SECURITIES AND EXCHANGE COMMISSION
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934
POPULAR, INC.
Popular Center Building209 Muñoz Rivera Avenue, Hato ReySan Juan, Puerto Rico 00918
Registrant’s telephone number, including area code (787) 765-9800
Not Applicable
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
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Forward-Looking Information. The information included in this Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the adequacy of the allowance for loan losses, the Corporation’s market and liquidity risks and the effect of legal proceedings on Popular, Inc.’s financial condition and results of operations, among others. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could.” These forward-looking statements involve certain risks, uncertainties, estimates and assumptions by management. Various factors such as regional and national economic conditions, competitive and regulatory factors, and legislative changes, could cause actual results to differ from those contemplated by such forward-looking statements.
With respect to the adequacy of the allowance for loan losses and market risk, these factors include, among others, the rate of growth in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, the performance of the stock and bond market and the magnitude of interest rate and foreign currency exchange rate changes. Moreover, the outcome of litigation, as discussed in “Part II, Item I. Legal Proceedings,” is inherently uncertain and depends on judicial interpretations of law and the findings of judges and juries. The Corporation assumes no obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
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ITEM 1. FINANCIAL STATEMENTS
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Disclosure of accumulated other comprehensive (loss) income:
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Notes to Unaudited Consolidated Financial Statements(Dollars in thousands, except per share information)
Note 1 – Nature of operations and basis of presentation
Popular, Inc. (the “Corporation”) is a financial holding company offering a full range of financial products and services to consumer and corporate customers through its offices in Puerto Rico, the United States,the Caribbean, including the U.S. and British Virgin Islands, and Central America. The Corporation’s subsidiaries are engaged in the following businesses: commercial banking, auto loans and lease financing, mortgage and consumer lending, broker/dealer activities, retail financial services, insurance agency and reinsurance services , information technology and ATM and data processing services. Note 15 to the unaudited consolidated financial statements present information about the Corporation’s business segments.
The unaudited consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. These unaudited statements are, in the opinion of management, a fair statement of the results for the periods presented and include all necessary adjustments, of a normal recurring nature, for a fair statement of such results. Certain minor reclassifications have been made to the prior period consolidated financial statements to conform to the 2004 presentation.
As further described in Note 12 to the unaudited consolidated financial statements, during the second quarter of 2004, the Corporation’s Board of Directors authorized a two-for-one stock split in the form of a stock dividend. All references to the numbers of common shares and per share amounts in the financial statements and notes to the financial statements have been restated to reflect the stock split.
Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to the rules and regulations of the Securities and Exchange Commission and, accordingly, these financial statements should be read in conjunction with the audited Consolidated Financial Statements of the Corporation for the year ended December 31, 2003, included in the Corporation’s Annual Report on Form 10-K.
Note 2 – Recent Accounting Developments
FIN No. 46 “Consolidation of Variable Interest Entities”
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” The FASB’s stated intent in issuing FIN No. 46 was to clarify the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 requires an enterprise to consolidate a variable interest entity (as defined in FIN No. 46) if that enterprise has a variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected returns if they occur, or both.
In December 2003, the FASB issued a revised FIN No. 46 (FIN No. 46R), which attempts to clarify the guidance in the original interpretation. FIN No. 46 applies to variable interest entities created after January 31, 2003. FIN No. 46 also applies to all variable interest entities created prior to February 1, 2003 that are considered to be special-purpose entities (as defined in FIN No. 46R) as of December 31, 2003. FIN No. 46R must be applied to all variable interest entities no later than the end of the first reporting period that ends after March 15, 2004. Certain variable interest entities that are qualifying special purpose entities subject to the reporting requirements for SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” are not required to be consolidated under the provisions of FIN No. 46.
At December 31, 2003, the Corporation had two wholly-owned issuer trusts that issued trust preferred securities (also referred to as “Capital Securities”). Prior to FIN No. 46R, the issuer trusts were consolidated subsidiaries of the Corporation. In relation to these issuer trusts, the Corporation adopted the provisions of FIN No. 46R at December
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31, 2003, requiring the deconsolidation of these trusts. Refer to Note 11 to the unaudited consolidated financial statements for further information of the issuer trusts and the impact in the Corporation’s consolidated financial statements. Except for the impact described above, there was no other material impact on the Corporation’s financial condition or results of operations as a result of the adoption of FIN No. 46R.
SAB 105 “Application of Accounting Principles to Loan Commitments”
On March 9, 2004, the SEC issued Staff Accounting Bulletin 105, “Application of Accounting Principles to Loan Commitments,” (SAB 105) to inform registrants of the Staff’s view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. The adoption of SAB 105 did not have a material impact on the Corporation’s financial condition or results of operations.
Issue 03-1, “Meaning of Other Than Temporary Impairment”
In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1, “Meaning of Other Than Temporary Impairment” (Issue 03-1). The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired is as follows: Step 1: Determine whether the investment is impaired. An investment is impaired if its fair value is less than its cost. Step 2: Evaluate whether the impairment is other-than-temporary. Step 3: If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value. The three-step model used to determine other-than-temporary impairments shall be applied prospectively to all current and future investments in interim or annual reporting periods beginning after June 15, 2004. The Corporation does not anticipate that the adoption of the model stated in Issue 03-1 will have a material impact on its financial condition or results of operations.
FASB Staff Position No. FAS 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”
On December 8, 2003, The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law, authorizing Medicare to provide prescription drug benefits to retirees. To encourage employers to retain or provide postretirement drug benefits for their Medicare-eligible retirees, the federal government will begin (in 2006) to make subsidy payments to employers that sponsor postretirement benefit plans under which retirees receive prescription drug benefits that are “actuarially equivalent” to the prescription drug benefits provided under Medicare. FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the FSP 106-2), was issued on May 19, 2004. The FSP 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D. It also contains basic guidance on related income tax accounting, and complex rules for transition that permit various alternative prospective and retroactive transition approaches.
FASB Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the New Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-1), which was issued on January 12, 2004, and is superseded by FSP 106-2, permitted employers to either (1) recognize the effects of the Act as of its enactment date or (2) defer recognition until the earlier of (a) the FASB’s issuance of final rules on how to account for the federal subsidy employers would be entitled to receive under the Act or (b) any remeasurement of plan assets and obligations after January 31, 2004 due to a plan amendment, curtailment, or other significant event. Popular, Inc. elected to defer recognition pursuant to FSP 106-1.
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For Popular, Inc., the FSP 106-2 is effective for the third quarter of 2004. The guidance issued could require the Corporation to change previously reported information. The Corporation is currently assessing the impact the new legislation may have on the consolidated financial statements, and expects that it will eventually reduce the costs in the postretirement benefit plan for at least some of the participants.
Note 3 - Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), and contractual maturities of investment securities available-for-sale as of June 30, 2004, December 31, 2003 and June 30, 2003 were as follows:
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Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity.
The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or callable features.
During the quarter ended June 30, 2004, the Corporation reassessed the appropriateness of the classification of certain mortgage-backed securities and transferred $351,000 from trading to available-for-sale securities based on management’s intention and business purpose. The securities were transferred into the available-for-sale category at fair value.
The following table shows the Corporation’s gross unrealized losses and fair value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2004:
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Available-for-sale securities in an unrealized loss position at June 30, 2004 are primarily U.S. Agency and Treasury obligations, and to a lesser extent, U.S. Agency-issued collateralized mortgage obligations, and mortgage-backed securities. The vast majority of them are rated the equivalent of AAA by the major rating agencies. The investment portfolio is structured primarily with highly liquid securities which posses a large and efficient secondary market. Valuations are performed at least on a quarterly basis using third party providers and dealer quotes. Management believes that the unrealized losses in the available-for-sale portfolio at June 30, 2004 are substantially related to market interest rate fluctuations and not deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
Note 4 - Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), and contractual maturities of investment securities held-to-maturity as of June 30, 2004, December 31, 2003 and June 30, 2003 were as follows:
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The following table shows the Corporation’s gross unrealized losses and fair value of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2004:
The investment portfolio is structured primarily with highly liquid securities which posses a large and efficient secondary market. Management believes that the unrealized losses in the held-to-maturity portfolio at June 30, 2004 are substantially related to market interest rate fluctuations and not deterioration in the creditworthiness of the issuers. Also, management has the intent and ability to hold these investments for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.
