SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 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 136,371,606 - ---------------------------- ------------------------------------------- (Title of Class) (Shares Outstanding as of November 14, 2001)
POPULAR, INC. INDEX <TABLE> <CAPTION> Part I - Financial Information Page - ------------------------------ ---- <S> <C> Item 1. Financial Statements Unaudited Consolidated Statements of Condition as of September 30, 2001, December 31, 2000 and September 30, 2000 3 Unaudited Consolidated Statements of Income for the quarters and nine months ended September 30, 2001 and 2000 4 Unaudited Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2001 and 2000 5 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 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 N/A Item 5. Other information - None N/A Item 6. Exhibits and reports on Form 8-K 42 Signature 43 </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
POPULAR, INC. CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) <TABLE> <CAPTION> SEPTEMBER 30, December 31, September 30, (In thousands) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 617,012 $ 726,051 $ 573,396 - ------------------------------------------------------------------------------------------------------------------- Money market investments: Federal funds sold and securities purchased under agreements to resell 988,262 1,057,320 868,513 Time deposits with other banks 4,343 10,908 10,638 Banker's acceptances 410 390 500 - ------------------------------------------------------------------------------------------------------------------- 993,015 1,068,618 879,651 - ------------------------------------------------------------------------------------------------------------------- Investment securities available-for-sale, at market value: Pledged securities with creditors' right to repledge 2,592,130 3,657,729 3,579,407 Other investment securities available-for-sale 5,205,898 5,138,195 4,491,255 Investment securities held-to-maturity, at amortized cost 240,763 264,731 285,829 Trading account securities, at market value: Pledged securities with creditors' right to repledge 231,927 124,016 122,806 Other trading securities 45,942 29,057 40,839 Loans held-for-sale 910,615 823,901 682,455 - ------------------------------------------------------------------------------------------------------------------- Loans 17,042,433 15,580,379 15,908,554 Less - Unearned income 320,774 347,195 353,322 Allowance for loan losses 326,630 290,653 295,177 - ------------------------------------------------------------------------------------------------------------------- 16,395,029 14,942,531 15,260,055 - ------------------------------------------------------------------------------------------------------------------- Premises and equipment 390,324 405,772 401,975 Other real estate 29,257 23,518 21,494 Customers' liabilities on acceptances 1,953 1,647 1,904 Accrued income receivable 189,863 202,540 200,638 Other assets 423,396 367,150 401,123 Intangible assets 263,302 281,595 287,436 - ------------------------------------------------------------------------------------------------------------------- $28,530,426 $28,057,051 $27,230,263 =================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,045,604 $ 3,109,885 $2,945,057 Interest bearing 12,954,632 11,695,022 11,612,821 - ------------------------------------------------------------------------------------------------------------------- 16,000,236 14,804,907 14,557,878 Federal funds purchased and securities sold under agreements to repurchase 3,978,199 4,964,115 5,236,644 Other short-term borrowings 3,164,520 4,369,212 3,444,129 Notes payable 2,329,985 1,176,912 1,434,429 Acceptances outstanding 1,953 1,647 1,904 Other liabilities 480,168 470,687 443,707 - ------------------------------------------------------------------------------------------------------------------- 25,955,061 25,787,480 25,118,691 - ------------------------------------------------------------------------------------------------------------------- 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 908 927 838 - ------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 100,000 100,000 100,000 Common stock 831,932 830,356 829,729 Surplus 266,525 260,984 249,238 Retained earnings 1,011,473 865,082 823,418 Treasury stock-at cost (66,136) (66,214) (66,214) Accumulated other comprehensive income (loss), net of tax of $48,298 (December 31, 2000 - $1,683; September 30, 2000 - ($26,385)) 155,663 3,436 (100,437) - ------------------------------------------------------------------------------------------------------------------- 2,299,457 1,993,644 1,835,734 - ------------------------------------------------------------------------------------------------------------------- $28,530,426 $28,057,051 $27,230,263 =================================================================================================================== </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements. 3
POPULAR, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Quarter ended Nine months ended September 30, September 30, (In thousands, except per share information) 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME: Loans $ 392,801 $ 414,677 $ 1,178,207 $1,183,634 Money market investments 10,350 18,187 38,682 45,743 Investment securities 110,095 125,109 362,397 351,863 Trading account securities 3,736 3,201 11,554 10,509 - -------------------------------------------------------------------------------------------------------------- 516,982 561,174 1,590,840 1,591,749 - -------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 130,254 140,811 394,053 392,684 Short-term borrowings 72,664 139,757 276,275 356,266 Long-term debt 40,644 31,750 125,857 105,787 - -------------------------------------------------------------------------------------------------------------- 243,562 312,318 796,185 854,737 - -------------------------------------------------------------------------------------------------------------- Net interest income 273,420 248,856 794,655 737,012 Provision for loan losses 55,259 49,666 154,755 148,398 - -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 218,161 199,190 639,900 588,614 Service charges on deposit accounts 37,537 32,558 108,505 93,612 Other service fees 59,643 57,493 175,736 160,302 Gain (loss) on sale of securities 1,249 147 (613) 13,740 Trading account profit 777 259 149 1,617 Loss on derivatives (8,140) (7,119) Other operating income 26,293 29,581 76,014 75,779 - -------------------------------------------------------------------------------------------------------------- 335,520 319,228 992,572 933,664 - -------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 82,080 78,104 238,742 233,999 Profit sharing 3,986 5,197 13,101 14,897 Pension and other benefits 21,542 17,078 67,402 52,918 - -------------------------------------------------------------------------------------------------------------- 107,608 100,379 319,245 301,814 Net occupancy expenses 17,974 17,610 52,895 50,346 Equipment expenses 24,148 25,294 72,850 73,807 Other taxes 9,135 8,507 27,754 25,423 Professional fees 17,247 15,602 48,521 50,107 Communications 12,181 11,661 36,153 34,497 Business promotion 13,414 9,694 37,118 36,353 Printing and supplies 4,269 5,351 13,078 15,836 Other operating expenses 17,525 17,289 53,645 51,952 Amortization of intangibles 6,858 8,829 20,594 25,958 - -------------------------------------------------------------------------------------------------------------- 230,359 220,216 681,853 666,093 - -------------------------------------------------------------------------------------------------------------- Income before income tax, minority interest and cumulative effect of accounting changes 105,161 99,012 310,719 267,571 Income tax 27,952 27,662 82,440 68,103 Net loss (gain) of minority interest 7 (58) 19 1,136 - -------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting changes 77,216 71,292 228,298 200,604 Cumulative effect of accounting changes, net of tax 686 - -------------------------------------------------------------------------------------------------------------- NET INCOME $ 77,216 $ 71,292 $ 228,984 $ 200,604 ============================================================================================================== NET INCOME APPLICABLE TO COMMON STOCK $ 75,129 $ 69,205 $ 222,722 $ 194,342 ============================================================================================================== EARNINGS PER COMMON SHARE (BASIC AND DILUTED) (BEFORE AND AFTER CUMULATIVE EFFECT OF ACCOUNTING $ 0.55 $ 0.51 $ 1.63 $ 1.43 CHANGES) ============================================================================================================== DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ 0.16 $ 0.56 $ 0.48 ============================================================================================================== </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements. 4
POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Quarter ended Nine months ended September 30, September 30, (In thousands) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net Income $ 77,216 $ 71,292 $ 228,984 $ 200,604 ----------------------------------------------------------- Other comprehensive income, net of tax: Foreign currency translation adjustment (153) (855) (403) (1,152) Less: reclassification adjustment for foreign currency translation loss realized upon sale of investment in a foreign entity (1,678) (1,678) Unrealized gains on securities: Unrealized holding gains arising during the period, net of tax of $25,066 (2000 - $12,978) for the quarter and $47,033 (2000 - $13,109) for the nine-month period 83,944 50,235 151,383 50,398 Less: reclassification adjustment for gains (losses) included in net income, net of tax of $406 (2000 - $24) for the quarter and ($313) (2000 - $3,501) for the nine-month period 843 122 (1,555) 10,652 Net loss on cash flow hedges (908) (1,645) Less: reclassification adjustment for losses included in net income, net of tax of ($168) for the quarter and ($568) for the nine-month period in 2001 (262) (947) Cumulative effect of accounting change 254 Less: reclassification adjustment for losses included in net income, net of tax of ($77) for the nine-month period in 2001 (136) ----------------------------------------------------------- Total other comprehensive income $ 82,302 $ 50,936 $ 152,227 $ 40,272 ----------------------------------------------------------- Comprehensive income $ 159,518 $ 122,228 $ 381,211 $ 240,876 =========================================================== </TABLE> DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): <TABLE> <CAPTION> SEPTEMBER 30, December 31, September 30, (In thousands) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Foreign currency translation adjustment $ (1,287) $ (884) $ (739) Unrealized gains (losses) on securities 157,258 4,320 (99,698) Unrealized losses on derivatives (698) Cumulative effect of accounting change 390 --------------------------------------------------- Accumulated other comprehensive income (loss) $ 155,663 $ 3,436 ($100,437) =================================================== </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements. 5
POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> For the nine months ended September 30, (In thousands) 2001 2000 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 228,984 $ 200,604 - -------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment 56,960 57,339 Provision for loan losses 154,755 148,398 Amortization of intangibles 20,594 25,958 Loss (gain) on sale of investment securities available-for-sale 613 (13,740) Loss on derivatives 7,119 Loss on disposition of premises and equipment 351 340 Gain on sale of loans (860) (3,862) Net amortization of premiums and accretion of discounts on investments 1,975 1,300 Net increase in loans held-for-sale (86,714) (63,157) Net amortization of deferred loan fees and costs (15,622) 504 Net (increase) decrease in trading securities (124,796) 72,966 Net decrease (increase) in accrued income receivable 12,677 (30,625) Net decrease (increase) in other assets 11,657 (36,300) Net decrease in interest payable (73,384) (3,129) Net increase (decrease) in deferred and current taxes 5,256 (21,246) Net increase in postretirement benefit obligation 3,012 4,516 Net increase in other liabilities 6,962 17,224 - -------------------------------------------------------------------------------------------------------------- Total adjustments (19,445) 156,486 - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 209,539 357,090 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments 75,603 91,664 Purchases of investment securities held-to-maturity (4,515,716) (4,857,246) Maturities of investment securities held-to-maturity 4,622,152 4,779,569 Purchases of investment securities available-for-sale (3,303,701) (2,537,407) Maturities of investment securities available-for-sale 3,671,005 1,866,852 Proceeds from sales of investment securities available-for-sale 732,131 89,611 Net disbursements on loans (1,380,741) (1,916,583) Proceeds from sale of loans 404,760 711,375 Acquisition of loan portfolios (660,829) (394,632) Assets acquired, net of cash (123) (8,831) Acquisition of premises and equipment (45,044) (52,348) Proceeds from sale of premises and equipment 3,180 12,308 Cash transferred due to sale of investment in subsidiary (46,899) - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (397,323) (2,262,567) - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 1,186,127 564,811 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (985,916) 822,164 Net (decrease) increase in other short-term borrowings (1,204,692) 869,492 Net proceeds (payments) of notes payable 1,153,074 (375,228) Dividends paid (77,041) (71,448) Proceeds from issuance of common stock 7,116 7,450 Treasury stock sold (acquired) 77 (2,064) - -------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 78,745 1,815,177 - -------------------------------------------------------------------------------------------------------------- Net decrease in cash and due from banks (109,039) (90,300) Cash and due from banks at beginning of period 726,051 663,696 - -------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $ 617,012 $ 573,396 ============================================================================================================== </TABLE> The accompanying notes are an integral part of these unaudited consolidated financial statements. 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share information) NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION Popular, Inc. (the Corporation) is a 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, auto and 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 establishes 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. As of September 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 7
