $4.7 million in other service fees. The decrease in the category of other fees was associated to the reclassification of external payment and lock box fees to service charges on deposit accounts as previously mentioned. 37
38 The increase in other operating income compared with the second quarter of 2000 was mostly due to higher gains on the sale of loans held-for-sale, due in part to greater volume sold during the quarter. Popular Mortgage (PM), stimulated in part by the declining interest rate scenario, reached unprecedented levels in mortgage originations for the period ended June 30, 2001, increasing by approximately 75% when compared with the same period last year. PM normally sells some of the loans or the related mortgage-backed securities in the secondary markets. Also, investment banking fees contributed to the growth in other operating income. These rises were partly tempered by a decrease in other income mainly due to lower revenues derived by GM Group, such as system programming and engineering services. For the second quarter of 2001, the Corporation recognized profits of $0.9 million in trading account transactions and losses of $2.2 million in the sale of investment securities, compared with gains of $0.7 million and $0.3 million, respectively, for the same period in 2000. These two categories amounted to $0.3 million in gains, each, for the first quarter of 2001. The loss on sale of securities for the second quarter of 2001 was partly due to positioning strategies followed by the Corporation in the current scenario focused at deriving higher long-term yields. Gains on derivative transactions, resulting from the change in the fair market value of derivative instruments, amounted to $1.7 million for the quarter ended June 30, 2001. The latter related mostly to adjustments on the market value of interest rate swaps entered into by the Corporation. For the first quarter of 2001, the Corporation recognized a pretax loss on derivatives of $0.6 million. For the six-month period ended June 30, 2001 and 2000, non-interest income amounted to $236.3 million and $225.0 million, respectively, an increase of $11.3 million or 5.0%. Service charges on deposit accounts and other service fees reflected healthy growth, mostly attributed to the same reasons explained above. The decrease in the gains recognized on sale of securities is mostly attributed to the fact that during the second 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 $13.4 million pre-tax gain. In addition, this variance was impacted by the net losses recognized in 2001 on securities transactions as explained above. OPERATING EXPENSES For the second quarter of 2001, operating expenses were $232.5 million compared with $219.4 million for the same quarter in 2000, an increase of $13.1 million or 6.0%. When compared with the first quarter of 2001, the Corporation experienced an increase of $12.5 million or 5.7% in operating expenses. Personnel costs, the largest category of operating expenses, totaled $106.7 million for the second quarter of 2001, an increase of $8.5 million or 8.7% when compared with the same period of 2000. Among the principal factors contributing to the rise in personnel costs were higher pension and medical plan costs. As of the end of this quarter full time equivalent employees (FTE's) totaled 11,041, from the 11,619 employees as of the same date in 2000. Although a lower headcount resulted from the sale of BF and the U.S. credit card operations and employees from Banco Popular who retired at the end of 2000, the corresponding monetary reductions were partially tempered by annual merit increases and the impact of continued expansion in other business areas. Other operating expenses, excluding personnel costs, amounted to $125.7 million, an increase of $4.6 million or 3.8% when compared with the same quarter in 2000. The rises corresponded mostly to net occupancy expenses, operating taxes, and other general operating expenses. The latter was mostly associated to higher sundry losses, which resulted primarily from unresolved claims on credit cards and automated teller machine transactions. Partially tempering the rise in operating expenses was a decrease in the amortization of intangibles due to the full amortization in late 2000 of the core deposits recorded on the merger with BanPonce Corporation in 1990. For the first six months of 2001, operating expenses rose to $452.4 million from $445.9 million for the same period in 2000, an increase of $6.5 million or 1.5%. The increase was primarily as a result of higher personnel costs, net occupancy expenses and other taxes, partially offset by decreases in the categories of amortization of intangibles, 38