Note 5 – Pledged assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
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Pledged securities and loans in which the creditor has the right by custom or contract to repledge are presented separately in the consolidated statements of condition.
Note 6 – Derivative Instruments and Hedging Activities
In managing its market risk the Corporation enters, to a limited extent, into certain derivative transactions, primarily interest rate swaps, interest rate forwards and future contracts, interest rate caps, index options, foreign exchange contracts and interest-rate caps, floors and options embedded in financial contracts. There were no significant changes in derivative instruments and hedging activities from December 31, 2003 to June 30, 2004.
For the quarter and six months ended June 30, 2004, the Corporation recognized net gains of $23 and net losses $114, respectively, as a result of the changes in fair value of the non-hedging derivatives included as part of interest expense (June 30, 2003 – net gains of $2,548 and net losses of $8,107, respectively). During the second quarter of 2003, the Corporation terminated the interest rate contracts outstanding with a notional amount of $500,000, and recognized a gain of $1,565. These swap contracts did not qualify as hedges in accordance with SFAS No. 133, as amended.
Note 7 – Goodwill and Other Intangible Assets
The Corporation’s management has defined the reporting units based on legal entity, which is the way that operating decisions are made and performance is measured. For presentation purposes, these reporting units have been aggregated by reportable segments based on the provisions of SFAS No. 131 “Segment Reporting.” These segments have been defined as follows: Commercial Banking, Mortgage and Consumer Lending, Auto and Lease Financing and Other. All the operating segments and components that constitute reporting units were determined evaluating the nature of the products and services offered, types of customers, methods used to distribute their products and provide their services, and the nature of their regulatory environment, as well as other similar economic characteristics. Goodwill is assigned to each reporting unit at the time of acquisition.
The changes in the carrying amount of goodwill for the six months ended June 30, 2004, are as follows:
As of June 30, 2004, December 31, 2003 and June 30, 2003, goodwill totaled $192,174, $191,490 and $188,310, respectively. The Corporation has no other intangible assets not subject to amortization.
The following table reflects the components of other intangible assets subject to amortization as of June 30, 2004, December 31, 2003 and June 30, 2003:
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Certain core deposits intangibles became fully amortized during 2004 and 2003 and, as such, their gross amount and accumulated amortization were eliminated from the accounting records and the tabular disclosure presented above.
During the quarter and six months ended June 30, 2004, the Corporation recognized $1,800 and $3,602, respectively, in amortization expense related to other intangible assets with definite lives (June 30, 2003 - $2,028 and $4,055, respectively).
The following table presents the estimated aggregate annual amortization expense of the intangible assets with definite lives for each of the following fiscal years:
No significant events or circumstances have occurred that would reduce the fair value of any reporting unit below its carrying amount.
Note 8 – Commitments and Contingencies
In the normal course of business there are commercial letters of credit and stand by letters of credit outstanding, which contract amounts at June 30, 2004 were $18,457 and $161,405, respectively (December 31, 2003 - $13,833 and $137,290; June 30, 2003 - $22,832 and $138,821 ). There are also other commitments outstanding and contingent liabilities, such as commitments to extend credit and commitments to originate mortgage loans, which are not reflected in the accompanying financial statements.
At June 30, 2004, the Corporation recorded a liability of $311 , which represents the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002 (December 31, 2003 - $334; June 30, 2003 - $267). This liability was included as part of “other liabilities” in the consolidated statements of condition. The standby letters of credit were issued to guarantee the performance of various customers to third parties. The contract amounts in standby letters of credit outstanding represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of nonperformance by the customers. These standby letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. The Corporation’s standby letters of credit are generally secured, and in the event of nonperformance by the customers, the Corporation has rights to the underlying collateral provided, which normally includes cash and marketable securities, real estate, receivables and others.
At June 30, 2004, the Corporation had various outstanding commitments to purchase mortgage loans from other institutions at market value. In 2003, the Corporation entered into loan commitments to purchase an aggregate amount of $275,000 of mortgage loans with the option of purchasing $125,000 in additional loans. The commitments expire completely by June 30, 2005. As of June 30, 2004, $150,000 in loans had been purchased under these agreements.
The Corporation fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned subsidiaries approximating $3,568,041 at June 30, 2004 (December 31, 2003 - $3,623,787; June 30, 2003 - $3,587,000). In addition, at June 30, 2004, the Corporation fully and unconditionally guaranteed $444,000 of Capital Securities issued by two wholly-owned issuing trust entities that have been deconsolidated based on FIN No. 46R (December 31, 2003 - $444,000; June 30, 2003 - $144,000). Also, at June 30, 2004, Popular North America, Inc. fully and unconditionally guaranteed $215,689 of certain borrowing obligations issued by one of its non-banking subsidiaries (December 31, 2003 - $403,131).
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The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Based on the opinion of legal counsel, management believes that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations. Refer to Item 1 – Legal Proceedings in Part II – Other Information in this Form 10-Q for further information.
Note 9 – Stock Option and Other Incentive Plans
During the quarter and six months ended June 30, 2004, the Corporation recognized $1,333 and $2,012, in stock option expense (June 30, 2003 - $339, and $1,066), respectively.
The following table presents information on stock options at June 30, 2004:
The following table summarizes the stock option activity and related information:
The stock options exercisable at June 30, 2004 totaled 658,808 (June 30, 2003 – 300,868).
The fair value of the options was estimated on the date of the grants using the Black-Scholes Option Pricing Model. The weighted average assumptions used for the grants issued during 2004 and 2003 were:
The stock option information included above relates to options granted under the Popular, Inc., 2001 Stock Option Plan, which was intended to provide equity-based compensation incentives through the grant of stock options. In April 2004, the shareholders of Popular, Inc. adopted the “Popular, Inc. 2004 Omnibus Incentive Plan” (the “Plan”), which replaces and supersedes the 2001 Stock Option Plan. All outstanding award grants under the 2001 Stock Option Plan continue to remain outstanding under the original terms of the 2001 Stock Option Plan. The Plan permits the granting of incentive awards in the form of an Annual Incentive Award, a Long-term Performance Unit Award, an Option, a SAR (“stock appreciation right”), Restricted Stock, Restricted Unit or Performance Share. Participants in the Plan will be designated by the Compensation Committee of the Board of Directors (or its delegate as determined by the Board). Employees and directors of the Corporation or any of its subsidiaries are eligible to participate in the Plan. The aggregate number of shares of common stock which may be issued under the Plan is limited to 10,000,000
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shares, subject to adjustments for stock splits, recapitalizations and similar events. The shares may be made available from common stock purchased by the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock. For more information on the Plan, refer to the “Annex G – 2004 Omnibus Incentive Plan” included in the Corporation’s definitive proxy statement dated March 17, 2004 filed with the Securities and Exchange Commission.
During the quarter ended June 30, 2004, the Compensation Committee approved for certain corporate executive officers, incentive awards for the 2004 performance payable in the form of restricted stock. Shares of restricted stock will be granted at the beginning of 2005 subject to the attainment of the established performance goals for 2004. During the quarter ended June 30, 2004 the Corporation recognized $304 of restricted stock expense, which represents a form of deferred compensation. The compensation cost was estimated based upon a vesting period which extends up to each participant attaining 55 years of age.
Note 10 – Pension and Other Benefits
The Corporation has noncontributory defined benefit pension plans and supplementary pension plans for regular employees of certain of its subsidiaries.
The components of net periodic pension cost for the quarters and six months ended June 30, 2004 and 2003 were as follows:
As of June 30, 2004, contributions made to the pension and restoration plans approximated $218. The Corporation expects to contribute $1,528 to the pension plans and $374 to the benefit restoration plans during 2004.
The Corporation also provides certain health care benefits for retired employees of certain subsidiaries. The components of net periodic postretirement benefit cost for the quarters and six months ended June 30, 2004 and 2003 were as follows:
As of June 30, 2004, contributions made to the postretirement benefit plan approximated $3,200. The Corporation presently expects to contribute $6,900 to the postretirement benefit plan during 2004.
During March 2004, the Corporation received authorization from the Federal Reserve Bank of New York on the
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proposed reorganization to consolidate the information processing and technology functions of both Banco Popular de Puerto Rico (BPPR) and GM Group, Inc. into one organization, EVERTEC, INC. The effective date for the transaction was April 1, 2004. As part of this reorganization, the Corporation incurred certain curtailment gains / losses on the pension and postretirement plans related with the employees that were transferred to the new company and whose benefits were frozen. Also, the Corporation incurred certain costs related to employees of Banco Popular de Puerto Rico who elected early retirement effective March 31, 2004, as part of this reorganization.
