2002 Annual Report
Financial Highlights
Our Creed, Our People,
Institutional Values,
Strategic Objectives
Letter to Shareholders
Our Business
Puerto Rico
United States
Processing
Our Community
Senior Management Council
Management Group
Boards of Directors
Financial Information
1
2
3
7
8
14
18
22
25
26
27
28
P O P U L A R , I N C .
Popular, Inc., a financial holding company with $33.7 billion in assets, is a complete financial services
provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As
the leading financial institution in Puerto Rico, the Corporation offers full retail and commercial
banking services through its main subsidiary, Banco Popular, as well as investment banking,
auto and equipment leasing and financing, mortgage loans, consumer lending, insurance and
information processing through specialized subsidiaries. In the United States, the Corporation has
established the largest Hispanic financial services franchise, providing complete financial solutions
to all the communities it serves. The Corporation continues to use its expertise in technology
and electronic banking as a competitive advantage in its Caribbean and Latin America expansion,
and is exporting its 109 years of experience to the region. Popular, Inc. has always been committed
to meeting the needs of retail and business clients through innovation, and to fostering growth in
the communities it serves.
P O P U L A R , I N C .
REVENUE BY LINE OF BUSINESS
percentage
ASSETS BY GEOGRAPHICAL AREA
percentage
(cid:127) Puerto Rico: 66.27%
(cid:127) United States: 31.60%
(cid:127) Caribbean and
Latin America: 2.13%
(cid:127) Retail and Commercial
Banking: 69.11%
(cid:127) Mortgage and Consumer Lending:
15.66%
(cid:127) Processing: 6.04%
(cid:127) Auto and Equipment Leasing
and Financing: 5.05%
(cid:127) Investment: 1.78%
(cid:127) Insurance: 1.11%
(cid:127) Other: 1.25%
F I N A N C I A L H I G H L I G H T S
(Dollars in millions except per share data)
2002
2001
Net Interest Income
Non-Interest Income
Net Income
Assets
Net Loans
Deposits
Shareholders’ Equity
Market Capitalization
Return on Assets (ROA)
Return on Equity (ROE)
Per Common Share
Net Income
Book Value
Market Price
$ 1,180.3
523.7
351.9
$ 33,660.4
19,582.1
17,614.7
2,410.9
$ 4,476.4
1.11%
16.29%
$
2.61
18.20
33.80
$ 1,077.0
471.6
304.5
$ 30,744.7
18,168.6
16,370.0
2,272.8
$ 3,965.4
1.09%
14.84%
$
2.17
15.93
29.08
$
2000
982.8
464.1
276.1
$ 28,057.1
16,057.1
14,804.9
1,993.6
$ 3,578.1
1.04%
15.00%
$
1.97
13.92
26.31
2 0 0 2 A N N U A L R E P O R T
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O U R C R E E D
Social Commitment
I N S T I T U T I O N A L VA L U E S
We are committed to work actively in promoting
the social and economic well-being of the
communities we serve.
Customer
We achieve satisfaction for our customers and
earn their loyalty by adding value to each
interaction. Our relationship with the customer
takes precedence over any particular transaction.
Integrity
We are guided by the highest standards of ethics,
integrity and morality. Our customers’ trust is of
utmost importance to our institution.
Excellence
We believe there is only one way to do things:
the right way.
Innovation
We foster a constant search for new solutions
as a strategy to enhance our competitive
advantage.
Our People
We strive to attract, develop, compensate
and retain the most qualified people in a work
environment characterized by discipline and
affection.
Shareholder Value
Our goal is to produce high and consistent
financial returns for our shareholders, based on
a long-term view.
Banco Popular is a local institution dedicating its efforts
exclusively to the enhancement of the social and economic
conditions in Puerto Rico and inspired by the most sound
principles and fundamental practices of good banking.
Banco Popular pledges its efforts and resources to the
development of a banking service for Puerto Rico within
strict commercial practices and so efficient that it could
meet the requirement of the most progressive community
of the world.
These words, written in 1928 by Don Rafael Carrión
Pacheco, Executive Vice President and President
(1927–1956), embody the philosophy of Popular, Inc.
O U R P E O P L E
The men and women who work for our institution, from
the highest executive to the employees who handle the
most routine tasks, feel a special pride in serving our
customers with care and dedication. All of them feel the
personal satisfaction of belonging to the “Banco Popular
Family”, which fosters affection and understanding among
its members, and which at the same time firmly complies
with the highest ethical and moral standards of behavior.
These words by Don Rafael Carrión Jr., President and
Chairman of the Board (1956–1991) were written in 1988 to
commemorate the 95th anniversary of Banco Popular de
Puerto Rico, and reflect our commitment to human
resources.
S T R AT E G I C O B J E C T I V E S
Puerto Rico Fortress
Strengthen our competitive position in our main market
by offering the best and most complete financial services
in an efficient and convenient manner. Our services will
respond to the needs of all segments of the market in
order to earn their trust, satisfaction and loyalty.
PanAmerican Bank
Expand our franchise in the United States by offering the
most complete financial services to the communities we
serve while capitalizing on our strengths in the Hispanic
market, and in the Caribbean, using our technological
advantage.
Processing
Provide added value to our customers by offering
integrated technology solutions and financial transaction
processing.
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P O P U L A R , I N C .
L E T T E R T O S H A R E H O L D E R S
The year 2002 was one of difficult decisions
and an uncertain economic environment. We
witnessed an aggressive rate-cutting campaign
by the Federal Reserve, which culminated in
a 1.25% overnight lending rate, the lowest in
over 40 years. The year also experienced uneven
economic growth, weakness in several sectors of
the economy, aggressive competition, the lingering
effects of terrorism and general uncertainty in the
financial markets. Notwithstanding this difficult
business environment and the specific challenges
we faced, at year-end Popular reported net income
of $351.9 million, an increase of 16% over 2001.
Earnings per common share (EPS) totaled $2.61,
compared to $2.17 for the previous year. The
Corporation’s total assets increased 9% to
$33.7 billion by the end of the year. In terms
of profitability, these results yielded a return
on assets (ROA) of 1.11% and a return on equity
(ROE) of 16.29%.
In May 2002 the Corporation repurchased
4.3 million shares of its common stock from
Banco Popular’s Retirement Plan. Earnings
retention and a favorable change in the value of
securities available-for-sale compensated
these capital reductions.
Richard L. Carrión
Chairman
President
Chief Executive Officer
At December 31, 2002, Popular’s stock
(BPOP) closed at $33.80, an increase of 16%
over the closing price for 2001. Over a 10-year
period, our stock’s total return has averaged
18.89% annually, outperforming broad and
industry-specific market indexes.
Customer
Finding ways to strengthen and add value to
each customer’s relationship with Popular is
essential to our growth strategy. To this purpose,
in Puerto Rico we successfully introduced
PREMIA, a unique loyalty program in which
clients accumulate points for acquiring,
maintaining and using products and services
from the Popular brand, rewarding customers
for a wide array of financial relations. The
program has enjoyed great acceptance among
our customers and exceeded its first-year goals
after only six months. At year-end we had more
than 145,000 enrolled and active members.
We are confident of the continuing success of
the PREMIA program as a value-adding feature
to the relationship with our customers in Puerto
Rico. Likewise, it provides us with a tool
to increase our customers’ share of wallet and
encourages retention among our extensive
customer base.
In the continental United States a recently
introduced image initiative, “Popularity”, was
developed to expand the Banco Popular brand.
Banco Popular North America (BPNA) strives
to serve and expand its customer base, not only
within the Hispanic community, but also to
other individual and commercial customers with
diverse cultural backgrounds, while maintaining
its personalized attention, professional guidance
and corporate values.
Social Commitment
Reflecting one of our institutional values, Popular
has always made it a priority to make financial
services accessible to everyone. Starting with
our Banco Rodante (Bank-on-Wheels) initiative
in 1951, when we brought the bank to rural
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P O P U L A R , I N C .
L E T T E R T O S H A R E H O L D E R S
unbanked communities throughout Puerto Rico,
Banco Popular de Puerto Rico (BPPR) has always
been committed to the promotion of savings.
Today, we are proud to report that the El Banco en
la Comunidad (Bank in the Community) initiative
has produced very positive results for the second
consecutive year. As part of these efforts to
bring basic financial services and to educate
the unbanked sector about the benefits of
saving for the future, our employees visited
480 low-income communities in Puerto Rico
and opened approximately 100,000 accounts of
Acceso Popular, an account tailored to meet the
needs of this segment. Most significantly, over
75% of these customers have activated the savings
section of this account. We are extremely proud
of these accomplishments, and we reaffirm our
dedication to promote financial access and to
serve the underserved.
Innovation
Popular is at the forefront of advancements in
the financial services industry. We have employed
our creativity to evolve in tandem with our
community and to jointly reap the benefits of
innovation. We have also pursued technological
innovation to diversify our business and to offer
more and better services to our clients.
An important area of technological innovation
is our Internet banking initiative, Mi Banco
Popular, which by the end of the year had 150,000
registered clients. During 2002 we improved its
performance and browsing capabilities, providing
our customers with a first-class Internet banking
experience. We also expanded this service to
support small and mid-size businesses, as well
as mortgage and credit card customers. We
are very pleased with the positive response and
the increased level of satisfaction among our
Internet-using customers after these upgrades.
We further enhanced Mi Banco Popular by
adding the first set of outside merchants to the
online electronic billing and payment feature
first introduced in 2001. In 2003, we will continue
to expand the number of merchants subscribed to
this service so that our customers can conveniently
receive, review and pay most of their bills over
the Internet.
This year marked the introduction of another
innovative project: ticketpop, a ticket-processing
service. During the first quarter of 2002, we
completed the in-house development of this
multichannel ticket sale and distribution system
that supports phone, in-person and Internet sales.
Ticketpop has been operational since September
2002 and at year-end had sold approximately
90,000 tickets. This exemplifies how our payment
processing expertise can be leveraged to generate
new sources of revenue as we provide our
customers added convenience.
Shareholder Value
We are continuously seeking to maximize our
resources and the returns to our shareholders.
To this purpose we decided to restructure Popular
Finance, our small loans subsidiary in Puerto
Rico. This process has resulted in revamped
systems, processes, operating environment and
business strategy, as well as in a reduction in
the number of branches. By taking advantage of
BPPR’s core systems, loan origination, collections,
accounting and communications, Popular Finance
is now positioned to absorb higher loan origination
numbers, offer new products and services and
improve loan quality.
Our expansion in the continental United
States is at the center of our growth strategy and
our long-term vision. This year we launched a
new strategic initiative for BPNA, “A New Day”,
through which we communicated to BPNA’s
employees the Bank’s vision, new organizational
structure and business strategy in our effort
to become the premier community bank in all the
markets we serve in the United States.
Following the consolidation and strengthening
of our operational platform and product offerings
in 1999, during 2002 we centralized the support
areas of BPNA in its new headquarters in
Rosemont, Illinois. As part of these reorganization
efforts we had to make the difficult, but necessary
AVERAGE ANNUAL RETURN
including dividend and
dividend reinvestment
percentage
21.4
21.7
20.0
18.9
10
years
15
years
20
years
25
years
25
20
15
10
5
0
P 4
20 YEARS OF GROWTH
dollars in millions
40,000
400
35,000
350
30,000
300
25,000
250
20,000
200
15,000
150
10,000
100
5,000
50
0
83
(cid:127) Assets
(cid:127) Net Income
02
decision of reducing headcount by 20%. These
organizational and operational changes, together
with the efforts of our entire U.S. team, are
producing very positive results as the net income
from our United States operations increased by
$41 million over 2001.
Excellence
We strive for excellence in everything we do.
Continuing with that tradition, this year we started
an initiative to measure customer satisfaction
levels across all of Popular’s businesses in Puerto
Rico. The constant measurement and monitoring
of customer satisfaction levels will be a valuable
tool in focusing our efforts in our principal goal,
exceeding our clients’ expectations.
In Banco Popular North America, we shifted
our retail and business banking focus from
price, products and operations to customer, sales,
service and profitability. Through the new “Quest
for Success” program we developed sales and
service training, a performance management
program, and incentive and recognition programs
that stimulate a sales and service culture. These
initiatives resulted in a 178% increase in sales
per banker. We believe that these efforts provide
our institution with the right tools to continue
our quest for excellence.
Our People
Our continued success as a company derives from
the efforts of nearly 11,000 employees who work
every day sharing the same vision, values and
commitment. We are especially grateful to those
who dedicate their career to our institution and
through their contribution leave an indelible mark
on the Popular family.
During 2002, Larry B. Kesler announced
his retirement as Executive Vice President of the
Retail Credit Group after 16 years of service. We
are extremely grateful for his contributions and
valuable accomplishments during this time. Larry
will continue his collaboration with our Corporation
as a consultant to Popular Insurance, Equity One
and Banco Popular’s Virgin Islands operations.
Guillermo Martínez, GM Group’s founder,
Chief Executive Officer and Chairman of the
Board of Directors, also announced his retirement
effective November 30, 2002. We will be forever
grateful to Guillermo for his drive and vision
which helped position GM Group as the leader in
the processing industry in Puerto Rico, the
Caribbean and Latin America. Guillermo will
continue as a member of the Board of Directors of
Banco Popular.
Carlos Colino, previously the Chief Executive
Officer of Servicios Electrónicos Globales
(E-GLOBAL), a payment systems and electronic
banking company in Mexico, assumes the
position of GM Group’s Chief Executive Officer
and Chairman of its Board of Directors. Carlos
was also named Executive Vice President of
Popular and member of our Senior Management
Council. Walter Cervoni, previously GM Group’s
Senior Vice President, assumed the role of
GM Group’s President.
Integrity
Since our beginnings 109 years ago, Popular
has been committed to the prosperity of the
communities where we do business. In achieving
our business goals, we have conducted our
dealings with a code of ethics built on the solid
foundation laid by our predecessors. The integrity
of our business is and always will be one of our
most esteemed institutional values. These core
values remain constant and have guided us
through the cycles of the business environment.
Our values and our traditions have provided
us a strong platform from which to overcome
significant challenges during the year.
In early 2003, Banco Popular de Puerto Rico
reached a Deferred Prosecution Agreement (DPA)
with the U.S. Department of Justice, the Board
of Governors of the Federal Reserve System,
and the Financial Crimes Enforcement Network
of the U.S. Department of Treasury (FINCEN). In
accordance with this Agreement, the Government
filed an information single count of failure to file
Suspicious Activity Reports (SARs) in a timely
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P O P U L A R , I N C .
L E T T E R T O S H A R E H O L D E R S
a statement of fact contained in the Factual
Statement, Banco Popular may avoid breach
of this Agreement by publicly repudiating such
statement within 48 hours after notification by
the United States.” For this reason, we believe
that it is not prudent to make any public comment
that may be misconstrued as a breach of the
Deferred Prosecution Agreement.
I want to stress that through the lengthy and
comprehensive investigation, no current or former
officer, director or employee of BPPR was found
by any of the Federal agencies to have benefited
financially from the situation described in
the Agreement. This Agreement closes a difficult
chapter in our history as an institution and is
another example of the difficult decisions that
we faced in 2002. Reaching this Agreement
with the Federal authorities was a painful step,
but we decided that the alternative of a court case
would subject the Bank to many months of
negative publicity and would continue to drain
managerial and financial resources.
It has been a difficult year and 2003 promises
to be full of challenges as well. We feel blessed
with people committed to our Vision and our
Values. We are confident that we will continue
to thrive.
Richard L. Carrión
Chairman
President
Chief Executive Officer
and complete manner, primarily in relation to
a former client’s activities and some others.
Consequently, BPPR agreed to forfeit $21.6
million connected to certain former clients’ trans-
actions. This Agreement concludes a three-year
investigation of anti-money laundering compliance
issues in our organization and resolves all
claims in this matter against BPPR. The Deferred
Prosecution Agreement also terminates
a previous Written Agreement signed with the
Federal Reserve Bank of New York in 2000,
which required enhancements to our anti-money
laundering and Bank Secrecy Act programs.
The Federal Reserve found us to be fully
compliant with this Written Agreement on
November 26, 2001. Recognizing that the Bank
accepted responsibility and took the necessary
corrective measures, the Government has post-
poned any action for 12 months at which time all
charges will be dismissed provided that the Bank
fulfills its commitments under the Deferred
Prosecution Agreement.
The third clause of the Deferred Prosecution
Agreement states that “Banco Popular expressly
agrees that it shall not, through its attorneys,
board of directors, agents, officers or employees,
make any public statement contradicting
any statement of fact contained in the Factual
Statement. Any such contradictory public
statement by Banco Popular, its attorneys, board
of directors, agents, officers or employees, shall
constitute a breach of this Agreement as governed
by Paragraph 12 of this Agreement, and Banco
Popular would thereafter be subject to prosecution
pursuant to the terms of this Agreement. The
decision of whether any statement by any
such person contradicting a fact contained in
the Factual Statement will be imputed to Banco
Popular for the purpose of determining whether
Banco Popular has breached this Agreement
shall be in the sole discretion of the United
States. Upon the United States’ notification to
Banco Popular of a public statement by any
such person that in whole or in part contradicts
RETURN TO SHAREHOLDERS
1986=100
900
800
700
600
500
400
300
200
100
0
02
83
(cid:127) BPOP
(cid:127) S&P Bank Index
(cid:127) S&P 500 Index
P 6
Puerto Rico
United States
Processing
As a result of the combined efforts of nearly 11,000 people at Popular, we successfully
grew earnings by 16% and assets by 9% to $34 billion in 2002. But our
success in maximizing our relationship with existing customers and establishing relationships
with prospective customers cannot be measured in numbers alone. This commitment
to the people has spurred innovation in products and services, and expanded
coverage in Puerto Rico, the United States, the Caribbean and Latin America. We believe
that as long as our Puerto Rico, United States and Processing businesses are oriented to our
customers, their communities and their needs, we will continue to achieve our goals.
2 0 0 2 A N N U A L R E P O R T
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P O P U L A R , I N C . P U E R T O R I C O
D I S T R I B U T I O N N E T W O R K
Banco Popular
Popular Finance
• 195 branches in Puerto Rico
• 8 branches in Virgin Islands
• 10 Commercial Banking
Centers
• Mi Banco Popular
(Internet banking)
• TeleBanco Popular
• 30 offices
• 7 mortgage centers
Popular Mortgage
• 29 mortgage centers
• 22 locations in BPPR branches
(24-hour phone banking)
Popular Auto
• 551 ATMs
• 27,263 Point-of-Sale
Terminals
• 8 offices
• 10 daily rental centers
Popular Securities
Popular Insurance
• 5 investment centers
• 47 locations in BPPR branches
• 2 offices
• 15 locations in BPPR branches
The foundation of the Corporation is our operations in Puerto Rico.
We are firmly committed to bring the most modern and sophisticated financial services
to all clients, from the unbanked individual to the largest institution. Through continuous
technological and product innovation, we provide the best products and services to all our
clients. We believe that each client’s relationship adds value to our Corporation, and we
strive every day to make those relationships with Popular stronger and more rewarding
for each client.
2 0 0 2 A N N U A L R E P O R T
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P U E R T O R I C O
Popular’s main subsidiary, Banco Popular de
Puerto Rico, is the largest commercial bank
in Puerto Rico with $12.8 billion in deposits
and $10.3 billion in loans. It offers retail and
commercial clients a full range of financial
services through its extensive multichannel
distribution network, including 195 branches,
551 ATMs, a 24-hour call center and the online
banking site Mi Banco Popular.
Banco Popular continued its commitment to
provide financial advice to the unbanked segment
conducting 480 El Banco en la Comunidad activi-
ties throughout the island. Acceso Popular, a low-
cost transaction account tailored to meet the needs
of the unbanked segment, finished the year with
approximately 100,000 new accounts, a 69%
increase over new account openings reported
in 2001.
Banco Popular launched PREMIA, an
innovative corporate rewards program that enables
clients to accumulate points for acquiring and
using a variety of Popular’s financial products
and services. This unique program enhances the
value of the Corporation’s diversity of offerings.
In addition, PREMIA is aligned with the initiative
to migrate clients to electronic channels. It
encourages the use of our electronic products
and services by rewarding clients for its usage.
The accumulated points are redeemable for
airline tickets, merchandise and prepaid
ATM cards, among many other alternatives. At
year-end, PREMIA had over 145,000 registered
clients and had awarded over 500 million points.
Mi Banco Popular (www.bancopopular.com)
reached 150,000 registered users in 2002. The
performance and browsing capabilities of the
website were upgraded during the year, and
were expanded to support small and mid-sized
businesses as well as credit card and mortgage
customers. Mi Banco Popular was further enhanced
by adding the first set of outside merchants to
the online electronic billing and payment feature
first introduced in 2001. This service will expand
during 2003 to include additional merchants.
In addition, Banco Popular’s Commercial
Banking group continued to offer the broadest
array of financial services available in the local
market. During 2002, the institution promoted the
use of online services by introducing a redesigned
“PREMIA is one of a kind. As a member of other programs
I recognize the uniqueness of PREMIA. Being a client of
Banco Popular has always been rewarding. Now, I enjoy all
the benefits this program offers for what I do every day.”
Ilsa López
P O P U L A R , I N C .
P 1 0
BPPR TRANSACTIONS
in millions
400
300
200
100
0
97 98 99 00 01 02
93
94
95 96
(cid:127) Electronic Transactions
(cid:127) Items Processed
commercial ATM card and the launch of Pagos
de Estaciones Remotas (PER), a unique software
that allows clients to make utilities bill payments
online using the Bank’s network. Banco Popular is
the only local institution currently providing this
service. Banco Popular also leads in loans granted
under the Small Business Administration program,
collaborating to develop local investment in small
and growing businesses.
Popular conducts its banking business in
other Caribbean islands through Banco Popular
Virgin Islands. With eight branches in the U.S.
and British Virgin Islands, a team of more than
220 employees, deposits totaling $800 million
and approximately $700 million in assets at
year-end, Banco Popular has established itself
as the leading financial institution in the region.
Popular Mortgage, one of the leading
mortgage banks in Puerto Rico, experienced
another outstanding year. As a result of the
continued low interest rates, an aggressive
customer-centered marketing strategy and the
continued growth of its distribution network,
Popular Mortgage originated over $1.4 billion
in mortgage loans.
As part of its technology and customer-oriented
strategies, during 2002 Popular Mortgage introduced
“Instant Pre-Approval”, an Internet-based
application that provides a preapproval in five
easy steps. Popular also introduced Pago Flexible,
a mortgage loan with a flexible payment schedule.
With these two new products, Popular Mortgage
continues to expand its services and to provide
greater convenience, flexibility and value to its
customers. Popular Mortgage also opened four new
mortgage centers, for a total of 29.
Popular Auto completed its first year of
consolidated operations after the merger between
Banco Popular’s Auto Loan Division and Popular
Leasing. This subsidiary, with a team of more than
340 employees, offers individual and commercial
clients a wide range of auto and equipment
leasing and financing options as well as daily
rental of automobiles and trucks. At year-end,
Popular Auto’s portfolio surpassed $1 billion in
assets. It currently has eight sales and service
centers where it offers clients complete equipment
and auto leasing and financing solutions, and 10
daily rental offices with a fleet of more than 1,100
passenger vehicles and commercial units to
“Our dealings with Popular Mortgage were very easy and
straightforward. We were able to do all transactions over the
phone. Their service was excellent, and they even helped us by
offering different financing options. These alternatives resulted
in lower mortgage costs to us.”
Frances Pedraza and Irán Rivera
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P O P U L A R , I N C . P U E R T O R I C O
complement its auto loan and leasing services.
The efforts of all its employees and effective
marketing strategies throughout the year were
fundamental in the successful completion of the
merger, in the attainment of $610.9 million
in loan and lease origination volumes and in
the reaffirmation of Popular Auto’s leadership
position in this market.
institutions, mutual funds, pension funds and
large companies. Clients include the Government
of Puerto Rico and a range of local, national and
international companies. By year-end, Popular
Securities had participated in the underwriting
and distribution of stock and bond issues totaling
$11.1 billion, an increase of 35% from $8.2
billion in 2001.
Popular Securities offers brokerage and
In October 2002, Popular Securities issued
investment banking services to both retail
and institutional clients. In total, assets under
management surpassed $3 billion at year-end.
Through its retail business, Popular Securities
offers individuals financial advisory and
full investment services, including the sale of
securities, through more than 80 financial
consultants available at most Banco Popular
branches, five investment centers and its website,
www.popularsecurities.com.
On the institutional side, Popular Securities
underwrites stock and bond issues and offers
advisory services to public and private entities,
providing investment expertise to local financial
the Popular High Grade Fixed-Income Fund,
a high-quality mutual fund specifically designed
for investors who are residents of Puerto Rico.
The Fund, which offers a unique combination
of tax advantages, exceeded $150 million
in total assets as of December 31, 2002.
Popular Asset Management, a division of
Banco Popular, offers professional investment
and money management services to institutional
clients. It serves as investment adviser for
11 investment mutual funds, including the new
Popular High Grade Fixed-Income Fund and
two IRA funds. It also manages investments for
public and private pension funds, academic
endowments, charitable foundations, labor
“Popular Auto helps Gómez Hermanos Kennedy, Inc., our car
dealership, in two ways. They provide us with floor plan financing
and give my clients auto loans with exceptional service and the
best rates. As a result, Popular Auto makes the experience of
buying a car with us a very pleasant one. We both benefit from
our relationship.”
Víctor M. Gómez III
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ASSETS BY LINE OF BUSINESS
percentage
(cid:127) Retail and Commercial
Banking: 73.94%
(cid:127) Mortgage and Consumer Lending:
17.48%
(cid:127) Investment: 3.86%
(cid:127) Auto and Equipment Leasing
and Financing: 3.67%
(cid:127) Insurance: 0.09%
(cid:127) Other: 0.96%
unions and private corporations. At the end of
2002 it had more than $2.5 billion assets under
management.
Popular Insurance, a general agency
established in 2000, offers insurance products
and services to retail and commercial clients
and represents over 80 insurance companies
in Puerto Rico and the U.S. Virgin Islands.
At the end of 2002, the agency had subscribed
over $125 million in premiums.
During 2002, Popular Insurance continued
its expansion by placing additional representatives
through Banco Popular’s branch network,
increasing to 15 the permanent branch locations.
In addition, Popular Insurance announced the
acquisition of two insurance agencies in Puerto
Rico, Del Nido & Associates and Life Insurance
Services, Inc., adding to the current product
offering, client base and available resources of
Popular Insurance. With the acquisitions
and the launching of the life insurance agency
to complement the established business, Popular
Insurance is now positioned as one of the leading
insurance marketing organizations in Puerto Rico.
Popular Finance, which offers small personal
and mortgage loans, restructured its operations.
As a result, the office network now stands
at 30 offices and seven mortgage centers in 25
Puerto Rico municipalities.
As part of the reorganization efforts, Popular
Finance enhanced its operational systems
to improve customer service and expand loan
origination capabilities.
In May, Popular Finance established Popular
Sales Credit, an indirect financing service offered
through authorized dealers. This new credit
product provides an additional source of income
to complement the revenues generated by its
loan products and its fee income services such
as bill payment and money order sales.
“Laboratorio Borinquen was founded 31 years ago. We started
with one clinical laboratory and now own 17. Without Banco
Popular we would not be where we are now. In the beginning,
when we needed the most financial support, they gave us
their trust. Since then they have always been willing to help us.”
Delia Manrique de Whitlock
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P O P U L A R , I N C . U N I T E D S T A T E S
D I S T R I B U T I O N N E T W O R K
Banco Popular North America
Equity One
• 96 branches in 6 states
• 153 offices in 26 states
• Telephone Banking
• Popular Net Banking
Popular Leasing, U.S.A.
(Internet Banking)
• 13 offices in 11 states
• 131 ATMs
• 542 Point-of-Sale Terminals
Popular Cash Express
• 136 stores
• 59 mobile units
Popular Insurance, U.S.A.
• 1 office
Our business in the continental United States grows stronger and
broader every year. What began as an attempt to capitalize on the potential of the
Hispanic market has expanded beyond this community. We have established ourselves
as a dependable source of financial services for the entire market because of our
superior service, full product offerings, and convenient locations. Our continued
success in the United States will contribute significantly to the future growth of
our Corporation.
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U N I T E D S TAT E S
Banco Popular North America (BPNA) is the
largest Hispanic-owned bank in the United States
with assets totaling $5.7 billion and more
than 350,000 customers. BPNA is a full service
commercial and relationship-oriented Bank,
offering a wide array of credit and deposit products
to both individual and business clients throughout
96 branches located in New York, New Jersey,
Florida, Texas, Illinois and California. BPNA is
an important small business lender in all of its
markets, ranking among the top 10 Small Business
Administration (SBA) lenders in the country.
The year 2002 was a turnkey year for the
organization. Early in the year, BPNA announced
a series of strategic initiatives under the
theme “A New Day”. The principal objective
was to communicate to its employees a revised
management organization, a new three-year strategic
plan, and the roadmap to achieve its new vision:
to become the premier community bank in
the markets it serves while leveraging its unique
Hispanic opportunities.
As part of its “New Day” efforts, BPNA
centralized back office and support areas in its
new Rosemont, Illinois, headquarters. A thorough
revision of back office and branch processes
led to an important re-engineering effort aimed
at creating the foundation to support significant
business growth and further efficiency improve-
ments. These efforts resulted in significantly lower
expenses in the back office and branch areas and
helped increase net income by more than 100%.
BPNA also launched “Popularity”, an
institutional advertising campaign featuring
actual customers. The campaign showcases the
Bank’s diverse customer base and is aimed at
expanding the Bank’s brand appeal to all segments
of its markets. The campaign’s theme “Make
Dreams Happen” is consistent with BPNA’s focus
on working class neighborhoods and its commitment
to its customers’ individual needs.
“Aspire is a non-profit agency serving individuals with
development disabilities. For us to have a Bank that has the
capacity to meet our growing needs is a crucial component
of our working relationship. Banco Popular takes away
the hassle of managing a very large agency.”
Ann M. Shannon
P O P U L A R , I N C .
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BANCO POPULAR NORTH AMERICA
RETAIL AND COMMERCIAL
BANKING ASSETS
dollars in millions
93
94
95 96
97 98 99 00 01 02
6,000
5,000
4,000
3,000
2,000
1,000
0
Popular Cash Express (PCE) complements
Popular Leasing, U.S.A., with headquarters
in Ellisville, Missouri, offers small-ticket
equipment leasing and specifically targets
medical vendors to provide medical equipment
leasing. With 13 branches in 11 states, clients
are able to access information as well as submit
applications online through Popular Leasing’s
website, www.popularleasingusa.com. Total
assets increased by 8%, reaching $149 million
at year-end.
Popular Insurance, U.S.A., the insurance
subsidiary in the United States, offers insurance
and investment products through BPNA’s national
branch network. It is licensed as an insurance
agency in 23 states. In its first nine months
of operation, Popular Insurance, U.S.A.’s licensed
sales force grew to 20 representatives. Five
of the six BPNA regions now have licensed
representatives.
Banco Popular North America’s distribution
network by targeting the growing unbanked
segment. It offers a wide range of financial
services to individuals, including check-cashing,
wire transfers, utility payments and money orders.
During 2002, PCE continued its aggressive growth
strategy and closed the year with 136 stores in
California, Florida, Arizona, Texas, New York and
Washington, D.C., as well as 59 mobile units in
the Los Angeles metro area, making PCE the third
largest check-cashing operation in the country.
PCE generated $27.3 million in revenues in 2002,
an 18% increase from the $23.2 million reported
in 2001, and has close to 500,000 customers.
Equity One is a diversified consumer lending
institution offering a complete line of real estate
secured, home improvement and unsecured loan
products. It operates through a network of 153
branches located in 26 states. During 2002 Equity
One fueled its growth through the development of
a Hispanic lending unit and a continued emphasis
on customer service. At year-end its customer
base had grown to 150,000 and its managed
receivables reached $4.9 billion.
“We own Don Pepe’s Cuban Café and Pepito’s Cuban Café.
Banco Popular’s support in the early days gave us a phenomenal
opportunity. The Bank has a family-type environment that’s
still completely professional. When I walk in, they know my
name and that makes all the difference in the world.”
Rubén Pérez
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P O P U L A R , I N C . P R O C E S S I N G
D I S T R I B U T I O N N E T W O R K
Puerto Rico
Caribbean
• 1,261 ATMs
• 46,383 Point-of-Sale
Terminals
Latin America
• ATH Costa Rica
– 530 ATMs
– 4,750 Point-of-Sale
Terminals
• CONTADO, S.A.
– 1,143 ATMs
– 15,867 Point-of-Sale
Terminals
• Banco Popular Virgin Islands
– 12 ATMs
– 1,006 Point-of-Sale
Terminals
Our Processing business reflects the dynamic and innovative character
of Popular. The Corporation continuously leverages its technological expertise to
diversify its businesses and offer the best products and services alternatives to clients.
We are strongly positioned to provide complete processing services, exporting our
capabilities to the various markets we serve including Puerto Rico, the Caribbean and
Latin America. Our incessant efforts to innovate and create new business opportunities
will contribute to our solidification in these and other prospective markets.
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P R O C E S S I N G
GM Group is the leading provider of electronic
banking and information system services across
the Caribbean region. It offers a diverse portfolio
of services through its five main offices in
San Juan, Caracas, Santo Domingo and Miami
and has a presence in 10 different markets: Costa
Rica, Dominican Republic, Venezuela, Haiti,
El Salvador, Honduras, Dominica, Belize,
Nicaragua and Puerto Rico. Services include ATM
network management, data processing, consulting,
software and hardware sales, system design and
implementation, and business recovery services.
GM’s ATM network management business runs
operations in Puerto Rico, Dominican Republic
and Costa Rica under the ATH brand name.
Red ATH continues to be the largest ATM
network in Puerto Rico, with a 16% increase in
total transaction volume. During 2002 the network
reported a 9% increase in ATMs for a total of
1,261, and another 9% increase in point-of-sales
(POS) terminals for a total of 46,383 terminals
managed by the network.
GM Group took advantage of new business
opportunities in Puerto Rico during 2002. Major
developments included the conversion into the
ATH network of three major local banks formerly
affiliated with a competing network, and the
launch of a private label gift card for the largest
shopping center in the Caribbean, which is
accepted in over 100 retail stores. GM Group’s
Electronic Benefits Transfer (EBT) business
continued to solidify in the local market. As part
of its EBT initiatives, GM Group continued to
work with government entities to build technology
solutions, including the development of an
electronic toll payment system, the creation of
automated information networks and government-
benefits debit cards.
During 2002 the Consorcio de Tarjetas
Dominicanas (CONTADO, S.A.), Popular’s
network investment in the Dominican Republic,
increased its penetration through strategic
initiatives. These initiatives included selling
prepaid phone cards through ATMs, implementing
an internal automated accounting system and
connecting Banco de Reservas, the only
“When I returned from the military in 1962, I purchased a truck
and started buying and reselling produce to different small
grocery stores around the island. Banco Popular was there
from the beginning and as Empacadora Hill Brothers grew,
Banco Popular trusted us when we needed them the most.
Today, our business has more than 150 employees and we
continue to have all of our financial relationships with Popular.”
Cecilio Massanet and Emma Rosario
P O P U L A R , I N C .
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NETWORK TRANSACTION
PROCESSING
in millions
350
300
250
200
150
100
50
0
97 98 99 00 01 02
94
95 96
93
(cid:127) ATH Puerto Rico
(cid:127) CONTADO, S.A.
(cid:127) ATH Costa Rica
Dominican Republic Government bank, into the
network. In addition, CONTADO will become the
first provider in Latin America and the Caribbean
to participate in a Visa chip card pilot program
expected to be launched during the first half of
2003. The network connected 1,143 ATMs and
15,867 POS terminals, reflecting a 17% and 37%
growth, respectively, over the previous year.
Total transaction volume increased by 14% for
a total of approximately 44 million transactions.
ATH Costa Rica continued to experience rapid
expansion during 2002. The number of automated
teller machines in the network increased 89%
for a total of 530, while POS terminals grew 7%
to 4,750. POS transactions volume reached
6 million, a 33% increase over the previous year.
As part of its credit card processing business
efforts, the network became the “MasterCard
Issuer Member Service Provider” for the region,
which enabled it to enter into the Belize and
Nicaragua markets.
Banco Popular also launched ticketpop,
a ticket-processing service. This multichannel
ticket sale and distribution system supports
in-person, telephone and Internet sales. Ticketpop
initially formed a strategic alliance with
Caribbean Cinemas, the largest movie theater
chain in the Caribbean, allowing it to sell tickets
at nine movie theaters through ticket-dispensing
machines. In the first eight months of operations,
ticketpop sold approximately 50,000 tickets. In
September 2002, new functionalities were added
to the website www.ticketpop.com to allow clients
to purchase tickets online for concerts, sports, arts
and other special events. Ticketpop sold over
40,000 tickets for these types of events.
“Banco Popular and GM Group have surpassed our expectations
many times. They helped us to install POS terminals directly
to the cash registers, making Mr. Special the first establishment
in Puerto Rico to use this type of technology. That venture
provided substantial savings to us. We are completely satisfied
with the service provided.”
Edwin Alonso
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P O P U L A R , I N C .
POPULAR, INC.
DONATIONS AND SPONSORSHIPS
percentage
(cid:127) Cultural: 50%
(cid:127) Civic/Community: 38%
(cid:127) Educational: 6%
(cid:127) Sports: 6%
O U R C O M M U N I T Y
Popular is much more than a financial institution.
Since its founding 109 years ago, it has been
committed to the social well-being of the
communities it serves. It has supported the
cultural and educational expressions of our people
and has promoted sports as a means to foster the
spirit of achievement among children and youths.
Moreover, Popular has distinguished itself for
implementing community development programs
and initiatives that stimulate the self-sufficiency
and the integration of all sectors of the population
into the banking mainstream.
This social commitment is made evident by
a solid sponsorships and donations program and
by an active participation of employees through
their financial contributions and volunteer
work to numerous non-profit organizations in
our community.
In 2002, Popular donations amounted to
$6.6 million to more than 350 community
organizations. Moreover, it has consistently
invested in the academic development of students
through donations to educational programs and
universities. BPNA, on its part, renewed its
relationship with the Hispanic Scholarship Fund,
and entered into a partnership with the FDIC
to jointly develop the Spanish version of
MoneySmart, a program designed to educate
the Hispanic community about the importance
of financial planning.
Likewise, Popular maintains a firm commitment
to promote the arts by supporting the most
important avenues for artistic expression
in our communities and by contributing to the
presentation of cultural activities. As a legacy to
our music tradition, the 2002 production,
Encuentro, was dedicated to three renowned
The Banco Popular Foundation fosters innovative projects at the
Juan Ponce de León School.
Hispanic songwriters and performers: Rubén
Blades, Juan Luis Guerra and Robi Dräco Rosa.
In this musical production we paid tribute to the
caliber of composition and artistic performance
of three pillars of contemporary Hispanic
music. Part of the proceeds from the sale of the
production is donated to Banco Popular
Foundation for its support of other educational
and community programs.
In addition, for over 23 years, Banco Popular
Foundation has focused on participating actively
and effectively in improving the quality of life
of the communities in Puerto Rico. It
promotes their social well-being through several
projects aimed at improving education, the arts,
community development and the living conditions
of the less privileged. Its main focus is geared
toward education and innovative community
development projects that inspire residents to
strive for excellence.
During 2002, Banco Popular Foundation
granted more than $771,000 to 49 non-profit
entities. Moreover, it participated in programs
aimed at transforming communities, such as
the Community Initiative program, by providing
both financial and legal resources. It also
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P O P U L A R , I N C . O U R C O M M U N I T Y
inaugurated the music center of the Loaíza Cordero
Institute, which fosters musical education among
blind students. The project was funded from the
product of the sale of the Guitarra Mía music
production. Several employees collaborated to
maximize the investment by offering their space-
planning and equipment-purchasing expertise,
which helped create outstanding facilities for
students with special needs. The Foundation also
participated in creating an endowment fund for
the Puerto Rico Music Conservatory, the island’s
foremost music education institution.
Through Banco Popular Foundation’s
Volunteers Program, employees remain committed
to the communities we serve. Every month over
51% of Popular’s employees make a voluntary
contribution to the Foundation through payroll
deductions. In 2002, those contributions amount-
ed to $231,284. In addition, a fund-matching
program was established by which seven
Popular units contributed voluntarily to non-profit
organizations. Those employees contributed a total
of $71,235 and the Foundation matched the full
contribution. Moreover, in 2002 our employees
participated in various volunteer activities, some
of them focused on protecting the environment,
BANCO POPULAR FOUNDATION
DONATIONS
percentage
(cid:127) Community Development: 42%
(cid:127) Education: 29%
(cid:127) Special Needs: 20%
(cid:127) Arts: 9%
Through the Volunteers Program, Popular’s employees dedicated
their time and resources to the cleaning and reforestation of the
Esperanza Beach.
P 2 4
The musical center for visually impaired students at the Loaíza
Cordero Institute was funded with the product of the sale of
the Guitarra Mía music production.
building new housing for the needy, collecting
funds for different social causes and serving
as mentors in schools.
Through the Rafael Carrión Jr. Scholarship
Fund, 175 scholarships totaling $267,100 were
distributed to children of Popular employees and
retirees. In addition, 15 Puerto Rican students
pursuing their Bachelor’s degrees at the Wharton
School of the University of Pennsylvania
have received scholarships from another fund
established in 1994 with a current balance
of $531,294.
Popular and its employees maintain a firm
commitment to actively participate in improving
the social, economic and educational well-being
of their communities. Our contribution to the
social development and the quality of life of the
communities we serve reflects the values that have
defined us as an institution from our beginnings.
P O P U L A R , I N C .
S E N I O R M A N A G E M E N T C O U N C I L
Richard L. Carrión
Chairman
President
Chief Executive Officer
David H. Chafey Jr.
Senior Executive Vice President
Retail Banking
Jorge A. Junquera
Senior Executive Vice President
Chief Financial Officer
María Isabel Burckhart
Executive Vice President
Administration
Carlos Colino
Executive Vice President
GM Group
Roberto R. Herencia
Executive Vice President
North America
Larry B. Kesler
Executive Vice President
Retail Credit
Tere Loubriel
Executive Vice President
Human Resources
Emilio E. Piñero Ferrer, Esq.
Executive Vice President
Commercial Banking
Brunilda Santos de Álvarez, Esq.
Executive Vice President
Legal
Carlos J. Vázquez
Executive Vice President
Risk Management
Félix M. Villamil
Executive Vice President
Operations
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P O P U L A R , I N C .
P O P U L A R , I N C . M A N A G E M E N T G R O U P
PUERTO RICO
Banco Popular
de Puerto Rico
Richard L. Carrión
Chairman
President
Chief Executive Officer
Retail Banking Group
David H. Chafey Jr.
Orlando Berges
Bayamón Region
Jorge Biaggi1
Denise Draper 2
Hato Rey Region
Félix León
Eastern Region
Carlos J. Mangual
Caguas Region
Maritza Méndez
Río Piedras Region
Miguel Ripoll
San Juan Region
Carlos Rodríguez
Western Region
Edgar Roig
Ponce Region
Elí Sepúlveda Jr.
Arecibo/Manatí Region
Juan Guerrero
Financial and Investment
Services
Néstor O. Rivera
Retail Banking
Lizzie Rosso
Alternative Delivery
Channels
Retail Credit Group
Larry B. Kesler 3
David H. Chafey Jr.4
Linda C. Colón
Retail Credit Services
and Subsidiaries
Popular Auto, Inc.
Andrés Morrell
President
Popular Finance, Inc.
Rafael Negrón
President
Fabio García
Individual Lending
Popular Mortgage, Inc.
Silvio López
President
Raúl Colón
Mortgage Servicing
Valentino I. McBean
Virgin Islands Region
Commercial Banking Group
Emilio E. Piñero Ferrer, Esq.
Structured Finance
Yamil Castillo
Construction Loans
Cynthia Toro
Business Banking
Ricardo Toro
Corporate Banking
Financial Management Group
Jorge A. Junquera
Richard Barrios
Investments and Treasury
Luis R. Cintrón, Esq.
Trust
Amílcar L. Jordán, Esq.
Comptroller
Iván Pagán
Acquisitions and
Corporate Investments
Popular Securities, Inc.
Kenneth W. McGrath
President
Administration Group
María Isabel Burckhart
Ginoris López-Lay
Strategic Planning
and Marketing
Olga Mayoral Wilson
Public Relations and
Communications
Jaime L. Nazario Yordán
Corporate Real Estate
1 Until January 1, 2003
2 As of January 16, 2003
3 Until December 31, 2002
4 As of January 1, 2003
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Human Resources Group
Tere Loubriel
UNITED STATES
Legal Group
Brunilda Santos de Álvarez, Esq.
Eduardo J. Negrón, Esq.
Legal
Banco Popular
North America, Inc.
Richard L. Carrión
Chairman
Chief Executive Officer
Operations Group
Félix M. Villamil
Roberto R. Herencia
President
Luis O. Abreu
Operational Financial
Support
José L. Casas
Computer and Network
Services
Ramón L. Meléndez
Programming
Roberto Negrón
Operations
Otto Rosario
Transaction Processing
Héctor Torres
Security
Risk Management Group
Carlos J. Vázquez
Jesús Aldarondo
Operational Risk
Management
Ana Carmen Alemañy
Credit Risk Management
María de Lourdes Jiménez, Esq.
Corporate Compliance
José A. Méndez
General Auditor
GM Group, Inc.
Carlos Colino
Chairman
Chief Executive Officer
Walter Cervoni
President
Popular Insurance, Inc.
Angela Weyne
President
Manuel Chinea
Marketing and Product
Development
Jeannette Frett
Mari Pat Varga
People and Leadership
Chris McFadden
Comptroller
César Medina
Credit Risk Management
James Norini
Administration
Alberto Paracchini
Finance and Treasury
Richard Peterson
Community Banking
Vernon V. Aguirre
Southern California Region
Mike Carr
Houston Region
Michele Imbasciani
New York Metro Region
Mercedes F. McCall
Orlando Region
Javier Ubarri
Chicago Region
Richard Stiles
Commercial Banking
Popular Cash Express, Inc.
Chris McFadden
Interim President
Popular Leasing, U.S.A.
Bruce D. Horton
President
Banco Popular,
National Association
Jorge A. Junquera
President
Equity One, Inc.
C.E. (Bill) Williams
President
P O P U L A R , I N C .
B O A R D S O F D I R E C T O R S
POPULAR, INC.
Richard L. Carrión
Chairman
President
Chief Executive Officer
Antonio Luis Ferré
Vice Chairman
Chairman
El Nuevo Día
Juan J. Bermúdez
Partner
Bermúdez & Longo, S.E.
José B. Carrión Jr.
Private Investor
David H. Chafey Jr.
Senior Executive Vice President
Popular, Inc.
Héctor R. González
President
Chief Executive Officer
Ventek Group, Inc.
Jorge A. Junquera
Senior Executive Vice President
Popular, Inc.