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. 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. 8
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. 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. Accounting for Asset Retirement Obligations In June 2001, the Financial Accounting Standards Board issued SFAS No. 143 "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management understands that the adoption of this statement will not have a material effect on the consolidated financial statements of the Corporation. Accounting for the Impairment or Disposal of Long-Lived Assets In August 2001, the Financial Accounting Standards Board issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the requirements of Statement 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. This Statement removes goodwill from its scope and, therefore, eliminates the requirement of Statement 121 to allocate goodwill to long-lived assets to be tested for impairment. Also, the Statement requires that a long-lived asset to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spinoff be considered held and used until it is disposed of. The changes in this Statement improve financial reporting by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Management understands that the adoption of this statement will not have a material effect on the consolidated financial statements of the Corporation. 9
NOTE 3 - INVESTMENT SECURITIES The average contractual maturities as of September 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> SEPTEMBER 30, December 31, September 30, ------------- ------------ ------------- 2001 2000 2000 ---- ---- ---- AMORTIZED MARKET Amortized Market Amortized Market COST VALUE Cost Value Value Cost --------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Treasury (average maturity of 1 year) $ 700,594 $ 721,967 $1,140,544 $1,146,744 $1,740,923 $1,735,129 Obligations of other U.S. Government agencies and corporations (average maturity of 4 years and 6 months) 4,042,736 4,137,920 5,001,672 4,977,669 4,184,653 4,078,770 Obligations of Puerto Rico, States and Political subdivisions (average maturity Of 8 years and 8 months) 102,954 107,487 70,678 71,278 77,896 77,658 Collateralized mortgage obligations (average maturity of 22 years and 9 months) 1,804,521 1,816,244 1,552,544 1,553,285 1,392,624 1,373,623 Mortgage-backed securities (average maturity of 21 years and 6 months) 633,481 641,786 700,844 695,987 503,346 498,219 Equity securities (without contractual maturity) 222,814 286,318 229,547 255,651 228,434 238,055 Others (average maturity of 15 years and 5 months) 84,951 86,306 94,092 95,310 68,869 69,208 --------------------------------------------------------------------------- $7,592,051 $7,798,028 $8,789,921 $8,795,924 $8,196,745 $8,070,662 =========================================================================== </TABLE> Investment securities held-to-maturity: <TABLE> <CAPTION> SEPTEMBER 30, December 31, September 30, ------------- ------------ ------------- 2001 2000 2000 ---- ---- ---- AMORTIZED MARKET Amortized Market Amortized Market COST VALUE Cost Value Value Cost ------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> <C> Obligations of other U.S. Government agencies and corporations (average maturity of 1 month) $ 69,842 $ 69,845 $ 11,061 $ 11,095 6,445 6,432 Obligations of Puerto Rico, States and political subdivisions (average maturity of 9 years and 8 months) 88,043 93,338 118,595 117,467 140,829 138,887 Collateralized mortgage obligations (average maturity of 22 years and 8 months) 1,464 1,464 12,369 12,228 14,696 14,586 Mortgage-backed securities 18,744 19,110 19,930 19,930 Others (average maturity of 3 years and 7 months) 81,414 80,893 103,962 98,672 103,929 99,200 ------------------------------------------------------------------------- $240,763 $245,540 $264,731 $258,572 $285,829 $279,035 ========================================================================= </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
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 September 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> SEPTEMBER 30, December 31, September 30, (In thousands) 2001 2000 2000 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Investment securities available-for-sale $1,958,671 $1,617,134 $1,618,274 Investment securities held-to-maturity 5,114 6,798 6,803 Loans 1,832,089 777,118 561,826 - ---------------------------------------------------------------------------------------------------------- $3,795,874 $2,401,050 $2,186,903 ========================================================================================================== </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 September 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 $363. 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 September 30, 2001, the fair market value of these interest rate caps was $4,278 included in other assets. These contracts have a maximum maturity of 8.3 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 September 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
As of September 30, 2001, the Corporation had recognized a derivative asset of $8,919 based on the fair value of the swaptions, a derivative liability of $32,552 based on the fair value of the bifurcated option, and a related discount on the certificates of deposit of $21,594, 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 cannot be designated as hedges in accordance with SFAS 133 and therefore changes in the fair value of the derivatives are recorded in the statement of income. For the quarter and nine months ended September 30, 2001, the Corporation recognized a loss of $8,140 and $7,119, respectively, as a result of the changes in fair value of the non-hedging derivatives included as part of the loss 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 September 30, 2001, amounted to $17,183 and $90,530, respectively (September 30, 2000 - $13,894 and $69,568; 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 2001, options for 15,904 common shares were awarded under the Plan with exercise prices ranging from $30.56 to $34.87. The exercise price equaled the share's market price at the date of grant. The weighted average exercise price of these options was $32.60 at September 30, 2001. The weighted average remaining contractual life of all options at September 30, 2001 was 9.7 years. No options were exercisable at September 30, 2001. No compensation cost was recognized by the Corporation during the period ended September 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
<TABLE> <CAPTION> Quarter ended Nine-months ended September 30, September 30, 2001 2000 2001 2000 -------------------------------------------------------------------- (In thousands, except per share information) <S> <C> <C> <C> <C> Net income applicable to common stock As reported $ 75,129 $ 69,205 $ 222,722 $ 194,342 Pro forma $ 75,121 $ 69,205 $ 222,711 $ 194,342 Basic earnings per common share As reported $ 0.55 $ 0.51 $ 1.63 $ 1.43 Pro forma $ 0.55 $ 0.51 $ 1.63 $ 1.43 Diluted earnings per common share As reported $ 0.55 $ 0.51 $ 1.63 $ 1.43 Pro forma $ 0.55 $ 0.51 $ 1.63 $ 1.43 </TABLE> The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The following weighted-average assumptions were used for the grants in 2001: an expected dividend yield of 2.10%, an average expected life of the options of 10 years, an expected volatility of 31.66% and a risk-free interest rate of 5.10%. The weighted-average fair value of options granted during 2001 was $12.52. 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 $1,073. The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures (which shortening would result in a mandatory redemption of the Capital Securities) may be shortened. NOTE 9 - STOCKHOLDERS' EQUITY Authorized common stock is 180,000,000 shares with a par value of $6 per share. At September 30, 2001, there were 138,655,314 (September 30, 2000 - 138,288,062; December 31, 2000 - 138,392,822) shares issued and 136,268,031 (September 30, 2000 - 135,893,857; December 31, 2000 - 135,998,617) shares outstanding. As of September 30, 2001, a total of 2,387,283 (September 30, 2000 - 2,394,205; December 31, 2000 - 2,394,205) common shares with a total cost of $66,136 (September 30, 2000 - $66,214; 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 September 30, 2001, September 30, 2000 and December 31, 2000. 13
NOTE 10 - EARNINGS PER COMMON SHARE A computation of earnings per common share follows: <TABLE> <CAPTION> Quarter ended Nine-months ended September 30, September 30, 2001 2000 2001 2000 --------------------------------------------------------- <S> <C> <C> <C> <C> (In thousands, except per share information) Net income $ 77,216 $ 71,292 $ 228,984 $ 200,604 Less: Preferred stock dividends 2,087 2,087 6,262 6,262 --------------------------------------------------------- Net income applicable to common stock $ 75,129 $ 69,205 $222,722 $194,342 ========================================================= Average common shares outstanding 136,277,273 135,971,955 136,193,360 135,871,832 Average potential common shares - stock options 594 - 244 - --------------------------------------------------------- Average common shares outstanding - assuming dilution 136,277,867 135,971,955 136,193,604 135,871,832 ========================================================= Basic earnings per common share $ 0.55 $ 0.51 $ 1.63 $ 1.43 ========================================================= Diluted earnings per common share $ 0.55 $ 0.51 $ 1.63 $ 1.43 ========================================================= </TABLE> Potential common shares consist of common stock issuable under the assumed exercise of stock options granted under the Corporation's stock option plan, using the treasury stock method. The stock options granted in the third quarter of 2001 were not included in the computation of the quarter and year-to-date diluted earnings per share computation as the effect of their inclusion would be antidilutive. NOTE 11 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS During the nine-month period ended September 30, 2001, the Corporation paid interest and income taxes amounting to $869,569 and $62,192, respectively (2000 - - $857,867 and $83,038). In addition, the loans receivable transferred to other real estate and other property for the nine-month period ended September 30, 2001, amounted to $25,157 and $20,881, respectively (2000 - $23,609 and $18,814). 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 auto and lease financing segment provides financing for vehicles and equipment through Popular Auto, Inc. (formerly Popular Leasing) 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. The accounting policies of the segments are the same as those followed by the Corporation in the ordinary course of 14
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 nine months ended September 30, 2001 and 2000. <TABLE> <CAPTION> MORTGAGE AND AUTO AND COMMERCIAL CONSUMER LEASE BANKING LENDING FINANCING OTHER ELIMINATIONS TOTAL - -------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) QUARTER ENDED SEPTEMBER 30, 2001 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> NET INTEREST INCOME $ 222,419 $ 36,434 $ 13,797 $ 804 $ (34) $ 273,420 PROVISION FOR LOAN LOSSES 37,556 10,599 7,104 55,259 OTHER INCOME 64,351 16,023 4,399 35,878 (3,292) 117,359 AMORTIZATION EXPENSE 5,458 182 189 1,029 6,858 DEPRECIATION EXPENSE 14,259 905 2,410 1,176 18,750 OTHER OPERATING EXPENSES 144,036 24,698 5,330 30,958 (271) 204,751 MINORITY INTEREST 7 7 INCOME TAX 20,917 6,018 1,226 549 (758) 27,952 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 64,544 $ 10,062 $ 1,937 $ 2,970 $ (2,297) $ 77,216 - -------------------------------------------------------------------------------------------------------------------------------- SEGMENT ASSETS $23,648,015 $4,018,926 $980,114 $6,559,278 $(6,675,907) $28,530,426 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> MORTGAGE AND AUTO AND COMMERCIAL CONSUMER LEASE BANKING LENDING FINANCING OTHER ELIMINATIONS TOTAL - -------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> NET INTEREST INCOME $ 662,858 $ 94,209 $ 38,530 $ (836) $ (106) $ 794,655 PROVISION FOR LOAN LOSSES 108,776 29,669 16,310 154,755 OTHER INCOME 182,967 43,992 14,509 119,258 (8,054) 352,672 AMORTIZATION EXPENSE 16,380 546 566 3,102 20,594 DEPRECIATION EXPENSE 43,292 2,714 7,554 3,400 56,960 OTHER OPERATING EXPENSES 426,061 68,671 16,830 93,409 (672) 604,299 MINORITY INTEREST 19 19 INCOME TAX 61,261 13,623 4,469 4,939 (1,852) 82,440 CUMULATIVE EFFECT OF ACCOUNTING CHANGES 686 686 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 190,741 $ 22,997 $ 7,310 $ 13,572 $ (5,636) $ 228,984 - -------------------------------------------------------------------------------------------------------------------------------- SEGMENT ASSETS $23,648,015 $4,018,926 $980,114 $6,559,278 $(6,675,907) $28,530,426 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Mortgage and Auto and Commercial consumer Lease Banking lending Financing Other Eliminations Total - ---------------------------------------------------------------------------------------------------------------------------------- (In thousands) Quarter ended September 30, 2000 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net interest income $ 213,184 $ 23,627 $ 10,482 $ 1,599 $ (36) $ 248,856 Provision for loan losses 33,929 9,944 4,930 863 49,666 Other income 67,936 12,836 4,777 37,993 (3,504) 120,038 Amortization expense 7,222 201 188 1,218 8,829 Depreciation expense 14,578 553 2,247 1,473 18,851 Other operating expenses 136,169 18,897 5,448 32,399 (377) 192,536 Minority interest 10 (68) (58) Income tax 24,407 2,210 964 893 (812) 27,662 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 64,815 $ 4,668 $ 1,482 $ 2,678 $ (2,351) $ 71,292 - ---------------------------------------------------------------------------------------------------------------------------------- Segment Assets $23,191,642 $2,663,259 $938,230 $6,174,048 $(5,736,916) $27,230,263 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> 15