Note 11 – Subordinated Notes and Junior Subordinated Deferrable Interest Debentures Held by Trusts that Issued Trust Preferred Securities
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 October 31, 2003, Popular Capital Trust I, a statutory business trust created under the laws of the State of Delaware that is wholly-owned by the Corporation, sold to institutional and retail investors $300,000 of its 6.70% Cumulative Monthly Income Trust Preferred Securities (liquidation amount twenty-five dollars per Capital Security) (“6.70% Capital Securities”) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by the Corporation of $9,279 of Popular Capital Trust I’s 6.70% common securities (liquidation amount twenty-five dollars per common security) were used to purchase $309,279 aggregate principal amount of the Corporation’s 6.70% Junior Subordinated Deferrable Interest Debentures (the “6.70% Junior Subordinated Debentures”). The 6.70% Capital Securities are fully and unconditionally guaranteed by the Corporation. The assets of Popular Capital Trust I consisted of $309,279 of 6.70% Junior Subordinated Debentures at June 30, 2004, and the related accrued interest receivable. The 6.70% Junior Subordinated Debentures mature on November 1, 2033; however, under certain circumstances, the maturity of the Junior Subordinated Debentures may be shortened (which shortening would result in a mandatory redemption of the 6.70% Capital Securities). The 6.70% Capital Securities are traded on the NASDAQ under the symbol “BPOPN”.
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 (PNA) and indirectly wholly-owned by the Corporation, sold to institutional investors $150,000 of its 8.327% Capital Securities Series A (liquidation amount one thousand dollars per Capital Security) (“8.327% Capital Securities”) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by PNA of $4,640 of BanPonce Trust I’s 8.327% common securities (liquidation amount one thousand dollars per common security) were used to purchase $154,640 aggregate principal amount of PNA’s 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the “8.327% Junior Subordinated Debentures”). As of June 30, 2004, the Corporation had reacquired $6,000 of the 8.327% Capital Securities. The obligations of PNA under the 8.327% Junior Subordinated Debentures and its guarantees of the obligations of BanPonce Trust I are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust I consisted of $148,640 of 8.327% Junior Subordinated Debentures at June 30, 2004, (December 31, 2003 — $148,640; June 30, 2003 — $148,640) and the related accrued interest receivable. The 8.327% Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the 8.327% Junior Subordinated Debentures may be shortened (which shortening would result in a mandatory redemption of the 8.327% Capital Securities).
Prior to FIN No. 46R, the issuer trusts described above were consolidated subsidiaries of the Corporation. The 8.327% Capital Securities were included in the consolidated statement of condition at June 30, 2003 under the caption “Preferred beneficial interest in Popular North America’s junior subordinated deferrable interest debentures guaranteed by the Corporation,” and the retained common capital securities of the issuer trusts were eliminated against the Corporation’s investment in the issuer trust. Distributions on the Capital Securities were recorded as interest expense on the consolidated statements of income.
As a result of the adoption of FIN No. 46R, the Corporation deconsolidated these issuer trusts effective December 31, 2003. The Junior Subordinated Debentures issued by Popular, Inc. and PNA to the issuer trusts, totaling $457,919 are reflected in the Corporation’s consolidated statement of condition at June 30, 2004 and December 31, 2003, under the caption of notes payable. The Corporation recognizes interest expense on the corresponding junior subordinated
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debentures in the consolidated statement of income. The Corporation also recorded in the caption of other investment securities in the consolidated statement of condition at June 30, 2004 and December 31, 2003, the common securities issued by the issuer trusts.
Note 12 - Stockholders’ Equity
On May 12, 2004, the Corporation’s Board of Directors authorized a stock split in the form of a stock dividend of one additional share of common stock for each common stock share held as of the record date of June 18, 2004. As a result of the split, 139,774,235 shares were issued and $838,645 was transferred from retained earnings to common stock. All references in the financial statements to the numbers of common shares and per share amounts have been restated to reflect the stock split. The new shares were distributed on July 8, 2004.
Effective April 30, 2004, the Corporation’s Restated Certificate of Incorporation was amended to increase the number of authorized shares of common stock from 180,000,000 to 470,000,000 and the number of authorized shares of preferred stock from 10,000,000 to 30,000,000 shares.
The Corporation’s only outstanding class of preferred stock are its 6.375% noncumulative monthly income preferred stock, 2003 Series A. These shares of preferred stock are nonconvertible and are redeemable solely at the option of the Corporation beginning on March 31, 2008. The redemption price per share is $25.50 from March 31, 2008 through March 30, 2009, $25.25 from March 31, 2009 through March 30, 2010 and $25.00 from March 31, 2010 and thereafter. Dividends on the 2003 Series A preferred stock are noncumulative and are payable monthly at an annual rate of 6.375% of the liquidation preference value of $25.00 per share.
Note 13 - Earnings per Common Share
A computation of earnings per common share and diluted earnings per common share follows:
Potential common shares consist of common stock issuable under the assumed exercise of stock options and restricted stock granted under the Corporation’s compensation plans, using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise in addition to the amount of compensation cost attributed to future services are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased will be added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share.
Stock options that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per share. For the quarter and six-month period ended June 30, 2004, there were 973,466 and 922,275 weighted average antidilutive stock options outstanding, respectively (June 30, 2003 – 1,004,526 and 927,957, respectively).
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Note 14 - Supplemental Disclosure on the Consolidated Statements of Cash Flows
During the six months ended June 30, 2004, the Corporation paid interest and income taxes amounting to $370,999 and $62,411 respectively (2003 – $387,904 and $84,803, respectively). Loans receivable transferred to other real estate and other property for the six months ended June 30, 2004, amounted to $49,088 and $13,242, respectively (2003 — $38,046 and $13,555, respectively). In addition, during the quarter ended June 30, 2004, the Corporation transferred certain trading account securities to the available-for-sale portfolio as described in Note 3 to these financial statements.
Note 15 - Segment Reporting
Popular, Inc. operates the following reportable segments: commercial banking, mortgage and consumer lending, auto and lease financing, and other. Management has determined its reporting units based on legal entity, which is the way that operating decisions are made and performance is measured. These reporting units have then been aggregated into segments by products, services and markets with similar characteristics.
The Corporation’s commercial banking segment includes all banking subsidiaries, which provide individuals, corporations and institutions with commercial and retail banking services, including loans and deposits, trust, mortgage banking and servicing, asset management, credit cards and other financial services. These services are offered through a delivery system of branches throughout Puerto Rico, the U.S. and British Virgin Islands and the United States.
The Corporation’s mortgage and consumer lending segment includes those non-banking subsidiaries whose principal activity is associated with mortgage and consumer loans such as Popular Mortgage, Popular Finance, Equity One, Levitt Mortgage Corporation and Popular FS, LLC. Effective July 30, 2004 Levitt Mortgage was merged with and into Popular Mortgage.
The Corporation’s auto and lease financing segment provides financing for vehicles and equipment through Popular Auto 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 and reinsurance, retail financial services, broker/dealer activities, as well as those providing information technology and ATM and data processing services.
The accounting policies of the segments are the same as those followed by the Corporation in the ordinary course of business and conform with generally accepted accounting principles and with general practices within the financial industry. Following are the results of operations and selected financial information by operating segment for the quarters and six-months periods ended June 30, 2004 and 2003.
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During the first quarter of 2004, the Corporation’s parent holding company realized gains on the sale of marketable equity securities of approximately $10,500 ($9,200 after-tax). During the quarter ended June 30, 2003, the parent holding company realized gains on sale of marketable equity securities of approximately $29,300 ($25,700 after tax). These gains are included in “other income” within the “other” reportable segment category.
The increase in the eliminations in the “other income” and “other operating expenses” categories for the quarter and six months ended June 30, 2004, compared with the corresponding periods in the previous year, is mostly related to information technology and data processing services provided by EVERTEC, INC. to other subsidiaries of the Corporation. Also, as a result of the reorganization to consolidate the information processing and technology functions into EVERTEC, INC., certain internal services previously provided by BPPR or internally serviced by
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other subsidiaries, are now provided by EVERTEC, INC. The intercompany billings are eliminated in the consolidated financial statements.