Manuel Morales Jr.
President
Parkview Realty, Inc.
Francisco M. Rexach Jr.
President
Capital Assets, Inc.
Félix J. Serrallés Nevares
President
Chief Executive Officer
Destilería Serrallés, Inc.
BANCO POPULAR
NORTH AMERICA
Richard L. Carrión
Chairman
Chief Executive Officer
Roberto R. Herencia
President
Alfonso F. Ballester
President
Ballester Hermanos, Inc.
Jorge A. Junquera
Senior Executive Vice President
Popular, Inc.
Francisco M. Rexach Jr.
President
Capital Assets, Inc.
Félix J. Serrallés Nevares
President
Chief Executive Officer
Destilería Serrallés, Inc.
Richard N. Speer Jr.
Chief Executive Officer
Speer & Associates, Inc.
Julio E. Vizcarrondo Jr.
President
Chief Executive Officer
Desarrollos Metropolitanos, S.E.
Brunilda Santos de Álvarez, Esq.
Secretary
Board of Directors
Eduardo J. Negrón, Esq.
Assistant Secretary
Board of Directors
Héctor R. González
President
Chief Executive Officer
Ventek Group, Inc.
Guillermo L. Martínez
Chairman
Chief Executive Officer
GM Capital
Manuel Morales Jr.
President
Parkview Realty, Inc.
Alberto M. Paracchini
Private Investor
Francisco M. Rexach Jr.
President
Capital Assets, Inc.
Félix J. Serrallés Nevares
President
Chief Executive Officer
Destilería Serrallés, Inc.
Jon E. Slater
President
Chief Executive Officer
Puerto Rico Telephone Co.
Verizon Wireless Puerto Rico
Julio E. Vizcarrondo Jr.
President
Chief Executive Officer
Desarrollos Metropolitanos, S.E.
Samuel T. Céspedes, Esq.
Secretary
Board of Directors
Brunilda Santos de Álvarez, Esq.
Assistant Secretary
Board of Directors
Ernesto N. Mayoral, Esq.
Assistant Secretary
Board of Directors
Eduardo J. Negrón, Esq.
Assistant Secretary
Board of Directors
Julio E. Vizcarrondo Jr.
President
Chief Executive Officer
Desarrollos Metropolitanos, S.E.
Samuel T. Céspedes, Esq.
Secretary
Board of Directors
Brunilda Santos de Álvarez, Esq.
Assistant Secretary
Board of Directors
Ernesto N. Mayoral, Esq.
Assistant Secretary
Board of Directors
Eduardo J. Negrón, Esq.
Assistant Secretary
Board of Directors
BANCO POPULAR
DE PUERTO RICO
Richard L. Carrión
Chairman
President
Chief Executive Officer
Juan A. Albors Hernández
Chairman
President
Chief Executive Officer
Albors Development Corp.
José A. Bechara Bravo
President
Empresas Bechara, Inc.
Juan J. Bermúdez
Partner
Bermúdez & Longo, S.E.
Francisco J. Carreras
Educator
Executive Director
Fundación Ángel Ramos, Inc.
José B. Carrión Jr.
Private Investor
David H. Chafey Jr.
Senior Executive Vice President
Popular, Inc.
María Luisa Ferré
Executive Vice President
Grupo Ferré Rangel
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P O P U L A R , I N C .
C O N D E N S E D C O N S O L I D AT E D S TAT E M E N T S O F C O N D I T I O N
(In thousands)
Assets
Cash and due from banks
Money market investments
Trading securities, at market value
Investment securities available-for-sale, at market value
Investment securities held-to-maturity, at amortized cost
Loans held-for-sale, at lower of cost or market
Loans
Less – Unearned income
Allowance for loan losses
Premises and equipment
Other real estate
Accrued income receivable
Other assets
Goodwill
Other intangible assets
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and securities sold under
agreements to repurchase
Other short-term borrowings
Notes payable
Other liabilities
Subordinated notes
Preferred beneficial interest in Popular North America’s
junior subordinated deferrable interest debentures
guaranteed by the Corporation
Minority interest in consolidated subsidiaries
Stockholders’ Equity:
Preferred stock
Common stock
Surplus
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income, net of tax
At December 31,
2002
2001
$
652,556
1,094,646
510,346
10,531,903
180,751
1,092,927
18,775,847
286,655
372,797
18,116,395
461,177
39,399
184,549
578,091
182,965
34,647
$ 33,660,352
$
606,142
823,790
270,186
9,284,401
592,360
939,488
17,556,029
326,966
336,632
16,892,431
405,705
31,533
186,143
496,855
177,842
37,800
$ 30,744,676
$ 3,367,385
14,247,355
17,614,740
$ 3,281,841
13,088,201
16,370,042
6,684,551
1,703,562
4,298,853
677,605
30,979,311
125,000
5,751,768
1,827,242
3,735,131
512,686
28,196,869
125,000
144,000
1,162
149,080
909
—
834,799
278,366
1,300,437
(205,210)
202,487
2,410,879
$ 33,660,352
100,000
832,498
268,544
1,057,724
(66,136)
80,188
2,272,818
$ 30,744,676
R E P O R T O F I N D E P E N D E N T
A C C O U N T A N T S
To the Board of Directors and
Stockholders of Popular, Inc.:
We have audited, in accordance
with auditing standards generally
accepted in the United States
of America, the consolidated
statements of condition of
Popular, Inc. and its subsidiaries
as of December 31, 2002 and
2001, and the related consolidated
statements of income, of
comprehensive income, of
changes in stockholders’ equity
and of cash flows for each of
the three years in the period
ended December 31, 2002
(not presented herein) appearing
in the 2002 Financial Review
and Supplementary Information
to stockholders of Popular, Inc.,
which is incorporated by reference
in Popular, Inc.’s Annual Report
on Form 10-K for the year ended
December 31, 2002; and in our
report dated February 28, 2003,
we expressed an unqualified
opinion on those consolidated
financial statements with an
explanatory paragraph for
the adoption of SFAS No. 142
“Goodwill and Other Intangible
Assets.”
In our opinion, the information
set forth in the accompanying
condensed consolidated
statements of condition and
of income, when read in
conjunction with the consolidated
financial statements from which
it has been derived, is fairly
stated in all material respects
in relation thereto.
San Juan, Puerto Rico
February 28, 2003
Stamp 1838467 of the P.R. Society
of Certified Public Accountants
has been affixed to the file copy
of this report.
P 2 8
P O P U L A R , I N C .
C O N D E N S E D C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E
(In thousands, except per share information)
Interest Income
Loans
Money market investments
Investment securities
Trading securities
Interest Expense
Deposits
Short-term borrowings
Long-term debt
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Service charges on deposit accounts
Other service fees
(Loss) gain on sale of investment securities
Derivative losses
Trading account (loss) profit
Gain on sale of loans
Other operating income
Operating Expenses
Personnel costs
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Other operating expenses
Amortization of intangibles
Income before income tax and minority interest
Income tax
Net (gain) loss of minority interest
Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
Net Income
Net Income Applicable to Common Stock
Net Income per Common Share (Basic and Diluted) (Before and After
Cumulative Effect of Accounting Change)
Year ended December 31,
2002
2001
2000
$ 1,528,903
32,505
445,925
16,464
2,023,797
$ 1,559,890
47,610
473,344
15,018
2,095,862
$ 1,586,832
62,356
486,198
14,771
2,150,157
431,128
185,250
227,090
843,468
1,180,329
205,570
974,759
157,713
258,543
(3,342)
(20,085)
(804)
59,340
72,313
1,498,437
488,741
78,503
99,099
37,144
84,660
53,892
61,451
19,918
96,490
9,104
1,029,002
469,435
117,255
(248)
351,932
—
351,932
349,422
2.61
$
$
$
518,168
329,648
171,061
1,018,877
1,076,985
213,250
863,735
146,994
242,547
27
(20,228)
(1,781)
45,633
58,396
1,335,323
425,142
72,100
97,383
38,756
73,735
48,883
50,783
17,804
74,185
27,438
926,209
409,114
105,280
18
303,852
686
304,538
296,188
529,373
508,029
129,994
1,167,396
982,761
194,640
788,121
125,519
215,995
11,201
—
1,991
39,673
69,681
1,252,181
394,176
67,720
98,022
34,125
64,851
45,689
46,791
20,828
69,673
34,558
876,433
375,748
100,797
1,152
276,103
—
$ 276,103
$ 267,753
2.17
$
1.97
$
$
$
For a complete set of audited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America,
refer to Popular, Inc.’s 2002 Financial Review and Supplementary Information to stockholders incorporated by reference in Popular, Inc.’s Annual Report on
Form 10-K for the year ended December 31, 2002.
2 0 0 2 A N N U A L R E P O R T
P 2 9
P O P U L A R , I N C .
H I S T O R I C A L F I N A N C I A L S U M M A R Y – 2 5 Y E A R S
(Dollars in millions, except per share data)
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
Selected Financial Information
Net Interest Income
Non-Interest Income
Operating Expenses
Net Income
Assets
Net Loans
Deposits
Stockholders’ Equity
Market Capitalization
Return on Assets (ROA)
Return on Equity (ROE)
Per Common Share 1
Net Income
Dividends (Declared)
Book Value
Market Price
Assets by Geographical Area
Puerto Rico
United States
Caribbean and Latin America
$ 89.8
9.8
72.1
12.6
$2,105.5
904.2
1,792.4
98.5
$ 62.5
$ 110.6
13.5
88.8
18.2
$2,472.0
974.1
2,045.8
112.4
$ 70.3
0.65%
13.64%
0.79%
17.56%
$ 130.0
14.2
101.3
23.5
$2,630.1
988.4
2,060.5
122.1
45.0
0.92%
19.96%
$
$ 135.9
15.8
109.4
24.3
$2,677.9
1,007.6
2,111.7
142.3
66.4
0.90%
18.36%
$
$ 151.7
15.9
121.2
27.3
$2,727.0
976.8
2,208.2
163.5
99.0
0.96%
17.99%
$
$ 144.9
19.6
127.3
26.8
$2,974.1
1,075.7
2,347.5
182.2
$ 119.3
$ 156.8
19.0
137.2
29.8
$3,526.7
1,373.9
2,870.7
203.5
$ 159.8
$ 174.9
26.8
156.0
32.9
$4,141.7
1,715.7
3,365.3
226.4
$ 216.0
$ 184.2
41.4
168.4
38.3
$4,531.8
2,271.0
3,820.2
283.1
$ 304.0
$ 207.7
41.0
185.7
38.3
$5,389.6
2,768.5
4,491.6
308.2
$ 260.0
$ 232.5
54.9
195.6
47.4
$5,706.5
3,096.3
4,715.8
341.9
$ 355.0
0.95%
15.86%
0.94%
15.83%
0.89%
15.59%
0.88%
15.12%
0.76%
13.09%
0.85%
14.87%
$ 0.17
0.05
1.05
0.87
$ 0.25
0.06
1.53
0.98
$ 0.34
0.07
1.66
1.01
$ 0.34
0.06
1.93
0.92
$
0.38
0.08
2.22
1.38
$ 0.37
0.11
2.47
1.66
$
0.41
0.12
2.76
2.22
$ 0.46
0.14
3.07
3.00
$ 0.50
0.15
3.46
4.00
$ 0.48
0.17
3.77
3.34
$ 0.59
0.17
4.19
4.44
96.59%
3.41%
96.54%
3.46%
95.53%
4.47%
94.65%
5.14%
0.21%
94.63%
5.01%
0.36%
93.70%
5.23%
1.07%
91.31%
7.52%
1.17%
92.42%
6.47%
1.11%
91.67%
7.23%
1.10%
94.22%
5.01%
0.77%
93.45%
5.50%
1.05%
Total
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Traditional Delivery System
Banking Branches
Puerto Rico
Virgin Islands
United States
Subtotal
Non-Banking Offices
Equity One
Popular Cash Express
Popular Finance
Popular Auto
Popular Leasing, U.S.A.
Popular Mortgage
Popular Securities
Popular Insurance
Popular Insurance, U.S.A.
Popular Insurance, V.I.
Levitt Mortgage
GM Group
Subtotal
Total
Electronic Delivery System
ATMs
Owned
Puerto Rico
Caribbean
United States
Subtotal
Driven
Puerto Rico
Caribbean
Subtotal
Total
110
8
118
110
8
118
110
7
117
110
1
7
118
110
2
7
119
112
3
6
121
113
3
9
125
115
3
9
127
124
3
9
136
126
3
9
138
126
3
10
139
118
118
117
118
119
121
125
127
136
30
30
30
78
78
6
6
84
94
94
36
36
130
113
113
51
51
164
14
17
14
152
136
3
139
55
55
194
17
156
153
3
156
68
68
224
BPPR Transactions (in millions)
Electronic Transactions
Items Processed
N/A
Employees (full-time equivalent)
1 Per common share data adjusted for stock splits.
3,215
P 3 0
88.9
3,659
94.8
3,838
96.9
3,891
98.5
3,816
0.6
102.1
3,832
4.4
110.3
4,110
7.0
123.8
4,314
8.3
134.0
4,400
12.7
139.1
4,699
14.9
159.8
5,131
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
$ 260.9
63.3
212.4
56.3
$5,972.7
3,320.6
4,926.3
383.0
$ 430.1
$ 284.2
70.9
229.6
63.4
$8,983.6
5,373.3
7,422.7
588.9
$ 479.1
$ 407.8
131.8
345.7
64.6
$8,780.3
5,195.6
7,207.1
631.8
$ 579.0
0.99%
15.87%
1.09%
15.55%
0.72%
10.57%
$
440.2
124.5
366.9
85.1
$10,002.3
5,252.1
8,038.7
752.1
987.8
0.89%
12.72%
$
$
492.1
125.2
412.3
109.4
$11,513.4
6,346.9
8,522.7
834.2
$ 1,014.7
1.02%
13.80%
$ 535.5
141.3
447.8
124.7
$12,778.4
7,781.3
9,012.4
1,002.4
923.7
1.02%
13.80%
$
$ 584.2
173.3
486.8
146.4
$15,675.5
8,677.5
9,876.7
1,141.7
$ 1,276.8
$ 681.3
205.5
541.9
185.2
$16,764.1
9,779.0
10,763.3
1,262.5
$ 2,230.5
$ 784.0
247.6
636.9
209.6
$19,300.5
11,376.6
11,749.6
1,503.1
$ 3,350.3
$
873.0
291.2
720.4
232.3
$23,160.4
13,077.8
13,672.2
1,709.1
$ 4,602.4
$ 953.7
372.9
837.5
257.6
$25,460.5
14,907.8
14,173.7
1,661.0
$ 3,790.2
$ 982.8
464.1
876.4
276.1
$28,057.1
16,057.1
14,804.9
1,993.6
$ 3,578.1
$ 1,077.0
471.6
926.2
304.5
$30,744.7
18,168.6
16,370.0
2,272.8
$ 3,965.4
$ 1,180.3
523.7
1,029.0
351.9
$33,660.4
19,582.1
17,614.7
2,410.9
$ 4,476.4
1.04%
14.22%
1.14%
16.17%
1.14%
15.83%
1.14%
15.41%
1.08%
15.45%
1.04%
15.00%
1.09%
14.84%
1.11%
16.29%
$
0.70
0.20
4.69
5.38
$ 0.79
0.20
4.92
4.00
$ 0.54
0.20
5.25
4.81
$
0.70
0.20
5.76
7.56
$
0.84
0.23
6.38
7.75
$
0.92
0.25
6.87
7.03
$
1.05
0.29
7.91
9.69
$
1.34
0.35
8.80
16.88
$
1.50
0.40
10.37
24.75
$
1.65
0.50
11.86
34.00
$ 1.84
0.60
11.51
27.94
$ 1.97
0.64
13.92
26.31
$
2.17
0.76
15.93
29.08
$
2.61
0.80
18.20
33.80
92.18%
6.28%
1.54%
88.59%
9.28%
2.13%
86.67%
10.92%
2.41%
87.33%
10.27%
2.40%
79.42%
16.03%
4.55%
75.86%
19.65%
4.49%
75.49%
20.76%
3.75%
73.88%
22.41%
3.71%
74.10%
23.34%
2.56%
71.32%
24.44%
4.24%
70.95%
25.17%
3.88%
71.80%
25.83%
2.37%
67.66%
29.84%
2.50%
66.27%
31.60%
2.13%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
128
3
10
141
18
4
22
163
151
3
154
65
65
219
173
3
24
200
26
9
35
235
211
3
214
54
54
268
161
3
24
188
27
26
9
62
250
206
3
209
73
73
282
162
3
30
195
41
26
9
76
271
211
3
6
220
81
81
301
165
8
32
205
58
26
8
92
297
234
8
11
253
86
86
339
166
8
34
208
73
28
10
111
319
262
8
26
296
88
88
384
166
8
40
214
91
31
9
3
134
348
281
8
38
327
120
120
447
178
8
44
230
102
39
8
3
1
153
383
327
9
53
389
162
97
259
648
201
8
63
272
117
44
10
7
3
2
183
455
391
17
71
479
170
192
362
841
16.1
161.9
5,213
18.0
164.0
7,023
23.9
166.1
7,006
28.6
170.4
7,024
33.2
171.8
7,533
43.0
174.5
7,606
56.6
175.0
7,815
78.0
173.7
7,996
111.2
171.9
8,854
198
8
89
295
128
51
48
10
8
11
2
258
553
421
59
94
574
187
265
452
1,026
130.5
170.9
199
8
91
298
137
102
47
12
10
13
2
2
4
329
627
442
68
99
609
102
851
953
1,562
159.4
171.0
199
8
95
302
136
132
61
12
11
21
3
2
2
4
384
686
478
37
109
624
118
920
1,038
1,662
199.5
160.2
196
8
96
300
149
154
55
20
13
25
3
2
1
1
4
427
727
524
39
118
681
155
823
978
1,659
206.0
149.9
195
8
96
299
153
195
37
18
13
29
5
2
1
1
2
5
461
760
551
53
131
735
174
926
1,100
1,835
236.6
145.3
10,549
11,501
10,651
11,334
10,960
2 0 0 2 A N N U A L R E P O R T
P 3 1
S U B S I D I A R I E S
S T O C K H O L D E R S ’ I N F O R M AT I O N
Banco Popular de Puerto Rico
Independent Public Accountants
Popular Auto, Inc.
Popular Finance, Inc.
Popular Insurance, Inc.
Popular Mortgage, Inc.
Levitt Mortgage
Popular Securities, Inc.
Banco Popular North America
Banco Popular, National Association
Popular Cash Express, Inc.
Popular Insurance, U.S.A.
Popular Leasing, U.S.A.
Equity One, Inc.
GM Group, Inc.
ATH Costa Rica /CreST, S.A.
ATH Dominicana /CONTADO, S.A.
PricewaterhouseCoopers LLP
Annual Meeting
The 2003 Annual Stockholders’ Meeting of Popular, Inc.
will be held on Wednesday, April 30, at 9:00 a.m.
at Centro Europa Building in San Juan, Puerto Rico.
Telephone: (787) 765-9800 ext. 5637, 5525
Fax: (787) 281-5193
E-mail: popular-stck-transfer@bppr.com
Additional Information
Copies of the Annual Report to the Securities and Exchange
Commission on Form 10-K and any other financial information
may be obtained by writing to:
Amílcar L. Jordán
Senior Vice President and Comptroller
Banco Popular de Puerto Rico
PO Box 362708
San Juan, PR 00936-2708
Telephone: (787) 765-9800 ext. 6102
Fax: (787) 759-7803
Or visit our web site www.popularinc.com
Design: BD&E Inc., Pittsburgh, Pennsylvania
Illustration: Carlos Aponte
Printing: Wallace Hoechstetter
2 0 0 2 A N N U A L R E P O R T
P 3 2
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Financial Review and Supplementary Information
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Statistical Summaries
Financial Statements
Management’s Report on Responsibility
for Financial Reporting
Report of Independent Accountants
Consolidated Statements of Condition
as of December 31, 2002 and 2001
Consolidated Statements of Income
for the years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Cash Flows
for the years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Changes in
Stockholders’ Equity for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive
Income for the years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
2
30
35
36
37
38
39
40
41
42
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
of Financial Condition and Results of Operations
of Financial Condition and Results of Operations
of Financial Condition and Results of Operations
of Financial Condition and Results of Operations
This section provides a discussion and 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 broad 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:
(cid:132) Commercial Banking – Banco Popular de Puerto Rico (BPPR),
Banco Popular North America (BPNA), and Banco Popular,
National Association (BP, N.A.)
(cid:132) Auto Loans and Lease Financing – Popular Auto, Inc. and
Popular Leasing, U.S.A.
(cid:132) Mortgage and Consumer Lending – Popular Mortgage, Inc.,
Equity One, Inc., Popular Finance, Inc. and Levitt Mortgage
Corporation.
(cid:132) Broker/Dealer – Popular Securities, Inc.
(cid:132) Processing and Information Technology Services and Products –
GM Group, ATH Costa Rica and CreST, S.A.
(cid:132) Retail Financial Services – Popular Cash Express, Inc.
(cid:132) Insurance Agency – Popular Insurance, Inc., Popular Insurance
Agency U.S.A., Inc. and Popular Insurance V.I., Inc.
OOOOOVERVIEW
VERVIEW
VERVIEW
VERVIEW
VERVIEW
The year 2002 was challenging for the markets and investors alike. It
was characterized by significant corporate scandals, the continued
fight against terrorism and heightened geopolitical risks, such as a
U.S. war against Iraq. Sluggish economic data and weaker than
expected corporate profits dampened any chance of a quick bounce
back from the poor economic conditions that prevailed throughout the
year. The Federal Reserve intervened only once by reducing its federal
funds target rate by a larger than expected 50 basis points to 1.25% in
November. They felt the economy still needed the lowest borrowing
costs in four decades in order to sustain the recovery and support
consumption. Consumers took advantage of the low interest rate
environment to finance and purchase homes at a record setting pace,
reaffirming that housing activity remained as one of the strongest
areas of the economy.
Early during the year, BPPR, the Corporation’s principal
subsidiary, acquired three branches of Banco Bilbao Vizcaya Argentaria
in Puerto Rico with deposits approximating $40 million.
In April 2002, BPPR launched the new PREMIA rewards program.
This is a unique customer-loyalty program designed to compensate
its customers for their banking relationships. The program allows
customers of BPPR and of the Corporation’s subsidiaries in Puerto
Rico to enroll and accumulate points for everyday financial transactions
and from a variety of products and services, including deposit accounts,
credit cards, mortgage and auto loans, and electronic services
transactions, among others. The points accumulated are redeemable
for airline tickets, merchandise and pre-paid ATM cards, among
other alternatives. At the end of 2002, the PREMIA rewards program
had more than 145,000 registered clients.
In 2002, the Corporation acquired the general insurance agencies
of Del Nido & Associates and Life Insurance Services, Inc., and
established insurance subsidiaries in the U.S. Virgin Islands and in
the mainland U.S. These initiatives provide the building blocks to
enhance revenue growth by allowing the Corporation to offer a wider
variety of insurance products and services to more customers.
During 2002, BPNA, the leading U.S. Hispanic-owned bank,
celebrated more than 40 years of community banking services in the
United States and launched an institutional advertising campaign,
“Popularity”, created to expand the Bank’s brand. The campaign’s
theme “Make Dreams Happen” reflects BPNA’s aim to know its
customers and help them achieve their dreams. BPNA also launched
the new Programa Acceso Popular, which offers tailored financial
products and services to Hispanic customers in the U.S. mainland,
allowing BPNA to convey its financial expertise directly into the
communities.
Table A
Table A
Table A
Table A
Table A
Components of Net Income as a Percentage of Average Total Assets
Net interest income
Provision for loan losses
Securities and trading (losses) gains
Derivative losses
Operating income
Operating expenses
Net income before tax and minority interest
Income tax
Net loss of minority interest
2002
2001
3.71%
(0.65)
(0.01)
(0.06)
1.72
4.71
(3.23)
3.85%
(0.76)
(0.01)
(0.07)
1.76
4.77
(3.31)
1.48
(0.37)
-
1.46
(0.37)
-
For the Year
2000
1999
1998
3.70%
(0.73)
0.05
-
1.70
4.72
(3.30)
1.42
(0.38)
-
4.01%
(0.63)
-
-
1.57
4.95
(3.52)
1.43
(0.36)
0.01
4.27%
(0.67)
0.06
-
1.36
5.02
(3.52)
1.50
(0.36)
-
Net income
1.11%
1.09%
1.04%
1.08%
1.14%
2 2 2 2 2
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table B
Table B
Table B
Table B
Table B
Changes in Net Income and Earnings per Common Share
(In thousands, except per common share amounts)
Dollars
Per share
Dollars
Per share
Dollars
Per share
2002
2001
2000
Net income applicable to common stock
for prior year
Increase (decrease) from changes in:
Operating income
Net interest income
Sales of investment securities
Trading account
Derivative activities
Minority interest
Income tax
Operating expenses
Cumulative effect of accounting change
Provision for loan losses
Net income before preferred stock dividends
and change in average common shares
Decrease in preferred stock dividends
Change in average common shares*
$296,188
$2.17
$267,753
$1.97
$249,208
$1.84
54,339
103,344
(3,369)
977
143
(266)
(11,975)
(102,793)
(686)
7,680
343,582
5,840
-
0.40
42,702
0.76
94,224
(0.03)
(11,174)
0.01
(3,772)
- (20,228)
-
(1,134)
(0.09)
(4,483)
(0.76)
(49,776)
-
686
0.06
(18,610)
0.31
0.69
(0.08)
(0.03)
(0.15)
(0.01)
(0.03)
(0.36)
-
(0.14)
77,807
29,023
10,563
3,812
-
(1,302)
(15,677)
(39,989)
-
(45,692)
2.52
0.04
0.05
296,188
-
-
2.17
-
-
267,753
-
-
0.57
0.21
0.08
0.03
-
(0.01)
(0.12)
(0.29)
-
(0.34)
1.97
-
-
Net income applicable to common stock
$349,422
$2.61
$296,188
$2.17
$267,753
$1.97
*Reflects the effect of the shares repurchased, plus the shares issued through the Dividend Reinvestment Plan in the years presented.
The Corporation’s mortgage operations benefited from the 2002
low interest rate environment that drove refinancing activity. Equity
One achieved a record loan origination volume of $3.2 billion in 2002,
representing an increase of approximately 19% over the previous
year. Also, the volume of originations of Popular Mortgage for 2002
reached $1.4 billion, for a record second year in a row.
Popular, Inc. reported net earnings of $351.9 million for the year
ended December 31, 2002, compared with $304.5 million a year
before, an increase of $47.4 million or 16%. Earnings per common
share (EPS), basic and diluted, totaled $2.61 in 2002, compared with
$2.17 in 2001. The Corporation’s return on assets (ROA) for 2002
was 1.11% compared with 1.09% in 2001, while the return on common
equity (ROE) was 16.29% in 2002 compared with 14.84% in 2001.
The Corporation’s stockholders’ equity as of December 31, 2002
reflected the redemption of all the outstanding shares of its 8.35%
Non-Cumulative Monthly Income Preferred Stock on January 21,
2002. In addition, in May 2002 the Corporation repurchased
4,300,000 shares of the Corporation’s common stock from Banco
Popular de Puerto Rico’s Retirement Plan at a cost of $139 million.
Table A presents a five-year summary of the components of net
income as a percentage of average total assets, whereas Table B
presents the changes in net income applicable to common stock and
earnings per common share. At December 31, 2002, the market
value and book value per share of the Corporation’s common stock
were $33.80 and $18.20, respectively, compared with $29.08 and
$15.93 at the same date in 2001.
Further discussion of operating results and the Corporation’s
financial condition is presented in the following narrative and tables.
In addition, Table C provides selected financial data for the past 10
years.
The information included herein may contain forward-looking
statements with respect to the adequacy of the allowance for loan
losses, the Corporation’s market and liquidity risks and the effect of
legal proceedings on the Corporation’s financial condition and results
of operations, among others. These forward-looking statements involve
certain risks and uncertainties that may cause actual results to differ
materially from those expressed in forward-looking statements. Factors
such as changes in interest rate environment as well as general changes
in business and economic conditions may cause actual results to
differ from those contemplated by such forward-looking statements.
Settlement of Federal Investigation
On January 16, 2003, the U.S. District Court for the District of Puerto
Rico approved a Deferred Prosecution Agreement among BPPR, the
U.S. Department of Justice, the Board of Governors of the Federal
Reserve System, and the Financial Crimes Enforcement Network of
the U.S. Department of the Treasury (“FinCEN”). The Agreement
concludes an investigation related principally to the circumstances
surrounding the activities of a former customer of BPPR, including
BPPR’s reporting and compliance efforts, as well as certain other
customers. The former customer has pleaded guilty to money
2 0 0 2 A N N U A L R E P O R T 3
2 0 0 2 A N N U A L R E P O R T 3
2 0 0 2 A N N U A L R E P O R T 3
2 0 0 2 A N N U A L R E P O R T 3
2 0 0 2 A N N U A L R E P O R T 3
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table C
Table C
Table C
Table C
Table C
Selected Financial Data
(In thousands, except per share data)
CONDENSED INCOME STATEMENTS
Interest income
Interest expense
Net interest income
Securities, trading and derivatives (losses) gains
Other income
Operating expenses
Provision for loan losses
Net (gain) loss of minority interest
Income tax
Dividends on preferred stock of BPPR
Cumulative effect of accounting change
Net income
Net income applicable to common stock
PER COMMON SHARE DATA*
Net income (basic and diluted) (before and after cumulative
effect of accounting change)
Dividends declared
Book value
Market price
Outstanding shares:
Average
End of period
AVERAGE BALANCES
Net loans**
Earning assets
Total assets
Deposits
Subordinated notes
Preferred beneficial interest in Popular North America’s
junior subordinated deferrable interest debentures
guaranteed by the Corporation
Total stockholders’ equity
PERIOD END BALANCES
Net loans**
Allowance for loan losses
Earning assets
Total assets
Deposits
Subordinated notes
Preferred beneficial interest in Popular North America’s
junior subordinated deferrable interest debentures
guaranteed by the Corporation
Total stockholders’ equity
SELECTED RATIOS
Net interest yield (taxable equivalent basis)
Return on average total assets
Return on average common stockholders’ equity
Dividend payout ratio to common stockholders
Efficiency ratio
Overhead ratio
Tier I capital to risk-adjusted assets
Total capital to risk-adjusted assets
2002
2001
2000
$2,023,797
843,468
1,180,329
(24,231)
547,909
1,029,002
205,570
(248)
117,255
-
-
$351,932
$349,422
$2.61
0.80
18.20
33.80
133,915,082
132,439,047
$18,729,220
30,194,914
31,822,390
16,984,646
125,000
145,254
2,150,386
$19,582,119
372,797
31,899,765
33,660,352
17,614,740
125,000
$2,095,862
1,018,877
1,076,985
(21,982)
493,570
926,209
213,250
18
105,280
-
686
$304,538
$296,188
$2.17
0.76
15.93
29.08
136,238,288
136,362,364
$17,045,257
26,414,204
27,957,107
15,575,791
125,000
150,000
2,096,534
$18,168,551
336,632
29,139,288
30,744,676
16,370,042
125,000
$2,150,157
1,167,396
982,761
13,192
450,868
876,433
194,640
1,152
100,797
-
-
$276,103
$267,753
$1.97
0.64
13.92
26.31
135,907,476
135,998,617
$15,801,887
24,893,366
26,569,755
14,508,482
125,000
150,000
1,884,525
$16,057,085
290,653
26,339,431
28,057,051
14,804,907
125,000
144,000
2,410,879
149,080
2,272,818
150,000
1,993,644
4.26%
1.11
16.29
30.76
59.69
42.81
9.85
11.52
4.40%
1.09
14.84
33.10
58.97
42.21
9.96
11.74
4.23%
1.04
15.00
32.47
61.54
41.96
10.44
12.37
* Per share data is based on the average number of shares outstanding during the periods, except for the book value and market price which are based on the information
at the end of the periods. All per share data has been adjusted to reflect two stock splits effected in the form of dividends on July 1, 1998 and July 1, 1996.
** Includes loans held-for-sale.
4 4 4 4 4
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
1999
1998
1997
Year ended December 31,
1996
1995
1994
1993
$1,851,670
897,932
953,738
(944)
373,860
837,482
148,948
2,454
85,120
-
-
$257,558
$249,208
$1.84
0.60
11.51
27.94
$1,651,703
778,691
873,012
12,586
278,660
720,354
137,213
328
74,671
-
-
$232,348
$223,998
$1.65
0.50
11.86
34.00
$1,491,303
707,348
783,955
6,202
241,396
636,920
110,607
-
74,461
-
-
$209,565
$201,215
$1.50
0.40
10.37
24.75
$1,272,853
591,540
681,313
3,202
202,270
541,919
88,839
-
70,877
-
-
$185,150
$176,800
$1.34
0.35
8.80
16.88
$1,105,807
521,624
584,183
7,153
166,185
486,833
64,558
-
59,769
-
-
$146,361
$138,011
$1.05
0.29
7.91
9.69
$887,141
351,633
535,508
451
140,852
447,846
53,788
-
50,043
385
-
$124,749
$120,504
$0.92
0.25
6.87
7.04
$772,136
280,008
492,128
1,418
123,762
412,276
72,892
-
28,151
770
6,185
$109,404
$109,404
$0.84
0.23
6.38
7.75
135,585,634
135,654,292
135,532,086
135,637,327
134,036,964
135,365,408
132,044,624
132,177,012
131,632,600
131,794,544
131,192,972
131,352,512
130,804,944
130,929,692
$13,901,290
22,244,959
23,806,372
13,791,338
125,000
$11,930,621
19,261,949
20,432,382
12,270,101
125,000
$10,548,207
17,409,634
18,419,144
10,991,557
125,000
150,000
1,712,792
150,000
1,553,258
122,877
1,370,984
$14,907,754
292,010
23,754,620
25,460,539
14,173,715
125,000
$13,078,795
267,249
21,591,950
23,160,357
13,672,214
125,000
$11,376,607
211,651
18,060,998
19,300,507
11,749,586
125,000
$9,210,964
15,306,311
16,301,082
10,461,796
147,951
-
1,193,506
$9,779,028
185,574
15,484,454
16,764,103
10,763,275
125,000
$8,217,834
13,244,170
14,118,183
9,582,151
56,850
-
1,070,482
$8,677,484
168,393
14,668,195
15,675,451
9,876,662
175,000
$7,107,746
11,389,680
12,225,530
8,837,226
56,082
$5,700,069
9,894,662
10,683,753
8,124,885
73,967
-
924,869
-
793,001
$7,781,329
153,798
11,843,806
12,778,358
9,012,435
50,000
$6,346,922
133,437
10,657,994
11,513,368
8,522,658
62,000
150,000
1,660,986
150,000
1,709,113
150,000
1,503,092
-
-
1,262,532
1,141,697
-
1,002,423
-
834,195
4.65%
1.08
15.45
31.56
63.08
48.71
10.17
12.29
4.91%
1.14
15.41
28.42
62.55
49.15
10.82
13.14
4.84%
1.14
15.83
25.19
62.12
49.66
12.17
14.56
4.77%
1.14
16.17
24.63
61.33
49.38
11.63
14.18
4.74%
1.04
14.22
26.21
64.88
53.66
11.91
14.65
5.06%
1.02
13.80
27.20
66.21
57.24
12.85
14.25
5.50%
1.02
13.80
25.39
66.94
58.34
12.29
13.95
2 0 0 2 A N N U A L R E P O R T 5
2 0 0 2 A N N U A L R E P O R T 5
2 0 0 2 A N N U A L R E P O R T 5
2 0 0 2 A N N U A L R E P O R T 5
2 0 0 2 A N N U A L R E P O R T 5
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
laundering, including in connection with transactions made through
an account at BPPR. No current or former BPPR officer, director or
employee has been charged with a crime or accused of benefitting
financially from the transactions described in the Agreement.
Under the Deferred Prosecution Agreement, BPPR agreed to the
filing of a one-count information charging it with failure to file
suspicious, activity reports in a timely and complete manner. The
Agreement provides for BPPR to forfeit $21.6 million to the United
States, and resolves all claims the United States, FinCEN or the
Federal Reserve may have against BPPR arising from the matters that
were subject to investigation. This forfeiture was recognized in the
Corporation’s consolidated statement of condition and results of
operations for the year ended December 31, 2002.
This settlement also terminates the Written Agreement BPPR
signed with the Federal Reserve Bank of New York on March 9, 2000,
which required enhancements to BPPR’s anti-money laundering and
Bank Secrecy Act program. The Federal Reserve found BPPR to be
fully compliant with the Written Agreement on November 26, 2001.
Finally, the Deferred Prosecution Agreement provides that the court
will dismiss the information and the Deferred Prosecution Agreement
will expire 12 months following the settlement, provided that BPPR
complies with its obligations under the Agreement.
CCCCCRITICAL
CCOUNTING P P P P POLICIES
RITICAL A A A A ACCOUNTING
OLICIES
OLICIES
CCOUNTING
CCOUNTING
RITICAL
RITICAL
OLICIES
OLICIES
CCOUNTING
RITICAL
The Corporation’s accounting policies are essential to the understanding
of its financial statements. The Corporation’s significant accounting
policies are described in detail in Note 1 to the consolidated financial
statements and should be read in conjunction with this section on
critical accounting policies. The following is a summary of the
Corporation’s critical accounting policies, which involve significant
management judgment associated with estimates about the effect of
matters that are inherently uncertain and that involve a high degree of
subjectivity.
Investment Securities
Management determines the appropriate classification of debt and
equity securities at the time of purchase. Debt securities are classified
as held-to-maturity when the Corporation has the intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated
at amortized cost. Debt and equity securities are classified as trading
when they are bought and held principally for the purpose of selling
them in the near term. Trading securities are reported at fair value,
with unrealized gains and losses included in earnings. Debt and
equity securities not classified as held-to-maturity or trading are
classified as available-for-sale. Securities available-for-sale are reported
at fair value, with unrealized gains and losses excluded from earnings
and reported net of taxes in accumulated other comprehensive income.
At December 31, 2002, unrealized gains on the available-for-sale
securities, net of taxes, amounted to $208 million.
Loans and Allowance for Loan Losses
Loans are carried at their principal amount outstanding net of unearned
income, if applicable, including net deferred loan fees and costs,
except for loans held-for-sale which are carried at the lower of cost or
market. The Corporation defers certain nonrefundable loan origination
and commitment fees and the direct costs of originating or acquiring
6 6 6 6 6
loans. Interest on loans is accrued and recorded as interest income
based upon the principal amount outstanding. It is the Corporation’s
policy to discontinue the recognition of interest income when a
commercial loan or commercial lease becomes 60 days past due as to
principal or interest. For consumer financing leases, conventional
mortgages and closed-end consumer loans, interest recognition is
discontinued when payments are delinquent by 90 days or four
scheduled payments in arrears. Closed-end consumer loans are
charged-off when payments are delinquent 120 days. Open-end
(revolving credit) consumer loans are charged-off if payments are
delinquent 180 days. Certain loans that 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.
When interest accruals are discontinued, the balance of uncollected
accrued interest is charged against current earnings and thereafter,
income is recorded only to the extent of any interest collected. The
Corporation reports its non-performing assets on a more conservative
basis than most U.S. Banks. It is the Corporation's policy to place
commercial loans on non-accrual status if payments of principal or
interest are delinquent 60 days rather than the standard industry
practice of 90 days. Refer to the Credit Risk Management and Loan
Quality section of this report for further information.
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 an amount can be reasonably estimated. A loan is
considered impaired when its 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. The allowance for
impaired loans is part of the Corporation’s overall allowance for loan
losses.
The Corporation’s management evaluates the adequacy of the
allowance for loan losses on a monthly basis following a systematic
methodology in order to provide for known and inherent risks in the
loan portfolio. In developing an assessment of the adequacy of the
allowance for loan losses, the Corporation must rely on estimates and
exercise judgment regarding matters where the ultimate outcome is
unknown, such as economic and political developments affecting
companies in specific industries and specific issues with respect to
single borrowers. Other factors that can affect management’s estimates
are the years of data to include when estimating losses, changes in
underwriting standards, financial accounting standards and loan
impairment measurement, among many others. Changes in the financial
condition of individual borrowers, in economic conditions, in historical
loss experience and in the condition of the various markets in which
collateral may be sold, may all affect the required level of the allowance
for loan losses.
The provision for loan losses charged to current operations is
based on the above-mentioned methodology. Loan losses are charged
and recoveries are credited to the allowance for loan losses.
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Income Taxes
The Corporation uses an asset and liability approach to the recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Corporation’s
financial statements or tax returns. Valuation allowances are
established, when necessary, to reduce the deferred tax assets to the
amount expected to be realized. Fluctuations in the actual outcome of
these future tax consequences could impact the Corporation’s financial
position or its results of operations.
SFAS No. 109 “Accounting for Income Taxes” requires the
recognition of income taxes on the unremitted earnings of subsidiaries,
unless these can be remitted on a tax-free basis or are permanently
invested. Certain of the Corporation’s foreign subsidiaries have not
remitted retained earnings to date since these are necessary to carry
out the Corporation’s expansion plans in the respective markets of
those subsidiaries, thus considered to be permanently invested. In
addition, the Corporation has no foreseeable need for the subsidiaries’
earnings given its ability to service its dividend program from the
earnings of its domestic units. As of December 31, 2002, approximately
$171 million of retained earnings held by the subsidiaries have not
been subject to deferred taxes. Had the Corporation recorded a deferred
tax liability on the unremitted earnings of these subsidiaries, it would
have approximated $18 million for the year 2002 and $51 million on
a cumulative basis at December 31, 2002. Refer to Note 27 to the
consolidated financial statements for further information.
Assessment of Fair Value
The assessment of fair value applies to certain of the Corporation’s
assets and liabilities, including trading securities, available-for-sale
securities, interest-only strips, loans held-for-sale, servicing rights,
other real estate owned, as well as derivative financial assets and
liabilities. These assets and liabilities are recorded either at fair value
or at the lower of cost or fair value. Fair values are volatile and are
affected by factors such as market interest rates, prepayment speeds
and discount rates.
Fair values for trading securities, most of the Corporation’s
available-for-sale securities, and derivative financial instruments are
based on quoted market prices. If quoted market prices are not
available, fair values are based on quoted prices of similar instruments.
Tax-exempt Puerto Rico GNMA securities cannot be valued only by
reference to market quotations for U.S. GNMA securities with similar
characteristics, due to their preferential tax status in Puerto Rico. The
Corporation determines the fair value of tax-exempt P.R. GNMA
securities from quotations obtained from locally based brokerage firms.
Significant changes in factors such as interest rate changes and
accelerated prepayment rates could affect the value of the trading and
investment securities, to be recognized in the results of operations,
thereby adversely affecting results of operations. Management assesses
the fair value of its portfolio on a regular basis. Any impairment that is
considered other than temporary is recorded directly in the income
statement. The fair values of loans held-for-sale are based on
anticipated liquidation values or quoted market prices.
To estimate the fair value of mortgage servicing rights the
Corporation considers prices for similar assets and the present value
of expected future cash flows associated with the servicing assets
calculated using assumptions that market participants would use in
estimating future servicing income and expense, including discount
rates, anticipated prepayment and credit loss rates. Servicing rights
are assessed for impairment periodically with any impairment
recognized in earnings through a valuation allowance. The primary
risk of material changes to the value of the servicing rights is the
potential volatility of the assumptions used, mainly prepayment speeds
and discount rates. Refer to Note 21 to the consolidated financial
statements for further information on the Corporation’s mortgage
servicing rights as of the end of the year.
The fair values of other real estate owned are mostly determined
based on appraisals by third parties, less estimated costs to sell.
Notwithstanding the judgment required in fair valuing the
Corporation’s assets and liabilities, management believes that its
estimates of fair value are reasonable given the process of obtaining
external prices in many instances, periodic review of internal models
and the consistent application of approaches from period to period.
Goodwill and Other Intangible Assets
The Corporation’s goodwill and other intangible assets are tested on
an annual basis, as prescribed in SFAS No. 142 “Goodwill and Other
Intangible Assets.” Management has defined reporting units based
on legal entity, following the same logic employed when making
operating decisions and measuring performance.
The Corporation uses the present value of future cash flows and
market price multiples of comparable companies to determine the fair
market value of the reporting units. The discount rate employed to
estimate the present value of projected cash flows is calculated using
the Capital Asset Pricing Model (CAPM). Projected income is adjusted
to determine each reporting unit’s total cash flow.
The assumptions incorporated into the model are determined by
analyzing the financial results of each reporting unit. Assumptions
are based on historical financial results, market conditions and
comparable companies, among other factors.
Refer to Notes 1 and 10 to the consolidated financial statements
for further information on goodwill and other intangible assets.
Stock Options
The Corporation has adopted the fair value method for accounting for
the stock options granted to employees and directors, which are valued
using a Black-Scholes model. The Black-Scholes option pricing model
requires the use of subjective assumptions which can materially affect
the fair value estimates. The fair value of each grant of stock options
was estimated on the date of the grant using assumptions for expected
dividend yields, risk-free interest rates, expected volatility and
estimated lives of options. Refer to note 25 to the consolidated financial
statements for a description of the assumptions used in determining
the prices for the stock options granted by the Corporation.
Among the assumptions that an estimated option price is most
sensitive to, is the expected volatility of the underlying security, which
in this case is the Corporation’s common stock. Volatility refers to
the standard deviation of the change in the underlying security’s price
during a period of time. When estimating the market price of the stock
options granted to employees, an assumption regarding the expected
volatility of the Corportation’s common stock during the life of the
options must be made. When pricing options granted to employees or
directors, it is assumed that the expected volatility of the Corporation’s
2 0 0 2 A N N U A L R E P O R T 7
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P O P U L A R
I N C .
shares of common stock during the life of the options is similar to the
average actual volatility during the past 260 trading days, which is
approximately one calendar year.
Pension and Postretirement Benefit Obligations
The Corporation has a noncontributory defined benefit pension plan
and a nonqualified unfunded supplementary pension and profit sharing
plan for employees of certain subsidiaries. The Corporation also
provides certain health care benefits for retired employees of BPPR.
The benefit costs and obligations of these plans are impacted by the
use of subjective assumptions which can materially affect recorded
amounts, including discount rates, expected returns on plan assets,
rate of compensation increase and health care trend rates. Management
applies judgment in the determination of these factors, which normally
undergo evaluation against industry assumptions, among other factors.
The Corporation uses an independent actuarial firm for assistance in
the determination of the pension and postretirement benefit costs and
obligations. Detailed information on the plans and related valuation
assumptions are included in Note 24 to the consolidated financial
statements.
The Corporation periodically reviews its assumption for long-term
expected return on pension plan assets in the Banco Popular de
Puerto Rico Retirement Plan, which is the Corporation’s largest pension
plan with a market value of assets of $398 million as of December 31,
2002. In developing the assumed long term rate of return for use in
determining net periodic pension expense the Corporation considers
the asset allocation, historical returns on the types of assets held in
the pension trust, and the current economic environment.
