1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
X THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
---
For the Fiscal Year Ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-13818
BANPONCE CORPORATION
--------------------
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0416582
Principal Executive Offices:
----------------------------
209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Telephone Number: (809) 765-9800
--------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($6.00 par value)
8.35% Non-Cumulative Monthly Income Preferred Stock,
1994 Series A (Liquidation Preference $25.00 Per Share)
Series A Participating Cumulative Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of February 28, 1995 the Corporation had 32,866,623 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates of the Corporation was $994,215,000, based upon the reported
closing price of $30.25 on the NASDAQ National Market System on that date.
1
2
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Corporation's Annual Report to Shareholders for the
fiscal year ended December 31, 1994 are incorporated herein by reference in
response to Item 1 of Part I.
(2) Portions of the Corporation's Proxy Statement relating to the 1995
Annual Meeting of Stockholders of the Corporation are incorporated herein by
reference to Items 10 through 13 of Part III.
================================================================================
2
3
TABLE OF CONTENTS
Page
----
PART I
------
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . 10
Item 4 Submission of Matters to a Vote of Security Holders . . . . 10
PART II
-------
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . 10
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . 11
Item 7 Management s Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 11
Item 8 Financial Statements and Supplementary Data . . . . . . . . 11
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 11
PART III
--------
Item 10 Directors and Executive Officers of the Registrant . . . . . 12
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . 12
Item 12 Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . 12
Item 13 Certain Relationships and Related Transactions . . . . . . 12
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 12
3
4
PART I
ITEM 1. BUSINESS
BanPonce Corporation (the "Corporation") is a diversified, publicly
owned bank holding company, incorporated under the General Corporation Law of
Puerto Rico in November 1984. It provides a wide variety of financial services
through its principal subsidiaries: Banco Popular de Puerto Rico ("Banco
Popular"), Vehicle Equipment Leasing Company, Inc. ("VELCO") and Popular
International Bank, Inc. ("PIB"). The Corporation is subject to the provisions
of the U.S. Bank Holding Company Act of 1956 (the "BHC Act") and, accordingly,
subject to the supervision and regulation of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Banco Popular, the
Corporation's principal bank subsidiary, is a member of the Federal Reserve
System and is also subject to the supervision of the Office of the Commissioner
of Financial Institutions of the Commonwealth of Puerto Rico and the
Superintendent of Banks of the State of New York. Banco Popular's deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC"). Banco
Popular is a full-service commercial bank and Puerto Rico's largest banking
institution, with $11.6 billion in assets, $8.7 billion in deposits, and a
delivery system of 166 branches throughout Puerto Rico, 30 branches in New York
City, 1 in Los Angeles, California, 7 branches in the U.S. Virgin Islands and 1
branch in the British Virgin Islands. In addition,Banco Popular has two
subsidiaries, Popular Leasing & Rental, Inc., Puerto Rico's second largest
vehicle leasing and daily rental company, and Popular Consumer Services, Inc.,
a small-loan company with 27 offices in Puerto Rico operating under the name of
Best Finance. VELCO is a wholly owned subsidiary of the Corporation engaged in
finance leasing and daily rental of motor vehicles to corporations and
professionals. It is the leading leasing operation in Puerto Rico.
PIB, incorporated under the Puerto Rico International Banking Center
Act ("IBC Act"), owns all issued and outstanding stock of BanPonce Financial
Corp. ("Financial"), a Delaware Corporation. PIB does not engage directly in
any activities other than providing managerial services to its subsidiaries.
On March 31, 1994 Financial became the direct owner of all issued and
outstanding shares of Pioneer Bancorp, Inc., a corporation organized under the
laws of Delaware and headquartered in Chicago, Illinois, and a registered bank
holding company under the BHC Act, which through its wholly-owned subsidiary
River Associates Bancorp, Inc., a Delaware corporation, owns and operates
Pioneer Bank & Trust Company ("Pioneer"), a bank organized under the laws of
the State of Illinois with two branches in that state. The deposits of Pioneer
are insured by the FDIC. On August 31, 1994, Pioneer acquired most of the
assets and assumed all of the liabilities of a branch of Banco Popular
operating in Chicago. As of December 31, 1994 the assets of Pioneer were
$385.4 million and its deposits were $325.8 million. Effective January 16,
1995 Banco Popular converted its branch in Chicago into an agency.
On January 20, 1995 Financial became the direct owner of all issued
and outstanding shares of Banco Popular, FSB, a new federal savings bank which
acquired from the Resolution Trust Corporation certain assets and all of the
deposits of four New Jersey branches of the former Carteret Federal Savings
Bank, a federal savings bank under the Resolution Trust Corporation
conservatorship. The deposits of Banco Popular, FSB are insured by the FDIC.
As a result of the acquisition of Pioneer and of becoming the owner of all
shares of Banco Popular, FSB, Financial has become a registered bank holding
company under the BHC Act and a registered savings and loan holding company
under the Home Owners' Loan Act. On January 20, 1995, simultaneously with the
organization of Banco Popular, FSB, Financial transferred the control of all the
issued and outstanding shares of its wholly-owned subsidiary Equity One, Inc.
(formerly Spring Financial Services, Inc.) to Banco Popular, FSB. Equity One,
Inc. became an operating subsidiary of Banco Popular, FSB. Equity One, Inc., a
Delaware corporation, is a diversified consumer finance company engaged in the
business of granting personal and mortgage loans and providing dealer financing
through 73 offices located in 20 states with total assets of $620.5 million as
of December 31, 1994.
The Corporation is a legal entity separate and distinct from its
subsidiaries. There are various legal limitations governing the extent to
which the Corporation's banking subsidiaries may extend credit, pay dividends
or otherwise supply funds to, or engage in transactions with, the Corporation
or certain of its other subsidiaries. The rights of the Corporation to
participate in any distribution of assets of any subsidiary upon its
liquidation or reorganization or otherwise, are subject to the prior claims of
creditors of that subsidiary, except to the extent that the Corporation may
itself be a creditor of that subsidiary and its claims are recognized. Claims
on the Corporation's subsidiaries by creditors other than the Corporation may
include long-term debt and substantial obligations with respect to deposit
liabilities, federal funds purchased, securities sold under agreements to
repurchase and commercial paper, as well as various other liabilities.
The Corporation's business is described on pages 9 through 27 of the
Business Review Section of the Annual Report to Shareholders for the year ended
December 31, 1994, information which is incorporated herein by reference.
4
5
REGULATION AND SUPERVISION
GENERAL
The Corporation is a bank holding company subject to the supervision
and regulation by the Federal Reserve Board under the BHC Act. As a bank
holding company, the Corporation's activities and those of its banking and
non-banking subsidiaries are limited to the business of banking and activities
closely related to banking, and the Corporation may not directly or indirectly
acquire the ownership or control of more than 5% of any class of voting shares
or substantially all of the assets of any company, including a bank, without
the prior approval of the Federal Reserve Board. In addition, bank holding
companies are generally prohibited under the BHC Act from engaging in
non-banking activities, subject to certain exceptions.
Banco Popular is considered a foreign bank for purposes of the
International Banking Act of 1978 (the "IBA"). Under the IBA and the BHC Act,
neither the Corporation nor Banco Popular are permitted to operate a branch or
conduct certain activities, or acquire more than 5% of any class of the voting
shares of, or substantially all the assets of, or control of an additional bank
or bank holding company that is located outside of their "home state", except
that (i) the Corporation may acquire control of a bank in a state if the laws
of that state explicitly authorize a bank holding company from such bank
holding company s home state to do so and (ii) Banco Popular may continue to
operate a "grandfathered" branch or agency. Puerto Rico is not considered a
state for purposes of these geographic limitations. Banco Popular has designated
the state of New York as its home state. In addition, some states have laws
prohibiting or restricting foreign banks from acquiring banks located in such
states and treat Puerto Rico's banks and bank holding companies as foreign banks
for such purposes.
Banco Popular operates a branch in Los Angeles that is not
grandfathered for purposes of the IBA. The Federal Reserve Board has required
that Banco Popular conform said branch's existence to the legal requirements
set forth above. Banco Popular has petitioned the Federal Reserve Board to
permit it to continue to maintain this facility. There can be no assurance
that the Federal Reserve Board will grant Banco Popular's request .
Banco Popular, Pioneer and Banco Popular, FSB are subject to
supervision and examination by applicable federal and state banking agencies
including, in the case of Banco Popular, the Federal Reserve Board and the
Office of the Commissioner of Financial Institutions of Puerto Rico, in the
case of Pioneer, the FDIC and the Illinois Commissioner of Banks and Trust
Companies and in the case of Banco Popular, FSB, the Office of Thrift
Supervision. Banco Popular, Pioneer and Banco Popular, FSB are subject to
requirements and restrictions under federal and state law, including
requirements to maintain reserves for deposits, restrictions on the types and
amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of other investments that may be made and
the types of services that may be offered. Various consumer laws and
regulations also affect the operations of Banco Popular, Pioneer and Banco
Popular, FSB. In addition to the impact of regulations, commercial banks are
affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
influence the economy.
F D I C I A
Under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") the federal banking regulators must take prompt corrective
action in respect of depository institutions that do not meet minimum capital
requirements. FDICIA and regulations thereunder established five capital
tiers: "well capitalized", "adequately capitalized," "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized". At
December 31, 1994, Banco Popular was well capitalized.
A depository institution is deemed well capitalized if it maintains a
leverage ratio of at least 5% a risk-based tier 1 capital ratio of at least 6%
and a risk-based total capital ratio of at least 10% and is not subject to any
written agreement or directive to meet a specific capital level. A depository
institution is deemed adequately capitalized if it is not well capitalized but
maintains a leverage ratio of at least 4% (or at least 3% if given the highest
regulatory rating and not experiencing or anticipating significant growth), a
risk-based tier 1 capital ratio of at least 4% and a risk-based total capital
ratio of at least 8%. A depository institution is deemed undercapitalized if
it fails to meet the standards for adequately capitalized institutions (unless
it is deemed significantly or critically undercapitalized). An institution is
deemed significantly undercapitalized if it has a leverage ratio of less than
3%, a risk-based tier 1 of less than 3% or a risk-based total capital ratio of
less than 6%. An institution is deemed critically undercapitalized if it has
tangible equity equal to 2% or less of total assets. A depository institution
may be deemed to be in a capitalization category that is lower than the
indicated by its actual capital position if it receives a less than
satisfactory examination rating in any one of four categories.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
5
6
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of five percent of the depository institution's assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may
not accept a capital plan without determining, among other things, that the
plan is based on realistic assumptions and is likely to succeed in restoring
the depository institution's capital. If a depository institution fails to
submit an acceptable plan, it is treated as if it is significantly
undercapitalized. Significantly undercapitalized depository institutions may
be subject to a number of requirements and restrictions, including orders to
sell sufficient stock to become adequately capitalized, requirements to reduce
total assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator.
HOLDING COMPANY STRUCTURE
Banco Popular, Pioneer and Banco Popular, FSB are subject to
restrictions under federal law that limit the transfer of funds between them
and the Corporation, Financial, PIB and the Corporation's other non-banking
subsidiaries, whether in the form of loans, other extensions of credit,
investments or asset purchases. Such transfers by Banco Popular, Pioneer or
Banco Popular, FSB, respectively, to the Corporation or any one non-banking
subsidiary are limited in amount to 10% of the transferring institution's
capital stock and surplus and, with respect to the Corporation and all
non-banking subsidiaries, to an aggregate of 20% of the transferring
institution's capital stock and surplus. Furthermore, such loans and extensions
of credit are required to be secured in specified amounts.
Under the Federal Reserve Board policy, a bank holding company such as
the Corporation, is expected to act as a source of financial strength to each
of its subsidiary banks and to commit resources to support each such subsidiary
bank. This support may be required at times when, absent such policy, the bank
holding company might not otherwise provide such support. In addition, any
capital loans by a bank holding company to any of its subsidiary banks must be
subordinated in right of payment to deposits and to certain other indebtedness
of such subsidiary bank. In the event of a bank holding company's bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. Banco Popular, Pioneer and
Banco Popular, FSB are currently the only subsidiary depository institutions of
the Corporation.
Because the Corporation, PIB and Financial are holding companies,
their right to participate in the assets of any subsidiary upon the latter's
liquidation or reorganization will be subject to the prior claims of the
subsidiary's creditors (including depositors in the case of depository
institution subsidiaries) except to the extent that the Corporation, PIB or
Financial, as the case may be, may itself be a creditor with recognized claims
against the subsidiary.
Under the Federal Deposit Insurance Act (FDIA), a depository
institution (which definition includes both banks and savings associations),
the deposits of which are insured by the FDIC, can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default".
"Default" is defined generally as the appointment of a conservator or a
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance. Banco Popular, Pioneer and Banco Popular, FSB are
all currently FDIC-insured depository institutions. In some circumstances
(depending upon the amount of the loss or anticipated loss suffered by the
FDIC), cross-guarantee liability may result in the ultimate failure or
insolvency of one or more insured depository institutions in a holding company
structure. Any obligation or liability owned by a subsidiary bank to its
parent company is subordinated to the subsidiary bank's cross-guarantee
liability with respect to commonly controlled insured depository institutions.
DIVIDEND RESTRICTIONS
The principal regular source of cash flow for the Corporation is
dividends from Banco Popular. Various statutory provisions limit the amount of
dividends Banco Popular can pay to the Corporation without regulatory approval.
As a member bank subject to the regulations of the Federal Reserve
Board, Banco Popular must obtain the approval of the Federal Reserve Board for
any dividend if the total of all dividends declared by the member bank in any
calendar year would exceed the total of its net profits, as defined by the
Federal Reserve Board, for that year, combined with its retained net profits
for the preceding two years. In addition, a member bank may not pay a dividend
in an amount greater than its undivided profits then on hand after deducting
its losses and bad debts. For this purpose, bad debts are generally defined to
include the principal amount of loans that are in arrears with respect to
interest by six months or more unless such loans are fully secured and in the
process of collection. Moreover, for purposes of this limitation, a member
bank is not permitted to add the balance in its allowance for loan
6
7
losses account to its undivided profits then on hand. However, it may net the
sum of its bad debts as so defined against the balance in its allowance for
loan losses account and deduct from undivided profits only bad debts as so
defined in excess of that account. At December 31, 1994, Banco Popular could
have declared a dividend of approximately $170,117,000 without the approval of
the Federal Reserve Board.
The payment of dividends by Banco Popular may also be affected by
other regulatory requirements and policies, such as the maintenance of adequate
capital. If, in the opinion of the applicable regulatory authority, a
depository institution under its jurisdiction is engaged in, or is about to
engage in, an unsafe or unsound practice (that, depending on the financial
condition of the bank, could include the paymen of dividends), such authority
may require, after notice and hearing, that such bank cease and desist from
such practice. The Federal Reserve Board has issued a policy statement that
provides that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings. In addition, all insured
depository institutions are subject to the capital-based limitations described
under FDICIA.
FDIC INSURANCE ASSESSMENTS
Banco Popular, Pioneer and Banco Popular, FSB are subject to FDIC
deposit insurance assessments. Pursuant to FDICIA, the FDIC has adopted a
risk-based assessment system, under which the assessment rate for an insured
depository institution, varies according to the level of risk incurred in its
activities. An institution's risk category is based partly upon whether the
institution is well capitalized, adequately capitalized or less than adequately
capitalized. Each insured depository institution is also assigned to one of
the following "supervisory subgroups": "A", "B" or "C". Group "A" institutions
are financially sound institutions with only a few minor weaknesses; Group "B"
institutions are institutions that demonstrate weaknesses which, if not
corrected, would result in significant deterioration; and Group "C"
institutions are institutions for which there is a substantial probability that
the FDIC will suffer a loss in connection with the institution unless effective
action is taken to correct the areas of weakness. Based on its capital and
supervisory subgroups, each FDIC member institution is assigned an annual
assessment rate varying between 0.23% and 0.31%. On January 31, 1995 the FDIC
issued a proposal to reduce deposit insurance rate assessments for bank and
thrift members of the Bank Insurance Fund which if adopted, could be effective
for the second half of 1995.
CAPITAL ADEQUACY
Information about the capital composition of the Corporation as of
December 31, 1994 and for the four previous years is presented in Table N
"Capital Adequacy Data", on page F-22 in the "Management Discussion and
Analysis of Financial Condition and Results of Operations" (MD&A) and is
incorporated herein by reference.
The Federal Reserve Board has adopted risk-based capital guidelines
for bank holding companies. Under the guidelines the minimum ratio of
qualifying total capital to risk-weighted assets (including certain off-balance
sheet items, such as standby letters of credit) is 8%. At least half of the
total capital is to be comprised of stockholders' common equity, retained
earnings, non-cumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock less goodwill and other disallowed
intangibles ("Tier 1 Capital"). The remainder ("Tier 2 Capital") may consist
of a limited amount of subordinated debt, other preferred stock, certain other
instruments and a limited amount of loan and lease loss reserves.
In addition, the Federal Reserve Board has established minimum
leverage ratio (Tier 1 Capital to quarterly average assets) guidelines for bank
holding companies. These guidelines provide for a minimum leverage ratio of 3%
for bank holding companies that meet certain specified criteria, including that
they have the highest regulatory rating. All other bank holding companies are
required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions are expected
to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals
for expansion or new activities. The tangible Tier 1 leverage ratio is the
ratio of a banking organization's Tier 1 Capital, less all intangibles, to
total assets, less all intangibles. The Federal Reserve Board has not advised
the Corporation of any specific minimum leverage ratio applicable to it.
The Federal Reserve Boar has adopted regulations with respect to
risk-based and leverage capital ratios that require most intangibles, including
core deposit intangibles, to be deducted from Tier 1 Capital. The regulations,
however, permit the inclusion of a limited amount of intangibles related to
purchased mortgage servicing rights and purchased credit card relationships and
include a "grandfather" provision permitting the continued inclusion of certain
existing intangibles.
7
8
Banco Popular is subject to similar risk-based and leverage capital
requirements adopted by the Federal Reserve Board. As of December 31, 1994,
Banco Popular had a tier 1 capital ratio of 11.87%, a total capital ratio of
13.29% and a leverage ratio of 6.99%.
Failure to meet capital guidelines could subject a bank to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business.
The federal banking agencies have issued a notice of proposed
rulemaking to solicit public comment on a proposal for incorporating an
interest rate risk component into the existing risk-based capital standards.
Under the proposal, banks and bank holding companies with greater than "normal"
levels of interest rate risk would be required to have additional capital. The
Corporation cannot determine whether, or in what form, such proposal may be
enacted and, if enacted, what effect such regulations would have upon its
capital ratios. The Federal Reserve Board revised its capital adequacy
guidelines for state member banks and bank holding companies to establish a
limitation on the amount of certain deferred tax assets that may be included in
Tier 1 capital for risk-based and leverage capital purposes. Under the final
rule deferred tax assets that can only be realized if an institution earns
taxable income in the future are limited for regulatory capital purposes to the
amount that the institution expects to realize within one year of the
quarter-end report date based on its projection of taxable income or 10 percent
of Tier 1 capital, whichever is less. This final rule is effective on April 1,
1995. In addition, the Federal Reserve Board has recently decided to exclude
from regulatory capital the amount of net unrealized gains and losses on
securities available-for-sale, except the net unrealized losses of equity
securities available-for-sale with readily determinable fair values.
Bank regulators have, from time to time, indicated their desire to
raise capital requirements applicable to banking organizations. However,
management is unable to predict whether and when higher capital requirements
would be imposed and, if so, at what levels and on what schedule.
Puerto Rico Regulation
As a commercial bank organized under the laws of the Commonwealth of
Puerto Rico (the "Commonwealth"), Banco Popular is subject to supervision,
examination and regulation by the Office of the Commissioner of Financial
Institutions of the Commonwealth (the "Office of the Commissioner"), pursuant
to the Puerto Rico Banking Act of 1933, as amended (the "Banking Law").
Section 27 of the Banking Law requires that at least ten percent (10%)
of the yearly net income of Banco Popular be credited annually to a reserve
fund. This apportionment shall be done every year until the reserve fund shall
be equal to ten percent (10%) of the total deposits or the total paid-in
capital, whichever is greater. At the end of its most recent fiscal year,
Banco Popular had a fund established in compliance with these requirements.
Section 27 of the Banking Law also provides that when the expenditures
of a bank are greater than the receipts, the excess of the former over the
lattershall be charged against the undistributed profits of the bank, and the
balance, if any, shall be charged against the reserve fund, as a reduction
thereof. If there is no reserve fund sufficient to cover such balance in whole
or in part, the outstanding amount shall be charged against the capital account
and no dividend shall be declared until said capital has been restored to its
original amount and the reserve fund to 20% of the original capital.
Section 16 of the Banking Law requires every bank to maintain a legal
reserve which shall not be less than 20% of its demand liabilities, except
government deposits (federal, state and municipal) which are secured by actual
collateral. However, if a bank becomes a member of the Federal Reserve System,
the 20% legal reserve shall not be effective and the reserve requirements
demanded by the Federal Reserve System shall be applicable. Pursuant to an
order of the Board of Governors dated November 24, 1982, Banco Popular has been
exempted from such reserve requirements with respect to deposits payable in
Puerto Rico but is subject to Puerto Rico regulatory reserve requirements.
Section 17 of the Banking Law permits Banco Popular to make loans to
any one person, firm, partnership or corporation, up to an aggregate amount of
fifteen percent (15%) of the paid-in capital and reserve fund of the Bank. As
of December 31, 1994, the legal lending limit for the Bank under this provision
was approximately $85 million. If such loans are secured by collateral worth
at least twenty-five percent (25%) more than the amount of the loan, the
aggregate maximum amount may reach one third of the paid-in capital of the
Bank, plus its reserve fund. There are no restrictions under Section 17 on the
amount of loans which are wholly secured by bonds, securities and other
evidence of indebtedness of the Government of the United States or the
Commonwealth, or by current debt bonds, not in default, of municipalities or
instrumentalities of the Commonwealth.
8
9
Section 14 of the Banking Law authorizes Banco Popular to conduct
certain financial and related activities directly or through subsidiaries,
including finance leasing of personal property and operating a small loans
company. Banco Popular engages in these activities through its wholly-owned
subsidiaries, Popular Leasing & Rental, Inc. and Popular Consumer Services,
Inc., respectively, both of which are organized and operate solely in Puerto
Rico.
IBC Act
Under the IBC Act, without the prior approval of the Office of the
Commissioner, PIB may not amend its articles of incorporation or issue
additional shares of capital stock or other securities convertible into
additional shares of capital stock unless such shares are issued directly to
the shareholders of PIB previously identified in the application to organize
the international banking entity, in which case notification to the Office of
the Commissioner must be given within ten business days following the date of
the issue. Pursuant to the IBC Act, without the prior approval of the Office
of the Commissioner, PIB may not initiate the sale, encumbrance, assignment,
merger or other transfer of shares if by such transaction a person or persons
acting in concert could acquire direct or indirect control of 10% or more of
any class of the PIB's stock. Such authorization must be requested at least 30
days prior the transaction.
PIB must submit to the Office of the Commissioner a report of its
condition and results of operation on a monthly basis and its annual audited
financial statement as of the end of its fiscal year. Under the IBC Act, PIB
may not deal with "domestic persons" as such term is defined in the IBC Act.
Also, it may only engage in those activities authorized in the IBC Act, the
regulations adopted thereunder and its license.
The IBC Act empowers the Office of the Commissioner to revoke or
suspend, after a hearing, the license of an international banking entity if,
among other things, it fails to comply with the IBC Act, regulations issued by
the Office of the Commissioner or the terms of its license or if the Office of
the Commissioner finds that the business of the international banking entity is
conducted in a manner not consistet with the public interest.
Employees
At December 31, 1994, the Corporation employed 7,549 persons. None of
its employees are represented by a collective bargaining group.
ITEM 2. PROPERTIES
As of December 31, 1994, Banco Popular owned (and wholly or partially
occupied) approximately 68 branches and other facilities throughout the
Commonwealth, 15 branches in New York, and a branch in Los Angeles. In
addition, as of such date, Banco Popular leased properties for branch
operations in approximately 103 locations in Puerto Rico, 15 locations in New
York, 7 locations in the U.S Virgin Islands and one location in the British
Virgin Islands. The Corporation's management believes that each of its
facilities is well-maintained and suitable for its purpose. The principal
properties owned by Banco Popular for banking operations and other services are
described below:
Popular Center, the metropolitan area headquarters building, located
at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story office building.
Approximately 60% of the office space is leased to outside tenants.
Hato Rey Center, a 23 story office structure located at 268 Munoz
Rivera Avenue, Hato Rey, Puerto Rico. The office space is mostly rented to
outside tenants.