Intersegment Revenues *
Geographic Information
Note 16 – Condensed Consolidating Financial Information of Guarantor and Issuers of Registered Guaranteed Securities:
The following condensed consolidating financial information presents the financial position of Popular, Inc. Holding Company (PIHC) (parent only), Popular International Bank, Inc. (PIBI), Popular North America, Inc. (PNA) and all other subsidiaries of the Corporation as of June 30, 2004, December 31, 2003 and June 30, 2003, and the results of their operations and cash flows for the periods ended June 30, 2004 and 2003. 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
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of May 31, 2004, November 30, 2003 and May 31, 2003, corresponds to their financial information included in the consolidated financial statements of Popular, Inc. as of June 30, 2004, December 31, 2003 and June 30, 2003, respectively.
PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under shelf registrations filed with the SEC.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries, ATH Costa Rica, CreST, S.A., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned subsidiaries, Popular Cash Express, Inc., Equity One, Inc., BPNA, including its wholly-owned subsidiaries Popular Leasing, U.S.A., Popular Insurance Agency, U.S.A. and Popular FS, LLC, 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 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 during the calendar year would exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels. At June 30, 2004, BPPR could have declared a dividend of approximately $234,676 without the approval of the Federal Reserve Board.
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF CONDITIONJUNE 30, 2004(UNAUDITED)
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF CONDITIONDECEMBER 31, 2003(UNAUDITED)
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF CONDITIONJUNE 30, 2003(UNAUDITED)
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF INCOMEFOR THE QUARTER ENDED JUNE 30, 2004(UNAUDITED)
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF INCOMEFOR THE QUARTER ENDED JUNE 30, 2003(UNAUDITED)
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF INCOMEFOR THE SIX MONTHS ENDED JUNE 30, 2004(UNAUDITED)
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF INCOMEFOR THE SIX MONTHS ENDED JUNE 30, 2003(UNAUDITED)
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 30, 2004(UNAUDITED)
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POPULAR, INC.CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 30, 2003(UNAUDITED)
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This financial review contains an analysis of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the “Corporation”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis. The Corporation is a financial holding company, which offers a wide range of products and services to consumer and corporate customers in Puerto Rico, the United States, the Caribbean and Central America. The Corporation’s subsidiaries are engaged in the following businesses:
2004 SECOND QUARTER HIGHLIGHTS
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TABLE AFinancial Highlights
Note: All per share data has been adjusted to reflect the two-for-one stock split effected in the form of a stock dividend.
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- The Corporation’s net income for the second quarter of 2004 reflected the following variances compared with the same quarter last year:
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CRITICAL ACCOUNTING POLICIES
The accounting policies followed by the Corporation and its subsidiaries, and the methods of applying these policies, conform with generally accepted accounting principles in the United States and to general practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. These estimates and assumptions are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates. The Corporation has identified as critical accounting policies those related to securities’ classification and related values, loans and allowance for loan losses, income taxes, goodwill and other intangible assets, and pension and postretirement benefit obligations. For a summary of the Corporation’s critical accounting policies, refer to that particular section in the Management’s Discussion and Analysis included in Popular, Inc.’s 2003 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003. Also, refer to Note 1 to the consolidated financial statements included in said report for a summary of the Corporation’s significant accounting policies, as well as to the accompanying notes to the unaudited consolidated financial statements included in this Form 10-Q. No significant changes in critical accounting policies have occurred since year-end 2003, except as described in the next paragraph. The summary of the Corporation’s critical accounting policies referred to above states that closed-end consumer loans are charged-off when payments are delinquent 120 days. In the case of the Corporation’s non-bank consumer and mortgage lending subsidiaries, however, closed-end consumer loans are charged-off when payments are 180 days delinquent.
Effective for the quarter ended March 31, 2004, the Corporation adopted the standard industry practice of placing commercial and construction loans on non-accrual status when payments of principal or interest are delinquent 90 days rather than 60 days, its prior practice. Had the Corporation continued reporting commercial and construction loans in non-performing status when delinquent 60 days, non-performing assets would have been $34 million higher than reported in this Form 10-Q for the quarter ended June 30, 2004. The estimated impact of the new adopted practice in the Corporation’s interest income for the quarter ended June 30, 2004 approximated $0.3 million. Refer to the Credit Risk Management and Loan Quality section for a more detailed analysis of the impact of the change in the non-accruing policy for commercial and construction loans.
NET INTEREST INCOME
Net interest income for the quarter ended June 30, 2004 reached $340.7 million, an increase of $11.0 million, or 3%, compared with the same quarter of 2003. On a taxable equivalent basis, net interest income increased to $369.0 million, from $360.7 million in the second quarter of 2003. The increase in net interest income resulted from growth in average earning assets, partially offset by compression in the net interest margin.
Tables B and C present the different components of the Corporation’s net interest income, on a taxable equivalent basis, for the quarter and six-months ended June 30, 2004, respectively, as compared with the same periods in 2003, segregated by major categories of earning assets and interest bearing liabilities. Some of the assets, mostly investments in obligations of the U.S. Government and Agencies and the Puerto Rico Commonwealth and its agencies, generate interest which is exempt for income tax purposes, principally in Puerto Rico. Therefore, to facilitate the comparison of all interest data related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates (in Puerto Rico the statutory tax rate is 39%).
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TABLE BANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASISQuarter ended June 30, 2004
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.
As shown in Table B, the increase in average earning assets for the quarter ended June 30, 2004, compared with the second quarter of 2003, was driven principally by a 19% increase in the average loan portfolio, mainly mortgage loans, which grew on average by 32%. The increase in mortgage loans contributed with 67% of the total increase in average loans. The increase in the volume of earning assets was funded through a combination of borrowings, interest bearing deposits, and non-interest bearing sources of funds, including demand deposits and other funds. The most significant increase was in long-term debt, which is debt with an original maturity of more than one year, principally due to the issuance of asset-backed securities supported by residential mortgage loans, and to the issuance during 2003 of $1.1 billion in fixed-rate five-year notes and of $309 million in junior subordinated debentures. Since June 30, 2003, Equity One has participated in offerings of asset-backed securities of approximately $3.2 billion, which are primarily supported by home equity loans. These transactions have been accounted for by the Corporation as secured borrowings since they did not qualify as sales under SFAS No. 140 “Accounting for Transfers and Servicing of
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Financial Assets and Extinguishment of Liabilities.”
As can be seen in Table B both our net interest margin and spread decreased. This decline can be largely attributed to growth in lower-yielding assets, primarily mortgage loans. Also, contributing to the decline was the downward repricing of loans and a reduction in the yield on investment securities, reflecting maturities of higher rate securities, replaced by lower-yielding securities in the low interest rate environment. The decrease in the average yield on earning assets also resulted from promotional campaigns with lower rates targeted at consumer loans, prepayments of higher rate mortgage related products, including mortgage-backed securities, and a greater proportion of adjustable and floating rate commercial loans in the portfolio. As of June 30, 2004, approximately 61% of the commercial and construction loan portfolios had floating or adjustable rates, compared with approximately 56% a year ago.
The average cost of interest-bearing liabilities for the quarter ended June 30, 2004 declined by 16 basis points, compared with the same quarter of 2003. The principal factors to the decrease were the repricing of some of the Corporation’s short-term borrowings and long-term debt issuances at lower rates in the low interest rate environment and the results of certain initiatives taken in 2003 to reduce the cost of certain interest-bearing liabilities, including revisions made to interest rates on interest-bearing deposits.
As shown in Table C, for the six-month period ended June 30, 2004, net interest income, on a taxable equivalent basis, totaled $727.4 million, an increase of 6%, compared with the same period of 2003. This improvement resulted from higher average volume of earning assets, partially offset by the impact of a lower net interest margin.
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TABLE CANALYSIS OF LEVELS & YIELDS ON A TAXABLE EQUIVALENT BASIS
Average earning assets for the six-month period ended June 30, 2004 increased by 12%, compared with the same period of 2003, primarily associated with higher average volume of loans, mainly mortgage and commercial loans. The increase was primarily funded through long-term debt, interest bearing deposits and demand deposits.