As part of the review, the Corporation’s independent consulting
actuaries performed an analysis of expected returns based on the
plan’s asset allocation as of January 1, 2003 to develop expected rates
of return. This forecast reflects the actuarial firm’s expected long-
term rates of return for each significant asset class or economic
indicator, for example, 9.9% for U.S. equities, 4.7% for fixed income,
and 2.4% inflation as of January 1, 2003. The range of returns
developed relies both on forecasts and on broad-market historical
benchmarks for expected return, correlation, and volatility for each
asset class.
Although the expected investment return assumption is long-term
in nature, the range of reasonable expected returns has dropped over
the past few years as a consequence of lower inflation and lower bond
yields. As a consequence of its most recent review, the Corporation
reduced its expected return from 8.5% for year 2002 to 8.0% for year
2003.
When calculating expected return on plan assets Popular, Inc.
uses the market value of assets, and does not employ any further asset
smoothing. As a result, all changes in the fair value of assets prior to
January 1, 2003 will be reflected in the results of operations for year
2003.
Pension expense for the Banco Popular de Puerto Rico Retirement
Plan in 2002 amounted to ($0.4) million. This included a credit of
$35.2 million reflecting the expected return on assets for 2002. There
were no contributions made to the Plan during 2002.
Pension expense is sensitive to changes in the expected return on
assets. For example, decreasing the expected rate of return for 2003
from 8.50% to 8.00% increased the forecast 2003 expense for the
Banco Popular de Puerto Rico Retirement Plan by approximately
$1.9 million.
Popular, Inc. considers the Moody’s Long-term AA Corporate
Bond yield prevailing at the end of the fiscal year as a guide in the
selection of the discount rate. At the end of December 2001, the
Moody’s Long-term AA Corporate Bond compounded annual yield
was equal to 7.19% and we chose 7.00% as our discount rate. At the
end of December 2002 the Moody’s Long-term AA Corporate Bond
compounded annual yield was equal to 6.63% and we chose 6.50% as
our discount rate.
A 25 basis point increase / decrease in the assumed discount rate
assumption as of the beginning of 2003 would decrease / increase the
forecast 2003 expense for the Banco Popular de Puerto Rico
Retirement Plan by approximately $0.5 million. The change would
not affect the minimum required contribution to the Plan.
EEEEEARNINGS
ARNINGS A A A A ANALYSIS
NALYSIS
NALYSIS
ARNINGS
ARNINGS
NALYSIS
NALYSIS
ARNINGS
Net Interest Income
Net interest income is the difference between interest and fee income
earned on earning assets such as loans, leases, securities, and money
market investments, and interest expense paid on liabilities such as
deposits and borrowings. The variables that affect net interest income
are various, including the interest rate scenario, the volumes and mix
of earning assets and interest bearing liabilities, and the repricing
characteristics of these assets and liabilities.
Following 2001, a very active year for the Federal Reserve, in
which the federal funds target rate was decreased eleven times by 475
basis points, during 2002 rates were maintained almost flat until the
end of the year. On November 6, 2002 the Federal Reserve decreased
the federal funds target rate by 50 basis points. The average key
index rates for the years 2000 through 2002 were as follows:
Prime rate
Fed funds rate
3-month LIBOR
3-month Treasury Bill
2-year Treasury
FNMA 30-year
2002
2001
2000
4.68% 6.91% 9.23%
1.67
3.88
1.79
3.78
1.63
3.47
2.61
3.81
6.74
7.40
6.26
6.54
5.98
6.20
8.14
As further discussed in the Risk Management section, the
Corporation has comprehensive policies and procedures that are
utilized to monitor and control the risk associated with the composition
and repricing of its earning assets and interest-bearing liabilities and
to assist management in maintaining stability in the net interest margin
under varying interest rate environments.
Net interest income for the year ended December 31, 2002 reached
$1,180.3 million, an increase of $103.3 million, or 10%, when
compared with $1,077.0 million reported in 2001. For the year ended
December 31, 2000, net interest income amounted to $982.8 million.
Table D presents the different components of the Corporation’s
net interest income segregated by major categories of earning assets
and interest-bearing liabilities. Some of the assets, mostly investments
in obligations of the U.S. Government and its agencies and the Puerto
Rico Commonwealth and its agencies, generate interest, which is
exempt for income tax purposes principally in Puerto Rico. Therefore,
8 8 8 8 8
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I N C .
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. Non-accrual loans
have been included in the respective average loans and leases
categories. Average outstanding securities balances are based upon
amortized cost excluding any unrealized gains or losses on securities
available-for-sale.
The taxable equivalent adjustment amounted to $103.6 million in
the year 2002 compared with $84.7 million in 2001 and $69.5 million
in 2000. The increase in the adjustment from 2001 is mostly related
to a lower interest expense disallowance required by the Internal
Revenue Code of Puerto Rico, partially offset by lower exempt interest
income. The decrease in the interest expense disallowance is directly
associated with the 131 basis points decrease in the cost of interest
bearing liabilities due to the 2002 lower interest rate scenario. The
taxable equivalent adjustment increased from 2000 to 2001 mostly
due to a significant decrease in the interest expense disallowance
resulting from a decrease of 96 basis points in the average cost of
interest bearing liabilities.
The increase of $122.2 million in net interest income from 2001 to
2002, on a taxable equivalent basis, was the effect of positive variances
of $89.2 million due to a higher volume of average earning assets and
$33.0 million due to a higher net interest spread. From 2000 to 2001,
net interest income on a taxable equivalent basis increased by $109.4
million, resulting from a favorable variance of $49.1 million due to
higher average volume of earning assets and $60.3 million due to a
higher net interest margin.
Average earning assets reached $30.2 billion in 2002, a 14%
increase from $26.4 billion in the year 2001. The principal growth
was attained in investment securities and mortgage loans, which
accounted for 51% and 39%, respectively, of the total increase in
average earning assets. The rise in investment securities was mostly
associated with higher U.S. agency securities and mortgage-backed
obligations. Mortgage loan originations benefited from the lower rate
scenario, which promoted consumer refinancing. Average commercial
and construction loans rose $281 million from 2001, while the
consumer loan portfolio declined by $109 million. The latter was
mainly related to lower demand for personal loans, a shift of consumer
credit to mortgage credit and the sale of approximately $20 million in
ending balances of small loans by Popular Finance in the second
quarter of 2002.
The average yield on earning assets for 2002, on a taxable equivalent
basis, decreased by 121 basis points to 7.05%, compared with 8.26%
in 2001.
The yield on average loans decreased by 98 basis points principally
related to the lower yield on commercial loans due to the floating rate
characteristics of a portion of the Corporation’s portfolio and the
origination of new loans in a lower rate environment. As of December
31, 2002 approximately 54% of the commercial and construction loan
portfolios had floating or adjustable rates.
The average yield on investment securities, on a taxable equivalent
basis, declined to 5.34% in 2002 from 6.74% in the previous year,
mainly due to the repricing of the investment portfolio runoff in a
declining rate environment. The yield on money market investments
had a negative variance of 190 basis points, declining from 5.11% in
2001 to 3.21% in 2002. As a result of their short-term nature, the low
interest rate environment that prevailed in 2002 directly impacted
these investments.
A mix of funding sources supported the increase in the volume of
earning assets. See Table L for a complete detail of average deposits
by category. For the year ended December 31, 2002, average interest
bearing deposits increased by $1.2 billion, or 10%, compared with
$12.5 billion in 2001. Average savings, NOW and money market
deposits rose $1.0 billion, or 16%, while average time deposits rose
$234 million, or 4%, compared with 2001. Within this latter category,
brokered deposits increased by $101 million, from an average of
$656 million in 2001. The average cost of interest bearing deposits
decreased 101 basis points when compared with 2001, due to
reductions in deposit rates coupled with the prevailing lower interest
rate scenario.
Average short-term borrowings, which are mostly comprised of
Fed funds, repurchase agreements and commercial paper, increased
by $651 million in 2002, or 9%, from 2001, while longer-term
borrowings increased by $1.7 billion, or 65%, when compared with
the previous year. The increase in long-term debt, which is debt with
an original maturity of more than one year, was principally due to the
issuance of secured borrowings arising in securitization transactions.
The net interest margin of the Corporation on a taxable equivalent
basis decreased to 4.26% in 2002 from 4.40% reported in 2001. The
lower net interest margin by 14 basis points resulted from various
primary factors, all related to the low general interest rate environment
that has prevailed for the past two years. The factor with the highest
monetary impact on the net interest margin was the maturity of high
yield investment securities, followed by the repricing of the commercial
loan portfolio due to its floating rate characteristics. These negative
factors were partially offset by interest rate adjustments made to money
market and savings deposits and the repricing of borrowings. In
addition, the redemption and repurchase of capital stock since
December 31, 2001, also had an impact on the net interest margin,
since these funds do not carry an interest cost. This was partially
offset by higher average demand deposits for the year 2002.
Notwithstanding the above, the Corporation’s spread, which is the
difference between the yield on earning assets and the cost of interest
bearing liabilities, improved slightly by 10 basis points.
As shown in Table D, net interest income on a taxable equivalent
basis, amounted to $1.2 billion in 2001, up $109.4 million from
2000. This increase was attributable to a higher level of average
earning assets in 2001 and a higher net interest margin. The increase
in mortgage loans was the primary contributor to the growth in earning
assets in 2001. The net interest margin on a taxable equivalent basis
increased by 17 basis points from 4.23% in 2000 to 4.40% in 2001.
The Federal Reserve monetary policy positively impacted the net
interest margin of the Corporation, due to its liability sensitive structure
at the beginning of the year 2001, in which the borrowings and deposits
repriced at a faster pace than the earning assets.
Provision for Loan Losses
The provision for loan losses reflects management’s assessment of
the adequacy of the allowance for loan losses to cover probable losses
inherent in the loan portfolio after taking into account loan impairment
and net charge-offs for the current period. The Corporation recorded a
$205.6 million provision for loan losses for the year ended December
31, 2002, compared with $213.2 million in 2001 and $194.6 million
2 0 0 2 A N N U A L R E P O R T 9
2 0 0 2 A N N U A L R E P O R T 9
2 0 0 2 A N N U A L R E P O R T 9
2 0 0 2 A N N U A L R E P O R T 9
2 0 0 2 A N N U A L R E P O R T 9
P O P U L A R
P O P U L A R
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Table D
Table D
Table D
Table D
Table D
Net Interest Income - Taxable Equivalent Basis
(Dollars in millions)
(In thousands)
Year ended December 31,
Average Volume
Average Yields / Costs
Interest
Variance
Attributable to
2002
2001 Variance 2002
2001 Variance
2002
2001
Variance
Rate
Volume
$1,012
10,090
364
11,466
7,752
875
6,987
3,115
$932
8,170
267
9,369
7,471
843
5,507
3,224
$80
1,920
97
2,097
3.21% 5.11% (1.90%)
5.34
6.74
4.66
5.75
5.13
6.55
(1.40)
(1.09)
(1.42)
281
6.68
32 11.13
7.72
1,480
(109) 12.33
8.11
11.62
8.12
12.90
(1.43)
(0.49)
(0.40)
(0.57)
Money market investments
Investment securities
Trading securities
Loans:
Commercial and construction
Leasing
Mortgage
Consumer
$32,505
538,916
16,961
588,382
517,899
97,367
539,758
384,008
$47,610 ($15,105)
(11,334)
550,250
1,603
15,358
(24,836)
613,218
($18,180)
(118,977)
(3,286)
(140,443)
$3,075
107,643
4,889
115,607
606,227
97,951
447,197
416,007
(88,328)
(584)
92,561
(31,999)
(110,434)
(4,235)
(22,704)
(15,013)
22,106
3,651
115,265
(16,986)
18,729
17,045
1,684
8.22
9.20
(0.98)
1,539,032
1,567,382
(28,350)
(152,386)
124,036
$30,195
$26,414
$3,781
7.05% 8.26% (1.21%)
$2,502
$2,102
$400
2.15% 3.08% (0.93%)
4,775
6,481
4,170
6,247
605
234
2.23
4.18
2.79
5.40
(0.56)
(1.22)
13,758
12,519
1,239
3.13
4.14
(1.01)
7,787
4,403
7,136
2,669
651
1,734
2.38
5.16
4.62
6.41
(2.24)
(1.25)
Total earning assets
Interest bearing deposits:
NOW and money market
Savings
Time deposits
Short-term borrowings
Medium and long-term debt
Total interest bearing
$2,127,414
$2,180,600 ($53,186) ($292,829) $239,643
$53,776
106,538
270,814
$64,637 ($10,861)
($21,107)
$10,246
116,226
(9,688)
(24,811)
337,305
(66,491)
(80,115)
15,123
13,624
431,128
518,168
(87,040)
(126,033)
38,993
185,250
227,090
329,648 (144,398)
56,029
171,061
(164,694)
(35,088)
20,296
91,117
25,948
22,324
3,624
3.25
4.56
(1.31)
liabilities
843,468
1,018,877 (175,409)
(325,815)
150,406
3,227
1,020
$30,195
3,057
1,033
$26,414
170
(13)
$3,781
2.79% 3.86% (1.07%)
4.26% 4.40% (0.14%)
Demand deposits
Other sources of funds
Net interest margin
Net interest income on
a taxable equivalent basis
3.80% 3.70% 0.10%
Net interest spread
1,283,946
1,161,723
122,223
$32,986
$89,237
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.
Taxable equivalent
adjustment
Net interest income
103,617
84,738
18,879
$1,180,329
$1,076,985 $103,344
in 2000. The provision for loan losses for 2002 exceeded net charge-
offs by $33.8 million or 20%. While the provision remained at relatively
high levels in 2002, it was down $7.6 million or 4% from the previous
year. The decrease in the provision for loan losses was mostly
associated with the fact that the growth in the Corporation’s loan
portfolio has been mostly in mortgage loans, which historically represent
a lower risk portfolio, and with the decline in the consumer loan
portfolio. Also, it relates to lower net charge-offs to average loans and
lower non-performing assets in the commercial and consumer loan
portfolios. Refer to the Credit Risk Management and Loan Quality
section for a more detailed analysis of the allowance for loan losses,
net charge-offs, and credit quality statistics.
Operating Income
For purposes of this analysis, operating income excludes securities,
trading and derivative transactions, since due to the volatility of these
transactions, management believes that their exclusion permits greater
comparability for analytical purposes. Operating income has become
an increasingly important contributor to the growth in the Corporation’s
total revenues. The Corporation’s business expansion strategies and
1 0
1 0
1 0
1 0
1 0
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P O P U L A R
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(Dollars in millions)
(In thousands)
Average Volume
Average Yields / Costs
Interest
Variance
Attributable to
2001
2000 Variance
2001
2000 Variance
2001
2000
Variance
Rate
Volume
$932
8,170
267
9,369
7,471
843
5,507
3,224
$933
7,945
213
9,091
7,216
770
4,405
3,411
($1)
225
54
278
5.11% 6.68% (1.57%)
6.85
6.74
7.33
5.75
6.85
6.55
(0.11)
(1.58)
(0.30)
255
73
1,102
8.11
11.62
8.12
(187) 12.90
9.66
11.80
8.27
13.05
(1.55)
(0.18)
(0.15)
(0.15)
Money market investments
Investment securities
Trading securities
Loans:
Commercial and construction
Leasing
Mortgage
Consumer
$47,610
550,250
15,358
613,218
606,227
97,951
447,197
416,007
$62,356 ($14,746)
5,642
544,608
(266)
15,624
(9,370)
622,588
($14,562)
(8,730)
(3,749)
(27,041)
696,903
90,906
364,269
445,038
(90,676)
7,045
82,928
(29,031)
(114,574)
(1,456)
(6,662)
(1,923)
($184)
14,372
3,483
17,671
23,898
8,501
89,590
(27,108)
17,045
15,802
1,243
9.20
10.11
(0.91)
1,567,382
1,597,116
(29,734)
(124,615)
94,881
$26,414
$24,893
$1,521
8.26%
8.92% (0.66%)
$2,102
$1,811
$291
3.08% 3.60% (0.52%)
4,170
6,247
4,113
5,549
57
698
2.79
5.40
2.89
6.22
(0.10)
(0.82)
Total earning assets
Interest bearing deposits:
NOW and money market
Savings
Time deposits
$2,180,600
$2,219,704 ($39,104) ($151,656) $112,552
$64,637
116,226
337,305
$65,195
($558)
($10,196)
$9,638
118,823
345,355
(2,597)
(5,024)
2,427
(8,050)
(45,652)
37,602
12,519
11,473
1,046
4.14
4.61
(0.47)
518,168
529,373
(11,205)
(60,872)
49,667
7,136
2,669
7,781
1,894
(645)
775
4.62
6.41
6.53
6.87
(1.91)
(0.46)
22,324
21,148
1,176
4.56
5.52
(0.96)
3,057
1,033
$26,414
3,035
710
$24,893
22
323
$1,521
3.86% 4.69% (0.83%)
4.40% 4.23% 0.17%
3.70% 3.40% 0.30%
329,648
171,061
508,029 (178,381)
41,067
129,994
(143,245)
(7,835)
(35,136)
48,902
1,018,877
1,167,396 (148,519)
(211,952)
63,433
Short-term borrowings
Medium and long-term debt
Total interest bearing
liabilities
Demand deposits
Other sources of funds
Net interest margin
Net interest income on a
taxable equivalent basis
1,161,723
1,052,308
109,415
$60,296
$49,119
Net interest spread
Taxable equivalent
adjustment
84,738
69,547
15,191
Net interest income
$1,076,985
$982,761
$94,224
its technological leadership in Puerto Rico have been key factors for
fee revenue growth in services beyond traditional banking activities.
Operating income, excluding securities, trading and derivatives
transactions, totaled $547.9 million for the year 2002, an increase of
$54.3 million or 11% compared with $493.6 million in 2001. In
2000, these revenues totaled $450.9 million. Operating income by
major categories for the past five years is presented in Table E. As a
percentage of average assets, operating income, as defined above,
represented 1.72% in 2002, compared with 1.77% in 2001 and
1.70% in 2000. The ratio of operating income, excluding securities,
trading and derivatives transactions, to operating expenses for the
year 2002 was 53.25%, compared with 53.29% in 2001 and 51.44%
in 2000.
Service charges on deposit accounts increased $10.7 million or
7% from 2001, reaching $157.7 million in 2002. This rise is mostly
related to certain commercial accounts, on which fees have been
favorably impacted by a lower earnings credit on compensatory
balances in the low interest rate scenario, and higher transaction
volume. Also, the increase in service charges is related to fees on
deposit accounts, including charges for daily overdrafts and electronic
transaction fees, among others, which commenced in mid or late
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Table E
Table E
Table E
Table E
Table E
Operating Income
(Dollars in thousands)
2002
2001
2000
1999
1998
Five-Year
C.G.R.*
Service charges on deposit accounts
$157,713
$146,994
$125,519
$118,187
$103,732
10.87%
Year ended December 31,
Other service fees:
Credit card fees and discounts
Debit card fees
Processing fees
Other fees
Insurance fees
Sale and administration of
investment products
Check cashing fees
Mortgage servicing fees, net of
amortization
Trust fees
Total other service fees
Other income
Gain on sale of loans
Total operating income
59,199
42,461
36,545
32,245
24,380
21,590
21,128
11,924
9,071
258,543
72,313
59,340
55,776
37,156
37,521
31,825
18,718
21,633
18,187
12,183
9,548
242,547
58,396
45,633
60,652
30,513
28,528
33,072
9,385
17,298
14,505
12,561
9,481
215,995
69,681
39,673
49,233
36,038
22,785 17,702
15.00
21.91
- -
8,312
31,815
6,903
17,452
11,999
11,300
9,928
21,620
8,690
11,890
2,631
9,131
8,873
169,727
116,575
51,056
34,890
35,317
23,036
12.36
20.65
17.70
119.57
5.49
5.94
21.25
23.38
20.54
$547,909
$493,570
$450,868
$373,860
$278,660
17.81%
Operating income to average assets
1.72%
Operating income to operating expenses
53.25
1.77%
53.29
1.70%
51.44
1.57%
44.64
1.36%
38.68
Note: For purposes of this Management’s Discussion and Analysis, operating income excludes securities, trading and derivative gains or losses.
* C.G.R. refers to compound growth rate.
2001. Service charges on deposit accounts were 0.93% of average
deposits in 2002, 0.94% in 2001 and 0.87% in 2000.
Other service fees, which experienced a compounded growth rate
of 21% over the last five years, amounted to $258.5 million in 2002,
an increase of $16.0 million or 7% from 2001. This increase was
mostly attributed to higher credit and debit card fees, insurance agency
commissions and check cashing fees. Credit and debit card fees
increased $8.7 million or 9% compared with 2001, mainly due to
higher volume of transactions and business growth. Average debit
card monthly transactions increased by approximately 2.3 million or
31%, since December 31, 2001. Insurance fees rose $5.7 million or
30% from 2001, derived from business expansion, the launching of
new products and services and capitalizing on the Corporation’s broad
delivery channels and client base. Check cashing fees rose $2.9 million
from 2001 driven by the continuous expansion of Popular Cash
Express, the Corporation’s retail financial services subsidiary in the
United States, which added 36 new stores and mobile units during
2002 to its delivery network.
As shown in Table E, gain on sales of loans, including loans held-
for-sale, totaled $59.3 million for the year ended December 31, 2002,
an increase of $13.7 million or 30% compared with 2001. This increase
derived in part from higher mortgage loan origination volume and
subsequent sale of these loans. The results for 2002 also included a
$2.2 million gain on the sale of loans guaranteed by the Small Business
Administration. Other income amounted to $72.3 million in 2002, an
increase of $13.9 million compared with 2001. Contributing to the
increase in other income were higher investment banking fees derived
by the Corporation’s broker/dealer subsidiary, gains on the sale of
software and equipment, consulting and network services fees, higher
revenues from the Corporation’s investment in Telecomunicaciones
de Puerto Rico, Inc. (TELPRI) and higher revenues derived from the
Corporation’s equity investments. Also, during 2002, the Corporation
recognized non-recurring gains of $3.1 million on the sale of BPNA’s
trust operations in Chicago, Illinois, and $0.6 million on the sale of 15
branches of Popular Finance, both sold as part of strategic initiatives
at these subsidiaries. These increases were partially offset by write-
downs in the value of interest-only strips of approximately $3.1 million
during 2002, impacted by the effects of the prevailing interest scenario,
since these impairments were considered other than temporary.
In 2001, operating income, excluding securities, trading and
derivatives transactions, increased $42.7 million or 9% from 2000,
reaching $493.6 million in 2001. This growth was partly attributed to
service charges on deposit accounts, which grew by $21.5 million, or
17%, mostly related to commercial accounts and new fees on deposit
accounts implemented during the latter part of 2000 and mid-2001.
In 2001, other service fees were $26.6 million or 12% higher than in
the previous year. As shown in Table E, most categories exhibited
growth in 2001, mostly as a result of higher customer activity, business
1 2
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expansion and continued growth of the Corporation’s electronic delivery
services, with considerable increases recorded in insurance agency
commissions, processing, debit card and investment banking fees.
These variances were partially offset by a decrease in credit card fees
and discounts of $4.9 million or 8% as a result of the sale of the U.S.
credit card operations in 2000. These operations contributed
approximately $13 million in service fees during 2000. Gains on sale
of loans rose by $6.0 million or 15%. Other income decreased by
$11.3 million from 2000 mostly as a result of pretax gains realized in
2000 on the sales of the Corporation’s U.S. credit card operations and
of the participation in Banco Fiduciario (BF), which combined resulted
in pre-tax gains of $9.3 million.
Securities and Trading Gains/Losses
In 2002, losses on the sale of investment securities amounted to $3.3
million, compared with slight gains of $27 thousand in 2001. The
losses in 2002 were mainly attributed to the sale of $710 million in
U.S. Agency Securities, as part of the asset/liability management
strategies followed by the Corporation due to the interest rate
environment. Proceeds from these sales were reinvested at higher
yields. Also, the Corporation recorded approximately $2.8 million in
write-downs of certain investment securities which impairment in
value was considered other than temporary. Trading losses amounted
to $0.8 million in 2002, compared with trading losses of $1.8 million
the previous year.
In 2000, the Corporation recorded $11.2 million in gains on sale
of investment securities and $2.0 million in trading account profit.
The gains on sale of securites were mostly related to a $13.4 million
pre-tax gain recognized during the year 2000 in the conversion of
preferred stock of a financial corporation in Puerto Rico to common
stock of the same entity.
Derivatives
During 2002 and 2001, the Corporation recognized derivative losses
of $20.1 million and $20.2 million, respectively, principally attributed
to the changes in fair value of $500 million in notional amount of
interest rate swaps that the Corporation uses to convert floating rate
debt to fixed rate debt in order to cap the future cost of short-term
borrowings. These swaps did not qualify as hedges in accordance
with SFAS No. 133, as amended, and therefore changes in fair value
of these derivatives are recorded in the statement of income. Since the
Corporation pays a fixed rate, as interest rates fall so does the fair
value of the swaps. Refer to the Market Risk section of this report and
Note 30 to the consolidated financial statements for further information
on the Corporation’s derivative activities.
Operating Expenses
Operating expenses totaled $1,029.0 million in 2002, an increase of
$102.8 million, or 11%, compared with $926.2 million in 2001.
Table F presents a detail of operating expenses and various related
ratios for the last five years. As a percentage of average assets, operating
expenses decreased to 3.23% in 2002, compared with 3.31% in 2001
and 3.30% in 2000. The Corporation’s efficiency ratio increased from
58.97% in 2001 to 59.69% in 2002. In 2000 this ratio was 61.54%.
These performance ratios for 2002 were impacted by the $21.6 million
forfeiture related to the settlement of the federal investigation previously
mentioned in the Overview section of this Management’s Discussion
and Analysis. Excluding this particular charge, operating expenses
were $1,007.4 million in 2002, or 3.17% of average assets, while the
efficiency ratio would have been 58.43%.
Personnel costs, the largest category of operating expenses,
amounted to $488.7 million in 2002, an increase of $63.6 million, or
15%, compared with $425.1 million in 2001, mostly due to annual
merit increases, incentives, profit sharing and higher pension and
post-retirement costs, among other fringe benefits. At December 31,
2002 full-time equivalent employees (FTE’s) totaled 10,960, reflecting
a decrease of 374 employees from 11,334 employees at December
31, 2001, mainly as part of the reorganization efforts at BPNA.
Incentives and commissions rose due to strong performance and
business production at various subsidiaries. Also, during 2002, the
Corporation opted to adopt the fair value method of recording stock
options contained in SFAS No. 123, “Accounting for Stock-Based
Compensation,” which resulted in approximately $1.0 million in
operating expenses in the year. All stock option grants will be expensed
over the stock option vesting period based on the fair value at the date
the options are granted. Refer to Note 25 to the consolidated financial
statements for further information on stock options.
Operating expenses, excluding personnel costs, amounted to
$540.3 million for the year ended December 31, 2002, an increase of
$39.2 million, or 8%, compared with $501.1 million in 2001. The
categories that increased the most were professional fees, business
promotion, net occupancy and other operating expenses. Professional
fees rose $10.9 million, or 15%, compared with the previous year,
mostly attributed to legal expenses, related in part to the federal
investigation previously mentioned, collection costs, and consulting
services for the strategic initiatives conducted at BPNA during 2002.
The increase in business promotion of $10.7 million, or 21%, was
mainly associated with higher advertising expenses, resulting mostly
from the launching of PREMIA, an innovative rewards program for
the Corporation’s customers in Puerto Rico, and also to continuous
aggressive marketing and direct mailing campaigns at the Corporation’s
mortgage and consumer lending subsidiaries. Net occupancy expenses
rose $6.4 million, or 9%, partly associated with business expansion.
Other operating expenses, which grew by $22.3 million, or 30%,
included the $21.6 million forfeiture, which resulted from the resolution
of the federal investigation previously mentioned. Partially offsetting
these rises was a decrease in the amortization of intangibles, mostly
goodwill, by $18.3 million, or 67%, due mainly to the adoption of
SFAS No. 142 “Goodwill and Other Intangible Assets” during 2002.
Total operating expenses increased $49.8 million, or 6%, from
2000 to 2001. Personnel costs increased $31.0 million, or 8%, over
the amounts reported in 2000, mainly due to annual merit increases,
higher headcount, higher pension and health insurance costs, among
other fringe benefits. Partially offsetting this rise was a lower profit
sharing expense due to a lower return on equity at BPPR. Other
operating expenses, excluding personnel costs, totaled $501.1 million
in 2001, compared with $482.3 million in 2000. This increase was
mainly the result of higher professional fees, municipal taxes, net
occupancy expenses, business promotion, communications costs and
other expenses, the latter mostly associated with higher credit card
and ATM transactions volume. Partially offsetting these rises was
lower amortization of intangibles due to the full amortization at the end
of 2000 of the core deposits intangibles recorded on the merger with
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Table F
Table F
Table F
Table F
Table F
Operating Expenses
(Dollars in thousands)
2002
2001
2000
1999
1998
Year ended December 31,
Salaries
Pension and other benefits
Profit sharing
Total personnel costs
Equipment expenses
Professional fees
Net occupancy expense
Business promotion
Communications
Other taxes
Printing and supplies
Amortization of intangibles
Other operating expenses:
Transportation and travel
FDIC assessment
All other *
Subtotal
Total
$361,957
104,549
22,235
$321,386
87,505
16,251
$306,529
68,734
18,913
$289,995
72,820
23,881
$247,590
67,743
22,067
488,741
99,099
84,660
78,503
61,451
53,892
37,144
19,918
9,104
13,896
2,805
79,789
425,142
97,383
73,735
72,100
50,783
48,883
38,756
17,804
27,438
10,960
2,750
60,475
394,176
98,022
64,851
67,720
46,791
45,689
34,125
20,828
34,558
10,112
2,846
56,715
386,696
88,334
67,955
60,814
45,938
43,146
33,290
20,709
31,788
10,426
1,782
46,604
337,400
75,302
58,087
48,607
39,376
36,941
32,191
17,604
27,860
7,968
1,497
37,521
540,261
501,067
482,257
450,786
382,954
Five-Year
C.G.R.
11.32%
8.52
(2.84)
9.75
8.32
12.60
14.66
12.85
10.09
4.17
5.09
(16.83)
14.10
13.35
19.37
10.36
$1,029,002
$926,209
$876,433
$837,482
$720,354
10.07%
Efficiency ratio**
Personnel costs to average assets
Operating expenses to average assets
Assets per employee (in millions)
59.69%
1.54
3.23
$3.07
58.97%
1.52
3.31
$2.71
61.54%
1.48
3.30
$2.63
63.08%
1.62
3.52
$2.21
62.55%
1.65
3.53
$2.20
* Includes credit card interchange and processing expenses, insurance, sundry losses, and other real estate expenses, among others.
** Non-interest expense divided by net interest income plus recurring fee income.
BanPonce Corporation in 1990, as well as lower printing and supplies
expenses.
Income Tax Expense
Income tax expense for the year ended December 31, 2002 was $117.3
million, compared with $105.3 million in 2001, an increase of $12.0
million or 11%. The increase in 2002 was primarily due to higher
pretax earnings for the current year, partially offset by higher net
benefits from tax-exempt interest income.
The effective tax rate decreased slightly from 25.7% in 2001 to
25.0% in 2002, mostly as a result of a decrease in the disallowance of
interest expense attributed to tax-exempt investments in Puerto Rico
due to lower cost of funds. Also, the decline in the effective tax rate
resulted from not recognizing amortization of goodwill upon adoption
of SFAS 142 in January 2002, since a portion of goodwill is not tax
deductible.
The difference between the effective tax rate and the maximum
statutory tax rate for the Corporation, which is 39%, is primarily
due to the interest income earned on certain investments and loans
which is exempt from Puerto Rico income tax, net of the disallowance
of related expenses attributable to the exempt income.
In 2001, income tax expense increased $4.5 million, or 4%, from
$100.8 million in 2000. The effective tax rate was 26.8% in 2000.
The rise in income taxes was mostly due to higher pretax earnings for
the year 2001, partially offset by a decrease in the disallowance of
interest expense attributed to tax-exempt investments due to lower
cost of funds. The decrease in the effective tax rate for 2001 was
mostly related to the loss on derivatives recorded during the year in
the U.S. due to a higher effective tax rate applicable to the operations
in the U.S. mainland.
Refer to Note 27 to the consolidated financial statements for
additional information on income taxes.
Fourth Quarter Results
The net income for the last quarter of 2002 was $80.8 million, or
$0.61 per common share (basic and diluted), compared with $75.6
million, or $0.54 per common share (basic and diluted), for the same
quarter of 2001. The results for the fourth quarter of 2002 represented
an annualized return on assets of 0.96% and an annualized return on
common equity of 14.64%, compared with 1.03% and 14.08%,
respectively, for the same period in 2001.
1 4
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The net interest margin, on a taxable equivalent basis, decreased
to 4.18% for the quarter ended December 31, 2002, from 4.47% in
the same period of 2001. The rise of $25.9 million or 8% in net
interest income, on a taxable equivalent basis, over the fourth quarter
of 2001 was mostly attributed to higher investment activities. The
average volume of earning assets rose by $4.4 billion, primarily due to
a $2.8 billion increase in the average volume of money market, trading
and investment securities, mostly comprised of U.S. Agency securities,
which are tax-exempt in Puerto Rico, as well as a $1.6 billion increase
in average loans, mainly mortgages. The increase in the volume of
earning assets was funded mostly through borrowed funds, which on
average rose by $3.4 billion, and by interest bearing deposits, which
increased by $0.9 billion. The decrease in the net interest yield was
mostly due to a lower yield in earning assets by 88 basis points,
primarily related to a reduction in the yields of the investment and
commercial loans portfolios. This reduction in yield was partly offset
by a reduction in the cost of funds by 59 basis points mainly associated
with the lower interest rate scenario during 2002.
The provision for loan losses declined to $50.0 million for the
quarter ended December 31, 2002, from $58.5 million in the fourth
quarter of 2001. Net charge-offs for the quarter ended December
31, 2002, were $31.9 million or 0.66% of average loans, compared
with $48.9 million or 1.10% for the same period in 2001. The decline
in net charge-offs in the fourth quarter of 2002 was mainly reflected in
the commercial, including construction, and the consumer loan
portfolios, which declined by $15.1 million and $3.2 million,
respectively. The decline in the provision for loan losses is also
influenced by the fact that most of the Corporation’s loan growth has
been in mortgage loans, a secured portfolio, which historically has
experienced minimal losses. Moreover, although non-performing assets
rose from December 31, 2001 to the same date in 2002, this rise was
mostly in mortgage loans. Refer to Table M for a detail of non-
performing loans by category for the past five years. Also, the provision
for loan losses in the last quarter of 2001 was evaluated in light of the
slowdown of the economy as a result of the September 11th , 2001
events.
Operating income, excluding securities, trading and derivative
transactions, amounted to $140.1 million for the quarter ended
December 31, 2002, compared with $128.8 million for the same
quarter in 2001, an increase of $11.3 million or 9%. The growth in
operating income was led by an increase in other service fees of $4.6
million, other operating income of $4.3 million, service charges on
deposit accounts of $1.3 million and gain on sales of loans of $1.1
million. The rise in other service fees was mostly associated with
higher credit card fees and discounts, debit card and check cashing
fees, as well as insurance agency commissions. Other operating income
increased mostly due to higher investment banking fees, gains on
sales of software and equipment, and consulting and network services.
Service charges on deposit accounts increased mainly due to higher
commercial account charges.
Sale of securities for the fourth quarter in 2002 resulted in losses
of $0.7 million, compared with gains of $0.6 million in the same
quarter of 2001. Trading losses totaled $0.7 million and $1.9 million
in the quarters ended December 31, 2002 and 2001, respectively.
Derivative gains for the fourth quarter in 2002 amounted to $2.0
million, compared with losses of $13.1 million in the same quarter the
previous year, resulting mostly from changes in the fair value of the
Corporation’s interest rate swaps.
Operating expenses for the quarter ended December 31, 2002
increased by $42.4 million, or 18%, from $239.9 million in the fourth
quarter of 2001 to $282.3 million in the same quarter in 2002. This
rise was principally reflected in other operating expenses and personnel
costs. The rise in other operating expenses of $23.1 million was
mostly attributed to the forfeiture of $21.6 million previously mentioned.
The rise in personnel costs of $16.4 million, or 16%, was primarily
due to higher salaries, pension costs and stock option expenses. The
remaining categories of operating expenses rose $2.9 million, reflected
mostly in higher professional fees and business promotion, partially
offset by a decrease in the amortization of intangibles. Income tax
expense increased by $7.9 million in the fourth quarter of 2002
compared with the same period in the previous year. The effective tax
rate was 27.6% for the quarter ended December 31, 2002, compared
with 23.2% in the same period in 2001. The increase is due in part to
the impact of higher tax benefits in the last quarter of 2001 related to
derivative losses, principally in the U.S. mainland where the effective
tax rate for the Corporation is higher.
SSSSSTATEMENT
ONDITION A A A A ANALYSIS
TATEMENT OFOFOFOFOF C C C C CONDITION
NALYSIS
NALYSIS
ONDITION
ONDITION
TATEMENT
TATEMENT
NALYSIS
NALYSIS
ONDITION
TATEMENT
Assets
At December 31, 2002, the Corporation’s total assets were $33.6
billion, an increase of $2.9 billion, or 9%, compared with $30.7
billion a year earlier.
Earning assets increased to $31.9 billion at December 31, 2002,
from $29.1 billion at December 31, 2001. Money market investments,
investment securities and trading securities amounted to $12.3 billion
at December 31, 2002, representing an increase of $1.3 billion, or
12%, compared with $11.0 billion at December 31, 2001. The increase
since 2001 was mainly reflected in investment securities, which totaled
$10.7 billion at December 31, 2002, $836 million or 8% higher than
the $9.9 billion reported a year earlier. The growth resulted mostly
from investment opportunities undertaken by the Corporation,
especially in securities of U.S. Government agencies and mortgage-
backed securities. For a breakdown of the Corporation’s investment
portfolio, refer to Notes 4 and 5 to the consolidated financial statements.
Table G reflects the Corporation’s continued loan portfolio growth
for the last five years. Total loans increased $1.4 billion, or 8%, from
$18.2 billion at December 31, 2001 to $19.6 billion at the end of
2002. The largest increases in the loan portfolio were in mortgage and
commercial (including construction) loans, which increased $969
million and $450 million, respectively. Commercial loan portfolio
growth resulted principally from the continued marketing efforts
towards the retail and middle market, notwithstanding the slowdown
experienced in the economy. Consumer loans, which include personal,
auto and boat, credit cards and reserve lines, decreased by $33 million
since the end of 2001.
The decrease in the consumer loans portfolio was mostly reflected
in personal loans, the largest category of consumer loans, which
decreased $160 million, or 10%, from $1.6 billion at December 31,
2001 to $1.4 billion at December 31, 2002. This decline was partly
due to a lower demand for personal loans as a result of the low interest
rate scenario, which tends to favor the refinancing of mortgage loans
and personal debt consolidation. It was also due to the sale of
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Table G
Table G
Table G
Table G
Table G
Loans Ending Balances
(Dollars in thousands)
Commercial, industrial and
agricultural
Construction
Lease financing
Mortgage*
Consumer
Total
*Includes loans held-for-sale.
As of December 31,
2002
2001
2000
1999
1998
$7,883,381
245,926
886,731
7,466,531
3,099,550
$19,582,119
$7,420,738
258,453
859,119
6,497,459
3,132,782
$18,168,551
$7,013,834
258,197
816,714
4,643,646
3,324,694
$16,057,085
$6,656,411
247,288
728,644
3,933,663
3,341,748
$5,646,027
257,786
645,280
3,351,748
3,177,954
$14,907,754 $13,078,795
Five-Year
C.G.R.
11.20%
(0.34)
8.79
21.38
0.17
11.47%
approximately $20 million in small consumer loans during the second
quarter of 2002, as part of the sale of 15 branches of Popular Finance,
Inc. Partially offsetting the decrease in personal loans were increases
in the other consumer loan categories. Auto and marine secured loans
increased $125 million, or 18%, since December 31, 2001, mostly
due to sales efforts. Also, credit cards and revolving lines of credit
rose less than 1% each, since December 31, 2001, increasing by
$1.5 million and $1.1 million, respectively.
At December 31, 2002, the Corporation’s lease financing portfolio
increased by $28 million, or 3%, since the end of 2001. The
Corporation’s leasing subsidiary in Puerto Rico contributed with $25
million of the rise, while the Corporation’s leasing subsidiary in the
U.S. mainland contributed with $18 million of the rise since the end
of 2001. These increases were partially offset by reductions in the
leasing portfolio at the banking subsidiaries.
Premises and equipment totaled $461 million at December 31,
2002, compared with $406 million at December 31, 2001. The increase
since 2001 is mostly associated with the acquisition the Centro Europa
building in Puerto Rico, after the Bank exercised its option to buy it.
Certain BPPR departments as well as other independent tenants occupy
the office building. The increase is also related to office remodeling
and acquisitions and premises under construction for business
expansion.
Other assets totaled $578 million at the end of 2002, an increase
of $81 million, or 16%, compared with $497 million at December 31,
2001. This growth was mostly associated with advances on
securitizations.
At December 31, 2002, goodwill totaled $183 million compared
with $178 million at the end of 2001. The increase was mostly associated
with the acquisitions performed during 2002 and the end of 2001 by
Equity One, Popular Cash Express and Popular Insurance. Other
intangible assets totaled $35 million at December 31, 2002, a decline
of $3 million, compared with the same date in the previous year, due
to the annual amortization of these intangibles. Refer to Note 10 to the
consolidated financial statements for the composition of other intangible
assets.
Deposits and Other Interest and Non-Interest Bearing
Liabilities
Total deposits at December 31, 2002 amounted to $17.6 billion,
compared with $16.4 billion at the end of 2001, an increase of $1.2
billion or 8%. Interest bearing deposits amounted to $14.2 billion
at December 31, 2002, compared with $13.1 billion the previous
year, an increase of $1.1 billion or 9%. Non-interest bearing deposits
were $3.4 billion at December 31, 2002, compared with $3.3 billion
at the end of 2001.
Savings deposits, which include NOW and money markets,
accounted for 76% of the increase in total deposits since the end of
2001, rising $947 million or 14%. This growth was attained in both
retail and commercial accounts. Meanwhile, time deposits increased
by $210 million, or 3%, from December 31, 2001. Brokered
certificates of deposit, which are included as part of time deposits,
totaled $856 million at December 31, 2002, a rise of $104 million, or
14%, since December 31, 2001. Also, contributing to the rise in time
deposits were higher individual retirement account deposits, among
other products. Demand deposits increased $87 million when
compared with December 31, 2001. This rise was reflected in most
categories, including commercial and individual deposit accounts,
deposits in trust and others.
Borrowed funds, including subordinated notes and capital
securities, increased $1.4 billion, from $11.6 billion at December 31,
2001 to $13.0 billion at the end of 2002. The increase in borrowed
funds was used primarily to fund the Corporation’s loan and investment
portfolio growth.
Short-term borrowings, including federal funds purchased and
securities sold under agreements to repurchase, amounted to $8.4
billion at December 31, 2002, compared with $7.6 billion in 2001.
Long-term borrowed funds totaled $4.6 billion at December 31, 2002,
compared with $4.0 billion at the same date the previous year.
During 2002, as well as in the previous year, the Corporation
continued extending the duration of its borrowings as part of its asset/
liability management strategies. The strategies that were followed in
2001 included issuing medium-term notes and asset-backed
securities, extending repurchase agreements, raising longer-term time
deposits and entering into an interest rate swap, where the Corporation
1 6
1 6
1 6
1 6
1 6
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table H
Table H
Table H
Table H
Table H
Capital Adequacy Data
(Dollars in thousands)
Risk-based capital:
Tier I capital
Supplementary (Tier II) capital
Total capital
Risk-weighted assets:
Balance sheet items
Off-balance sheet items
Total risk-weighted assets
Ratios:
2002
2001
2000
1999
1998
As of December 31,
$2,054,027
346,531
$2,400,558
$1,849,305
330,213
$2,179,518
$1,741,004
321,627
$2,062,631
$1,557,096
324,519
$1,881,615
$1,450,187
310,091
$1,760,278
$19,487,339
1,355,430
$20,842,769
$18,087,672
479,691
$18,567,363
$16,173,005
496,735
$16,669,740
$14,878,731
428,780
$15,307,511
$12,955,995
443,926
$13,399,921
Tier I capital (minimum required - 4.00%)
Total capital (minimum required - 8.00%)
Leverage ratio (minimum required - 3.00%)
Equity to assets
Tangible equity to assets
Equity to loans
Internal capital generation rate
9.85%
11.52
6.19
6.76
6.12
11.48
11.29
9.96%
11.74
6.46
7.50
6.74
12.30
9.19
10.44%
12.37
6.40
7.09
6.18
11.93
9.59
10.17%
12.29
6.40
7.19
6.21
12.32
9.80
10.82%
13.14
6.72
7.60
6.64
13.02
10.06
pays a fixed rate. This same strategy was followed during 2002, mainly
through issuing asset-backed securities.
Refer to Notes 12 through 17 to the consolidated financial statements
for information on the Corporation’s borrowings as of December 31,
2002 and 2001.
In 2001, the Corporation filed a shelf registration with the Securities
and Exchange Commission, allowing Popular, Inc., Popular North
America, Inc. and Popular International Bank, Inc. to issue medium-
term notes, debt securities and preferred stock in an aggregate amount
of up to $2 billion. These securities are fully and unconditionally
guaranteed by the Corporation. As of December 31, 2002, the
Corporation had available $1.9 billion under this shelf registration.
Other liabilities were $678 million at December 31, 2002, an
increase of $165 million compared with December 31, 2001. This
increase is mainly associated with derivative instruments, payables to
broker/dealer and counterparties related to transactions accounted at
trade date, the forfeiture payable under the Deferred Prosecution
Agreement, taxes payable and accrued interest, among many others.
Stockholders’ Equity
The Corporation’s stockholders’ equity at December 31, 2002 was
$2.4 billion, compared with $2.3 billion at the same date in 2001.
Earnings retention and higher accumulated other comprehensive
income, mostly associated with a favorable change in the value of
securities available-for-sale, contributed to the increase in stockholders’
equity since 2001. Unrealized gains on securities available-for-sale,
net of deferred taxes, totaled $208 million at December 31, 2002,
compared with $81 million at the end of the previous year. The
consolidated statement of condition for 2002 also included $3 million
in unrealized losses on derivatives instruments, compared with
unrealized gains of $78 thousand at the end of 2001.
Partially offsetting the capital increases explained above was the
redemption of $100 million of the Corporation’s preferred stock in
January 2002. The redemption consisted of the repurchase of shares
at the liquidation preference value of $25.50 per share plus accrued
dividends, for a total repurchase price of $25.6276 per share. Also, in
May 2002 the Corporation repurchased 4.3 million shares of its
common stock from the Banco Popular Retirement Plan, at a total cost
of $139 million, which is included as treasury stock in the consolidated
statement of condition.