39 business promotion, and professional fees. The decrease in business promotion and in professional fees is partly due to the sale of the U.S. credit card operations in 2000, which resulted in lower advertising costs, data processing and computer service fees, among others, partly tempered by other marketing efforts launched by the Corporation as well as additional costs resulting from business growth and expansion. Income tax expense increased by $5.7 million or 26.1% from $21.7 million in the second quarter of 2000. As of March 31, 2001 income taxes were $27.2 million. The income tax expense for the six-month period ended June 30, 2001 totaled $54.5 million compared with $40.4 million a year ago. The effective tax rate for the six months ended June 30, 2001 was 26.51% compared with 23.99% in the same period of 2000. Notwithstanding the rise in tax resulting from higher taxable income, mainly associated to the U.S. operations, which are subject to higher tax rates, the Corporation was favorably impacted by a reduction in the capital gains tax rate applicable to assets located in Puerto Rico. The rates were reduced from 25.0% to 12.5% upon the enactment of a change in the tax code in Puerto Rico during the quarter. The new rate is effective for transactions occurring from January 1st, 2001 and thereafter. Consequently, the Corporation reversed $1.7 million in deferred taxes related to capital assets during the second quarter of 2001. 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 June 30, 2001 reached $27.9 billion compared with $28.1 billion as of December 31, 2000 and $26.5 billion as of the same date a year earlier. Earning assets totaled $26.2 billion as of June 30, 2001 compared with $26.3 billion as of December 31, 2000 and $24.7 billion as of June 30, 2000. The investment portfolio reached $7.7 billion as of June 30, 2001, a decrease of $1.4 billion compared with $9.1 billion as of December 31, 2000. This decline is mostly due to lower arbitrage activity in 2001 resulting from management's objective of reducing the reliance on borrowings. Investment securities as of June 30, 2000 amounted to $7.5 billion. As shown in Table G, the loan portfolio reached $17.2 billion as of June 30 2001, an increase of $1.1 billion or 7.1% compared with December 31, 2000. This increase is mostly attributed to higher mortgage loans by $974 million and commercial loans (including construction loans) by $223 million. The mortgage loan portfolio increased from December 31, 2000 due to an aggressive marketing campaign and to the impact of the reduction in interest rates which generally results in a higher demand for mortgage loans. The growth in the commercial loan portfolio resulted principally from the continued marketing efforts focused towards the retail and middle market, including franchise loans, among others. On the other hand, consumer loans decreased by $88 million since the end of 2000, mainly due to lower demand for personal loans caused by the declining interest rate scenario, which tends to favor mortgage loan refinancing and the consolidation of personal debt. Total loans increased by $1.4 billion or 9.0% compared with June 30, 2000. The increase since June 30, 2000 was also in the mortgage and commercial (including construction) loan portfolios, which grew by $1.2 billion and $256 million, respectively. Consumer loans decreased by $186 million mainly due to the sale of the U.S. credit card portfolio, which totaled $187 million as of June 30, 2000. 39
40 TABLE G LOANS ENDING BALANCES <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------ JUNE 30, December 31, June 30, 2001 2000 2000 - ------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> <C> Commercial, industrial and agricultural $ 7,230,613 $ 7,013,834 $ 6,957,801 Construction 264,880 258,197 281,790 Lease financing 842,278 816,714 743,191 Mortgage * 5,617,441 4,643,646 4,368,381 Consumer * 3,237,034 3,324,694 3,423,441 ---------------------------------------------- Total $17,192,246 $16,057,085 $15,774,604 ============================================== </TABLE> * Includes loans held-for-sale Other assets were $451 million as of June 30, 2001, representing an increase of $84 million or 22.8% compared with December 31, 2000. The increase in other assets is mainly due to the acquisition of 19.99% of the voting stock of Centro Financiero BHD, S.A., the third largest private financial institution in the Dominican Republic, for $24.9 million. Also, it is due to the recording of the fair value of certain derivatives based on the accounting provisions of SFAS No. 133, mostly related to swaps and swaptions entered into by the Corporation. Other assets totaled $430 million as of June 30, 2000. Total deposits were $15.6 billion as of June 30, 2001 or $765 million higher than the $14.8 billion reported at December 31, 2000. Time and savings deposits increased $502 million and $232 million, respectively, when compared with December 31, 2000. The increase in time deposits its mainly due to higher brokered CD's, which consist of certificate of deposits purchased from a broker acting as an agent for depositors. Brokered CD's amounted to $740 million at June 30, 2001. Also, the increase in interest bearing deposits is related to growth in retail deposits, mostly associated to the business growth in the U.S. banking operations, an aggressive marketing campaign for IRA accounts and higher public funds. Demand deposits had an increase of $30 million compared with December 31, 2000. As of June 30, 2000 total deposits amounted to $14.5 billion. Borrowed funds, including subordinated notes and capital securities, amounted to $9.6 billion at June 30, 