The compression in the net interest margin for the six months ended June 30, 2004 shown in Table C was also attributed to the factors previously described. Also, the six-month period ended June 30, 2003 was impacted by higher losses related to derivative transactions. Following the guidance in EITF Issue No. 03-11, “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133 and Not Held for Trading Purposes,” the Corporation included as part of interest expense, $0.1 million and $8.1 million in derivative losses, for the six months ended June 30, 2004 and 2003, respectively. The derivative losses for 2003 related mostly to the
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interest-rate swaps with notional value of $500 million which were cancelled by the Corporation in the second quarter of 2003.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to earnings necessary to maintain the allowance for loan losses at a level that reflects management’s assessment of the adequacy to absorb probable losses inherent in the loan portfolio taking into account loan impairment and net charge-offs. The Corporation’s provision for loan losses for the quarter ended June 30, 2004 was $41.3 million, a decrease of $8 million, or 16%, compared with the quarter ended June 30, 2003. The provision for loan losses represented 116% of net charge-offs for the quarter ended June 30, 2004, compared with 130% in the second quarter of 2003. The quarter reflected decreases in the net charge-off ratio to average loans for all loan categories. For the six-month period ended June 30, 2004, the provision for loan losses totaled $86.0 million, a decrease of $11.5 million, or 12%, compared with the same period in the previous year. The provision for loan losses represented 114% of net charge-offs for the six months ended June 30, 2004, compared with 127% in the same period of 2003. Refer to the Credit Risk Management and Loan Quality section, including Tables G, H and I, for a more detailed analysis of the allowance for loan losses, net charge-offs, non-performing assets and credit quality statistics.
NON-INTEREST INCOME
Non-interest income totaled $159.0 million during the second quarter of 2004, a decrease of $10.7 million, or 6%, from the corresponding period in 2003. Non-interest income for the second quarter of 2003 included $29.9 million in gain on sale of securities, mainly marketable equity securities, compared with $0.4 million in the quarter ended June 30, 2004. Partially offsetting this decrease were higher other service fees, trading account profits and other operating income, including the aforementioned gain on sale of real estate.
Other service fees for the quarter ended June 30, 2004 increased 9% compared with the second quarter of 2003. Refer to Table D for a breakdown of other service fees by major categories. The increase in debit and credit card fees and discounts was driven mostly by higher transactional volume, while the rise in insurance fees was partly attributed to business initiatives and expanded services which intend to capitalize on the Corporation’s broad delivery channels and client base.
TABLE DOther Service Fees
Trading account profits were $615 thousand for the quarter ended June 30, 2004, compared with trading losses of $4.2 million in the same quarter of 2003. This change resulted mostly from favorable changes related to forward sales hedges on mortgage-backed securities.
Other operating income amounted to $27.5 million for the second quarter of 2004, an increase of $7.6 million, or 38%, compared with the corresponding period in 2003. The increase in other operating income was mostly associated with a sale of a real estate property in Puerto Rico that resulted in capital gains of $10.9 million, partially offset by
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lower dividends derived from the Corporation’s ownership participation in Telecomunicaciones de Puerto Rico, Inc. and lower write-downs on interest-only strips related with declines in their fair value that were considered other than temporary.
For the six-month period ended June 30, 2004, non-interest income amounted to $304.2 million, a decrease of $8.2 million, or 3%, compared with the same period in the previous year. The decrease was also associated with a lower gain on the sale of investment securities by $17.9 million, mainly marketable equity securities, compared with the six-month period ended June 30, 2003. Also, gains on sale of loans were lower by $11.0 million, compared with the same period in 2003, mostly related to lower sales volume and pricing. These unfavorable variances were partially offset by higher service charges on deposit accounts by $2.1 million, mainly due to higher commercial account analysis fees, along with charges related to returned checks. Also, as shown in Table D, other services fees rose by $6.4 million, mostly related to the same factors described previously for the quarterly results.
Other operating income for the six months ended June 30, 2004 rose by $8.5 million, compared with the same period in 2003, mainly due to the aforementioned gain on the sale of a real estate property in the second quarter of 2004, partially offset by lower management fees and dividends received from the Corporation’s ownership participation in Telecomunicaciones de Puerto Rico, Inc.
OPERATING EXPENSES
Refer to the unaudited consolidated statements of income included in this Form 10-Q for a breakdown of operating expenses by major categories. For the second quarter of 2004, operating expenses were up $12.4 million, or 4%, compared with the same period in the previous year. Personnel costs, the major component of operating expenses, increased $11.8 million, or 9%, compared with the quarter ended June 30, 2003, resulting mostly from higher salaries, incentives, performance bonuses, stock options, and other compensation. Full-time equivalent employees were 11,563 at June 30, 2004, an increase of 184 employees from June 30, 2003. The increases were partially offset by lower pension costs associated in part with improvements in the fair value of plan assets. For the second quarter of 2004, other operating expenses, excluding personnel costs, amounted to $150.1 million, an increase of $0.6 million. This rise was mainly reflected in the categories of professional fees, net occupancy expenses and equipment expenses resulting from continuing investments in systems technology and costs to support business initiatives and expansion. Also, there was an increase in depreciation and maintenance and repair expenses. Offsetting these increases was a decline in other operating expenses mostly associated with lower sundry losses. The results of the second quarter of 2003 included non-recurrent losses resulting from unauthorized credit card transactions, which approximated $14 million. The decrease in sundry losses was partly compensated by an increase in other real estate expenses, insurance costs, and credit and debit card interchange expenses.
For the six-month period ended June 30, 2004, operating expenses totaled $571.4 million, an increase of $28.5 million, or 5%, compared with the same period in 2003. Categories with the major variances included personnel costs, professional fees, net occupancy, equipment and other operating expenses, primarily associated with the same factors previously described for the quarterly results. Personnel costs for the six-months ended June 30, 2004 included $2.4 million in early-retirement window costs and net curtailment gains recorded in the first quarter, which were associated with the realignment of the Corporation’s processing and technology operations. This realignment resulted in certain plan amendments and the transfer of employees from BPPR to EVERTEC.
INCOME TAX
Income tax expense for the quarter ended June 30, 2004 increased $2.9 million, or 8%, compared with the same quarter of 2003. The increase was primarily due to a reduction in income subject to a lower preferential tax rate for the current period, partially offset by an increase in exempt interest income, net of the expense disallowance attributed to such exempt income. The effective tax rate for these quarters were 23.32% and 21.06%, respectively.
Income tax expense for the six-month period ended June 30, 2004 increased $5.0 million, or 8%, compared with the same period in 2003. The increase was primarily due to higher pre-tax earnings, partially offset by an increase in exempt interest income, net of the expense disallowance attributed to such exempt income. Also, there was a reduction in income subject to a lower preferential tax rate when compared with the previous year. The effective tax rate for the six-month period ended June 30, 2004 was 22.59%, compared with 22.22% in the same period of 2003.
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BALANCE SHEET COMMENTS
The Corporation’s total assets at June 30, 2004 reached $39.6 billion, an increase of 9%, compared with $36.4 billion at December 31, 2003, mostly in loans. Total assets at June 30, 2003 amounted to $36.1 billion. Earning assets totaled $37.2 billion at June 30, 2004, compared with $34.5 billion at December 31, 2003 and $33.9 billion at June 30, 2003.
Investment and trading securities reached $11.6 billion at June 30, 2004, an increase of $0.5 billion compared with $11.1 billion at December 31, 2003. Investment and trading securities at June 30, 2003 totaled $12.3 billion. Notes 3 and 4 to the consolidated financial statements presents the breakdown of the Corporation’s available-for-sale and held-to-maturity investment portfolios.
Table E presents a breakdown of the Corporation’s loan portfolio at June 30, 2004 compared with the reported amounts at the end of 2003 and at June 30, 2003. Mortgage loans accounted for 57% of the rise in the total loan portfolio from December 31, 2003. Consumer loans increased 13% as compared with December 31, 2003, partly as a result of favorable customer response to aggressive marketing efforts, targeted mostly to auto loans and personal loans. The loan portfolio at June 30, 2004 grew by 18% from June 30, 2003. Mortgage loans also accounted for the largest increase in the portfolio since that date, rising 31% and representing 67% of the increase in the total loan portfolio.
TABLE ELoans Ending Balances
Other assets amounted to $999 million at June 30, 2004, an increase of $230 million compared with December 31, 2003. This increase was mostly associated with deferred tax assets, increased participation in certain equity investments, assets associated with the bank-owned life insurance program, securitization advances and other related assets. The increase since June 30, 2003 was also related to these factors.