<TABLE> <CAPTION> Mortgage and Auto and Commercial Consumer Lease Banking Lending Financing Other Eliminations Total - -------------------------------------------------------------------------------------------------------------------------------- (In thousands) Nine-month period ended September 30, 2000 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net interest income $ 632,749 $ 69,312 $ 31,990 $ 3,065 $ (104) $ 737,012 Provision for loan losses 107,003 22,632 14,273 4,490 148,398 Other income 193,224 32,923 16,125 111,150 (8,372) 345,050 Amortization expense 21,215 523 565 3,655 25,958 Depreciation expense 43,326 1,867 6,974 5,172 57,339 Other operating expenses 424,772 56,906 17,158 86,302 (2,342) 582,796 Minority interest 32 1,104 1,136 Income tax 56,949 6,771 3,462 2,520 (1,599) 68,103 - -------------------------------------------------------------------------------------------------------------------------------- Net income $ 172,708 $ 13,568 $ 5,683 $ 13,180 $ (4,535) $ 200,604 - -------------------------------------------------------------------------------------------------------------------------------- Segment Assets $23,191,642 $2,663,259 $938,230 $6,174,048 $(5,736,916) $27,230,263 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> GEOGRAPHIC INFORMATION Quarter ended Nine month period ended SEPTEMBER 30, September 30, SEPTEMBER 30, September 30, 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> Revenues* Puerto Rico $432,917 $461,800 $1,349,396 $1,325,984 United States 185,038 186,584 545,626 514,328 Other 16,386 32,828 48,490 96,487 - -------------------------------------------------------------------------------------------------------- Total consolidated revenues $634,341 $681,212 $1,943,512 $1,936,799 - -------------------------------------------------------------------------------------------------------- </TABLE> * Total revenues include interest income, service charges on deposit accounts, other service fees, gain (loss) on sale of securities, trading account profit, loss on derivatives and other operating income. <TABLE> <CAPTION> SEPTEMBER 30, December 31, September 30, 2001 2000 2000 - ----------------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> Selected Balance Sheet Information: Puerto Rico Total assets $19,107,359 $20,146,184 $19,386,613 Loans 9,643,769 9,370,627 9,616,626 Deposits 10,620,492 9,974,677 9,851,236 United States Total assets $ 8,689,070 $ 7,246,259 $ 7,188,144 Loans 7,567,049 6,264,014 6,201,331 Deposits 4,584,680 4,107,994 4,004,726 Other Total assets $ 733,997 $ 664,608 $ 655,506 Loans 421,456 422,444 419,730 Deposits 795,064 722,236 701,916 </TABLE> 16
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 September 30, 2001, December 31, 2000 and September 30, 2000, and the results of their operations and cash flows for the periods ended September 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 August 31, 2001, November 30, 2000 and August 31, 2000, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of September 30, 2001, December 31, 2000 and September 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 September 30, 2001, BPPR could have declared a dividend of approximately $197,341 without the approval of the Federal Reserve Board. 17
POPULAR, INC. CONSOLIDATED STATEMENT OF CONDITION SEPTEMBER 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 $ 207 $ 131 $ 195 $ 679,777 $ (63,298) $ 617,012 Money market investments 25,987 302 118 1,172,876 (206,268) 993,015 Investment securities available-for-sale, at market value 181,937 19,712 6,599 7,592,580 (2,800) 7,798,028 Investment securities held-to-maturity, at amortized cost 395,403 (154,640) 240,763 Trading account securities, at market value 277,869 277,869 Investment in subsidiaries, at equity 2,292,822 559,247 763,414 154,849 (3,770,332) Loans held-for-sale, at lower of cost or market 910,615 910,615 - ----------------------------------------------------------------------------------------------------------------------------------- Loans 197,817 2,494,883 18,328,989 (3,979,256) 17,042,433 Less - Unearned income 320,774 320,774 Allowance for loan losses 326,630 326,630 - ----------------------------------------------------------------------------------------------------------------------------------- 197,817 2,494,883 17,681,585 (3,979,256) 16,395,029 - ----------------------------------------------------------------------------------------------------------------------------------- Premises and equipment 390,324 390,324 Other real estate 29,257 29,257 Customers' liabilities on acceptances 1,953 1,953 Accrued income receivable 285 2 13,586 197,427 (21,437) 189,863 Other assets 24,527 26,398 3,651 368,293 527 423,396 Intangible assets 263,665 (363) 263,302 - ----------------------------------------------------------------------------------------------------------------------------------- $2,723,582 $605,792 $3,282,446 $30,116,473 $(8,197,867) $28,530,426 =================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,108,843 $ (63,239) $ 3,045,604 Interest bearing 12,974,309 (19,677) 12,954,632 - ----------------------------------------------------------------------------------------------------------------------------------- 16,083,152 (82,916) 16,000,236 Federal funds purchased and securities sold underagreements to repurchase $ 148,041 3,988,728 (158,570) 3,978,199 Other short-term borrowings $ 751 $ 4,365 1,639,400 2,712,352 (1,192,348) 3,164,520 Notes payable 250,493 917,530 4,113,966 (2,952,004) 2,329,985 Acceptances outstanding 1,953 1,953 Other liabilities 47,881 54 26,905 431,787 (26,459) 480,168 - ----------------------------------------------------------------------------------------------------------------------------------- 299,125 4,419 2,731,876 27,331,938 (4,412,297) 25,955,061 - ----------------------------------------------------------------------------------------------------------------------------------- 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 105 803 908 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 100,000 100,000 Common stock 831,932 3,962 2 72,575 (76,539) 831,932 Surplus 266,525 487,676 439,964 1,333,919 (2,261,559) 266,525 Retained earnings 1,011,473 99,459 105,112 1,119,671 (1,324,242) 1,011,473 Treasury stock-at cost (66,136) (1,495) 1,495 (66,136) Accumulated other comprehensive income, net of taxes 155,663 10,276 5,492 109,760 (125,528) 155,663 - ---------------------------------------------------------------------------------------------------------------------------------- 2,299,457 601,373 550,570 2,634,430 (3,786,373) 2,299,457 - ---------------------------------------------------------------------------------------------------------------------------------- $2,723,582 $605,792 $3,282,446 $30,116,473 $(8,197,867) $28,530,426 ================================================================================================================================== </TABLE> 18
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
POPULAR, INC. STATEMENT OF CONDITION AS OF SEPTEMBER 30, 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 $ 239 $ 41 $ 758 $ 655,513 $ (83,155) $ 573,396 Money market investments 8,937 303 47 1,752,507 (882,143) 879,651 Investment securities available-for-sale, at market value 155,128 13,021 5,587 7,896,926 8,070,662 Investment securities held-to-maturity, at amortized cost 440,469 (154,640) 285,829 Trading account securities, at market value 163,645 163,645 Investment in subsidiaries, at equity 1,848,621 530,448 726,066 113,586 (3,218,721) Loans held-for-sale, at lower of cost or market 682,455 682,455 - ----------------------------------------------------------------------------------------------------------------------------------- Loans 627,678 22,500 1,740,515 15,897,859 (2,379,998) 15,908,554 Less - Unearned income 353,322 353,322 Allowance for loan losses 2,000 293,177 295,177 - ----------------------------------------------------------------------------------------------------------------------------------- 625,678 22,500 1,740,515 15,251,360 (2,379,998) 15,260,055 - ----------------------------------------------------------------------------------------------------------------------------------- Premises and equipment 401,975 401,975 Other real estate 21,494 21,494 Customers' liabilities on acceptances 1,904 1,904 Accrued income receivable 1,819 49 11,120 206,074 (18,424) 200,638 Other assets 19,813 798 6,636 374,558 (682) 401,123 Intangible assets 287,920 (484) 287,436 - ----------------------------------------------------------------------------------------------------------------------------------- $2,660,235 $567,160 $2,490,729 $28,250,386 $(6,738,247) $27,230,263 =================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,028,107 $ (83,050) $ 2,945,057 Interest bearing 11,776,868 (164,047) 11,612,821 - ----------------------------------------------------------------------------------------------------------------------------------- 14,804,975 (247,097) 14,557,878 Federal funds purchased and securities sold under agreements to repurchase $ 17,800 $ 50,400 5,309,504 (141,060) 5,236,644 Other short-term borrowings 390,828 $ 5,414 978,840 3,480,691 (1,411,644) 3,444,129 Notes payable 251,440 913,589 1,955,542 (1,686,142) 1,434,429 Acceptances outstanding 1,904 1,904 Other liabilities 39,433 198 27,889 398,500 (22,313) 443,707 - ----------------------------------------------------------------------------------------------------------------------------------- 699,501 5,612 1,970,718 25,951,116 (3,508,256) 25,118,691 - ----------------------------------------------------------------------------------------------------------------------------------- Subordinated notes 125,000 125,000 - ----------------------------------------------------------------------------------------------------------------------------------- Preferred beneficial interests in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 - ----------------------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 838 838 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 100,000 100,000 Common stock 829,729 3,962 2 33,363 (37,327) 829,729 Surplus 249,238 485,676 439,964 1,335,995 (2,261,635) 249,238 Retained earnings 823,418 73,371 80,241 890,767 (1,044,379) 823,418 Treasury stock, at cost (66,214) (314) 314 (66,214) Accumulated other comprehensive income (loss), net of deferred taxes (100,437) (1,461) (196) (110,541) 112,198 (100,437) - ----------------------------------------------------------------------------------------------------------------------------------- 1,835,734 561,548 520,011 2,149,270 (3,230,829) 1,835,734 - ----------------------------------------------------------------------------------------------------------------------------------- $2,660,235 $567,160 $2,490,729 $28,250,386 $(6,738,247) $27,230,263 =================================================================================================================================== </TABLE> 20
POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED SEPTEMBER 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 $ 3,751 $ 40,362 $ 411,020 $ (62,332) $ 392,801 Money market investments 227 $ 4 143 20,861 (10,885) 10,350 Investment securities 264 1 189 112,896 (3,255) 110,095 Trading account securities 3,736 3,736 - ----------------------------------------------------------------------------------------------------------------------------------- 4,242 5 40,694 548,513 (76,472) 516,982 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 131,170 (916) 130,254 Short-term borrowings 247 48 18,377 78,712 (24,720) 72,664 Long-term debt 6,456 20,098 64,891 (50,801) 40,644 - ----------------------------------------------------------------------------------------------------------------------------------- 6,703 48 38,475 274,773 (76,437) 243,562 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (2,461) (43) 2,219 273,740 (35) 273,420 Provision for loan losses 55,259 55,259 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (2,461) (43) 2,219 218,481 (35) 218,161 Service charges on deposit accounts 37,580 (43) 37,537 Other service fees 59,703 (60) 59,643 Gain on sale of securities 1,249 1,249 Trading account profit 27 750 777 (Loss) gain on derivatives (8,228) 88 (8,140) Other operating income 4,434 609 24,438 (3,188) 26,293 - ----------------------------------------------------------------------------------------------------------------------------------- 1,973 593 (6,009) 342,289 (3,326) 335,520 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 74 82,006 82,080 Profit sharing 3,986 3,986 Pension and other benefits 13 21,529 21,542 - ----------------------------------------------------------------------------------------------------------------------------------- 87 107,521 107,608 Net occupancy expenses 3 17,971 17,974 Equipment expenses 24,148 24,148 Other taxes 245 8,890 9,135 Professional fees 181 3 247 16,904 (88) 17,247 Communications 13 12,168 12,181 Business promotion 13,414 13,414 Printing and supplies 4,269 4,269 Other operating expenses 29 19 106 17,553 (182) 17,525 Amortization of intangibles 6,858 6,858 - ----------------------------------------------------------------------------------------------------------------------------------- 468 112 353 229,696 (270) 230,359 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax, minority interest and equity in earnings of subsidiaries 1,505 481 (6,362) 112,593 (3,056) 105,161 Income tax (2,189) 30,899 (758) 27,952 Net loss of minority interest 7 7 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before equity in earnings of subsidiaries 1,505 481 (4,173) 81,701 (2,298) 77,216 Equity in earnings of subsidiaries 75,711 5,105 9,292 5,598 (95,706) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 77,216 $ 5,586 $ 5,119 $ 87,299 $ (98,004) $ 77,216 =================================================================================================================================== </TABLE> 21
POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED SEPTEMBER 30, 2000 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA Other Elimination Popular, Inc. Holding Co. Holding Co. Holding Co. Subsidiaries entries Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Loans $ 11,712 $ 47 $ 31,544 $ 415,715 $ (44,341) $ 414,677 Money market investments 292 8 37 33,691 (15,841) 18,187 Investment securities 678 1 178 127,514 (3,262) 125,109 Trading account securities 3,201 3,201 - ----------------------------------------------------------------------------------------------------------------------------------- 12,682 56 31,759 580,121 (63,444) 561,174 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 146,356 (5,545) 140,811 Short-term borrowings 7,856 91 15,807 141,600 (25,597) 139,757 Long-term debt 6,492 17,523 40,002 (32,267) 31,750 - ----------------------------------------------------------------------------------------------------------------------------------- 14,348 91 33,330 327,958 (63,409) 312,318 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (1,666) (35) (1,571) 252,163 (35) 248,856 Provision for loan losses 49,666 49,666 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (1,666) (35) (1,571) 202,497 (35) 199,190 Service charges on deposit accounts 32,558 32,558 Other service fees 57,635 (142) 57,493 Gain on sale of securities 147 147 Trading account profit 259 259 Other operating income 2,668 757 29,517 (3,361) 29,581 - ----------------------------------------------------------------------------------------------------------------------------------- 1,002 722 (1,571) 322,613 (3,538) 319,228 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 70 78,034 78,104 Profit sharing 5,197 5,197 Pension and other benefits 10 17,068 17,078 ---------------------------------------------------------------------------------------------------------------------------------- 80 100,299 100,379 Net occupancy expenses 3 17,607 17,610 Equipment expenses 1 25,354 (61) 25,294 Other taxes 452 8,055 8,507 Professional fees 95 3 174 15,609 (279) 15,602 Communications 4 11,657 11,661 Business promotion 9,694 9,694 Printing and supplies 5,351 5,351 Other operating expenses 21 14 17,290 (36) 17,289 Amortization of intangibles 8,829 8,829 - ----------------------------------------------------------------------------------------------------------------------------------- 572 101 174 219,745 (376) 220,216 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax, minority interest and equity in earnings of subsidiaries 430 621 (1,745) 102,868 (3,162) 99,012 Income tax (236) (611) 29,322 (813) 27,662 Net gain of minority interest (58) (58) - ----------------------------------------------------------------------------------------------------------------------------------- Income before equity in earnings of subsidiaries 666 621 (1,134) 73,488 (2,349) 71,292 Equity in earnings of subsidiaries 70,626 5,963 7,604 4,066 (88,259) - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 71,292 $ 6,584 $ 6,470 $ 77,554 $ (90,608) $ 71,292 =================================================================================================================================== </TABLE> 22
POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 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 $ 18,102 $ 1,069 $ 115,958 $ 1,215,341 $ (172,263) $ 1,178,207 Money market investments 690 14 199 76,310 (38,531) 38,682 Investment securities 1,148 2 567 370,436 (9,756) 362,397 Trading account securities 11,554 11,554 - ----------------------------------------------------------------------------------------------------------------------------------- 19,940 1,085 116,724 1,673,641 (220,550) 1,590,840 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 396,000 (1,947) 394,053 Short-term borrowings 1,117 198 51,591 307,979 (84,610) 276,275 Long-term debt 25,442 63,960 170,341 (133,886) 125,857 - ----------------------------------------------------------------------------------------------------------------------------------- 26,559 198 115,551 874,320 (220,443) 796,185 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (6,619) 887 1,173 799,321 (107) 794,655 Provision for loan losses 154,755 154,755 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (6,619) 887 1,173 644,566 (107) 639,900 Service charges on deposit accounts 108,547 (42) 108,505 Other service fees 175,856 (120) 175,736 Loss on sale of securities (50) (563) (613) Trading account profit 26 123 149 Loss on derivatives (6,711) (408) (7,119) Other operating income 9,835 1,018 73,053 (7,892) 76,014 - ----------------------------------------------------------------------------------------------------------------------------------- 3,216 1,881 (5,538) 1,001,174 (8,161) 992,572 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 217 238,525 238,742 Profit sharing 13,101 13,101 Pension and other benefits 38 67,364 67,402 - ----------------------------------------------------------------------------------------------------------------------------------- 255 318,990 319,245 Net occupancy expenses 9 52,886 52,895 Equipment expenses 72,850 72,850 Other taxes 1,149 26,605 27,754 Professional fees 1,112 6 357 47,251 (205) 48,521 Communications 29 36,124 36,153 Business promotion 37,118 37,118 Printing and supplies 13,078 13,078 Other operating expenses 77 41 319 53,675 (467) 53,645 Amortization of intangibles 20,594 20,594 - ----------------------------------------------------------------------------------------------------------------------------------- 2,367 311 676 679,171 (672) 681,853 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax, minority interest, cumulative Effect of accounting changes and equity in earnings of Subsidiaries 849 1,570 (6,214) 322,003 (7,489) 310,719 Income tax (1,386) (2,202) 87,880 (1,852) 82,440 Net loss of minority interest 19 19 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting changes and equity in earnings of subsidiaries 2,235 1,570 (4,012) 234,142 (5,637) 228,298 Cumulative effect of accounting changes 686 686 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before equity in earnings of subsidiaries 2,235 1,570 (4,012) 234,828 (5,637) 228,984 Equity in earnings of subsidiaries 226,749 14,313 18,691 16,286 (276,039) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 228,984 $ 15,883 $ 14,679 $ 251,114 $ (281,676) $228,984 =================================================================================================================================== </TABLE> 23
POPULAR, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED) <TABLE> <CAPTION> Popular, Inc. PIBI PNA Other Elimination Popular, Inc. Holding Co. Holding Co. Holding Co. Subsidiaries Entries Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Loans $ 40,364 $ 336 $ 85,165 $ 1,186,945 $ (129,176) $ 1,183,634 Money market investments 643 77 178 86,177 (41,332) 45,743 Investment securities 1,624 1 533 359,421 (9,716) 351,863 Trading account securities 10,509 10,509 - ----------------------------------------------------------------------------------------------------------------------------------- 42,631 414 85,876 1,643,052 (180,224) 1,591,749 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 414,487 (21,803) 392,684 Short-term borrowings 24,223 467 29,883 370,565 (68,872) 356,266 Long-term debt 23,330 142 60,793 110,967 (89,445) 105,787 - ----------------------------------------------------------------------------------------------------------------------------------- 47,553 609 90,676 896,019 (180,120) 854,737 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (4,922) (195) (4,800) 747,033 (104) 737,012 Provision for loan losses 148,398 148,398 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (4,922) (195) (4,800) 598,635 (104) 588,614 Service charges on deposit accounts 93,612 93,612 Other service fees 162,004 (1,702) 160,302 Gain on sale of securities 13,000 740 13,740 Trading account profit 1,617 1,617 Other operating income 8,066 1,082 73,301 (6,670) 75,779 - ----------------------------------------------------------------------------------------------------------------------------------- 16,144 87 (4,800) 929,909 (8,476) 933,664 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 210 233,789 233,999 Profit sharing 14,897 14,897 Pension and other benefits 36 52,882 52,918 - ----------------------------------------------------------------------------------------------------------------------------------- 246 301,568 301,814 Net occupancy expenses 9 50,337 50,346 Equipment expenses 1 73,923 (117) 73,807 Other taxes 898 24,525 25,423 Professional fees 296 6 480 51,443 (2,118) 50,107 Communications 7 34,490 34,497 Business promotion 36,353 36,353 Printing and supplies 15,836 15,836 Other operating expenses 70 39 51,949 (106) 51,952 Amortization of intangibles 25,958 25,958 - ----------------------------------------------------------------------------------------------------------------------------------- 1,271 301 480 666,382 (2,341) 666,093 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income tax, minority interest and equity in earnings of subsidiaries 14,873 586 (5,280) 263,527 (6,135) 267,571 Income tax 3,492 (1,848) 68,059 (1,600) 68,103 Net loss of minority interest 1,136 1,136 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before equity in earnings of subsidiaries 11,381 586 (3,432) 196,604 (4,535) 200,604 Equity in earnings of subsidiaries 189,223 3,256 9,668 10,639 (212,786) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 200,604 $ 3,842 $ 6,236 $ 207,243 $ (217,321) $200,604 =================================================================================================================================== </TABLE> 24
POPULAR, INC. STATEMENTS OF CASH FLOWS FOR THE PERIOD ENDED SEPTEMBER 31, 2001 <TABLE> <CAPTION> Popular, Inc. PIBI PNA All other Eliminations Consolidated (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Popular, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 228,984 $ 15,883 $ 14,679 $ 251,114 $ (281,676) $ 228,984 - ------------------------------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries (226,749) (14,313) (18,691) (16,286) 276,039 Depreciation and amortization of premises and equipment 56,960 56,960 Provision for loan losses 154,755 154,755 Amortization of intangibles 20,594 20,594 Loss on sale of investment securities available-for-sale 50 563 613 Net loss on derivatives 6,712 407 7,119 Loss on disposition of premises and equipment 351 351 Gain on sale of loans (860) (860) Net amortization of premiums and accretion of discounts on investments 1,975 1,975 Net increase in loans held-for-sale (86,714) (86,714) Net amortization of deferred loan fees and costs (15,622) (15,622) Net increase in trading securities (124,796) (124,796) Net decrease (increase) in accrued income receivable 828 588 (1,536) 12,525 272 12,677 Net (increase) decrease in other assets (2,544) (25,503) 5,519 36,117 (1,932) 11,657 Net decrease in interest payable (11,013) (213) (17,038) (45,120) (73,384) Net (decrease) increase in deferred and current taxes (34) 733 5,999 (1,442) 5,256 Net increase in postretirement benefit obligation 3,012 3,012 Net increase (decrease) in other liabilities 16,628 (8) (5,001) (287) (4,370) 6,962 - ------------------------------------------------------------------------------------------------------------------------------------ Total adjustments (222,884) (39,399) (29,302) 3,573 268,567 (19,445) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 6,100 (23,516) (14,623) 254,687 (13,109) 209,539 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Net (increase) decrease in money market investments (5,150) 25 (58) 771,489 (690,703) 75,603 Purchases of investment securities held-to-maturity (4,515,716) (4,515,716) Maturities of investment securities held-to-maturity 4,622,152 4,622,152 Purchases of investment securities available-for-sale (7,829) (146) (3,295,726) (3,303,701) Maturities of investment securities available-for-sale 34 3,668,545 2,426 3,671,005 Sales of investment securities available-for-sale 732,131 732,131 Net collections (disbursements) on loans 345,956 22,500 (652,368) (2,497,778) 1,400,949 (1,380,741) Proceeds from sale of loans 404,760 404,760 Acquisition of loan portfolios (660,829) (660,829) Capital contribution to subsidiary (1,998) (32) 2,030 Assets acquired, net of cash (123) (123) Return of investment from subsidiary 300 (300) Acquisition of premises and equipment (45,044) (45,044) Proceeds from sale of premises and equipment 3,180 3,180 Dividends received from subsidiary 71,250 (71,250) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 402,229 22,679 (652,424) (812,959) 643,152 (397,323) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase in deposits 1,122,091 64,036 1,186,127 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 79,341 (1,044,389) (20,868) (985,916) Net (decrease) increase in other short-term borrowings (376,962) (1,050) 303,337 (1,707,128) 577,111 (1,204,692) Net proceeds of notes payable 38,482 284,276 2,116,244 (1,285,928) 1,153,074 Dividends paid to parent company (71,250) 71,250 Dividends paid (77,041) (77,041) Proceeds from issuance of common stock 7,116 7,116 Treasury stock sold 77 77 Return of investment to parent (300) 300 Capital contribution from parent 2,000 32 (2,032) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (408,405) 950 666,954 415,377 (596,131) 78,745 - ------------------------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and due from banks (76) 113 (93) (142,895) 33,912 (109,039) 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 $ 207 $ 131 $ 195 $ 679,777 $ 63,298 $ 617,012 ==================================================================================================================================== </Table> 25