Cupey Center Complex, two buildings of three and two stories,
respectively, located at Cupey, Rio Piedras, Puerto Rico. The computer center,
operational and support services, and a recreational center for employees are
some of the main activities conducted at these facilities. The facilities are
fully occupied by Banco Popular's personnel.
Stop 22 - Santurce building, a twelve story structure located in
Santurce, Puerto Rico. A branch, the accounting department, the human
resources division, the auditing department and the international division are
the main activities conducted at this facility.
San Juan building, a twelve story structure located at Old San Juan,
Puerto Rico. The Bank occupies 50% of the basement, the entire ground floor,
the mezzanine and the 10th floor. The rest of the building is rented to outside
tenants.
9
10
Mortgage Loan Center, a seven story building located at 153 Ponce de
Leon Avenue, Hato Rey, Puerto Rico, is fully occupied by the mortgage loans and
mortgage servicing departments. During 1994, a four story building, located at
167 Ponce de Leon Avenue, Hato Rey, Puerto Rico was acquired for expansion of
mortgage loans and mortgage servicing activities.
Los Angeles building, a nine story structure located at 354 South
Spring Street, Los Angeles, California in which office space is mostly rented
to outside tenants.
New York building, a nine story structure with two underground levels
located at 7 West 51st. Street, New York City, where approximately 54% of the
office space is used for banking operations. The remaining space is rented or
available for rent to outside tenants.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various
lawsuits arising in the ordinary course of business. Management is of the
opinion that the aggregate liabilities, if any, arising from such actions would
not have a material adverse effect on the financial position of the
Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Corporation common stock is traded on the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market System under
the symbol BPOP. Information concerning the range of high and low sales prices
for the Corporation's common shares for each quarterly period during 1994 and
the previous four years, as well as cash dividends declared is contained under
Table O, "Common Stock Performance", and under the captions "Common Stock" and
"Dividends" on page F-23 in the MD&A, and is incorporated herein by reference.
Information concerning legal or regulatory restrictions on the payment
of dividends by the Corporation and Banco Popular is contained under the
caption "Regulation and Supervision" in Item 1 herein.
The Corporation currently has outstanding Senior Notes due January 14,
1997 in the aggregate principal amount of $30,000,000 (the "1997 Senior
Notes"). The 1997 Senior Notes contain various covenants, which, among other
things, restrict the payment of dividends. The 1997 Senior Notes prohibit the
Corporation from paying dividends or making any other distributions with
respect to the Corporation's Common Stock if such aggregate distribution
exceeds $50,000,000 plus 50% of consolidated net income (or minus 100% of
consolidated net loss), computed on a cumulative basis from January 1, 1992 to
the date of payment of any such dividends or other distributions or if an event
of default has occurred and is continuing.
As of February 28, 1995, the Corporation had 5,239 record holders, not
including beneficial owners whose shares are held in record names of brokers or
other nominees. The last sales price for the Corporation's Common Stock on
such date, as quoted on the NASDAQ was $30.25 per share.
The Puerto Rico Income Tax Act of 1954, as amended, generally imposes
a withholding tax on the amount of any dividends paid by corporations to
individuals, whether residents of Puerto Rico or not, trusts, estates and
special partnerships at a special 20% withholding tax rate (10% beginning on
July 1, 1995, due to the Tax Reform Act enacted in Puerto Rico in October
1994). If the recipient is a foreign corporation or partnership not engaged in
trade or business within Puerto Rico the rate of withholding is 25% (also 10%
beginning on July 1, 1995).
Prior to the first dividend distribution for the taxable year,
individuals who are residents of Puerto Rico may elect to be taxed on the
dividends at the regular rates, in which case the special 20% tax (10%
beginning on July 1, 1995), will not be withheld from such year s
distributions.
United States citizens who are non-residents of Puerto Rico will not
be subject to Puerto Rico tax on dividends, if said individual's gross income
from sources within Puerto Rico during the taxable year does not exceed $1,300
if single, or $3,000 if
10
11
married, and Form AS2732 of the Puerto Rico Treasury Department "Withholding
Tax Exemption Certificate for the Purpose of Section 143", is filed with the
withholding agent.
U.S. income tax law permits a credit against U.S. income tax
liability, subject to certain limitations, for certain foreign income taxes
paid or deemed paid with respect to such dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears in Table B, "Selected
Financial Data" on pages F-4 and F-5 and the text under the caption "Earnings
Analysis", on pages F-6 and F-7 in the MD&A, and is incorporated herein by
reference.
The Corporation's ratio of earnings to fixed charges on a consolidated
basis for each of the last five years is as follows:
Year ended December 31,
-----------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Excluding Interest on Deposits 2.6 3.0 2.9 2.1 3.6
Including Interest on Deposits 1.5 1.5 1.3 1.2 1.3
For purposes of computing these consolidated ratios, earnings represent
income before income taxes, plus fixed charges excluding capitalized interest.
Fixed charges represent all interest expense (ratios are presented both
excluding and including interest on deposits), the portion of net rental
expense which is deemed representative of the interest factor, the amortization
of debt issuance expense and capitalized interest.
The Corporation's long-term senior debt and preferred stock on a
consolidated basis for each of the last five years ended December 31, is as
follows:
Year ended December 31,
-----------------------
(In thousands) 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Long-term obligations $489,524 $283,855 $120,062 $103,752 $38,018
Non-cumulative preferred
stock of the corporation $100,000 $ -0- $ -0- $ -0- $ -0-
Cumulative perpetual
preferred stock of
Banco Popular $ -0- $ 11,000 $ 11,000 $ 11,000 $11,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item appears on pages F-2 through F-29
under the caption MD&A, and is incorporated herein by reference.
Table K, "Maturity Distribution of Earning Assets", on page F-19 in the
MD&A, has been prepared on the basis of contractual maturities. The
Corporation does not have a policy with respect to rolling over maturing loans
but rolls over loans only on a case-by-case basis after review of such loans in
accordance with the Corporation's lending criteria.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages F-32 through
F-62, and on page F-27 under the caption "Statistical Summary - Quarterly
Financial Data", in the MD&A and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
11
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Shares Beneficially Owned
by Directors, Nominees and Executive Officers of the Corporation", and "Board
of Directors and Committees" on pages 3 through 8 and "Nominees for Election as
Directors" on page 9 of the Corporation's definitive proxy statement filed with
the Securities and Exchange Commission on March 13, 1995 (the "Proxy
Statement"), and under the caption "Executive Officers", on pages 9 and 10 of
the Proxy Statement, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation Program", on
pages 11 through 16 and under the caption "BanPonce Corporation Performance
Graph" on page 17 of the Proxy Statement, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information under the captions "Principal Stockholders", on page 2
and under "Shares Beneficially Owned by Directors, Nominees and Officers of the
Corporation", on pages 3 and 4 of the Proxy Statement, is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Family Relationships" and "Other
relationships and transactions", on page 11 of the Proxy Statement, is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are part of this report and appear on the pages
indicated.
(1) Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
Consolidated Statements of Condition as of December 31, 1994 and 1993 . . . . . . . . . . . . F-33
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-34
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-35
Consolidated Statements of Changes in Stockholder's Equity for each of the years in the three-year
period ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . F-37
(2) Financial Statement Schedules: No schedules are presented because
the information is not applicable or is included in the Consolidated
Financial Statements described in A.1 above or in the notes thereto.
(3) Exhibits
The exhibits listed on the Exhibits Index on page 14 of this report
are filed herewith or are incorporated herein by reference.
B. The Corporation filed one report on Form 8-K for the quarter ended
December 31, 1994.
Dated: December 22, 1994
Item reported: Item 5 - Other Event
Item 7 - Financial Statements , Pro Forma Financial
Information and Exhibits
12
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BANPONCE CORPORATION
(Registrant)
By: S\RICHARD L. CARRION
----------------------
Richard L. Carrion
Chairman of the Board, President
and Chief Executive Officer
Dated: 02-16-95 (Principal Executive Officer)
-----------
By: S\DAVID H. CHAFEY, JR.
------------------------
David H. Chafey, Jr.
Executive Vice President
Dated: 02-16-95 (Principal Financial Officer)
-----------
By: S\AMILCAR L. JORDAN
----------------------
Amilcar L. Jordan
Treasurer
Dated: 02-16-95 (Principal Accounting Officer)
-----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
S\RICHARD L. CARRION Chairman of the Board,
-------------------- President and Chief
Richard L. Carrion Executive Officer 02-16-95
----------------------
S\ALFONSO F. BALLESTER Vice Chairman of
---------------------- the Board 02-16-95
Alfonso F. Ballester ----------------------
S\MANUEL L. DEL VALLE Vice Chairman of
--------------------- the Board 02-16-95
Manuel L. Del Valle ----------------------
S\ANTONIO LUIS FERRE Vice Chairman of
-------------------- the Board 02-16-95
Antonio Luis Ferre ----------------------
S\JUAN J. BERMUDEZ
------------------
Juan J. Bermcdez Director 02-16-95
----------------------
S\FRANCISCO J. CARRERAS
-----------------------
Francisco J. Carreras Director 02-16-95
----------------------
-----------------------
Waldemar Del Valle Director
----------------------
S\LUIS E. DUBON, JR.
--------------------
Luis E. Dubon, Jr. Director 02-16-95
----------------------
13
14
S\HECTOR R. GONZALEZ
--------------------
Hector R. Gonzalez Director 02-16-95
----------------------
S\JORGE A. JUNQUERA
-------------------
Jorge A. Junquera Director 02-16-95
----------------------
S\FRANKLIN A. MATHIAS
---------------------
Franklin A. Mathias Director 02-16-95
----------------------
S\MANUEL MORALES, JR.
---------------------
Manuel Morales, Jr. Director 02-16-95
----------------------
S\ALBERTO M. PARACCHINI
-----------------------
Alberto M. Paracchini Director 02-16-95
----------------------
S\FRANCISCO PEREZ, JR.
----------------------
Francisco Perez, Jr. Director 02-16-95
----------------------
-----------------------------
Francisco M. Rexach, Jr. Director
----------------------
-----------------------------
Felix J. Serralles, Jr. Director
----------------------
S\EMILIO JOSE VENEGAS
---------------------
Emilio Jose Venegas Director 02-16-95
----------------------
S\JULIO E. VIZCARRONDO, JR.
---------------------------
Julio E. Vizcarrondo, Jr. Director 02-16-95
----------------------
EXHIBITS INDEX
--------------
EXHIBIT NO. DESCRIPTION FOOTNOTE
-------------------------------------------------------------------------------------------------------------------------
3.1 Restated certificate of Incorporation and By-Laws of BanPonce Corporation. (1)
4.1 Form of certificate for common stock. (1a)
4.2 Certificates of Resolution of the Board of Directors of BanPonce Corporation dated Au-
gust 11, 1988 creating a series of Preferred Stock of the Corporation designated as Series
A Participating Cumulative Preferred Stock Purchase rights and the designation and amount
of such series, the voting power preferences, and relative, participating, optional, or other
special rights of the shares of such series, and the qualifications, limitations or restrictions
thereof. Rights Agreement dated as of August 11, 1988 by and between BanPonce Corpo-
ration and Manufacturers Hanover Trust Company regarding the issuance of certain Rights
to the Corporation's shareholders. (2)
4.3 Amendment to Rights Agreement dated as of December 11, 1990. (3)
4.4 Indenture, dated as of October 1, 1991, among BanPonce Financial Corp., BanPonce Cor-
poration and Citibank, N.A. relating to the debt securities of BanPonce Financial Corp.
guaranteed by BanPonce Corporation. (2a)
4.5 Form of medium-term fixed note of BanPonce Financial Corp. guaranteed by BanPonce
Corporation. (2b)
4.6 Form of medium-term floating rate note of BanPonce Financial Corp. guaranteed by
BanPonce Corporation. (2c)
4.7 Form of Certificate of 8.35% non-cumulative monthly Income Preferred Stock, 1994 Se-
ries A (Liquidation Preference $25.00 per share).
10.2 Form of 8-A Filing filed in connection with the Series A Participating Cumulative Pre-
ferred Stock Purchase Rights. (4)
14
15
10.3 Senior Note Agreement dated as of January 15, 1992, between BanPonce Corporation
and New York Life Insurance Company regarding the issuance by BanPonce Corporation of
$30,000,000 Senior Notes due January 15, 1997. (10)
10.3.1 Amended and Restated Senior Notes Agreement dated June 11, 1993 by and among
BanPonce Corporation, New York Life Insurance Company and New York Life Insurance
Company and Annuity Company. (15)
10.3.2 Waiver of Section 5.4 (a)(3) of the Senior Notes Agreement.
10.6 Amended and Restated Agreement and Plan of Merger dated as of January 10, 1990 by and
among BanPonce Corporation, Banco de Ponce, Banco Popular de Puerto Rico and the
Interim Corporation. (5)
10.7 Note Purchase Agreement dated March 15, 1989 for $50,000,000 of senior subordinated
Capital Notes, maturing on June 15, 1996 by and between Banco Popular de Puerto Rico
and Chase Manhattan Capital Market Corporation of Puerto Rico. (6)
10.8 Management Incentive Plan for certain Division Supervisors approved in January, 1987. (7)
10.8.1 BanPonce Corporation Senior Executive Long-Term Incentive Plan dated October 6, 1994.
10.9 Letter of Credit and Reimbursement Agreement dated November 22, 1991 between
BanPonce Corporation and Barclays Bank PLC relating to Velco 1991-A Grantor Trust,
Asset Backed Certificates; Underwriting Agreement dated November 21, 1991 by and be-
tween Vehicle Equipment Leasing Company, Inc., BanPonce Corporation and the First
Boston Corporation. (8)
10.10 Revolving loan agreement executed by and between Vehicle Equipment Leasing and
BanPonce Corporation as of January 15, 1992 in the aggregate principal amount of
$30,000,000. (9)
10.11 $85,785,000 Banco Popular de Puerto Rico 1992 Grantor Trust 1 Mortgage Pass - Through
Certificates, Class, A, offering memorandum dated June 25, 1992. Underwriting Agree-
ment by and between Merrill Lynch, Pierce, Fenner & Smith, Incorporated acting through
its Puerto Rico branch office and Lehman Brothers Puerto Rico, Inc. and Banco Popular de
Puerto Rico dated June 25, 1992; Insurance Agreement by and between Municipal Bond
Investors Assurance Corporation as Insurer, Banco Popular de Puerto Rico as Settlor, Banco
Popular de Puerto Rico as Servicer, Banco Central as Collateral Agent and Banco Central
as Trustee dated June 25, 1992. (11)
10.12 Credit Agreement by and between BanPonce Corporation, BanPonce Financial Corp.,
Vehicle Equipment Leasing, Company, Inc. ("the Companies") and Citibank, N.A. for
borrowing up to the principal amount of $35,000,000 dated as of May 22, 1992; Credit
Agreement between the Companies and Barclays Bank PLC, acting through its Miami Agency
for borrowing up to the principal amount $25,000,000 dated as of May 19, 1992; Credit
Agreement by and between the Companies and The First National Bank of Chicago, acting
individually and as agent, for borrowing up to the aggregate amount of $40,000,000 dated
as of May 1, 1992. (12)
10.12.1 First, Second and Third Amendments to Credit Agreement by and between BanPonce
Corporation, BanPonce Financial Corp., Vehicle Equipment Leasing Company, Inc. ("the
Companies") and Citibank, N.A. for borrowing up to the principal amount of $50,000,000
dated as of April 8, 1993, May 21, 1993 and May 20, 1994, respectively. First, Second and
Third Amendments to Credit Agreement by and between the Companies and Barclays Bank
PLC, acting through its Miami Agency for borrowing up to the principal amount of
$45,000,000 dated as of April 2, 1993 and March 31, 1994, respectively. First, Second and
Third Amendments to Credit Agreement by and between the Companies and the First National
Bank of Chicago, acting individually and as agent, for borrowing up to $60,000,000
dated April 1, 1993, June 1, 1993 and April 1, 1994, respectively. (13)
10.12.2 Credit Agreement by and between BanPonce Corporation, BanPonce Financial Corp., Vehicle
Equipment Leasing Company, Inc. and Chemical Bank for borrowing up to the principal
amount of $25,000,000 dated as of April 1, 1994. (14)
12.0 Computation of ratio of earnings to fixed charges
13.1 Registrant's Annual Report to Shareholders for the year ended December 31, 1994.
21.1 Schedule of Subsidiaries
23.1 Consent of Independent Auditors
27.0 Financial Data Schedule
99.1 Registrant's Proxy Statement for the April 21, 1995 Annual Meeting of Stockholders
15
16
- - - - - - - - - - - - - - - - - - - - - - -
(1) Incorporated by reference to Exhibit 4.1 of Registration Statement No. 33-39028.
(1a) Incorporated by reference to exhibit 4.1 of the Corporation's Annual Report on Form
10-K for the year ended December 31, 1990 (the "1990 Form 10-K").
(2) Incorporated by reference to Exhibit 4.3 of Registration Statement No. 33-39028.
(2a) Incorporated by reference to Exhibit 4(c) to Registration Statement No. 33-41686.
(2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8, 1991.
(2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8, 1991.
(3) Incorporated by reference to Exhibit 4.4 of Registration Statement No. 33-39028.
(4) Incorporated by reference to Exhibit number 10.2 of Registration Statement
No. 33-00497.
(5) Incorporated by reference to Exhibit 10.10 of the 1991 Form 10-K.
(6) Incorporated by reference to Exhibit 10.22 of the 1990 Form 10-K.
(7) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K.
(8) Incorporated by reference to Exhibit 10.14 of the 1991 Form 10-K.
(9) Incorporated by reference to Exhibit 10.19 of the 1991 Form 10-K.
(10) Incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K.
(11) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K.
(12) Incorporated by reference to Exhibit 10.15 of the 1992 Form 10-K.
(13) Incorporated by reference to Exhibit 10.12.1 of the 1993 Form 10-K.
(14) Incorporated by reference to Exhibit 10.12.2 of the 1993 Form 10-K.
(15) Incorporated by reference to Exhibit 10.3.1 of the 1993 Form 10-K.
16
17
BANPONCE CORPORATION
INDEX TO FINANCIAL DATA
Page
----
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statistical Summaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-30
FINANCIAL STATEMENTS
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
Consolidated Statements of Condition as of December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . F-33
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-34
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-35
Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year
period ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-37
F-1
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
SUMMARY
The year 1994 was one of great challenges to the banking industry. As a
result of the strong growth in the economy and in anticipation of inflationary
pressures, the Federal Reserve Board (FED) began to raise the discount and
federal funds rates on February 4, 1994. The FED raised these short-term rates
six times throughout the year, totalling 250 basis points. In February 1995,
the FED raised another 50 basis points, completing the most significant rate
increase within a 12-month period since World War II. This volatility in the
interest rate scenario highlights the importance of performing an adequate
asset/liability management to avoid significant setbacks in the net interest
margin.
Notwithstanding this environment, BanPonce Corporation (the Corporation)
was able to improve its performance during 1994. Net earnings for the
Corporation in 1994 totaled $124.7 million, an improvement of 14% from the net
earnings of $109.4 million reported in 1993. Earnings per common share (EPS)
for 1994 were $3.67 compared with $3.35 in 1993. The results obtained in 1993
include $6.2 million in additional income resulting from the one-time
cumulative effect of the adoption of two accounting standards (SFAS 106 and
109). Excluding the effect of these adjustments, EPS for 1993 were $3.16.
Average common shares outstanding for 1994 and 1993 were 32,798,243 and
32,701,236, respectively. The results obtained in 1994 represented returns of
1.02% on assets (ROA) and 13.80% on stockholders' equity (ROE), the same as in
1993. However, ROA and ROE for 1993 adjusted to exclude the cumulative effect
mentioned above were 0.97% and 13.02%, respectively.
As presented in Table A, the Corporation was able to reduce its provision
for loan losses. In addition, as a percentage of average assets, operating
expenses and net interest income decreased, while non-interest revenues
remained stable and the income tax expense increased.
In 1994, the Corporation continued experiencing balance sheet growth with
total assets reaching $12,778 million at December 31, 1994, up 11% over the
1993 level of $11,513 million. At September 30, 1994, the Corporation was the
51st. largest bank holding company in the U.S. To attain this growth and in
order to diversify its sources of income the Corporation has expanded into new
markets and entered into new businesses. On March 31, 1994, the Corporation
acquired Pioneer Bancorp, Inc. (Pioneer), a full-service banking operation with
two branches and assets of $333.7 million in Chicago, Illinois. In addition,
Equity One, the Corporation's diversified consumer financial services
subsidiary, continued with its aggressive expansion in the mainland, operating
73 branches in 20 states with total assets of $620.5 million at the end of
1994, compared with 58 branches in 14 states and total assets of $385.1 million
a year before. The Corporation also began an investment products sales program
at selected banking locations and participated actively in the organization and
distribution of the first mutual fund registered and developed under the Puerto
Rico Investment Companies Act.
The increase in the Corporation's assets was mostly reflected in loans,
which grew $1,434 million or 22.6%. The mortgage and commercial loan portfolios
showed the major increases. At September 30, 1994, Banco Popular de Puerto Rico
(Banco Popu-
TABLE A
A Components of Net Income as a Percentage of Average Total Assets
--------------------------------------------------------------------------------
For the Year
------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-----------------------------------------------
Net interest income ............................... 4.36% 4.61% 4.62% 4.56% 4.87%
Provision for loan losses ......................... (0.44) (0.68) (1.03) (1.36) (0.91)
Other income ...................................... 1.17 1.17 1.31 1.47 1.21
-----------------------------------------------
5.09 5.10 4.90 4.67 5.17
Operating expenses ................................ (3.66) (3.86) (3.85) (3.86) (3.93)
-----------------------------------------------
Net income before tax, dividends on preferred stock
of Banco Popular and cumulative effect of
accounting changes ............................. 1.43 1.24 1.05 0.81 1.24
Provision for income tax .......................... (0.41) (0.26) (0.15) (0.08) (0.15)
-----------------------------------------------
Net income before dividends on preferred stock of
Banco Popular and cumulative effect of
accounting changes ............................. 1.02 0.98 0.90 0.73 1.09
Dividends on preferred stock of Banco Popular ..... (0.01) (0.01) (0.01)
Cumulative effect of accounting changes ........... 0.05
-----------------------------------------------
Net income ........................................ 1.02% 1.02% 0.89% 0.72% 1.09%
===============================================
F-2
19
--------------------------------------------------------------------------------
lar), the Corporation's principal subsidiary, had increased its market share on
the Island to 30.6% of total loans from 28.5% at the same date in 1993.
Despite the loan growth, the Corporation's credit quality statistics
continued improving markedly. Non-performing assets (NPA) at December 31, 1994
decreased to $107.6 million, from $111.2 million a year before. The ratio of
NPA to total assets improved further from 0.97% at the end of 1993 to 0.84% in
1994. Assuming the standard industry practice, NPA represented 0.61% of total
assets at the end of 1994, compared with 0.70% in 1993.
Also, net loan charge-offs during 1994 were $36.9 million, or 0.52% of
average loans, compared with $51.7 million or 0.91% of average loans in 1993.
These improvements allowed the Corporation to reduce its provision for loan
losses by $19.1 million or 26.2%, from $72.9 million in 1993 to $53.8 million
in 1994. Notwithstanding the lower provision, the allowance for loan losses
rose from $133.4 million in 1993 to $153.8 million in 1994. The allowance for
loan losses was 142.89% of non-performing assets at December 31, 1994 compared
with 120.04% at December 31, 1993.
Total deposits were $9,012 million at December 31, 1994 compared with
$8,523 million a year ago. This increase was mainly due to the deposits
acquired in Pioneer's transaction and the sustained growth of Banco Popular. At
September 30, 1994, Banco Popular's market share of deposits in Puerto Rico was
31.1% compared with 30.4% in 1993.
At December 31, 1994, the stockholders' equity of the Corporation reached
$1,002 million. Excluding the $19.4 million allowance for unrealized losses on
securities available-for-sale, net of deferred taxes required by SFAS 115, that
will be further explained in this financial review, stockholders' equity grew
$187.8 million or 22.5% to $1,022 million, from $834.2 million reported a year
earlier. The growth was mainly attributed to the retention of earnings
generated during the year and the issuance of 4,000,000 shares of
non-cumulative preferred stock on June 27, 1994, which added $96.7 million in
additional capital.
At December 31,1994, the Corporation's Tier I capital ratio was 12.85%,
compared with 12.29% at December 31, 1993. Total risk-based capital ratio was
14.25%, compared with 13.95% in 1993. Both of these measures compare favorably
with the regulatory minimums of 4% for Tier I and 8% for total risk-based
capital. The Corporation's leverage ratio was 7.62% at December 31, 1994
compared with 6.95% at December 31, 1993.