At June 30, 2004, total deposits amounted to $19.2 billion, an increase of $1.1 billion, or 6%, compared with December 31, 2003. Demand deposits rose by $401 million, or 11% from December 31, 2003, principally due to commercial accounts, deposits in trust from governmental sources subsequently used to repay government obligations, and higher deposits from public funds. Savings deposits rose $342 million, or 4%, while time deposits increased by $387 million, or 6%, partly due to deposit campaigns by the Corporation’s banking subsidiary in the United States. When compared with June 30, 2003, total deposits rose $952 million, or 5%. Savings and time deposits accounted for the largest increases, rising $542 million, or 7%, and $499 million, or 8%, respectively, from June 30, 2003. Brokered certificates of deposits, which are included in time deposits, decreased by $74 million from June 30, 2003. Demand deposits declined $89 million, or 2%, partly related to a larger balance of deposits in trust from governmental sources at June 30, 2003 that were used to repay government obligations on July 1, 2003.
Borrowed funds, including subordinated notes and capital securities, increased $2.0 billion or 14% since December 31, 2003, reaching $16.9 billion at June 30, 2004. The increase in borrowed funds since the end of 2003 was mainly in the form of secured borrowings supported by residential mortgage loans, federal funds purchased and assets sold under agreements to repurchase. During the six-months ended June 30, 2004, Equity One tapped the asset-backed securities market with offerings of approximately $1.6 billion. The transactions were accounted for as secured borrowings since they did not qualify as sales of loans under the criteria of SFAS No. 140, “Accounting for Transfers
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and Servicing of Financial Assets and Extinguishment of Liabilities.” Borrowed funds totaled $14.4 billion at June 30, 2003. The increase in borrowed funds since June 30, 2003 to the same date in 2004 included secured borrowings, medium-term notes, junior subordinated debentures derived from the issuance of trust preferred securities and short-term sources of funds, including term funds and funds raised through available lines of credit.
The Corporation’s stockholders’ equity at June 30, 2004, December 31, 2003 and June 30, 2003 approximated $2.8 billion. Stockholders’ equity at June 30, 2004, compared with December 31, 2003, was impacted by an unfavorable change in accumulated other comprehensive income (losses) by $141 million, mostly associated with unrealized losses on the securities available-for-sale portfolio caused by rising long-term rates. When compared with June 30, 2003, accumulated other comprehensive income (losses) changed unfavorably by $369 million, also associated with unrealized losses on the securities available-for-sale portfolio. The consolidated statement of changes in stockholders’ equity and the statements of accumulated other comprehensive income included in the unaudited consolidated financial statements of this Form 10-Q present further information on the composition and changes in the Corporation’s equity position.
The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage as of June 30, 2004 and 2003, and December 31, 2003 are presented on Table F. Also, at June 30, 2004, December 31, 2003 and June 30, 2003, BPPR, BPNA and BP, N.A. were all well-capitalized.
The Corporation’s common and preferred stocks are traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) under the symbols BPOP and BPOPO, respectively. Table A presents limited data on the Corporation’s common stock for the quarters and six-month periods ended June 30, 2003 and 2004. The Corporation’s market capitalization at June 30, 2004 was $5.7 billion, compared with $5.1 billion at June 30, 2003 and $6.0 billion at December 31, 2003.
TABLE FCapital Adequacy Data
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CREDIT RISK MANAGEMENT AND LOAN QUALITY
NON-PERFORMING ASSETS
Non-performing assets consist of past-due loans that are no longer accruing interest, renegotiated loans and real estate property acquired through foreclosure.
Commencing in the quarter ended March 31, 2004, the Corporation adopted the standard industry practice of placing commercial and construction loans on non-accrual status if payments of principal or interest are delinquent 90 days rather than 60 days, its previous practice. Lease financing, conventional mortgages and closed-end consumer loans are placed on non-accrual status if payments are delinquent 90 days or four scheduled payments in arrears. Closed-end consumer loans of the Corporation’s banks and their subsidiaries are charged-off when payments are delinquent 120 days. Closed-end consumer loans of non-bank consumer and mortgage lending subsidiaries are charged-off when payments are 180 days delinquent. Open-end (revolving credit) consumer loans are charged-off when payments are delinquent 180 days. Certain loans, which would be treated as non-accrual loans pursuant to the foregoing policy, are treated as accruing loans if they are considered well-secured and in the process of collection. Unsecured retail loans to borrowers who declare bankruptcy are charged-off within 60 days of receipt of notification of filing from the bankruptcy court. Under the standard industry practice, closed-end consumer loans are not customarily placed on non-accrual status prior to being charged-off.
A summary of non-performing assets by loan categories and related ratios is presented in Table G.
TABLE GNon-Performing Assets
Had the Corporation continued reporting commercial and construction loans in non-performing status when delinquent 60 days or more, non-performing assets would have amounted to $635 million at June 30, 2004, or 2.57% of ending loans and 1.61% of total assets.
Non-performing mortgage loans represented 60% of total non-performing assets and 3.30% of total mortgage loans at June 30, 2004, compared with 52% of total non-performing assets and 3.87% of total mortgage loans at June 30, 2003. As of December 31, 2003, non-performing mortgage loans represented 56% of total non-performing assets and 3.55% of total mortgage loans. This increase in non-performing mortgage loans was mostly reflected in the Corporation’s non-bank consumer and mortgage-banking subsidiary in the United States, Equity One. Of the total non-performing mortgage loans at June 30, 2004, 75% pertained to Equity One, compared with 69% at June 30, 2003, and 72% at December 31, 2003. Results for the second quarter of 2004 showed improved credit quality trends at this subsidiary. Non-performing mortgage loans at this subsidiary represented 3.85% of its total mortgage loans at June 30, 2004, down from 4.45% of its total mortgage loans at June 30, 2003, and 4.07% at December 31, 2003. This decrease at Equity One was related in part to more dynamic foreclosure procedures and improved quality supported in part by improved credit scoring. Historically, the Corporation has experienced a low level of losses in its mortgage portfolio, both in Puerto Rico and the U.S. mainland. Mortgage loans net charge-offs for the
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Corporation as a percentage of the average mortgage loan portfolio was 0.29% in the second quarter of 2004, compared with 0.38% in the second quarter 2003.
Non-performing consumer loans were 1.01% of consumer loans at June 30, 2004, compared with 1.13% at June 30, 2003 and 1.11% at December 31, 2003. The increase in non-performing consumer loans since the end of 2003 was associated with the increase in the consumer portfolio. The decline in the non-performing consumer loans to consumer loans ratio reflects a better credit quality mix, coupled with improved delinquency levels.
Non-performing commercial and construction loans represented 1.64% of that loan portfolio at June 30, 2004, compared with 2.42% at June 30, 2003, and 1.96% at December 31, 2003. Had the Corporation continued reporting commercial and construction loans in non-performing status when delinquent 60 days, the Corporation’s non-performing commercial and construction loans at June 30, 2004 would have been $181 million or 2.02% of that loan portfolio. The decrease in non-performing commercial and construction loans since December 31, 2003 and June 30, 2003 was mostly due to the aforementioned change in the Corporation’s policy for non-accrual commercial and construction loans and intensified credit management efforts.
Non-performing financing leases represented 0.41% of the lease financing portfolio at June 30, 2004, compared with 0.91% at June 30, 2003, and 0.71% at December 31, 2003. The decline in non-performing leases was the result of lower delinquency levels.
Other real estate assets, which are recorded at the lower of cost or fair value less estimated costs to sell, represented 9% of non-performing assets at June 30, 2004, compared with 8%, at June 30, 2003, and 9%, at December 31, 2003. The increase in other real estate assets was associated with the growth in the non-performing mortgage loan portfolio, coupled with strengthened and more dynamic foreclosure procedures.
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, at June 30, 2003 and December 31, 2003, adjusted non-performing assets would have been $542 million or 2.60% of loans and $547 million or 2.42% of loans, respectively. The allowance to non-performing loans ratio would have been 80.44% and 82.91% at June 30, 2003 and December 31, 2003, respectively. Excluding the closed-end consumer loans from non-accruing at June 30, 2004, adjusted non-performing assets would have been $564 million or 2.29% of loans and the allowance to non-performing loans ratio would have been 83.37%.