2001, from $10.8 billion as of December 31, 2000 and $9.8 billion at June 30, 2000. As part of the investment in subsidiaries, the Corporation recognized a minority interest of $0.9 million as of June 30, 2001, which mostly represented the beneficial interest of the minority investors of Levitt Mortgage. As of June 30, 2000 the Corporation had a minority interest of $21.3 million. The decrease from the same quarter last year was mainly attributed to the sale of BF. The Corporation's stockholders' equity as of June 30, 2001 and December 31, 2000 was $2.2 billion and $2.0 billion, respectively, compared with $1.7 billion as of June 30, 2000. Included in stockholders' equity as of June 30, 2001 were $74 million in unrealized gains on securities available-for-sale, net of tax, compared with $150 million in unrealized losses a year earlier and $4 million in unrealized gains as of the end of 2000. The dividend payout ratio to common stockholders for the quarter ended June 30, 2001, was 28.86% compared with 34.46% for the same quarter last year and 32.47% for the year ended December 31, 2000. The cash dividend declared was increased by 25% from $0.16 per common share in previous quarterly cash dividends to $0.20 per common share for the second quarter of 2001. 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 I leverage, as of June 30, 2001, June 30, 2000 and December 31, 2000 are presented on Table H. 40
41 The Corporation's common stock price at June 30, 2001 was $32.94, compared with $26.31 at December 31, 2000 and $19.06 at June 30, 2000. The Corporation's market capitalization at June 30, 2001, was $4.5 billion compared with $3.6 billion at December 31, 2000 and $2.6 billion at June 30, 2000. TABLE H CAPITAL ADEQUACY DATA <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, 2001 2000 2000 (Dollars in thousands) - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> Risk-based capital Tier I capital $ 1,845,648 $ 1,741,004 $ 1,640,921 Supplementary (Tier II) capital 343,388 321,627 329,591 ---------------------------------------------- Total capital $ 2,189,036 $ 2,062,631 $ 1,970,512 ============================================== Risk-weighted assets Balance sheet items 16,965,111 16,173,005 15,732,466 Off-balance sheet items 442,958 496,735 528,748 ---------------------------------------------- Total risk-weighted assets $17,408,069 $16,669,740 $16,261,214 ============================================== Ratios: Tier I capital (minimum required - 4.00%) 10.60% 10.44% 10.09% Total capital (minimum required - 8.00%) 12.57% 12.37% 12.12% Leverage ratio (minimum required - 3.00%) 6.89% 6.40% 6.42% </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. As described on page 7 of the Annual Report, Banco Popular de Puerto Rico (the "Bank") has been cooperating fully with an investigation by federal law enforcement authorities. The investigation relates principally to the circumstances surrounding the activities of a former customer of the Bank, including the Bank's reporting and compliance efforts. The former customer has been indicted for money laundering, including in connection with transactions through an account at the Bank. The Bank believes based on the information available to it that there was no knowing participation by the Bank or any Bank employee in the former customer's activities. The law enforcement investigation could result in adverse consequences to the Corporation and the Bank including the possibility of civil and criminal claims being brought against the Bank. The Corporation cannot predict when or on what basis the investigation will conclude or its effect if any on the Corporation or the Bank. On March 9, 2000, the Bank entered into a written agreement with the Federal Reserve Bank of New York, which imposed a number of compliance, reporting and control requirements. Substantially, all of these compliance, reporting and control requirements and controls are now in place. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS The Corporation held its Annual Stockholder's Meeting on April 23, 2001, at which common stockholders elected the following four directors: Jose B. Carrion Jr., Hector R. Gonzalez, Manuel Morales Jr. and Julio E. Vizcarrondo Jr. All four directors were elected for a three year with favorable votes ranging from 87.24% to 87.53% of the voting shares issued and outstanding which amounted to 136,111,025 as of the record date, March 5, 2001. A 88.02% of the common shares issued an outstanding as of the mentioned record date, were represented at the meeting, which complied with the quorum required by law. 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 June 30, 2001 </TABLE> 41
42 b) One report on Form 8-K was filed for the quarter ended June 30, 2001: Dated: April 10, 2001 Items reported: Item 5 - Other Events 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: August 14, 2001 By: S/ Jorge A. Junquera -------------------- ------------------------------------- Jorge A. Junquera Senior Executive Vice President Date: August 14, 2001 By: S/ Amilcar L. Jordan -------------------- ------------------------------------- Amilcar L. Jordan, Esq. Senior Vice President & Comptroller 42