Dividends declared on common stock during 2002 amounted to
$106.7 million, compared with $103.5 million in 2001. Cash dividends
declared per common share for 2002 increased to $0.80, which is 5%
higher than the 2001 cash dividend of $0.76 per common share, and
25% higher than the 2000 cash dividend of $0.64 per common share.
The dividend payout ratios for 2002, 2001 and 2000 were 30.76%,
33.10% and 32.47%, respectively.
The Corporation has a Dividend Reinvestment Plan for its
stockholders that offers the opportunity of automatically reinvesting
dividends in shares of common stock at a 5% discount from the
average market price at the time of the issuance. During 2002, a total
of 383,301 shares, equivalent to $11.2 million in additional capital,
were issued under the Plan. In 2001, 356,831 shares representing
$9.7 million in additional capital were issued under this Plan.
Table H presents the Corporation’s capital adequacy information
for the years 1998 to 2002. The Corporation continues to exceed the
well-capitalized guidelines under the federal banking regulations.
Note 20 to the consolidated financial statements presents further
information on the Corporation’s regulatory capital requirements.
Effective on January 1, 2002, a final rule revising the regulatory
capital treatment of recourse arrangements and direct credit substitutes,
including residual interests and credit-enhancing interest-only strips,
as well as asset-backed and mortgage-backed securities, took effect.
2 0 0 2 A N N U A L R E P O R T 1 7
2 0 0 2 A N N U A L R E P O R T 1 7
2 0 0 2 A N N U A L R E P O R T 1 7
2 0 0 2 A N N U A L R E P O R T 1 7
2 0 0 2 A N N U A L R E P O R T 1 7
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table I
Table I
Table I
Table I
Table I
Common Stock Performance
Market Price
High
Low
2002
4th quarter
3rd quarter
2nd quarter
1st quarter
2001
4th quarter
3rd quarter
2nd quarter
1st quarter
2000
4th quarter
3rd quarter
2nd quarter
1st quarter
1999
4th quarter
3rd quarter
2nd quarter
1st quarter
1998
4th quarter
3rd quarter
2nd quarter
1st quarter
$341/4
356/7
332/3
30
$ 301/6
361/4
3215/16
294/9
$ 277/8
271/16
239/16
267/8
$ 32
31
327/8
377/8
$ 34
363/4
365/32
2911/32
$ 285/7
301/9
283/5
271/2
$ 271/3
273/7
284/9
251/4
$ 231/2
195/8
191/16
185/8
$ 257/16
2513/16
2813/16
307/8
$ 253/8
28
297/32
231/32
Book
Value
Per
Share
Dividend
Payout
Ratio
Dividend
Yield *
Price/
Earnings
Ratio
Market/
Book
Ratio
$18.20
30.76%
2.58% 12.95x 185.71%
15.93
33.10
2.43
13.40
182.60
13.92
32.47
2.75
13.36
188.95
11.51
31.56
1.90
15.18
242.72
11.86
28.42
1.55
20.61
286.68
Cash
Dividends
Declared
Per Share
$0.20
0.20
0.20
0.20
$0.20
0.20
0.20
0.16
$ 0.16
0.16
0.16
0.16
$ 0.16
0.16
0.14
0.14
$ 0.14
0.14
0.11
0.11
* Based on the average high and low market price for the four quarters.
Note: All per share data has been adjusted to reflect the stock split effected in the form of a dividend of one share for each share outstanding on July 1, 1998.
As a result of the adoption of this rule, off-balance sheet items included
in the computation of regulatory capital of the Corporation increased
by $792 million.
The average tangible equity amounted to $1.9 billion for the year
ended December 31, 2001 and 2002. Total tangible equity at
December 31, 2002 was $2.2 billion compared with $2.0 billion at
the end of the previous year. The average tangible equity to average
assets ratio for 2002 was 6.12% compared with 6.74% in 2001. The
reduction resulted from the redemption of preferred stock and the
repurchase of common stock mentioned above, together with the growth
in assets.
Book value per common share was $18.20 at December 31, 2002,
compared with $15.93 at December 31, 2001. The market value of
the Corporation’s common stock at the end of 2002 was $33.80 per
share compared with $29.08 a year earlier. Total market capitalization
was $4.5 billion at December 31, 2002 and $4.0 billion at December
31, 2001.
The Corporation’s common stock is traded on the National
Association of Securities Dealers Automated Quotation (NASDAQ)
National Market System under the symbol BPOP. Table I shows the
Corporation’s common stock performance on a quarterly basis during
the last five years, including market prices and cash dividends declared.
As of February 28, 2003, the Corporation had 11,117 stockholders of
record of its common stock, not including the beneficial owners whose
shares are held in record names of brokers or other nominees.
The Corporation has a stock option plan, which permits the granting
of incentive awards in the form of qualified stock options, incentive
stock options, or non-statutory stock options of the Corporation. Any
employee or director of the Corporation or any of its subsidiaries is
eligible to participate in the plan. During 2001 and 2002, options for
26,416 and 423,647 common shares, respectively, were awarded
1 8
1 8
1 8
1 8
1 8
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
under the plan. Refer to Note 25 to the consolidated financial statements
for further information.
Risk Management
A Risk Management Committee composed of members of the Board of
Directors of the Corporation monitors and approves policies and
procedures and evaluates the Corporation’s activities affected by credit,
market, operational, legal, liquidity, reputation and strategic risks.
The Corporation has specific policies and procedures which
structure and delineate the management of risks, particularly those
related to interest rate exposure, liquidity and credit, all of which are
discussed below.
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 to the Corporation is the impact
of changes in interest rates.
The stability and level of the Corporation’s net interest income, as
well as its market value of equity, are subject to interest rate volatility.
Changes in interest rates affect both the rates at which the Corporation’s
assets and liabilities reprice over time, and the market values of most
of its assets and liabilities. Since net interest income is the main
source of earnings for the Corporation, the constant measurement and
control of market risk is a major priority.
The Corporation’s Board of Directors (the Board) is responsible for
establishing policies regarding the assumption and management of
market risk, and delegates their implementation to the Market Risk
Committee (the Committee) of Popular, Inc. The Committee’s primary
goal is to ensure that the market risk assumed by the Corporation
remains within the parameters of the Board’s policies.
Interest Rate Risk
Interest rate risk (IRR) refers to the impact of changes in interest rates
on the Corporation’s 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. In limiting interest
rate risk to an acceptable level, management may alter the mix of
floating and fixed rate assets and liabilities, change pricing schedules,
adjust maturities through sales and purchases of investment securities,
and enter into derivative contracts, among other alternatives.
The Committee implements the market risk policies approved by
the Board as well as the risk management strategies reviewed and
adopted in Committee meetings. The Committee measures and monitors
the level of short and long-term IRR assumed by the Corporation and
its subsidiaries. It uses simulation analysis and static gap estimates
for measuring short-term IRR. Duration analysis is used to quantify
the level of long-term IRR assumed, and focuses on the estimated
economic value of the Corporation, that is, the difference between the
estimated market value of financial assets less the estimated value of
financial liabilities.
Static gap analysis measures the volume of assets and liabilities at
a point in time and their repricing during future time periods. The
repricing volumes typically include adjustments for anticipated future
asset prepayments and for differences in sensitivity to market rates.
The volume of assets and liabilities repricing during future periods,
particularly within one year, is used as one short-term indicator of
IRR. Table J presents the static gap estimate for the Corporation as of
December 31, 2002. These static measurements do not reflect the
results of any projected activity and are best used as early indicators
of potential interest rate exposures.
The interest rate sensitivity gap is defined as the difference between
earning assets and interest-bearing liabilities maturing or repricing
within a given time period. At December 31, 2002, the Corporation’s
one-year cumulative gap was $3.5 billion or 11.07% of total earning
assets, compared with a one-year cumulative positive gap of $0.7
billion or 2.24% of total earning assets at the end of 2001. During
2002, the Corporation continued extending the maturity dates of certain
borrowings into long-term maturities to take advantage of the low
interest rate environment.
At December 31, 2002, the Corporation was a participant in interest
rate swap agreements with an aggregate notional amount of $525
million. In such agreements, the Corporation converted floating rate
debt to fixed rate debt, reducing its exposure to increases in interest
rates that may occur in the future.
Simulation analysis is another measurement used by the Corporation
for short-term IRR, and it addresses some of the deficiencies of gap
analysis. It involves estimating the effect on net interest income of one
or more future interest rate scenarios as applied to the repricing of the
Corporation’s current assets and liabilities and the assumption of new
balances. The simulation analyses reviewed by the Committee are
based on various interest rate scenarios, and include assumptions
made related to the prepayment of the amortizing loans and securities,
and the sensitivity of the Corporation’s cost of retail deposits to changes
in market rates. The computations do not contemplate actions
management could take to respond to changes in interest rates.
Computations of the prospective effects of hypothetical interest rate
changes should not be relied upon as indicative of actual results. By
their nature, these forward-looking statements are only estimates and
may be different from what actually occurs in the future. As of
December 31, 2002, the difference in projected net interest income
under a rising and declining rate scenario, which assumes interest
rates gradually change by 100 basis points up and down during the
twelve-month period from the prevailing rates at year end, was a
decrease of $2.2 million and an increase of $2.4 million, respectively,
which represented changes of 0.2% in net interest income. These
estimated changes are within the policy guidelines established by the
Board.
Duration analysis measures longer-term IRR, in particular the
duration of market value of equity. It expresses in general terms the
sensitivity of the market value of equity to changes in interest rates.
The estimated market value of equity is obtained from the market
value of the cash flows from the Corporation’s financial assets and
liabilities, which are primarily payments of interest and repayments
of principal. Thus, the market value of equity incorporates most future
cash flows from net interest income, whereas other measures of IRR
focus primarily on short-term net interest income.
The duration of the market value of portfolio equity (“MVPE”) is a
measure of its riskiness. The MVPE is equal to the estimated market
value of the Corporation’s assets minus the estimated market value of
2 0 0 2 A N N U A L R E P O R T 1 9
2 0 0 2 A N N U A L R E P O R T 1 9
2 0 0 2 A N N U A L R E P O R T 1 9
2 0 0 2 A N N U A L R E P O R T 1 9
2 0 0 2 A N N U A L R E P O R T 1 9
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table J
Table J
Table J
Table J
Table J
Interest Rate Sensitivity
(Dollars in thousands)
Assets:
Money market investments
Investment and trading securities
Loans
Other assets
Total
Liabilities and stockholders’ equity:
Savings, NOW and money market
accounts
Other time deposits
Federal funds purchased and securities
sold under agreements to repurchase
Other short-term borrowings
Notes payable
Capital securities
Subordinated notes
Non-interest bearing deposits
Other non-interest bearing liabilities
and minority interest
Stockholders’ equity
Total
Interest rate swaps
Interest rate sensitive gap
Cumulative interest rate
sensitive gap
Cumulative sensitive gap to
earning assets
As of December 31, 2002
By Repricing Dates
Within
31-90
days
After
three months
but within
six months
After
six months
but within
nine months
After
nine months
but within
one year
After one
year
Non-interest
bearing
funds
0-30
days
$790,237
2,811,690
5,559,491
$302,064
685,105
1,061,357
$1,418
1,216,971
857,062
$927
718,347
797,865
$1,140,357
859,616
$4,650,530
10,446,728
9,161,418
2,048,526
2,075,451
1,517,139
1,999,973
15,097,258
$1,760,587
1,760,587
872,078
1,198,764
4,425,603
972,523
657,611
1,090,294
798,235
424,944
361,433
1,251,112
579,207
764,632
55,545
13,304
4,999
1,980
60,000
149,542
78,528
34,918
6,740,778
2,760,829
950,311
2,687,151
144,000
125,000
3,367,385
Total
$1,094,646
11,223,000
19,582,119
1,760,587
33,660,352
7,612,856
6,634,499
6,684,551
1,703,562
4,298,853
144,000
125,000
3,367,385
$8,126,579
$3,685,245
$872,083
$636,466
$474,879
$13,408,069
525,000
1,559,839
(1,636,719)
1,203,368
880,673
1,525,094
(525,000)
1,164,189
1,559,839
(76,880)
1,126,488
2,007,161
3,532,255
4,696,444
4.89%
(0.24%)
3.53%
6.29%
11.07%
14.72%
678,767
2,410,879
678,767
2,410,879
$6,457,031 $33,660,352
the liabilities. The duration of MVPE is equal to the product of the
market value of assets times its duration, minus the product of the
market value of liabilities times its duration, divided by the market
value of equity. In general, the longer the duration of MVPE, the more
sensitive is its market value to changes in interest rates. As of
December 31, 2002, the estimated duration of the market value of
equity of the Corporation was 7.03 years compared with 3.62 years as
of the same date a year earlier. The increase in the duration of equity
is related to an increase in the duration of the investment securities.
Duration measures the average length of a financial asset or liability.
In particular it equals the weighted average maturity of all the cash
flows of a financial asset or liability where the weights are equal to the
present value of each cash flow. The present value of cash flows
occurring in the future is the estimated market value as of a certain
date. The sensitivity of the market value of a financial asset or liability
to changes in interest rates is primarily a function of its duration. In
general terms, the longer the duration of an asset or liability, the
greater is the sensitivity of its market value to interest rate changes.
Since duration measures the length of a financial asset or liability, it is
usually expressed in terms of years or months.
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 and cash
flows that are caused by interest rate volatility. The Corporation’s goal
is to manage interest rate sensitivity by modifying the repricing or
maturity characteristics of certain balance sheet assets and liabilities
so that the net interest margin is not, on a material basis, adversely
affected by movements in interest rates. Derivative instruments that
are used, to a limited extent, as part of the Corporation’s interest rate
risk management strategy include interest rate swaps, interest rate
forwards and future contracts, interest rate swaptions, foreign exchange
contracts, and interest rate caps, floors and put options embedded in
interest rate contracts.
As a matter of policy, the Corporation does not use highly leveraged
derivative instruments for interest rate risk management. The
2 0
2 0
2 0
2 0
2 0
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table K
Table K
Table K
Table K
Table K
Maturity Distribution of Earning Assets
(In thousands)
Money market securities
Investment and trading securities
Loans:
Commercial
Construction
Lease financing
Mortgage
Consumer
Total
As of December 31, 2002
Maturities
After one year
through five years
After five years
Fixed
interest
rates
Variable
interest
rates
Fixed
interest
rates
Variable
interest
rates
$4,103,269
$858,542
$2,983,481
$678,747
1,289,327
7,742
638,353
2,661,022
1,320,810
1,190,782
34,847
360,106
1,129,982
23,126
8
1,287,065
834,943
985,969
130,575
1,235,463
Total
$1,094,646
10,882,003
7,883,381
245,926
886,731
7,466,531
3,099,550
One year
or less
$1,094,646
2,257,964
3,287,321
49,636
248,370
1,922,875
943,797
$9,804,609
$10,020,523
$2,444,277
$6,258,605
$3,030,754
$31,558,768
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity securities held by the Corporation are not included in this table.
Corporation’s derivative activities are monitored by the Committee,
which is responsible for approving hedging strategies that are developed
through the analysis of data derived from financial simulation models
and other internal and industry sources. The resulting hedging
strategies are then incorporated into the Corporation’s overall interest
rate risk management and trading strategies. Several derivative contracts
that the Corporation has entered into do not qualify for accounting as
hedges as defined in SFAS No. 133, and their changes in market
value are recognized in current earnings.
Refer to Note 30 to the consolidated financial statements for further
information on the Corporation’s involvement in derivative instruments
and hedging activities.
Trading
The Corporation’s trading activities are another source of market risk
and are subject to strict guidelines approved by the Board of Directors
and included in the investment policy. Most of the Corporation’s trading
activities are limited to mortgage banking activities, the purchase of
debt securities for the purpose of selling them in the near term and
positioning securities for resale to retail customers. In anticipation of
customer demand, the Corporation carries an inventory of capital
market instruments and maintains market liquidity by quoting bid
and offer prices to and trading with other market makers. Positions
are also taken in interest rate sensitive instruments, based on
expectations of future market conditions. These activities constitute
the proprietary trading business and are conducted by the Corporation
to provide customers with financial products at competitive prices. As
the trading instruments are recognized at market value, the changes
resulting from fluctuations in market prices, interest rates or exchange
rates directly affect reported income. Further information on the
Corporation’s risk management and trading activities is included in
Note 30 to the consolidated financial statements.
In the opinion of management, the size and composition of the
trading portfolio does not represent a potentially significant source of
market risk for the Corporation.
As of December 31, 2002 the trading portfolio of the Corporation
amounted to $510 million and represented 1.5% of total assets,
compared with $270 million and 0.9% a year earlier. This portfolio
was composed of the following as of December 31, 2002:
(Dollars in thousands)
Mortgage-backed securities
Commercial paper
U.S. Treasury and agencies
Puerto Rico Government obligations
Other
Amount
$377,135
114,958
9,105
3,991
5,157
$510,346
Weighted
Average Yield
6.40%
1.90
3 . 0 0
5 . 6 0
6 . 0 7
5.31%
As of December 31, 2002, the trading portfolio of the Corporation
had an estimated duration of 0.6 years and a one-month value at risk
(VAR) of approximately $1.0 million, assuming a confidence level of
95%. VAR is a key measure of market risk for the Corporation. VAR
represents the maximum amount that the Corporation has placed at
risk of loss with a 95% degree of confidence, in the course of its risk
taking activities. Its purpose is to describe the amount of capital
requirement to absorb potential losses from adverse market
movements. There are numerous assumptions and estimates
associated with VAR modeling, and actual results could differ from
these assumptions and estimates.
The Corporation does not participate in any trading activities
involving commodity contracts.
2 0 0 2 A N N U A L R E P O R T 2 1
2 0 0 2 A N N U A L R E P O R T 2 1
2 0 0 2 A N N U A L R E P O R T 2 1
2 0 0 2 A N N U A L R E P O R T 2 1
2 0 0 2 A N N U A L R E P O R T 2 1
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table L
Table L
Table L
Table L
Table L
Average Total Deposits
(Dollars in thousands)
2002
2001
2000
1999
1998
For the Year
Five-Year
C.G.R.
7.11%
-
7.06
7.07
14.32
9.26
Demand
Other non-interest bearing accounts
Non-interest bearing
Savings accounts
NOW and money market accounts
Savings deposits
Certificates of deposit:
Under $100,000
$100,000 and over
936
Certificates of deposit
Other time deposits
Interest bearing
$3,226,758
-
3,226,758
4,775,115
2,502,272
7,277,387
$3,052,270
4,277
3,056,547
4,170,202
2,101,892
$3,030,307
4,976
3,035,283
4,113,338
1,811,352
$3,032,001
6,881
3,038,882
4,132,397
1,745,579
$2,607,525
4,251
2,611,776
3,761,160
1,459,972
6,272,094
5,924,690
5,877,976
5,221,132
2,809,305
2,797,085
121,290
2,751,490
2,721,716
111,251
2,766,905
2,030,067
259,203
2,664,174
1,601,861
297,122
2,155,391
1,421,456
369,530
18.22
8.44
(24.93)
5,727,680
5,584,457
5,056,175
4,563,157
3,946,377
9.79
752,821
662,693
492,334
311,323
490,816
11.74
13,757,888
12,519,244
11,473,199
10,752,456
9,658,325
9.60
Total
$16,984,646
$15,575,791
$14,508,482
$13 ,791,338
$12,270,101
9.09%
Foreign Exchange
The Corporation conducts business in certain Latin American markets
through several of its processing and information technology services
and products subsidiaries. Also, it holds an interest in Consorcio de
Tarjetas Dominicanas, S.A. (Contado) and Centro Financiero BHD,
S.A. in the Dominican Republic. Although not significant, some of
these businesses are conducted in the country’s particular foreign
currency. However, management does not expect future exchange
volatility between the U.S. dollar and the particular foreign currency to
affect significantly the value of the Corporation’s investment in these
companies.
Liquidity
Liquidity refers to the ability to fund current operations, including the
cash flow requirements of depositors and borrowers as well as future
growth. The Corporation utilizes various sources of funding to help
ensure that adequate levels of liquidity are always available.
Diversification of funding sources is a major priority, as it helps
protect the liquidity of the Corporation from market disruptions. Since
the duration and repricing characteristics of the Corporation’s
borrowings determine, to a major extent, the overall interest rate risk
of the Corporation, they are actively managed.
Deposits tend to be less volatile than institutional borrowings and
their cost is less sensitive to changes in market rates. The extensive
branch network of the Corporation in the Puerto Rico market and its
expanding network in major U.S. markets, have enabled it to maintain
a significant and stable base of deposits. Deposits are the primary
source of funding, although wholesale borrowings are an increasingly
important source. At December 31, 2002, the Corporation’s core
deposits amounted to $14.3 billion or 81% of total deposits, an increase
of $985 million or 7% from the same date a year ago. Certificates of
deposits with denominations of $100,000 and over as of December
31, 2002 totaled $3.3 billion, or 19% of total deposits. Their
distribution by maturity was as follows:
(Dollars in thousands)
3 months or less
3 to 6 months
6 to 12 months
over 12 months
$1,404,407
309,565
377,000
1,250,612
$3,341,584
For further detail on average deposits for the last five years, please
refer to Table L.
Another important liquidity source for the Corporation is its assets,
particularly the investment portfolio. This portfolio consists primarily
of liquid U.S. Treasury and Agency securities that can be used to
raise funds in the repo markets. As of December 31, 2002, the entire
investment portfolio, excluding trading securities, totaled $10.7 billion,
of which $1.7 billion or 16% has maturities of one year or less. The
maturity distribution of the investment and trading portfolio is presented
in Table K. Mortgage-related investments in Table K are presented
based on expected maturities, which may differ from contractual
maturities, since they could be subject to prepayments.
The Corporation’s loan portfolio is another important source of
liquidity since it generates substantial cash flow resulting from principal
and interest payments and principal prepayments. The loan portfolio
can also be used to obtain funding in the capital markets. In particular,
mortgage loans and some types of consumer loans, and to a lesser
extent commercial loans, have highly developed secondary markets,
which the Corporation uses on a regular basis. The maturity distribution
of the loan portfolio as of December 31, 2002 is presented in Table K.
As of that date $6.5 billion or 33% of the loan portfolio is expected to
mature within one year. The contractual maturities of loans have been
2 2
2 2
2 2
2 2
2 2
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
adjusted to include prepayments based on historical data and
prepayment trends.
Various forms of both short and long-term borrowings provide
additional funding sources. Wholesale or institutional sources of
funding include the repo, federal funds and Eurodollar markets,
commercial paper, medium term notes, senior debentures and asset
securitizations. A more detailed description of these sources is included
in the Statement of Condition analysis in this Management’s Discussion
and Analysis and in notes 12 through 17 to the consolidated financial
statements.
At December 31, 2002, the Corporation had outstanding $253
million in commercial paper. At that date, the Corporation had a
committed liquidity facility in the amount of $315 million, which also
serves as a back-up for the commercial paper program. The facility
has never been drawn and management does not anticipate doing so
in the future. At the end of 2002, the Corporation had $815 million in
approved lines of credit with the Federal Home Loan Bank, of which
approximately $485 million remained unused. These FHLB advances
are secured by securities and mortgages under a collateral agreement.
Other approved short and long term credit facilities are warehouse,
repos and fed funds lines, banks notes program, and other. Of these
facilities, $18.2 billion were approved and $12.2 billion remained
unused as of the end of 2002. In addition, BPPR has established a
borrowing facility at the discount window of the Federal Reserve Bank
of New York. As of December 31, 2002, BPPR has a borrowing
capacity at the discount window of approximately $2.0 billion, which
remained unused. These facilities are collateralized sources of credit
that are highly reliable even under difficult market conditions.
Also, the Corporation obtains liquidity in the capital markets
through the sale of its debt and equity securities. The Corporation has
a shelf registration filed with the Securities and Exchange Commission,
which is intended to permit the Corporation to raise funds through
sales of preferred stock or medium-term notes with a relatively short
lead-time. On February 26, 2003, the Corporation announced the
offering of its 6.375% Noncumulative Monthly Income Preferred Stock,
2003 Series A, at a price of $25 per share. The new proceeds to the
Corporation, after the underwriting discounts and expenses, are
estimated at approximately $157 million, or a maximum of
approximately $181 million if an over-allotment option is exercised in
full by the underwriters. The Corporation intends to use the net
proceeds for general corporate purposes.
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. In addition, as mentioned above, the
Corporation’s banking subsidiaries maintain borrowing facilities at
the Discount Window of the Federal Reserve Bank of New York, and
have a considerable amount of collateral that can be used to raise
funds under these facilities.
Although the Corporation raises the majority of its financing from
retail deposits, it still borrows a material amount of funds from
institutional sources. Institutional lenders tend to be sensitive to the
perceived credit risk of the entities to which they lend, and this exposes
the Corporation to the possibility of having its access to funding affected
by how the market perceives its credit quality; this, in part, may be
due to factors beyond its control.
Changes in the credit rating of the Corporation or any of its
subsidiaries to a level below “investment grade” may affect the
Corporation’s access to the capital markets. The Corporation’s
counterparties are sensitive to the risk of a rating downgrade. In the
event of a downgrade, it may be expected that the cost of borrowing
funds in the institutional market would increase. In addition, the
ability of the Corporation to raise new funds or renew maturing debt
may be more difficult. During 2002, Fitch, a nationally recognized
credit rating agency, changed the Corporation’s rating outlook from
“stable” to “negative”. In the opinion of management, this does not
necessarily imply that a change in the actual rating of the Corporation
is imminent, but does suggest that the agency has identified financial
trends, which if left unchanged, may result in a rating change.
Management does not anticipate changes in the credit ratings of the
Corporation based on its expected outlook for the P.R./U.S. economy,
interest rates and expected financial results of the Corporation. Also,
management anticipates that all concerns raised by the credit rating
agency will be fully addressed.
The Corporation and BPPR’s debt ratings as of December 31, 2002
were as follows:
Popular, Inc.
BPPR
Short-term
debt
F-1
P-2
A-2
Long-term
debt
A
A3
BBB+
Short-term
debt
F-1
P-1
A-2
Long-term
debt
A
A2
A-
Fitch
Moody’s
S&P
Some of the Corporation’s borrowings are subject to “rating triggers”,
contractual provisions that accelerate the maturity of the underlying
borrowing 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 was $0.3 billion as of December 31, 2002, of
which $200 million were in Popular North America and $73 million
in BPPR.
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 foreseeable future. As of December 31, 2002, the Corporation
had outstanding $0.9 billion in obligations subject to covenants,
including those which are subject to “rating triggers” and those
2 0 0 2 A N N U A L R E P O R T 2 3
2 0 0 2 A N N U A L R E P O R T 2 3
2 0 0 2 A N N U A L R E P O R T 2 3
2 0 0 2 A N N U A L R E P O R T 2 3
2 0 0 2 A N N U A L R E P O R T 2 3
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
outstanding under the commercial paper program and the warehouse
lines of credit.
The Corporation’s non-banking subsidiaries may be subject to a
higher degree of liquidity risk than the banking subsidiaries, due to
the latter’s access to federally insured deposits and the Federal Reserve
Discount Window. A higher proportion of the funding of the non-
banking subsidiaries is from institutional sources, as compared to the
banking subsidiaries, and these are more sensitive to the perceived
credit risk of the Corporation than providers of deposits. In the event
of a downgrade in the credit ratings of the Corporation, the non-
banking subsidiaries may experience an increase in their cost of
funds and reduced availability of financing. Management does not
anticipate such a scenario developing in the foreseeable future.
The importance of the Puerto Rico market for the Corporation is an
additional risk factor that could affect its financing activities. In the
case of an extended economic slowdown in Puerto Rico, the credit
quality of the Corporation could be affected, and as a result of higher
credit costs, profitability may decrease. The substantial integration of
Puerto Rico with the U.S. economy should limit the probability of a
prolonged recession in Puerto Rico (except if there is a U.S. national
recession) and its related risks to the Corporation.
Management intends to finance the future operations of the
Corporation with a combination of retail and commercial deposits, and
to a lesser extent, short and long-term borrowed funds. The sources
and the maturities of these borrowings will be diversified to avoid
undue reliance on any single source and maintain an orderly volume
of borrowings maturing in the future.
Factors that the Corporation does not control, such as the economic
outlook of its principal markets, could affect its ability to obtain funding.
In order to prepare for the possibility of such a scenario, management
has adopted contingency plans for raising financing under stress
scenarios, where important sources of funds that are usually fully
available are temporarily not willing to lend to the Corporation.
These plans 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 Home Loan
Bank of New York and the Federal Reserve Bank of New York. The
Corporation has a substantial amount of assets available for raising
funds through non-traditional channels and is confident that it has
adequate alternatives to rely on, under a scenario where some primary
funding sources are temporarily unavailable.
Off-Balance Sheet Activities
In past years, in the ordinary course of business, the Corporation
conducted asset securitizations involving the transfer of mortgage
loans to a qualifying special purpose entity (QSPE), which in turn
transferred the assets, including their titles, to different trusts, thus
isolating those loans from the Corporation’s assets. The transactions
qualified for sale accounting based on the provisions of SFAS No. 140
“Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities,” and as such, these trusts are not
consolidated in the Corporation’s financial statements. As of December
31, 2002, these trusts held approximately $248 million in assets in
the form of mortgage loans. Their liabilities in the form of debt principal
due to investors approximated $240 million at the end of 2002. In
these securitizations, the Corporation retained servicing responsibilities
and certain subordinated interests in the form of interest-only
2 4
2 4
2 4
2 4
2 4
securities. The investors and the securitization trusts have no recourse
to the Corporation’s assets. 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, or fair value, respectively.
During the year ended December 31, 2002 the Corporation recorded
approximately $3.1 million of write-downs related to interest-only
strips, in which the decline in the fair value was considered other than
temporary.
Contractual Obligations and Commercial Commitments
As disclosed in the notes to the consolidated financial statements,
Popular, Inc. has certain obligations and commitments to make future
payments under contracts. At December 31, 2002, the aggregate
contractual obligations were:
(In millions)
Payments Due by Period
Long-term debt
Annual rental
commitments under
operating leases
Total contractual cash
Less than
1 year
$1,313
1 to 3 4 to 5 After 5
years
years
years
Total
$1,320 $1,241 $694 $4,568
3 5
5 5
3 9
9 6
225
obligations
$1,348
$1,375 $1,280 $790 $4,793
The operating lease agreements do not impose any restrictions on
Popular, Inc.’s ability to pay dividends or engage in debt or equity
financing transactions.
Popular, Inc. also utilizes lending-related financial instruments in
the normal course of business to meet the financial needs of its
customers. The Corporation’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit and commercial
letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in
making those commitments and conditional obligations as it does for
those reflected on the statements of condition. Many of the commitments
may expire without being drawn upon. As a result, total contractual
amounts are not representative of the Corporation’s actual future credit
exposure or liquidity requirements for these commitments. At
December 31, 2002 the contractual amounts related to the
Corporation’s off-balance sheet lending activities were:
(In millions)
Commitments to
extend credit
Commercial letters
of credit
Standby letters of
credit
Commitments to
Amount of Commitment – Expiration Period
Less than
1 year
1 to 3 4 to 5 After 5
years
years
years
Total
$4,212
$378
$225
$30 $4,845
2 0
5 3
-
6 9
7 6
-
-
3
-
1
-
2 0
126
547
originate mortgage loans
471
Total
$4,756
$523
$228
$31 $5,538
During 2002, the Corporation also entered into a commitment to
purchase $100 million of mortgage loans from another institution with
the option of purchasing $75 million in additional loans. The
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
commitment expires on June 30, 2004. As of December 31, 2002, no
loans have been purchased under this agreement.
Refer to Notes 14, 15, 16, 26 and 28 to the consolidated financial
statements for further information on the Corporation’s contractual
obligations and commercial commitments.
Credit Risk Management and Loan Quality
One of the Corporation’s primary risk exposures is its credit risk,
which represents the possibility of loss from the failure of a borrower
or counterparty to perform according to the terms of a credit-related
contract.
The Corporation manages credit risk by maintaining sound
underwriting standards, monitoring and evaluating the quality of the
loan portfolio, its trends and collectibility, assessing reserves and
loan concentrations, recruiting qualified and highly skilled credit
officers, implementing and monitoring lending policies and collateral
requirements, and instituting procedures to ensure appropriate actions
to comply with laws and regulations. Included in the policies, primarily
determined by the amount, type of loan and risk characteristics of the
credit facility, are various approval levels, ranging from the branch or
department level to those that are more centralized. When considered
necessary, the Corporation receives collateral to support credit
extensions and commitments, which is generally in the form of real
and personal property, cash on deposit and other highly liquid
instruments.
The Corporation has a Credit Strategy Committee (CRESCO) that
oversees all credit-related activities. It is the CRESCO’s responsibility
to manage the Corporation’s overall credit exposure and to develop
credit policies, standards and guidelines that define, quantify, and
monitor credit risk. Through the CRESCO, Senior Management reviews
asset quality ratios, trends and forecasts, problem loans, establishes
the provision for loan losses and assesses the methodology and
adequacy of the allowance for loan losses on a monthly basis. The
analysis of the allowance adequacy is presented to the Board of Directors
for review, consideration and ratification on a quarterly basis.
The Corporation also has an independent Credit Risk Management
Division (CRMD), which is centralized and independent of the lending
function. It manages the credit rating system and estimates the
adequacy of the allowance for loan losses in accordance with generally
accepted accounting principles (GAAP) and regulatory standards. To
manage and control the Corporation’s credit risk the CRMD utilizes
various techniques through the different stages of the credit process.
A CRMD representative, who is a permanent non-voting member of
the Executive Credit Committee, oversees the adherence to policies
and procedures established for the initial underwriting of the credit
portfolio. Also, the CRMD performs ongoing monitoring of the portfolio,
including potential areas of concern for specific borrowers and/or
geographic regions. Specialized workout officers, who are independent
of the originating unit, handle substantially all commercial loans which
are past due over 90 days, have filed bankruptcy, or based on their
risk profile are considered problem loans.
The Corporation also has an independent Credit Process Review
Group within the CRMD, which performs annual comprehensive credit
process reviews of several middle market, construction and corporate
banking lending groups. It also reviews the work performed by outside
loan review firms providing services to the Corporation on the U.S.
mainland. This group evaluates the risk profile of each originating
unit along with each unit’s credit administration effectiveness and the
quality of the credit and collateral documentation.
At December 31, 2002, the Corporation’s credit exposure was
centered in its $19.6 billion loan portfolio, which represented 61% of
its earning assets. The portfolio composition for the last five years is
presented in Table G.
The Corporation issues certain credit-related off-balance sheet
financial instruments, including commitments to extend credit, stand-
by letters of credit and commercial letters of credit to meet the financing
needs of its customers. For these financial instruments, the contract
amount represents the credit risk associated with failure of the
counterparty to perform in accordance with the terms and conditions
of the contract, and the decline in value of the underlying collateral.
The credit risk associated with these financial instruments varies
depending on the counterparty’s creditworthiness and the value of any
collateral held. Since many of these commitments expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Refer to Note 28 to the
consolidated financial statements for the Corporation’s involvement in
these credit-related activities and to the Contractual Obligations and
Commercial Commitments sections of this Management’s Discussion
and Analysis.
The Corporation is also exposed to credit risk by using derivative
instruments, but manages the level of risk by only dealing with
counterparties of good credit standing, entering into master netting
agreements whenever possible and, when appropriate, obtaining
collateral. Refer to Note 30 to the consolidated financial statements for
further information on the Corporation’s limited involvement in
derivative instruments and hedging activities.
The Corporation also manages exposures to a single borrower,
industry or product type through participations and loan sales. The
Corporation maintains a diversified portfolio intended to spread its
risk and reduce its exposure to economic downturns, which may
occur in different segments of the economy or in particular industries.
Industry and loan type diversification is reviewed quarterly.
The Corporation’s credit risk exposure is spread among individual
consumers, small commercial loans and a diverse base of borrowers
engaged in a wide variety of businesses. The Corporation has over
700,000 consumer loans and over 42,000 commercial lending
relationships. Only 91 of these relationships have loans outstanding
of $10 million or more. Highly leveraged transactions and credit facilities
to finance speculative real estate ventures are minimal, and there are
no loans to less developed countries. The Corporation limits its exposure
to concentrations of credit risk by the nature of its lending limits.
Approximately 26% of total commercial loans outstanding, including
construction, are secured by real estate or cash collateral. In addition,
the secured consumer loan portfolio was $1.2 billion or 40% of the
total consumer portfolio at December 31, 2002.
The Corporation continues diversifying its geographical risk as a
result of its expansion strategy throughout various markets in the
United States and the Caribbean. Puerto Rico’s share of the
Corporation’s total loan portfolio has decreased from 64% in 1997, to
54% in 2001 and 51% in 2002. The Corporation’s assets and revenue
composition by geographical area and by business line segments is
further presented in Note 32 to the consolidated financial statements.
2 0 0 2 A N N U A L R E P O R T 2 5
2 0 0 2 A N N U A L R E P O R T 2 5
2 0 0 2 A N N U A L R E P O R T 2 5
2 0 0 2 A N N U A L R E P O R T 2 5
2 0 0 2 A N N U A L R E P O R T 2 5
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table M
Table M
Table M
Table M
Table M
Non-Performing Assets
(Dollars in thousands)
Non-accrual loans:
Commercial, industrial and
agricultural
Construction
Lease financing
Mortgage*
Consumer
Renegotiated accruing loans
Other real estate
Total
Accruing loans past-due
90 days or more
Non-performing assets to loans
Non-performing loans to loans
Non-performing assets to assets
Interest lost*
2002
2001
As of December 31,
2000
1999
1998
$170,039
-
10,648
279,150
40,019
-
39,399
$539,255
$26,178
2.75%
2.55
1.60
$35,820
$195,169
3,387
10,297
176,967
40,946
-
31,532
$458,298
$24,613
2.52%
2.35
1.49
$27,866
$169,535
2,867
7,152
99,861
43,814
-
23,518
$346,747
$21,599
2.16%
2.01
1.24
$23,129
$163,968
1,504
3,820
70,038
57,515
-
29,268
$326,113
$142,371
144
4,937
68,527
46,626
578
32,693
$295,876
$28,731
2.19%
1.99
1.28
$20,428
$24,426
2.26%
2.01
1.28
$15,258
*Includes loans held-for-sale.
Note:
The Corporation’s policy is to place commercial and construction loans, as well as commercial leases, on non-accrual status if payments of principal or interest are
past-due 60 days or more. Consumer lease financing receivables and conventional residential mortgage loans are placed on non-accrual status if payments are
delinquent 90 days or four scheduled payments in arrears. Closed-end consumer loans are placed on non-accrual when they become 90 days or more past-due and
are charged-off when they are 120 days past-due. Open-end consumer loans are not placed on non-accrual status and are charged-off when they are 180 days past-
due. Loans past-due 90 days or more and still accruing are not considered as non-performing loans.
Puerto Rico’s economic outlook is generally similar to that of the U.S.
mainland, and its Government and its instrumentalities are all
investment-grade rated borrowers in the U.S. capital markets.
The Corporation is also exposed to government risk. As further
detailed in Notes 4 and 5 to the consolidated financial statements, a
substantial portion of the Corporation’s investment securities
represented exposure to the U.S. Government in the form of U.S.
Treasury securities and obligations of U.S. Government agencies and
corporations. In addition, $19 million of residential mortgages and
$382 million in commercial loans were insured or guaranteed by the
U.S. Government or its agencies at December 31, 2002. The
Corporation continues to be one of the largest Small Business
Administration lenders in the United States. Furthermore, there were
$334 million of loans issued to or guaranteed by the Puerto Rico
Government and its political subdivisions and $43 million of loans
issued to or guaranteed by the U.S. Virgin Islands Government.
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. A summary of non-performing assets by loan
categories and related ratios is presented in Table M.
The Corporation reports its non-performing assets on a more
conservative basis than most U.S. banks. It is the Corporation’s policy
to place commercial loans and commercial leases on non-accrual
status if payments of principal or interest are delinquent 60 days
rather than the standard industry practice of 90 days. Consumer
financing leases, conventional mortgages and closed-end consumer
loans are placed on non-accrual status if payments are delinquent 90
days or four scheduled payments in arrears. Closed-end consumer
loans are charged-off when payments are delinquent 120 days. Open-
end (revolving credit) consumer loans are charged-off if payments are
delinquent 180 days. Certain loans which would be treated as non-
accrual loans pursuant to the foregoing policy are treated as accruing
loans if they are considered well-secured and in the process of
collection. Under the standard industry practice, closed-end consumer
loans are charged-off when delinquent 120 days, but are not customarily
placed on non-accrual status prior to being charged-off. Unsecured
retail loans to borrowers who declare bankruptcy are charged-off within
60 days of receipt of notification of filing from the bankruptcy court.
Non-performing assets were $539 million or 2.75% of loans as of
December 31, 2002, compared with $458 million or 2.52% at the end
of 2001. The increase in non-performing assets since December 31,
2001 was mostly reflected in mortgage loans, which rose by $102
million or 58%. Non-performing mortgage loans amounted to $279
million or 52% of non-performing assets and 3.74% of total mortgage
loans at December 31, 2002, compared with $177 million or 39%
and 2.72%, respectively, as of the end of 2001. Mortgage loans
comprised 69% of total loan growth since December 31, 2001. The
increase in non-performing mortgage loans was mostly attributable to
Equity One’s non-performing mortgage loans, which rose by $86
million, or 86%, since December 31, 2001, and was mainly
concentrated in the late stage (90 days past due and over) delinquency
category. Equity One’s total mortgage portfolio rose by $1.2 billion, or
42%, since December 31, 2001. A 69% of Equity One’s total mortgage
loan portfolio is considered sub-prime as per the industry’s definition
2 6
2 6
2 6
2 6
2 6
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
of a FICO score of 660 or less (FICO Credit Scores stem from statistical
models developed by the Fair Isaac Company in conjunction with the
nation’s credit bureaus and are used to assess borrowers credit
worthiness and risk profile based on their credit history and current
credit accounts). Nevertheless, as of December 31, 2002, Equity
One’s sub-prime portfolio performed 139 basis points below industry
indicators for serious delinquency (90 days past due and over plus
foreclosures) and 206 basis points below industry indicators for total
delinquency (30 days past due and over), a better performance than
the sub-prime mortgage loan industry, as reported by the company
Loan Performance. The Corporation has experienced a low level of
losses in its mortgage portfolio, historically, both in the U.S. mainland
and Puerto Rico. Mortgage loans net charge-offs as a percentage of the
mortgage loan portfolio averaged 0.20% and 0.15% in 2002 and
2001, respectively.
Non-performing commercial loans, including construction loans,
decreased by $29 million, or 14%, since December 31, 2001. These
non-performing loans represented 2.09% of the commercial and
construction loan portfolio at December 31, 2002, compared with
2.59% in 2001. The decrease was principally due to aggressive
identification of potential problem loans and effective portfolio
monitoring.
Non-performing consumer loans represented 1.29% and 1.31%
of total consumer loans for the years ended December 31, 2002 and
2001, respectively. Non-performing consumer loans totaled $40
million as of the end of 2002, maintaining almost the same level when
compared with 2001, due in part to the Corporation’s tightening of its
credit criteria for consumer loans in the current economic environment.
Non-performing financing leases represented 1.20% of the lease
financing portfolio for the years ended December 31, 2002 and 2001.
Non-performing financing leases were $11 million at December 31,
2002, increasing slightly by $0.4 million compared with December
31, 2001.
Other real estate assets, which are recorded at fair value less
estimated selling costs, reached $39 million at December 31, 2002,
an increase of $7 million, or 25%, from the $32 million reported at the
end of 2001. The increase was related to the growth in the mortgage
loan portfolio and higher delinquencies in the housing sector loan
portfolio prompted by the economic slowdown.
Assuming the standard industry practice of placing commercial
loans on non-accrual status when payments of principal and interest
are past due 90 days or more and excluding the closed-end consumer
loans from non-accruing, the Corporation’s non-performing assets at
December 31, 2002, would have been $478 million or 2.44% of
loans, and the allowance for loan losses would have been 78% of non-
performing assets. At December 31, 2001 and 2000, adjusted
non-performing assets would have been $389 million or 2.14% of
loans, and $273 million or 1.70% of loans, respectively. The allowance
for loan losses as a percentage of non-performing assets as of December
31, 2001 and 2000 would have been 86.57% and 106.49%,
respectively.
Once a loan is placed in non-accrual status, the interest previously
accrued and uncollected is charged against current earnings and
thereafter income is recorded only to the extent of any interest collected.
The interest income that would have been realized had these loans
been performing in accordance with their original terms amounted to
$35.8 million in 2002, compared with $27.9 million in 2001 and
$23.1 million in 2000.....
In addition to the non-performing loans discussed earlier, there
were $36 million of loans at December 31, 2002, which in
management's opinion are currently subject to potential future
classification as non-performing, and therefore are considered impaired
for our calculation of SFAS No. 114. At December 31, 2001, these
potential problem loans approximated $29 million.
Allowance for Loan Losses
Allowance for Loan Losses
Allowance for Loan Losses
Allowance for Loan Losses
Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to
provide for estimated loan losses based on evaluations of inherent
risks in the loan portfolio. The Corporation’s management evaluates
the adequacy of the allowance for loan losses on a monthly basis. In
determining the allowance, management considers current economic
conditions, loan portfolio risk characteristics, prior loss experience,
results of periodic credit reviews of individual loans, regulatory
requirements and loan impairment measurement, among other factors.
The methodology used to establish and test the allowance for loan
losses for the Corporation 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 contingency for a group of homogenous loans,
which are not individually evaluated under SFAS No. 114, when it is
probable that a loss has been incurred and the amount can be
reasonably estimated. To calculate the allowance for loan losses
under SFAS No. 5, the Credit Risk Management Division calculates
the Corporation’s loan losses based on historical net charge-off
experience segregated by type of loan.
The result of the exercise described above is compared to stress-
related levels of historic losses over a period of time, recent tendencies
of losses and industry trends. Management considers all indicators
derived from the process described herein, along with qualitative
factors that may cause estimated credit losses associated with the loan
portfolios to differ from historical loss experience. The final outcome
of the provision for loan losses and the appropriate level of allowance
for loan losses for each subsidiary and the Corporation is a
determination made by the CRESCO, which actively reviews the
Corporation’s consolidated allowance for loan losses.
A loan is considered impaired when interest and/or principal is
past due 90 days or more or, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Please refer
to Notes 1 and 7 to the consolidated financial statements for further
information related to impaired loans and the methodology used by
the Corporation for their measurement.
The allowance for loan losses calculation under SFAS No. 5 for the
Corporation is based on historical net charge-offs experience segregated
by loan type and legal entity.