In addition to the non-performing loans discussed earlier, there were $28 million of loans at June 30, 2004, which in management’s opinion are currently subject to potential future classification as non-performing, and therefore are considered impaired under SFAS No. 114. At December 31, 2003 and June 30, 2003, these potential problem loans approximated $34 million and $55 million, respectively.
ALLOWANCE FOR LOAN LOSSES
The methodology used to establish the allowance for loan losses is based on SFAS No. 114 “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 5 “Accounting for Contingencies.” Under SFAS No. 114, certain commercial loans are identified for evaluation on an individual basis, and specific reserves are calculated based on impairment. SFAS No. 5 provides for the recognition of a loss allowance for a group of homogeneous loans when it is probable that a loss will be incurred and the amount can be reasonably estimated.
As can be seen in Table H, the ratio of allowance for loan losses to loans continued to reflect improvement in credit quality trends and a continued shift in the loan portfolio mix to include a greater proportion of residential mortgages. The Corporation’s management considers the allowance for loan losses to be at a level sufficient to provide for estimated losses based on current economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses.
The Corporation considers a loan to be impaired when interest and/or principal is past due 90 days or more, or, when 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. An allowance for loan impairment is recognized to the extent that the carrying value of an impaired loan exceeds the present value of the expected future cash flows discounted at the loan’s effective rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. The allowance for impaired loans is part of the Corporation’s overall allowance for loan
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losses. 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. For more information regarding the Corporation’s allowance for loan losses methodology refer to the Credit Risk and Loan Quality section in the Management’s Discussion and Analysis included in Popular, Inc.’s 2003 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003.
The following table shows the Corporation’s recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 at June 30, 2004, December 31, 2003 and June 30, 2003.
Average impaired loans during the second quarter of 2004 and 2003 were $127 million and $165 million, respectively. The Corporation recognized interest income on impaired loans of $0.7 million and $1.1 million for the quarters ended June 30, 2004 and June 30, 2003, respectively.
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Table H summarizes the movement in the allowance for loan losses and presents several loan loss statistics for the quarters and six-month periods ended June 30, 2004 and 2003.
TABLE HAllowance for Loan Losses and Selected Loan Losses Statistics
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Also, Table I presents annualized net charge-offs to average loans by loan category for the quarters and six months ended June 30, 2004 and 2003.
TABLE I Annualized Net Charge-offs to Average Loans
The decline in net charge-offs for the quarter ended June 30, 2004, when compared with the same quarter in the previous year was mostly in lease financing and commercial and construction loans. Lease financing net charge-offs declined primarily as a result of lower delinquency levels, due to better portfolio credit quality and collection strategies. The decrease in commercial and construction loans net charge-offs was mostly associated with better portfolio credit quality, coupled with collection efforts. The decrease in the net charge-offs to average loan ratio was also influenced by the continuing identification and monitoring of potential problem loans.
For the six-months ended June 30, 2004, total net charge-offs declined slightly, influenced by lower lease financing and commercial loans net charge-offs, including construction, as a result of the factors described above. Although, consumer loans net charge-offs showed an increase, they remained stable as a percentage of the average consumer loan portfolio. Additionally, the Corporation experienced an increase in mortgage loans net charge-offs for the six-months ended June 30, 2004, compared with the same period in the previous year, mostly as a result of portfolio growth. As a percentage of average mortgage loans for the six-months ended June 30, 2004, mortgage loans net charge-offs reflected improved trends since June 30, 2003, principally at Equity One. The mortgage loans net charge-offs to average loans ratio at this subsidiary was 0.35% for the six months ended June 30, 2004, compared with 0.41% for the same period in the previous year.
OFF-BALANCE SHEET ACTIVITIES
The Corporation conducts asset securitizations that involve the transfer of mortgage loans to a qualifying special purpose entity (QSPE), which in turn transferred these assets and their titles, to different trusts, thus isolating those loans from the Corporation’s assets. These transactions, which were conducted prior to 2001, qualified for sale accounting based on the provisions of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” and as such, these trusts are not consolidated in the Corporation’s financial statements. The investors and the securitization trusts have no recourse to the Corporation’s assets. At June 30, 2004, these trusts held approximately $122 million in assets in the form of mortgage loans. Their liabilities in the form of debt principal due to investors approximated $115 million at the end of the second quarter of 2004. The Corporation retained servicing responsibilities and certain subordinated interests in these securitizations in the form of interest-only securities. The servicing rights and interest-only securities retained by the Corporation are recorded in the statement of condition at the lower of cost or market, and fair value, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Market risk refers to the impact of changes in interest rates on the Corporation’s net interest income, market value of equity and trading operations. It also arises from fluctuations in the value of some foreign currencies against the U.S. dollar. Despite the varied nature of market risks, the primary source of this risk at the Corporation is the impact of changes in interest rates on net interest income. Depending on the duration and repricing characteristics of the Corporation’s assets, liabilities and off-balance sheet items, changes in interest rates could either increase or decrease the level of net interest income. The Corporation maintains a formal asset and liability management process to
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quantify, monitor and control interest rate risk (IRR) and to assist management in maintaining stability in the net interest margin under varying interest rate environments.
An interest rate sensitivity analysis performed at the Corporation level is the primary tool used in expressing the potential loss in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity analysis is calculated on a monthly basis using a simulation model, which incorporates actual balance sheet figures detailed by maturity and interest yields or costs, the expected balance sheet dynamics, reinvestments, and other non-interest related data. Simulations are processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation.
Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what actually may occur in the future.
Based on the results of the sensitivity analyses as of June 30, 2004, the Corporation’s net interest income for the next twelve months, on a hypothetical 200 basis points rising rate scenario, is estimated to decrease by $6.8 million, and the change for the same period, utilizing a hypothetical 100 basis points declining rate scenario, is an estimated increase of $5.0 million. The 100 basis point downward interest rate scenario is used in place of a 200 basis points declining rate scenario due to the current low interest rate environment. It should be mentioned that some short-term rates are below 1% at June 30, 2004. In the scenario of interest rates decreasing 100 basis points, rates were not permitted to fall below 0.1%, which is presumed to be highly unlikely. Both hypothetical rate scenarios consider the gradual change to be achieved during a twelve-month period from the prevailing rates at June 30, 2004. These estimated changes are within the policy guidelines established by the Board of Directors.
The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income that are caused by interest rate volatility. The Corporation has not experienced a significant change in its involvement in derivative activities since December 31, 2003.
The Corporation conducts business in certain Latin American markets through several of its processing and information technology services and products subsidiaries. Also, it holds interests in Consorcio de Tarjetas Dominicanas, S.A. and Centro Financiero BHD, S.A. in the Dominican Republic. Although not significant, some of these businesses are conducted in the country’s particular foreign currency. At June 30, 2004, the Corporation had $36 million in an unfavorable foreign currency translation adjustment as part of accumulated other comprehensive income, compared with $24 million at December 31, 2003. The increase was mostly associated with a devaluation of the Dominican peso. The Corporation had been monitoring the inflation levels in the Dominican Republic to evaluate whether it met the “highly inflationary economy” test prescribed by SFAS No. 52 “Foreign Currency Translation.” SFAS No. 52 defines a highly inflationary economy as a “cumulative inflation of approximately 100 percent or more over a 3-year period.” The cumulative inflation in the Dominican Republic for the 36 months ended June 30, 2004 exceeded the 100 percent threshold. In accordance with the provisions of SFAS No. 52, the classification as “highly inflationary” triggers the remeasurement of the Corporation’s interests in the Dominican Republic. Beginning in the third quarter of 2004, the effect of currency translation gains and losses on the investments held by the Corporation in the Dominican Republic will be reflected in earnings instead of accumulated other comprehensive income until the economy is no longer highly inflationary.
The Corporation believes that there have been no significant changes in market risk compared with the disclosures in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003.
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LIQUIDITY
Liquidity refers to the ability to fund current operations, including the cash flow requirements of depositors and borrowers as well as future growth. Liquidity management involves maintaining ample and diverse funding capacity, liquid assets and other sources of cash to accommodate fluctuations in asset and liability levels due to customer behavior, capital market conditions or unanticipated events. Liquidity risk may arise whenever the Corporation’s ability to raise cash and the runoff of its assets are substantially less than the runoff of its liabilities.