POPULAR, INC. STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ Popular, Inc. PIBI PNA Other Elimination Consolidated (In thousands) Holding Co. Holding Co. Holding Co. Subsidiaries Entries Popular, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 200,604 $ 3,842 $ 6,236 $ 207,243 $ (217,321) $ 200,604 - ------------------------------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to cash (used in) provided by operating activities: Equity in undistributed earnings of subsidiaries (189,223) (3,256) (9,668) (10,639) 212,786 Depreciation and amortization of premises and equipment 57,339 57,339 Provision for loan losses 148,398 148,398 Amortization of intangibles 25,958 25,958 Gain on sale of investment securities available-for-sale (13,000) (740) (13,740) Loss on disposition of premises and equipment 340 340 Gain on sale of loans (3,862) (3,862) Net amortization of premiums and accretion of discounts on investments 170 1,130 1,300 Net increase in loans held-for-sale (63,157) (63,157) Net amortization of deferred loan fees and costs 504 504 Net decrease in trading securities 72,966 72,966 Net (increase) decrease in accrued income receivable (1,697) 146 (10,448) (24,574) 5,948 (30,625) Net increase in other assets (8,485) (205) (1,854) (25,389) (367) (36,300) Net increase (decrease) in interest payable 5,664 (127) (16,787) 8,121 (3,129) Net (decrease) increase in current and deferred taxes (1,393) 170 (20,023) (21,246) Net increase in postretirement benefit obligation 4,516 4,516 Net increase (decrease) in other liabilities 3,057 (129) 1,923 19,777 (7,404) 17,224 - ------------------------------------------------------------------------------------------------------------------------------------ Total adjustments (205,077) (3,571) (36,494) 190,665 210,963 156,486 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by operating activities (4,473) 271 (30,258) 397,908 (6,358) 357,090 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Net decrease (increase) in money market investments 26,563 2,955 21,456 (46,881) 87,571 91,664 Purchases of investment securities held-to-maturity (4,857,246) (4,857,246) Maturities of investment securities held-to-maturity 4,779,569 4,779,569 Purchases of investment securities available-for-sale (108,576) (257) (2,428,574) (2,537,407) Maturities of investment securities available-for-sale 87,956 1,779,696 (800) 1,866,852 Sales of investment securities available-for-sale 89,611 89,611 Net collections (disbursements) on loans 269,771 16,392 (312,741) (1,882,520) (7,485) (1,916,583) Proceeds from sale of loans 711,375 711,375 Acquisition of loan portfolios (394,632) (394,632) Capital contribution to subsidiary (15,574) (7,943) (94,868) 118,385 Assets acquired, net of cash (8,831) (8,831) Acquisition of premises and equipment (52,348) (52,348) Proceeds from sale of premises and equipment 12,308 12,308 Cash transferred due to sale of investment in subsidiary (46,899) (46,899) Dividends received from subsidiary 66,000 (66,000) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 326,140 11,404 (386,410) (2,345,372) 131,671 (2,262,567) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase in deposits 160,003 404,808 564,811 Net increase in federal funds purchased and securities sold under agreements to repurchase 17,800 50,400 787,804 (33,840) 822,164 Net (decrease) increase in other short-term borrowings (40,222) (20,304) 654,184 567,534 (291,700) 869,492 Net (payments) proceeds of notes payable (233,276) (7,007) (287,822) 375,663 (222,786) (375,228) Dividends paid to parent company (66,000) 66,000 Dividends paid (71,448) (71,448) Proceeds from issuance of common stock 7,450 7,450 Treasury stock acquired (2,064) (2,064) Capital contribution from parent 15,450 84,735 (100,185) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (321,760) (11,861) 416,762 1,909,739 (177,703) 1,815,177 - ------------------------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and due from banks (93) (186) 94 (37,725) (52,390) (90,300) Cash and due from banks at beginning of period 332 227 664 693,238 (30,765) 663,696 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks at end of period $ 239 $ 41 $ 758 $ 655,513 $ (83,155) $ 573,396 ==================================================================================================================================== </Table> 26
TABLE A ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------ AT SEPTEMBER 30, AVERAGE FOR THE NINE MONTHS ------------------------------------------------------------------------------------ BALANCE SHEET HIGHLIGHTS 2001 2000 Change 2001 2000 Change (In thousands) - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Money market investments $ 993,015 $ 879,651 $ 113,364 $ 940,122 $ 932,578 $ 7,544 Investment and trading securities 8,316,660 8,520,136 (203,476) 8,310,532 7,945,071 365,461 Loans 17,632,274 16,237,687 1,394,587 16,800,193 15,674,947 1,125,246 Total assets 28,530,426 27,230,263 1,300,163 27,594,261 26,240,525 1,353,736 Deposits 16,000,236 14,557,878 1,442,358 15,316,240 14,447,585 868,655 Borrowings 9,747,704 10,390,202 (642,498) 9,732,669 9,434,291 298,378 Stockholders' equity 2,299,457 1,835,734 463,723 2,072,049 1,859,882 212,167 <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------ THIRD QUARTER NINE 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 $273,420 $248,856 $ 24,564 $794,655 $737,012 $57,643 Provision for loan losses 55,259 49,666 5,593 154,755 148,398 6,357 Fees and other income 117,359 120,038 (2,679) 352,672 345,050 7,622 Other expenses, net of minority 258,304 247,936 10,368 764,274 733,060 31,214 interest Cumulative effect of accounting changes, net of tax 686 686 Net income $77,216 $71,292 $5,924 $228,984 $200,604 $28,380 Net income applicable to common stock $75,129 $69,205 $5,924 $222,722 $194,342 $28,380 Earnings per common share $0.55 $0.51 $0.04 $1.63 $1.43 $0.20 </TABLE> <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------ SELECTED STATISTICAL INFORMATION THIRD QUARTER NINE MONTHS ----------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> COMMON STOCK DATA - Market price High $36.26 $27.06 $36.26 $27.06 Low 27.42 19.63 25.25 18.63 End 31.20 27.06 31.20 27.06 Book value at period end 16.14 12.77 16.14 12.77 Dividends declared 0.20 0.16 0.56 0.48 Dividend payout ratio 36.26% 31.42% 31.78% 33.54% Price/earnings ratio 14.38x 14.24x 14.38X 14.24x - ------------------------------------------------------------------------------------------------------------------------------ PROFITABILITY RATIOS - Return on assets 1.10% 1.04% 1.11% 1.02% Return on common equity 14.71 15.24 15.10 14.75 Net interest spread (taxable equivalent) 3.80 3.33 3.63 3.46 Net interest yield (taxable equivalent) 4.48 4.16 4.37 4.29 Effective tax rate 26.58 27.94 26.53 25.45 Overhead ratio 41.33 40.26 41.42 43.56 Efficiency ratio 58.04 61.27 59.04 62.98 - ------------------------------------------------------------------------------------------------------------------------------ CAPITALIZATION RATIOS - Equity to assets 7.63% 6.99% 7.51% 7.09% Tangible equity to assets 6.74 5.99 6.59 6.02 Equity to loans 12.22 11.69 12.33 11.87 Internal capital generation 9.01 9.95 9.42 9.26 Tier I capital to risk - adjusted assets 10.70 10.29 10.70 10.29 Total capital to risk - adjusted assets 12.68 12.33 12.68 12.33 Leverage ratio 6.91 6.29 6.91 6.29 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial review contains the analysis of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the Corporation) and should be read in conjunction with the consolidated financial statements, 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, N.A.) - Auto Loans and Lease Financing - Popular Auto, Inc. (previously d/b/a 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, Inc.) - 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 $77.2 million for the third quarter of 2001, compared with $71.3 million for the same quarter of 2000. Earnings per common share (EPS) for the quarter were $0.55, based on 136,277,273 average shares outstanding, compared to $0.51 reported on the third quarter of 2000, based on 135,971,955 average shares outstanding. Return on assets (ROA) and return on common equity (ROE) for the quarter ended September 30, 2001 was 1.10% and 14.71%, respectively, compared with 1.04% and 15.24% for the same period in 2000. The Corporation's results of operations for the quarter ended September 30, 2001 reflected an increase of $24.6 million in net interest income, compared with the same quarter the prior year. This improvement was partially offset by a decline of $2.7 million in other revenues, together with rises of $5.6 million in the provision for loan losses and $10.1 million in operating expenses. For the first nine months of 2001, the Corporation's net earnings rose to $229.0 million, compared with $200.6 million for the same period in 2000. EPS for the first nine months of 2001 and 2000 were $1.63 and $1.43, based on average shares outstanding of 136,193,360 and 135,871,832, respectively. ROA and ROE for the period ended September 30, 2001 were 1.11% and 15.10%, respectively, compared with 1.02% and 14.75% for the same period last year. NET INTEREST INCOME Net interest income for the third quarter of 2001 reached $273.4 million, an increase of 10% when compared with $248.8 million in the same period of 2000. On a taxable equivalent basis, net interest income increased to $294.1 million, from $265.1 million in the same quarter of 2000. The improvement of $29.0 million in net interest income on a taxable equivalent basis from the third quarter of 2000 resulted from a $29.1 million increase due to a higher net interest yield, partially offset by a $0.1 million decrease due to levels. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a taxable equivalent basis assuming the applicable statutory income tax rates. 28
Table B summarizes the changes in the composition of average earning assets and interest bearing liabilities, and their respective interest income and expense, and yields and costs, on a taxable equivalent basis, for the third quarter of 2001, as compared with the same quarter in 2000. TABLE B ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS QUARTER ENDED ON SEPTEMBER 30, <TABLE> <CAPTION> Variance Average Volume Average Yields Interest Attributable to - ---------------------------------------------------- -------------------------------------------------- 2001 2000 Variance 2001 2000 Variance 2001 2000 Variance Rate Volume - ---------------------------------------------------- -------------------------------------------------- ($ in millions) (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> $ 920 $ 1,033 $ (113) 4.46% 7.00% (2.54)% Money market investments $ 10,351 $ 18,187 $ (7,836) $ (6,136) $(1,700) 7,729 8,035 (306) 6.67 6.92 (0.25) Investment securities 128,898 139,195 (10,297) (3,125) (7,172) 274 176 98 5.53 7.37 (1.84) Trading 3,824 3,255 569 (942) 1,511 - --------------------------------------------------- -------------------------------------------------- 8,923 9,244 (321) 6.40 6.94 (0.54) 143,073 160,637 (17,564) (10,203) (7,361) - --------------------------------------------------- -------------------------------------------------- Loans: 7,547 7,399 148 7.84 9.88 (2.04) Commercial 149,182 183,726 (34,544) (38,172) 3,628 846 777 69 11.82 12.75 (0.93) Leasing 24,994 24,776 218 (1,880) 2,098 5,790 4,559 1,231 8.04 8.27 (0.23) Mortgage 116,388 94,282 22,106 (2,694) 24,800 3,215 3,574 (359) 12.91 12.74 0.17 Consumer 104,095 114,037 (9,942) 3,800 (13,742) - --------------------------------------------------- -------------------------------------------------- 17,398 16,309 1,089 9.04 10.19 (1.15) 394,659 416,821 (22,162) (38,946) 16,784 - --------------------------------------------------- -------------------------------------------------- $26,321 $25,553 $ 768 8.15% 9.02% (0.87)% TOTAL EARNING ASSETS $537,732 $577,458 $(39,726) ($49,149) $9,423 =================================================== ================================================== Interest bearing deposits: $ 2,096 $ 1,932 $ 164 3.03% 3.93% (0.90)% NOW and money market $ 16,004 $19,098 $(3,094) ($4,386) $1,292 4,182 4,022 160 2.78 2.75 0.03 Savings 29,308 27,845 1,463 190 1,273 6,478 5,812 666 5.20 6.43 (1.23) Time deposits 84,942 93,868 (8,926) (17,635) 8,709 - --------------------------------------------------- -------------------------------------------------- 12,756 11,766 990 4.05 4.76 (0.71) 130,254 140,811 (10,557) (21,831) 11,274 - --------------------------------------------------- -------------------------------------------------- 6,941 8,177 (1,236) 4.15 6.80 (2.65) Short-term borrowings 72,664 139,757 (67,093) (55,379) (11,714) 2,508 1,878 630 6.44 6.73 (0.29) Medium and long-term debt 40,644 31,750 8,894 (1,111) 10,005 - --------------------------------------------------- -------------------------------------------------- TOTAL INTEREST-BEARING 22,205 21,821 384 4.35 5.69 (1.34) LIABILITIES 243,562 312,318 (68,756) (78,321) 9,565 3,048 3,004 44 Demand deposits 1,068 728 340 Other sources of funds - --------------------------------------------------- -------------------------------------------------- $26,321 $25,553 $ 768 3.67% 4.86% (1.19)% =================================================== 4.48% 4.16% 0.32% NET INTEREST MARGIN ========================= NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS $294,170 $265,140 $ 29,030 $ 29,172 $ (142) 3.80% 3.33% 0.47% NET INTEREST SPREAD ================= ========================= Taxable equivalent adjustment 20,750 16,284 4,466 ------------------------------ Net interest income $273,420 $248,856 $24,564 ============================== </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 for the quarter ended September 30, 2001 increased by $768 million from the same quarter in 2000, primarily due to a rise of $1.1 billion in average loans, mainly mortgage. Partially offsetting the increase in loans, was the decrease in average investment securities of $306 million compared with the third quarter in 2000. The mortgage loan volume was favorably impacted by the current interest rate environment, which has stimulated the market for new volume and refinancing activity. Average mortgage loans for the quarter just ended rose 27% compared with the same period in prior year. Also, the average commercial loan portfolio increased $148 million compared with the same quarter in 2000. The rise resulted from the Corporation's business growth in both the retail and middle markets. On the other hand, consumer loans decreased by $359 million or 10% when compared with the third quarter of 2000, partly related to the sale of the U.S. credit card portfolio in 2000, which approximated $107 million in average balances for the quarter ended September 30, 2000. Also, the decrease is due to lower demand for personal loans 29