The Corporation paid annual dividends of $1.00 per share on its common
stock during 1994, compared with $0.90 and $0.80 in 1993 and 1992,
respectively. The dividend payout ratio to common stockholders increased to
27.20% from 25.39% in 1993. The Corporation also paid $4.2 million in dividends
on its preferred stock in 1994.
The Corporation looks forward with optimism to the recent and expected
statutory and regulatory developments that should have a positive impact on its
development and performance. The Riegle-Neal Interstate Banking and Branching
Efficiency Act approved in 1994 will allow bank holding companies to expand
into different states in the U.S. The Puerto Rico Tax Reform Act enacted in
1994 reduces corporate and individual tax rates and lowers the tax on dividends
received from domestic corporations on the Island to 10%. Undoubtedly, this
decrease in the dividends tax rate will benefit the Corporation's stockholders,
since effective for dividends paid after June 30, 1995, the Corporation's
shareholders, residents and non-residents of Puerto Rico, will enjoy the lower
withholding tax rate of 10% instead of the current rates which vary from 20% to
29%.
In addition, on January 31, 1995, the Federal Deposit Insurance
Corporation (FDIC) issued a proposal to reduce deposit insurance rate
assessments for bank and thrift members of the Bank Insurance Fund. The
proposal would drop the lower premium rate to four basis points and thereby
expand the range to 4 thru 31 basis points, compared with the current range of
23 thru 31 basis points. This proposal, if adopted, could be effective during
the second half of 1995.
The Corporation continues expanding and developing new ways to maintain
its leadership position. Early in 1995, Banco Popular, FSB, a new subsidiary of
BanPonce Corporation, acquired from the Resolution Trust Corporation (RTC) four
branches of the former Carteret Federal Savings Bank in New Jersey. In
addition, the Corporation entered into an agreement to acquire the assets of
Puerto Rico Home Mortgage, a mortgage origination and servicing operation with
approximately $1,800 million in its servicing portfolio. With this acquisition,
the Corporation will be the largest mortgage loan servicer on the Island. In
addition, as part of our strategy to diversify the sources of income, the
Corporation signed a letter of intent to acquire the operations of CS First
Boston, Puerto Rico, Inc. This acquisition will allow the Corporation to enter
in the securities and investment banking business.
This financial review contains an analysis of the performance of BanPonce
Corporation and its subsidiaries, Banco Popular de Puerto Rico including its
wholly-owned subsidiaries Popular Leasing and Rental, Inc. (Popular Leasing)
and Popular Consumer Services, Inc. ( Popular Consumer) , Vehicle Equipment
Leasing Company, Inc. (VELCO), Popular International Bank, Inc. and
F-3
20
--------------------------------------------------------------------------------
TABLE B
Selected Financial Data
-------------------------------------------
(Dollars in thousands, except per share data) 1994 1993 1992
-------------------------------------------
CONDENSED INCOME STATEMENTS
Interest income ................................ $ 885,125 $ 772,136 $ 740,354
Interest expense ............................... 351,633 280,008 300,135
-------------------------------------------
Net interest income ........................ 533,492 492,128 440,219
Security and trading gains (losses) ............ 451 1,418 625
Operating income ............................... 142,868 123,762 123,879
Operating expenses ............................. 447,846 412,276 366,945
Provision for loan losses ...................... 53,788 72,892 97,633
Income tax ..................................... 50,043 28,151 14,259
Dividends on preferred stock of Banco Popular... 385 770 770
Cumulative effect of accounting changes ........ 6,185
-------------------------------------------
Net income ................................. $ 124,749 $ 109,404 $ 85,116
===========================================
Net income applicable to common stock ...... $ 120,504 $ 109,404 $ 85,116
===========================================
PER COMMON SHARE DATA*
Net income ..................................... $ 3.67 $ 3.35 $ 2.79
Dividends declared ............................. 1.00 0.90 0.80
Book value ..................................... 27.48 25.49 23.03
Oustanding shares:
Average ...................................... 32,798,243 32,701,236 30,461,494
End of period ................................ 32,838,128 32,732,423 32,654,864
AVERAGE BALANCES
Net loans....................................... $ 7,107,746 $ 5,700,069 $ 5,150,328
Earning assets ................................. 11,389,680 9,894,662 8,779,981
Total assets ................................... 12,225,530 10,683,753 9,528,518
Deposits ....................................... 8,837,226 8,124,885 7,641,123
Subordinated notes ............................. 56,082 73,967 85,585
Total stockholders' equity ..................... 924,869 793,001 668,990
PERIOD END BALANCES
Net loans ...................................... $ 7,781,329 $ 6,346,922 $ 5,252,053
Allowance for loan losses....................... 153,798 133,437 110,714
Earning assets.................................. 11,843,806 10,657,994 9,236,024
Total assets ................................... 12,778,358 11,513,368 10,002,327
Deposits ....................................... 9,012,435 8,522,658 8,038,711
Subordinated notes.............................. 50,000 62,000 74,000
Total stockholders' equity ..................... 1,002,423 834,195 752,119
SELECTED RATIOS
Net interest yield (taxable equivalent basis)... 5.04% 5.50% 6.11%
Net operating expense/average earning assets.... 2.68 2.92 2.77
Return on average total assets.................. 1.02 1.02 0.89
Return on average earning assets................ 1.10 1.11 0.97
Return on average stockholders' equity.......... 13.80 13.80 12.72
Dividend payout ratio to common stockholders.... 27.20 25.39 28.33
Average net loans/average total deposits........ 80.43 70.16 67.40
Average earning assets/average total assets..... 93.16 92.61 92.14
Average stockholders' equity/average net loans.. 13.01 13.91 12.99
Average stockholders' equity/average assets..... 7.57 7.42 7.02
Overhead ratio.................................. 57.08 58.34 55.07
Tier I capital to risk-adjusted assets.......... 12.85 12.29 12.88
Total capital to risk-adjusted assets........... 14.25 13.95 14.85
Effective tax rate.............................. 28.57 21.30 14.24
* Per common share data is based on the average number of shares outstanding
during the periods, except for the book value which is based on total shares
at the end of the periods. All per common share data has been adjusted to
reflect a stock split effected in the form of a dividend on April 3, 1989.
F-4
21
-----------------------------------------------------------------------------------------------------------------
Year ended December 31,
-----------------------------------------------------------------------------------------------------------------
1991 1990 1989 1988 1987 1986 1985
-----------------------------------------------------------------------------------------------------------------
$ 794,943 $ 565,807 $ 558,273 $ 488,200 $ 410,605 $ 365,513 $ 352,691
387,134 281,561 302,747 261,316 206,778 183,253 182,159
-----------------------------------------------------------------------------------------------------------------
407,809 284,246 255,526 226,884 203,827 182,260 170,532
19,376 91 2,529 689 (366) 7,253 1,604
112,398 70,865 59,550 53,025 40,623 33,204 27,670
345,738 229,563 207,376 190,862 182,593 166,982 154,777
121,681 53,033 42,603 34,750 18,000 11,500 7,050
6,793 9,240 11,456 7,844 5,956 6,778 5,468
807
-----------------------------------------------------------------------------------------------------------------
$ 64,564 $ 63,366 $ 56,170 $ 47,142 $ 37,535 $ 37,457 $ 32,511
=================================================================================================================
$ 64,564 $ 63,366 $ 56,170 $ 47,142 $ 37,535 $ 37,457 $ 32,511
=================================================================================================================
$ 2.15 $ 3.15 $ 2.81 $ 2.36 $ 1.88 $ 1.97 $ 1.81
0.80 0.80 0.80 0.685 0.66 0.61 0.56
21.00 19.67 18.76 16.75 15.07 13.86 12.30
30,035,601 20,116,970 20,014,013 20,000,000 20,000,000 19,000,000 18,000,000
30,093,852 29,942,406 20,037,396 20,000,000 20,000,000 20,000,000 18,000,000
$ 5,302,189 $ 3,377,463 $ 3,132,167 $ 2,869,829 $ 2,510,495 $ 1,974,648 $ 1,553,739
8,199,195 5,461,938 5,318,800 5,182,535 4,597,32 3,949,899 3,392,972
8,944,357 5,836,749 5,676,981 5,523,823 4,918,984 4,257,327 3,666,180
7,198,187 5,039,422 4,782,791 4,571,456 4,211,465 3,655,492 3,084,367
94,000 50,000 38,082 119 1,717 8,178 14,706
610,641 407,611 353,844 317,001 286,752 247,679 208,598
$ 5,195,557 $ 5,365,917 $ 3,276,389 $ 3,056,761 $ 2,737,271 $ 2,266,437 $ 1,713,602
94,199 89,335 40,896 33,244 28,423 26,903 24,229
8,032,556 8,219,279 5,469,921 5,221,873 4,957,221 4,135,121 3,786,650
8,780,282 8,983,624 5,923,261 5,661,398 5,352,745 4,525,241 4,136,418
7,207,118 7,422,711 4,926,304 4,715,837 4,491,612 3,820,223 3,365,265
94,000 94,000 50,000 500 2,500 13,500
631,818 588,884 375,807 334,867 301,425 277,090 221,274
5.97% 6.30% 5.57% 5.10% 5.04% 5.70% 6.25%
2.85 2.91 2.78 2.66 3.09 3.39 3.75
0.72 1.09 0.99 0.85 0.76 0.88 0.89
0.79 1.16 1.06 0.91 0.82 0.95 0.96
10.57 15.55 15.87 14.87 13.09 15.12 15.59
34.13 25.33 28.14 28.00 35.17 31.08 30.87
73.66 67.02 65.49 62.78 59.61 54.02 50.37
91.67 93.58 93.69 93.82 93.46 92.78 92.55
11.52 12.07 11.30 11.05 11.42 12.54 13.43
6.83 6.98 6.23 5.74 5.83 5.82 5.69
52.47 55.80 56.86 60.45 69.83 69.42 73.59
11.01 10.10 9.47 9.19 N/A N/A N/A
13.35 12.74 11.76 10.10 N/A N/A N/A
9.41 12.73 16.94 14.27 13.70 15.32 14.40
F-5
22
------------------------------------------------------------------------------------------------------------------------------------
TABLE C
Changes in Net Income and Earnings per Common Share
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per common share amounts) DOLLARS PER SHARE Dollars Per share Dollars Per share
-------------------------------------------------------------------------
Net income for prior year ........................ $109,404 $ 3.35 $ 85,116 $ 2.79 $ 64,564 $ 2.15
Increase (decrease) from changes in:
Net interest income ............................ 41,364 1.26 51,909 1.70 32,411 1.08
Other operating income ......................... 19,106 0.58 (117) 11,480 0.38
Provision for loan losses ...................... 19,104 0.58 24,741 0.81 24,048 0.80
Dividends on preferred stock of Banco Popular... 385 0.01 37
Trading account profit ......................... (327) (0.01) 171 0.01 (376) (0.01)
Gain on sale of investment securities .......... (640) (0.02) 622 0.02 (18,376) (0.61)
Income tax ..................................... (21,892) (0.67) (13,892) (0.46) (7,465) (0.25)
Operating expenses ............................. (35,570) (1.09) (45,331) (1.49) (21,207) (0.71)
-------------------------------------------------------------------------
Subtotal ....................................... 130,934 3.99 103,219 3.38 85,116 2.83
Cumulative effect of accounting changes ........ (6,185) (0.19) 6,185 0.20
Dividends declared on preferred stock .......... (4,245) (0.13)
Change in average common shares* ............... (0.23) (0.04)
-------------------------------------------------------------------------
Net income applicable to common stock ............ $120,504 $ 3.67 $109,404 $ 3.35 $ 85,116 $ 2.79
=========================================================================
*Used to reflect the effect of the issuance of 2,458,740 shares of common stock
through a subscription offering in November 1992. Also reflects the effect of
the issuance of shares of common stock through the Dividend Reinvestment Plan
in the years presented. The average common shares outstanding used in the
above computation were 32,798,243 for 1994; 32,701,236 for 1993; and
30,461,494 for 1992.
--------------------------------------------------------------------------------
its wholly-owned subsidiaries BanPonce Financial Corp. (BanPonce Financial),
Equity One, Inc., formerly Spring Financial Services, Inc. (Equity One), and
Pioneer Bancorp, Inc. (Pioneer), second tier subsidiaries.
On December 31, 1990, Banco Popular de Puerto Rico and the former
BanPonce Corporation merged. Due to the effective date of the merger, the
financial information for 1990 and prior years included in this financial
review is presented as follows:
- The statement of condition as of December 31, 1990, and all references
to assets and liabilities as of the end of that period reflect the
figures for the combined entity immediately after the merger. Average
figures for 1990 are those of Banco Popular and its subsidiaries.
- All historical asset and liability information, including both averages
and end of period information, for the years before 1990 are those of
Banco Popular and its subsidiaries, Popular Leasing (organized in mid
-1989) and Popular Consumer (acquired in December of 1989).
- The results of operations for 1990 and prior years and all historical
income and expense information are those of Banco Popular and its
subsidiaries.
Table B presents a ten year summary of selected financial information.
EARNINGS ANALYSIS
The Corporation's net earnings for 1994 amounted to $124.7 million,
compared with $109.4 million a year before. The net income applicable to common
stock for 1994 was $120.5 million. Table C shows the variances, in dollar and
per common share amounts, of the major captions of the Corporation's income
statement for the last three years. A discussion of the key factors that
contributed to the rise in net earnings follows:
- Increase in net interest income due to the growth of $1,495 million in
the average volume of earning assets, partially offset by a decrease of
46 basis points in the net interest yield, on a taxable equivalent
basis.
- Increase in other operating income, principally in other service fees
and other operating income. The rise in other service fees results from
higher credit card fees, credit life insurance fees and other fees
collected by the Corporation on new products and services.
- Decrease in the provision for loan losses due to the improved credit
quality of the loan portfolios which resulted in a reduction in net
charge-offs.
- Higher income tax expense due to a higher pre-tax income, and to a
lower tax exempt income net of its related expenses. The decrease in
exempt income results from lower yields on the investment portfolio and
a lower average balance of tax-exempt securities.
F-6
23
------------------------------------------------------------------------------------------------------------------------------------
TABLE D
Net Interest Income - Taxable Equivalent Basis
Year ended December 31,
----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------
AVERAGE Average Average Average Average
BALANCE RATE Balance Rate Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------------------------------
Earning assets.............. $11,389,680 8.13% $9,894,662 8.33% $8,779,981 9.53% $8,199,195 10.69% $5,461,938 11.46%
================================================================================================
Financed by:
Interest
bearing funds ......... $ 9,330,088 3.77% $8,097,004 3.46% $7,277,051 4.12% $6,816,787 5.68% $4,325,229 6.51%
Non-interest
bearing funds ......... 2,059,592 1,797,658 1,502,930 1,382,408 1,136,709
------------------------------------------------------------------------------------------------
Total............... $11,389,680 3.09% $9,894,662 2.83% $8,779,981 3.42% $8,199,195 4.72% $5,461,938 5.16%
================================================================================================
Net interest income......... $ 574,560 $ 544,471 $ 536,485 $ 489,541 $ 344,307
================================================================================================
Spread...................... 4.36% 4.87% 5.41% 5.01% 4.95%
Net interest yield.......... 5.04 5.50 6.11 5.97 6.30
----------------------------------------------------------------------------------------------------------------------------------
- Higher other operating expenses, mainly personnel costs, principally
due to the inclusion of the salaries and benefits of Pioneer and annual
merit increases. Equipment expenses and professional fees also
increased due mainly to the implementation and usage of advanced
technology in order to provide a broader variety of products and
services to customers.
- Last year's recognition of the one-time cumulative effect of accounting
changes due to the implementation of SFAS 109, "Accounting for Income
Taxes" and SFAS 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions". The net effect of these changes last year was an
increase of $6.2 million in net income.
- Dividends declared on preferred stock issued this year.
NET INTEREST INCOME
Net interest income, the principal source of earnings for the
Corporation, represents the excess of the interest earned on earning assets
over the interest paid on rate-related liabilities. The net interest income is
affected by the changes in the balance sheet structure of the Corporation,
principally in the volume and composition of earning assets and interest
bearing liabilities, the rates earned or paid on these assets and liabilities,
and the maturity and repricing of these financial instruments. The latter is of
particular significance in years such as 1994 when the interest rates had a
significant increase after being at their lowest level in three decades. The
Corporation constantly monitors and manages the composition and maturity
structure of its assets and liabilities in order to minimize the impact of the
above circumstances on its net interest income.
For the year ended December 31, 1994, net interest income reached $533.5
million, an increase of $41.4 million over the $492.1 million reported in 1993.
In 1992, net interest income totaled $440.2 million. On a taxable equivalent
basis, the net interest income rose to $574.6 million, from $544.5 million in
1993 and $536.5 million in 1992. The increase of $30.1 million results from the
rise of $83.2 million due to the growth in average earning assets, partially
offset by a reduction of $53.1 million due to a lower net interest margin on a
taxable equivalent basis. The net interest yield, on a taxable equivalent
basis, was 5.04% compared with 5.50% in 1993 and 6.11% in 1992.
In order to present all the interest data on a comparative basis,
interest income on tax-exempt assets has been converted to a taxable equivalent
basis assuming an income tax rate of 42%. Table D presents a comparative
analysis of the net interest income and rates for the past five years.
Average earning assets increased $1,495 million to $11,390 million for
the year ended December 31, 1994, from $9,895 million in 1993 and $8,780
million in 1992. On a taxable equivalent basis, interest income amounted to
$926.2 million, compared with $824.5 million in 1993 and $836.6 million in
1992. The yield on earning assets, on a taxable equivalent basis, was 8.13% in
1994, or 20 basis points lower than the 8.33% reported in 1993. The yield on
earning assets, on a taxable equivalent basis, for 1992 was 9.53%.
Average loans for the year ended December 31, 1994 totaled $7,108 million
and represented 62.4% of total average earning assets. For the years 1993 and
1992 average loans amounted to $5,700 million and $5,150 million, and
represented 57.6% and
F-7
24
----------------------------------------------------------------------------------------------------------------------------------
TABLE E
Interest Variance Analysis - Taxable Equivalent Basis
1994 vs. 1993 1993 vs. 1992
----------------------------------------------------------------------------------------------------------------------------------
(In thousands) Increase (Decrease) Due to Change in: Increase (Decrease) Due to Change in:
Volume Rate Total Volume Rate Total
----------------------------------------------------------------------------------
Interest income:
Federal funds sold and securities
and mortgages purchased under
agreements to resell...................... ($ 103) $ 953 $ 850 ($ 736) ($ 410) ($ 1,146)
Time deposits with other banks.............. (2,202) 104 (2,098) (6,094) (740) (6,834)
Investment securities....................... 9,275 (21,521) (12,246) 59,181 (92,257) (33,076)
Trading securities.......................... (134) 53 (81) 98 48 146
Loans....................................... 124,678 (9,390) 115,288 47,873 (19,122) 28,751
---------------------------------------------------------------------------------
Total interest income.................. 131,514 (29,801) 101,713 100,322 (112,481) (12,159)
---------------------------------------------------------------------------------
Interest expense:
Savings and NOW accounts.................... 11,705 (2,342) 9,363 18,812 (20,305) (1,493)
Other time deposits......................... 7,245 11,670 18,915 (10,669) (21,767) (32,436)
Short-term borrowings....................... 19,305 15,839 35,144 13,998 (3,326) 10,672
Long-term borrowings........................ 10,089 (1,887) 8,202 4,634 (1,515) 3,119
---------------------------------------------------------------------------------
Total interest expense................. 48,344 23,280 71,624 26,775 (46,913) (20,138)
---------------------------------------------------------------------------------
Net interest income........................... $ 83,170 ($ 53,081) $ 30,089 $ 73,547 ($ 65,568) $ 7,979
=================================================================================
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.
--------------------------------------------------------------------------------
58.7% of average earning assets, respectively. The categories that increased
the most were mortgage loans, rising $770.5 million or 65.9% and commercial and
construction loans, growing $421.4 million or 17.8%. In addition, average
consumer loans increased $141.4 million or 7.7% , and average lease financing
receivables grew $74.3 million or 21.9%.
Banco Popular and Equity One experienced significant mortgage loan
origination and refinancing activity during 1993 and the beginning of 1994, as
a result of the low interest rates that prevailed during those periods. The
largest increase in mortgage loans was realized in the operations of Banco
Popular in New York which averaged approximately $342 million more than in
1993. The latter resulted from portfolio acquisitions and the start up of a
Mortgage Loan Origination Department in 1993. The increase in the commercial
loan portfolio was mostly attained at Banco Popular. The acquisition of
Pioneer, on March 31, 1994, contributed with $115.7 million to the
Corporation's commercial loan portfolio.
The average yield on loans was 9.44%, on a taxable equivalent basis,
compared with 9.75% in 1993, a decrease of 31 basis points. The yield on
mortgage loans declined 102 basis points due to the origination and refinancing
of loans in a lower interest rate scenario. Conversely, the taxable equivalent
yield of commercial and construction loans, increased 65 basis points, since
approximately 55% of the portfolio has floating rates tied to the prime rate,
which increased 250 basis points throughout 1994.
The increase in consumer loans was realized mainly in the categories of
home modernization and auto loans. The yield reported during 1994 and 1993 for
consumer loans was 11.95% and 12.48%, respectively. Prior to February 1992 the
interest rates on personal loans were regulated in Puerto Rico. The maximum
interest rate on these loans was set as a multiple of the prime rate. Effective
on February 1992 interest rates were deregulated in order to allow the market
to establish the interest rates to be charged on these loans. Due to the low
interest scenarios, the strong competition on the Island and the higher share
of secured loans which carry a lower yield, the yield on consumer loans has not
increased with the rise in interest rates. The yield on lease financing
receivables declined from 12.28% in 1993 to 11.68% in 1994, particularly due to
the origination of leases during periods of low interest rates.
Average investment securities for 1994 totaled $4,157 million, an
increase of $145.7 million from the $4,011 million reported in 1993. Average
investment securities for 1992 amounted to $3,262 million. The increase is
mainly attributed to the $114 million securities acquired from Pioneer. The
yield on investment securities, on a taxable equivalent basis, decreased from
6.53% reported in 1993 to 6.01% in 1994. The decrease in yield was affected by
the maturity of securities and the reinvestment of the proceeds during the low
interest rate scenarios of 1993 and the beginning of 1994. During 1994,
following an asset/liability management strategy designed to benefit from
expected higher interest rates, the Corporation acquired primarily short and
mid-term securities which resulted in relatively low yields. The taxable
equivalent yield on investment securities in 1992 was 9.04%. The decrease in
the taxable equivalent yield on investments from 1992 to 1993 resulted from the
maturity at the end of 1992, of approximately $400 million in investment
securities which were not
F-8
25
--------------------------------------------------------------------------------
subject to the interest expense disallowance under the Puerto Rico Income Tax
Act, and whose yield, on a taxable equivalent basis, exceeded 10%.
Average money market investments decreased $56.3 million to $119.5
million from the $175.8 million reported in 1993 and $362 million in 1992. The
average yield on these instruments, increased from 3.66% in 1993 to 4.34% in
1994. The increase relates directly to the rise in the interest rate scenario
that took place in 1994.
Average interest bearing liabilities were $9,330 million, compared with
$8,097 million reported in 1993. In 1992, these liabilities averaged $7,277
million. Interest expense increased $71.6 million to $351.6 million compared
with $280.0 million in 1993 and $300.1 million in 1992. Average deposits at
December 31, 1994 were $8,837 million compared with $8,125 million in 1993 and
$7,641 million in 1992. Interest bearing deposits averaged $551.2 million more
than in 1993, reaching $7,041 million, while average non-interest bearing
deposits grew $161.1 million. During the third and fourth quarters of 1993 the
Corporation acquired some branches in New York and the Virgin Islands which
added approximately $354.8 million in deposits. Also, the acquisition of
Pioneer contributed with $292.7 million in deposits.
Average savings accounts increased $345.7 million and NOW, Super NOW and
money market accounts also increased by $55 million, further strengthening the
Corporation's core deposit base. Average time deposits, including certificates
of deposits and other time deposits, rose $150.7 million in 1994. The cost of
savings accounts decreased 16 basis points, due mainly to adjustments made to
the pricing structure of these products throughout 1993. On the other hand, the
cost of NOW, Super NOW and money market accounts increased by 15 basis points.
The average cost of certificates of deposits rose 36 basis points from 3.80% in
1993 to 4.16% in 1994. In addition, the average cost of other time deposits
increased 67 basis points to 4.80%. The increase in the average cost of these
deposits resulted from the higher interest rate scenario that has prevailed
during 1994. As a result, the average cost of interest bearing deposits reached
3.52%, from 3.38% reported in 1993 and 4.11% reported in 1992.