Management’s judgment of the quantitative factors (historical net
charge-offs, statistical loss estimates, etc.) as well as qualitative factors
(current economic conditions, portfolio composition, delinquency
trends, etc.) results in the final determination of the provision for loan
2 0 0 2 A N N U A L R E P O R T 2 7
2 0 0 2 A N N U A L R E P O R T 2 7
2 0 0 2 A N N U A L R E P O R T 2 7
2 0 0 2 A N N U A L R E P O R T 2 7
2 0 0 2 A N N U A L R E P O R T 2 7
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table N
Table N
Table N
Table N
Table N
Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands)
Balance at beginning of year
Allowances acquired (sold)
Provision for loan losses
Losses charged to the allowance:
Commercial
Construction
Lease financing
Mortgage
Consumer
Recoveries:
Commercial
Construction
Lease financing
Mortgage
Consumer
Net loans charged-off (recovered):
Commercial
Construction
Lease financing
Mortgage
Consumer
Balance at end of year
Loans:
Outstanding at year end
Average
Ratios:
Allowance for loan losses to year
end loans
Recoveries to charge-offs
Net charge-offs to average loans
Net charge-offs earnings coverage
Allowance for loan losses to net
charge-offs
Provision for loan losses to:
Net charge-offs
Average loans
Allowance to non-performing assets
2002
$336,632
2,327
205,570
544,529
85,588
3,838
32,037
14,701
103,056
239,220
18,515
5,376
18,084
714
24,799
67,488
67,073
(1,538)
13,953
13,987
78,257
171,732
$372,797
2001
$290,653
1,675
213,250
505,578
76,140
6,394
41,702
8,577
102,236
235,049
14,636
960
26,008
500
23,999
66,103
61,504
5,434
15,694
8,077
78,237
168,946
$336,632
2000
$292,010
(15,869)
194,640
470,781
73,585
145
32,256
5,615
129,430
241,031
17,352
9
17,797
717
25,028
60,903
56,233
136
14,459
4,898
104,402
180,128
$290,653
1999
$267,249
515
148,948
416,712
51,011
651
23,009
3,977
104,062
182,710
18,589
169
15,839
771
22,640
58,008
32,422
482
7,170
3,206
81,422
124,702
$292,010
1998
$211,651
31,296
137,213
380,160
45,643
190
23,484
2,718
92,646
164,681
17,844
337
14,998
323
18,268
51,770
27,799
(147)
8,486
2,395
74,378
112,911
$267,249
$19,582,119
18,729,220
$18,168,551
17,045,257
$16,057,085
15,801,887
$14,907,754
13,901,290
$13,078,795
11,930,621
1.90%
28.21
0.92
3.93x
2.17
1.20
1.10%
69.13
1.85%
28.12
0.99
3.68x
1.99
1.26
1.25%
73.45
1.81%
25.27
1.14
3.17x
1.61
1.08
1.23%
83.82
1.96%
31.75
0.90
3.92x
2.34
1.19
1.07%
89.54
2.04%
31.44
0.95
3.93x
2.37
1.22
1.15%
90.32
losses to maintain a level of allowance for loan losses which is deemed
to be adequate.
considers that the level of the Corporation’s allowance for loan losses
is adequate.
At December 31, 2002, the allowance for loan losses was $373
million or 1.90% of total loans, compared with $337 million or 1.85%
at the same date in 2001. At December 31, 2000, the allowance was
$291 million or 1.81% of loans. 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, management
Table O details the breakdown of the allowance for loan losses by
loan categories. The breakdown is made for analytical purposes, and
it is not necessarily indicative of the categories in which future loan
losses may occur.
At December 31, 2002, the allowance for loan losses as a percentage
of non-performing loans was 74.58%, compared with 78.88% at
2 8
2 8
2 8
2 8
2 8
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Table O
Table O
Table O
Table O
Table O
Allocation of the Allowance for Loan Losses
(Dollars in millions)
2002
2001
As of December,
2000
1999
1998
Percentage of
Allowance Loans in Each Allowance
Category to
Loan Losses Total Loans
for
Loan Losses
for
Percentage of
Loans in Each
Category to
Total Loans
Allowance
for
Loan Losses
Percentage of
Loans in Each Allowance
Percentage of
Loans in Each Allowance
Category to
Total Loans
for
Loan Losses
Category to
Total Loans
for
Loan Losses
Percentage of
Loans in Each
Category to
Total Loans
Commercial
Construction
Lease Financing
Mortgage
Consumer
$155.5
8.4
29.6
34.6
144.7
40.3%
1.3
4.5
38.1
15.8
$140.3
8.2
22.7
19.9
145.5
40.9%
1.4
4.7
35.8
17.2
$120.6
8.1
18.6
12.0
131.4
43.7%
1.6
5.1
28.9
20.7
$140.5
8.7
9.2
14.6
119.0
44.6%
1.7
4.9
26.4
22.4
$130.2
11.6
8.3
14.0
103.1
43.2%
2.0
4.9
25.6
24.3
Total
$372.8
100.0%
$336.6
100.0%
$290.7
100.0%
$292.0
100.0%
$267.2
100.0%
tightening of credit criteria, coupled with improved collection strategies.
The allowance for loan losses for the lease financing portfolio increased
to 3.34% at December 31, 2002, from 2.64% at the end of 2001.
Mortgage loans net charge-offs increased to $14.0 million in 2002
from $8.1 million in 2001, an increase of $5.9 million or 73%. The
rise in mortgage loans net charge-offs was related to the growth in the
portfolio, as well as the increase in non-performing loans due to
slowdown in the economy. The allowance for loan losses assigned to
the mortgage loan portfolio has remained at relatively low levels since
these loans historically represent a low-risk portfolio with minimal
losses. Based on historical experience and current economic conditions,
the Corporation does not foresee significant losses in the mortgage
portfolio..... The allowance for loan losses for mortgage loans represented
0.46% of that portfolio as of December 31, 2002, compared with
0.31% at the end of 2001.
Notwithstanding the slight increase in net charge-offs during 2002
and the allowance for loan losses level resulting from the Corporation’s
methodology, the Corporation continued increasing its allowance for
loan losses as a result of the expectation of higher than anticipated
losses deriving from (1) the continued overall stagnation of economic
growth, as evidenced by (a) the rising trend in non-performing assets,
and (b) the higher unemployment figures; (2) the broad negative effect
on the Puerto Rico economy of the increased price of oil and oil-
related products that could extend well into 2003; and (3) the negative
collateral economic effect of a potential war with Iraq or additional
terrorist attacks, both of which add material risk to the economy and
curtail economic recovery.
December 31, 2001. The lower allowance to non-performing loans
ratio reflects the changing composition of the loan portfolio, as most of
its growth was realized in mortgage loans, which historically has
represented a low-risk portfolio with minimal losses. Excluding non-
performing mortgage loans and their related reserve, the allowance for
loan losses to non-performing loans was 153% as of December 31,
2002, compared with 127% as of December 31, 2001 and 125% at
December 31, 2000.
Table N summarizes the movement in the allowance for loan losses
and presents selected loan losses statistics for the past five years. As
shown in this table, net loan losses for the year 2002 totaled $171.7
million, an increase of $2.8 million, or 2%, compared with the previous
year. However, net charge-offs as a percentage of average loans
decreased during the year from 0.99% in 2001 to 0.92% in 2002.
Commercial loans net charge-offs, including construction loans,
amounted to $65.5 million in 2002, compared with $66.9 million a
year earlier. As a percentage of average commercial loans, they were
0.85% in 2002 and 0.90% in 2001. The allowance for loan losses
corresponding to commercial and construction loans represented
2.02% of this portfolio at December 31, 2002, compared with 1.93%
in 2001. The ratio of allowance to non-performing loans in the
commercial and construction loan category was 96.4% at the end of
2002, compared with 74.8% in 2001. At December 31, 2002 and
2001, the portion of the allowance for loan losses related to impaired
loans was $34.9 million and $36.8 million, respectively. Further
disclosures with respect to impaired loans are included in Note 7 to
the consolidated financial statements.
Consumer loans net charge-offs amounted to $78.3 million in
2002, compared with $78.2 million in 2001. Consumer loans net
charge-offs represented 2.51% of the average consumer loan portfolio
in 2002, compared with 2.43% for 2001. The credit environment has
prompted the Corporation to tighten its credit criteria for consumer
borrowings. The allowance for loan losses for consumer loans
represented 4.67% of that portfolio as of December 31, 2002, compared
with 4.64% in 2001.
Lease financing net charge-offs were $14.0 million or 1.59% of
the average lease financing portfolio for the year ended December 31,
2002, compared with $15.7 million or 1.86% for the prior year, a
reduction of $1.7 million or 11%. The reduction was the result of the
2 0 0 2 A N N U A L R E P O R T 2 9
2 0 0 2 A N N U A L R E P O R T 2 9
2 0 0 2 A N N U A L R E P O R T 2 9
2 0 0 2 A N N U A L R E P O R T 2 9
2 0 0 2 A N N U A L R E P O R T 2 9
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Statistical Summary 1998-2002
Statements of Condition
(In thousands)
ASSETS
Cash and due from banks
Money market investments:
Federal funds sold and securities purchased
under agreements to resell
Time deposits with other banks
Bankers’ acceptances
Trading securities
Investment securities available-for-sale,
at market value
Investment securities held-to-maturity, at amortized cost
Loans held-for-sale, at lower of cost or market
Loans
Less -Unearned income
Allowance for loan losses
Premises and equipment
Other real estate
Accrued income receivable
Other assets
Goodwill
Other intangible assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and securities
sold under agreements to repurchase
Other short-term borrowings
Notes payable
Other liabilities
Subordinated notes
Preferred beneficial interest in Popular North
America’s junior subordinated deferrable interest
debentures guaranteed by the Corporation
Minority interest in consolidated subsidiaries
Stockholders’ equity:
Preferred stock
Common stock
Surplus
Retained earnings
Treasury stock - at cost
Accumulated other comprehensive income (loss),
2002
2001
2000
1999
1998
As of December 31,
$652,556
$606,142
$726,051
$663,696
$667,707
1,091,435
3,057
154
1,094,646
510,346
10,531,903
180,751
1,092,927
18,775,847
286,655
372,797
18,116,395
461,177
39,399
184,549
578,091
182,965
34,647
$33,660,352
820,332
3,056
402
823,790
270,186
9,284,401
592,360
939,488
17,556,029
326,966
336,632
16,892,431
405,705
31,533
186,143
496,855
177,842
37,800
$30,744,676
$3,367,385
14,247,355
17,614,740
6,684,551
1,703,562
4,298,853
677,605
30,979,311
125,000
$3,281,841
13,088,201
16,370,042
5,751,768
1,827,242
3,735,131
512,686
28,196,869
125,000
144,000
1,162
149,080
909
-
834,799
278,366
1,300,437
(205,210)
100,000
832,498
268,544
1,057,724
(66,136)
1,057,320
10,908
390
1,068,618
153,073
8,795,924
264,731
823,901
15,580,379
347,195
290,653
14,942,531
405,772
23,518
202,540
368,797
212,756
68,839
$28,057,051
$3,109,885
11,695,022
14,804,907
4,964,115
4,369,212
1,176,912
472,334
25,787,480
125,000
150,000
927
100,000
830,356
260,984
865,082
(66,214)
931,123
54,354
517
985,994
236,610
7,324,950
299,312
619,298
14,659,400
370,944
292,010
13,996,446
440,971
29,268
175,746
383,462
214,674
90,112
$25,460,539
910,430
37,206
262
947,898
318,727
7,020,396
226,134
644,159
12,783,609
348,973
267,249
12,167,387
424,721
32,693
156,314
279,929
172,330
101,962
$23,160,357
$3,284,949
10,888,766
14,173,715
4,414,480
2,612,389
1,852,599
448,759
23,501,942
125,000
$3,176,309
10,495,905
13,672,214
4,076,500
1,639,082
1,307,160
453,697
21,148,653
125,000
150,000
22,611
100,000
827,662
243,855
694,301
(64,123)
150,000
27,591
100,000
825,690
216,795
530,481
(39,559)
net of tax
3 0
3 0
3 0
3 0
3 0
202,487
2,410,879
$33,660,352
80,188
2,272,818
$30,744,676
3,436
1,993,644
$28,057,051
(140,709)
1,660,986
$25,460,539
75,706
1,709,113
$23,160,357
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Statistical Summary 1998-2002
Statements of Income
(In thousands, except per
common share information)
INTEREST INCOME:
Loans
Money market investments
Investment securities
Trading account securities
Total interest income
Less - Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
(Loss) gain on sale of investment securities
Trading account (loss) profit
Derivative losses
Gain on sale of loans
All other operating income
OPERATING EXPENSES:
Personnel costs
All other operating expenses
Income before tax, minority interest and
cumulative effect of accounting change
Income tax
Net (gain) loss of minority interest
Income before cumulative effect of accounting
change
Cumulative effect of accounting change,
net of tax
NET INCOME
For the year ended December 31,
2002
2001
2000
1999
1998
$1,528,903
32,505
445,925
16,464
2,023,797
843,468
1,180,329
205,570
974,759
(3,342)
(804)
(20,085)
59,340
488,569
$1,559,890
47,610
473,344
15,018
2,095,862
1,018,877
1,076,985
213,250
863,735
27
(1,781)
(20,228)
45,633
447,937
$1,586,832
62,356
486,198
14,771
2,150,157
1,167,396
982,761
194,640
788,121
11,201
1,991
-
39,673
411,195
$1,373,158
33,434
425,907
19,171
1,851,670
897,932
953,738
148,948
804,790
638
(1,582)
-
34,890
338,970
$1,211,850
36,781
385,473
17,599
1,651,703
778,691
873,012
137,213
735,799
8,933
3,653
-
23,036
255,624
1,498,437
1,335,323
1,252,181
1,177,706
1,027,045
488,741
540,261
1,029,002
469,435
117,255
(248)
425,142
501,067
926,209
409,114
105,280
18
394,176
482,257
876,433
375,748
100,797
1,152
386,696
450,786
837,482
340,224
85,120
2,454
337,400
382,954
720,354
306,691
74,671
328
351,932
303,852
276,103
257,558
232,348
-
686
-
-
-
$351,932
$304,538
$276,103
$257,558
$232,348
NET INCOME APPLICABLE TO COMMON STOCK
$349,422
$296,188
$267,753
$249,208
$223,998
NET INCOME PER COMMON SHARE (BASIC AND DILUTED)
(BEFORE AND AFTER CUMULATIVE EFFECT OF ACCOUNTING
CHANGE)*
DIVIDENDS DECLARED PER COMMON SHARE
$2.61
$0.80
$2.17
$0.76
$1.97
$0.64
$1.84
$0.60
$1.65
$0.50
*The average common shares used in the computation of basic earnings per common share were 133,915,082 for 2002; 136,238,288 for 2001; 135,907,476 for 2000;
135,585,634 for 1999 and 135,532,086 for 1998. The average common shares used in the computation of diluted earnings per common share were 133,922,302 for 2002
and 136,238,470 for 2001. There were no dilutive common shares in 2000, 1999 and 1998.
2 0 0 2 A N N U A L R E P O R T 3 1
2 0 0 2 A N N U A L R E P O R T 3 1
2 0 0 2 A N N U A L R E P O R T 3 1
2 0 0 2 A N N U A L R E P O R T 3 1
2 0 0 2 A N N U A L R E P O R T 3 1
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Statistical Summary 1998-2002
Average Balance Sheet and Summary of Net Interest Income
On a Taxable Equivalent Basis*
(Dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell
Time deposits with other banks
Bankers’ acceptances
Total money market investments
U.S. Treasury securities
Obligations of other U.S. Government
agencies and corporations
Obligations of Puerto Rico, States and
political subdivisions
Collateralized mortgage obligations and
mortgage-backed securities
Other
Total investment securities
Trading account securities
Loans (net of unearned income)
Total interest earning assets/
Interest income
Total non-interest earning assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Average
Balance
2002
Interest
Average
Rate
Average
Balance
2001
Interest
Average
Rate
$1,008,776
3,056
525
1,012,357
467,517
$31,714
766
25
32,505
34,055
3.14%
25.07
4.76
3.21
7.28
$923,569
8,286
567
932,422
748,337
$46,477
1,083
50
47,610
51,637
5.03%
13.07
8.82
5.11
6.90
6,050,693
361,014
188,883
11,911
2,942,480
439,801
112,908
19,028
10,089,374
363,963
18,729,220
538,916
16,961
1,539,032
5.97
6.31
3.84
4.33
5.34
4.66
8.22
4,750,786
349,750
7.36
131,797
8,416
6.39
2,060,685
478,043
115,333
25,114
8,169,648
266,877
17,045,257
550,250
15,358
1,567,382
5.60
5.25
6.74
5.75
9.20
30,194,914
1,627,476
$31,822,390
$2,127,414
7.05% 26,414,204
1,542,903
$27,957,107
$2,180,600
8.26%
Savings, NOW and money market accounts $7,277,387
6,480,501
Time deposits
7,787,011
Short-term borrowings
4,132,811
Mortgages and notes payable
125,000
Subordinated notes
Guaranteed preferred beneficial interest in
Popular North America’s subordinated
debentures
Total interest bearing liabilities/
145,254
Interest expense
25,947,964
3,724,040
Total non-interest bearing liabilities
29,672,004
Total liabilities
2,150,386
Stockholders’ equity
Total liabilities and stockholders’ equity $31,822,390
Net interest income on a taxable
equivalent basis
Cost of funding earning assets
Net interest yield
$160,314
270,814
185,250
206,095
8,536
2.20% $6,272,094
4.18
6,247,150
2.38
7,136,358
4.99
2,393,642
6.83
125,000
$180,863
337,305
329,648
149,657
8,527
2.88%
5.40
4.62
6.25
6.82
12,459
843,468
8.58
3.25
150,000
12,877
8.58
1,018,877
4.56
22,324,244
3,536,329
25,860,573
2,096,534
$27,957,107
$1,283,946
$1,161,723
2.79%
4.26%
3.86%
4.40%
Effect of the taxable equivalent adjustment
Net interest income per books
103,617
$1,180,329
84,738
$1,076,985
* Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense
disallowance as required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis.
Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation’s policy.
3 2
3 2
3 2
3 2
3 2
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
2000
Average
Balance
Interest
Average
Rate
Average
Balance
1999
Interest
Average
Rate
Average
Balance
1998
Interest
Average
Rate
$914,604
17,723
559
932,886
1,762,129
$61,238
1,062
56
62,356
115,801
6.70%
5.99
10.02
6.68
6.57
$536,905
143,685
516
681,106
2,479,828
$24,470
8,912
52
33,434
169,683
4.56%
6.20
10.08
4.91
6.84
$670,072
82,935
778
753,785
3,227,375
$31,814
4,889
78
36,781
231,837
3,958,406
288,214
126,768
8,398
107,959
24,236
544,608
15,624
1,597,116
$2,219,704
1,838,016
260,143
7,945,462
213,131
15,801,887
24,893,366
1,676,389
$26,569,755
7.28
6.62
5.87
9.32
6.85
7.33
10.11
3,028,577
200,649
138,184
1,246,582
455,488
7,348,659
313,904
13,901,290
9,100
92,960
26,654
499,046
20,584
1,380,330
6.63
6.59
7.46
5.85
6.79
6.56
9.93
8.92% 22,244,959
1,561,413
$23,806,372
$1,933,394
8.69%
1,318,097
130,861
6,290,325
287,218
11,930,621
19,261,949
1,170,433
$20,432,382
1,477,168
111,332
136,824
9,272
81,970
14,015
448,426
18,943
1,218,849
4.75%
5.89
10.03
4.88
7.18
7.54
6.78
6.22
10.71
7.13
6.60
10.22
$1,722,999
8.95%
$5,924,690
5,548,509
7,781,030
1,618,517
125,000
$184,018
345,355
508,029
108,572
8,545
3.11% $5,877,976
4,874,480
6.22
5,992,445
6.53
1,558,410
6.71
125,000
6.84
$173,946
278,269
317,646
106,639
8,555
8.58
5.52
150,000
12,877
1,167,396
21,147,746
3,537,484
24,685,230
1,884,525
$26,569,755
150,000
12,877
897,932
18,578,311
3,515,269
22,093,580
1,712,792
$23,806,372
2.96%
5.71
5.30
6.84
6.84
8.58
4.83
$5,221,132
4,437,193
4,622,549
1,371,372
125,000
$163,805
247,687
251,724
93,846
8,555
150,000
13,074
778,691
15,927,246
2,951,878
18,879,124
1,553,258
$20,432,382
$1,052,308
$1,035,462
$944,308
4.69%
4.23%
4.04%
4.65%
69,547
$982,761
81,724
$953,738
71,296
$873,012
3.14%
5.58
5.45
6.84
6.84
8.72
4.89
4.04%
4.91%
2 0 0 2 A N N U A L R E P O R T 3 3
2 0 0 2 A N N U A L R E P O R T 3 3
2 0 0 2 A N N U A L R E P O R T 3 3
2 0 0 2 A N N U A L R E P O R T 3 3
2 0 0 2 A N N U A L R E P O R T 3 3
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Statistical Summary 2001-2002
Quarterly Financial Data
2002
2001
(In thousands, except per
common share information)
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$513,869
210,588
303,281
$508,110
211,155
296,955
$505,999
211,321
294,678
$495,819
210,404
285,415
$505,022
222,692
282,330
$516,982
243,562
273,420
$523,407
257,889
265,518
$550,451
294,734
255,717
50,049
140,100
50,992
136,755
50,075
136,117
54,454
134,937
58,495
128,813
55,259
125,025
49,462
124,058
50,034
115,674
(668)
(662)
2,018
282,326
1,251
1,247
(21,759)
253,857
85
(359)
(855)
250,653
(4,010)
(1,030)
511
242,166
640
(1,930)
(13,109)
239,855
1,249
777
(8,140)
231,911
(2,152)
(816)
1,652
233,920
290
188
(631)
220,523
111,694
30,783
109,600
23,730
128,938
32,594
119,203
30,148
98,394
22,840
105,161
27,952
104,878
27,337
100,681
27,151
(82)
(116)
(39)
(11)
(1)
7
(4)
16
$80,829
$85,754
$96,305
$89,044
$75,553
$77,216
$77,537
$73,546
-
$80,829
-
$85,754
-
$96,305
-
$89,044
-
$75,553
-
$77,216
-
$77,537
686
$74,232
$80,829
$85,754
$96,305
$86,534
$73,464
$75,129
$75,450
$72,145
$0.61
$0.65
$0.72
$0.63
$0.54
$0.55
$0.55
$0.53
$33,562
19,358
31,850
17,355
27,518
$31,863
19,044
30,249
16,962
26,054
$31,408
18,439
29,790
17,086
25,561
$30,418
18,058
28,856
16,526
24,625
$29,034
17,772
27,492
16,351
23,232
$27,879
17,398
26,321
15,803
22,205
$27,185
16,774
25,660
15,340
21,649
$27,714
16,215
26,168
14,832
22,244
0.96%
14.64
1.07%
16.03
1.23%
18.14
1.19%
16.83
1.03%
14.08
1.10%
14.71
1.14%
15.36
1.09%
15.25
SUMMARY OF OPERATIONS
Interest income
Interest expense
Net interest income
Provision for loan
losses
Operating income
(Loss) gain on sale of
investment securities
Trading account (loss) profit
Derivative gains (losses)
Non-interest expense
Income before tax,
minority interest and
cumulative effect of
accounting change
Income tax
Net (gain) loss of minority
interest
Income before
cumulative effect
of accounting change
Cumulative effect of
accounting change
Net income
Net income applicable
to common stock
Net income per
common share
SELECTED AVERAGE BALANCES
(In millions)
Total assets
Loans
Interest earning assets
Deposits
Interest bearing liabilities
SELECTED RATIOS
Return on assets
Return on equity
3 4
3 4
3 4
3 4
3 4
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
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P O P U L A R
P O P U L A R
I N C .
Management’s Report on Responsibility for Financial Reporting
To Our Stockholders:
The management of Popular, Inc. is responsible for the preparation, integrity and objectivity of the
accompanying consolidated financial statements. These statements were prepared in accordance with
accounting principles generally accepted in the United States of America and, in the judgment of
management, present fairly Popular, Inc.’s financial position and results of operations. Management also
prepared the financial information contained elsewhere in this annual report and is responsible for its
accuracy and consistency with the consolidated financial statements. The financial statements and other
financial information in this report include amounts that are based on management’s best estimates and
judgments giving due consideration to materiality.
Management maintains a comprehensive system of internal accounting controls to reasonably assure the
proper authorization of transactions, the safeguarding of assets and the reliability of the financial records.
Management recognizes that even a highly effective internal control system has inherent risks, including
the possibility of human error and the circumvention and overriding of controls, and that the effectiveness
of an internal control system can change with circumstances. However, management believes that the
internal control system provides reasonable assurance that errors or irregularities that could be material
to the consolidated financial statements are prevented or would be detected on a timely basis and
corrected through the normal course of business. Management has evaluated the internal control system
as of December 31, 2002, and believes that, as of that date, Popular, Inc. maintained an effective system
of accounting internal controls.
Popular, Inc. maintains an audit division, which separately assesses the effectiveness of the system of
internal control and makes recommendations on possible improvements.
The Audit Committee of the Board of Directors reviews the systems of internal control and financial
reporting. The Committee, which is comprised of directors who are independent from Popular, Inc., meets
and consults regularly with management, the internal auditors and the independent accountants to
review the scope and results of their work.
The accounting firm of PricewaterhouseCoopers LLP has performed an independent audit of Popular,
Inc.’s consolidated financial statements. Management has made available to PricewaterhouseCoopers
LLP all of Popular, Inc.’s financial records and related data, as well as the minutes of stockholders’ and
directors’ meetings. Furthermore, management believes that all representations made to
PricewaterhouseCoopers LLP during its audit were valid and appropriate.
Richard L. Carrión
Chairman of the Board,
President and Chief Executive Officer
Jorge A. Junquera
Senior Executive Vice President
and Chief Financial Officer
2 0 0 2 A N N U A L R E P O R T 3 5
2 0 0 2 A N N U A L R E P O R T 3 5
2 0 0 2 A N N U A L R E P O R T 3 5
2 0 0 2 A N N U A L R E P O R T 3 5
2 0 0 2 A N N U A L R E P O R T 3 5
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Report of Independent Accountants
To the Board of Directors and Stockholders of Popular, Inc.
In our opinion, the accompanying consolidated statements of condition and the related
consolidated statements of income, of comprehensive income, of changes in stockholders’
equity and of cash flows present fairly, in all material respects, the financial position of
Popular, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the Corporation’s
management; our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on January 1, 2002 the
Corporation adopted SFAS No. 142 “Goodwill and Other Intangible Assets,” which
changed the accounting for goodwill and other intangible assets.
PricewaterhouseCoopers LLP
San Juan, Puerto Rico
February 28, 2003
Stamp 1838466 of the P.R.
Society of Certified Public
Accountants has been affixed
to the file copy of this report.
3 6
3 6
3 6
3 6
3 6
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Consolidated Statements of Condition
(In thousands, except share information)
A S S E T S
Cash and due from banks
Money market investments:
Federal funds sold and securities purchased under
agreements to resell
Time deposits with other banks
Bankers’ acceptances
Trading securities, at market value:
Pledged securities with creditors’ right to repledge
Other trading securities
Investment securities available-for-sale, at market value:
Pledged securities with creditors’ right to repledge
Other securities available-for-sale
Investment securities held-to-maturity, at amortized cost (market value 2002 - $182,183; 2001 - $596,415)
Loans held-for-sale, at lower of cost or market
Loans:
Loans pledged with creditors’ right to repledge
Other loans
Less - Unearned income
Allowance for loan losses
Premises and equipment
Other real estate
Accrued income receivable
Other assets
Goodwill
Other intangible assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and securities sold under agreements to repurchase
Other short-term borrowings
Notes payable
Other liabilities
Subordinated notes
Preferred beneficial interest in Popular North America’s junior subordinated
deferrable interest debentures guaranteed by the Corporation
Commitments and contingencies (See Note 33)
Minority interest in consolidated subsidiaries
Stockholders’ equity:
Preferred stock, $25 liquidation value; 10,000,000 shares authorized;
4,000,000 issued and outstanding in 2001
Common stock, $6 par value; 180,000,000 shares authorized;
139,133,156 shares issued (2001 - 138,749,647) and 132,439,047 shares
outstanding (2001 - 136,362,364)
Surplus
Retained earnings
Accumulated other comprehensive income,
net of tax of $53,070 (2001 - $27,918)
Treasury stock - at cost, 6,694,109 shares (2001 - 2,387,283)
The accompanying notes are an integral part of the consolidated financial statements.
December 31,
2002
2 0 0 1
$652,556
$606,142
1,091,435
3,057
154
1,094,646
416,979
93,367
4,397,974
6,133,929
180,751
1,092,927
420,724
18,355,123
286,655
372,797
18,116,395
461,177
39,399
184,549
578,091
182,965
34,647
$33,660,352
$3,367,385
14,247,355
17,614,740
6,684,551
1,703,562
4,298,853
677,605
30,979,311
125,000
144,000
1,162
-
834,799
278,366
1,300,437
202,487
(205,210)
2,410,879
$33,660,352
820,332
3,056
402
823,790
244,916
25,270
4,056,655
5,227,746
592,360
939,488
301,706
17,254,323
326,966
336,632
16,892,431
405,705
31,533
186,143
496,855
177,842
37,800
$30,744,676
$3,281,841
13,088,201
16,370,042
5,751,768
1,827,242
3,735,131
512,686
28,196,869
125,000
149,080
909
100,000
832,498
268,544
1,057,724
80,188
(66,136)
2,272,818
$30,744,676
2 0 0 2 A N N U A L R E P O R T 3 7
2 0 0 2 A N N U A L R E P O R T 3 7
2 0 0 2 A N N U A L R E P O R T 3 7
2 0 0 2 A N N U A L R E P O R T 3 7
2 0 0 2 A N N U A L R E P O R T 3 7
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Consolidated Statements of Income
(In thousands, except per share information)
INTEREST INCOME:
Loans
Money market investments
Investment securities
Trading securities
INTEREST EXPENSE:
Deposits
Short-term borrowings
Long-term debt
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Service charges on deposit accounts
Other service fees
(Loss) gain on sale of investment securities
Derivative losses
Trading account (loss) profit
Gain on sale of loans
Other operating income
OPERATING EXPENSES:
Personnel costs:
Salaries
Profit sharing
Pension and other benefits
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Other operating expenses
Amortization of intangibles
Income before income tax, minority interest and cumulative
effect of accounting change
Income tax
Net (gain) loss of minority interest
Income before cumulative effect of accounting change
Cumulative effect of accounting change, net of tax
NET INCOME
NET INCOME APPLICABLE TO COMMON STOCK
NET INCOME PER COMMON SHARE (BASIC AND DILUTED) (BEFORE AND AFTER
CUMULATIVE EFFECT OF ACCOUNTING CHANGE)
DIVIDENDS DECLARED PER COMMON SHARE
Year ended December 31,
2002
2001
2000
$1,528,903
32,505
445,925
16,464
2,023,797
431,128
185,250
227,090
843,468
1,180,329
205,570
974,759
157,713
258,543
(3,342)
(20,085)
(804)
59,340
72,313
1,498,437
361,957
22,235
104,549
488,741
78,503
99,099
37,144
84,660
53,892
61,451
19,918
96,490
9,104
1,029,002
469,435
117,255
(248)
351,932
-
$351,932
$349,422
$2.61
$0.80
$1,559,890
47,610
473,344
15,018
2,095,862
518,168
329,648
171,061
1,018,877
1,076,985
213,250
863,735
146,994
242,547
27
(20,228)
(1,781)
45,633
58,396
1,335,323
321,386
16,251
87,505
425,142
72,100
97,383
38,756
73,735
48,883
50,783
17,804
74,185
27,438
926,209
409,114
105,280
18
303,852
686
$304,538
$296,188
$2.17
$0.76
$1,586,832
62,356
486,198
14,771
2,150,157
529,373
508,029
129,994
1,167,396
982,761
194,640
788,121
125,519
215,995
11,201
-
1,991
39,673
69,681
1,252,181
306,529
18,913
68,734
394,176
67,720
98,022
34,125
64,851
45,689
46,791
20,828
69,673
34,558
876,433
375,748
100,797
1,152
276,103
-
$276,103
$267,753
$1.97
$0.64
The accompanying notes are an integral part of the consolidated financial statements.
3 8
3 8
3 8
3 8
3 8
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P O P U L A R
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I N C .
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P O P U L A R
P O P U L A R
I N C .
Consolidated Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment
Provision for loan losses
Amortization of intangibles
Net loss (gain) on sale of investment securities
Derivatives losses
Net loss on disposition of premises and equipment
Net gain on sale of loans, excluding loans held-for-sale
Net amortization of premiums and accretion of discounts
on investments
Net amortization of deferred loan origination fees and costs
Stock options expense
Net increase in loans held-for-sale
Net (increase) decrease in trading securities
Net decrease (increase) in accrued income receivable
Net (increase) decrease in other assets
Net increase (decrease) in interest payable
Net (decrease) increase in current and deferred taxes
Net increase in postretirement benefit obligation
Net increase in other liabilities
Total adjustments
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in money market investments
Purchases of investment securities held-to-maturity
Maturities and redemptions of investment securities held-to-maturity
Purchases of investment securities available-for-sale
Maturities of investment securities available-for-sale
Proceeds from sales of investment securities available-for-sale
Net disbursements on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Assets acquired, net of cash
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Cash transferred due to sale of investment in subsidiary
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits
Net increase in federal funds purchased and
securities sold under agreements to repurchase
Net (decrease) increase in other short-term borrowings
Net proceeds from (payments of) notes payable and
capital securities
Dividends paid
Proceeds from issuance of common stock
Redemption of preferred stock
Treasury stock (acquired) sold
Net cash provided by financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
The accompanying notes are an integral part of the consolidated financial statements.
2002
Year ended December 31,
2001
2000
$351,932
$304,538
$276,103
74,167
205,570
9,104
3,342
20,085
773
(6,718)
15,980
29,155
957
(153,439)
(240,160)
1,594
(10,658)
1,331
(22,766)
7,479
96,233
32,029
383,961
(265,080)
(26,588,518)
27,000,127
(9,390,399)
7,449,140
1,266,542
(1,352,101)
592,992
(1,220,139)
(1,500)
(138,074)
7,662
-
(2,639,348)
75,962
213,250
27,438
(27)
20,228
672
(1,173)
6,708
22,881
-
(115,587)
(117,113)
16,397
10,574
(61,559)
19,356
4,052
15,494
137,553
442,091
244,828
(7,973,243)
7,635,276
(7,335,423)
5,785,806
1,161,097
(2,316,388)
887,238
(833,035)
-
(79,472)
2,905
-
(2,820,411)
76,848
194,640
34,558
(11,201)
-
210
(7,935)
920
22,093
-
(204,603)
83,537
(32,526)
(29,116)
24,901
(11,234)
3,844
18,625
163,561
439,664
(113,403)
(5,517,411)
5,458,897
(4,797,570)
2,784,494
818,955
(1,877,934)
1,024,637
(589,178)
(8,453)
(75,147)
11,631
(46,899)
(2,927,381)
1,271,967
1,552,033
926,171
932,783
(123,680)
558,642
(108,003)
11,166
(102,000)
(139,074)
2,301,801
46,414
606,142
$652,556
787,653
(2,541,970)
2,557,299
(106,384)
9,702
-
78
2,258,411
(119,909)
726,051
$606,142
549,635
1,794,575
(632,744)
(95,297)
9,823
-
(2,091)
2,550,072
62,355
663,696
$726,051
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Consolidated Statements of Changes in Stockholders’ Equity
(In thousands)
PREFERRED STOCK:
Balance at beginning of year
Redemption of preferred stock
Balance at end of year
COMMON STOCK:
Balance at beginning of year
Common stock issued under
Dividend Reinvestment Plan
Options exercised
Balance at end of year
SURPLUS:
Balance at beginning of year
Common stock issued under
Dividend Reinvestment Plan
Options granted
Options exercised
Transfer from retained earnings
Balance at end of year
RETAINED EARNINGS:
Balance at beginning of year
Net income
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Redemption of preferred stock
Transfer to surplus
Balance at end of year
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year
Other comprehensive income, net of tax
Balance at end of year
TREASURY STOCK - AT COST :
Balance at beginning of year
(Purchase) sale of common stock
Balance at end of year
2002
$100,000
(100,000)
-
832,498
2,300
1
834,799
268,544
8,857
957
8
-
278,366
1,057,724
351,932
(106,709)
(510)
(2,000)
-
1,300,437
80,188
122,299
202,487
(66,136)
(139,074)
(205,210)
Year ended December 31,
2001
2000
$100,000
-
100,000
830,356
2,142
-
832,498
260,984
7,560
-
-
-
268,544
865,082
304,538
(103,546)
(8,350)
-
-
1,057,724
3,436
76,752
80,188
(66,214)
78
(66,136)
$100,000
-
100,000
827,662
2,694
-
830,356
243,855
7,129
-
-
10,000
260,984
694,301
276,103
(86,972)
(8,350)
-
(10,000)
865,082
(140,709)
144,145
3,436
(64,123)
(2,091)
(66,214)
Total stockholders’ equity
$2,410,879
$2,272,818
$1,993,644
The accompanying notes are an integral part of the consolidated financial statements.
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Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Year ended December 31,
2002
2001
2000
$351,932
$304,538
$276,103
Other comprehensive income, net of tax:
Foreign currency translation adjustment
Less: reclassification adjustment for foreign currency translation
loss realized upon the sale of investment in a foreign entity
Unrealized gains on securities:
Unrealized holding gains arising during the period,
net of tax of $26,444 (2001 - $26,076; 2000 - $40,042)
Less: reclassification adjustment for (losses) gains included
in net income, net of tax of ($679) (2001 - ($102); 2000 - $2,366)
Net loss on cash flow hedges
Less: reclassification adjustment for losses included in net income,
net of tax of ($2,311) (2001- ($1,395))
Cumulative effect of accounting change
Less: reclassification adjustment for gains (losses) included in net income,
net of tax of ($77) in 2001
Total other comprehensive income, net of tax
(780)
-
(572)
-
(1,297)
(1,678)
125,485
75,831
153,280
(964)
(6,999)
(3,635)
-
6
122,299
(1,025)
(2,162)
(2,240)
254
(136)
76,752
9,516
-
-
-
-
144,145
Comprehensive income
$474,231
$381,290
$420,248
Disclosure of accumulated other comprehensive income:
(In thousands)
Foreign currency translation adjustment
Unrealized gains on securities
Unrealized (losses) gains on cash flow hedges
Cumulative effect of accounting change
Accumulated other comprehensive income
The accompanying notes are an integral part of the consolidated financial statements.
2002
Year ended December 31,
2001
2000
($2,236)
207,625
(3,286)
384
$202,487
($1,456)
81,176
78
390
$80,188
($884)
4,320
-
-
$3,436
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Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies ................. 43
Note 2 - Cash and due from banks .......................................... 48
Note 3 - Securities purchased under agreements to resell ........ 48
Note 4 - Investment securities available-for-sale ...................... 48
Note 5 - Investment securities held-to-maturity ....................... 50
Note 6 - Pledged assets ........................................................... 51
Note 7 - Loans and allowance for loan losses ........................... 52
Note 8 - Related party transactions .......................................... 52
Note 9 - Premises and equipment ........................................... 53
Note 10 - Goodwill and other intangible assets ......................... 53
Note 11 - Deposits ..................................................................... 54
Note 12 - Federal funds purchased and securities sold
under agreements to repurchase ................................. 54
Note 13 - Other short-term borrowings ...................................... 56
Note 14 - Notes payable ............................................................. 56
Note 15 - Subordinated notes .................................................... 56
Note 16 - Preferred beneficial interest in Popular North
America’s junior subordinated deferrable
interest debentures guaranteed by the Corporation ...... 57
Note 17 - Long-term debt maturity requirements ....................... 57
Note 18 - Earnings per common share ....................................... 57
Note 19 - Stockholders’ equity ................................................... 57
Note 20 - Regulatory capital requirements ................................. 58
Note 21 - Servicing assets .......................................................... 58
Note 22 - Sales of receivables .................................................... 59
Note 23 - Interest on investments .............................................. 60
Note 24 - Employee benefits ...................................................... 60
Note 25 - Stock option plan ........................................................ 62
Note 26 - Rental expense and commitments .............................. 63
Note 27 - Income tax ................................................................. 63
Note 28 - Off-balance sheet lending activities and
concentration of credit risk ......................................... 64
Note 29 - Disclosures about fair value of financial instruments .. 65
Note 30 - Derivative instruments and hedging activities ............. 66
Note 31 - Supplemental disclosure on the consolidated
statements of cash flows ............................................. 68
Note 32 - Segment reporting ...................................................... 68
Note 33 - Contingent liabilities .................................................. 69
Note 34 - Guarantees ................................................................ 69
Note 35 - Popular, Inc. (Holding Company only) financial
information ................................................................. 70
Note 36 - Condensed consolidating financial information
of guarantor and issuers of registered guaranteed
securities ................................................................... 71
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Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies:
The accounting and reporting policies of Popular, Inc. and its
subsidiaries (the Corporation) conform with generally accepted accounting
principles and with general practices within the financial services
industry. The following is a description of the most significant of these
policies:
Nature of operations
Popular, Inc. is a financial holding company offering a full range of
financial services through banking offices in Puerto Rico, the United
States and the U.S. and British Virgin Islands. The Corporation is
also engaged in mortgage and consumer lending, lease financing, broker/
dealer activities, retail financial services, insurance agency services
and information technology, ATM and data processing services
through its non-banking subsidiaries in Puerto Rico, the United
States, the Caribbean and Central America. Note 32 to the consolidated
financial statements presents further information about the
Corporation’s business segments.
Principles of consolidation
The consolidated financial statements include the accounts of Popular,
Inc. and its subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
Certain of the Corporation’s non-banking subsidiaries have
fiscal years ending on November 30th. Accordingly, their financial
information as of that date corresponds to their financial information
included in the consolidated financial statements of Popular, Inc.
as of December 31st. There are no significant intervening events
resulting from the difference in fiscal periods, which management
believes may materially affect the financial position or results of
operations of the Corporation for the years ended December 31,
2002, 2001 and 2000.
Unconsolidated investments in which there is greater than 20%
ownership are accounted for by the equity method, with earnings
recorded in other operating inome; those in which there is less than
20% ownership are generally carried at cost, unless significant
influence is exercised.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Investment securities
Investment securities are classified in three categories and accounted
for as follows:
(cid:132) Debt securities that the Corporation has the intent and ability to
hold to maturity are classified as securities held-to-maturity and
reported at amortized cost. The Corporation may not sell or transfer
held-to-maturity securities without calling into question its intent to
hold other debt securities to maturity, unless a nonrecurring or
unusual event that could not have been reasonably anticipated has
occurred.
(cid:132) Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains
and losses included in earnings.
(cid:132) Debt and equity securities not classified as either securities held-
to-maturity or trading securities are classified as securities
available-for-sale and reported at fair value, with unrealized gains
and losses excluded from earnings and reported net of taxes in other
comprehensive income. Stock that is owned by the Corporation to
comply with regulatory requirements, such as Federal Reserve Bank
and Federal Home Loan Bank (FHLB) stock, is also included in
this category, at cost.
The amortization of premiums is deducted and the accretion of
discounts is added to interest income based on a method which
approximates the interest method over the outstanding period of the
related securities. The cost of securities sold is determined by specific
identification. Net realized gains or losses on sales of investment
securities and unrealized loss valuation adjustments considered other
than temporary, if any, on securities available-for-sale and held-to
maturity are reported separately in the consolidated statements of
income.
Derivative financial instruments
The Corporation occasionally uses derivative financial instruments as
part of its overall interest rate risk management strategy and to minimize
significant unplanned fluctuations in earnings and cash flows caused
by interest rate volatility.
Effective January 1, 2001, the Corporation adopted SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” as
amended, which establishes accounting and reporting standards for
derivative instruments and hedging activities and requires recognition
of all derivatives as either assets or liabilities in the statement of financial
condition and measurement of those instruments at fair value. On the
date the Corporation enters into a derivative contract, the derivative
instrument is designated as either a fair value hedge, cash flow hedge or
as a free-standing derivative instrument. For a fair value hedge, changes
in the fair value of the derivative instrument and changes in the fair
value of the hedged asset or liability or of an unrecognized firm
commitment attributable to the hedged risk are recorded in current
period net income. For a cash flow hedge, changes in the fair value of the
derivative instrument, to the extent that it is effective, are recorded in
accumulated other comprehensive income and subsequently reclassified
to net income in the same period(s) that the hedged transaction impacts
net income. For free-standing derivative instruments, changes in the
fair values are reported in current period net income.
Prior to entering a hedge transaction, the Corporation formally
documents the relationship between hedging instruments and hedged
items, as well as the risk management objective and strategy for
undertaking various hedge transactions. This process includes linking
all derivative instruments that are designated as fair value or cash flow
hedges to specific assets and liabilities on the balance sheet or to
specific forecasted transactions along with a formal assessment at both,
inception of the hedge and on an ongoing basis as to the effectiveness of
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the derivative instrument in offsetting changes in fair values or cash
flows of the hedged item. If it is determined that the derivative instrument
is not highly effective as a hedge, hedge accounting is discontinued and
the adjustment to fair value of the derivative instrument is recorded in
net income.
In accordance with the transition provisions of SFAS No. 133, the
Corporation recorded a $686,000 net of tax cumulative effect adjustment
in earnings as of January 1, 2001. In addition, the Corporation recorded
a $254,000 net of tax cumulative effect adjustment in other
comprehensive income as of January 1, 2001.
As of December 31, 2001, the Corporation had $390,000 in
accumulated other comprehensive income pertaining to the cumulative
effect of adopting SFAS No. 133. This amount pertains to the
reclassification of $29,256,000 of held-to-maturity securities as
available-for-sale as permitted by SFAS No. 133.
Loans held-for-sale
Loans held-for-sale are stated at the lower of cost or market, cost being
determined based on the outstanding loan balance less unearned income,
and fair market value determined on an aggregate basis according to
secondary market prices. The amount by which cost exceeds market
value, if any, is accounted for as a valuation allowance with changes
included in the determination of net income for the period in which the
change occurs.
Loans
Loans are stated at the outstanding balance less unearned income and
allowance for loan losses. Fees collected and costs incurred in the
origination of new loans are deferred and amortized using the interest
method over the term of the loan as an adjustment to interest yield.
Recognition of interest income on commercial and construction
loans, as well as commercial leases, is discontinued when loans are
60 days or more in arrears on payments of principal or interest or
when other factors indicate that collection of principal and interest
is doubtful. Interest accrual for consumer lease financing,
conventional mortgage loans and closed-end consumer loans is
ceased when loans are 90 days or four scheduled payments in arrears.
Loans designated as non-accruing are not returned to an accrual
status until interest is received on a current basis and those factors
indicative of doubtful collection cease to exist. Closed-end consumer
loans and leases are charged-off against the allowance for loan losses
when 120 days in arrears. Open-end (revolving credit) consumer
loans are charged-off when 180 days in arrears. Income is generally
recognized on open-end consumer loans until the loans are charged-
off.