resulting from the slowdown in the economy, coupled with higher mortgage refinancing activity prompted by the lower interest rate scenario. The average yield on earning assets, on a taxable equivalent basis, declined 87 basis points from 9.02% in the third quarter of 2000 to 8.15% during the third quarter of 2001. This reduction is attributed to the lower interest rate scenario that has prevailed during the three months ended September 30, 2001, as compared with the same period last year, which affected principally commercial loans due to their volatility related to interest rates, and the lease financing portfolio. Also, the decrease in yield is related to the higher proportion of mortgages, which carry a lower yield, and to the lower yields related to fed funds, resale agreements and investment securities, which have also been negatively impacted by the further declines in interest rates. The increase of $384 million in the average balance of interest bearing liabilities for the third quarter of 2001, as compared with the same quarter in 2000, was mostly reflected in average interest bearing deposits, which grew by $990 million or 8%. Lower borrowing levels offset this rise. The increase in average interest bearing deposits was mostly in time deposits, which rose 11% compared with the third quarter of 2000. Within this category, brokered deposits increased $305 million, from an average of $423 million in the third quarter of 2000. The average cost of interest bearing liabilities decreased 134 basis points when compared with the same quarter of 2000. The reduction is mostly attributed to the interest rate scenario, which resulted in a lower cost of short-term borrowed money by 265 basis points or $55.4 million and interest bearing deposits by 71 basis points or $21.8 million. The Corporation's taxable equivalent net interest margin for the third quarter of 2001 was 4.48%, compared with 4.16% in the same quarter of 2000. 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 positioning at the beginning of the Federal Reserve's easing cycle, having a larger proportion of liabilities repricing faster than assets. For the nine-month period ended September 30, 2001, net interest income, on a taxable equivalent basis, rose $65.3 million, compared with the same period of 2000. The improvement resulted from a $32.4 million increase due to volume and $32.9 million increase due to a higher taxable equivalent net interest yield. As shown in Table C, average earning assets rose by $1.5 billion for the nine-month period ended September 30, 2001, compared with the same period in 2000. The increase in average mortgage loans for the period of $1.0 billion, represented 67% of the rise in average earning assets. Average interest bearing liabilities rose $1.2 billion when compared with the nine-month period ended September 30, 2000, mostly in time deposits, which represented $646 million or 54% of the rise compared with the first nine months of 2000. Most of this rise was in brokered deposits, which for the nine-month period ended September 30, 2001 averaged $406 million higher than in 2000. 30
TABLE C ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS NINE MONTHS ENDED SEPTEMBER 30, <TABLE> <CAPTION> Variance Average Volume Average Yields Interest Attributable to - ------------------------------------------------------- ------------------------------------------------------ 2001 2000 Variance 2001 2000 Variance 2001 2000 Variance Rate Volume - ------------------------------------------------------- ------------------------------------------------------ ($ in millions) (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Money market $ 940 $ 933 $ 7 5.50% 6.55% (1.05)% investments $ 38,682 $ 45,743 $ (7,061) $ (7,442) $ 381 Investment 8,056 7,740 316 6.91 6.82 0.09 securities 417,431 395,661 21,770 4,988 16,782 255 205 50 6.18 7.40 (1.22) Trading 11,770 11,340 430 (2,049) 2,479 - ------------------------------------------------------ ------------------------------------------------------ 9,251 8,878 373 6.75 6.80 (0.05) 467,883 452,744 15,139 (4,503) 19,642 - ------------------------------------------------------- ------------------------------------------------------ Loans: 7,430 7,211 219 8.45 9.67 (1.22) Commercial 469,560 522,175 (52,615) (68,124) 15,509 840 753 87 11.68 12.21 (0.53) Leasing 73,565 68,931 4,634 (3,117) 7,751 5,279 4,278 1,001 8.21 8.30 (0.09) Mortgage 324,907 266,325 58,582 (3,050) 61,632 3,251 3,433 (182) 12.95 13.00 (0.05) Consumer 315,516 334,512 (18,996) 3,134 (22,130) - ------------------------------------------------------- ------------------------------------------------------ 16,800 15,675 1,125 9.41 10.15 (0.74) 1,183,548 1,191,943 (8,395) (71,157) 62,762 - ------------------------------------------------------- ------------------------------------------------------ TOTAL EARNING $26,051 $24,553 $1,498 8.46% 8.94% (0.48)% ASSETS $1,651,431 $1,644,687 $ 6,744 $ (75,660) $ 82,404 ======================================================= ====================================================== Interest bearing deposits: NOW and money $ 2,025 $ 1,783 $242 3.25% 3.59% (0.34%) market $ 49,203 $ 47,954 $ 1,249 $ (4,870) $ 6,119 4,135 4,133 2 2.82 2.90 (0.08) Savings 87,322 89,572 (2,250) (2,875) 625 6,128 5,482 646 5.62 6.22 (0.60) Time deposits 257,528 255,158 2,370 (23,005) 25,375 - ------------------------------------------------------- ------------------------------------------------------ 12,288 11,398 890 4.29 4.60 (0.31) 394,053 392,684 1,369 (30,750) 32,119 - ------------------------------------------------------- ------------------------------------------------------ Short-term 7,234 7,375 (141) 5.11 6.45 (1.34) borrowings 276,275 356,266 (79,991) (76,167) (3,824) Medium and 2,499 2,059 440 6.73 6.86 (0.13) long-term debt 125,857 105,787 20,070 (1,657) 21,727 - ------------------------------------------------------- ------------------------------------------------------ 22,021 20,832 1,189 4.83 5.48 (0.65) TOTAL INTEREST-BEARING LIABILITIES 796,185 854,737 (58,552) (108,574) 50,022 3,028 3,050 (22) Demand deposits Other sources of 1,002 671 331 funds - ------------------------------------------------------- ------------------------------------------------------ $26,051 $24,553 $1,498 4.09% 4.65% (0.56)% ======================================================= 4.37% 4.29% 0.08% NET INTEREST MARGIN ========================== NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS $ 855,246 $ 789,950 $ 65,296 $ 32,914 $ 32,382 ================== 3.63% 3.46% 0.17% NET INTEREST SPREAD ========================== Taxable equivalent adjustment 60,591 52,938 7,653 -------------------------------- Net interest income $ 794,655 $ 737,012 $ 57,643 ================================ </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. - ------------------------------------------------------------------------------ The net interest margin on a taxable equivalent basis for the nine-month period ended September 30, 2001 was 4.37%, compared with 4.29% for the same period in 2000. 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 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. 31
The Corporation uses various techniques to assess the degree of interest rate risk, including static gap analysis, simulation and duration analysis. Each focuses on different aspects of the interest rate risk that is assumed at any point in time, and are therefore used jointly to make informed judgements about the risk levels and the appropriateness of strategies under consideration. An interest rate sensitivity analysis, performed at the Corporation level, is the primary tool used in expressing the potential improvement or loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking choices are only estimates and may be different from what actually may occur in the future. Based on the results of the sensitivity analysis as of September 30, 2001, the change in net interest income on a hypothetical rising rate scenario for the next twelve months was a $1.3 million decrease and the change for the same period utilizing a hypothetical declining rate scenario was an increase of $0.6 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 financial derivative instruments 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 companies. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses for the third quarter of 2001 amounted to $55.3 million, up $5.6 million or 11% when compared with the same period of 2000. For the nine-month period ended September 30, 2001, the provision totaled $154.8 million, an increase of $6.4 million or 4% compared with the same period in prior year. The higher provision for loan losses during this quarter was principally attributed to rises in non-performing loans and weak economic conditions, heightened by the impact of the September 11th events in the United States. The provision for loan losses for the first nine months of 2001 exceeded by $35 million or 29% the reported net charge-offs for the period. Refer to the "Allowance for Loan Losses" and "Credit Quality" discussions for information regarding net credit losses, credit quality statistics and other items, which impacted the provision for loan losses. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level, which is considered by management to be sufficient to provide for estimated losses based on evaluations of known and inherent risks in the loan portfolio. The Corporation's management evaluates the adequacy of the allowance for loan losses on a monthly basis. In determining the allowance, management considers the portfolio risk characteristics, the results of periodic credit reviews of individual loans, value of the collateral, prior loss experience, and prevailing economic conditions and loan impairment measurement, among other factors. 32
Table D summarizes the movement in the allowance for loan losses and presents certain key ratios for the quarter and nine-month periods ended September 30, 2001 and 2000. TABLE D ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS <TABLE> <CAPTION> THIRD QUARTER NINE MONTHS (Dollars in thousands) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance at beginning of period $ 313,337 $ 305,526 $290,653 $ 292,010 Allowance purchased (sold) 259 (17,468) 1,263 (15,987) Provision for loan losses 55,259 49,666 154,755 148,398 ---------------------------------------------------------------------- 368,855 337,724 446,671 424,421 ---------------------------------------------------------------------- Losses charged to the allowance: Commercial 20,213 19,940 54,207 55,064 Construction 4 0 2,623 145 Lease financing 12,685 6,617 32,565 22,589 Mortgage 2,286 1,188 5,873 3,380 Consumer 24,596 30,615 75,268 92,324 ---------------------------------------------------------------------- 59,784 58,360 170,536 173,502 ---------------------------------------------------------------------- Recoveries: Commercial 4,241 3,969 12,019 12,430 Construction 0 6 0 6 Lease financing 7,040 5,462 19,774 13,217 Mortgage 242 214 440 395 Consumer 6,036 6,162 18,262 18,210 ---------------------------------------------------------------------- 17,559 15,813 50,495 44,258 ---------------------------------------------------------------------- Net loans charged-off (recovered): Commercial 15,972 15,971 42,188 42,634 Construction 4 (6) 2,623 139 Lease financing 5,645 1,155 12,791 9,372 Mortgage 2,044 974 5,433 2,985 Consumer 18,560 24,453 57,006 74,114 ---------------------------------------------------------------------- 42,225 42,547 120,041 129,244 ---------------------------------------------------------------------- Balance at end of period $ 326,630 $ 295,177 $326,630 $ 295,177 ====================================================================== Ratios: Allowance for losses to loans 1.85% 1.82% 1.85% 1.82% Allowance to non-performing assets 74.88 85.85 74.88 85.85 Allowance to non-performing loans 80.27 91.57 80.27 91.57 Non-performing assets to loans 2.47 2.12 2.47 2.12 Non-performing assets to total assets 1.53 1.26 1.53 1.26 Net charge-offs to average loans 0.97 1.04 0.95 1.10 Provision to net charge-offs 1.31 x 1.17 x 1.29 x 1.15 x Net charge-offs earnings coverage 3.80 3.49 3.88 3.22 </TABLE> Net charge-offs for the third quarter of 2001 totaled $42.2 million or 0.97% of average loans, compared with $42.5 million or 1.04% of average loans in the same quarter of 2000. Consumer loans net charge-offs decreased $5.9 million or 24% for the quarter ended September 30, 2001, compared with the same quarter of 2000. These net charge-offs represented 2.31% of average consumer loans for the quarter ended September 30, 2001, compared with 2.74% for the same quarter last year. The decline was mostly due to the fact that the third quarter of 2000 included approximately $2.7 million of net charge-offs related to the U.S. credit card portfolio, which was sold in August 2000. Also, the credit environment has prompted the Corporation to tighten its credit criteria for unsecured consumer borrowings and to set objective standards to price loans according to risk levels. 33