Average short-term borrowings rose $518.7 million. Most of the increase
was due to higher balances of federal funds purchased and securities sold under
agreements to repurchase in Banco Popular and a higher average of commercial
paper issued by the holding company. The average rate of short-term borrowings
increased 101 basis points to 4.18% compared with 3.17% in 1993. During 1992
average short-term borrowings amounted to $903.9 million at an average cost of
3.51%.
Average long-term debt increased $163.2 million, due to a higher amount
of medium-term notes issued by BanPonce Financial to finance Equity One
operations. The average cost of long-term debt in 1994 was 6.10% compared with
6.74% in 1993.
The average cost of funding earning assets increased to 3.09% compared
with 2.83% reported in 1993 and 3.42% in 1992.
SECURITY AND TRADING GAINS
During the first quarter of 1994, the Corporation adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities", which addresses the accounting and
reporting for certain investments in debt and equity securities. SFAS 115
requires financial institutions to segregate their securities holdings among
three categories: held-to-maturity, available-for-sale and trading securities
based on management's intent as defined by the SFAS 115 as further explained in
the "Balance Sheet Comments" section of this financial review.
In 1994, the Corporation sold $293.4 million of the investment securities
available-for-sale for a net gain of $0.3 million. In accordance with the
provisions of SFAS 115, the Corporation may sell or transfer held-to-maturity
securities, only as a result of non-recurring, unusual events that could not
have been reasonably anticipated. In 1994, $13.6 million of the securities
classified as held-to-maturity were called by the issuer or sold due to a
significant deterioration in the issuer's creditworthiness, for a net loss of
$0.05 million. During 1993, $83.2 million of the investment securities
available-for-sale and $11.6 million of the investment securities were sold for
a net gain of $0.9 million. Also, trading account activities for the year ended
December 31, 1994, resulted in profits of $0.2 million compared with profits of
$0.6 million in 1993.
OTHER OPERATING INCOME
Other operating income, consisting mainly of service charges on deposit
accounts, credit card fees, other fee-based services and other revenues, grew
to $142.9 million in 1994 from $123.8 million in 1993, a 15.4% increase. In
1992 other operating income amounted to $123.9 million.
The rise in other operating income was mainly a result of the
Corporation's continuing efforts to build stable sources of fee income, which
include service charges on deposit accounts and revenues from electronic
banking and credit card services. This
F-9
26
------------------------------------------------------------------------------------------------------
TABLE F
Other Operating Income
Year ended December 31,
-------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1992 1991 1990
--------------------------------------------------------
Service charges on deposit accounts......... $ 71,727 $ 68,246 $ 63,064 $ 55,000 $36,031
Other service fees:
Credit card fees and discounts............ 18,611 16,818 16,795 15,268 11,447
Other fees................................ 32,629 26,129 25,696 24,066 17,336
Other income................................ 19,901 12,569 18,324 18,064 6,051
--------------------------------------------------------
Total..................................... $142,868 $123,762 $123,879 $112,398 $70,865
========================================================
Other operating income
to average assets......................... 1.17% 1.16% 1.30% 1.26% 1.21%
Other operating income
to operating expenses..................... 31.90 30.02 33.76 32.51 30.87
-------------------------------------------------------------------------------------------------------
growth is being accomplished through the aggressive marketing of existing
products and development of innovative products. As Table F shows, this increase
has resulted in a ratio of other operating income to operating expenses of
31.90% in 1994 compared with 30.02% in 1993. In addition, the ratio of other
operating income to average assets increased slightly to 1.17% in 1994 from
1.16% in 1993.
Service charges on deposit accounts, the principal component of other
operating income, rose 5.1% to $71.7 million in 1994, from $68.2 million in 1993
and $63.1 million in 1992. The rise in service charges was primarily attributed
to an increase in automated teller machine fees, which were implemented during
the second quarter of 1993, fees collected on returned checks, service charges
on new deposit products introduced during the year and a higher customer deposit
base due to growth and acquisitions. Pioneer contributed with $0.8 million in
deposit fees.
Other service fees which represented 35.9% of other operating income for
the year, improved significantly to $51.2 million for the year ended December
31, 1994, from $42.9 million in 1993 and $42.5 million in 1992. This increase
was principally reflected in Banco Popular where credit card fees rose by $1.8
million, electronic banking fees $1.1 million and credit life insurance fees
$0.6 million. Other fees collected on new services offered to Banco Popular
customers during 1994, such as the sale of securities, annuities and mutual
funds amounted to approximately $0.4 million. In addition, Pioneer contributed
$1.2 million in other service fees. Also, in December 1994, Banco Popular and
Paine Webber de P.R., Inc. organized the Puerto Rico Investors Tax Free Fund,
Inc. The Fund is a closed-end fund and is the first one registered and
developed under the Puerto Rico Investment Companies Act. The sale of the
fund's shares contributed with $0.8 million in additional fees.
Other operating income for the year ended December 31, 1994 amounted to
$19.9 million as compared with $12.6 million for the year ended December 31,
1993 and $18.3 million in 1992. In 1992, the Corporation realized a $4.4
million gain on the sale of $86 million on mortgage loans through a grantor
trust. During 1993 and 1994, Banco Popular recorded adjustments totaling $2.6
million and $0.5 million, respectively, to reflect the reduction in the market
value of the excess servicing recognized in 1992 upon the sale of mortgages
previously mentioned. These adjustments resulted from higher than expected
mortgage prepayments due to the declining interest scenario that prevailed in
1993.
The rise of $5.2 million in other operating income, excluding the effect
of the adjustments described above, relates mainly to an increase of $3.3
million in the gains recognized from the sale of mortgage loans principally by
Equity One. In addition, the other operating revenues of the Corporation's
leasing subsidiaries increased $1.2 million mostly related to the gains on
sales of daily rental units and a higher daily rental income.
OPERATING EXPENSES
The Corporation continues investing in personnel, new products and the
technology it needs to remain competitive. Consistently, Banco Popular has been
the first in Puerto Rico to implement new approaches and the use of the latest
available technology.
Total operating expenses for 1994 amounted to $447.8 million, compared
with $412.3 million in 1993 and $366.9 million in 1992. These amounts represent
increases of 8.6% in 1994 and 12.4% in 1993. As a percentage of average assets,
operating expenses decreased from 3.86% in 1993 to 3.66% in 1994. Table G
presents the composition of operating expenses for the past five years.
F-10
27
-------------------------------------------------------------------------------------------------------
TABLE G
Operating Expenses
Year ended December 31,
-------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1992 1991 1990
--------------------------------------------------------
Salaries.................................... $160,996 $151,432 $134,709 $129,928 $ 92,910
Pension and other benefits.................. 45,546 44,713 36,484 37,626 23,269
Profit sharing.............................. 19,205 19,766 17,041 13,080 15,143
--------------------------------------------------------
Total personnel costs............... 225,747 215,911 188,234 180,634 131,322
--------------------------------------------------------
Equipment expenses.......................... 35,474 27,964 23,813 22,755 16,524
Professional fees........................... 33,757 27,302 22,558 19,254 16,114
Net occupancy expense....................... 28,440 26,085 25,442 22,497 12,205
Communications ............................. 20,308 18,203 17,048 17,377 12,172
Other taxes................................. 19,807 15,996 14,608 13,049 9,788
Amortization of intangibles................. 18,003 16,176 14,888 13,687 384
Business promotion.......................... 16,271 16,638 12,548 10,723 8,963
Printing and supplies....................... 8,817 8,189 7,290 8,349 5,524
Other operating expenses:
FDIC assessment........................... 19,346 17,802 16,372 15,007 5,809
Transportation and travel................. 3,946 3,554 3,136 3,150 2,151
All other................................. 17,930 18,456 21,008 19,256 8,607
--------------------------------------------------------
Subtotal ......................... 222,099 196,365 178,711 165,104 98,241
--------------------------------------------------------
Total ............................ $447,846 $412,276 $366,945 $345,738 $229,563
========================================================
Personnel costs to average assets........... 1.85% 2.02% 1.98% 2.02% 2.25%
Operating expenses to average assets........ 3.66 3.86 3.85 3.86 3.93
Assets per employee (in millions)........... $ 1.69 $ 1.55 $ 1.44 $ 1.28 $ 1.29
-------------------------------------------------------------------------------------------------------
Personnel costs for the period ended December 31, 1994 totaled $225.7
million compared with $215.9 million recorded in 1993 and $188.2 million in
1992. Salaries, which represent 71.3% of total personnel costs, rose $9.6
million or 6.3% to $161 million in 1994 from $151.4 million in 1993. This rise
resulted primarily from annual merit increases, higher incentive payments tied
to performance and the growing number of employees due to increased business
activity and acquisitions. Included in the salaries expense for 1994 are $4.0
million pertaining to Pioneer. At December 31, 1994, BanPonce Corporation had
7,549 full-time equivalent employees (FTE) up 110 from the 7,439 FTE at the end
of 1993.
Employee benefits, including profit sharing, rose to $64.8 million
compared with $64.5 million for the same period in 1993 and $53.5 million in
1992. As we continued implementing "Total Quality Management" philosophy and
new technology , staff training expenses increased $0.8 million, from $1.5
million in 1993 to $2.3 million in 1994. Partially offsetting the increase in
staff training is a reduction in the profit sharing expense of $0.6 million due
to a lower contribution resulting from an amendment to the plan in 1994, in
which non-vested participations of resigning employees are credited to the
Corporation's annual contribution, reducing the profit sharing expense.
During 1993, the Corporation adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits other than Pensions". This statement requires that
employers accrue the expected cost of retiree health care and other
postretirement benefits, which represents the actuarial present value of the
anticipated benefits the employer expects to provide employees upon retirement.
In 1994, the Corporation recorded $7.9 million for postretirement benefits,
compared with $5.2 million in 1993.
The remaining components of operating expenses, in the aggregate,
amounted to $222.1 million for the year ended December 31, 1994, compared with
$196.4 million in 1993 and $178.7 million in 1992. Equipment expenses amounted
to $35.5 million in 1994 compared with $28.0 million in 1993, an increase of
$7.5 million or 26.9%. Professional fees rose from $27.3 million in 1993 to
$33.8 million in 1994, an increase of $6.5 million or 23.6%. The increase in
both expense categories was mostly attributed to the depreciation and software
costs related to the expansion of the electronic payment system, the network
expansion of point of sale (POS) terminals and the development of new products
and services. During 1994, as part of the initiatives related to the
Corporation's strategy of transforming Puerto Rico's payment system, 2,117
additional POS terminals and 43 ATM machines were installed.
F-11
28
--------------------------------------------------------------------------------
Other taxes also reflected a significant increase of $3.8 million or
23.8%, due to the increased business activity of the Corporation, higher tax
rates for property and municipal license taxes in Puerto Rico and other state
taxes paid in the U.S. Net occupancy expense, communications and amortization
of intangibles also rose in 1994 due to the expansion in the Corporation's
business activities.
INCOME TAX EXPENSE
Income tax expense for the year ended December 31, 1994 increased $21.9
million, totaling $50 million compared with $28.1 million reported in 1993.
This increase is principally the result of higher pre-tax earnings by $43
million and lower exempt income that results from lower yielding securities and
a lower average balance of tax exempt assets for the year. Income tax expense
reported in 1992 was $14.3 million.
Effective January 1, 1993, the Corporation adopted SFAS 109. This
statement requires an asset and liability approach to accounting for income
taxes. The objective of SFAS 109 is to recognize the amounts of taxes payable
or refundable in the current year and to recognize deferred tax liabilities
and/or assets for the future tax consequences of events that have been
recognized in the financial statements or tax returns. The measurement of
current and deferred tax liabilities or assets is based on the regular tax
rates and provisions of the enacted tax laws. At the date of adoption of SFAS
109 the Corporation recorded a credit to income and a deferred tax asset of
$28.9 million mainly due to alternative minimum tax credits and tax loss
carryforwards that the Corporation had available. Prior to 1993, the
Corporation determined its income tax provision under SFAS 96 whereby the
income tax expense was basically the same as the Corporation's income tax
liability.
At December 31, 1994, the Corporation net deferred tax asset amounted to
$22.9 million. The Corporation has recorded this deferred tax asset because,
based on the available evidence, it is more likely than not that the asset will
be realized.
The effective tax rate rose to 28.6% from 21.3% in 1993 and 14.2% in
1992. The difference between the effective tax rates and the statutory rate,
which in Puerto Rico is 42%, is primarily due to the interest income earned on
certain investments and loans which are tax-exempt, net of the related interest
expense disallowance.
On October 31, 1994, the Governor of Puerto Rico signed into law the
Puerto Rico Tax Reform Act of 1994. The Act has made comprehensive and
important changes in several major areas of the tax law. In general, the
provisions of the Act are effective for taxable years beginning after June 30,
1995. The changes that most significantly affect the Corporation can be
summarized as follows:
- The maximum tax rate for Corporations is reduced from 42% to 39%.
- Repeal of the reserve method for computing losses on bad debts. The
taxpayer will be required to use the direct write-off method. In
addition, the reserve balance is to be recaptured to income ratably
over the succeeding four-year period.
- Deduction permitted for the amortization of goodwill on assets
acquired after June 30, 1995, using a straight-line method of
amortization over a fifteen-year period.
- Dividends from local corporations will be taxed at 10%. This change
will be effective on July 1, 1995. The 85% dividend received
deduction will continue to be available for corporations.
- Repeal of the 29% withholding tax on interest payments to
non-resident and unaffiliated parties. This provision is also
effective on July 1, 1995.
During the year, the Corporation recorded an adjustment of $1.5 million,
reducing its deferred tax assets, giving effect to the change in tax rates
enacted in 1994 due primarily to the reversal of temporary differences after
December 31, 1995.
Please refer to Note 21 of the Financial Statements for additional
information on the deferred tax asset and the provision for income tax.
BALANCE SHEET COMMENTS
The Corporation's total assets at December 31, 1994 reached $12,778
million, reflecting an increase of 11% as compared with $11,513 million at
December 31, 1993. Total assets at the end of 1992 amounted to $10,002 million.
Average total assets for 1994 amounted to $12,226 million compared with $10,684
million in 1993 and $9,529 million in 1992. The acquisition of Pioneer
contributed to this increase, adding $333.7 million in assets and $292.7
million in deposits to the Corporation.
Earning assets at December 31, 1994, amounted to $11,844 million,
compared with $10,658 million at December 31, 1993 and $9,236 million at
December 31, 1992. Total loans, amounted to $7,781 million as of December 31,
1994 compared with $6,347 million at the end of 1993 and $5,252 million at the
end of 1992. This increase resulted mainly from the growth in the mortgage and
commercial loan portfolios. During the year, mortgage loans increased $601.7
million or 38.2%, from $1,576 million at December 31, 1993 to $2,178 million at
December 31, 1994. Commercial loans grew $524.0 million or 22.1%.
F-12
29
--------------------------------------------------------------------------------
Money market, investment and trading securities totaled $4,062 million at
December 31, 1994 compared with $4,311 million at the same date last year. The
decrease of $248.6 million or 5.8% was reflected mainly in the investment
securities, which totaled $3,795 million at the end of 1994 and $4,045 million
in 1993. These figures include $839.2 million in investment securities
available-for-sale as of December 31, 1994 and $715.6 million as of December
31, 1993. These securities are currently carried at market value under the
provisions of SFAS 115, adopted in the first quarter of 1994. Prior to the
adoption of this statement, these securities were carried at the lower of cost
or market.
SFAS 115 requires financial institutions to segregate their securities
holdings as follows:
- Those securities which management has the positive intent and ability
to hold to maturity are classified as held-to-maturity and carried at
amortized cost.
- Those that are bought and held principally for the purpose of selling
them in the near term, are classified as trading and continue to be
reported at fair value with unrealized gains and losses included in
earnings.
- All other securities are classified as available-for-sale and reported
at fair value with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity.
As a result of the adoption of this statement, the Corporation's
stockholders' equity at December 31, 1994 includes $19.4 million in unrealized
losses, net of deferred taxes, on securities available-for-sale.
Total deposits at December 31, 1994, amounted to $9,012 million compared
with $8,523 million at December 31, 1993. The increase of $489.8 million over
the prior year is mainly due to the acquisition of Pioneer and the launching of
new deposit products during 1994. Total deposits as of December 31, 1992
amounted to $8,039 million.
Core deposits reached $7,345 million by the end of 1994, compared with
$6,966 million the prior year. The increase of $378.7 million resulted
principally from a growth of $183.3 million in certificates of deposit under
$100,000, $112.4 million in savings accounts and $102 million in demand
deposits. NOW and money market accounts declined $19 million.
Borrowings increased $601.6 million to $2,501 million at December 31,
1994. The rise is mainly due to an increase of $396.0 million in federal funds
purchased, securities sold under agreements to repurchase and other short-term
borrowings. Commercial paper increased $30.9 million and $231.1 million in
medium-term notes were issued by BanPonce Financial to finance Equity One's
business growth.
Subordinated notes decreased to $50 million from $62 million outstanding
a year ago, due to the prepayment in July 1994 of an 8.50% note due in 1996. In
addition, $11 million in preferred stock of Banco Popular were redeemed at par
value on June 30, 1994.
The analysis of the Corporation's balance sheet components will focus on
the three major topics: Credit Risk Analysis, Asset and Liability Management
and Stockholders' Equity.
CREDIT RISK ANALYSIS
CREDIT MANAGEMENT
The successful management of risk is essential to the continued growth
and profitability of the Corporation. The Corporation employs many tools to
monitor and control the credit risks to which it is exposed. The strategies for
managing credit risk include among others, the establishment of strict credit
underwriting standards to monitor the loan granting process and the subsequent
performance of the loan portfolio. In addition, the Corporation continues
enforcing the policies of maintaining a highly skilled and experienced staff to
continue improving the credit processing technology.
The Corporation has an independent Credit Review and Audit Division which
oversees the management of credit risk. This division provides an independent
and objective assessment of the loan portfolio's credit quality. It also
manages the credit rating system, the major credit risk monitoring tool, and
tests the adequacy of the allowance for loan losses.
The Corporation receives collateral to support credit extensions and
commitments for which collateral is deemed necessary. The most significant
categories of collateral are real and personal property and cash on deposit.
At December 31, 1994, the Corporation's credit risk was centered in its
$7,781 million loan portfolio, which represented 65.7% of earning assets. The
portfolio composition at the end of 1994 was as follows: 37% in commercial
loans, 28% in residential mortgage loans, 27% in consumer loans, 6% in lease
financing and 2% in construction loans as compared with 37%, 25%, 30%, 6% and
2%, respectively, in 1993.
F-13
30
--------------------------------------------------------------------------------
The commercial portfolio continues showing an improvement in the level of
delinquency, charge-offs and recoveries. This was attained through the
development of a strong credit culture, through revamped credit training
programs, geared at the rehabilitation and effective collection of trouble and
charged-off loans, coupled with the sustained economic recovery during 1994.
As in the previous three years, the Consumer Credit Area also continues
reflecting a considerable improvement in the delinquency and net credit losses.
The lower net charge-off level reflects the consistent application of prudent
credit standards through officer training and periodic lending reviews, plus
enhanced collection systems. Furthermore, a shift in the consumer portfolio
from an unsecured to a secured basis, primarily mortgage and cash-secured
loans, has been achieved over the last years. During 1995, management is
directing its efforts to continue emphasizing the secured portion of the
portfolio, as part of the tools to continue improving credit quality.
The Corporation's credit risk is well balanced since its credit policies
and procedures emphasize diversification among geographic areas, business and
industry groups, to minimize the adverse impact of any single event or set of
occurrences. The loan 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 773,000 consumer loans and over 40,000
commercial lending relationships. Of these, only 34 relationships have loans
outstanding over $10 million. Highly leveraged transactions and credit
facilities to finance speculative real estate ventures are minimal and there
are no LDC loans.
The following risk concentration categories existed at year-end. Only
those concentrations with portfolio totals in excess of the Corporation's
stockholders' equity are presented.
Geographic Risk - Most of the Corporation's business activities and credit
exposure is concentrated with customers in Puerto Rico. The Island's
economic prospects are generally regarded as stable to improving and the
Government of Puerto Rico and its instrumentalities are all
investment-grade rated borrowers in the United States capital markets.
However, the Corporation has been increasing its market outside Puerto
Rico, which now represents 24% of the Corporation's total assets. Within
the last two years, Banco Popular, the Corporation's largest subsidiary,
has doubled its 33 year presence in New York where it now operates 30
branches. It also operates one branch in Los Angeles and eight branches
in the U.S. and British Virgin Islands, where it is the largest bank.
Furthermore, the Corporation acquired Pioneer, in the State of Illinois,
which as of December 31, 1994 had three branches with $233.5 million in
loans and $325.8 million in deposits. Equity One, a consumer finance
operation acquired in 1991, now has 73 branches in 20 states, primarily
in the Mid-Atlantic Region. In addition, in January 1995 the Corporation
incorporated Banco Popular, FSB, which operates four branches acquired
from the RTC of the former Carteret Federal Savings Bank in New Jersey,
with approximately $182 million in deposits. It has been the
Corporation's philosophy to generally limit its lending activities to
projects and borrowers within its geographic regions. This has
consistently resulted in acceptable credit quality.
Consumer Credit Risk - Consumer credit arises from exposures to credit card
receivables, home mortgages, personal loans, and other installment credit
facilities. At December 31, 1994, consumer and residential mortgage loans
amounted to $2,101 million and $2,178 million, respectively, with $741
million in unused credit card lines. At the same date, non-performing
consumer and mortgage loans amounted to $28.7 million and net charge-offs
in the consumer portfolio totaled $11.3 million, including $8.6 million
in credit card loans and $2.7 million in other consumer loans. Mortgage
loans net charge-offs amounted to $1.3 million in 1994. As previously
mentioned, management continues emphasizing the growth in the secured
portion of the portfolio. At December 31, 1994, the secured consumer loan
portfolio was $923.8 million or 44% of the total portfolio compared with
38% at December 31, 1993.
Industry Risk - Total commercial loans, including commercial real estate loans,
amounted to $2,894 million at year-end. Commercial loans secured by real
estate, consisting primarily of residential, owner-occupied and income
producing properties, represented $1,047 million or 36% of the commercial
portfolio. Construction loans amounted to $161 million at year-end. The
non-real estate-related portion of the commercial loan portfolio amounted
to $1,847 million, with $1,122 million in unused commitments under lines
of credit to commercial, industrial and agricultural concerns. Commercial
and stand-by letters of credit totaled $90.2 million at year-end. As
previously mentioned, there are no significant concentrations in any one
industry, with a substantial portion of the customers having credit needs
of less than $100,000.
Government Risk - As of December 31, 1994, $3,481 million of the 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, $100.3 million of residential mortgages and
$202.2 million in commercial loans are insured or guaranteed by the U.S.
Government or its agencies. Furthermore, there are $221.4 million of
investment securities representing obligations of the Puerto Rico
Government and political subdivisions thereof, with another $157.4
million of loans issued to or guaranteed by these same entities and $32.3
million of loans issued to or guaranteed by the United States Virgin
Islands' Government.
F-14
31
------------------------------------------------------------------------------------------------------------------------------------
TABLE H
Loans Ending Balances
------------------------------------------------------------------------------------------------------------------------------------
For the Year
------------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1994 1993 1992 1991 1990
---------------------------------------------------------------------------------
Commercial, industrial and
agricultural................................... $2,893,534 $2,369,514 $2,133,357 $1,995,500 $2,069,395
Construction.................................... 161,265 153,436 172,411 194,741 175,656
Lease financing................................. 448,236 375,693 314,905 252,727 258,597
Mortgage*....................................... 2,177,763 1,576,044 790,802 683,506 635,571
Consumer........................................ 2,100,531 1,872,235 1,840,578 2,069,083 2,226,698
---------------------------------------------------------------------------------
Total....................................... $7,781,329 $6,346,922 $5,252,053 $5,195,557 $5,365,917
=================================================================================
*Includes loans held-for-sale.
--------------------------------------------------------------------------------
LOANS
Total loans increased $1,434 million to $7,781 million at December 31,
1994, compared with $6,347 million at December 31, 1993. Total loans at
December 31, 1992 amounted to $5,252 million. All loan categories demonstrated
increases in 1994. The mortgage loan portfolio accounted for $601.7 million or
42% of the total rise followed by the commercial loan portfolio, which
accounted for $524.0 million or 36.5% of the increase. Consumer, lease
financing and construction loan portfolios increased $228.3 million or 12.2%,
$72.5 million or 19.3% and $7.8 million or 5.1%, respectively, as compared with
the balances a year ago.