Lease financing
The Corporation leases passenger and commercial vehicles and
equipment to individual and corporate customers. The finance method
of accounting is used to recognize revenue on lease contracts that
meet the criteria specified in SFAS No. 13, “Accounting for Leases,”
as amended. Aggregate rentals due over the term of the leases less
unearned income are included in finance lease contracts receivable.
Unearned income is amortized using a method which results in
approximate level rates of return on the principal amounts outstanding.
Finance lease origination fees and costs are deferred and amortized
over the average life of the portfolio as an adjustment to the yield.
Revenue for other leases is recognized as it becomes due under
the terms of the agreement.
Allowance for loan losses
The Corporation follows a systematic methodology to establish and
evaluate the adequacy of the allowance for loan losses to provide for
inherent losses in the loan portfolio. This methodology includes the
consideration of factors such as current economic conditions, portfolio
risk characteristics, prior loss experience, results of periodic credit
reviews of individual loans and financial accounting standards. The
provision for loan losses charged to current operations is based on
such methodology. Loan losses are charged and recoveries are credited
to the allowance for loan losses.
The Corporation has defined impaired loans as loans with interest
and/or principal past due 90 days or more and other specific loans for
which, based on current information and events, it is probable that the
debtor will be unable to pay all amounts due according to the contractual
terms of the loan agreement. Loan impairment is measured based on
the present value of expected future cash flows discounted at the
loan’s effective rate, on the observable market price of the loan or on
the fair value of the collateral if the loan is collateral dependent. Large
groups of smaller balance homogeneous loans are collectively evaluated
for impairment based on past experience adjusted for current economic
conditions. Commercial loans exceeding $250,000 are individually
evaluated for impairment. Once a specific measurement methodology
is chosen, it is consistently applied unless there is a significant change
in the financial position of the borrower. Impaired loans for which the
discounted cash flows, collateral value or market price is less than the
carrying value require an allowance. The allowance for impaired loans
is part of the Corporation’s overall allowance for loan losses.
Cash payments received on impaired loans are recorded in
accordance with the contractual terms of the loan. The principal portion
of the payment is used to reduce the principal balance of the loan,
whereas the interest portion is recognized as interest income. However,
when management believes the ultimate collectibility of principal is in
doubt, the interest portion is applied to principal.
Transfers and servicing of financial assets and extinguishment
of liabilities
After a transfer of financial assets, the Corporation recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished.
The Corporation sells mortgage and other loans through secondary
market securitizations. Upon consummation of a sale, the securitized
loans are removed from the balance sheet and a gain or loss on the
sale is recognized.
The transfer of financial assets in which the Corporation surrenders
control over the assets, is accounted for as a sale to the extent that
consideration other than beneficial interests is received in exchange.
SFAS No. 140 “Accounting for Transfer and Servicing of Financial
Assets and Liabilities - a Replacement of SFAS No. 125” sets forth
the criteria that must be met for control over transferred assets to be
considered to have been surrendered. When the Corporation transfers
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financial assets and the transfer fails any one of the SFAS No. 140
criteria then the Corporation is prevented from derecognizing the
transferred financial assets and the transaction is accounted for as a
secured borrowing.
Where the derecognition criteria are met and the transfer is
accounted for as a sale, interests in the assets sold may be retained in
the form of interest-only strips and servicing rights. Gains or losses
on sale depend in part on the previous carrying amount of the loans
involved in the transfer and are allocated between the loans sold and
the retained interests, based on their relative fair value at the date of
the sale. Gains and losses on securitization are recorded as gain on
sale of loans.
Servicing assets
Servicing assets represent the costs of acquiring the contractual
right to service loans for others. Loan servicing fees, which are based
on a percentage of the principal balances of the loans serviced, are
credited to income as loan payments are collected.
The Corporation recognizes as separate assets the rights to service
loans for others, whether those servicing assets are originated or
purchased. The total cost of loans to be sold with servicing assets
retained is allocated to the servicing assets and the loans (without the
servicing assets), based on their relative fair values. Servicing assets
are amortized in proportion to and over the period of estimated net
servicing income. In addition, the Corporation assesses capitalized
servicing assets for impairment based on the fair value of those assets.
To estimate the fair value of servicing assets the Corporation considers
prices for similar assets and the present value of expected future cash
flows associated with the servicing assets calculated using assumptions
that market participants would use in estimating future servicing income
and expense, including discount rates, anticipated prepayment and
credit loss rates. For purposes of evaluating and measuring impairment
of capitalized servicing assets, the Corporation stratifies such assets
based on predominant risk characteristics of underlying loans, such as
loan type, rate and term. The amount of impairment recognized, if any,
is the amount by which the capitalized servicing assets per stratum
exceed their estimated fair value. Impairment is recognized through a
valuation allowance with changes included in net income for the period
in which the change occurs. Servicing assets are included as part of
other assets in the consolidated statements of condition.
Interest-only securities
The Corporation periodically sells residential mortgage loans to a
qualifying special-purpose entity (SPE), which in turn issues asset-
backed securities to investors. The Corporation retains an interest in
the loans sold in the form of a residual or interest-only security and may
also retain other subordinated interests in the receivables sold to the
SPE. The residual or interest-only security represents the present value
of future excess cash flows resulting from the difference between the
finance charge income received from the obligors on the loans and the
interest paid to the investors in the asset-backed securities, net of credit
losses, servicing fees and other expenses. In the normal course of
business the Corporation also acquires interest-only securities in the
secondary market. The interest-only securities are classified as available-
for-sale securities and are measured at fair value. Factors considered in
the valuation model for calculating the fair value of these subordinated
interests are market discount rates, anticipated prepayment and loss
rates on the underlying assets.
Premises and equipment and other long-lived assets
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed on a straight-line basis
over the estimated useful life of each type of asset. Amortization of
leasehold improvements is computed over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is
shorter. Costs of maintenance and repairs which do not improve or
extend the life of the respective assets are expensed as incurred. Costs
of renewals and betterments are capitalized. When assets are disposed
of, their cost and related accumulated depreciation are removed from
the accounts and any gain or loss is reflected in earnings as realized or
incurred, respectively.
The Corporation evaluates for impairment its long-lived assets to be
held and used, and long-lived assets to be disposed of, whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
Other real estate
Other real estate comprises properties acquired through foreclosure.
Upon foreclosure, the recorded amount of the loan is written-down, if
required, to the appraised value less estimated costs of disposal of the
real estate acquired, by charging the allowance for loan losses. Subsequent
to foreclosure, the properties are carried at the lower of carrying value or
fair value less estimated costs of disposal. Gains or losses on the sale of
these properties are credited or charged to expense of operating other
real estate. The cost of maintaining and operating such properties is
expensed as incurred.
Goodwill and other intangible assets
Other identifiable intangible assets, mainly core deposits and customer
lists, are amortized using various methods over the periods benefited,
which range from 4 to 15 years. Goodwill represents the excess of the
Corporation’s cost of purchased operations over the fair value of the net
assets acquired.
In 2002, the Corporation adopted SFAS No. 142 “Goodwill and
Other Intangible Assets,” which changed the accounting for goodwill
and other intangible assets in the following significant respects:
-Goodwill and other intangible assets that have indefinite useful
lives will not be amortized, but will be tested at least annually for
impairment.
-SFAS No. 142 requires that goodwill be tested annually for
impairment using a two-step process. The first step is to identify
if a potential impairment exists. The second step measures the amount
of impairment, if any.
-Other intangible assets deemed to have an indefinite life will
be tested for impairment using a one-step process which compares
the fair value with the carrying amount of the asset as of the
beginning of the fiscal year.
The Corporation completed all transitional impairment tests during
2002, and determined that there are no impairment losses to be
recognized in the period as a cumulative effect of accounting change.
2 0 0 2 A N N U A L R E P O R T 4 5
2 0 0 2 A N N U A L R E P O R T 4 5
2 0 0 2 A N N U A L R E P O R T 4 5
2 0 0 2 A N N U A L R E P O R T 4 5
2 0 0 2 A N N U A L R E P O R T 4 5
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
The following table presents the reconciliation of reported net
income and earnings per share (EPS) (basic and diluted) adjusted to
exclude the amortization expense recognized in the period prior to the
adoption of SFAS No. 142.
(In thousands, except per share information)
2001
2000
Reported Net Income
$304,538
$276,103
Year ended December 31,
Add back: Goodwill amortization, including
impact on profit sharing expense and
related tax
Adjusted Net Income
Reported EPS
Add back: Goodwill amortization, including
impact on profit sharing expense and
related tax
Adjusted EPS
16,526
18,725
$321,064
$294,828
Year ended December 31,
2001
$2.17
2000
$1.97
0.12
$2.29
0.14
$2.11
With the adoption of SFAS No. 142, there were no changes to
amortization expense on acquired other intangibles assets with definite
lives.
For further disclosures required by SFAS No. 142, refer to Note
10 to the consolidated financial statements.
Securities sold/purchased under agreements to repurchase/
resell
Repurchase and resell agreements are treated as financing transactions
and are carried at the amounts at which the securities will be
reacquired or resold as specified in the respective agreements.
It is the Corporation’s policy to take possession of securities
purchased under resell agreements. However, the counterparties to
such agreements maintain effective control over such securities, and
accordingly are not reflected in the Corporation’s consolidated statements
of condition. The Corporation monitors the market value of the underlying
securities as compared to the related receivable, including accrued
interest, and requests additional collateral where deemed appropriate.
It is the Corporation’s policy to maintain effective control over
securities sold under agreements to repurchase; accordingly, such
securities continue to be carried on the consolidated statements of
condition.
Treasury stock
Treasury stock acquired is recorded at cost and is carried as a
reduction of stockholders’ equity in the consolidated statements of
condition. At the date of retirement or subsequent reissue, the treasury
stock account is reduced by the cost of such stock. The difference
4 6
4 6
4 6
4 6
4 6
between the consideration received upon issuance and the specific
cost is charged or credited to surplus.
Foreign currency translation
Assets and liabilities denominated in foreign currencies are translated
to U.S. dollars using prevailing rates of exchange at the end of the
period. Revenues, expenses, gains and losses are translated using
weighted average rates for the period. The resulting foreign currency
translation adjustment from operations for which the functional currency
is other than the U.S. dollar is reported in other comprehensive income.
Income taxes
The Corporation uses an asset and liability approach to the recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Corporation’s
financial statements or tax returns. Deferred income tax assets and
liabilities are determined for differences between financial statement
and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future. The computation is based on enacted
tax laws and rates applicable to periods in which the temporary
differences are expected to be recovered or settled. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Employees’ retirement and other postretirement benefit plans
Banco Popular de Puerto Rico (BPPR) and Banco Popular North
America (BPNA) have trusteed, noncontributory retirement and other
benefit plans covering substantially all full-time employees. Pension
costs are computed on the basis of accepted actuarial methods and are
charged to current operations. Net pension costs are based on various
actuarial assumptions regarding future experience under the plan, which
include costs for services rendered during the period, interest costs and
return on plan assets, as well as deferral and amortization of certain
items such as actuarial gains or losses. The funding policy is to contribute
to the plan as necessary to provide for services to date and for those
expected to be earned in the future. To the extent that these requirements
are fully covered by assets in the plan, a contribution may not be made
in a particular year.
BPPR also provides certain health and life insurance benefits for
eligible retirees and their dependents. The cost of postretirement
benefits, which is determined based on actuarial assumptions and
estimates of the costs of providing these benefits in the future, is
accrued during the years that the employee renders the required
service.
Stock option plan
The Corporation has a stock option plan that permits the granting
of incentive awards in the form of qualified stock options, incentive
stock options, or non-statutory options of the Corporation. In 2002,
the Corporation opted to use the fair value method of recording
stock options as described in SFAS No. 123 “Accounting for Stock-
Based Compensation,” which is considered the preferable accounting
method for stock-based compensation. All future stock option grants
will be expensed over the stock option vesting period based on the fair
value at the date the options are granted.
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Previously, as permitted by SFAS No. 123, the Corporation
measured compensation cost for this plan based on APB No. 25
“Accounting for Stock Issued to Employees” and disclosed the pro
forma net income and net income per share as if the fair value method
had been applied in measuring cost. The Corporation recognized
$957,000 in operating expenses during 2002 as a result of the
aforementioned changed in accounting method.
Comprehensive income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances, except those resulting from investments by owners and
distributions to owners. The presentation of comprehensive income is
included in a separate consolidated statement of comprehensive income.
Earnings per common share
Basic earnings per common share are computed by dividing net income,
reduced by dividends on preferred stock, by the weighted average number
of common shares of the Corporation outstanding during the year. Diluted
earnings per common share take into consideration the weighted average
common shares adjusted for the effect of stock options, using the treasury
stock method.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and amounts due from banks.
Reclassifications
Certain reclassifications have been made to the 2001 and 2000
consolidated financial statements to conform with the 2002
presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND REGULA-
TIONS
SFAS No. 143 “Accounting for Asset Retirement Obligations”
This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the related asset retirement costs. It requires that the
fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived
asset. This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Management believes that
the adoption of this statement will not have a material effect on the
consolidated financial statements of the Corporation.
SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets”
This statement provides a single accounting model for long-lived assets
that are to be disposed of by sale, whether previously held and used or
newly acquired. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001. The adoption
of this statement during 2002 did not have a material effect on the
consolidated financial statements of the Corporation.
SFAS No. 146 “Accounting for Costs Associated with Exit or
Disposal Activities”
In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs
Associated with Exit or Disposal Activities.” SFAS No. 146 addresses
financial accounting and reporting for a cost associated with exit or
disposal activities. SFAS No. 146 requires recognition of a liability
for a cost associated with an exit or disposal activity when the liability
is incurred, as opposed to when the entity commits to an exit plan
under EITF No. 94-3. SFAS No. 146 is effective prospectively for
exit or disposal activities initiated after December 31, 2002.
Management does not anticipate that SFAS No. 146 will have a material
impact on the Corporation's financial condition or results of operations,
which will be dependent on the number and size of any exit or disposal
activities that are undertaken.
SFAS No. 147 “Acquisitions of Certain Financial Institu-
tions”
This Statement, which is effective for acquisitions on or after October
1, 2002, removes acquisitions of financial institutions from the scope
of both SFAS No. 72 “Accounting for Certain Acquisitions of Banking
or Thrift Institutions,” and FASB Interpretation No. 9 “Applying
APB Opinions No. 16 and 17, When a Savings and Loan Association
or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method” and requires that those
transactions be accounted for in accordance with FASB Statements
No. 141 “Business Combinations,” and No. 142 “Goodwill and Other
Intangible Assets.” In addition, SFAS No. 147 amends FASB Statement
No. 144 “Accounting for the Impairment or Disposal of Long-Lived
Assets,” to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets. SFAS No. 147’s transition provisions require affected
institutions to reclassify their SFAS No. 72 goodwill as SFAS No. 142
goodwill as of the date the company initially applied SFAS No. 142 in
its entirety. The adoption of SFAS No. 147 did not impact the
Corporation’s financial condition or results of operations.
SFAS No. 148 “Accounting for Stock-Based Compensation –
Transition and Disclosure – an amendment to FASB State-
ment No. 123, Accounting for Stock-Based Compensation”
SFAS No. 148 amends SFAS No. 123 to provide alternative methods
of transition for an entity that voluntarily changes to the fair value-
based method of accounting for stock-based compensation. This
Statement expands the disclosure requirements with respect to stock-
based compensation. The transition guidance and annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after
2 0 0 2 A N N U A L R E P O R T 4 7
2 0 0 2 A N N U A L R E P O R T 4 7
2 0 0 2 A N N U A L R E P O R T 4 7
2 0 0 2 A N N U A L R E P O R T 4 7
2 0 0 2 A N N U A L R E P O R T 4 7
Note 3 - Securities purchased under agreements
to resell:
The securities underlying the agreements to resell were delivered to,
and are held by, the Corporation. The counterparties to such
agreements maintain effective control over such securities. The
Corporation is permitted by contract to repledge the securities, and
has agreed to resell to the counterparties the same or substantially
similar securities at the maturity of the agreements.
The fair value of the collateral securities held by the Corporation
on these transactions as of December 31, was as follows:
(In thousands)
Repledged
Not repledged
Total
2002
2001
$853,992
18,568
$738,685
24,094
$872,560
$762,779
The repledged securities were used as underlying securities for
repurchase agreement transactions.
Note 4 - 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), weighted average yield and contractual
maturities of investment securities available-for-sale as of December
31, 2002 and 2001 (2000 - only market value is presented) were as
follows:
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
December 15, 2002. The Corporation had already opted to use the fair
value method of recording stock options.
FIN No. 45 “Guarantor’s Accounting and Disclosure Require-
ments for Guarantees, Including Indirect Guarantees of
Indebtness of Others”
FASB’s Interpretation No. 45 (FIN No. 45) requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The expanded
disclosure requirements are required for financial statements ending
after December 15, 2002, while the liability recognition provisions
are applicable to certain guarantee obligations modified or issued
after December 31, 2002. Management is currently assessing the
impact of FIN No. 45 on the Corporation’s financial position and
results of operations for the year 2003.
FIN No. 46 “Consolidation of Variable Interest Entities”
FASB’s Interpretation No. 46 (FIN No. 46) expands upon and
strengthens existing accounting guidance that addresses when a
company should include in its financial statements the assets, liabilities
and activities of another entity. A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN No. 46 requires
a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable
interest entity’s activities or is entitled to receive a majority of the
entity’s residual returns or both. The consolidation requirements of
FIN No. 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning after June
15, 2003. This Interpretation is not expected to have a significant
impact on the Corporation’s financial position or results of operations.
In past years, the Corporation conducted asset securitizations
involving the transfer of mortgage loans to a qualifying special purpose
entity (QSPE), which in turn transferred the assets, including their
titles, to different trusts, thus isolating those loans from the
Corporation’s assets. The transaction qualified for sale accounting
based on the provisions of SFAS No. 140. The investors and the
securitization trusts have no recourse to the Corporation’s assets.
This QSPE is outside the scope of FIN 46.
Note 2 - Cash and due from banks:
The Corporation’s subsidiary banks are required by regulatory agencies
to maintain average reserve balances with the Federal Reserve Bank.
The amount of those required average reserve balances was
approximately $447,476,000 at December 31, 2002 (2001 -
$448,385,000).
4 8
4 8
4 8
4 8
4 8
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Amortized
cost
2 0 0 2
Gross
unrealized
gains
Gross
unrealized
losses
(Dollars in thousands)
Weighted
average
yield
Market
value
$300,072
54,885
$4,381
881
$304,453
55,766
5.67%
2.87
354,957
5,262
360,219
5.24
U.S. Treasury securities
(average maturity of
6 months):
Within 1 year
After 1 to 5 years
Obligations of other
U.S. Government
agencies and corporations
(average maturity of
5 years and 4 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
149,674
3,402,631
2,290,566
350,000
2 , 8 5 6
81,787
31,327
9,705
152,530
3,484,418
2,321,505
359,705
$388
6,192,871
125,675
3 8 8
6,318,158
4.32
4.17
4.44
5.88
4.37
5.90
5.32
5.94
6.34
5.87
4.72
5.14
2.91
2.94
6,500
23,425
26,499
22,580
79,004
103
1,563
1,161
2,088
4,915
1 2
2
1 4
6,591
24,986
27,660
24,668
83,905
12,904
22,372
2,136,841
401
249
11,314
2,172,117
11,964
13,305
22,621
2,147,883
2,183,809
272
272
Obligations of P.R.,
States and political
subdivisions (average
maturity of 7 years
and 10 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Collateralized mort-
gage obligations
(average maturity of
20 years and 6 months):
After 1 to 5 years
After 5 to 10 years
After 10 years
Mortgage-backed
securities (average
maturity of 23 years
and 5 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Equity securities
(without contractual
maturity)
1
9,548
108,956
975,771
2
1,955
34,599
1,094,276
36,556
1
9,550
110,911
1,010,214
6.99
6.93
5.07
5.89
1,130,676
5.82
156
1 5 6
263,342
77,677
2 2
340,997
0.52
Other (average maturity
of 16 years and 8 months):
After 1 to 5 years
After 5 to 10 years
After 10 years
1,046
369
110,927
112,342
3
2 8
1,769
1,800
3
3
1,046
397
112,696
8.22
11.80
8.52
114,139
8.53
$10,268,909
$263,849
$855
$10,531,903
4.21%
Amortized
cost
U.S. Treasury securities
(average maturity of
1 year and 1 month):
Within 1 year
After 1 to 5 years
$270,176
380,071
650,247
Obligations of other
U.S. Government
agencies and corporations
(average maturity of
4 years and 7 months):
1,173,100
Within 1 year
2,226,467
After 1 to 5 years
After 5 to 10 years 1,509,001
300,000
After 10 years
5,208,568
2 0 0 1
Gross
unrealized
gains
Gross
unrealized
losses
Market
value
(Dollars in thousands)
Weighted
average
yield
2 0 0 0
Market
value
$5,615
13,007
18,622
$275,791 6.13% $589,621
557,123
1,146,744
393,078 5.14
668,869 5.55
9,657 $27,414
7,144
22,388
29,893
2,455
64,393
34,558
1,195,488 6.42
2,208,710 4.47
1,531,750 5.46
302,455 6.40
5,238,403 5.31
1,256,262
1,841,154
1,591,645
288,608
4,977,669
Obligations of P.R.,
States and political
subdivisions (average
maturity of 8 years
and 5 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
1,665
6,417
72,433
21,128
101,643
2 2
176
1,988
1,734
3,920
1,687 5.92
6,593 5.89
74,421 5.95
22,695 4.54
105,396 5.65
167
167
2,880
9,074
23,440
35,884
71,278
Collateralized mort-
gage obligations
(average maturity of
21 years and 10 months):
After 1 to 5 years
After 5 to 10 years
After 10 years
17,335
76,209
2,148,283
2,241,827
2 8
1,690
6,443
8,161
17,363 2.34
77,899 5.96
2,146,824 3.47
2,242,086 3.55
28,965
81,200
1,443,120
1,553,285
7,902
7,902
Mortgage-backed
securities (average
maturity of 24 years
and 10 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Equity securities
(without contractual
maturity)
158
35,183
600,481
635,822
2
799
8,459
9,260
4
3,508
3,512
160 6.54
35,978 6.78
605,432 6.17
641,570 6.20
1 4
18,561
20,738
656,674
695,987
231,721
48,511
1 0
280,222 2.57
255,651
Other (average maturity
of 17 years and 6 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
227
1,402
103,517
105,146
6
4 3
2,664
2,713
233 7.75
1,441 8.84
106,181 8.49
107,855 8.50
4
4
6,784
751
7,632
80,143
95,310
$9,174,974 $155,580 $46,153 $9,284,401 4.91% $8,795,924
2 0 0 2 A N N U A L R E P O R T 4 9
2 0 0 2 A N N U A L R E P O R T 4 9
2 0 0 2 A N N U A L R E P O R T 4 9
2 0 0 2 A N N U A L R E P O R T 4 9
2 0 0 2 A N N U A L R E P O R T 4 9
2 0 0 2
Amortized
cost
Gross
Gross
unrealized
gains
(Dollars in thousands)
losses
unrealized Market
value
Weighted
average
yield
$28,618
$ 4
$28,622
1.68%
24,047
5 , 7 3 6
9 , 4 9 6
40,895
80,174
4
5 7
2 3 9
6 3 3
9 3 3
$ 8
4 0
3 5
1 0 3
1 8 6
24,043
5 , 7 5 3
9 , 7 0 0
41,425
80,921
1.47
5.76
6.25
6.57
4.94
1 , 1 2 6
1 1 2
1 , 0 1 4
5.45
12,748
51,203
6 , 8 8 2
70,833
4 7
6 4 0
1 0 6
7 9 3
12,795
51,843
6 , 9 8 8
71,626
5.21
5.21
5.35
5.22
$180,751
$1,730
$ 2 9 8
$182,183
4.54%
Obligations of
other U.S.
Government
agencies and
corporations
(average matu-
rity of 1 month):
Within 1 year
Obligations of P.R.,
States and political
subdivisions
(average maturity
of 10 years and
1 month):
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Collateralized
mortgage obliga-
tions (average
maturity of 21 years
and 7 months):
After 10 years
Other (average maturity of
2 years and 9 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
The weighted average yield on investment securities available-for-
sale is based on amortized cost, therefore it does not give effect to
changes in fair value.
The expected maturities of collateralized mortgage obligations,
mortgage-backed securities and certain other securities differ from
their contractual maturities because they may be subject to
prepayments. The allocation by maturities disclosed herein for these
types of securities is based on their ultimate contractual maturity
date.
The aggregate amortized cost and approximate market value of
investment securities available-for-sale at December 31, 2002, by
contractual maturity are shown below:
(In thousands)
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Amortized cost
Market value
$456,247
3,504,439
2,448,762
3,596,119
$463,575
3,589,071
2,483,094
3,655,166
T o t a l
Without contractual maturity
$10,005,567
263,342
$10,190,906
340,997
Total investment securities
available-for-sale
$10,268,909
$10,531,903
Proceeds from the sale of investment securities available-for-sale
during 2002 were $1,266,542,000 (2001 - $1,161,097,000; 2000 -
$818,955,000). Gross realized gains and losses on these securities
during the year were $3,717,000 and $7,059,000, respectively (2001
- $8,505,000 and $8,478,000; 2000 - $17,048,000 and $5,847,000).
As of December 31, 2002 and 2001, the investments in obligations
that are payable and secured by the same source of revenue or taxing
authority, other than the U.S. Government, did not exceed 10 percent
of stockholders’ equity.
Note 5 - 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), weighted average yield and contractual
maturities of investment securities held-to-maturity as of December
31, 2002 and 2001 (2000 - only amortized cost is presented) were as
follows:
5 0
5 0
5 0
5 0
5 0
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Obligations of
other U.S.
Government
agencies and
corporations
(average matu-
rity of 1 month):
Within 1 year
2 0 0 1
Gross
Gross
Amortized
cost
unrealized unrealized
gains
losses
Market
value
(Dollars in thousands)
2000
Weighted
average
yield
Amortized
cost
$416,980
$ 4
$416,984
1.96% $11,061
Obligations of P.R.,
States and political
subdivisions (average
maturity of 13 years
and 8 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
20,815
9,056
7,166
55,485
92,522
2 8 1
2 5 7
3 , 9 4 7
4 , 4 8 5
$ 2
3 7
3
6
4 8
20,813
9,300
7,420
59,426
96,959
1 . 1 6
7.29
6.56
4 . 9 2
4 . 4 3
35,400
13,988
5,960
63,247
118,595
Collateralized
mortgage obliga-
tions (average
maturity of 22 years
and 9 months):
After 1 to 5 years
After 10 years
Mortgage-backed
securities:
After 1 to 5 years
After 5 to 10 years
After 10 years
Other (average
maturity of 3 years
and 4 months):
Within 1 year
After 1 to 5 years
After 5 to 10 years
1 , 4 3 0
1 1 4
1 , 3 1 6
6 . 4 5
5 , 0 1 1
7 , 3 5 8
12,369
6 4
16,679
2 , 0 0 1
18,744
11,250
60,487
9,691
81,428
5 2
7 9
1 4 8
2 7 9
11,302
60,015
9,839
81,156
5 . 0 8
5.19
5.64
5 . 2 3
13,276
63,357
27,329
103,962
5 5 1
5 5 1
$592,360
$4,768
$713 $596,415
2.81% $264,731
The expected maturities of collateralized mortgage obligations,
mortgage-backed securities and certain other securities differ from
their contractual maturities because they may be subject to
prepayments. The allocation by maturities disclosed herein for these
types of securities is based on their ultimate contractual maturity
date.
The aggregate amortized cost and approximate market value of
investment securities held-to-maturity at December 31, 2002, by
contractual maturity are shown below:
(In thousands)
Within 1 year
After 1 to 5 years
After 5 to 10 years
After 10 years
Amortized cost
Market value
$65,413
56,939
16,378
42,021
$65,460
57,596
16,688
42,439
Total investment securities
held-to-maturity
$180,751
$182,183
As of December 31, 2002 and 2001, the investments in obligations
that are payable from and secured by the same source of revenue or
taxing authority, other than the U.S. Government, did not exceed 10
percent of stockholders’ equity.
Note 6 - Pledged assets:
At December 31, 2002 and 2001, securities and loans were pledged
to secure public and trust deposits, securities sold under agreements
to repurchase and other borrowings.
The classification and carrying amount of pledged assets, which
the secured parties are not permitted to sell or repledge the collateral
as of December 31, were as follows:
(In thousands)
Investment securities available-for-sale
Investment securities held-to-maturity
Loans
2002
$2,046,100
3,278
3,402,042
$5,451,420
2001
$1,973,552
5,110
2,181,383
$4,160,045
Securities and loans that the creditor has the right by custom or
contract to repledge are presented separately in the consolidated
statements of condition.
2 0 0 2 A N N U A L R E P O R T 5 1
2 0 0 2 A N N U A L R E P O R T 5 1
2 0 0 2 A N N U A L R E P O R T 5 1
2 0 0 2 A N N U A L R E P O R T 5 1
2 0 0 2 A N N U A L R E P O R T 5 1
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Note 7 - Loans and allowance for loan losses:
The composition of the loan portfolio at December 31, was as follows:
(In thousands)
Loans secured by real estate:
Insured or guaranteed by the U.S.
2002
2001
Government or its agencies
$19,457
$72,354
Guaranteed by the Commonwealth
of Puerto Rico
Commercial loans secured by real estate
Residential conventional mortgages
Construction and land development
Consumer
Financial institutions
Commercial, industrial and agricultural
Lease financing
Consumer for household, credit cards
and other consumer expenditures
Other
56,604
1,677,033
6,290,410
305,299
347,062
8,695,865
21,777
5,964,338
1,054,189
64,124
1,621,566
5,384,803
311,339
391,532
7,845,718
24,697
5,522,018
1,039,829
2,873,234
166,444
$18,775,847
2,935,207
188,560
$17,556,029
As of December 31, 2002, loans on which the accrual of interest
income had been discontinued amounted to $485,193,000 (2001 -
$415,052,000; 2000 - $319,188,000). If these loans had been accruing
interest, the additional interest income realized would have been
approximately $34,132,000 (2001 - $27,042,000; 2000 -
$23,129,000). Non-accruing loans as of December 31, 2002 include
$40,019,000 (2001 - $40,946,000; 2000 - $43,814,000) in consumer
loans.
The recorded investment in loans that were considered impaired
at December 31, and the related disclosures follow:
(In thousands)
Impaired loans with a related allowance
Impaired loans that do not require allowance
Total impaired loans
Allowance for impaired loans
Average balance of impaired
loans during the year
Interest income recognized on
December 31,
2002
$87,874
54,175
$142,049
2001
$90,914
53,056
$143,970
$34,941
$36,799
$142,669
$138,342
impaired loans during the year
$3,026
$3,668
The changes in the allowance for loan losses for the year ended
December 31, were as follows:
5 2
5 2
5 2
5 2
5 2
(In thousands)
2002
2001
2000
Balance at beginning of year
Net allowances acquired (sold)
Provision for loan losses
Recoveries
Loans charged-off
Balance at end of year
$336,632
2,327
205,570
67,488
(239,220)
$372,797
$290,653
1,675
213,250
66,103
(235,049)
$336,632
$292,010
(15,869)
194,640
60,903
(241,031)
$290,653
The components of the net financing leases receivable at December
31, were:
(In thousands)
2002
2001
Total minimum lease payments
Estimated residual value of leased property
Deferred origination costs
Less - Unearned financing income
Net minimum lease payments
Less - Allowance for loan losses
$872,206
177,701
4,282
(168,192)
885,997
(29,572)
$856,425
$864,330
169,728
5,771
(176,636)
863,193
(22,667)
$840,526
Estimated residual value is generally established at amounts
expected to be sufficient to cover the Corporation’s investment.
At December 31, 2002, future minimum lease payments are
expected to be received as follows:
(In thousands)
2003
2004
2005
2006
2007 and thereafter
$270,509
222,164
175,298
125,781
78,454
$872,206
Note 8 - Related party transactions:
The Corporation grants loans to its directors, executive officers
and certain related individuals or organizations in the ordinary course
of business. The movement and balance of these loans were as follows:
(In thousands)
Balance at December 31, 2000
New loans
Payments
Other changes
Balance at December 31, 2001
New loans
Payments
Other changes
Executive
Officers
Directors
Total
$2,979
549
(606)
$2,922
4,304
(2,122)
572
$108,595
358,481
(357,308)
(27,975)
$81,793
102,657
(90,982)
147
$111,574
359,030
(357,914)
(27,975)
$84,715
106,961
(93,104)
719
Balance at December 31, 2002
$5,676
$93,615
$99,291
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
These loans have been consummated on terms no more favorable
than those that would have been obtained if the transactions had been
with unrelated parties and do not involve more than the normal risk of
collectibility.
The amounts reported as “other changes” include changes in the
status of those who are considered related parties.
Note 9 - Premises and equipment:
Premises and equipment are stated at cost less accumulated
depreciation and amortization as follows:
Useful life
in years
2002
2 0 0 1
(In thousands)
Land
Buildings
Equipment
Leasehold improvements
10-50
1-15
Various
Less - Accumulated depreciation
and amortization
Construction in progress
$64,937
288,913
513,691
82,518
885,122
514,327
370,795
25,445
$461,177
$59,490
243,641
466,757
79,339
789,737
457,697
332,040
14,175
$405,705
Depreciation and amortization of premises and equipment for the
year 2002 was $74,167,000 (2001 - $75,962,000; 2000 -
$76,848,000) of which $19,674,000 (2001 - $18,781,000; 2000 -
$13,805,000) was charged to occupancy expense and $54,493,000
(2001 - $57,181,000; 2000 - $63,043,000) was charged to equipment,
communications and other operating expenses. Occupancy expense
is net of rental income of $12,423,000 (2001 - $10,440,000; 2000 -
$9,878,000).
Note 10 - Goodwill and other intangible assets:
SFAS No. 142 requires that goodwill and other indefinite-life intangible
assets be tested for impairment at least annually using a two-step
process at each reporting unit level. The first step of the goodwill
impairment test, used to identify potential impairment, compares the
fair value of a reporting unit with its carrying amount, including goodwill.
If the fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not considered impaired, thus the second step
of the impairment test is unnecessary. If needed, the second step
consists of comparing the implied fair value of reporting unit goodwill
with the carrying amount of that goodwill. The Corporation uses the
expected present value of future cash flows and market price multiples
of comparable companies to determine the fair value of each reporting
unit. The cost of equity used to discount the cash flows was calculated
using the Capital Asset Pricing Model.
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,
since the Corporation records the intangibles originated in the
acquisition on the books of the entity acquired by using the practice of
push down accounting.
The changes in the carrying amount of goodwill for the year ended
December 31, 2002, are as follows:
Commercial Consumer
Mortgage
and
Auto
and
Lease
Lending Financing Other
(In thousands)
Banking
Total
Balance as of
January 1, 2002
Goodwill acquired
during the year
Goodwill written-off
during the year
$110,482
$8,349 $6,727 $52,284 $177,842
3,203
(305)
2,225
5,428
(305)
Balance as of
December 31, 2002 $110,482 $11,247 $6,727 $54,509 $182,965
As of December 31, 2002 and December 31, 2001, goodwill
totaled $182,965,000 and $177,842,000, respectively. Goodwill
written-off during 2002 was related to various branches of Popular
Finance sold during the year.
The following table reflects the components of other intangible
assets subject to amortization as of December 31:
(In thousands)
2002
2001
Gross
Accumulated
Amount Amortization Amount Amortization
Accumulated
Gross
Core deposits
Credit-based customer
relationships
Other intangibles
$87,739
$56,263
$85,033
$48,100
2,886
509
120
104
7,946
202
7,205
7 6
Total
$91,134
$56,487
$93,181
$55,381
2 0 0 2 A N N U A L R E P O R T 5 3
2 0 0 2 A N N U A L R E P O R T 5 3
2 0 0 2 A N N U A L R E P O R T 5 3
2 0 0 2 A N N U A L R E P O R T 5 3
2 0 0 2 A N N U A L R E P O R T 5 3
At December 31, 2002, the Corporation had brokered certificates
of deposit amounting to $855,834,000 (2001 - $751,661,000).
Note 12 - Federal funds purchased and securities
sold under agreements to repurchase:
The following table summarizes certain information on federal funds
purchased and securities sold under agreements to repurchase as of
December 31:
(In thousands)
2002
2001
2000
Federal funds purchased
Securities sold under
agreements to repurchase
Total amount outstanding
Maximum aggregate balance
$834,338
$651,858
$687,914
5,850,213
$6,684,551
5,099,910
$5,751,768
4,276,201
$4,964,115
outstanding at any month-end
$7,104,223
$6,015,631
$5,236,644
Average monthly aggregate
balance outstanding
Weighted average interest rate:
For the year
At December 31
$5,763,812
$4,447,708
$4,585,945
2.62%
2.36
4.42%
2.41
6.22%
6.74
The following table presents the liability associated with the
repurchase transactions (including accrued interest), their maturities
and weighted average interest rates. Also, it includes the amortized
cost and approximate market value of the collateral (including accrued
interest) as of December 31, 2002 and 2001. The information excludes
repurchase agreement transactions which were collateralized with
securities or other assets held for trading purposes or which have
been obtained under agreements to resell:
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
During the year ended December 31, 2002, the Corporation
recognized $2,706,000 in core deposits associated with the purchase
of various branches from a financial institution in Puerto Rico. This
intangible asset has a weighted-average life of 10 years. Also, credit-
based customer relationships with a gross amount of $7,946,000
were fully amortized during 2002.
During the year ended December 31, 2002, the Corporation
recognized $9,104,000 in amortization expense related to other
intangible assets with definite lives, excluding the effect of goodwill
amortization. This expense totaled $10,092,000 for the year ended
December 31, 2001.
The following table presents the estimated aggregate amortization
expense of the intangible assets with definite lives that the Corporation
has as of December 31, 2002, for each of the following fiscal years:
(In thousands)
2003
2004
2005
2006
2007
$7,836
7,145
5,543
5,394
3,693
No significant events or circumstances have occurred that would
reduce the fair value of any reporting unit below its carrying amount.
Note 11 - Deposits:
Total interest bearing deposits as of December 31, consisted of:
(In thousands)
2 0 0 2
2 0 0 1
Savings deposits:
Savings accounts
NOW and money
market accounts
Certificates of deposit:
Under $100,000
$100,000 and over
$5,101,026
$4,359,670
2,511,830
7,612,856
2,305,996
6,665,666
3,292,915
3,341,584
6,634,499
3,340,259
3,082,276
6,422,535
$14,247,355
$13,088,201
A summary of certificates of deposit by maturity as of December
31, 2002, follows:
(In thousands)
2003
2004
2005
2006
2007
2008 and thereafter
5 4
5 4
5 4
5 4
5 4
$3,877,399
1,106,676
622,448
440,852
508,133
78,991
$6,634,499
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
2002
2001
Repurchase
liability
Amortized cost Market value
of collateral
of collateral
(Dollars in thousands)
Weighted
average
interest rate
Repurchase
liability
Amortized cost
of collateral
Market value
of collateral
(Dollars in thousands)
Weighted
average
interest rate
U.S. Treasury
securities
After 30 to 90 days
After 90 days
Obligations of
other U.S.
Government
agencies and
corporations
Within 30 days
After 30 to 90 days
After 90 days
Mortgage - backed
securities
Overnight
Within 30 days
After 30 to 90 days
After 90 days
Collateralized mortgage
obligations
Within 30 days
After 30 to 90 days
After 90 days
$229,773
50,852
$228,501
52,383
$231,771
52,383
280,625
280,884
284,154
1.73%
6.67
2.61
1,467,010
856,344
363,834
1,630,599
877,985
373,647
1,655,631
887,242
380,252
2,687,188
2,882,231
2,923,125
21,314
22,606
30,351
103,684
177,955
579,705
44,748
349,485
26,518
22,703
30,568
110,195
189,984
576,974
46,223
366,022
26,596
23,900
32,108
115,257
197,861
578,783
47,271
369,734
973,938
989,219
995,788
1.65
1.50
4.77
2.02
1.89
1.54
1.37
4.12
3.06
1.46
4.84
3.90
2.49
U.S. Treasury
securities
Overnight
Within 30 days
After 90 days
Obligations of
other U.S.
Government
agencies and
corporations
Within 30 days
After 30 to 90 days
After 90 days
Mortgage - backed
securities
Overnight
Within 30 days
After 90 days
Collateralized mortgage
obligations
Within 30 days
After 30 to 90 days
After 90 days
$79,123
420,066
76,313
575,502
$79,781
402,198
78,721
560,700
$79,813
415,317
81,414
576,544
0.55%
1.75
6.32
2.18
1,607,223
52,014
365,658
2,024,895
1,646,909
51,915
373,251
2,072,075
1,643,437
53,145
379,789
2,076,371
19,492
64,930
78,602
163,024
28,769
65,691
86,399
180,859
28,473
68,030
88,086
184,589
625,130
40,217
336,782
1,002,129
553,430
41,452
353,782
948,664
653,180
41,452
352,759
1,047,391
1.95
1.88
5.22
2.54
1.00
2.32
4.96
3.43
1.90
1.84
4.18
2.66
2.50
2.55%
Loans
Within 30 days
412,512
$4,532,218
420,624
$4,762,942
437,449
$4,838,377
1.71
2.17%
Loans
Within 30 days
295,693
$4,061,243
304,790
$4,067,088
326,074
$4,210,969
2 0 0 2 A N N U A L R E P O R T 5 5
2 0 0 2 A N N U A L R E P O R T 5 5
2 0 0 2 A N N U A L R E P O R T 5 5
2 0 0 2 A N N U A L R E P O R T 5 5
2 0 0 2 A N N U A L R E P O R T 5 5
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Note 13 - Other short-term borrowings:
(Dollars in thousands)
2002
2001
Other short-term borrowings as of December 31, consisted of:
(Dollars in thousands)
2002
2001
Advances under credit facilities:
-with fixed interest rates ranging from 1.76% to 1.78%
at December 31, 2002 (2001- 1.73% to 2.06%)
Commercial paper at rates ranging from 1.12% to 2.47%
$500,000
$350,000
(2001 - 2.00% to 3.85%)
253,041
301,415
Term notes paying interest quarterly at floating
interest rates of 0.62% over the 3-month LIBOR
rate (3-month LIBOR rate at December 31, 2002
was 1.38%)
Term notes paying interest monthly at rates ranging
from 1.63% to 2.00%
Term funds purchased at rates ranging from 1.36%
to 2.88% (2001 - 1.82% to 3.65%)
Others
25,000
85,202
840,000
319
1,175,380
447
$1,703,562
$1,827,242
The weighted average interest rate of other short-term borrowings
at December 31, 2002 was 1.71% (2001 - 2.24%; 2000 - 6.74%).
The maximum aggregate balance outstanding at any month-end was
approximately $2,573,355,000 (2001 - $3,164,520,000; 2000 -
$4,369,212,000). The average aggregate balance outstanding during
the year was approximately $2,023,200,000 (2001 - $2,806,598,000;
2000 - $3,346,151,000). The weighted average interest rate during
the year was 1.69% (2001 - 4.73%; 2000 - 6.65%).
At December 31, 2002, the Corporation had $814,768,000 in
approved lines of credit with the Federal Home Loan Bank (2001 -
$1,568,755,000), of which $484,768,000 remained unused at the
end of 2002 (2001 - $743,000,000). The FHLB advances are secured
by securities and mortgages under a collateral agreement. The Corporation
also had $18,223,590,000 in other credit facilities, which include fed
funds lines, Federal Reserve Bank discount window and other financial
institutions’ regular credit lines with other banks (2001 -
$6,248,000,000) of which $12,236,507,000 remained unused at the
end of 2002 (2001 - $4,421,362,000).
Note 14 - Notes payable:
Notes payable outstanding at December 31, consisted of the
following:
Advances under credit facilities:
-maturities ranging from 2003 through 2004
paying interest monthly at fixed rates ranging
from 3.44% to 5.20% (2001 - 3.44% to 6.88%)
- maturing in 2002, paying interest quarterly at
a floating interest rate of 0.10% under the 3-month
LIBOR (3-month LIBOR rate at December 31, 2001
was 1.88%)
Term notes with maturities ranging from 2003
through 2006 paying interest semiannually at
fixed rates ranging from 4.80% to 7.43%
(2001 - 6.07% to 8.13%)
Term notes with maturities ranging from 2003
$180,000
$230,000
75,000
1,385,663
1,337,140
through 2004 paying interest quarterly at rates
ranging from 0.13% to 1.65% over the 3-month
LIBOR rate (3-month LIBOR rate at December 31, 2002
was 1.38%; 2001 - 1.88%)
526,710
1,002,863
Term notes with maturities ranging from 2003
through 2030 paying interest monthly at fixed
rates ranging from 5.15% to 7.62% (2001 - 3.00% to
7.62%)
Term notes maturing in 2002 paying interest monthly
at a floating interest rate of 0.25% under the 1-month
LIBOR rate (1-month LIBOR rate at December 31, 2001
was 1.87%)
Promissory notes with maturities ranging from
2003 through 2005 with floating interest rates
ranging from 85% to 92% of the 3-month LIBID
rate (3-month LIBID rate at December 31, 2002 was 1.25%;
2001 - 1.75%)
Promissory notes with maturities until 2003 paying
97,066
206,992
14,906
180,000
210,000
interest at a fixed rate of 6.35%
8,400
8,400
Secured borrowings with maturities until 2032
paying interest monthly at fixed
rates ranging from 3.63% to 7.03% (2001 - 4.20% to
6.68%)
761,398
189,460
Secured borrowings with maturities until 2032
paying interest monthly at floating rates subject
to the 1-month LIBOR rate, ranging from 1.96% to 2.15%
(1-month LIBOR rate at December 31, 2002 was 1.38%;
2001 - 1.87%)
Mortgage notes and other debt
1,151,532
452,279
8,084
8,091
$4,298,853
$3,735,131
Note 15 - Subordinated notes:
Subordinated notes at December 31, 2002 and 2001, consisted of
$125,000,000 issued by the Corporation on December 12, 1995,
maturing on December 15, 2005, with interest payable semiannually at
6.75%. The notes issued by the Corporation are unsecured obligations
which are subordinated in right of payment to the prior payment in
full of all present and future senior indebtedness of the Corporation.
These notes do not provide for any sinking fund.
5 6
5 6
5 6
5 6
5 6
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Note 16 - Preferred beneficial interest in Popular
North America’s junior subordinated deferrable
interest debentures guaranteed by the Corporation:
On February 5, 1997, BanPonce Trust I, a statutory business trust
created under the laws of the State of Delaware that is wholly-owned
by Popular North America, Inc. (PNA) and indirectly wholly-owned
by the Corporation, sold to institutional investors $150,000,000 of
BanPonce Trust I’s 8.327% Capital Securities Series A (liquidation
amount $1,000 per Capital Security) through certain underwriters.