The Corporation has contingency plans for raising financing under stress scenarios, where important sources of funds that are usually fully available are temporarily not willing to lend to the Corporation. These plans call for using alternate funding mechanisms such as the pledging or securitization of certain asset classes, committed credit lines, and loan facilities implemented with the Federal Reserve Bank of New York. The Corporation has a substantial amount of assets available for raising funds through non-traditional channels and is confident that it has adequate alternatives to rely on, under a scenario where some primary funding sources are temporarily unavailable.
The Corporation’s liquidity position is closely monitored on an ongoing basis. Management believes that available sources of liquidity are adequate to meet the funding needs in the normal course of business.
The composition of the Corporation’s financing to total assets at June 30, 2004 and December 31, 2003 were as follows:
The Corporation’s core deposits, which consist of demand, savings, money markets, and time deposits under $100 thousand, constituted 82% of total deposits at June 30, 2004. Certificates of deposit with denominations of $100 thousand and over at June 30, 2004 represented 18% of total deposits. Their distribution by maturity was as follows:
The Corporation diversifies the sources and the maturities of borrowings in order to avoid undue reliance on any single source and maintain an orderly volume of borrowings maturing in the future. The Corporation has established borrowing relationships with the Federal Home Loan Bank (FHLB), the Federal Reserve Bank of New York and other correspondent banks, which further support and enhance liquidity.
The Corporation has a shelf registration with the Securities and Exchange Commission, which is intended to permit the Corporation to raise funds through sales of preferred stock, senior debt or other debt securities with a relatively short lead-time. At June 30, 2004, the Corporation had available approximately $2.5 billion under this shelf registration. Subsequent to quarter end, Popular North America, a subsidiary of Popular, Inc., sold $400 million in fixed-rate five-year medium-term notes under this shelf registration. The funds raised will be used primarily to repay outstanding short-term borrowings and the remainder will be used to partially fund the acquisition of Quaker City
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Bancorp in California.
There have been no significant changes in the Corporation’s funding activities and strategy disclosed in the Management Discussion and Analysis included in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003. Also, there have been no significant changes in the Corporation’s off-balance sheet arrangements and aggregate contractual obligations since the end of 2003. Refer to note 8 to the unaudited consolidated financial statements for the Corporation’s involvement in certain commitments at June 30, 2004.
Risks to Liquidity
The Corporation’s ability to compete successfully in the marketplace for deposits depends on various factors, including service, convenience and financial stability as reflected by operating results and credit ratings (by nationally recognized credit rating agencies). Although a downgrade in the credit rating of the Corporation may impact its ability to raise deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured and this is expected to mitigate the effect of a downgrade in credit ratings.
Institutional lenders tend to be sensitive to the perceived credit risk of the entities to which they lend, and this exposes the Corporation to the possibility of having its access to funding affected by how the market perceives its credit quality; this in part, may be due to factors beyond its control.
Changes in the credit rating of the Corporation or any of its subsidiaries to a level below “investment grade” may affect the Corporation’s access to the capital markets. The Corporation’s counterparties are sensitive to the risk of a rating downgrade. In the event of a downgrade, it may be expected that the cost of borrowing funds in the institutional market would increase. In addition, the ability of the Corporation to raise new funds or renew maturing debt may be more difficult.
The Corporation and BPPR’s debt ratings at June 30, 2004 were as follows:
The ratings above are subject to revisions or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
Some of the Corporation’s borrowings and deposits are subject to “rating triggers”, contractual provisions that accelerate the maturity of the underlying obligations in the case of a change in rating. Therefore, the need for the Corporation to raise funding in the marketplace could increase more than usual in the case of a rating downgrade. The amount of obligations subject to rating triggers that could accelerate the maturity of the underlying borrowings was $231 million at June 30, 2004.
In the course of borrowing from institutional lenders, the Corporation has entered into contractual agreements to maintain certain levels of debt, capital and non-performing loans, among other financial covenants. If the Corporation were to fail to comply with those agreements, it may result in an event of default. Such failure may accelerate the repayment of the related borrowings. An event of default could also affect the ability of the Corporation to raise new funds or renew maturing borrowings. The Corporation is currently in full compliance with all financial covenants in effect and expects to remain so in the future. At June 30, 2004, the Corporation had outstanding $825 million in obligations subject to covenants, including those which are subject to rating triggers and those outstanding under the commercial paper program.
The Corporation believes that there have been no significant changes in liquidity risk compared with the disclosures in Popular, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting
There have been no changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the six-month period ended on June 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the financial position and results of operations of the Corporation.
Item 2. Changes in Securities , Use of Proceeds and Issuer Purchases of Equity Securities
On May 12, 2004, the Corporation announced that the Corporation’s Board of Directors authorized a stock split in the form of a stock dividend of one additional share of common stock for each common stock share held as of the record date of June 18, 2004. The new shares were distributed on July 8, 2004.
Effective April 30, 2004, the Corporation’s Restated Certificate of Incorporation was amended to increase the number of authorized shares of Common Stock from 180,000,000 to 470,000,000 and the number of authorized shares of Preferred Stock from 10,000,000 to 30,000,000 shares. For additional information regarding the increased number of authorized shares of Common and Preferred Stock, refer to the Corporation’s definitive proxy statement, dated March 17, 2004, filed with the Securities and Exchange Commission.
There were no issuer purchases of equity securities during the quarter ended June 30, 2004.
Item 4. Submission of Matters to a Vote of Security Holders
The annual Shareholders Meeting of Popular, Inc. was held on April 30, 2004. A quorum was obtained with 122,171,232.420 shares represented in person or by proxy, which represented approximately 91.86% of all votes eligible to be cast at the meeting. Three Directors of the Corporation, José B. Carrión Jr., Manuel Morales Jr. and José Vizcarrondo, were elected for a three-year term. Two Directors of the Corporation, María Luisa Ferré and Frederic V. Salerno, were elected for a one-year term. The following directors were not up for reelection and continued to hold office after the meeting: Juan J. Bermúdez, Richard L. Carrión, Francisco M. Rexach Jr. and Félix J. Serrallés Jr. The ratification of PricewaterhouseCoopers LLP as the Corporation’s registered independent public accounting firm for 2004 was also approved at the Annual Meeting. The result of the voting on each of the proposals is set forth below:
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Proposal 1: Election of three (3) Class 2 Directors:
Proposal 2: Election of one (1) Director to fill a vacancy as Class 3 Director and reassignment of one (1) Director from Class 1 to Class 3, and thereby cause Class 3 to have the same amount of Directors as the other two classes:
Proposal 3: Ratification of the appointment of PricewaterhouseCoopers LLP as the Corporation’s registered independent public accounting firm for 2004:
Proposal 4: Amendment of Article Fifth of the Restated Articles of Incorporation to increase the authorized number of shares of Common Stock, par value $6, from 180,000,000 to 470,000,000:
Proposal 5: Amendment of Article Fifth of the Restated Articles of Incorporation to increase the authorized number of shares of Preferred Stock without par value from 10,000,000 to 30,000,000:
Proposal 6: Amendment of Article Eighth of the Restated Articles of Incorporation to eliminate the requirement that the total number of Directors shall always be an odd number:
Proposal 7: Approval of the Corporation’s 2004 Omnibus Incentive Plan:
Item 5. Other Events
On July 14, 2004, the Board of Directors of Popular, Inc. appointed Mr. William J. Teuber, Jr. as an independent director, commencing on November 1, 2004. Mr. Teuber is currently Executive Vice President and Chief Financial Officer at EMC Corporation. EMC Corporation and its subsidiaries design, manufacture, market and support products and services for the storage, management and protection of information.
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Mr. Teuber will also serve as member of the Audit Committee of the Board. This appointment reflects the Corporation’s continued commitment to strong corporate governance.
On July 30, 2004, Levitt Mortgage Corporation, a direct subsidiary of Popular, Inc., merged with Popular Mortgage, Inc., a subsidiary of Banco Popular de Puerto Rico. Levitt will continue offering its products and services to its Puerto Rico customers as Levitt Mortgage, a Division of Popular Mortgage.
In March 2004, Popular, Inc. and Quaker City Bancorp, Inc. jointly announced the signing of a definitive merger agreement pursuant to which Popular, Inc. will acquire all of the common stock of Quaker City Bancorp, Inc. On August 5, 2004 the Federal Reserve Board announced its approval of the transaction which is expected to be completed on September 1, 2004. Quaker City Bancorp, Inc. is a savings and loan holding company for Quaker City Bank, based in Whittier, California.
Item 6. Exhibits and Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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