The increase of 38.2% in the mortgage loan portfolio compared with the
prior year balance of $1,576 million, was achieved through a significant
mortgage loan origination and refinancing activity during 1993 and the
beginning of 1994 in Banco Popular and Equity One. Banco Popular's mortgage
loans increased $363.7 million and Equity One's portfolio rose $201.4 million.
The mortgage loan portfolio amounted to $790.8 million at December 31, 1992.
Included in the mortgage loan portfolio at December 31, 1994, are $36.6 million
in loans of Pioneer. Due to the increase in interest rates during 1994,
mortgage application indices have been showing a drop in total application
volume which indicate a possible slowdown in originations in 1995.
The commercial loan portfolio increased from $2,370 million at December
31, 1993 to $2,894 million at the same date this year. Commercial loans totaled
$2,133 million at December 31, 1992. The rise was mainly due to the sustained
economic recovery and strong marketing efforts geared at the retail and middle
market with emphasis on the origination of government guaranteed loans,
primarily Small Business Administration (SBA) loans. These factors led to
increases of $206.2 million in Fortune 500 corporate loans, $124.1 million in
the retail and middle market portfolio and $47.7 million in
Government-guaranteed loans. Over the last three years, Banco Popular has been
the top SBA lender among commercial banks in the United States. In addition,
Pioneer had $141.3 million in commercial loans at year-end.
It is expected that the commercial loan portfolio will continue to grow
during 1995, primarily in economic sectors such as: service industries, middle
market and corporate loans, and pre-export and export financing. Furthermore,
significant increases in loan demand are expected in the tourism industry
sector and privately-developed infrastructure projects.
The lease financing portfolio amounted to $448.2 million as of December
31, 1994, compared with $375.7 million and $314.9 million as of December 31,
1993 and 1992, respectively. The rise in truck and vehicle sales in Puerto Rico
contributed to the growth in this loan category.
Total consumer loans, which include personal, auto and boat, credit
cards, reserve lines and student loans, amounted to $2,101 million at December
31, 1994, compared with $1,872 million at year-end 1993 and $1,841 million as
of December 31, 1992. This growth reflects the personal loans acquired from
Pioneer, which totaled $55.5 million at December 31, 1994, the economic
recovery and strong marketing efforts during the year.
The personal loan portfolio amounted to $1,033 million or 49% of the
total consumer portfolio at December 31, 1994. The personal loan portfolio was
comprised of approximately 23% in mortgage secured loans, 11% with cash
collateral and the remainder was unsecured. The Corporation's strategy to
emphasize the secured portion of the portfolio has resulted in a secured
personal loan portfolio of 34% at the end of 1994, as compared with 20% three
years ago.
Auto and boat secured loans represent about 19% of the total consumer
loan portfolio, revolving credit (credit cards plus reserve lines of credit)
represents 21% and home improvement loans represent 6%. The remaining 5% is
student loans and small dealer contracts.
F-15
32
------------------------------------------------------------------------------------------------------------------------------------
TABLE I
Non-Performing Assets
As of December 31,
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------
Commercial, industrial and
agricultural............................... $ 53,553 $ 49,517 $ 62,662 $ 79,642 $ 61,328
Construction................................ 7,994 8,215 8,798 8,213 6,297
Lease financing............................. 4,027 4,429 4,752 5,449 405
Mortgage.................................... 16,510 14,363 11,532 10,374 5,581
Consumer.................................... 12,179 16,290 20,597 25,049
Renegotiated accruing loans................. 2,982 5,643 8,380 520
Other real estate........................... 10,390 12,699 15,582 7,012 6,666
------------------------------------------------------------------------------------
Total................................... $107,635 $111,156 $132,303 $136,259 $ 80,277
====================================================================================
Accruing loans past-due
90 days or more............................ $ 15,012 $ 15,505 $ 23,957 $ 32,658 $ 57,355
====================================================================================
Non-performing assets to loans.............. 1.38% 1.75% 2.52% 2.62% 1.50%
Non-performing assets to assets............. 0.84 0.97 1.32 1.55 0.89
Interest lost............................... $ 5,441 $ 4,992 $ 7,548 $ 10,983 $ 6,869
Note: The Corporation's policy is to place commercial and construction loans
on non-accrual status if payments of principal or interest are past-due
60 days or more. Lease financing receivables and conventional
residential mortgage loans are placed on non-accrual status if payments
are delinquent 90 days or more. 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. Prior to 1991, the Corporation continued to accrue
interest on closed-end consumer loans until they were 120 days
past-due, at which time they were sold for a percent of their balance
and the difference charged-off.
------------------------------------------------------------------------------------------------------------------------------------
In 1995, credit and service quality continues to be emphasized through
additional training, continued personnel specialization and improved processing
technology. Continuous marketing efforts should spur growth in most consumer
portfolios due to the improved economic conditions.
NON-PERFORMING ASSETS
Non-performing assets consist of past-due loans on which no interest
income is being accrued, renegotiated loans, other real estate and in-substance
foreclosed assets. The Corporation reports its non-performing assets on a more
conservative basis than most U.S. banks. The Corporation's policy is to place
commercial loans on non-accrual status if payments of principal or interest are
delinquent 60 days rather than the standard industry practice of 90 days.
Financing leases, conventional mortgages and closed-end consumer loans are
placed on non-accrual status if payments are delinquent 90 days. Closed-end
consumer loans are charged-off against the allowance when 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 these consumer loans are not customarily placed on non-accrual
status prior to being charged-off.
As of December 31, 1994, non-performing assets amounted to $107.6 million
or 1.38% of loans, compared with $111.2 million or 1.75% of total loans and
$132.3 million or 2.52% at the end of 1993 and 1992, respectively.
Non-performing loans at December 31, 1994, totaled $94.3 million or 1.21% of
loans as compared with $92.8 million or 1.46% a year earlier. As of December
31, 1992 non-performing loans were $108.3 million or 2.06% of loans.
The reduction in non-performing assets was reflected mainly in
non-performing consumer loans which decreased $4.1 million due to improved
collection efforts. In addition, other real estate decreased $2.3 million
mainly due to the aggressive efforts directed at the orderly disposition of
other real estate and the sustained economic recovery. Renegotiated loans
decreased $2.6 million, from $5.6 million at December 31, 1993 to $3.0 million
this year. Non-performing lease financing and construction loans also showed
reductions of $0.4 million and $0.2 million, respectively. On the other hand,
non-performing commercial and mortgage loans increased $4.0 million and $2.1
million, respectively , mainly due to the significant rise in the portfolios.
Table I presents the composition of non-performing assets by category at the
end of 1994 and the previous four years.
F-16
33
------------------------------------------------------------------------------------------------------------------------------------
TABLE J
Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year............. $ 133,437 $ 110,714 $ 94,199 $ 89,335 $ 40,896
Allowance of acquired Corporation ....... 43,932
Other allowances purchased............... 3,473 1,580 1,556 1,786
Provision for loan losses................ 53,788 72,892 97,633 121,681 53,033
---------------------------------------------------------------------------------------
190,698 185,186 191,832 212,572 139,647
---------------------------------------------------------------------------------------
Losses charged to the allowance
Commercial.............................. 27,435 29,501 37,700 24,849 12,578
Construction............................ 1,794 3,060 1,887 2,450 587
Lease financing......................... 6,860 9,150 10,139 4,316 20
Mortgage................................ 1,310 477
Consumer................................ 29,545 35,239 52,454 97,700 40,486
---------------------------------------------------------------------------------------
66,944 77,427 102,180 129,315 53,671
---------------------------------------------------------------------------------------
Recoveries
Commercial.............................. 6,950 6,279 3,577 4,300 1,414
Construction............................ 1,374 607 796 50
Lease financing......................... 3,514 2,081 2,169 154
Mortgage................................ 5 36
Consumer................................ 18,201 16,675 14,520 6,488 1,895
--------------------------------------------------------------------------------------
30,044 25,678 21,062 10,942 3,359
---------------------------------------------------------------------------------------
Net loans charged-off.................... 36,900 51,749 81,118 118,373 50,312
---------------------------------------------------------------------------------------
Balance at end of year................... $ 153,798 $ 133,437 $ 110,714 $ 94,199 $ 89,335
=======================================================================================
Loans:
Outstanding at year end................. $7,781,329 $6,346,922 $5,252,053 $5,195,557 $5,365,917
Average................................. 7,107,746 5,700,069 5,150,328 5,302,189 3,377,463
Ratios:
Allowance for loan losses to year
end loans............................. 1.98% 2.10% 2.11% 1.81% 1.66%
Recoveries to charge-offs............... 44.88 33.16 20.61 8.46 6.26
Net charge-offs to average loans........ 0.52 0.91 1.58 2.23 1.49
Net charge-offs earnings coverage....... 6.21x 3.96x 2.44x 1.64x 2.50x
Allowance for loan losses to net
charge-offs............................ 4.17 2.58 1.36 0.80 1.78
Provision for loan losses to:
Net charge-offs...................... 1.46 1.41 1.20 1.03 1.05
Average loans........................ 0.76% 1.28% 1.90% 2.29% 1.57%
Allowance to non-performing assets...... 142.89 120.04 83.68 69.13 111.28
------------------------------------------------------------------------------------------------------------------------------------
Assuming the standard industry practice of placing commercial loans on
non-accrual status when payments 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, 1994, would have been $78.2 million or 1.01% of loans,
and the allowance for loan losses would be 196.63% of non-performing assets. At
December 31, 1993, and 1992 adjusted non-performing assets would have been
$80.9 million or 1.27% of loans and $105.7 million or 2.01% of loans,
respectively.
Accruing loans that are contractually past-due 90 days or more as to
principal or interest as of December 31, 1994, amounted to $15.0 million as
compared with $15.5 million in 1993.
Once a loan is placed on 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 $5.4 million for 1994 compared
with $5 million for 1993.
F-17
34
--------------------------------------------------------------------------------
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Corporation maintains the allowance for loan losses at a level which
is considered adequate to absorb losses inherent in the portfolio. The adequacy
of the allowance is reviewed regularly by management. In determining the
allowance, management considers the composition of the loan portfolio, past
loan loss experience, loan risk classifications and prevailing and projected
economic conditions.
The provision for loan losses was $53.8 million for 1994, compared with
$72.9 million in 1993, a decrease of $19.1 million or 26.2%. The provision for
loan losses for 1992 was $97.6 million. The decrease in the provision is the
result of the loan quality improvement and the lower ratio of net charge-offs
during the last three years. Net charge-offs for the year totaled $36.9 million
or 0.52% of average loans, compared with $51.7 million or 0.91% in 1993 and
$81.1 million or 1.58% in 1992.
All major loan categories, except mortgage, showed reductions in net
credit losses, with the consumer loan portfolio reflecting the largest
reduction. Consumer loans net charge-offs decreased $7.2 million or 38.9%
compared with prior year, from $18.5 million in 1993 to $11.3 million. In 1992,
consumer loans net charge-offs totaled $37.9 million. As a percentage of
average consumer loans, net charge-offs amounted to 0.58% in 1994, compared
with 1.02% in 1993 and 2.0% in 1992.
The decrease in the consumer loans net charge-offs was mainly in personal
loans where net charge-offs declined 63% from $5.7 million or 0.65% of average
loans in 1993 to $2.1 million or 0.10% this year. In 1992, personal loans' net
charge-offs were $21.5 million or 2.28% of average loans. The lower net
charge-off amounts for consumer credit in 1994 reflects, as previously
mentioned, the consistent application of prudent credit standards plus enhanced
collection systems.
Lease financing, commercial and construction loans net charge-offs also
showed reductions of $3.7 million, $2.7 million and $2.0 million, respectively,
compared with 1993. All these reductions are the result of the sustained
economic improvement, the implementation of upgraded collection systems in 1992
and 1993 and the improvement in collection efforts of troubled and charged-off
loans. Mortgage loans net charge-offs rose $0.9 million, compared with prior
year mainly as a result of Equity One's portfolio expansion.
The recent trend in the loan portfolio quality and the sustained economic
recovery portend more improvement in the Corporation's net credit losses in
1995, in spite of a higher interest rate scenario and potential inflationary
pressures.
At December 31, 1994, the allowance for loan losses was $153.8 million,
representing 1.98% of loans. At the same date in 1993 the allowance for loan
losses amounted to $133.4 million or 2.10% of loans. At December 31, 1992, the
allowance was $110.7 million or 2.11% of loans. Although the ratio of allowance
for loan losses to loans shows a small decrease, the Corporation continues
enjoying a strong allowance position since most of the increase in loans has
been experienced in the mortgage loan portfolio where the Corporation, based on
its historical experience and expected economic conditions, does not foresee
significant losses. Broken down by major loan categories, the allowance for the
last five years was as follows:
ALLOWANCE FOR LOAN LOSSES
AT DECEMBER 31,
(IN MILLIONS)
1994 1993 1992 1991 1990
-------------------------------------------------------
Commercial.............. $ 73.8 $ 64.0 $ 49.5 $34.4 $21.9
Construction ........ 10.8 10.6 6.5 3.5 3.2
Lease financing......... 6.5 5.8 5.4 5.4 4.3
Consumer................ 56.7 52.0 49.3 50.9 59.9
Mortgage................ 6.0 1.0
-------------------------------------------------------
$153.8 $133.4 $110.7 $94.2 $89.3
=======================================================
Table J summarizes the movement in the allowance for loan losses and
presents selected loan loss statistics for the past five years.
In May 1993 the Financial Accounting Standards Board issued SFAS 114,
"Accounting by Creditors for Impairment of a Loan" as amended by SFAS 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". These statements address the accounting by creditors for
impairment of a loan by specifying how the allowance for loan losses related to
certain loans should be determined. Under these statements a loan impairment
should be determined based on the present value of the loan's expected future
cash flows discounted at the loan's effective interest rate, the loan's market
price or the fair value of the collateral. SFAS 114 and 118 are effective for
fiscal years beginning after December 15, 1994. Management estimates that the
adoption of these statements will have no material effect on the financial
statements of the Corporation.
F-18
35
------------------------------------------------------------------------------------------------------------------------------------
TABLE K
Maturity Distribution of Earning Assets
As of December 31, 1994
------------------------------------------------------------------------------------------------------------------------------------
Maturities
-------------------------------------------------------
After one year
through five years After five years
-------------------------------------------------------
Fixed Variable Fixed Variable
One year interest interest interest interest
(In thousands) or less rates rates rates rates Total
-----------------------------------------------------------------------------------------------------------------------------------
Money Market Securities............ $ 265,670 $ 265,670
Investment and Trading
Securities ...................... 1,404,125 $2,159,422 $ 233,260 3,796,807
Loans:
Commercial ...................... 1,305,322 619,661 $377,964 339,434 $251,153 2,893,534
Construction .................... 142,537 5,343 13,385 161,265
Lease financing ................. 140,974 305,097 2,165 448,236
Consumer ........................ 610,871 1,288,796 200,864 2,100,531
Mortgage .......................... 163,712 617,205 1,396,846 2,177,763
--------------------------------------------------------------------------------------------
Total........................... $4,033,211 $4,990,181 $383,307 $2,172,569 $264,538 $11,843,806
============================================================================================
ASSET/LIABILITY MANAGEMENT
A major consideration in the financial management of commercial banking
institutions is the impact of changes in interest rates on net interest income.
The Corporation manages its balance sheet structure to minimize the impact of
interest rate volatility on earnings. Conservative interest rate risk
management is institutionalized in policies approved by the Board of Directors
and implemented by the Asset/Liability Management Committee (ALCO), which is
comprised of senior officers.
The maximization of the Corporation's net interest income while
maintaining interest rate risk within policy guidelines, is the ALCO's mandate.
The Asset/Liability Management Policy Manual, which is approved by the Board of
Directors, sets the specific risk parameters that must be maintained. Usually,
compliance with the policy calls for a balanced position between rate sensitive
assets and rate sensitive liabilities. Notwithstanding, temporary mismatches
may be assumed to take advantage of market conditions. Mismatched positions may
be assumed only under policy guidelines, and these are monitored closely by the
ALCO. In addition, they are structured so that the position can be adjusted
quickly if market conditions change.
The ALCO holds meetings on a monthly basis to review the Corporation's
earnings, interest rate risk position, and to assess current market conditions
as well as the outlook for interest rates. Financial strategies are presented
and adopted at these meetings, with the purpose of ensuring the attainment of
the Corporation's financial objectives. Monthly simulations of the
Corporation's financial results under various economic and financial scenarios
are prepared for review by the ALCO. These include measures of the extent to
which net interest income is affected by proposed financial strategies as well
as interest rates forecasts.
LIQUIDITY
Besides prudent rate risk management, liquidity management is of
paramount importance in the complete management of financial institutions. The
main objective of liquidity management is to ensure that sufficient funds are
always available to finance the loan demand of customers, deposit withdrawals,
the maturities of wholesale borrowings and the Corporation's operations. In a
positive yield curve environment it is costly to hold excessive amounts of
liquidity. Particularly under such conditions, an important issue is to
maintain an optimal level of liquid assets. Such asset level must be cost
effective and provide adequate coverage for most foreseeable scenarios with a
reasonable cushion for unforeseen events.
Both the Corporation's assets and liabilities are sources of substantial
liquidity. The investment portfolio is comprised mostly of high quality
securities. In addition, the Corporation's position as primary competitor in
the local funds market provides wide access to retail deposits. Moreover,
considerable credit lines have been established in the U.S. money and capital
markets, which give the Corporation the ability to raise funds on short notice.
The Corporation's investment portfolio, a significant source of
liquidity, consists mostly of U.S. Treasury and Agencies securities. As of
December 31, 1994, the portion of the Corporation's investment portfolio
classified as available-for-sale totaled $839.2 million.
F-19
36
-----------------------------------------------------------------------------------------------------------------------------------
TABLE L
Average Total Deposits
For the Year
-----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------
Private demand......................... $1,515,907 $1,396,339 $1,265,230 $1,206,443 $ 872,124
Public demand.......................... 273,565 235,323 201,218 172,722 144,867
Other non-interest bearing accounts.... 6,967 3,678 3,807 4,247 4,383
-----------------------------------------------------------------------------------------
Non-interest bearing.............. 1,796,439 1,635,340 1,470,255 1,383,412 1,021,374
-----------------------------------------------------------------------------------------
Savings accounts....................... 2,838,551 2,492,845 2,044,037 1,629,806 1,055,410
NOW and money market accounts.......... 1,133,106 1,078,075 955,654 767,984 433,989
-----------------------------------------------------------------------------------------
Savings deposits.................. 3,971,657 3,570,920 2,999,691 2,397,790 1,489,399
-----------------------------------------------------------------------------------------
Certificates of deposit:
Under $100,000........................ 1,060,940 1,053,515 1,125,653 1,184,350 768,584
$100,000 and over..................... 590,305 498,093 511,585 633,126 629,472
936................................... 1,007,147 1,029,450 1,202,604 1,260,491 947,555
-----------------------------------------------------------------------------------------
Certificates of deposit........... 2,658,392 2,581,058 2,839,842 3,077,967 2,345,611
-----------------------------------------------------------------------------------------
Public time............................ 177,534 124,629 155,715 181,019 132,128
Other time............................. 233,204 212,938 175,620 157,999 50,910
-----------------------------------------------------------------------------------------
Other time deposits............... 410,738 337,567 331,335 339,018 183,038
-----------------------------------------------------------------------------------------
Interest bearing.................. 7,040,787 6,489,545 6,170,868 5,814,775 4,018,048
-----------------------------------------------------------------------------------------
Total.......................... $8,837,226 $8,124,885 $7,641,123 $7,198,187 $5,039,422
=========================================================================================
This portfolio is an easily accessible liquidity source since it can be sold
promptly in the secondary markets with minimal transaction costs. The
investment securities held-to-maturity are also another source of liquidity. As
of year-end, this portfolio totaled $2,956 million, of which 70.6%, represented
U.S. Treasury and Agencies obligations, with 47.3% maturing within one year.
These securities are easily financed in the money markets at competitive rates.
Significant cash is generated from the Corporation's loan portfolio due
to its stream of principal and interest payments. As of December 31, 1994 the
loan portfolio maturing in less than one year amounted to $2,363 million, or
30.4% of the total loan portfolio.
The Corporation's dominant position in the local funds market has
resulted in a substantial base of core deposits, also a main liquidity source
for the Corporation. These deposits comprise consumer and commercial demand
deposits, savings deposits and time deposits under $100,000. As compared with
institutional funds, core deposits are more stable and reliable since they are
not as sensitive to changes in interest rates and market conditions. Core
deposits at year-end amounted to $7,345 million, or 81.5% of total deposits,
increasing 5.4% from the balance at the end of 1993. As of December 31, 1994,
certificates of deposit with denominations of $100,000 and more amounted to
$1,667 million, or 18.5% of total deposits, and had the following distribution:
(In thousands)
3 months or less.............. $1,271,042
3 to 6 months................. 197,366
6 to 12 months................ 115,304
over 12 months .............. 83,629
----------
$1,667,341
==========
Part of the Corporation's deposit base encompasses Section 936 deposits
which amounted to $922.4 million as of December 31, 1994, or 10.2% of total
deposits. The Corporation has implemented internal limitations on the maximum
amount of Section 936 funds which may be borrowed, with the purpose of avoiding
any undue dependence. As of December 31, 1994, total Section 936 funds
including certificates of deposits and repurchase agreements amounted to $1,842
million, or 15.7% of total liabilities.
The reductions in the benefits of Section 936 of the U.S. Internal
Revenue Code, which were enacted in 1993, became effective in 1994 and will be
phased in gradually throughout a five-year period. The Corporation's portfolio
of Section 936 funds was not affected negatively, as it reflected an increase
during 1994. Furthermore, the economy of Puerto Rico is not expected to be
significantly affected by the changes to the Code, given the level of benefits
retained.
F-20
37
------------------------------------------------------------------------------------------------------------------------------------
TABLE M
Interest Rate Sensitivity
As of December 31, 1994
------------------------------------------------------------------------------------------------------------------------------------
By Repricing Dates
------------------------------------------------------------------------------------------
After After
Within three months six months Non-interest
0-30 31-90 but within but within After one bearing
(Dollars in thousands) days days six months one year year funds Total
------------------------------------------------------------------------------------------------------------------------------------
Assets:
Federal funds sold and
securities purchased under
agreements to resell................... $ 265,000 $ 265,000
Short-term interest bearing
deposits in other banks................ 570 $ 100 670
Investment and trading securities....... 211,472 $ 467,594 257,004 $ 661,578 $2,199,069 $ 90 3,796,807
Loans................................... 1,985,470 341,159 290,470 398,623 4,765,607 7,781,329
Other assets............................ 934,552 934,552
-------------------------------------------------------------------------------------------
Total............................. 2,462,512 808,753 547,574 1,060,201 6,964,676 934,642 12,778,358
-------------------------------------------------------------------------------------------
Liabilities and equity:
Savings, NOW and Money Market
accounts*.............................. 1,113,800 522 2,863,534 3,977,856
Other time deposits..................... 1,018,565 762,067 505,885 298,770 498,409 3,083,696
Short-term interest bearing liabilities. 1,047,771 589,912 123,697 115,801 134,698 2,011,879
Long-term interest bearing liabilities.. 1 2 3 5 539,513 539,524
Non-interest bearing deposits........... 1,950,883 1,950,883
Other non-interest bearing liabilities.. 21,097 212,097
Stockholders' equity.................... 1,002,423 1,002,423
-------------------------------------------------------------------------------------------
Total............................. 3,180,137 1,351,981 629,585 415,098 4,036,154 $3,165,403 12,778,358
-------------------------------------------------------------------------------------------
Interest rate sensitive gap............. ($ 717,625) ($ 543,228) ($ 82,011) $ 645,103 $2,928,522
Cumulative interest rate
sensitivity gap........................ ($ 717,625) ($1,260,853) ($1,342,864) ($ 697,761) $2,230,761
Cumulative sensitive gap to
earning assets......................... (6.06%) (10.65%) (11.34%) (5.89%) 18.83%
* Now and Money Market accounts are presented as repricing within 0-30 days.
Savings accounts are included as repricing after one year as they have proved
to be stable sources of funds that have not been subject to withdrawal,
notwithstanding the changes in interest rates.
------------------------------------------------------------------------------------------------------------------------------------
To further enhance the Corporation's and its subsidiaries' ability to
secure financing in the U.S. money and capital markets, on June 24, 1994 a
"shelf" registration was filed with the Securities and Exchange Commission.
Under this registration, the Corporation and various of its subsidiaries may
issue unsecured debt securities, which may be either senior or subordinated
notes, or shares of preferred stock in an aggregate amount of up to $500
million. The amounts, terms and timing of offerings will be determined in the
future when and as the Corporation decides to sell debt securities and/or
shares of preferred stock under the registration. At the beginning of 1994,
Banco Popular became a member of the Federal Home Loan Bank of New York, which
represents a source of long-term funding at competitive rates.