Commercial and construction loans net charge-offs for this quarter remained steady from the third quarter of 2000. As a percentage of average commercial and construction loans, these net credit losses declined from 0.86% in the third quarter of 2000, to 0.85% in 2001. The aforementioned decline in net charge-offs in the consumer loan portfolio for the quarter ended September 30, 2001, was partially offset by increases in net charge-offs in the lease financing and mortgage portfolios. Lease financing net charge-offs totaled $5.6 million or 2.67% of the average lease financing portfolio for the quarter ended September 30, 2001, compared with $1.2 million or 0.59% for the same period in 2000. The increase reflected the rise in the portfolio and a higher level of delinquencies due to the deteriorated economy. Mortgage loans net charge-offs increased to $2.0 million or 0.14% of average mortgage loans for the third quarter of 2001, from $1.0 million or 0.09% in the same period a year earlier. Net charge-offs for the nine-month period ended September 30, 2001, reached $120.0 million or 0.95% of average loans, compared with $129.2 million or 1.10% for the same period in 2000. Consumer loans net charge-offs totaled $57.0 million or 2.34% of average consumer loans for the nine-month period ended September 30, 2001, compared with $74.1 million or 2.88% in the same period of 2000. The U.S. credit card operations portfolio had $9.2 million in net charge-offs when it was sold in August 2000. Also, as explained above, the Corporation has tightened its credit criteria for unsecured consumer loans. Lease financing net charge-offs totaled $12.8 million or 2.03% of the average lease financing portfolio for the first nine months of 2001, compared with $9.4 million or 1.66% for the same period last year. The rise resulted from the increase in the portfolio and higher delinquencies due to economic conditions, partially offset by a $2.5 million charge-off recorded in the nine-month period ended September 30, 2000 related to an external fraud scheme unveiled in the U.S. operations that year. Commercial and construction loans net charge-offs for the nine-month period increased by $2.0 million compared with the same period last year. They represented 0.80% of the average balance of those loans for the nine-months ended September 30, 2001, compared with 0.79% for the same period last year. Mortgage loans net charge-offs increased to $5.4 million or 0.14% of average mortgage loans for the first nine months of 2001, from $3.0 million or 0.09% for the same period in prior year. The allowance for loan losses at September 30, 2001, amounted to $327 million or 1.85% of loans compared with $295 million or 1.82% at September 30, 2000. At December 31, 2000, the allowance for loan losses totaled $291 million or 1.81% of loans. 34
CREDIT QUALITY Non-performing assets consist of past-due loans that are no longer accruing interest and real estate property acquired through foreclosure. A summary of non-performing assets by loan categories and related ratios is presented in Table E. TABLE E NON-PERFORMING ASSETS <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, 2001 2000 2000 - ---------------------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> Commercial, construction, industrial and agricultural $209,354 $172,402 $168,039 Lease financing 10,243 7,152 12,987 Mortgage 149,204 99,861 93,047 Consumer 38,131 43,814 48,269 Other real estate 29,257 23,518 21,494 -------------------------------------------------------- Total $436,189 $346,747 $343,836 ======================================================== Accruing loans past-due 90 days or more $ 22,789 $ 21,599 $ 24,960 ======================================================== Non-performing assets to loans 2.47% 2.16% 2.12% Non-performing assets to total assets 1.53 1.24 1.26 </TABLE> 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 were $436 million or 2.47% of loans at September 30, 2001, compared with $344 million or 2.12% at the same date last year and $347 million or 2.16% at December 31, 2001. The increase in non-performing assets since September 30, 2000, and December 31, 2001, was mostly reflected in mortgage loans, which grew by $56 million and $49 million, from each respective date. Non-performing mortgage loans amounted to $149 million or 34% of non-performing assets as of September 30, 2001. Commercial non-performing loans also increased by $41 million and $37 million as of September 30, 2000 and December 31, 2001, respectively. Non-performing mortgage loans, represented 2.47% of mortgage loans as of the end of the third quarter of 2001, compared with 2.15% at the end of 2000. Non-performing commercial and construction loans represented 2.77% of that portfolio at September 30, 2001, 35
compared with 2.37% at the end of 2000. The increase was principally due to the current economic slowdown, worsened by the impact of the terrorist attacks. Non-performing consumer loans represented 1.20% of consumer loans as of September 30, 2001, compared with 1.32% as of December 31, 2000. The decrease in the ratio results partly due to a tightening in the Corporation's credit approval standards for unsecured consumer loans. Non-performing financing leases were 1.20% of the lease financing portfolio as of September 30, 2001, compared with 0.88% as of December 31, 2000, reflecting higher delinquencies. At September 30, 2001, the allowance for loan losses as a percentage of non-performing loans was 80.27% compared with 91.57% at September 30, 2000 and 89.92% at December 31, 2000. The lower allowance to non-performing loans ratio reflects the changing composition of the loan portfolio, as most of its growth was realized in mortgage loans, which historically represents a low-risk portfolio with minimal losses. Mortgage loans comprised 89% of total loan growth since December 31, 2000. The Corporation, based on historical experience and current economic conditions, does not foresee significant losses in the mortgage portfolio. Excluding non-performing mortgage loans, the allowance for loan losses to non-performing loans was 126.73% as of September 30, 2001, compared with 128.73% and 130.12% as of September 30, 2000, and December 31, 2000, respectively. In the third quarter of 2001, Banco Popular North America experienced an increase in non-performing loans in most of the industry sectors represented in its commercial loan portfolio, due to the economic downturn in the U.S. economy, which was heightened by the negative impact of the recent events of September 11th. As of September 30, 2001, BPNA had no significant concentrations of loans in any single industry and the increase experienced in non-performing loans was spread out throughout all geographical regions in which the subsidiary operates. Non-performing loans as of the end of this quarter included $8 million of the New York City taxicab medallion portfolio. This portfolio aggregated $288 million at September 30, 2001, which approximated 1.6% of the Corporation's loan portfolio. This industry, which had already been experiencing high volatility in the market value of the taxicab medallions, was adversely impacted by the recent events in New York City. The Corporation expects to provide the taxicab medallion owners, in coordination with the New York City Economic Development Corporation and the U.S. Small Business Administration, a disaster relief loan program, which will provide cash flow relief to the affected taxicab medallion owners. As a result and due to the fact that these loans are secured by collateral, the Corporation does not expect any significant loss in this portfolio. The Corporation has defined impaired loans as loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of the expected future cash flows discounted at the loan's effective rate, on the observable market price of the loan, or on the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment based on past experience adjusted for current conditions. Larger balance commercial loans are evaluated on a loan-by-loan basis. Once a specific measurement methodology is chosen, it is consistently applied unless there is a significant change in the financial position of the borrower. An impaired loan for which the discounted cash flows, collateral value or market price is less than its carrying value requires an allowance. The allowance for impaired loans is part of the Corporation's overall allowance for loan losses. The Corporation's management evaluates the adequacy of the allowance for loan losses on a monthly basis. The following table shows the Corporation's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 (as amended by SFAS No. 118) at September 30, 2001, December 31, 2000 and September 30, 2000. <TABLE> <CAPTION> SEPTEMBER 30, 2001 December 31, 2000 September 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 $111 $46 $113 $27 $137 $32 No valuation allowance required 53 42 39 ----------------------------------------------------------------------- Total impaired loans $164 $46 $155 $27 $176 $32 ----------------------------------------------------------------------- </TABLE> 36
Average impaired loans during the third quarter of 2001 and 2000 were $174 million and $171 million, respectively. The Corporation recognized interest income on impaired loans of $0.8 million and $1.0 million, respectively, during the quarters ended September 30, 2001 and 2000. Assuming the standard industry practice of placing commercial loans on non-accrual status when payments of principal and interest are past due 90 days or more and excluding the closed-end consumer loans from non-accruing, the Corporation's non-performing assets as of September 30, 2001, would have been $350 million or 1.98% of loans, and the allowance for loan losses would have been 93.35% of non-performing assets. At September 30, 2000 and December 31, 2000, adjusted non-performing assets would have been $266 million or 1.64% of loans and $273 million or 1.70% of loans, respectively, and the allowance to non-performing assets would have been 111.09% and 106.49%, respectively. NON-INTEREST INCOME A breakdown of non-interest income categories is presented in Table F. TABLE F NON-INTEREST INCOME <TABLE> <CAPTION> Third Quarter Year-to-Date - ---------------------------------------------------------------------------------------------------------------------------- 2001 2000 Change 2001 2000 Change - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Service charges on deposit accounts $ 37,537 $ 32,558 $ 4,979 $ 108,505 $ 93,612 $ 14,893 -------------------------------------------------------------------------- Other service fees: Credit cards fees and discounts 14,782 15,652 (870) 42,040 48,327 (6,287) Debit card fees 9,192 8,116 1,076 28,123 20,307 7,816 Processing fees 9,410 8,005 1,405 27,833 21,034 6,799 Other fees 6,126 9,401 (3,275) 19,202 25,335 (6,133) Sale and administration of investment products 5,320 4,172 1,148 15,027 12,669 2,358 Insurance fees 4,989 2,845 2,144 13,558 5,667 7,891 Check cashing fees 4,517 3,523 994 13,883 10,734 3,149 Mortgage servicing fees, net of amortization 2,966 3,448 (482) 8,982 9,162 (180) Trust fees 2,341 2,331 10 7,088 7,067 21 -------------------------------------------------------------------------- Subtotal other service fees 59,643 57,493 2,150 175,736 160,302 15,434 -------------------------------------------------------------------------- Other operating income 26,293 29,581 (3,288) 76,014 75,779 235 -------------------------------------------------------------------------- Total operating income 123,473 119,632 3,841 360,255 329,693 30,562 -------------------------------------------------------------------------- Gain (loss) on sale of securities 1,249 147 1,102 (613) 13,740 (14,353) Trading account profit 777 259 518 149 1,617 (1,468) Loss on derivatives (8,140) (8,140) (7,119) (7,119) -------------------------------------------------------------------------- Total non-interest income $ 117,359 $ 120,038 $ (2,679) $ 352,672 $345,050 $ 7,622 ========================================================================== </TABLE> Non-interest income, excluding securities, trading and derivative transactions, for the quarter ended September 30, 2001 amounted to $123.5 million, an increase of $3.8 million or 3% compared with the same quarter in 2000. Service charges on deposit accounts for the quarter just ended increased $5.0 million or 15% when compared with the third quarter of 2000. This rise is mostly related to commercial accounts, particularly non-balance compensation accounts, which have been favorably impacted by a lower earnings credit and higher transaction volume. Also, the increase relates to certain external payments and lockbox fees, previously accounted for in the category of other fees, and beginning in 2001 they are being included in the deposit account analysis for certain commercial customers. The growth in service charges is also related to fees on deposit accounts implemented during the latter part of 2000, including charges for daily and electronic transactions overdrafts, and to certain ATM usage fees, which commenced in mid-2001. 37