The proceeds of the issuance, together with the proceeds of the
purchase by PNA of $4,640,000 of BanPonce Trust I’s 8.327%
common securities (liquidation amount $1,000 per common security)
were used to purchase $154,640,000 aggregate principal amount of
PNA 8.327% Junior Subordinated Deferrable Interest Debentures,
Series A (the “Junior Subordinated Debentures”). As of December
31, 2002, the Corporation had reacquired $6,000,000 of the capital
securities. BanPonce Trust I is a 100% owned finance subsidiary of
the Corporation. The capital securities qualify as Tier 1 capital, are
fully and unconditionally guaranteed by the Corporation, and are
presented in the Consolidated Statements of Condition as “Preferred
Beneficial Interest in Popular North America’s Junior Subordinated
Deferrable Interest Debentures Guaranteed by the Corporation.” The
obligations of PNA under the Junior Subordinated Debentures and its
guarantees of the obligations of BanPonce Trust I are fully and
unconditionally guaranteed by the Corporation. The assets of BanPonce
Trust I consisted of $148,640,000 of Junior Subordinated Debentures
at December 31, 2002 (December 31, 2001 - $154,640,000) and a
related accrued interest receivable of $4,126,000 (December 31, 2001
- $4,292,000). The Junior Subordinated Debentures mature on
February 1, 2027; however, under certain circumstances, the maturity
of the Junior Subordinated Debentures may be shortened (which
shortening would result in a mandatory redemption of the Capital
Securities).
Note 17 - Long-term debt maturity requirements:
The aggregate amounts of maturities of notes payable, capital securities
and subordinated notes were as follows:
Year
2003
2004
2005
2006
2007
Later years
Notes
payable
Capital
Securities
Subordinated
notes
Total
(In thousands)
$1,313,292
770,176
424,790
1,090,280
150,793
549,522
$125,000
$1,313,292
770,176
549,790
1,090,280
150,793
693,522
$144,000
T o t a l
$4,298,853
$144,000
$125,000
$4,567,853
Note 18 - Earnings per common share:
The following table sets forth the computation of earnings per common
share and diluted earnings per common share for the year ended
December 31:
(In thousands, except share information)
Net income
Less: Preferred stock dividends
2002
$351,932
2,510
2001
$304,538
8,350
Net income applicable to common stock
$349,422
$296,188
2000
$276,103
8,350
$267,753
Average common shares outstanding
Average potential common shares -
stock options
Average common shares outstanding -
133,915,082 136,238,288
135,907,476
182
assuming dilution
133,915,082 136,238,470
135,907,476
Basic earnings per common share
Diluted earnings per common share
$2.61
$2.61
$2.17
$2.17
$1.97
$1.97
Potential common shares consist of common stock issuable under
the assumed exercise of stock options granted under the Corporation’s
stock option plan, using the treasury stock method. This method
assumes that the potential common shares are issued and the proceeds
from exercise in addition to the amount of compensation cost attributed
to future services are used to purchase common stock at the exercise
date. The difference between the number of potential shares issued
and the shares purchased will be added as incremental shares to the
actual number of shares outstanding to compute diluted earnings per
share.
Options with an exercise price greater than the average market price
of the Corporation’s common stock are antidilutive and, therefore, are
not included in the computation of diluted earnings per common share.
During 2002 there were 433,555 weighted-average antidilutive stock
options outstanding (2001 - 8,554). No dilutive potential common
shares were outstanding during the years ended December 31, 2001
and 2000.
Note 19 - Stockholders’ equity:
The Corporation has 180,000,000 shares of authorized common stock
with par value of $6 per share. At December 31, 2002, there were
139,133,156 (2001 - 138,749,647) shares issued and 132,439,047
shares outstanding (2001 - 136,362,364). As of December 31, 2002,
the Corporation had 6,694,109 shares (2001 -2,387,283) in treasury
stock at a total cost of $205,210,000 (2001 - $66,136,000).
The Corporation has a dividend reinvestment plan under which
stockholders may reinvest their quarterly dividends in shares of common
stock at a 5% discount from the market price at the time of issuance.
During 2002, shares totaling 383,301 (2001 - 356,831; 2000 - 449,203),
equivalent to $11,157,000 (2001 - $9,702,000; 2000 - $9,823,000) in
additional equity were issued under the plan.
The Corporation has 10,000,000 shares of authorized preferred
stock with no par value. This stock may be issued in one or more series,
and the shares of each series shall have such rights and preferences as
shall be fixed by the Board of Directors when authorizing the issuance
of that particular series. The Corporation had 4,000,000 shares issued
and outstanding of its 8.35% noncumulative monthly income Series A
preferred stock as of December 31, 2001. Effective January 22, 2002,
2 0 0 2 A N N U A L R E P O R T 5 7
2 0 0 2 A N N U A L R E P O R T 5 7
2 0 0 2 A N N U A L R E P O R T 5 7
2 0 0 2 A N N U A L R E P O R T 5 7
2 0 0 2 A N N U A L R E P O R T 5 7
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
the Corporation redeemed the outstanding preferred stock at a redemption
price of $25.6276 per share, which consisted of the redemption price of
$25.50 plus an amount representing accrued and unpaid dividends.
The Corporation’s average number of common shares outstanding
used in the computation of net income per common share was
133,915,082 in 2002 (2001 - 136,238,288; 2000 -135,907,476).
During the year 2002, cash dividends of $0.80 (2001 - $0.76; 2000 -
$0.64) per common share outstanding amounting to $106,709,000
(2001 - $103,546,000; 2000 - $86,972,000) were declared. In addition,
dividends declared on preferred stock amounted to $510,000 (2001 -
$8,350,000; 2000 - $8,350,000).
The Banking Act of the Commonwealth of Puerto Rico requires that
a minimum of 10% of BPPR’s net income for the year be transferred to
a legal surplus account until such surplus equals total paid-in capital.
The surplus account is not available for payment of dividends to
shareholders. No transfer to the legal surplus account was necessary in
2001 and 2002.
On February 26, 2003, the Corporation announced the closing of
a public offering of 6,500,000 shares of its 6.375% noncumulative
monthly income preferred stock, Series A, at a price of $25 per share.
The Corporation also granted the underwriters an option to purchase
up to an additional 975,000 shares at the same price for a period of 30
days to cover over-allotments. The net proceeds to the Corporation,
after the underwriting discounts and expenses, are estimated to be
$157,000,000 if the over-allotment option is not exercised and
$181,000,000 if it is fully exercised. This issuance increases
stockholders’ equity, qualifies as Tier 1 capital for regulatory capital
requirements and will impact the net income applicable to common
stock in future earnings per common share computations.
Note 20 - Regulatory capital requirements:
The Corporation is subject to various regulatory capital requirements
imposed by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation’s financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Federal Reserve Bank and the other bank
regulators have adopted quantitative measures which assign risk
weightings to assets and off-balance sheet items and also define and set
minimum regulatory capital requirements. All banks are required to
have core capital (Tier I) of at least 4% of risk-weighted assets, total
capital of at least 8% of risk-weighted assets and a minimum Tier I
leverage ratio of 3% or 4% of adjusted quarterly average assets,
depending on the bank’s classification. The regulations also define
well-capitalized levels of Tier I, total capital and Tier I leverage of 6%,
10% and 5%, respectively. Management has determined that as of
December 31, 2002, the Corporation exceeded all capital adequacy
requirements to which it is subject.
As of December 31, 2001, the Corporation’s preferred stock totaling
$100,000,000 was excluded from Tier I and Total Capital as a result of
its redemption on January 22, 2002.
As of December 31, 2002, BPPR and BPNA were well capitalized
under the regulatory framework for prompt corrective action, and there
are no conditions or events since that date that management believes
have changed the institutions’ category.
The Corporation’s actual ratios and amounts of total risk-based
capital, Tier I risk-based capital and Tier I leverage, as of December
31, were as follows:
(Dollars in thousands)
Regulatory requirements
Actual
Actual
Amount
Ratio
Amount
Ratio
2002
2001
Total Capital
(to Risk-Weighted Assets):
Consolidated
BPPR
BPNA
Tier I Capital
(to Risk-Weighted Assets):
Consolidated
BPPR
BPNA
Tier I Capital
(to Average Assets):
Consolidated
BPPR
BPNA
$2,400,558
1,413,878
489,070
11.52%
11.19
11.63
$2,179,518
1,325,724
444,011
11.74%
11.56
11.04
$2,054,027
1,254,687
436,264
9.85%
9.93
10.37
$1,849,305
1,181,331
393,493
9.96%
10.31
9.79
$2,054,027
1,254,687
436,264
6.19%
5.81
7.92
$1,849,305
1,181,331
393,493
6.46%
6.26
7.27
Note 21 - Servicing assets:
The changes in servicing assets for the years ended December 31, were
as follows:
(In thousands)
2002
2001
2000
Balance at beginning of year
Rights originated
Rights purchased
Amortization
Balance at end of year
Less: Valuation allowance
Balance at end of year,
net of valuation allowance
$43,665 $40,116 $33,866
14,404
12,957
697
1,364
(10,772)
(8,851)
40,116
43,665
562
649
14,895
2,824
(11,557)
49,827
1,991
$47,836 $43,016 $39,554
Total loans serviced for others were $5,934,968,000 at December
31, 2002 (2001- $5,112,914,000). The estimated fair value of
capitalized servicing rights was $64,449,000 at December 31, 2002
(2001 - $58,198,000).
The activity in the valuation allowance for impairment of recognized
servicing assets for the years ended December 31, was as follows:
(In thousands)
Balance at beginning of year
Additions charged to operations
Balance at end of year
2 0 0 2
2 0 0 1
2 0 0 0
$ 6 4 9
1,342
$1,991
$ 5 6 2
8 7
$ 6 4 9
$ 1 4
5 4 8
$ 5 6 2
5 8
5 8
5 8
5 8
5 8
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Note 22 - Sales of receivables:
During the years ended December 31, 2002 and 2001, the Corporation
retained servicing responsibilities and other subordinated interests
on various securitization transactions and whole loan sales of residential
mortgage and commercial loans.
In the course of certain residential mortgage and commercial whole
loan sales in 2002 and 2001, the Corporation retained subordinated
interests, including retained servicing responsibilities. The retained
interests are subject to prepayment, credit and interest rate risks on
the transferred financial assets. During 2002 and 2001, the
Corporation also retained servicing assets on residential mortgage
loans securitized in the form of trading and investment securities.
Pretax gains of $39,057,000 and $28,598,000 were realized on these
securitization transactions and the whole loan sales involving retained
interests, which took place in 2002 and 2001, respectively.
During 2002 and 2001, the Corporation also participated in various
securitization transactions, which did not meet the SFAS No. 140
criteria for sale accounting, as such these transactions were accounted
for as secured borrowings.
The Corporation receives average annual servicing fees based on a
percentage of the outstanding loan balance. In 2002, those average
fees ranged from 0.33 to 0.50 percent for mortgage loans (2001 -
0.35% to 0.50%) and 1.0 percent for loans guaranteed by the Small
Business Administration (SBA) (2001 - 1.0%).
Valuation methodologies used in determining the fair value of the
retained interests, including servicing assets and interest-only
securities, are disclosed in Note 1 to the consolidated financial
statements.
Key economic assumptions used in measuring the retained
interests at the date of the securitization and whole loan sales
completed during the years ended December 31, 2002, and 2001,
were as follows:
Prepayment speed
Weighted average life (in years)
Expected credit losses
Discount rate
Residential Mortgage
Loans
2002
17.3%
10.2
-
9.0%
2001
18.1%
10.1
-
9.0%
SBA
Loans
2002
17.5%
3.7
-
15%
At December 31, 2002, key economic assumptions and the
sensitivity of the current value of residual cash flows to immediate
10 percent and 20 percent adverse changes in those assumptions for
retained interests as of the end of the year are as follows:
(Dollars in thousands)
Carrying amount of retained interests
Fair value of retained interests
Weighted average life (in years)
Prepayment Speed Assumption (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Expected Credit Losses (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Residential
Mortgage Loans
$66,537
$83,150
8.6 - 11.8
SBA Loans
$1,042
$1,042
2.1 - 3.7
21.7% - 23.2% 17.5% - 25.0%
($93)
($174)
($3,897)
($7,500)
0% - 0.35%
($1,260)
($2,323)
-
-
-
9% - 11.5% 10.0% - 15.0%
($32)
($3,018)
($62)
($5,779)
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a 10
percent variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in
fair value may not be linear. Also, in this table, the effect of a variation
in a particular assumption on the fair value of the retained interest is
calculated without changing any other assumption; in reality, changes
in one factor may result in changes in another (for example, increases
in market interest rates may result in lower prepayments and increased
credit losses), which might magnify or counteract the sensitivities.
The cash flows received from and paid to securitization trusts for
the year ended December 31, were as follows:
(In thousands)
Servicing fees received
Servicing advances
Repayment of servicing
advances
Other cash flows received
on retained interests
2002
$1,632
(7,484)
829
1,455
2001
$2,122
(2,578)
271
4,856
The expected credit losses for the residential mortgage loans
securitized/sold during the year ended December 31, 2002, are
estimated at rates ranging from 0.0% to 0.35% for 2003 and 2004. No
credit losses are anticipated on the retained servicing assets derived
from the sale of SBA loans since the participation sold is fully
guaranteed by the SBA.
Quantitative information about delinquencies, net credit losses,
and components of securitized financial assets and other assets
managed together with them by the Corporation for the year ended
December 31, 2002, follows:
(In thousands)
Loans (owned and managed):
Commercial
Lease financing
Mortgage
Consumer
Less:
Loans securitized / sold
Loans held-for-sale
Loans held in portfolio
Total principal Principal amount
60 days or more
amount of loans,
past due
net of unearned
$8,146,215
8 8 6 , 7 3 1
9,313,116
3,099,550
$170,439
19,406
4 1 8 , 6 8 3
83,216
Net credit
losses
$65, 5 3 5
13,953
16,242
78,257
(1,863,493)
(1,092,927)
$18,489,192
$691,744
$173,987
2 0 0 2 A N N U A L R E P O R T 5 9
2 0 0 2 A N N U A L R E P O R T 5 9
2 0 0 2 A N N U A L R E P O R T 5 9
2 0 0 2 A N N U A L R E P O R T 5 9
2 0 0 2 A N N U A L R E P O R T 5 9
Change in benefit obligation:
Benefit obligation
at beginning of year
Service cost
Interest cost
Plan amendment
Curtailment
Actuarial loss (gain)
Benefits paid
Benefit obligations
at end of year
Change in plan assets:
Fair value of plan assets
at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at
end of year
Unfunded status
Unrecognized net asset
Unrecognized net prior
service cost (benefit)
Unrecognized net actuarial
loss
Prepaid (accrued) pension
cost
Amount recognized in the
statement of financial
condition consists of:
Prepaid benefit cost
Accrued benefit liability
Net amount recognized
Pension Plan
$349,902
12,823
25,304
1,472
(170)
42,632
(19,936)
Benefit
Restoration Plan
2002
(In thousands)
$11,373
511
789
(1,472)
(401)
(21)
Total
$361,275
13,334
26,093
(170)
42,231
(19,957)
412,027
10,779
422,806
425,858
(5,741)
254
(19,936)
400,435
(11,592)
(5,783)
6
6,600
6,606
(4,173)
425,858
(5,735)
6,854
(19,936)
407,041
(15,765)
(5,783)
7,345
(1,167)
6,178
49,933
39,903
3,004
52,937
(2,336)
37,567
41,788
(1,885)
$39,903
(2,336)
($2,336)
41,788
(4,221)
$37,567
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Note 23 - Interest on investments:
Interest on investments for the year ended December 31, consisted of
the following:
(In thousands)
2002
2001
2000
Money market investments:
Federal funds sold and securities
purchased under agreements to resell
Time deposits with other banks
Other
Investment securities:
U.S. Treasury securities
Obligations of other U.S.
Government agencies
and corporations
Obligations of Puerto Rico,
States and political subdivisions
Collateralized mortgage obligations
Mortgage-backed securities
Other
$31,714
766
25
$32,505
$46,477
1,083
50
$47,610
$61,238
1,062
56
$62,356
$26,121
$43,363
$110,655
280,362
277,063
233,116
9,370
73,792
39,044
17,236
6,460
87,956
35,553
22,949
7,834
90,847
32,330
11,416
$445,925
$473,344
$486,198
Note 24 - Employee benefits:
Pension and benefit restoration plans
All regular employees of BPPR and BPNA are covered by a
noncontributory defined benefit pension plan. Pension benefits begin
to vest after one year of service and are based on age, years of credited
service and final average compensation, as defined. At December 31,
2002, plan assets consisted primarily of U.S. Government obligations,
high grade corporate bonds and listed stocks, including 1,372,860
shares (2001 - 5,672,860) of the Corporation’s stock with a market
value of approximately $46,403,000 (2001 - $164,967,000). Dividends
paid on shares of the Corporation’s stock held by the plan during
2002 amounted to $2,818,000 (2001 - $4,311,000). In May 2002,
the Corporation repurchased 4,300,000 shares of its common stock
from Banco Popular Retirement Plan.
BPPR and BPNA also have supplementary pension and profit
sharing plan for those employees whose compensation exceeds the
limits established by ERISA.
The following table sets forth the aggregate status of the plans and
the amounts recognized in the consolidated financial statements at
December 31:
6 0
6 0
6 0
6 0
6 0
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Change in benefit obligation:
Benefit obligation
at beginning of the year
Service cost
Interest cost
Plan amendment
Actuarial loss
Benefits paid
Benefit obligation
at end of year
Change in plan assets:
Fair value of plan assets
at beginning of the year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at
end of year
Funded (unfunded) status
Unrecognized net asset
Unrecognized net prior
service cost
Unrecognized net actuarial
(gain) loss
Prepaid (accrued) pension
cost
Amount recognized in the
statement of financial
condition consists of:
Prepaid benefit cost
Accrued benefit liability
Intangible assets
Pension Plan
Benefit
Restoration Plan
2001
(In thousands)
$319,549
11,097
22,657
1,223
11,695
(16,319)
$11,359
686
824
506
(14)
Total
$330,908
11,783
23,481
1,223
12,201
(16,333)
349,902
13,361
363,263
426,932
14,707
538
(16,319)
425,858
75,956
(8,244)
(13,361)
426,932
14,707
538
(16,319)
425,858
62,595
(8,244)
6,440
358
6,798
(33,833)
5,281
(28,552)
40,319
(7,722)
32,597
41,421
(1,102)
(8,080)
358
41,421
(9,182)
358
Net amount recognized
$40,319
($7,722)
$32,597
Weighted average
assumptions as of
December 31:
Discount rate
Expected return on
plan assets
Rate of compensation
increase
Pension Plan
2001
2000
2002
Benefit
Restoration Plan
2001
2000
2002
6.50% 7.00%
7.25%
6.50% 7.00% 7.25%
8.50% 8.50%
3.5 to
3.5 to
7.5%
7.5%
8.50%
3.5 to
7.5%
3.5 to
7.5%
3.5 to
3.5 to
7.5% 7.5%
Pension Plan
2001
2002
Restoration Plan
2001
2000
2000
2002
(In thousands)
Components of net
periodic pension cost:
Service cost
Interest cost
Expected return
on plan assets
Amortization of
$12,823
25,304
$11,097
22,657
$9,468
21,369
$511
789
$686
824
$580
717
(35,421)
(35,677)
(36,646)
(307)
asset obligation
(2,461)
(2,461)
(2,461)
Amortization of
prior service cost
565
510
455
53
53
53
Amortization of
net (gain) loss
Net periodic
cost (benefit)
Curtailment gain
(2,340)
(7,578)
189
358
323
(6,214)
(15,393)
1,235
1,921
1,673
810
(139)
Total cost (benefit)
$671
($6,214)
($15,393)
$1,235
$1,921
$1,673
Retirement and savings plan
The Corporation also provides contributory retirement and savings plans
pursuant to Section 1165 (e) of the Puerto Rico Internal Revenue Code
and Section 401 (k) of the U.S. Internal Revenue Code, as applicable,
for substantially all the employees of Popular Securities, Equity One,
Banco Popular North America, Popular Finance, Popular Auto, Popular
Insurance, Popular Mortgage, GM Group, Banco Popular, National
Association and Popular Cash Express. Employer contributions are
determined based on specific provisions of each plan. The cost of
providing this benefit in 2002 was $8,658,000 (2001 - $5,865,000;
2000 -$5,444,000).
The Corporation also has a contributory savings plan available to
employees of BPPR. Employees are fully vested in the employer’s
contribution after five years of service. Total savings plan expense was
$973,000 in 2002 (2001 - $1,003,000; 2000 - $988,000). The savings
plan held 2,338,854 (2001 - 2,190,994 ; 2000 - 1,590,695) shares of
common stock of the Corporation with a market value of approximately
$79,053,000 at December 31, 2002 (2001 - $63,714,000; 2000 -
$41,855,000).
Postretirement health care benefits
In addition to providing pension benefits, BPPR provides certain
health care benefits for retired employees. Substantially all of the
employees of BPPR who are eligible to retire under the pension plan,
and provided they reach retirement age while working for BPPR, may
become eligible for these benefits.
The status of the Corporation’s unfunded postretirement benefit
plan at December 31, was as follows:
2 0 0 2 A N N U A L R E P O R T 6 1
2 0 0 2 A N N U A L R E P O R T 6 1
2 0 0 2 A N N U A L R E P O R T 6 1
2 0 0 2 A N N U A L R E P O R T 6 1
2 0 0 2 A N N U A L R E P O R T 6 1
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning
of the year
Service cost
Interest cost
Plan amendment
Benefits paid
Actuarial loss
Benefit obligation at end of year
Change in plan assets:
Unfunded status
Unrecognized net prior service benefit
Unrecognized net actuarial loss
Accrued benefit cost
2002
2001
$105,848
2,987
9,160
(6,065)
33,691
$145,621
$90,907
2,800
6,426
(168)
(4,375)
10,258
$105,848
($145,621)
(7,136)
47,335
($105,848)
(7,943)
15,848
($105,422)
($97,943)
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 2002
was 6.50% (2001 - 7.00%).
The components of net periodic postretirement benefit cost for the
year ended December 31, were as follows:
(In thousands)
2002
2001
2000
Service cost
Interest cost
Amortization of prior service benefit
Amortization of net loss
Net periodic benefit cost
$2,987
9,160
(807)
2,204
$13,544
$2,800
6,426
(799)
$2,455
6,212
(696)
$8,427
$7,971
For measurement purposes, a 10% annual rate of increase in the
per capita cost of covered health care benefits was assumed for 2002.
The rate was assumed to decrease 1% annually to 5% in 2007 and
remain at that level thereafter. The Plan assumes that the cost will be
capped to 3% of the annual health care cost increase affecting only
those employees retiring after February 1, 2001.
Assumed health care trend rates generally have a significant effect
on the amounts reported for a health care plan. A one-percentage-
point change in assumed health care cost trend rates would have the
following effects:
Note 25 - Stock option plan:
The Corporation has a Stock Option Plan, which permits the granting
of incentive awards in the form of qualified stock options, incentive
stock options, or non-statutory stock options of the Corporation. Any
employee or director of the Corporation or any of its subsidiaries is
eligible to participate in the plan. The Board of Directors has the
absolute discretion to determine the individuals eligible to participate
in the plan. This plan provides for the issuance of Popular, Inc.’s
common stock at a price equal to its fair market value at the grant date,
subject to certain plan provisions. The aggregate number of shares of
common stock, which may be issued under the plan, is limited to
5,000,000 shares, subject to adjustment for stock splits,
recapitalizations and similar events. The shares are to be made
available from authorized but unissued shares of common stock or
treasury stock. The maximum option term is generally ten years from
the date of grant. Unless an option agreement provides otherwise, all
options granted are 20% exercisable after the first year and an
additional 20% is exercisable after each subsequent year. The exercise
price of each option is equal to the market price of the Corporation’s
stock on the date of grant.
In 2002, the Corporation opted to use the fair value method of recording
stock options as described in SFAS No. 123 “Accounting for Stock-
Based Compensation,” which is considered the preferable accounting
method for stock-based compensation. All future stock option grants
will be expensed over the stock option vesting period based on the fair
value at the date the options are granted.
Previously, as permitted by SFAS No. 123, the Corporation measured
compensation cost for this plan based on APB No. 25 “Accounting for
Stock Issued to Employees.” Had the recognition provisions of SFAS
No. 123 been applied to such grants during 2001, there would have
been no change in the related earnings per share.
The Corporation recognized $957,000 in stock options expense for
the year ended December 31, 2002 as a result of the aforementioned
change in accounting method.
The following table presents information on stock options as of
December 31, 2002:
Effect on total service cost and
interest cost components
Effect on postretirement
benefit obligation
1-Percentage
Point Increase
1-Percentage
Point Decrease
$639,000
($550,000)
Exercise
Price
Range
per Share
Options
Outstanding
Weighted-
Average
Exercise
Price of
Options
Outstanding
Weighted-
Average
Remaining
Life in Years
.
Options
Exercisable
Weighted
Average
Exercise
Price of
Options
Exercisable
$9,730,000
($8,367,000)
$28.78 - $35.65
445,075
$29.25
9.12
22,529
$29.55
Profit sharing plan
BPPR also has a profit sharing plan covering substantially all regular
employees. Annual contributions are determined based on the bank’s
profitability ratios, as defined in the plan, and are deposited in trust.
Profit sharing expense for the year, including the cash portion paid
annually to employees which represented 50% of the expense,
amounted to $21,219,000 in 2002 (2001 - $15,455,000; 2000 -
$18,234,000).
6 2
6 2
6 2
6 2
6 2
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
The following table summarizes the stock option activity and related
information:
Balance at January 1, 2001
Granted
Exercised
Forfeited
Outstanding at December 31, 2001
Granted
Exercised
Forfeited
Options
Outstanding
-
26,416
-
-
26,416
423,647
(199)
(4,789)
Weighted-Average
Exercise Price
-
$31.39
-
-
31.39
29.11
32.60
28.84
Outstanding at December 31, 2002
445,075
$29.25
The fair value of these options was estimated on the date of the grants
using the Black-Scholes Option Pricing Model. The weighted average
assumptions used for the grants issued during 2002 were an expected
dividend yield of 2.16%, an expected life of options of 10 years, an
expected volatility of 26.48% and a risk-free interest rate of 4.91%.
The weighted-average fair value of options granted during 2002 was
$9.80 per option. The weighted average assumptions used for the
grants issued during 2001 were an expected dividend yield of 2.31%,
an expected life of 10 years, an expected volatility of 30.62% and a
risk-free interest rate of 5.05%. The weighted-average fair value of
options granted during 2001 was $11.43 per option.
Note 26 - Rental expense and commitments:
At December 31, 2002, the Corporation was obligated under a number
of noncancelable leases for land, buildings, and equipment which
require rentals (net of related sublease rentals) as follows:
Year
2003
2004
2005
2006
2007
Later years
Minimum
payments
Sublease
rentals
Net
(In thousands)
$35,025
30,505
24,953
20,401
18,107
96,102
$225,093
$2,466
1,535
1,245
782
468
$6,496
$32,559
28,970
23,708
19,619
17,639
96,102
$218,597
Total rental expense for the year ended December 31, 2002, was
$45,823,000 (2001 - $42,529,000; 2000 - $39,331,000).
Note 27 - Income tax:
The components of income tax expense for the years ended December
31, are summarized below. Included in these amounts are income
taxes of ($469,000) in 2002 (2001 - $2,094,000; 2000 - $2,490,000),
related to net losses or gains on securities transactions.
(In thousands)
2002
2001
2000
Current income tax expense:
Puerto Rico
Federal and States
Subtotal
Deferred income tax benefit:
Puerto Rico
Federal and States
Subtotal
$92,110
52,095
144,205
(12,548)
(14,402)
(26,950)
$99,811
35,588
135,399
$93,352
17,622
110,974
(11,968)
(18,151)
(30,119)
(7,577)
(2,600)
(10,177)
Total income tax expense
$117,255
$105,280
$100,797
The reasons for the difference between the income tax expense
applicable to income before provision for income taxes and the amount
computed by applying the statutory rate in Puerto Rico, were as follows:
2002
2001
2000
% of
pre-tax
income
Amount
% of
pre-tax
income
% of
pre-tax
income
Amount
(Dollars in thousands)
Amount
Computed income tax at
statutory rates
$183,080
39% $159,554
39% $146,542
39%
Benefits of net tax exempt
interest income
Federal, States taxes
and other
(71,696)
(15)
(58,741)
(14)
(46,164)
(12)
5,871
1
4,467
1
419
Income tax expense
$117,255
25% $105,280
26% $100,797
27%
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and their tax bases. Significant
components of the Corporation’s deferred tax assets and liabilities at
December 31, were as follows:
(In thousands)
2 0 0 2
2 0 0 1
Deferred tax assets:
Tax credits available for carryforward
Net operating loss carryforward available
Postretirement and pension benefits
Allowance for loan losses
Unrealized loss on derivatives
Other temporary differences
Total gross deferred tax assets
Deferred tax liabilities:
Differences between the assigned
values and the tax bases of assets
and liabilities recognized in purchase
business combinations
Unrealized net gain on securities available-for-sale
Other temporary differences
Total gross deferred tax liabilities
Valuation allowance
Net deferred tax asset
$12,071
2,071
29,308
143,335
15,990
45,873
248,648
4,486
54,985
25,965
85,436
418
$14,060
2,025
26,139
129,491
6,292
32,797
210,804
4,875
27,861
20,516
53,252
33
$162,794
$157,519
At December 31, 2002, the Corporation had $12,071,000 in credits
expiring in annual installments through year 2016 that will reduce the
2 0 0 2 A N N U A L R E P O R T 6 3
2 0 0 2 A N N U A L R E P O R T 6 3
2 0 0 2 A N N U A L R E P O R T 6 3
2 0 0 2 A N N U A L R E P O R T 6 3
2 0 0 2 A N N U A L R E P O R T 6 3
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
regular income tax liability in future years. The Corporation had, at the
end of 2002, $11,666,000 in net operating losses (NOL) available to
carry over to offset taxable income in future years. Other temporary
differences included as deferred taxes are mainly related to the deferral
of loan origination costs and commissions.
A valuation allowance of $418,000 is reflected in 2002 (2001 -
$33,000), related to deferred tax assets arising from temporary
differences for which the Corporation could not determine the
likelihood of its realization. Based on the information available, the
Corporation expects to fully realize all other items comprising the net
deferred tax asset as of December 31, 2002.
Under the Puerto Rico Internal Revenue Code, the Corporation and
its subsidiaries are treated as separate taxable entities and are not
entitled to file consolidated tax returns. The Code provides a dividend
received deduction of 100% on dividends received from “controlled”
subsidiaries subject to taxation in Puerto Rico and 85% on dividends
received from other taxable domestic corporations.
The Corporation has never received any dividend payments from its
U.S. subsidiaries. Any such dividend paid from a U.S. subsidiary to the
Corporation would be subject to a 30% withholding tax based on the
provisions of the U.S. Internal Revenue Code. The Corporation has not
recorded any deferred tax liability on the unremitted earnings of its U.S.
subsidiaries because the reinvestment of such earnings is considered
permanent. The Corporation believes that the likelihood of receiving
dividend payments from any of its U.S. subsidiaries in the foreseeable
future is remote based on the expansion it is undertaking in the U.S.
mainland.
The Corporation’s subsidiaries in the United States file a consolidated
federal income tax return. The Corporation’s federal income tax provision
for 2002 was $34,614,000 (2001 - $14,824,000; 2000 - $14,636,000).
The intercompany settlement of taxes paid is based on tax sharing
agreements which generally allocate taxes to each entity based on a
separate return basis.
On February 20, 2003, Senate Bill 2044 and House of
Representatives Bill 3496 were filed to amend the International
Banking Center Regulatory Act. The proposed amendment would
eliminate the current tax exemption on the net income of international
banking entities operating in Puerto Rico, and impose a ten-percent
tax rate on the net income of such entities. Although the Corporation
cannot predict if, when and in what form this amendment will be
adopted, the Corporation believes that the financial impact of the
proposed bill is not likely to be material to the Corporation.
Note 28 - Off-balance sheet lending activities and
concentration of credit risk:
Off-balance sheet risk
The Corporation is a party to financial instruments with off-balance
sheet credit risk in the normal course of business to meet the financial
needs of its customers. These financial instruments include loan
commitments, letters of credit, and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated
statements of condition.
The Corporation’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit and financial
guarantees written is represented by the contractual notional amounts
of those instruments. The Corporation uses the same credit policies in
making these commitments and conditional obligations as it does for
those reflected on the consolidated statements of condition.
Financial instruments with off-balance sheet credit risk at
December 31, whose contract amounts represent potential credit risk
were as follows:
(In thousands)
2002
2001
Commitments to extend credit:
Credit card lines
Commercial lines of credit
Other unused commitments
Commercial letters of credit
Standby letters of credit
Commitments to purchase mortgage loans
Commitments to originate mortgage loans
$2,166,034
2,651,835
27,175
19,564
126,383
100,000
547,284
$1,950,970
2,562,860
56,219
16,846
87,810
100,000
193,958
Commitments to extend credit
Contractual commitments to extend credit are legally binding agreements
to lend money to customers for a specified period of time. To extend
credit the Corporation evaluates each customer’s creditworthiness.
The amount of collateral obtained, if deemed necessary, is based on
management’s credit evaluation of the counterparty. Collateral held
varies but may include cash, accounts receivable, inventory, property,
plant and equipment and investment securities, among others. Since
many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future
cash requirements.
Letters of credit
There are two principal types of letters of credit: commercial and standby
letters of credit. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
In general, commercial letters of credit are short-term instruments
used to finance a commercial contract for the shipment of goods from
a seller to a buyer. This type of letter of credit ensures prompt payment
to the seller in accordance with the terms of the contract. Although the
commercial letter of credit is contingent upon the satisfaction of specified
conditions, it represents a credit exposure if the buyer defaults on the
underlying transaction.
Standby letters of credit are issued by the Corporation to disburse
funds to a third party beneficiary if the Corporation’s customer fails to
perform under the terms of an agreement with the beneficiary. These
letters of credit are used by the customer as a credit enhancement and
typically expire without being drawn upon.
Other commitments
In 2002, the Corporation entered into a commitment to purchase
$100,000,000 of mortgage loans from another institution with the option
of purchasing $75,000,000 in additional loans. The commitment expires
6 4
6 4
6 4
6 4
6 4
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
on June 30, 2004. The purchased mortgage loans will continue to be
serviced by the originating institution. As of December 31, 2002, no
loans have been purchased under this agreement. In 2001, the
Corporation entered into a similar agreement purchasing the full amount
during 2002.
Geographic concentration
A geographic concentration exists within the Corporation’s loan portfolio
since a significant portion of its business activity is with customers
located in Puerto Rico. As of December 31, 2002, the Corporation had
no significant concentrations of credit risk and no significant exposure
to highly leveraged transactions in its loan portfolio. Note 32 provides
further information on the asset composition of the Corporation by
geographical area as of December 31, 2002 and 2001.
Included in total assets of Puerto Rico are investments in obligations
of the U.S. Treasury and U.S. Government agencies amounting to
$6.1 billion and $5.2 billion in 2002 and 2001, respectively.
Note 29 - Disclosures about fair value of financial
instruments:
The fair value of financial instruments is the amount at which an asset
or obligation could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. Fair value
estimates are made at a specific point in time based on the type of
financial instrument and relevant market information. Many of these
estimates involve various assumptions and may vary significantly
from amounts that could be realized in actual transactions.
The information about the estimated fair values of financial
instruments presented hereunder excludes all nonfinancial instruments
and certain other specific items.
Derivatives are considered financial instruments and their carrying
value equals fair value. For disclosures about the fair value of derivative
instruments refer to Note 30 to the consolidated financial statements.
For those financial instruments with no quoted market prices
available, fair values have been estimated using present value or
other valuation techniques, as well as management’s best judgment
with respect to current economic conditions, including discount rates,
estimates of future cash flows and prepayment assumptions.
The fair values reflected herein have been determined based on
the prevailing interest rate environment as of December 31, 2002 and
2001, respectively. In different interest rate environments, fair value
estimates can differ significantly, especially for certain fixed rate
financial instruments and non-accrual assets. In addition, the fair
values presented do not attempt to estimate the value of the
Corporation’s fee generating businesses and anticipated future
business activities, that is, they do not represent the Corporation’s
value as a going concern. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the
fair values of significant financial instruments at December 31, 2002
and 2001.
Short-term financial assets and liabilities have relatively short
maturities, or no defined maturities, and little or no credit risk. The
carrying amounts reported in the consolidated statements of condition
approximate fair value. Included in this category are: cash and due
from banks, federal funds sold and securities purchased under
agreements to resell, time deposits with other banks, bankers
acceptances, customers’ liabilities on acceptances, accrued interest
receivable, federal funds purchased and securities sold under
agreements to repurchase, short-term borrowings, acceptances
outstanding and accrued interest payable.
Trading and investment securities are financial instruments that
regularly trade on secondary markets. The estimated fair value of
these securities was determined using either market prices or dealer
quotes, where available, or quoted market prices of financial
instruments with similar characteristics. Trading account securities
and securities available-for-sale are reported at their respective fair
values in the consolidated statements of condition since they are
marked-to-market for accounting purposes. These instruments are
detailed in the consolidated statements of condition and in Notes 4, 5
and 30.
The estimated fair value for loans held-for-sale is based on
secondary market prices. The fair values of the loan portfolios have
been determined for groups of loans with similar characteristics. Loans
were segregated by type such as commercial, construction, residential
mortgage, consumer and credit cards. Each loan category was further
segmented based on loan characteristics, including repricing term
and pricing. The fair value of most fixed-rate loans was estimated by
discounting scheduled cash flows using interest rates currently being
offered on loans with similar terms. For variable rate loans with
frequent repricing terms, fair values were based on carrying values.
The fair values for certain mortgage loans are based on quoted market
prices. Prepayment assumptions have been applied to the mortgage
and installment loan portfolio. The fair value of the loans was also
reduced by an estimate of credit losses inherent in the portfolio.
Generally accepted accounting principles do not require, and the
Corporation has not performed a fair valuation of its lease financing
portfolio, therefore it is included in the loan totals at its carrying
amount.
The fair value of deposits with no stated maturity, such as non-
interest bearing demand deposits, savings, NOW and money market
accounts is, for purpose of this disclosure, equal to the amount payable
on demand as of the respective dates. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows,
using interest rates currently being offered on certificates with similar
maturities.
Borrowings and long-term debt, which include notes payable, senior
debentures, subordinated notes and capital securities, were valued
2 0 0 2 A N N U A L R E P O R T 6 5
2 0 0 2 A N N U A L R E P O R T 6 5
2 0 0 2 A N N U A L R E P O R T 6 5
2 0 0 2 A N N U A L R E P O R T 6 5
2 0 0 2 A N N U A L R E P O R T 6 5
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
using quoted market rates for similar instruments at December 31,
2002 and 2001, respectively.
Commitments to extend credit were fair valued using the fees
currently charged to enter into similar agreements. For those
commitments where a future stream of fees is charged, the fair value
was estimated by discounting the projected cash flows of fees on
commitments, which are expected to be disbursed, based on historical
experience. The fair value of letters of credit is based on fees currently
charged on similar agreements.
Carrying or notional amounts, as applicable, and estimated fair
values for financial instruments at December 31 were:
(In thousands)
2002
2001
Carrying
amount
Fair
value
Carrying
amount
Fair
value
Financial Assets:
Financial Assets:
Financial Assets:
Financial Assets:
Financial Assets:
Cash and short-term
investments
Trading securities
Investment securities
available-for-sale
Investment securities
held-to-maturity
Loans held-for-sale
Loans, net
Financial Liabilities:
Financial Liabilities:
Financial Liabilities:
Financial Liabilities:
Financial Liabilities:
Deposits
Federal funds purchased
Securities sold under
agreements to repurchase
Short-term borrowings
Notes payable
Subordinated notes
$1,747,202 $1,747,202 $1,429,932 $1,429,932
270,186
270,186
510,346
510,346
10,531,903 10,531,903
9,284,401
9,284,401
180,751
1,092,927
596,415
940,715
18,116,395 18,753,941 16,892,431 17,469,537
182,183
1,102,639
592,360
939,488
$17,614,740 $17,757,376 $16,370,042 $16,451,776
651,858
651,858
834,338
834,338
5,850,213
1,703,562
4,298,853
125,000
5,850,213
1,703,562
4,650,813
136,406
5,099,910
1,827,242
3,735,131
125,000
5,099,910
1,827,242
3,932,148
128,033
Capital securities
144,000
168,085
149,080
160,617
Notional
amount
Fair
value
Notional
amount
Fair
value
Commitments to extend
Commitments to extend
Commitments to extend
Commitments to extend
Commitments to extend
credit and standby letters
credit and standby letters
credit and standby letters
credit and standby letters
credit and standby letters
of credit:
of credit:
of credit:
of credit:
of credit:
Commitments to extend
credit
$4,845,044
$10,666 $4,570,049
$10,749
Letters of credit
145,947
8,020
104,656
7,543
Note 30 - Derivative instruments and hedging
activities:
The Corporation maintains an overall interest rate risk-management
strategy that incorporates the use of derivative instruments to
minimize significant unplanned fluctuations in earnings and cash
flows that are caused by interest rate volatility. The Corporation’s goal
is to manage interest rate sensitivity by modifying the repricing or
maturity characteristics of certain balance sheet assets and liabilities
so that the net interest margin is not, on a material basis, adversely
affected by movements in interest rates. As a result of interest rate
fluctuations, hedged fixed-rate assets and liabilities will appreciate or
depreciate in market value. The effect of this unrealized appreciation
or depreciation is expected to be substantially offset by the Corporation’s
6 6
6 6
6 6
6 6
6 6
gains or losses on the derivative instruments that are linked to these
hedged assets and liabilities. Another result of interest rate fluctuations
is that the interest income and interest expense of hedged variable-
rate assets and liabilities, respectively, will increase or decrease. The
effect of this variability in earnings is expected to be substantially
offset by the Corporation’s gains and losses on the derivative
instruments that are linked to these hedged assets and liabilities. The
Corporation considers its strategic use of derivatives to be a prudent
method of managing interest-rate sensitivity, as it prevents earnings
from being exposed to undue risk posed by changes in interest rates.
Derivative instruments that are used as part of the Corporation’s
interest rate risk-management strategy include interest rate swaps,
interest rate swaptions and interest rate forwards and futures contracts.
As a matter of policy, the Corporation does not use highly leveraged
derivative instruments for interest rate risk management. Interest rate
swaps generally involve the exchange of fixed- and variable-rate interest
payments between two parties, based on a common notional principal
amount and maturity date. Interest rate swaptions are options on
swaps, which combine the characteristics of interest rate swaps and
options. Interest rate forwards and futures are contracts for the delayed
delivery of securities which the seller agrees to deliver on a specified
future date at a specified price or yield.
The Corporation also enters into foreign exchange contracts and
interest rate caps, floors and put options embedded in interest bearing
contracts. The Corporation enters into foreign exchange contracts to a
limited extent in the spot or futures market. Spot contracts require the
exchange of two currencies at an agreed rate to occur within two business
days of the contract date. Forward and futures contracts to purchase
or sell currencies at a future date settle over periods of up to one year,
in general. Interest rate caps and floors are option-like contracts that
require the writer to pay the purchaser at specified future dates the
amount, if any, by which a specified market interest rate exceeds the
fixed cap rate or falls below the fixed floor rate, applied to a notional
principal amount. The option writer receives a premium for bearing
the risk of unfavorable interest rate changes.
By using derivative instruments, the Corporation exposes itself to
credit and market risk. If a counterparty fails to fulfill its performance
obligations under a derivative contract, the Corporation’s credit risk
will equal the fair-value gain in a derivative. Generally, when the fair
value of a derivative contract is positive, this indicates that the
counterparty owes the Corporation, thus creating a repayment risk for
the Corporation. When the fair value of a derivative contract is negative,
the Corporation owes the counterparty and, therefore, assumes no
repayment risk. To manage the level of credit risk, the Corporation
deals with counterparties of good credit standing, enters into master
netting agreements whenever possible and, when appropriate, obtains
collateral. Concentrations of credit risk which arise through the
Corporation’s off-balance sheet lending activities are presented in
Note 28.
Market risk is the adverse effect that a change in interest rates,
currency exchange rates, or implied volatility rates might have on the
value of a financial instrument. The Corporation manages the market
risk associated with interest rates, and to a limited extent, with
fluctuations in foreign currency exchange rates, by establishing and
monitoring limits for the types and degree of risk that may be
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undertaken. The Corporation regularly measures this risk by using
static gap analysis, simulations and duration analysis.
The Corporation’s derivatives activities are monitored by its Market
Risk Committee as part of that committee’s oversight of the Corporation’s
asset/liability and treasury functions. The Corporation’s Market Risk
Committee is responsible for approving hedging strategies that are
developed through its analysis of data derived from financial simulation
models and other internal and industry sources. The resulting hedging
strategies are then incorporated into the Corporation’s overall interest
rate risk-management and trading strategies.
Cash Flow Hedges
Futures and forwards are contracts for the delayed delivery of securities
in which the seller agrees to deliver on a specified future date, a
specified instrument, at a specified price or yield. These contracts
qualify for cash flow hedge accounting in accordance with SFAS No.
133, as amended and therefore, changes in the fair value of the
derivatives are recorded in other comprehensive income. As of
December 31, 2002, the fair market values of these forwards were
$75,000 recorded in other liabilities. As of December 31, 2002, the
total amount (net of tax) included in accumulated other comprehensive
income pertaining to forward contracts was an unrealized loss of
$46,000, which the Corporation expects to reclassify into earnings in
the next twelve months. These contracts have a maximum maturity of
50 days. As of December 31, 2001, the fair market value of these
futures and forwards were $70,000 recorded in other liabilities and
$355,000 included in other assets, respectively. As of December 31,
2001, the total amount (net of tax) included in accumulated other
comprehensive income pertaining to futures and forward contracts
was an unrealized loss and gain of $43,000 and $216,000, respectively.
The Corporation purchased interest rate caps as part of a
securitization in order to limit the interest rate payable to the security
holders. These contracts qualify for cash flow hedge accounting in
accordance with SFAS No. 133, as amended. As of December 31,
2002, the fair market value of these interest rate caps was $3,192,000
included in other assets and the amount included in accumulated
other comprehensive income was a loss of $2,883,000. These contracts
have a maximum maturity of 7.1 years. As part of these contracts,
during 2002 the Corporation reclassified $140,000 from other
comprehensive income into earnings pertaining to the ineffective portion
of changes in fair value of the cash flow hedge and $173,000 pertaining
to the caplets expiration, both amounts included as an increase to
interest expense. Assuming no change in interest rates, $1,626,000,
net of tax, of accumulated other comprenhensive loss is expected to be
reclassified to earnings over the next twelve months as contractual
payments are made.