INTEREST RATE SENSITIVITY
The rising interest rate environment that characterized most of 1994,
highlighted the sensitivity of many financial institutions' net interest income
to interest rate fluctuations. Since a significant portion of the Corporation's
earnings is derived from net interest income, management closely monitors the
Corporation's interest rate sensitivity together with the developments in the
financial market. These factors are examined continuously, specially during
extremely volatile interest rates scenarios, to ascertain their potential
impact on the Corporation's profitability.
The degree to which interest rate fluctuations affect net interest income
depends upon the maturity, duration and repricing characteristics of the
Corporation's assets and liabilities. It is also affected by the direction of
interest rate movements as well as changes in the shape of the yield curve. An
asset sensitive position occurs generally when a higher volume of assets than
liabilities matures or reprices within a certain period of time. Conversely, a
liability sensitive position occurs when a higher volume of liabilities than
assets matures or reprices within a certain time period.
The FED, in an attempt to maintain price stability by reducing the growth
rate of the U.S. economy, increased interest rates dramatically during 1994.
Significant increases in rates affect financial institutions differently,
depending upon the type and degree of interest rate
F-21
38
------------------------------------------------------------------------------------------------------------------------------------
TABLE N
Capital Adequacy Data
As of December 31,
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993 1992 1991 1990
-------------------------------------------------------------------------
Risk-based capital
Tier I capital....................................... $ 953,266 $ 786,686 $ 722,082 $ 598,034 $ 567,653
Supplementary (Tier II) capital...................... 104,338 106,193 110,704 127,181 148,085
-------------------------------------------------------------------------
Total capital................................... $1,057,604 $ 892,879 $ 832,786 $ 725,215 $ 715,738
=========================================================================
Risk-weighted assets
Balance sheet items.................................. $7,219,906 $6,150,749 $5,430,534 $5,240,345 $5,537,909
Off-balance sheet items.............................. 199,327 250,102 177,172 191,927 82,205
-------------------------------------------------------------------------
Total risk-weighted assets...................... $7,419,233 $6,400,851 $5,607,706 $5,432,272 $5,620,114
=========================================================================
Ratios:
Tier I capital (minimum required - 4.00%)............ 12.85% 12.29% 12.88% 11.01% 10.10%
Total capital (minimum required - 8.00%)............. 14.25 13.95 14.85 13.35 12.74
Leverage ratio (minimum required - 3.00%) ........... 7.62 6.95 7.26 6.64 6.34
Equity to assets..................................... 7.57 7.42 7.02 6.83 6.98
Tangible equity to assets............................ 6.55 6.29 5.66 5.46 6.87
Equity to loans...................................... 13.01 13.91 12.99 11.52 12.07
Internal capital generation rate..................... 9.48 10.08 9.04 6.64 11.60
------------------------------------------------------------------------------------------------------------------------------------
sensitivity. When interest rates rise, an asset sensitive position usually
results in increased net interest income. Under such a position, more assets
than liabilities reprice at a higher interest rate, therefore increasing net
interest income. On the other hand, a liability sensitive position generally
results in a lower net interest income. As rates increase, more liabilities
than assets reprice at a higher rate, therefore increasing the cost of funds
faster than interest revenue.
The Corporation's interest rate risk position as of December 31, 1994 is
presented in Table M. At year-end, the Corporation presented a negative
cumulative one-year gap of $697.8 million, or negative 5.9% of total earning
assets, compared with a positive cumulative gap of $253.2 million, or 4.85% of
earning assets, at December 31, 1993. The change was due to a decrease of
$678.3 million in investment and trading securities, increases of $243.9
million in other time deposits and $385.0 million in short-term liabilities,
all repricing within one year. This change was partially offset by an increase
of $333.4 million in loans repricing within one year.
STOCKHOLDERS' EQUITY
At December 31, 1994, stockholders' equity amounted to $1,002 million, an
increase of $168.2 million or 20.2% compared with the balance of $834.2 million
at year-end 1993. This increase is due to the issuance of preferred stock that
raised $96.7 million in additional capital, the issuance of additional shares
amounting to $3.2 million under the Corporation's Dividend Reinvestment Plan,
and earnings' retention. As previously mentioned, during the first quarter of
1994, the Corporation adopted SFAS 115 and as a result stockholders' equity at
December 31, 1994 includes $19.4 million in unrealized losses, net of deferred
taxes, on securities available-for-sale.
On June 27, 1994 the Corporation issued 4,000,000 shares of Series A
preferred stock. These shares are non-convertible and are redeemable at the
option of the Corporation on or after June 30, 1998. Dividends are
non-cumulative and are payable monthly at an annual rate per share of 8.35%
based on the liquidation preference value of $25 per share.
The Corporation exceeds the regulatory risk-based capital requirements
for well capitalized institutions by wide margins, due to the high level of
capital and the conservative nature of the Corporation's assets. Tier I capital
to risk-adjusted assets and total capital ratios at December 31, 1994 were
12.85% and 14.25%, compared with 12.29% and 13.95%, respectively, at year-end
1993. The Corporation's leverage ratio was 7.62% at December 31, 1994, compared
with 6.95% for the previous year. Table N shows capital adequacy information
for the current and previous four years.
The average tangible equity increased to $792 million for the year ended
December 31, 1994 from $663.6 million a year before, an increase of $128.4
million or 19.4%. Total tangible equity at December 31, 1994 was $873.7 million
compared with $701.4 million at December 31, 1993. The tangible equity to
assets ratio increased as well, to 6.55% in 1994 from 6.29% in 1993. Book value
per share increased to $27.48 at December 31, 1994, compared with $25.49 at
year-end 1993. Furthermore, the Corporation's Board of Directors approved a
stock repurchase program. Under this program the Corporation may repurchase up
to one million shares of the outstanding common stock of the Corporation at
such times and prices as market conditions shall warrant.
F-22
39
------------------------------------------------------------------------------------------------------------------------------------
TABLE O
Common Stock Performance
Cash Book *
Market Price Dividends Value Dividend Price/ Market/
----------------------- Declared Per Payout Dividend Earnings Book
High Low Per Share Share Ratio Yield Ratio Ratio
------------------------------------------------------------------------------------------------------------------------------------
1994 $27.48 27.20% 3.18% 7.66x 102.37%
1ST QUARTER.................. $ 32 1/2 $30 3/4 $.25
2ND QUARTER.................. 32 3/4 31 .25
3RD QUARTER.................. 33 1/4 31 1/2 .25
4TH QUARTER.................. 33 27 .25
1993 25.49 25.39 2.97 9.42 123.58
1st quarter.................. $ 31 1/4 $26 1/2 $.20
2nd quarter.................. 28 1/4 24 3/8 .20
3rd quarter.................. 30 1/4 26 1/2 .25
4th quarter.................. 32 1/4 29 3/4 .25
1992 23.03 28.33 3.12 10.83 131.35
1st quarter.................. $ 25 1/2 $18 3/4 $.20
2nd quarter.................. 27 3/4 24 .20
3rd quarter.................. 27 3/4 24 1/2 .20
4th quarter.................. 30 1/4 24 1/2 .20
1991 21.00 34.13 4.18 8.96 91.67
1st quarter.................. $ 17 1/2 $14 3/4 $.20
2nd quarter.................. 19 7/8 16 3/4 .20
3rd quarter.................. 18 1/2 16 1/2 .20
4th quarter.................. 19 1/2 17 .20
1990 19.67 25.33 4.41 5.08 81.34
1st quarter.................. $ 22 $19 $.20
2nd quarter.................. 19 3/4 18 1/2 .20
3rd quarter.................. 19 1/2 14 3/4 .20
4th quarter.................. 16 7/8 14 1/4 .20
*Based on the average high and low market price for the four quarters.
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
The Corporation's stock is traded on the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market System under
the symbol BPOP. Table O shows the range of market quotations and cash
dividends declared for each quarter during the last five years.
The Corporation has a Dividend Reinvestment Plan for its stockholders.
This plan offers the stockholders the opportunity to automatically reinvest
their dividends in shares of common stock at a 5% discount from the average
market price at the time of issuance. During 1994, 105,706 shares, equivalent
to $3.2 million in additional capital, were issued under the plan. A total of
565,106 shares have been issued under this plan since its inception in 1989,
contributing $12.3 million in additional capital.
PREFERRED STOCK
The preferred stock of the Corporation is also traded on the NASDAQ
National Market System under the symbol BPOPP.
DIVIDENDS
Dividends declared on common stock during 1994 totaled $32.8 million,
compared with $29.4 million in 1993. The Corporation, following its policy of
maintaining a dividend payout ratio close to 30%, increased its quarterly
dividend from $0.20 to $0.25 per common share, effective on October 1, 1993.
The annual dividend declared per common share for 1994 was $1.00 compared with
$0.90 in 1993 and $0.80 in 1992.
The dividend payout ratio to common stockholders for the year
increased to 27.20% compared with 25.39% a year before, as a result of the
growth in dividends paid per common share during the year.
Dividends declared on the preferred stock issued this year amounted to
$4.2 million.
F-23
40
-------------------------------------------------------------------------------
INFLATION ACCOUNTING
SFAS 89 makes optional the disclosure of supplementary information on the
effects of inflation.
The Corporation has decided not to prepare the supplementary data for the
following reasons:
- The impact of inflation on the banking industry differs significantly
from that on industries that require a higher proportion of investment
in fixed assets. Our asset and liability structure is composed mainly
of monetary assets and liabilities.
- Changes in interest rates that may significantly impact the
Corporation's earnings do not necessarily move in the same direction or
in the same magnitude as the prices of other goods and services.
- Information included in this annual report such as Interest Variance
Analysis, Interest Rate Sensitivity Table, Average Balance Sheet,
Summary of Net Interest Income and the market value disclosures
required by SFAS 107, provides more insight as to the effects on the
Corporation of changes in interest rates than the supplementary data on
inflation accounting.
F-24
41
STATISTICAL SUMMARY 1990-1994 BANPONCE CORPORATION
STATEMENTS OF CONDITION
------------------------------------------------------------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
1994 1993 1992 1991 1990
---------------------------------------------------------------------------
ASSETS
Cash and due from banks............................. $ 442,316 $ 368,837 $ 325,497 $ 311,384 $ 347,619
---------------------------------------------------------------------------
Money market investments:
Federal funds sold and securities
and mortgages purchased under
agreements to resell............................ 265,000 247,333 234,163 139,530 288,036
Time deposits with other banks.................... 100 15,100 50,100 340,100 644,938
Bankers' acceptances.............................. 570 259 858 1,703 2,369
---------------------------------------------------------------------------
265,670 262,692 285,121 481,333 935,343
---------------------------------------------------------------------------
Investment securities held-to-maturity,
at cost........................................... 2,955,911 3,329,798 3,290,440 2,354,009 1,917,144
---------------------------------------------------------------------------
Investment securities available-for-sale
at lower of cost or market value.................. 839,226 715,565 408,127
---------------------------------------------------------------------------
Trading securities.................................. 1,670 3,017 283 1,657 875
---------------------------------------------------------------------------
Loans held-for-sale................................. 10,296
---------------------------------------------------------------------------
Loans............................................... 8,066,954 6,655,072 5,614,724 5,575,976 5,798,072
Less-Unearned income............................ 295,921 308,150 362,671 380,419 432,155
Allowance for loan losses................ 153,798 133,437 110,714 94,199 89,335
---------------------------------------------------------------------------
7,617,235 6,213,485 5,141,339 5,101,358 5,276,582
---------------------------------------------------------------------------
Premises and equipment.............................. 324,160 298,089 260,330 253,054 235,830
Other real estate................................... 10,390 12,699 15,582 7,012 6,748
Customers' liabilities on acceptances............... 902 1,392 1,830 1,691 3,059
Accrued income receivable........................... 78,765 79,285 76,008 59,027 59,106
Other assets........................................ 103,088 95,763 64,890 71,026 68,267
Intangible assets .................................. 128,729 132,746 132,880 138,731 133,051
---------------------------------------------------------------------------
$12,778,358 $11,513,368 $10,002,327 $8,780,282 $8,983,624
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing............................ $ 1,950,883 $ 1,848,859 $ 1,614,806 $1,499,352 $1,455,785
Interest bearing................................ 7,061,552 6,673,799 6,423,905 5,707,766 5,966,926
---------------------------------------------------------------------------
9,012,435 8,522,658 8,038,711 7,207,118 7,422,711
Federal funds purchased and securities
sold under agreements to repurchase.......... 1,438,038 951,733 665,222 449,114 394,148
Other short-term borrowings..................... 573,841 664,173 206,882 143,724 181,317
Notes payable................................... 459,524 253,855 90,062 73,752 8,018
Senior debentures............................... 30,000 30,000 30,000 30,000 30,000
Acceptances outstanding......................... 902 1,392 1,830 1,691 3,059
Other liabilities............................... 211,195 182,362 132,501 138,065 250,487
---------------------------------------------------------------------------
11,725,935 10,606,173 9,165,208 8,043,464 8,289,740
---------------------------------------------------------------------------
Subordinated notes.............................. 50,000 62,000 74,000 94,000 94,000
---------------------------------------------------------------------------
Preferred stock of Banco Popular................ 11,000 11,000 11,000 11,000
---------------------------------------------------------------------------
Stockholders' equity:
Preferred stock................................. 100,000
Common stock.................................... 197,029 196,395 195,929 180,563 179,655
Surplus......................................... 409,445 386,622 361,982 287,539 276,049
Retained earnings............................... 272,458 208,607 150,208 110,287 93,180
Unrealized losses on investment securities
avalilable-for-sale, net of deferred taxes... (19,366)
Capital reserves................................ 42,857 42,571 44,000 53,429 40,000
---------------------------------------------------------------------------
1,002,423 834,195 752,119 631,818 588,884
---------------------------------------------------------------------------
$12,778,358 $11,513,368 $10,002,327 $8,780,282 $8,983,624
===========================================================================
F-25
42
STATISTICAL SUMMARY 1990-1994 BANPONCE CORPORATION
STATEMENTS OF INCOME
---------------------------------------------------------------------------------------------
For the year ended December 31,
---------------------------------------------------------------------------------------------
(In thousands, except per common share
information) 1994 1993 1992 1991 1990
------------------------------------------------
INTEREST INCOME:
Loans...................................... $665,031 $549,388 $518,074 $579,463 $395,797
Money market investments................... 5,186 6,434 14,414 33,590 37,571
Investment securities...................... 214,611 215,944 207,642 181,413 131,911
Trading account securities................. 297 370 224 477 528
------------------------------------------------
Total interest income................. 885,125 772,136 740,354 794,943 565,807
Less - Interest expense.................... 351,633 280,008 300,135 387,134 281,561
------------------------------------------------
Net interest income................... 533,492 492,128 440,219 407,809 284,246
Provision for loan losses.................. 53,788 72,892 97,633 121,681 53,033
------------------------------------------------
Net interest income after provision
for loan losses..................... 479,704 419,236 342,586 286,128 231,213
Gain on sale of investment securities...... 224 864 242 18,617 64
Trading account profit..................... 227 554 383 759 27
All other operating income................. 142,868 123,762 123,879 112,398 70,865
------------------------------------------------
623,023 544,416 467,090 417,902 302,169
------------------------------------------------
OPERATING EXPENSES:
Personnel costs............................ 225,747 215,911 188,234 180,634 131,322
All other operating expenses............... 222,099 196,365 178,711 165,104 98,241
------------------------------------------------
447,846 412,276 366,945 345,738 229,563
------------------------------------------------
Income before tax, dividends on preferred
stock of Banco Popular and cumulative
effect of accounting changes.......... 175,177 132,140 100,145 72,164 72,606
Income tax................................. 50,043 28,151 14,259 6,793 9,240
------------------------------------------------
Income before dividends on preferred
stock of Banco Popular and cumulative
effect of accounting changes.......... 125,134 103,989 85,886 65,371 63,366
Dividends on preferred stock of
Banco Popular......................... 385 770 770 807
------------------------------------------------
Income before cumulative effect of
accounting changes.................... 124,749 103,219 85,116 64,564 63,366
Cumulative effect of accounting changes.... 6,185
------------------------------------------------
NET INCOME................................. $124,749 $109,404 $ 85,116 $ 64,564 $ 63,366
================================================
NET INCOME APPLICABLE TO COMMON STOCK...... $120,504 $109,404 $ 85,116 $ 64,564 $ 63,366
================================================
EARNINGS PER COMMON SHARE*
Before effect of accounting changes... $ 3.67 $ 3.16 $ 2.79 $ 2.15 $ 3.15
================================================
Net income............................ $ 3.67 $ 3.35 $ 2.79 $ 2.15 $ 3.15
================================================
Dividends declared on common stock:
Cash dividends per common share
outstanding.............................. $ 1.00 $ 0.90 $ 0.80 $ 0.80 $ 0.80
================================================
*The average common shares used in the computation of earnings and cash
dividend per common share were 32,798,243 for 1994; 32,701,236 for 1993;
30,461,494 for 1992; 30,035,601 for 1991, and 20,116,970 for 1990.
F-26
43
STATISTICAL SUMMARY 1992-1994 BANPONCE CORPORATION
QUARTERLY FINANCIAL DATA
---------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST Fourth Third Second First
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
(In thousands, except per
common share information)
Interest income......... $238,374 $228,227 $219,543 $198,981 $199,780 $196,709 $191,220 $184,427
Net interest income..... 136,791 136,231 135,117 125,353 126,490 125,174 122,703 117,761
Provision for loan
losses................ 12,544 13,544 14,037 13,663 14,737 17,442 19,166 21,547
Non-interest income .... 38,468 36,481 34,864 33,282 34,000 30,178 31,905 28,233
Gain (loss) on sale of
investment securities. 157 (205) 272 332 86 446
Non-interest expense ... 114,266 114,551 112,452 106,577 107,462 101,436 100,524 102,854
Income before income
tax, cumulative effect
of accounting changes
and dividends on
preferred stock of
Banco Popular......... 48,606 44,412 43,492 38,667 38,291 36,806 35,004 22,039
Income taxes............ 15,980 12,695 11,623 9,745 9,875 8,459 7,306 2,511
Dividends on preferred
stock of Banco Popular 192 193 192 193 192 193
Cumulative effect of
accounting changes.... 6,185
------------------------------------------------------------------------------------
Net income.............. $ 32,626 $ 31,717 $ 31,677 $ 28,729 $ 28,224 $ 28,154 $ 27,506 $ 25,520
====================================================================================
Net income applicable
to common stock ..... $ 30,538 $ 29,560 $ 31,677 $ 28,729 $ 28,224 $ 28,154 $ 27,506 $ 25,520
====================================================================================
Net income per common
share before cumu-
lative effect of
accounting changes ... $ 0.93 $ 0.90 $ 0.96 $ 0.88 $ 0.87 $ 0.86 $ 0.84 $ 0.59
------------------------------------------------------------------------------------
Net income per
common share.......... $ 0.93 $ 0.90 $ 0.96 $ 0.88 $ 0.87 $ 0.86 $ 0.84 $ 0.78
------------------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
(In millions)
Total assets ........... $ 12,585 $ 12,385 $ 12,301 $ 11,618 $ 11,374 $ 10,855 $ 10,472 $ 10,017
Loans .................. 7,645 7,356 6,958 6,456 6,219 5,849 5,466 5,254
Interest earning assets. 11,749 11,540 11,449 10,809 10,543 10,064 9,693 9,264
Deposits................ 8,960 8,841 9,000 8,543 8,426 8,074 8,005 7,992
Interest bearing
liabilities............. 9,572 9,445 9,440 8,856 8,612 8,249 7,946 7,569
------------------------------------------------------------------------------------
SELECTED RATIOS
Return on assets ....... 1.03% 1.02% 1.03% 1.00% 0.98% 1.03% 1.05% 1.03%
Return on equity ....... 13.54 13.26 14.59 13.78 13.59 13.90 14.09 13.60
1992
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------
SUMMARY OF OPERATIONS
(In thousands, except per
common share information)
Interest income......... $187,284 $188,328 $183,168 $181,574
Net interest income..... 115,514 112,093 107,912 104,700
Provision for loan
losses................ 23,043 24,333 26,237 24,020
Non-interest income .... 29,208 30,783 34,137 30,134
Gain (loss) on sale of
investment securities. 58 10 (36) 210
Non-interest expense ... 95,080 93,626 91,718 86,521
Income before income
tax, cumulative effect
of accounting changes
and dividends on
preferred stock of
Banco Popular......... 26,657 24,927 24,058 24,503
Income taxes............ 3,415 3,536 3,022 4,286
Dividends on preferred
stock of Banco Popular
Cumulative effect of
accounting changes.... 192 193 192 193
------------------------------------------
Net income.............. $ 23,050 $ 21,198 $ 20,844 $ 20,024
==========================================
Net income applicable
to common stock ..... $ 23,050 $ 21,198 $ 20,844 $ 20,024
==========================================
Net income per common
share before cumu-
lative effect of
accounting changes ... $ 0.73 $ 0.71 $ 0.69 $ 0.66
------------------------------------------
Net income per
common share.......... $ 0.73 $ 0.71 $ 0.69 $ .66
------------------------------------------
SELECTED AVERAGE BALANCES
(In millions)
Total assets ........... $ 9,991 $ 9,804 $ 9,172 $ 9,138
Loans .................. 5,211 5,078 5,153 5,160
Interest earning assets. 9,245 9,033 8,437 8,397
Deposits................ 7,940 7,844 7,446 7,330
Interest bearing liabilit 7,610 7,546 6,979 6,967
------------------------------------------
SELECTED RATIOS
Return on assets ....... 0.92% 0.86% 0.91% 0.88%
Return on equity ....... 12.85 12.60 12.83 12.60
F-27
44
STATISTICAL SUMMARY 1990-1994
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
------------------------------------------------------------------------------------------------------------------------------------
ON A TAXABLE EQUIVALENT BASIS*
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1994 1993
------------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE Average Average
BALANCE INTEREST RATE Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Federal funds sold and securities and
mortgages purchased under agreements
to resell........................................... $ 114,215 $ 4,858 4.25% $ 117,095 $ 4,115 3.51%
Time deposits with other banks........................ 4,916 300 6.10 57,845 2,259 3.91
Bankers' acceptances.................................. 332 28 8.43 871 60 6.89
------------------------------------------------------------------------
Total money market investments................... 119,463 5,186 4.34 175,811 6,434 3.66
------------------------------------------------------------------------
U.S. Treasury securities.............................. 2,657,975 164,102 6.17 2,985,634 202,695 6.79
Obligations of other U.S. Government
agencies and corporations........................... 526,687 33,969 6.45 274,821 18,033 6.56
Obligations of Puerto Rico, States and
political subdivisions.............................. 259,534 14,074 5.42 227,784 14,253 6.26
Other................................................. 712,972 37,535 5.26 523,224 26,944 5.15
------------------------------------------------------------------------
Total investment securities...................... 4,157,168 249,680 6.01 4,011,463 261,925 6.53
------------------------------------------------------------------------
Trading account securities.............................. 5,303 368 6.94 7,319 449 6.13
------------------------------------------------------------------------
Loans (net of unearned income).......................... 7,107,746 670,959 9.44 5,700,069 555,671 9.75
------------------------------------------------------------------------
Total interest earning assets/
Interest income............................... 11,389,680 $926,193 8.13% 9,894,662 $824,479 8.33%
------------------------------------------------------------------------
Total non-interest earning assets................ 835,850 789,091
------------------------------------------------------------------------
TOTAL ASSETS .................................... $12,225,530 $10,683,753
========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings and NOW accounts............................. $ 3,971,657 $116,817 2.94% $ 3,570,920 $107,454 3.01%
Other time deposits.................................. 3,069,130 130,909 4.27 2,918,625 111,994 3.84
Short-term borrowings................................ 1,856,649 77,537 4.18 1,337,970 42,392 3.17
Mortgages and notes payable.......................... 376,570 22,420 5.95 195,522 12,801 6.55
Subordinated notes................................... 56,082 3,950 7.04 73,967 5,367 7.26
------------------------------------------------------------------------
Total interest bearing liabilities/
Interest expense............................ 9,330,088 351,633 3.77 8,097,004 280,008 3.46
------------------------------------------------------------------------
Total non-interest bearing liabilities 1,965,148 1,782,748
------------------------------------------------------------------------
Total liabilities 11,295,236 9,879,752
------------------------------------------------------------------------
Preferred stock of Banco Popular..................... 5,425 11,000
------------------------------------------------------------------------
Stockholders' equity.................................... 924,869 793,001
------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $12,225,530 $10,683,753
========================================================================
Net interest income on a taxable
equivalent basis $574,560 $544,471
------------------------------------------------------------------------
Interest expense to earning assets...................... 3.09% 2.83%
------------------------------------------------------------------------
Net interest yield...................................... 5.04% 5.50%
========================================================================
Effect of the taxable equivalent adjustment...... 41,068 52,343
------------------------------------------------------------------------
Net interest income per books........................... $533,492 $492,128
========================================================================
*Shows the effect of the tax exempt status of some loans and investments on
their yield. A 42% tax rate was used for 1994 through 1990. The computation
considers the interest expense disallowance as required by the Tax Reform Act
enacted in 1987. 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.