Other service fees, for the third quarter of 2001, increased $2.2 million or 4% compared with the same period in prior year. Insurance fees, the principal contributor to this favorable variance, increased $2.1 million or 75%, mostly attributed to higher insurance commissions generated by Popular Insurance, which began operating shortly after midyear 2000. Processing and debit card fees combined increased $2.5 million or 15%, resulting from the growing volume of point-of-sale terminals and automated teller machine (ATM's) transactions processed. Fees on the sale and administration of investment products rose $1.1 million or 28% due to higher commissions derived from the retail business. The rise in check cashing fees of $1.0 million or 28% is associated with the expansion of the Corporation's retail financial services subsidiary in the United States. On the other hand, credit card fees and discounts decreased mainly due to income no longer derived as a result of the sale of U.S. credit card operations. For the quarter ended September 30, 2000, these operations contributed approximately $3.5 million in other service fees. The decrease in the category of other fees was partly due to the partial reclassification of external payment and lockbox fees to the category of service charges on deposit accounts as previously explained. For the quarter ended September 30, 2001, the Corporation had a decrease of $3.3 million or 11% in other operating income, compared with the third quarter results in 2000. The decline was mostly the result of last year's pretax gain realized on the sale of the Corporation's U.S. credit card operations of $8.5 million in the third quarter of 2000. These decreases were partially offset by higher gains on the sale of mortgage loans held-for-sale and higher dividend income derived from the Corporation's investment in Telecomunicaciones de Puerto Rico, Inc. (TELPRI). For the third quarter of 2001, the Corporation recognized profits of $0.8 million in trading account transactions and gains of $1.2 million in the sale of securities, compared with $0.3 million and $0.1 million, respectively, for the third quarter of 2000. Also, for the quarter just ended, the Corporation recognized losses on derivatives amounting to $8.1 million. These losses result primarily from adjustments to the market value of interest rate swaps, that were negatively impacted by declines in interest rates during the quarter. For the nine-month period ended September 30, 2001, non-interest income, excluding securities, trading and derivative transactions, amounted to $360.3 million, an increase of $30.6 million or 9%, compared with the same period in 2000. As shown in Table F, and principally for the same reasons explained above, service charges on deposit accounts, which increased $14.9 million or 16%, and other service fees, which increased $15.4 million or 10%, were the principal contributors to the rise since 2000. These favorable variances were partially offset by a decrease of $14.4 million in the gain on sale of securities, mostly attributed to the fact that in the first quarter of 2000, the Corporation exercised its conversion right and exchanged its investment in preferred stock of a financial corporation in Puerto Rico for common stock of the same entity, resulting in a $13.4 million pretax gain. Also, non-interest income for the nine-month period ended September 30, 2001 was negatively impacted by a $7.1 million derivative loss associated to the interest rate swaps. OPERATING EXPENSES For the third quarter of 2001, operating expenses were $230.4 million, representing an increase of $10.1 million or 5% compared with the same quarter in 2000. Personnel costs, the largest category of operating expenses, totaled $107.6 million for the third quarter of 2001, an increase of $7.2 million or 7% compared with the same period last year. Salaries and pension and other benefits accounted for the major increase in this category, rising $8.4 million, partially offset by a decrease in profit sharing expenses. The increase in salaries and benefits was mostly related to higher incentive compensation, pension and postretirement costs, higher medical insurance expenses, as well as the impact of the annual merit increases. At the end of this quarter, full-time equivalent employees (FTE's) totaled 11,088, an increase of 392 employees from the 10,696 FTE's at the same date in 2000. Other operating expenses, excluding personnel costs, amounted to $122.8 million, an increase of $2.9 million or 2% when compared with the same period in 2000. This increase was mainly reflected in the categories of business promotion and professional fees, partially offset by lower amortization of intangibles, equipment expenses and printing and supplies. The increase in business promotion was mostly associated to higher advertising and public relations expenses, while professional fees rose mostly due to higher attorneys' fees. Partially compensating these rises were lower amortization of intangibles, which had become fully amortized in late 2000 related to the core deposits acquired 38
in the merger with BanPonce Corporation in 1990, and lower equipment, printing and supplies expenses. The decline in equipment expenses was related in part to costs associated to the former subsidiary, Banco Fiduciario. Income tax expense rose $0.3 million from $27.7 million in the third quarter of 2000, to $28.0 million this quarter. The effective tax rate for the third quarter of 2001 was 26.58% compared with 27.94% for the same period in prior year. For the nine-month period ended September 30, 2001, total operating expenses rose to $681.9 million, from $666.1 million for the same period in 2000, an increase of $15.8 million or 2%. This increase was primarily as a result of higher personnel costs, impacted by the same factors explained above, net occupancy expenses, mainly in building rentals, other operating taxes and other operating expenses, mainly related to credit card processing and interchange expenses, as well as other real estate expenses. These rises were partially offset by decreases in the amortization of intangibles, printing and supplies and professional fees, the latter associated in part to the sale of the U.S. credit card operations in 2000. Income tax expense for the nine-month period ended September 30, 2001 totaled $82.4 million, compared with $68.1 million a year ago, resulting in an effective tax rate of 26.53% and 25.45%, for each respective period. CUMULATIVE EFFECT OF ACCOUNTING CHANGES 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. Upon the adoption, the Corporation recognized $0.7 million (net of tax) in income as a cumulative effect of accounting changes. Refer to Note 5 of the consolidated financial statements for further information. BALANCE SHEET COMMENTS Total assets as of September 30, 2001 reached $28.5 billion, compared with $28.1 billion as of December 31, 2000 and $27.2 billion as of the same date a year earlier. Earning assets totaled $26.9 billion at September 30, 2001, compared with $26.3 billion at December 31, 2000 and $25.6 billion at September 30, 2000. Investment and trading securities reached $8.3 billion as of September 30, 2001, a decrease of $0.9 billion, compared with $9.2 billion as of December 31, 2000. This decline was mostly due to lower arbitrage activity in 2001. Investment and trading securities as of September 30, 2000 amounted to $8.5 billion. As seen in Note 3 of the consolidated financial statements, the investment portfolio is comprised significantly of U.S. Treasuries and agencies obligations. As shown in Table G, the loan portfolio reached $17.6 billion as of September 30 2001, an increase of $1.6 billion or 10%, compared with December 31, 2000. This increase is mostly attributed to higher mortgage loans by $1.4 billion and commercial loans, including construction, by $294 million. The rise in the mortgage loan portfolio is principally 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 towards the retail and middle market, including franchise loans, among others. On the other hand, consumer loans decreased by $158 million since the end of 2000, partly due to lower demand for personal loans as a result of the declining interest rate scenario, which tends to favor the refinancing of mortgage loans and the consolidation of personal debt. Also, it is due to the Corporation's tightening in the credit criteria for granting unsecured loans. Total loans increased 9% or $1.4 billion compared with September 30, 2000. The growth was also experienced in the mortgage and commercial, including construction, loan portfolios, which rose by $1.3 billion and $233 million, respectively. 39
TABLE G LOANS ENDING BALANCES <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------ SEPTEMBER 30, December 31, September 30, 2001 2000 2000, - ------------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> <C> Commercial, industrial and agricultural $ 7,308,894 $ 7,013,834 $ 7,038,558 Construction 256,686 258,197 293,702 Lease financing 850,949 816,714 820,320 Mortgage * 6,049,448 4,643,646 4,733,684 Consumer * 3,166,297 3,324,694 3,351,423 ------------------------------------------------ Total $17,632,274 $16,057,085 $16,237,687 ================================================ * Includes loans held-for-sale - ------------------------------------------------------------------------------------------------ </TABLE> Other assets were $423 million at September 30, 2001, an increase of $56 million or 15%, compared with December 31, 2000. The increase in other assets is mainly due to an investment during the second quarter of 2001 in Centro Financiero BHD, S.A., the third largest private financial institution in the Dominican Republic, and in Coqui.com, an Internet service provider in Puerto Rico. Also, it is due to the recording of the fair value of certain derivatives based on the accounting provision of SFAS No. 133, and to premium receivables recorded by the Corporation's insurance subsidiary. Other assets totaled $401 million as of September 30, 2000. Total deposits were $16.0 billion at September 30, 2001, or $1.2 billion or 8% higher than the $14.8 billion reported at December 31, 2000. Time and savings deposits increased $990 million and $276 million, respectively, when compared with December 31, 2000. The increase in time deposits since the end of 2000 is mainly due to an aggressive marketing campaign in the U.S. mainland and to higher activity in Puerto Rico, mostly associated to IRA accounts, public funds and other products. Also, included in time deposits, are brokered certificates of deposit, which increased $301 million since December 31, 2000. Demand deposits decreased $71 million or 2% compared with December 31, 2000, mainly in commercial accounts. Total deposits amounted to $16.0 billion at September 30, 2001, an increase of $1.4 billion or 10% compared with the period ended September 30, 2000. The favorable variance since September 30, 2000 was reflected in all deposit categories. Demand deposits grew by $100 million, while savings and time deposits rose $325 million and $1.0 billion, respectively. Borrowed funds, including subordinated notes and capital securities, amounted to $9.7 billion at September 30, 2001, from $10.8 billion at December 31, 2000 and $10.4 billion at September 30, 2000. As part of the investment in subsidiaries, the Corporation recognized a minority interest of $0.9 million as of September 30, 2001, which represented mostly the beneficial interest of the minority investors of Levitt Mortgage. As of December 31, 2000 and September 30, 2000, the minority interest amounted to $0.9 million and $0.8 million, respectively. The Corporation's stockholders' equity as of September 30, 2001 and December 31, 2000 was $2.3 billion and $2.0 billion, respectively, compared with $1.8 billion as of September 30, 2000. Included in accumulated other comprehensive income (loss) within the stockholders' equity category at September 30, 2001 was $157 million in unrealized gains on securities available-for-sale, net of tax, compared with $100 million in unrealized losses at September 30, 2000 and $4 million in unrealized gains as of the end of 2000. The Corporation is subject to various regulatory requirements imposed by the federal banking agencies. Management has determined that as of the periods presented, the Corporation exceeded all capital adequacy requirements to which it is subject. The Corporation's ratios and amounts of total risk-based capital, Tier 1 risk based capital and Tier 1 leverage, as of September 30, 2001, September 30, 2000 and December 31, 2000 are presented on Table H. 40
The Corporation's common stock price at September 30, 2001 was $31.20, compared with $26.31 at December 31, 2000 and $27.06 at September 30, 2000. The Corporation's market capitalization at September 30, 2001, was $4.3 billion, compared with $3.6 billion at December 31, 2000 and $3.7 billion at September 30, 2000. TABLE H CAPITAL ADEQUACY DATA <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, 2001 2000 2000 (Dollars in thousands) - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> Risk-based capital Tier I capital $ 1,900,169 $ 1,741,004 $ 1,690,399 Supplementary (Tier II) capital 351,937 321,627 336,095 -------------------------------------------- Total capital $ 2,252,106 $ 2,062,631 $ 2,026,494 ============================================ Risk-weighted assets Balance sheet items 17,309,296 16,173,005 $16,005,655 Off-balance sheet items 456,249 496,735 425,716 -------------------------------------------- Total risk-weighted assets $17,765,545 $16,669,740 $16,431,371 ============================================ Ratios: Tier I capital (minimum required - 4.00%) 10.70% 10.44% 10.29% Total capital (minimum required - 8.00%) 12.68% 12.37% 12.33% Leverage ratio (minimum required - 3.00%) 6.91% 6.40% 6.29% </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 are now in place. 41
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 September 30, 2001 b) One report on Form 8-K was filed for the quarter ended September 30, 2001: Dated: July 13, 2001 Items reported: Item 5 - Other Events </TABLE> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be filed on its behalf by the undersigned thereunto duly authorized. POPULAR, INC. ------------- (Registrant) Date: November 14, 2001 By: S/ Jorge A. Junquera -------------------------------- Jorge A. Junquera Senior Executive Vice President Date: November 14, 2001 By: S/ Amilcar L. Jordan -------------------------------- Amilcar L. Jordan, Esq. Senior Vice President & Comptroller 42