As of December 31, 2001, the fair market value of these interest
rate caps was $4,278,000 included in other assets and the amount
included in accumulated other comprehensive income was a loss of
$94,000.
During the last quarter of 2002, the Corporation entered into a
$25,000,000 notional amount interest rate swap to convert floating
rate debt to fixed rate debt in order to fix the cost of short-term
borrowings. This contract qualifies for cash flow hedge accounting in
accordance with SFAS No. 133, as amended. As of December 31,
2002, the fair market value of the interest rate swap was $156,000
included in other assets and the amount included in accumulated
other comprehensive income was a gain of $160,000. This contract
matures on October 17, 2005.
For cash flow hedges, gains and losses on derivative contracts that
are reclassified from accumulated other comprehensive income to
current-period earnings are included in the line item in which the
hedged item is recorded and in the same period in which the forecasted
transaction affects earnings.
Trading and Non-Hedging Activities
The Corporation enters into options on swaps (“swaption”) derivative
securities, which combine the characteristics of interest rate swaps
and options. These swaptions are related to certificates of deposit with
returns linked to the Standard & Poor’s 500 index through an
embedded option, which has been bifurcated from the host contract,
and in accordance with SFAS No. 133 do not qualify for hedge
accounting. As of December 31, 2002, the Corporation had recognized
a derivative liability of $15,043,000 based on the fair value of the
swaptions, a derivative liability of $3,685,000 based on the fair value
of the bifurcated option, and a related discount on the certificates of
deposit of $15,189,000. These amounts are included in other liabilities
and deposits, respectively. As of December 31, 2001, the Corporation
had recognized a derivative asset of $13,515,000 based on the fair
value of the swaptions, a derivative liability of $34,863,000 based on
the fair value of the bifurcated option, and a related discount on the
certificates of deposit of $19,743,000.
The Corporation uses interest rate swaps to convert floating rate
debt to fixed rate debt in order to fix the future cost of the portfolio of
short-term borrowings. The specific terms and notional amounts of
the swaps are determined based on management’s assessment of
future interest rates, as well as other factors. As of December 31,
2002, the Corporation had $500,000,000 in notional amount pertaining
to these interest rate swaps. These swaps do not qualify as hedges in
accordance with SFAS No. 133, as amended, and therefore changes
in fair value of the derivatives are recorded in the statement of income.
For the year ended December 31, 2002 and 2001, respectively,
the Corporation recognized a loss of $20,085,000 and $20,228,000
as a result of the changes in fair value of the non-hedging derivatives
included as part of the loss on derivatives.
To satisfy the needs of its customers, from time to time, the
Corporation enters into foreign exchange contracts in the spot or futures
market and at the same time into foreign exchange contracts with third
parties under the same terms and conditions. As of December 31,
2002, the Corporation did not have any foreign exchange contracts
outstanding. As of December 31, 2001, the Corporation included
$2,000 and $2,000 in other assets and other liabilities, respectively,
pertaining to the fair value of these contracts.
At December 31, 2002 and 2001, respectively, the Corporation
also had forward contracts to sell $194,700,000 and $20,000,000 of
mortgage-backed securities with terms lasting less than a month which
were accounted for as trading derivatives. These contracts are
recognized at fair market value with changes directly reported in
income. At December 31, 2002 and 2001, respectively, the fair market
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value of these forwards was a liability of $153,000 and an asset of
$91,000.
operations and selected financial information by operating segment
for each of the three years ended December 31:
These contracts are entered into in order to optimize the gain on
sales of mortgage loans and/or mortgage backed securities and net
interest income, given levels of interest rate risk consistent with the
Corporation’s business strategies.
In addition, the Corporation entered into call options for mortgage-
backed securities. The gross notional (or contractual) amounts of these
written option contracts used for trading purposes as of December 31,
2002 amounted to $98,000,000. The fair value of these derivative
financial instruments was a liability of $13,000 at December 31, 2002.
N o t e 3 1 - S u p p l e m e n t a l d i s c l o s u r e o n t h e
consolidated statements of cash flows:
During the year ended December 31, 2002, the Corporation paid
interest and income taxes amounting to $842,137,000 and
$135,247,000, respectively (2001 - $1,080,436,000 and
$94,358,000; 2000 - $1,142,495,000 and $117,920,000). In addition,
loans transferred to other real estate and other property for the year
ended December 31, 2002, amounted to $59,052,000 and
$31,733,000, respectively (2001 - $47,264,000 and $30,372,000).
Note 32 - Segment reporting:
Popular, Inc. operates three major reportable segments: commercial
banking, mortgage and consumer lending, and lease financing.
Management has determined its reportable segments based on legal
entity, which is the way that operating decisions are made and
performance is measured. These entities have then been aggregated
by products, services and markets with similar characteristics.
The Corporation’s commercial banking segment includes all
banking subsidiaries, which provide individuals, corporations and
institutions with commercial and retail banking services, including
loans and deposits, trust, mortgage banking and servicing, asset
management, credit cards and other financial services.
The Corporation’s mortgage and consumer lending segment
includes those non-banking subsidiaries whose principal activity is
originating mortgage and consumer loans such as Popular Mortgage,
Levitt Mortgage, Popular Finance and Equity One.
The Corporation’s auto and lease 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, retail financial services, broker/
dealer activities, as well as those providing ATM processing services,
electronic data processing and consulting services, sale and rental of
electronic data processing equipment, and selling and maintenance of
computer software.
The accounting policies of the segments are the same as those
followed by the Corporation in the ordinary course of business and
conform with generally accepted accounting principles and with general
practices within the financial industry. Following are the results of
6 8
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6 8
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2002
Mortgage and Auto and
Commercial
banking
consumer
lending
Lease
financing
Other
Elimina-
tions
(In thousands)
Net interest income (loss)
Provision for loan losses
Other income
Amortization of intangibles
Depreciation expense
Other operating expenses
Net gain of minority interest
Income tax
$908,606
134,762
269,115
8,959
52,595
658,179
69,000
$206,557
44,033
70,678
$66,838
26,775
19,132
10,789
30,975
4,318
123,309
(248)
36,820
($1,919)
$247
175,405
145
6,465
134,257
(10,652)
(989)
Total
$1,180,329
205,570
523,678
9,104
74,167
945,731
(248)
117,255
6,474
7,367
(2,406)
Net income
$254,226
$68,507
$10,957
$25,252
($7,010)
$351,932
Segment assets
$26,525,374
$5,884,442 $1,235,402 $6,979,182 ($6,964,048) $33,660,352
2001
Mortgage and Auto and
Commercial
banking
consumer
lending
Lease
financing
(In thousands)
$53,124
21,320
19,860
755
10,058
24,094
$137,013
42,300
66,711
728
3,690
100,637
18
20,114
Net interest income
$886,687
149,630
Provision for loan losses
Other income
248,535
Amortization of intangibles 21,827
Depreciation expense
57,466
Other operating expenses 575,007
Net loss of minority interest
Income tax
Cumulative effect of
79,128
accounting change
Net income
Segment assets
686
$252,850
$25,538,228
Other
$267
148,249
4,128
4,748
123,947
Elimina-
tions
($106)
(11,767)
(876)
Total
$1,076,985
213,250
471,588
27,438
75,962
822,809
18
105,280
686
$304,538
$30,744,676
6,414
2,412
(2,788)
$36,273
($8,209)
$4,344,797 $1,037,468 $6,752,836 ($6,928,653)
$10,343
$13,281
2000
Mortgage and Auto and
Commercial
banking
consumer
lending
Lease
financing
(In thousands)
Net interest income
Provision for loan losses
Other income
Amortization of intangibles
Depreciation expense
Other operating expenses
Net loss of minority interest
Income tax
$845,575
137,774
253,112
28,399
58,055
556,782
81,314
Net income
$236,363
$92,373
29,250
50,119
717
3,342
73,471
48
12,201
$23,559
$43,546
21,761
21,620
754
9,018
22,629
4,181
$6,823
Other
$1,408
5,855
147,853
4,688
6,433
114,675
1,104
4,641
Elimina-
tions
($141)
(8,644)
(2,530)
(1,540)
Total
$982,761
194,640
464,060
34,558
76,848
765,027
1,152
100,797
$14,073
($4,715)
$276,103
Segment assets
$23,880,191
$2,848,464
$957,175
$6,240,372 ($5,869,151) $28,057,051
Intersegment revenues*
(In thousands)
Commercial Banking
Mortgage and Consumer Lending
Auto and Lease Financing
Other
Total intersegment revenues
2002
2001
2000
$67,402
(171,681)
(53,735)
168,419
$10,405
$68,576
(176,591)
(56,035)
175,923
$11,873
$27,582
(144,088)
(48,154)
173,445
$8,785
* For purposes of the intersegment revenues disclosure, revenues include interest income
(expense) related to internal funding and other income derived from intercompany transactions,
mainly related to gain on sales of loans.
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Geographic Information
(In thousands)
2002
2001
2000
Revenues*:
Puerto Rico
United States
Other
$1,174,193
477,990
51,824
$1,113,958
387,754
46,861
$1,010,229
374,621
61,971
Total consolidated revenues
$1,704,007
$1,548,573
$1,446,821
* Total revenues include net interest income, service charges on deposit accounts, other service
fees, (loss) gain on sale of investment securities, derivative losses, trading account (loss) profit,
gain on sale of loans and other operating income.
(In thousands)
2002
2001
2000
Selected Balance Sheet Information:
Puerto Rico
Total assets
Loans
Deposits
United States
Total assets
Loans
Deposits
Other
Total assets
Loans
Deposits
$22,307,784
10,065,646
12,036,491
$20,800,728
9,879,632
10,874,829
$20,146,184
9,370,627
9,974,677
$10,637,293
9,140,382
4,778,234
$9,174,050
7,868,729
4,718,692
$7,246,259
6,264,014
4,107,994
$715,275
376,091
800,015
$769,898
420,190
776,521
$664,608
422,444
722,236
Note 33 - Contingent liabilities:
The Corporation is a defendant in a number of legal proceedings
arising in the normal course of business. Management believes, based
on the opinion of legal counsel, that the final disposition of these
matters will not have a material adverse effect on the Corporation’s
financial position or results of operations.
Settlement of Federal Investigation
On January 16, 2003, the U.S. District Court for the District of Puerto
Rico approved a Deferred Prosecution Agreement among BPPR, the
U.S. Department of Justice, the Board of Governors of the Federal
Reserve System, and the Financial Crimes Enforcement Network of
the U.S. Department of the Treasury (“FinCEN”). The Agreement
concludes an investigation related principally to the circumstances
surrounding the activities of a former customer of BPPR, including
BPPR’s reporting and compliance efforts, as well as certain other
customers. The former customer has pleaded guilty to money
laundering, including in connection with transactions made through
an account at BPPR. No current or former BPPR officer, director or
employee has been charged with a crime or accused of benefitting
financially from the transactions described in the Agreement.
Under the Deferred Prosecution Agreement, BPPR agreed to the
filing of a one-count information charging it with failure to file suspicious
activity reports in a timely and complete manner. The Agreement
provides for BPPR to forfeit $21.6 million to the United States, and
resolves all claims the United States, FinCEN or the Federal Reserve
may have against BPPR arising from the matters that were subject to
investigation. Their forfeiture was recognized in the Corporation’s
consolidated statement of condition and results of operations for the
year ended December 31, 2002.
This settlement also terminates the Written Agreement BPPR
signed with the Federal Reserve Bank of New York on March 9, 2000,
which required enhancements to BPPR’s anti-money laundering and
Bank Secrecy Act program. The Federal Reserve found BPPR to be
fully compliant with the Written Agreement on November 26, 2001.
Finally, the Deferred Prosecution Agreement provides that the court
will dismiss the information and the Deferred Prosecution Agreement
will expire 12 months following the settlement, provided that BPPR
complies with its obligations under the Agreement.
On February 19, 2003, a derivative action was filed by a
shareholder of Popular, Inc. in the United States District Court for the
District of Puerto Rico in connection with the above-described matters
against certain current and former directors of Popular, Inc. alleging
that the defendants breached their fiduciary duties by failing to take
the necessary steps to comply with the Bank Secrecy Act and to
implement sufficient controls to permit them to exercise their oversight
responsibilities and ensure compliance with Federal and state laws.
The action seeks, on behalf of Popular, Inc., monetary damages from
the defendants and attorneys’ fees. Popular, Inc. does not expect that
the foregoing civil action will have a material impact on Popular Inc.’s
operations or consolidated financial statements.
Note 34 - Guarantees
The Corporation has obligations upon the occurrence of certain events
under financial guarantees provided in certain contractual
arrangements. These various arrangements are summarized below.
At December 31, 2002, the Corporation had issued approximately
$126,383,000 of financial standby letters of credit to guarantee the
performance of various customers to third parties. This contract amount
represents the maximum amount of credit risk in the event of
nonperformance by these 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 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 December 31, 2002, the Corporation services approximately
$1,600,000,000 in residential mortgage loans with recourse or other
servicer-provided credit enhancement. In the event of any customer
default, pursuant to the credit recourse provided, the Corporation is
required to reimburse the third party investor. The maximum potential
amount of future payments that the Corporation would be required to
make under the agreement in the event of nonperformance by the
borrowers, is equivalent to the total outstanding balance of the residential
mortgage loans serviced. In the event of nonperformance, the
Corporation has rights to the underlying collateral securing the mortgage
loan, thus the losses associated to these guarantees should not be
significant. The Corporation also services approximately
$4,300,000,000 in mortgage loans without recourse or other servicer-
provided credit enhancement. Although the Corporation may, from
time to time, be required to make advances to maintain a regular flow
of scheduled interest and principal payments to investors, including
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Statements of Income
Statements of Income
Statements of Income
Statements of Income
Statements of Income
(In thousands)
Income:
Dividends from subsidiaries
Interest on money market and
investment securities
Other operating income
(Loss) gain on sale of securities
Interest on advances to
subsidiaries
Interest on loans to affiliates
Total income
Expenses:
Interest expense
Provision for loan losses
Operating expenses
Total expenses
Income before income taxes
and equity in undistributed
earnings of subsidiaries
Income taxes
Income before equity in
undistributed earnings of
subsidiaries
Equity in undistributed earnings
Year ended December 31,
2001
2002
2000
$248,000
$248,550
$88,000
1,466
18,472
(2,361)
10,774
961
277,312
2,680
14,519
(100)
19,873
1,652
287,174
21,435
32,360
2,297
23,732
2,802
35,162
2,718
10,818
12,001
48,516
1,847
163,900
59,690
1,365
2,454
63,509
253,580
(308)
252,012
(1,399)
100,391
3,354
253,888
253,411
97,037
223,661
1,511,933
166,193
1,416,698
of subsidiaries
Net income
98,044
$351,932
51,127
179,066
$304,538
$276,103
680,602
129,935
150,574
16,949
11,192
22,075
608,450
104,742
173,979
22,433
12,006
21,118
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special purpose entities, this does not represent an insurance against
losses. These loans serviced are mostly insured by FHA, VA, and
others, or the certificates arising in securitization transactions may be
covered by a funds guaranty insurance policy.
The Corporation fully and unconditionally guarantees certain
borrowing obligations issued by certain of the Corporation’s wholly-
owned subsidiaries approximating $2,100,000,000 at December 31,
2002.
Note 35 - Popular, Inc. (Holding Company only)
financial information:
The following condensed financial information presents the financial
position of the Holding Company only as of December 31, 2002 and
2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31.
December 31,
2002
2001
$324
2,937
$263
112,937
Statements of Condition
Statements of Condition
Statements of Condition
Statements of Condition
Statements of Condition
(In thousands)
ASSETS
Cash
Money market investments
Investment securities available-for-sale,
at market value
Investment in BPPR and subsidiaries, at equity
Investment in Popular International Bank
and subsidiaries, at equity
Investment in other subsidiaries, at equity
Advances to subsidiaries
Loans to affiliates
Premises and equipment
Other assets
Total assets
$2,750,182
$2,638,819
LIABILITIES AND STOCKHOLDERS’ EQUITY
Federal funds purchased
Commercial paper
Other short-term borrowings
Notes payable
Accrued expenses and other liabilities
Subordinated notes
Stockholders’ equity
$10,300
18,989
10,202
137,777
37,035
125,000
2,410,879
$198,918
42,083
125,000
2,272,818
Total liabilities and stockholders’ equity
$2,750,182
$2,638,819
7 0
7 0
7 0
7 0
7 0
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Statements of Cash Flows
Statements of Cash Flows
Statements of Cash Flows
Statements of Cash Flows
Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Year ended December 31,
2002
2001
2000
Net income
$351,932
$304,538
$276,103
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of subsidiaries
(98,044)
(51,127)
Provision for loan losses
Net loss (gain) on sale of investment securities
available-for-sale
Stock options expense
Net decrease (increase) in other assets
Net (decrease) increase in current and
deferred taxes
Net decrease in interest payable
Net (decrease) increase in other liabilities
Total adjustments
Net cash provided by operating
activities
Cash flows from investing activities:
Net decrease (increase) in money
(179,066)
1,365
2,361
148
973
(339)
(179)
(2,080)
(97,160)
100
(12,001)
(10,016)
(19,904)
(21)
(12,599)
12,369
(61,294)
6,826
(605)
5,451
(197,934)
254,772
243,244
78,169
market investments
110,000
(92,100)
14,663
Purchases of investment securities
available-for-sale
(34,347)
(103,902)
(37,318)
Maturities of investment securities
available-for-sale
Proceeds from sales of investment
securities available-for-sale
Capital contribution to subsidiaries
99,679
13,503
131
(50)
(6,815)
19,950
(25,747)
Net change in advances to subsidiaries
28,889
347,362
350,310
Net cash provided by investing
activities
Cash flows from financing activities:
Net increase in securities sold under
104,623
244,224
335,361
agreements to repurchase
10,300
Net increase (decrease) in commercial
paper
18,989
(51,987)
(81,130)
Net increase (decrease) in other
short-term borrowings
Net decrease in notes
payable
Cash dividends paid
Proceeds from issuance of
common stock
Redemption of preferred stock
Treasury stock acquired
Net cash used in
financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
10,202
(325,726)
27,793
(61,141)
(108,003)
11,166
(102,000)
(138,847)
(13,093)
(106,384)
(272,704)
(95,297)
9,702
9,823
(2,064)
(359,334)
(487,488)
(413,579)
61
263
$324
(20)
283
$263
(49)
332
$283
The principal source of income for the Holding Company 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 in any calendar year would exceed the total of its net
profits for that year, as defined by the Federal Reserve Board,
combined with its retained net profits for the preceding two years. The
payment of dividends by BPPR may also be affected by other regulatory
requirements and policies, such as the maintenance of certain
minimum capital levels described in Note 20. At December 31, 2002,
BPPR could have declared a dividend of approximately $162,688,000
without the approval of the Federal Reserve.
Note 36 - 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),
Popular International Bank, Inc. (PIBI), Popular North America, Inc.
(PNA) and all other subsidiaries of the Corporation as of December
31, 2001 and 2002, and the results of their operations and cash flows
for each of the three years in the period ended December 31, 2002.
PIBI, PNA, and their wholly-owned subsidiaries, except BPNA and
Banco Popular, National Association (BP,N.A.), have a fiscal year that
ends on November 30. Accordingly, the consolidated financial
information of PIBI and PNA as of November 30, 2000, 2001 and
2002, corresponds to their financial information included in the
consolidated financial statements of Popular, Inc. as of December 31,
2000, 2001 and 2002, respectively.
PIHC, PIBI and PNA are authorized issuers of debt securities
and preferred stock under various shelf registrations filed with the
SEC.
PIBI is an operating subsidiary of PIHC and is the holding company
of its wholly-owned subsidiaries, ATH Costa Rica, CreST, S.A.,
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 subsidiary Popular
Leasing, U.S.A., and BP, N.A., including its wholly-owned subsidiary
Popular Insurance, Inc.
PIHC fully and unconditionally guarantees all registered debt
securities and preferred stock issued by PIBI and PNA. As described
in Note 35 to the consolidated financial statements, the principal
source of cash flows for PIHC consists of dividends from BPPR.
2 0 0 2 A N N U A L R E P O R T 7 1
2 0 0 2 A N N U A L R E P O R T 7 1
2 0 0 2 A N N U A L R E P O R T 7 1
2 0 0 2 A N N U A L R E P O R T 7 1
2 0 0 2 A N N U A L R E P O R T 7 1
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Condensed Consolidating Statement of Condition
At December 31, 2002
(In thousands)
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
All other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
$324
2,937
$70
300
$1,161
9,708
$694,114
1,250,994
($43,113)
(169,293)
$652,556
1,094,646
223,661
28,290
6,720
10,278,232
(5,000)
10,531,903
2,322,470
624,306
850,071
167,523
167,523
11,192
294
21,781
2,573,222
2,573,222
2
36,409
11,891
15,068
$2,750,182
$689,377
$3,467,841
$10,300
29,191
137,777
37,035
214,303
125,000
$90
8,788
166
9,044
$498,883
439,052
1,849,017
64,705
2,851,657
3,962
492,543
170,874
2
439,964
170,956
329,391
510,346
199,869
1,109,161
20,341,601
286,655
372,797
19,682,149
449,985
39,399
194,372
503,268
182,965
34,647
$35,458,892
$3,410,409
14,270,528
17,680,937
6,307,488
2,477,471
5,517,986
604,830
32,588,712
144,000
110
72,577
1,335,498
1,178,321
(463)
(148,640)
(3,996,716)
(16,234)
(4,306,499)
(4,306,499)
(22,010)
1,565
($8,705,940)
($43,024)
(23,173)
(66,197)
(132,120)
(1,242,242)
(3,214,715)
(29,131)
(4,684,405)
1,052
(76,541)
(2,268,005)
(1,520,151)
463
180,751
510,346
1,092,927
18,775,847
286,655
372,797
18,116,395
461,177
39,399
184,549
578,091
182,965
34,647
$33,660,352
$3,367,385
14,247,355
17,614,740
6,684,551
1,703,562
4,298,853
677,605
30,979,311
125,000
144,000
1,162
834,799
278,366
1,300,437
(205,210)
12,954
680,333
$689,377
5,262
616,184
$3,467,841
140,137
2,726,070
$35,458,892
(158,353)
(4,022,587)
($8,705,940)
202,487
2,410,879
$33,660,352
ASSETS
Cash and due from banks
Money market investments
Investment securities
available-for-sale, at market value
Investment securities
held-to-maturity, at amortized cost
Trading account securities, at market value
Investment in subsidiaries
Loans held-for-sale, at lower of cost or market
Loans
Less - Unearned income
Allowance for loan losses
Premises and equipment
Other real estate
Accrued income receivable
Other assets
Goodwill
Other intangible assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and securities sold under
agreements to repurchase
Other short-term borrowings
Notes payable
Other liabilities
Subordinated notes
Preferred beneficial interests in Popular North America’s
junior subordinated deferrable interest debentures
guaranteed by the Corporation
Minority interest in consolidated subsidiaries
Stockholders’ equity:
Common stock
Surplus
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income,
net of tax
834,799
278,366
1,300,437
(205,210)
202,487
2,410,879
$2,750,182
7 2
7 2
7 2
7 2
7 2
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Condensed Consolidating Statement of Condition
At December 31, 2001
(In thousands)
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
All other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
$263
112,937
$18
302
$252
442
$659,094
1,075,301
($53,485)
(365,192)
$606,142
823,790
166,193
20,781
6,473
9,101,954
(11,000)
9,284,401
ASSETS
Cash and due from banks
Money market investments
Investment securities
available-for-sale, at market value
Investment securities
held-to-maturity, at amortized cost
Trading account securities, at market value
Investment in subsidiaries
Loans held-for-sale, at lower of cost or market
Loans
Less - Unearned income
Allowance for loan losses
Premises and equipment
Other real estate
Accrued income receivable
Other assets
G o o d w i l l
Other intangible assets
2,129,890
559,658
772,220
196,412
196,412
12,006
323
20,795
2,537,021
2,537,021
2
32,010
12,263
9,994
$2,638,819
$612,771
$3,338,665
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Federal funds purchased and securities sold under
agreements to repurchase
Other short-term borrowings
Notes payable
Other liabilities
Subordinated notes
$4,272
72
4,344
$421,618
536,443
1,780,452
48,959
2,787,472
$198,918
42,083
241,001
125,000
Preferred beneficial interests in Popular North America’s
junior subordinated deferrable interest debentures
guaranteed by the Corporation
Minority interest in consolidated subsidiaries
747,000
271,106
164,146
957,403
18,870,993
326,966
336,632
18,207,395
393,699
31,533
196,277
434,248
177,842
37,800
$32,454,798
(154,640)
(920)
(3,625,914)
(17,915)
(4,048,397)
(4,048,397)
(22,722)
(192)
($8,300,377)
$3,335,268
13,099,160
16,434,428
5,561,883
2,663,575
4,709,260
450,637
29,819,783
($53,427)
(10,959)
(64,386)
(231,733)
(1,377,048)
(2,953,499)
(29,065)
(4,655,731)
592,360
270,186
939,488
17,556,029
326,966
336,632
16,892,431
405,705
31,533
186,143
496,855
177,842
37,800
$30,744,676
$3,281,841
13,088,201
16,370,042
5,751,768
1,827,242
3,735,131
512,686
28,196,869
125,000
150,000
105
(920)
804
149,080
909
Stockholders’ equity:
Preferred stock
Common stock
Surplus
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive income,
net of tax
100,000
832,498
268,544
1,057,724
(66,136)
80,188
2,272,818
$2,638,819
3,962
492,494
105,748
2
439,964
110,687
72,575
1,334,918
1,032,542
(236)
(76,539)
(2,267,376)
(1,248,977)
236
100,000
832,498
268,544
1,057,724
(66,136)
6,223
608,427
$612,771
540
551,193
$3,338,665
45,111
2,484,910
$32,454,798
(51,874)
(3,644,530)
($8,300,377)
80,188
2,272,818
$30,744,676
2 0 0 2 A N N U A L R E P O R T 7 3
2 0 0 2 A N N U A L R E P O R T 7 3
2 0 0 2 A N N U A L R E P O R T 7 3
2 0 0 2 A N N U A L R E P O R T 7 3
2 0 0 2 A N N U A L R E P O R T 7 3
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Condensed Consolidating Statement of Income
Year ended December 31, 2002
Popular, Inc.
Holding Co.
PIBI
Holding Co.
P N A
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
$11,735
260
1,206
13,201
1,588
19,847
21,435
$9
9
110
52
162
$154,873
179
1,059
156,111
22,308
134,104
156,412
(8,234)
(153)
(301)
(8,234)
(153)
(301)
(2,361)
18,472
7,877
5,119
4,966
303
56
359
13
11
81
464
4,502
4,502
60,625
$65,127
1,071
869
40
317
2,297
5,580
(308)
5,888
346,044
$351,932
25
(18,705)
169
(18,812)
189
513
702
(19,514)
(6,494)
(13,020)
73,289
$60,269
$1,595,811
76,499
456,426
16,628
2,145,364
431,965
237,309
287,320
956,594
1,188,770
205,570
983,200
157,727
258,867
(1,006)
(874)
(1,380)
68,508
49,768
1,514,810
361,651
22,235
104,493
488,379
78,490
99,099
36,073
83,930
53,852
61,451
19,918
96,232
9,104
1,026,528
488,282
126,463
(248)
361,571
31,960
($233,516)
(44,442)
(12,766)
(164)
(290,888)
(837)
(76,065)
(214,233)
(291,135)
247
247
(14)
(324)
70
(9,168)
(1,215)
(10,404)
3
3
(339)
(653)
(989)
(9,415)
(2,406)
(7,009)
(511,918)
$1,528,903
32,505
445,925
16,464
2,023,797
431,128
185,250
227,090
843,468
1,180,329
205,570
974,759
157,713
258,543
(3,342)
(804)
(20,085)
59,340
72,313
1,498,437
361,957
22,235
104,549
488,741
78,503
99,099
37,144
84,660
53,892
61,451
19,918
96,490
9,104
1,029,002
469,435
117,255
(248)
351,932
$393,531
($518,927)
$351,932
(In thousands)
INTEREST INCOME:
Loans
Money market investments
Investment securities
Trading account securities
INTEREST EXPENSE:
Deposits
Short-term borrowings
Long-term debt
Net interest (loss) income
Provision for loan losses
Net interest (loss) income after provision
for loan losses
Service charges on deposit accounts
Other service fees
(Loss) gain on sale of investment securities
Trading account loss
Loss on derivatives
Gain on sale of loans
Other operating income
OPERATING EXPENSES:
Personnel costs:
Salaries
Profit sharing
Pension and other benefits
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Other operating expenses
Amortization of intangibles
Income (loss) before income tax, minority interest,
and equity in earnings of subsidiaries
Income tax
Net gain of minority interest
Income (loss) before equity in earnings of subsidiaries
Equity in earnings of subsidiaries
NET INCOME
7 4
7 4
7 4
7 4
7 4
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Condensed Consolidating Statement of Income
Year ended December 31, 2001
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
(In thousands)
INTEREST INCOME:
Loans
Money market investments
Investment securities
Trading account securities
INTEREST EXPENSE:
Deposits
Short-term borrowings
Long-term debt
Net interest (loss) income
Provision for loan losses
Net interest (loss) income after provision
for loan losses
Service charges on deposit accounts
Other service fees
(Loss) gain on sale of investment securities
Trading account profit (loss)
(Loss) gain on derivatives
Gain on sale of loans
Other operating income
OPERATING EXPENSES:
Personnel costs:
Salaries
Profit sharing
Pension and other benefits
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Other operating expenses
Amortization of intangibles
$21,525
1,127
1,553
$1,069
19
2
$153,426
781
756
24,205
1,090
154,963
1,144
31,216
32,360
(8,155)
(8,155)
(100)
231
231
859
859
(50)
27
14,519
6,264
1,915
2,751
292
51
343
12
9
61
425
1,394
1,275
39
94
2,802
64,856
87,488
152,344
2,619
2,619
(20,515)
(17,896)
402
426
828
Income (loss) before income tax, minority interest,
cumulative effect of accounting change and equity
in earnings of subsidiaries
Income tax
Net loss of minority interest
Income (loss) before cumulative effect of
accounting change and equity in earnings
of subsidiaries
Cumulative effect of accounting change
Income (loss) before equity in earnings of subsidiaries
Equity in earnings of subsidiaries
3,462
(1,399)
2,326
(18,724)
(6,627)
4,861
2,326
(12,097)
4,861
299,677
2,326
19,845
(12,097)
32,350
$1,614,050
97,931
484,095
15,024
2,211,100
520,587
372,091
236,654
1,129,332
1,081,768
213,250
868,518
147,037
242,701
177
(1,808)
287
45,633
53,532
1,356,077
321,094
16,251
87,454
424,799
72,088
97,383
37,362
72,317
48,844
50,783
17,804
74,212
27,438
923,030
433,047
116,095
18
316,970
686
317,656
23,820
($230,180)
(52,248)
(13,062)
(6)
(295,496)
(2,419)
(108,674)
(184,297)
(295,390)
(106)
(106)
(43)
(154)
(11,570)
(11,873)
(268)
(608)
(876)
(10,997)
(2,789)
(8,208)
(8,208)
(375,692)
$1,559,890
47,610
473,344
15,018
2,095,862
518,168
329,648
171,061
1,018,877
1,076,985
213,250
863,735
146,994
242,547
27
(1,781)
(20,228)
45,633
58,396
1,335,323
321,386
16,251
87,505
425,142
72,100
97,383
38,756
73,735
48,883
50,783
17,804
74,185
27,438
926,209
409,114
105,280
18
303,852
686
304,538
NET INCOME
$304,538
$22,171
$20,253
$341,476
($383,900)
$304,538
2 0 0 2 A N N U A L R E P O R T 7 5
2 0 0 2 A N N U A L R E P O R T 7 5
2 0 0 2 A N N U A L R E P O R T 7 5
2 0 0 2 A N N U A L R E P O R T 7 5
2 0 0 2 A N N U A L R E P O R T 7 5
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Condensed Consolidating Statement of Income
(In thousands)
INTEREST INCOME:
Loans
Money market investments
Investment securities
Trading account securities
INTEREST EXPENSE:
Deposits
Short-term borrowings
Long-term debt
Net interest (loss) income
Provision for loan losses
Net interest (loss) income after provision
for loan losses
Service charges on deposit accounts
Other service fees
Gain (loss) on sale of investment securities
Trading account profit
Gain on sale of loans
Other operating income
OPERATING EXPENSES:
Personnel costs:
Salaries
Profit sharing
Pension and other benefits
Net occupancy expenses
Equipment expenses
Other taxes
Professional fees
Communications
Business promotion
Printing and supplies
Other operating expenses
Amortization of intangibles
Income (loss) before income tax, minority interest
and equity in earnings of subsidiaries
Income tax
Net loss of minority interest
Income (loss) before equity in earnings
of subsidiaries
Equity in earnings of subsidiaries
12,001
10,818
14,845
1
1,350
473
19
2
609
2,454
12,391
3,354
Year ended December 31, 2000
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
Other
Subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
$50,363
855
1,863
53,081
30,354
29,336
59,690
(6,609)
1,365
$876
81
2
959
552
142
694
265
$119,316
189
715
120,220
$1,589,626
118,585
496,603
14,771
2,219,585
54,030
72,646
126,676
(6,456)
(7,974)
265
(6,456)
($173,349)
(57,354)
(12,985)
(243,688)
(24,098)
(98,998)
(120,451)
(243,547)
(141)
(141)
(1,819)
(6,825)
(8,785)
(16)
(1,947)
(567)
(2,530)
(6,255)
(1,540)
(4,715)
(310,181)
$1,586,832
62,356
486,198
14,771
2,150,157
529,373
508,029
129,994
1,167,396
982,761
194,640
788,121
125,519
215,995
11,201
1,991
39,673
69,681
1,252,181
306,529
18,913
68,734
394,176
67,720
98,022
34,125
64,851
45,689
46,791
20,828
69,673
34,558
876,433
375,748
100,797
1,152
276,103
553,471
522,091
148,321
1,223,883
995,702
193,275
802,427
125,519
217,814
(800)
1,991
39,673
64,409
1,251,033
306,249
18,913
68,688
393,850
67,724
98,021
32,775
66,088
45,670
46,791
20,826
69,160
34,558
875,463
375,570
101,573
1,152
275,149
9,271
1,279
1,544
(6,456)
280
46
326
12
9
50
397
1,147
228
421
649
(7,105)
(2,590)
(4,515)
20,944
9,037
267,066
1,147
12,900
NET INCOME
$276,103
$14,047
$16,429
$284,420
($314,896)
$276,103
7 6
7 6
7 6
7 6
7 6
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Condensed Consolidating Statement of Cash Flows
(In thousands)
Popular, Inc.
Holding Co.
PIBI
Holding Co.
P N A
Holding Co.
Other
subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
Year ended December 31, 2002
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries
Depreciation and amortization of
premises and equipment
Provision for loan losses
Amortization of intangibles
Net loss (gain) on sale of investment securities
Loss on derivatives
Net loss on disposition of premises and equipment
Net gain on sale of loans, excluding loans held-for-sale
Amortization of premiums and accretion
of discounts on investments
Amortization of deferred loan fees and costs
Stock options expense
Increase in loans held-for-sale
Net increase in trading securities
Net decrease in interest receivable
Net decrease (increase) in other assets
Net (decrease) increase in interest payable
Net decrease in current and deferred taxes
Net increase in postretirement benefit
obligation
Net (decrease) increase in other liabilities
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Net decrease (increase) in money market investments
Purchases of investment securities held-to-maturity
Maturities of investment securities held-to-maturity
Purchases of investment securities available-for-sale
Maturities of investment securities available-for-sale
Proceeds from sales of investment securities available-for-sale
Net repayments (disbursements) on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Capital contribution to subsidiaries
Assets acquired, net of cash
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Dividends received from subsidiary
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase in deposits
Net increase in federal funds purchased and
securities sold under agreements to repurchase
Net increase (decrease) in other short-term borrowings
Net (payments) proceeds from issuance of notes
payable and capital securities
Dividends paid to parent company
Dividends paid
Proceeds from issuance of common stock
Redemption of preferred stock
Treasury stock acquired
Capital contribution from parent
Net cash (used in) provided by financing activities
Net increase in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
248,000
352,623
10,300
29,191
(61,141)
(108,003)
11,166
(102,000)
(138,847)
(359,334)
61
263
$324
$351,932
$65,127
$60,269
$393,531
($518,927)
$351,932
(346,044)
(60,625)
(73,289)
(31,960)
511,918
814
2,361
148
29
130
(179)
(339)
(2,080)
(345,160)
6,772
110,000
(4,398)
(47)
140
(64,930)
197
1
(34,347)
(4,721)
131
28,889
(50)
(81)
(25)
18,705
371
1,406
(1,610)
(867)
(7,048)
(62,357)
(2,088)
(9,266)
(1,932,303)
1,931,303
1,024
(36,201)
73,353
205,570
9,104
1,006
1,380
773
(6,718)
15,980
29,155
809
(151,759)
(239,240)
1,906
(6,038)
2,176
(16,336)
7,479
101,055
(2,305)
391,226
(169,917)
(26,588,518)
27,006,127
(7,419,028)
5,523,837
1,265,387
(1,602,891)
592,992
(1,220,139)
(1,500)
(138,074)
7,662
(4,801)
(45,443)
(2,744,062)
74,167
205,570
9,104
3,342
20,085
773
(6,718)
15,980
29,155
957
(153,439)
(240,160)
1,594
(10,658)
1,331
(22,766)
7,479
96,233
32,029
(1,680)
(920)
(712)
(1,758)
991
(5,224)
4,166
506,781
(12,146)
383,961
(195,898)
(6,000)
(6,000)
258,102
131
(248,000)
(197,665)
(265,080)
(26,588,518)
27,000,127
(9,390,399)
7,449,140
1,266,542
(1,352,101)
592,992
(1,220,139)
(1,500)
(138,074)
7,662
(2,639,348)
(4,182)
8,788
50
4,656
52
18
$70
1,273,778
(1,811)
1,271,967
77,265
(97,390)
68,565
48,440
909
252
$1,161
745,605
(186,107)
802,726
(248,000)
(227)
81
2,387,856
35,020
659,094
$694,114
99,613
134,808
(260,296)
248,000
(131)
220,183
10,372
(53,485)
($43,113)
932,783
(123,680)
558,642
(108,003)
11,166
(102,000)
(139,074)
2,301,801
46,414
606,142
$652,556
2 0 0 2 A N N U A L R E P O R T 7 7
2 0 0 2 A N N U A L R E P O R T 7 7
2 0 0 2 A N N U A L R E P O R T 7 7
2 0 0 2 A N N U A L R E P O R T 7 7
2 0 0 2 A N N U A L R E P O R T 7 7
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Condensed Consolidating Statement of Cash Flows
(In thousands)
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
Other
subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
Year ended December 31, 2001
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries
Depreciation and amortization of
premises and equipment
Provision for loan losses
Amortization of intangibles
Net loss (gain) on sale of investment securities
Loss (gain) on derivatives
Net loss on disposition of premises and equipment
Net gain on sale of loans, excluding loans held-for-sale
Amortization of premiums and accretion
of discounts on investments
Increase in loans held-for-sale
Amortization of deferred loan fees and costs
Net increase in trading securities
Net decrease (increase) in interest receivable
Net decrease (increase) in other assets
Net decrease in interest payable
Net (decrease) increase in current and deferred taxes
Net increase in postretirement benefit
obligation
Net increase (decrease) in other liabilities
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Net (increase) decrease in money market investments
Purchases of investment securities held-to-maturity
Maturities of investment securities held-to-maturity
Purchases of investment securities available-for-sale
Maturities of investment securities available-for-sale
Proceeds from sales of investment securities available-for-sale
Net repayments (disbursements) on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Capital contribution to subsidiaries
Return on investment from subsidiary
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Dividends received from subsidiary
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase in deposits
Net increase in federal funds purchased and
securities sold under agreements to repurchase
Net decrease in other short-term borrowings
Net (payments) proceeds from issuance of notes
payable and capital securities
Dividends paid to parent company
Dividends paid
Proceeds from issuance of common stock
Treasury stock sold
Return of capital to parent
Capital contribution from parent
Net cash (used in) provided by financing activities
Net decrease in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
7 8
7 8
7 8
7 8
7 8
$304,538
$22,171
$20,253
$341,476
($383,900)
$304,538
(299,677)
(19,845)
(32,350)
(23,820)
375,692
203
100
50
20,515
789
1,201
(12,599)
(21)
12,369
(297,635)
6,903
588
(31,116)
(217)
13
(50,527)
(28,356)
(212)
(2,972)
(7,660)
1,475
(4,722)
(25,926)
(5,673)
(92,100)
25
(382)
(103,902)
99,679
(145)
62
347,362
22,500
(694,506)
300
(532)
(6,815)
(12,209)
248,550
480,565
75,759
213,250
27,438
(177)
(287)
672
(1,173)
6,708
(133,502)
22,881
(118,033)
13,675
44,905
(41,083)
19,635
4,052
11,166
122,066
463,542
869,064
(7,973,243)
7,635,276
(7,231,376)
5,675,066
1,161,097
(3,452,097)
887,238
(833,035)
1,259
(67,263)
2,905
75,962
213,250
27,438
(27)
20,228
672
(1,173)
6,708
(115,587)
22,881
(117,113)
16,397
10,574
(61,559)
19,356
4,052
15,494
137,553
442,091
244,828
(7,973,243)
7,635,276
(7,335,423)
5,785,806
1,161,097
(2,316,388)
887,238
(833,035)
(79,472)
2,905
(2,820,411)
17,915
920
1,557
(1,444)
(1,733)
(3,332)
389,575
5,675
(531,779)
10,999
1,460,353
6,088
(300)
(248,550)
696,811
22,680
(695,358)
(3,325,109)
1,471,561
80,472
1,552,033
(377,713)
(1,142)
352,918
(799,621)
528,767
(1,765,638)
(94,032)
402,144
787,653
(2,541,970)
(13,093)
(106,384)
9,702
(487,488)
(20)
283
$263
1,147,198
2,711,539
(248,550)
(1,288,345)
248,550
6,818
5,676
18
$18
500
700,995
(36)
288
$252
78
(300)
532
2,697,989
(163,578)
822,672
$659,094
300
(7,850)
(658,761)
43,725
(97,210)
($53,485)
2,557,299
(106,384)
9,702
78
2,258,411
(119,909)
726,051
$606,142
P O P U L A R
P O P U L A R
P O P U L A R ,,,,, I N C .
I N C .
I N C .
I N C .
P O P U L A R
P O P U L A R
I N C .
Condensed Consolidating Statement of Cash Flows
(In thousands)
Popular, Inc.
Holding Co.
PIBI
Holding Co.
PNA
Holding Co.
Other
subsidiaries
Elimination
Entries
Popular, Inc.
Consolidated
Year ended December 31, 2000
$276,103
$14,047
$16,429
$284,420
($314,896)
$276,103
(267,066)
(12,900)
(20,944)
(9,271)
310,181
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries
Depreciation and amortization of
premises and equipment
Provision for loan losses
Amortization of intangibles
Net (gain) loss on sale of investment securities
Net loss on disposition of premises and equipment
Net gain on sale of loans, excluding loans held-for-sale
Amortization of premiums and accretion
of discounts on investments
Increase in loans held-for-sale
Amortization of deferred loan fees and costs
Net decrease in trading securities
Net increase in interest receivable
Net increase in other assets
Net (decrease) increase in interest payable
Net increase (decrease) in current and deferred taxes
Net increase in postretirement benefit
obligation
Net increase in other liabilities
Total adjustments
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Net decrease (increase) in money market investments
Purchases of investment securities held-to-maturity
Maturities of investment securities held-to-maturity
Purchases of investment securities available-for-sale
Maturities of investment securities available-for-sale
Proceeds from sales of investment securities available-for-sale
Net repayments (disbursements) on loans
Proceeds from sale of loans
Acquisition of loan portfolios
Capital contribution to subsidiaries
Assets acquired, net of cash
Acquisition of premises and equipment
Proceeds from sale of premises and equipment
Cash transferred due to sale of investment in subsidiary
Merger of Popular Holdings USA in PNA
Dividends received from subsidiary
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase in deposits
Net increase in federal funds purchased and
securities sold under agreements to repurchase
Net (decrease) increase in other short-term borrowings
Net (payments) proceeds from issuance of notes payable
Dividends paid to parent company
Dividends paid
Proceeds from issuance of common stock
Treasury stock acquired
Capital contribution from parent
1,365
(12,001)
(991)
(18,913)
(605)
6,826
5,451
(285,934)
(9,831)
(430)
(11,379)
(155)
(3,585)
(2,165)
435
(38,223)
(21,794)
(394)
(302)
(210)
31
(13,775)
272
14,663
2,931
21,443
(37,318)
13,503
19,950
350,310
(298)
16,392
(414,741)
(25,747)
(7,943)
(97,390)
455
88,000
423,361
(53,337)
(272,704)
(95,297)
9,823
(2,064)
Net cash (used in) provided by financing activities
(413,579)
Net (decrease) increase in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
(49)
332
$283
15,450
(11,861)
(209)
227
$18
511,949
2,745,602
(376)
664
$288
76,848
193,275
34,558
800
210
(7,935)
1,350
(204,603)
22,093
83,537
(27,779)
(9,984)
29,301
(17,268)
3,844
26,502
195,478
479,898
(254,838)
(5,517,411)
5,458,897
(4,759,954)
2,771,791
799,005
(1,899,973)
1,024,637
(589,178)
(10,174)
(8,453)
(75,147)
11,631
(46,899)
76,848
194,640
34,558
(11,201)
210
(7,935)
920
(204,603)
22,093
83,537
(32,526)
(29,116)
24,901
(11,234)
3,844
18,625
163,561
439,664
(113,403)
(5,517,411)
5,458,897
(4,797,570)
2,784,494
818,955
(1,877,934)
1,024,637
(589,178)
(8,453)
(75,147)
11,631
(46,899)
8,017
238
1,373
(13,794)
306,015
(8,881)
102,398
(800)
70,078
141,254
(455)
(88,000)
511,417
1,385,576
417,844
(88,000)
(27)
105,299
129,434
693,238
(30,482)
(528,767)
(202,719)
88,000
(120,749)
(282,039)
(66,445)
(30,765)
549,635
1,794,575
(632,744)
(95,297)
9,823
(2,091)
2,550,072
62,355
663,696
$822,672
($97,210)
$726,051
2 0 0 2 A N N U A L R E P O R T 7 9
2 0 0 2 A N N U A L R E P O R T 7 9
2 0 0 2 A N N U A L R E P O R T 7 9
2 0 0 2 A N N U A L R E P O R T 7 9
2 0 0 2 A N N U A L R E P O R T 7 9
11,380
(490,531)
(3,096,066)
224,475
(2,927,381)
413,493
512,678
926,171
(20,304)
(7,007)
68,700
1,011,407
(568,158)