F-28
45
BANPONCE CORPORATION
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1992 1991
------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Federal funds sold and securities and
mortgages purchased under agreements
to resell........................................... $ 144,539 $ 5,209 3.60% $ 76,095 $ 4,448 5.85%
Time deposits with other banks........................ 215,970 9,093 4.21 427,536 28,886 6.76
Bankers' acceptances.................................. 1,496 112 7.49 2,848 256 8.99
-------------------------------------------------------------------
Total money market investments................... 362,005 14,414 3.98 506,479 33,590 6.63
-------------------------------------------------------------------
U.S. Treasury securities 2,443,267 226,038 9.25 1,596,986 179,103 11.22
Obligations of other U.S. Government
agencies and corporations........................... 317,152 27,838 8.78 332,002 32,241 9.71
Obligations of Puerto Rico, States and
political subdivisions.............................. 212,762 19,345 9.09 212,180 22,243 10.48
Other.................................................. 288,818 21,780 7.54 241,064 19,328 8.02
-------------------------------------------------------------------
Total investment securities...................... 3,261,999 295,001 9.04 2,382,232 252,915 10.62
-------------------------------------------------------------------
Trading account securities.............................. 5,649 303 5.36 8,295 650 7.84
-------------------------------------------------------------------
Loans (net of unearned income).......................... 5,150,328 526,902 10.23 5,302,189 589,520 11.12
-------------------------------------------------------------------
Total interest earning assets/
Interest income................................ 8,779,981 $836,620 9.53% 8,199,195 $876,675 10.69%
-------------------------------------------------------------------
Total non-interest earning assets................ 748,537 745,162
-------------------------------------------------------------------
TOTAL ASSETS..................................... $9,528,518 $8,944,357
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings and NOW accounts............................. $2,999,691 $108,945 3.63% $2,397,790 $113,165 4.82%
Other time deposits.................................. 3,171,177 144,430 4.55 3,416,985 210,552 6.16
Short-term borrowings................................ 903,903 31,711 3.51 855,702 51,142 5.98
Mortgages and notes payable.......................... 116,695 8,245 7.07 52,310 3,965 7.58
Subordinated notes................................... 85,585 6,804 7.95 94,000 8,310 8.84
-------------------------------------------------------------------
Total interest bearing liabilities/
Interest expense............................ 7,277,051 300,135 4.12 6,816,787 387,134 5.68
-------------------------------------------------------------------
Total non-interest bearing liabilities........ 1,571,477 1,505,929
-------------------------------------------------------------------
Total liabilities ............................ 8,848,528 8,322,716
-------------------------------------------------------------------
Preferred stock of Banco Popular..................... 11,000 11,000
-------------------------------------------------------------------
Stockholders' equity.................................... 668,990 610,641
-------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $9,528,518 $8,944,357
===================================================================
Net interest income on a taxable
equivalent basis .................................... $536,485 $489,541
-------------------------------------------------------------------
Interest expense to earning assets...................... 3.42% 4.72%
-------------------------------------------------------------------
Net interest yield...................................... 6.11% 5.97%
===================================================================
Effect of the taxable equivalent adjustment...... 96,266 81,732
-------------------------------------------------------------------
Net interest income per books........................... $440,219 $407,809
===================================================================
(Dollars in thousands) 1990
------------------------------------------------------------------------------------------------------------------------------
Average Average
Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Federal funds sold and securities and
mortgages purchased under agreements
to resell........................................... $ 138,701 $ 11,476 8.27%
Time deposits with other banks........................ 308,904 25,970 8.41
Bankers' acceptances.................................. 1,217 125 10.27
-------------------------------------------------------------------
Total money market investments................... 448,822 37,571 8.37
-------------------------------------------------------------------
U.S. Treasury securities .................... 944,804 109,116 11.55
Obligations of other U.S. Government
agencies and corporations........................... 411,257 48,387 11.77
Obligations of Puerto Rico, States and
political subdivisions.............................. 146,874 15,395 10.48
Other................................................. 123,509 11,689 9.46
-------------------------------------------------------------------
Total investment securities...................... 1,626,444 184,587 11.35
-------------------------------------------------------------------
Trading account securities.............................. 9,209 705 7.66
-------------------------------------------------------------------
Loans (net of unearned income).......................... 3,377,463 403,005 11.93
-------------------------------------------------------------------
Total interest earning assets/
Interest income............................... 5,461,938 $625,868 11.46%
-------------------------------------------------------------------
Total non-interest earning assets................ 374,811
-------------------------------------------------------------------
TOTAL ASSETS .................................... $5,836,749
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings and NOW accounts............................. $1,489,399 $ 71,848 4.82%
Other time deposits.................................. 2,528,649 185,251 7.33
Short-term borrowings................................ 252,695 20,037 7.93
Mortgages and notes payable.......................... 4,486 285 6.35
Subordinated notes................................... 50,000 4,140 8.28
-------------------------------------------------------------------
Total interest bearing liabilities/
Interest expense............................ 4,325,229 281,561 6.51
-------------------------------------------------------------------
Total non-interest bearing liabilities........ 1,103,909
-------------------------------------------------------------------
Total liabilities ............................ 5,429,138
-------------------------------------------------------------------
Preferred stock of Banco Popular.....................
-------------------------------------------------------------------
Stockholders' equity.................................... 407,611
-------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,836,749
===================================================================
Net interest income on a taxable
equivalent basis............................. $344,307
-------------------------------------------------------------------
Interest expense to earning assets...................... 5.16%
-------------------------------------------------------------------
Net interest yield...................................... 6.30%
===================================================================
Effect of the taxable equivalent adjustment...... 60,061
-------------------------------------------------------------------
Net interest income per books........................... $284,246
===================================================================
F-29
46
GLOSSARY OF TERMS
--------------------------------------------------------------------------------
936 CORPORATIONS - Subsidiaries of U.S. firms operating in Puerto Rico and
other offshore areas under Section 936 of the U.S. Internal Revenue Code.
Section 936 provides certain tax benefits on Puerto Rico source earnings from
the active conduct of a trade or business or from qualified investments.
936 DEPOSITS - Funds of 936 corporations deposited in banks usually in the form
of time deposits. The restriction that these funds must be reinvested in
eligible assets, if income derived from them is to be considered tax-exempt for
U.S. and Puerto Rico's Industrial Incentive Act purposes, lowers the rate on
these funds as compared to interest rates paid on similar deposits.
BASIS POINT - Equal to one-hundredth of one percent. Used to express changes
or differences in interest yields and rates.
CORE DEPOSITS - A deposit category that includes all non-interest bearing
deposits, savings deposits and certificates of deposit under $100,000. These
deposits are considered a stable source of funds.
EARNING ASSETS - Assets that earn interest, such as loans, investment
securities, money market investments and trading account securities.
EARNINGS PER COMMON SHARE - Net income less dividends on preferred stock of the
Corporation, divided by the average number of common shares outstanding during
the periods presented.
GAP - The difference that exists at a specific period of time between the
maturities or repricing terms of interest-sensitive assets and
interest-sensitive liabilities.
INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid such as
saving deposits, certificates of deposit, other time deposits, borrowings and
subordinated notes.
INTEREST-SENSITIVE ASSETS/LIABILITIES - Interest-earning
assets/interest-bearing liabilities for which interest rates are adjustable
within a specified time period due to maturity or contractual arrangements.
LEVERAGE RATIO - Ratio adopted by the Federal Reserve System to assist in the
assessment of the capital adequacy of state member banks. This ratio is
calculated by dividing Tier I capital by total assets reduced by goodwill and
any other intangible asset deducted from Tier I capital.
LIQUIDITY - A combination of assets that assures currently available supplies
of funds necessary to meet deposit withdrawals, loan demands and repayment of
borrowings as they become due. The need for liquid funds is normally satisfied
from daily operations and the maturity management of money market investments
and investment securities.
NET INCOME APPLICABLE TO COMMON STOCK - Net income less dividends paid on the
Corporation's preferred stock.
NET INTEREST INCOME - The difference between interest income and fees on
earning assets and interest expense on liabilities.
NET INTEREST YIELD - A percentage computed by dividing net interest income by
average earning assets.
NON-PERFORMING ASSETS - Includes loans on which the accrual of interest income
has been discontinued due to default on interest and/or principal payments or
other factors indicative of doubtful collection, renegotiated loans and
foreclosed real estate properties, including in-substance foreclosures.
RETURN ON ASSETS - Net income as a percentage of average total assets.
RETURN ON EQUITY - Net income applicable to common stock as a percentage of
average common stockholders' equity.
RISK-BASED CAPITAL - Guidelines for the regulatory measurement of capital
adequacy. These guidelines set forth how capital is to be measured and how
total assets are to be risk adjusted. Total risk adjusted assets include
assets and off-balance sheet items adjusted by the appropriate credit risk
category, based on the type of obligor or, where relevant, the guarantor, or
the nature of the collateral.
SPREAD - A percentage difference or margin between the yield on earning assets
and the effective interest rate paid on interest-bearing liabilities.
F-30
47
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY - Excess of assets over liabilities that constitutes the
stockholders ownership participation in the Corporation's financial resources.
SUPPLEMENTARY (TIER II) CAPITAL - Consists of the allowance for loan losses and
qualifying term subordinated notes.
TANGIBLE EQUITY - Consists of stockholders' equity less intangible assets.
TAXABLE EQUIVALENT BASIS - An adjustment of income on tax-exempt earning assets
to an amount that would yield the same after-tax income had the income been
subject to taxation. The result is to equate the true earnings value of
tax-exempt and taxable income.
TIER I CAPITAL - Consists of common stockholders' equity (including the related
surplus, retained earnings and capital reserves), non-cumulative perpetual
preferred stock less goodwill and any other non-qualifying intangible asset.
YIELD - Percentage denoting actual return on earning assets.
F-31
48
REPORT OF INDEPENDENT ACCOUNTANTS BANPONCE CORPORATION
--------------------------------------------------------------------------------
PRICE WATERHOUSE [LOGO]
San Juan, Puerto Rico
January 27, 1995
To the Board of Directors
and Stockholders of
BanPonce Corporation
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of BanPonce Corporation and its subsidiaries at December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. 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 generally accepted
auditing standards, 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 the opinion expressed above.
As discussed in Note 2 to the Consolidated Financial Statements, the
Corporation changed its method of accounting for certain investments in debt
and equity securities as required by Statement of Financial Accounting
Standards No. 115. In 1993 the Corporation changed its method of accounting
for postretirement benefits other than pensions to conform with Statement of
Financial Accounting Standards No. 106 and for income taxes to conform with
Statement of Financial Accounting Standards No. 109.
Price Waterhouse
----------------
Price Waterhouse
Stamp 1249295 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report.
F-32
49
CONSOLIDATED STATEMENTS OF CONDITION BANPONCE CORPORATION
------------------------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------
1994 1993
----------------------------------------------------------------------------------------------------------------------
(In thousands)
ASSETS
Cash and due from banks ............................................................... $ 442,316 $ 368,837
---------------------------
Money market investments:
Federal funds sold and securities and mortgages purchased under
agreements to resell ............................................................. 265,000 247,333
Time deposits with other banks ..................................................... 100 15,100
Bankers' acceptances ............................................................... 570 259
---------------------------
265,670 262,692
---------------------------
Investment securities held-to-maturity, at cost (market value $2,886,851,000;
1993 - $3,357,216,000) (Notes 3 and 5) ............................................. 2,955,911 3,329,798
---------------------------
Investment securities available-for-sale, at market value in 1994 and at lower
of cost or market value in 1993 (1993 market value - $734,729,000) (Note 4) ........ 839,226 715,565
---------------------------
Trading securities, at market ......................................................... 1,670 3,017
---------------------------
Loans held-for-sale ................................................................... 10,296
---------------------------
Loans (Notes 5, 6 and 7) .............................................................. 8,066,954 6,655,072
Less - Unearned income ............................................................ 295,921 308,150
Allowance for loan losses .................................................. 153,798 133,437
---------------------------
7,617,235 6,213,485
---------------------------
Premises and equipment (Note 8) ....................................................... 324,160 298,089
Other real estate ..................................................................... 10,390 12,699
Customers' liabilities on acceptances ................................................. 902 1,392
Accrued income receivable ............................................................. 78,765 79,285
Other assets .......................................................................... 103,088 95,763
Intangible assets ..................................................................... 128,729 132,746
---------------------------
$12,778,358 $11,513,368
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 9):
Non-interest bearing ............................................................. $ 1,950,883 $ 1,848,859
Interest bearing ................................................................. 7,061,552 6,673,799
---------------------------
9,012,435 8,522,658
Federal funds purchased and securities sold under agreements to repurchase (Note 10) 1,438,038 951,733
Other short-term borrowings (Note 11) .............................................. 573,841 664,173
Notes payable (Notes 12 and 15) .................................................... 459,524 253,855
Senior debentures (Notes 13 and 15) ................................................ 30,000 30,000
Acceptances outstanding ............................................................ 902 1,392
Other liabilities .................................................................. 211,195 182,362
---------------------------
11,725,935 10,606,173
---------------------------
Subordinated notes (Notes 14 and 15) ............................................... 50,000 62,000
---------------------------
Preferred stock of Banco Popular (Note 16) ......................................... 11,000
---------------------------
Stockholders' equity (Note 17):
Preferred stock, $25 liquidation value; 10,000,000 shares authorized;
4,000,000 issued and outstanding ................................................. 100,000
Common stock, $6 par value; authorized 90,000,000 shares;
issued and outstanding 32,838,128 in 1994 and 32,732,423 in 1993 ................. 197,029 196,395
Surplus ............................................................................ 409,445 386,622
Retained earnings .................................................................. 272,458 208,607
Unrealized losses on investment securities available-for-sale, net of deferred
taxes of $6,893,000 (Note 2) ..................................................... (19,366)
Capital reserves (Note 14) ......................................................... 42,857 42,571
---------------------------
1,002,423 834,195
---------------------------
$12,778,358 $11,513,368
===========================
The accompanying notes are an integral part of the consolidated financial
statements.
F-33
50
CONSOLIDATED STATEMENTS OF INCOME BANPONCE CORPORATION
------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------
1994 1993 1992
(In thousands, except per common share information)
INTEREST INCOME:
Loans ..................................................... $665,031 $549,388 $518,074
Money market investments (Note 18) ........................ 5,186 6,434 14,414
Investment securities (Note 18) ........................... 214,611 215,944 207,642
Trading securities ........................................ 297 370 224
---------------------------------------------------
885,125 772,136 740,354
---------------------------------------------------
INTEREST EXPENSE:
Deposits .................................................. 247,726 219,448 253,375
Short-term borrowings ..................................... 77,537 42,392 31,711
Long-term debt ............................................ 26,370 18,168 15,049
---------------------------------------------------
351,633 280,008 300,135
---------------------------------------------------
Net interest income ......................................... 533,492 492,128 440,219
Provision for loan losses (Note 6) ........................ 53,788 72,892 97,633
---------------------------------------------------
Net interest income after provision for loan losses ......... 479,704 419,236 342,586
Service charges on deposit accounts ....................... 71,727 68,246 63,064
Other service fees ........................................ 51,240 42,947 42,491
Gain on sale of investment securities ..................... 224 864 242
Trading account profit .................................... 227 554 383
Other operating income .................................... 19,901 12,569 18,324
---------------------------------------------------
623,023 544,416 467,090
---------------------------------------------------
OPERATING EXPENSES:
Personnel costs (Note 19):
Salaries ................................................ 160,996 151,432 134,709
Profit sharing .......................................... 19,205 19,766 17,041
Pension and other benefits .............................. 45,546 44,713 36,484
---------------------------------------------------
225,747 215,911 188,234
Net occupancy expense (Notes 8 and 20) .................... 28,440 26,085 25,442
Equipment expenses (Notes 8 and 20) ....................... 35,474 27,964 23,813
Other taxes ............................................... 19,807 15,996 14,608
Professional fees ......................................... 33,757 27,302 22,558
Communications ............................................ 20,308 18,203 17,048
Business promotion ........................................ 16,271 16,638 12,548
Printing and supplies ..................................... 8,817 8,189 7,290
Other operating expenses .................................. 41,222 39,812 40,516
Amortization of intangibles ............................... 18,003 16,176 14,888
---------------------------------------------------
447,846 412,276 366,945
---------------------------------------------------
Income before income tax, dividends on preferred stock of
Banco Popular and cumulative effect of accounting changes.. 175,177 132,140 100,145
Income tax (Note 21) ........................................ 50,043 28,151 14,259
---------------------------------------------------
Income before dividends on preferred stock of Banco
Popular and cumulative effect of accounting changes ....... 125,134 103,989 85,886
Dividends on preferred stock of Banco Popular (Note 16) ..... 385 770 770
---------------------------------------------------
Income before cumulative effect of accounting changes ....... 124,749 103,219 85,116
Cumulative effect of accounting changes (Note 2) .......... 6,185
---------------------------------------------------
NET INCOME .................................................. $124,749 $109,404 $ 85,116
===================================================
NET INCOME APPLICABLE TO COMMON STOCK ....................... $120,504 $109,404 $ 85,116
===================================================
EARNINGS PER COMMON SHARE (NOTE 17):
Income before cumulative effect of accounting changes ..... $ 3.67 $ 3.16 $ 2.79
Cumulative effect of accounting changes ................... .19
---------------------------------------------------
NET INCOME .................................................. $ 3.67 $ 3.35 $ 2.79
===================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-34
51
CONSOLIDATED STATEMENTS OF CASH FLOWS BANPONCE CORPORATION
------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------------
1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 124,749 $ 109,404 $ 85,116
--------------------------------------------------------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of premises and equipment 38,654 28,535 28,155
Provision for loan losses ............................... 53,788 72,892 97,633
Amortization of intangibles ............................. 18,003 16,176 14,888
Gain on sale of investment securities ................... (224) (864) (242)
Gain on sale of premises and equipment .................. (2,311) (604) (333)
Gain on sale of loans ................................... (4,454) (1,187) (3,347)
Amortization of premiums and accretion of discounts
on investments ....................................... 6,277 14,708 2,694
Amortization of deferred loan fees and costs ............ 2,755 2,508 (353)
Increase in postretirement obligation ................... 5,818 42,672
Net decrease (increase) in trading securities ........... 1,347 (2,734) 1,374
Net decrease (increase) in interest receivable .......... 2,613 (2,528) (16,981)
Net (increase) decrease in other assets ................. (8,207) 12,860 5,561
Net increase (decrease) in interest payable ............. 6,226 (2,167) (4,729)
Net increase (decrease) in current and deferred taxes.... 19,620 (42,953) 9,815
Net increase (decrease) in other liabilities ............ 8,187 14,336 (11,023)
--------------------------------------------------------
Total adjustments ............................... 148,092 151,650 123,112
--------------------------------------------------------
Net cash provided by operating activities ....... 272,841 261,054 208,228
--------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments ..................... 2,422 22,429 196,212
Purchases of investment securities held-to-maturity .......... (7,290,753) (3,935,926) (4,679,275)
Maturities of investment securities held-to-maturity ......... 7,671,104 3,887,806 3,297,635
Sales of investment securities held-to-maturity .............. 13,555 12,059 43,114
Purchases of investment securities available-for-sale ........ (385,963) (408,200)
Maturities of investment securities available-for-sale ....... 64,297
Sales of investment securities available-for-sale ............ 293,712 83,621
Net disbursements on loans ................................... (1,441,989) (691,638) (278,275)
Proceeds from sale of loans .................................. 193,411 22,997 118,707
Assets acquired, net of cash ................................. (17,557)
Acquisition of mortgage loan portfolios ...................... (76,700) (367,053)
Acquisition of premises and equipment ........................ (64,709) (81,945) (51,579)
Proceeds from sale of premises and equipment ................. 8,825 19,026 16,480
--------------------------------------------------------
Net cash used in investing activities ........... (1,030,345) (1,436,824) (1,336,981)
--------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ..................................... 197,072 112,095 257,752
Net deposits acquired ........................................ 237,096 573,842
Net increase in federal funds purchased and
securities sold under agreements to repurchase ............. 481,304 286,511 216,108
Net (decrease) increase in other short-term borrowings ....... (92,932) 457,291 63,157
Proceeds from issuance of notes payable ...................... 205,679 163,801 16,310
Payment of notes payable ..................................... (10) (9)
Payment of subordinated notes ................................ (12,000) (12,000) (20,000)
Dividends paid ............................................... (37,016) (27,781) (24,112)
Proceeds from issuance of preferred stock .................... 96,690
Proceeds from issuance of common stock ....................... 3,196 2,106 59,809
Redemption of preferred stock ................................ (11,000)
--------------------------------------------------------
Net cash provided by financing activities ....... 830,983 1,219,110 1,142,866
--------------------------------------------------------
Net increase in cash and due from banks ........................ 73,479 43,340 14,113
Cash and due from banks at beginning of period ................. 368,837 325,497 311,384
--------------------------------------------------------
Cash and due from banks at end of period ....................... $ 442,316 $ 368,837 $ 325,497
========================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-35
52
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY BANPONCE CORPORATION
------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
(In thousands)
PREFERRED STOCK:
Preferred stock issued (Note 17) ...................... $ 100,000
--------------------------------------------------
Balance at end of year .................... 100,000
--------------------------------------------------
COMMON STOCK:
Balance at beginning of year .......................... 196,395 $195,929 $180,563
Common stock issued (Note 17) ......................... 14,752
Common stock issued under Dividend Reinvestment Plan... 634 466 614
--------------------------------------------------
Balance at end of year .................... 197,029 196,395 195,929
--------------------------------------------------
SURPLUS:
Balance at beginning of year .......................... 386,622 361,982 287,539
Issuance cost of preferred stock ...................... (3,310)
Proceeds from common stock issued (Note 17) ........... 42,848
Proceeds from common stock issued under
Dividend Reinvestment Plan .......................... 2,562 1,640 1,595
Transfer from retained earnings ....................... 15,000 11,000 10,000
Transfer from capital reserves (Note 14) .............. 8,571 12,000 20,000
--------------------------------------------------
Balance at end of year .................... 409,445 386,622 361,982
--------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year .......................... 208,607 150,208 110,287
Net income ............................................ 124,749 109,404 85,116
Cash dividends declared on common stock (Note 17) ..... (32,796) (29,434) (24,624)
Cash dividends declared on preferred stock (Note 17)... (4,245)
Transfer to capital reserves (Note 14) ................ (8,857) (10,571) (10,571)
Transfer to surplus ................................... (15,000) (11,000) (10,000)
--------------------------------------------------
Balance at end of year ................... 272,458 208,607 150,208
--------------------------------------------------
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes ............. (19,366)
--------------------------------------------------
CAPITAL RESERVES:
Balance at beginning of year .......................... 42,571 44,000 53,429
Transfer from retained earnings (Note 14) ............. 8,857 10,571 10,571
Transfer to surplus (Note 14) ......................... (8,571) (12,000) (20,000)
--------------------------------------------------
Balance at end of year ................... 42,857 42,571 44,000
--------------------------------------------------
Total stockholders' equity .............................. $1,002,423 $834,195 $752,119
==================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANPONCE CORPORATION
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of BanPonce Corporation (the
Corporation) and its subsidiaries conform with generally accepted accounting
principles and with general practices within the banking industry. The
following is a description of the more significant of these policies:
CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries Vehicle Equipment Leasing
Company, Inc. (Velco); Banco Popular de Puerto Rico (Banco Popular) and its
wholly-owned subsidiaries Popular Leasing and Rental, Inc. and Popular Consumer
Services, Inc; Popular International Bank, Inc. and its wholly-owned subsidiary
BanPonce Financial Corp., including Equity One, Inc. (formerly Spring Financial
Services, Inc.) and Pioneer Bancorp, Inc. (second tier subsidiaries). All
intercompany accounts and transactions have been eliminated in consolidation.
The preferred stock of Banco Popular and dividends related thereto have been
treated as minority interest in the accompanying consolidated financial
statements.
INVESTMENT SECURITIES
On January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities," which addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Those investments are classified in
three categories and accounted for as follows:
- Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as securities held-to-maturity and
reported at amortized cost.
- 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.
- 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 a
separate component of stockholders' equity.
The Corporation may sell or transfer held-to-maturity securities without
calling into question its intent to hold other debt securities to maturity,
only as a result of non-recurring, unusual events that could not have been
reasonably anticipated.
Prior to the adoption of SFAS 115, securities deemed available-for-sale
were carried at the lower of aggregate amortized cost or market value.
The amortization of premiums is deducted and the accretion of discounts
is added to interest income based on the interest method over the outstanding
period of the related securities. Interest on investment securities is reported
as interest income. 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 are reported separately in
the statement of income. The Corporation anticipates prepayments of principal
in the calculation of the effective yield and average maturity for
collateralized mortgage obligations and mortgage-backed securities.
TRADING SECURITIES
Derivative financial instruments such as interest rate futures and
options contracts and nonderivative instruments utilized by the Corporation in
dealing and other trading activities are carried at market value. Realized and
unrealized changes in market values are recorded separately in the trading
profit or loss account in the period in which the changes occur. Interest
revenue and expense arising from trading instruments are included in the income
statement as part of net interest income rather than as net trading account
profit.
RISK MANAGEMENT INSTRUMENTS
The Corporation occasionally uses derivative financial instruments, such
as interest rate caps and swaps, in the management of its interest rate
exposure, including hedging. These instruments are accounted for primarily on
an accrual basis. Income and expenses arising from the instruments are recorded
in the category appropriate to the related asset or liability. Gains and losses
related to contracts that are effective hedges are deferred to be recognized in
income in the same period as gains and losses on the hedged item. Amounts to be
paid or received under interest rate swap agreements are recognized as interest
income or expense in the periods in which they are realized. Gains and losses
on early terminations of contracts that modify the characteristics of specified
assets or liabilities are deferred and amortized as an adjustment to the yield
of the related assets or liabilities over their remaining lives.
F-37
54
--------------------------------------------------------------------------------
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 of the period in which the change occurs.
LOANS
Loans are stated at the outstanding balance, less unearned income and
allowance for loan losses. Loan origination fees and costs incurred in the
origination of new loans are deferred and amortized by the interest method over
the life of the loans as an adjustment of interest yield. Unearned interest on
installment loans is recognized as income on a basis which results in
approximate level rates of return over the term of the loans.
Recognition of interest income on commercial and construction loans 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. For lease financing, conventional mortgage loans and
close-end consumer loans, interest accrual is ceased when loans are 90 days or
more past due. Such loans are designated as non-accruing and 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. Close-end consumer
loans are charged-off against the allowance for loan losses after becoming 120
days past due. Open-end (revolving credit) consumer loans are charged-off after
becoming 180 days past due. Income is generally recognized on open-end loans
until the loans are charged-off.
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 as well as in other credit-related balance sheet
and off-balance sheet financial instruments. This methodology includes the
consideration of such factors as economic conditions, portfolio risk
characteristics, prior loss experience and results of periodic credit reviews
of individual loans.
The provision for loan losses charged to current operations is based on
an evaluation of the risk characteristics of the loan portfolio and the
economic conditions. Loan losses are charged and recoveries are credited to the
allowance for loan losses.
The Corporation will adopt, in the first quarter of 1995, SFAS 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These statements address the accounting by creditors for
impairment of certain loans and require that impaired loans, as defined, be
measured based on the present value of expected future cash flows discounted at
the loan's effective rate, at the observable market price of the loan or the
fair value of the collateral if the loan is collateral dependent. Management
estimates that the adoption of this statement will have no material effect on
the financial statements of the Corporation.
PREMISES AND EQUIPMENT
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 the operations currently.
OTHER REAL ESTATE
Other real estate comprises properties acquired through both formal
foreclosure proceedings and in-substance foreclosures. In-substance foreclosed
properties are those properties where the borrower retains title but has little
or no remaining equity in the property considering its fair value, where
repayment can only be expected to come from the operation or sale of property,
and where the borrower has effectively abandoned control of the property or it
is doubtful that the borrower will be able to rebuild equity in the property.
These properties are accounted for as if they were properties of the
Corporation and carried at the lower of cost (outstanding loan balance) or
estimated market value less estimated costs of disposal.
At foreclosure, the recorded amount of the loan is written-down, if
required, to the appraised value of the real estate acquired by charging the
allowance for loan losses. Subsequent to foreclosure, gains or losses on the
sale of these properties are credited or charged to expense of operating other
real estate. The costs of maintaining and operating such properties are
expensed as incurred.
F-38
55
--------------------------------------------------------------------------------
INTANGIBLE ASSETS
Intangible assets consist of goodwill and other identifiable intangible
assets acquired, mainly core deposits. The fair values of credit cardholder
relationships were computed as the net present values of the estimated future
income streams to be obtained from them. The values of core deposits, credit
cardholder relationships, assembled work force, credit customer relationships,
and mortgage servicing rights, are amortized using various methods over the
periods benefitted ranging from 4 to 12 years. Goodwill represents the excess
of the Corporation's cost of purchased operations over the fair value of the
net assets acquired and is being amortized on the straight-line basis over 15
years.
INCOME TAXES
In January 1993, the Corporation adopted SFAS 109, "Accounting for Income
Taxes." SFAS 109 requires 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. In estimating future tax consequences, SFAS 109 generally
considers all expected future events other than future enactments of changes in
the tax laws or rates. Previously, the Corporation used the SFAS 96 asset and
liability approach that gave no recognition to future events other than the
recovery of assets and settlement of liabilities at their carrying amounts.
EMPLOYEES' RETIREMENT PLANS
The Corporation has trusteed, non-contributory retirement and related
plans covering substantially all full-time employees. Pension costs are
computed on the basis of accepted actuarial methods. The related costs are
charged to current operations and consist of several components of net pension
cost based on various actuarial assumptions regarding future experience under
the plan. Actuarial assumptions are evaluated periodically. The funding policy
is to contribute funds 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.
OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation provides certain health and life insurance benefits for
eligible retirees and their dependents. The cost of postretirement benefits is
accrued during the years that the employee renders the required service. Before
1993, the cost of providing these benefits was recognized as a charge to income
in the period the benefits were paid.
EARNINGS PER COMMON SHARE
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.
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 minor reclassifications have been made to the 1993 and 1992
consolidated financial statements to conform with the presentation of the 1994
consolidated financial statements.
F-39
56
--------------------------------------------------------------------------------
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES:
Effective January 1, 1994, the Corporation adopted SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities." As a result of the
adoption, the Corporation recognized a net unrealized loss on securities
available-for-sale, which are carried at market value, of $26,259,000 which was
included in stockholders' equity at $19,366,000 on an after-tax basis at
December 31, 1994.
Effective January 1, 1993, the Corporation implemented SFAS 106,
"Employers Accounting for Postretirement Benefits other than Pensions" (OPEB).
Under SFAS 106 the cost of retiree health care and other postretirement
benefits is accrued during the employees' service periods. The Corporation
elected to recognize the full transition obligation in 1993, which is the
portion of future retiree benefit costs related to service already rendered by
both active and retired employees up to the date of adoption, rather than
amortizing it over future periods. The cumulative effect of this accounting
change resulted in a reduction of net income of $22,736,000, or $0.70 per
common share, net of $16,464,000 in deferred taxes.
Effective January 1, 1993, the Corporation adopted SFAS 109, "Accounting
for Income Taxes" which superseded SFAS 96. Under SFAS 109, the Corporation
recognizes to a greater degree the future tax consequences of events which have
been recognized in the financial statements or tax returns. The adjustments to
the January 1, 1993, Statement of Condition and the Statement of Income to
adopt SFAS 109 netted to $28,921,000 or $0.89 per common share. This amount is
reflected in 1993 net income as part of the effect of a change in accounting
principle. It primarily represents the impact of recognizing a deferred tax
asset for the benefit of certain credits and loss carryforwards that could not
be recognized under SFAS 96.
NOTE 3 - INVESTMENT SECURITIES HELD-TO-MATURITY:
The amortized cost, gross unrealized gains and losses and approximate
market value of investment securities held-to-maturity (or fair value for
certain investment securities where no market quotations are available) and
related maturities as of December 31, 1994 and 1993 (1992 - only amortized cost
is presented) are as follows:
1994
---------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average
cost gains losses value yield
---------------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of 1 year and 1 month):
Within 1 year................................................ $ 875,346 $ 17 $11,237 $ 864,126 4.74%
After 1 to 5 years........................................... 866,363 21,079 845,284 5.60
---------------------------------------------------------------
1,741,709 17 32,316 1,709,410 5.17
---------------------------------------------------------------
Obligations of other U.S. Government agencies and corporations
(average maturity of 2 years):
Within 1 year................................................ 111,655 10 167 111,498 5.92
After 1 to 5 years........................................... 207,647 8,588 199,059 5.29
After 5 to 10 years.......................................... 3,525 152 3,373 6.08
After 10 years............................................... 22,459 16 596 21,879 6.65
---------------------------------------------------------------
345,286 26 9,503 335,809 5.59
---------------------------------------------------------------
Obligations of Puerto Rico, States and political sub-divisions
(average maturity of 3 years and 2 months):
Within 1 year................................................ 144,588 58 91 144,555 3.53
After 1 to 5 years........................................... 37,417 814 93 38,138 7.30
After 5 to 10 years.......................................... 15,764 479 255 15,988 6.62
After 10 years............................................... 21,695 827 32 22,490 8.96
---------------------------------------------------------------
219,464 2,178 471 221,171 4.96
---------------------------------------------------------------
Collaterized Mortgage Obligations (average maturity of 2 years
and 7 months):
Within 1 year................................................ 156,168 5,173 150,995 5.25
After 1 to 5 years........................................... 353,655 19,388 334,267 5.44
After 5 to 10 years.......................................... 72,643 3,429 69,214 6.44
After 10 years............................................... 14,780 1,036 13,744 6.84
---------------------------------------------------------------
597,246 29,026 568,220 5.55
---------------------------------------------------------------
Other (average maturity of 9 years and 5 months):
Within 1 year................................................ 250 250 6.75
After 1 to 5 years........................................... 6,145 17 6,162 2.70
After 5 to 10 years.......................................... 3,527 3,527 7.89
After 10 years............................................... 42,284 18 42,302 5.98
---------------------------------------------------------------
52,206 35 52,241 5.73
---------------------------------------------------------------
$2,955,911 $2,256 $71,316 $2,886,851 5.29%
===============================================================
F-40
57
------------------------------------------------------------------------------------------------------------------------------------
1993 1992
-----------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average Amortized
cost gains losses value yield cost
-----------------------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of 9 months):
Within 1 year........................................ $1,597,481 $11,696 $1,609,177 5.34% $ 671,809
After 1 to 5 years................................... 627,670 7,041 $ 70 634,641 4.84 1,877,555
-----------------------------------------------------------------------
2,225,151 18,737 70 2,243,818 5.20 2,549,364
-----------------------------------------------------------------------
Obligations of other U.S. Government agencies and
corporations (average maturity of 7 months):
Within 1 year........................................ 215,355 279 5 215,629 3.63 74,506
After 1 to 5 years................................... 65,012 1,056 66,068 5.49 80,025
After 5 to 10 years.................................. 28 28 6.50 27
After 10 years....................................... 8,266 10 1 8,275 7.50 19,678
-----------------------------------------------------------------------
288,661 1,345 6 290,000 4.17 174,236
-----------------------------------------------------------------------
Obligations of Puerto Rico, States and political sub-
divisions (average maturity of 3 years and 8 months):
Within 1 year........................................ 152,091 209 152,300 2.36 87,630
After 1 to 5 years................................... 39,170 3,044 18 42,196 7.40 37,559
After 5 to 10 years.................................. 24,939 3,063 28,002 7.59 25,872
After 10 years....................................... 40,474 2,628 101 43,001 8.33 58,748
-----------------------------------------------------------------------
256,674 8,944 119 265,499 4.56 209,809
-----------------------------------------------------------------------
Other (average maturity of 2 years and 1 month):
Within 1 year........................................ 228,344 1,084 2,091 227,337 5.26 120,118
After 1 to 5 years................................... 294,378 900 1,247 294,031 5.25 189,079
After 5 to 10 years.................................. 23,393 151 158 23,386 6.51 32,719
After 10 years....................................... 13,197 1 53 13,145 5.69 15,115
-----------------------------------------------------------------------
559,312 2,136 3,549 557,899 5.31 357,031
-----------------------------------------------------------------------
$3,329,798 $31,162 $3,744 $3,357,216 5.08% $3,290,440
=======================================================================
The aggregate amortized cost and approximate market value of investment
securities held-to-maturity at December 31, 1994, by contractual and estimated
maturity, are shown below:
Amortized cost Market value
-------------------------------------
(In thousands)
Within 1 year............... $1,288,007 $1,271,424
After 1 to 5 years.......... 1,471,227 1,422,910
After 5 to 10 years......... 95,459 92,102
After 10 years.............. 101,218 100,415
-------------------------------------
$2,955,911 $2,886,851
=====================================
During 1994, investment securities held-to-maturity with an amortized
cost of $13,603,000 were sold in response to isolated circumstances that could
not have been reasonably anticipated by the Corporation. Proceeds from the sale
of those securities during the year were $13,555,000 (1993 -$12,059,000; 1992 -
$43,114,000). Gross realized gains and losses on those sales during the year
were $189,000 and $237,000, respectively (1993 - $445,000 and $2,000; 1992 -
$245,000 and $3,000).
Investments in obligations that are payable from and secured by the same
source of revenue or taxing authority and that exceeded 10 percent of
stockholders' equity were as follows:
Percent of
Amortized stockholders' Market
cost equity value
-------------------------------------
(Dollars in thousands)
Issuer:
Government of Puerto Rico,
its agencies and
instrumentalities:
December 31, 1994................. $219,314 22% $221,021
December 31, 1993................. 256,530 31 265,370
F-41
58
--------------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
The amortized cost, gross unrealized gains and losses and approximate
market value of investment securities available-for-sale (or fair value for
certain investment securities where no market quotations are available) and
related maturities as of December 31, 1994 and 1993 (1992 - only amortized cost
is presented) are as follows:
1994
---------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average
cost gains losses value yield
---------------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of 2 years and 5 months):
Within 1 year.............................................. $ 18,993 $ 171 $ 18,822 5.19%
After 1 to 5 years......................................... 550,606 $483 20,790 530,299 6.28
---------------------------------------------------------------
569,599 483 20,961 549,121 6.25
---------------------------------------------------------------
Obligations of other U.S. Government agencies and corporations
(average maturity of 7 years and 2 months):
Within 1 year.............................................. 74,529 1 458 74,072 6.41
After 1 to 5 years......................................... 94,513 2,154 92,359 6.74
After 5 to 10 years........................................ 6,364 447 5,917 6.21
After 10 years............................................. 25,853 852 25,001 6.90
---------------------------------------------------------------
201,259 1 3,911 197,349 6.60
---------------------------------------------------------------
Obligations of Puerto Rico, States and political sub-divisions
(average maturity of 3 years):
Within 1 year.............................................. 4,710 12 2 4,720 4.50
After 1 to 5 years......................................... 16,886 684 16,202 4.33
After 5 to 10 years........................................ 2,472 136 2,336 6.02
---------------------------------------------------------------
24,068 12 822 23,258 4.54
---------------------------------------------------------------
Collaterized Mortgage Obligations (average maturity of 3 years
and 6 months):
Within 1 year.............................................. 4,356 76 4,280 6.45
After 1 to 5 years......................................... 46,408 681 45,727 6.87
After 5 to 10 years........................................ 481 481 8.75
---------------------------------------------------------------
51,245 757 50,488 6.85
---------------------------------------------------------------
Other (average maturity of 1 year and 2 months):
Within 1 year............................................. 14,403 63 242 14,224 6.63
After 1 to 5 years........................................ 3,726 118 3,608 7.74
After 10 years............................................ 1,185 7 1,178 6.47
---------------------------------------------------------------
19,314 63 367 19,010 6.83
---------------------------------------------------------------
$865,485 $559 $26,818 $839,226 6.33%
===============================================================
1993 1992
--------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average Amortized
cost gains losses value yield cost
--------------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of 3 years and 2 months):
After 1 to 5 years............................................... $550,021 $15,736 $2,749 $563,008 5.63% $223,360
After 5 to 10 years.............................................. 80,934 5,341 86,275 6.72 81,111
--------------------------------------------------------------
630,955 21,077 2,749 649,283 5.77 304,471
--------------------------------------------------------------
Obligations of other U.S. Government agencies and corporations
(average maturity of 2 years and 5 months):
Within 1 year.................................................... 25,000 25,000 5.50
After 1 to 5 years............................................... 50,126 836 50,962 6.71 60,139
After 5 to 10 years.............................................. 35,033
--------------------------------------------------------------
75,126 836 75,962 6.30 95,172
--------------------------------------------------------------
Other (average maturity of 3 years and 2 months):
After 1 to 5 years............................................... 8,484 8,484 8.75 8,484
After 10 years................................................... 1,000 1,000
--------------------------------------------------------------
9,484 9,484 8.75 8,484
--------------------------------------------------------------
$715,565 $21,913 $2,749 $734,729 5.86% $408,127
==============================================================
F-42
59
-------------------------------------------------------------------------------
The aggregate amortized cost and approximate market value of investment
securities available-for-sale at December 31, 1994, by contractual and
estimated maturity, are shown below:
Amortized Market
Cost Value
--------------------------
(In thousands)
Within 1 year.................. $116,991 $116,118
After 1 to 5 years............. 712,139 688,195
After 5 to 10 years............ 9,317 8,734
After 10 years................. 27,038 26,179
--------------------------
$865,485 $839,226
==========================
Proceeds from the sale of investment securities available-for-sale during
1994 were $293,712,000 (1993 -$83,621,000). Gross realized gains and losses on
those sales during the year were $1,159,000 and $887,000, respectively (1993
-$421,000 and $0). The basis on which cost was determined in computing the
realized gains and losses was the specific identification method.
NOTE 5 - PLEDGED ASSETS:
Investment securities and loans amounting to $2,244,617,000 are pledged
to secure public and trust deposits and securities and mortgages sold under
agreements to repurchase.
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The composition of the loan portfolio at December 31, is as follows:
1994 1993
----------------------------
(In thousands)
Loans secured by real estate:
Insured or guaranteed by the U.S. Government
or its agencies................................... $ 133,120 $ 128,054
Guaranteed by the Commonwealth of Puerto Rico....... 75,476 24,758
Commercial loans secured by real estate............. 1,047,155 894,181
Other............................................... 2,067,755 1,477,500
----------------------------
3,323,506 2,524,493
Financial institutions.............................. 68,160 36,445
Commercial, industrial and agricultural............. 1,428,216 1,115,703
Real estate (construction).......................... 161,860 154,237
Lease financing..................................... 553,605 462,399
Individuals - For household, credit cards
and other consumer expenditures................... 2,199,872 2,062,437
Other............................................... 331,735 299,358
----------------------------
$8,066,954 $6,655,072
============================
As of December 31, 1994, loans on which the accrual of interest income
had been discontinued amounted to $94,263,000 (1993 - $92,814,000; 1992 -
$108,341,000). If these loans had been accruing interest, the additional
interest income realized would have been approximately $5,441,000 (1993 -
$4,992,000; 1992 - $7,548,000). In addition, there are $2,982,000 of
renegotiated loans still accruing interest at December 31, 1994 (1993 -
$5,643,000). Included in the non-accruing loans as of December 31, 1994 are
$12,179,000 (1993 - $16,290,000) in consumer loans.
The changes in the allowance for loan losses were as follows:
1994 1993 1992
------------------------------------------
(In thousands)
Balance at beginning of year......................... $133,437 $110,714 $ 94,199
Reserve for acquired loans........................... 3,473 1,580
Provision for loan losses............................ 53,788 72,892 97,633
Recoveries........................................... 30,044 25,678 21,062
Loans charged-off.................................... (66,944) (77,427) (102,180)
------------------------------------------
Balance at end of year............................... $153,798 $133,437 $110,714
==========================================
F-43
60
--------------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS:
The Corporation grants loans to its directors, executive officers and to
certain related individuals or organizations in the ordinary course of
business. The movement and balance of these loans were as follows:
Officers Directors Total
------------------------------------------
(In thousands)
Balance at January 1, 1993........................... $ 733 $ 56,106 $ 56,839
Additions............................................ 1,938 137,809 139,747
Reductions........................................... (637) (102,431) (103,068)
------------------------------------------
Balance at December 31, 1993......................... 2,034 91,484 93,518
Additions............................................ 2,708 307,783 310,491
Reductions........................................... (425) (267,928) (268,353)
------------------------------------------
Balance at December 31, 1994......................... $4,317 $ 131,339 $ 135,656
==========================================
These loans have been consummated on terms no more favorable than those
that would have been obtained if the transaction had been with unrelated
parties.
NOTE 8 - PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation
and amortization as follows:
Useful life
in years 1994 1993
--------------------------------------
(In thousands)
Land................................................. $ 41,918 $ 33,070
------------------------
Buildings............................................ 30-50 202,854 207,707
Equipment............................................ 3-10 220,623 178,632
Leasehold improvements............................... Various 46,288 44,730
------------------------
469,765 431,069
Less -Accumulated depreciation and amortization...... 207,802 187,243
------------------------
261,963 243,826
------------------------
Construction in progress............................. 20,279 21,193
------------------------
$324,160 $298,089
========================
Depreciation and amortization of premises and equipment for the year was
$38,654,000 (1993 -$28,535,000; 1992 - $28,155,000) of which $8,497,000 (1993 -
$7,646,000; 1992 - $8,715,000) was charged to occupancy expense and $30,157,000
(1993 - $20,889,000; 1992 - $19,440,000) was charged to equipment,
communications and other operating expenses. Occupancy expense is net of rental
income of $15,631,000 (1993 - $14,097,000; 1992 - $13,067,000).
NOTE 9 - DEPOSITS:
Total interest bearing deposits as of December 31, consist of:
1994 1993
----------------------------
(In thousands)
Savings deposits:
Savings accounts................................... $2,849,457 $2,737,037
NOW and money market accounts...................... 1,128,399 1,147,458
----------------------------
3,977,856 3,884,495
----------------------------
Certificates of deposit:
Under $100,000..................................... 1,416,355 1,233,019
$100,000 and over.................................. 1,667,341 1,556,285
----------------------------
3,083,696 2,789,304
----------------------------
$7,061,552 $6,673,799
============================
F-44
61
--------------------------------------------------------------------------------
NOTE 10 - 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:
1994 1993 1992
----------------------------------------------
(Dollars in thousands)
Federal funds purchased.............................. $ 332,700 $ 9,100
Securities sold under agreements to repurchase....... 1,105,338 942,633 $ 665,222
----------------------------------------------
Total amount outstanding............................. $1,438,038 $ 951,733 $ 665,222
==============================================
Maximum aggregate balance outstanding at any
month-end.......................................... $1,444,148 $1,108,578 $ 920,272
==============================================
Average aggregate balance outstanding................ $1,120,762 $ 832,651 $1,628,620
==============================================
Weighted average interest rate:
For the year....................................... 3.81% 2.77% 3.16%
At December 31..................................... 5.27 2.91 2.79
NOTE 11 - OTHER SHORT-TERM BORROWINGS:
Other short-term borrowings as of December 31, consist of:
1994 1993
----------------------------
(In thousands)
Advances under revolving lines of credit amounting to $224,000,000 (1993 -
$195,000,000) with floating interest rates ranging from 5.25% to 6.38%
(1993 - 2.66% to 3.55%)................................................... $153,100 $109,025
Term federal funds purchased with maturities until June 1995 at rates ranging
from 6.13% to 6.19% (1993 - 3.31% to 3.50%)............................... 175,000 345,000
Commercial paper (issued to institutional investors) with various maturities
until September 1995 at rates ranging from 5.10% to 7.00% (1993 - 3.39%
to 3.75%)................................................................. 150,023 119,112
Term notes maturing in 1995, paying quarterly interest at rates ranging from
0.19% to 0.63% (1993 - 0.44% to 0.94%) over the 3 month LIBOR rate
(LIBOR rate at December 31, 1994 was 6.50%; 1993 - 3.38%)................. 49,983 44,986
Term notes due in 1995 paying semiannual interest at a fixed rate ranging from
5.25% to 7.85% (1993 - 3.81% to 7.88%) ................................... 24,994 44,961
Term notes due on July 20, 1995, paying interest on due date at a fixed
rate of 6.25% ............................................................ 9,990
Term notes due in August, 1995, paying quarterly interest at the one month LIBOR
rate (LIBOR rate at December 31, 1994 was 6.50%)......................... 10,000
Others....................................................................... 751 1,089
------------------------
$573,841 $664,173
========================
The weighted average interest rate of other short-term borrowings at
December 31, 1994, was 4.83% (1993 - 3.40%; 1992 - 4.03%). The maximum
aggregate balance outstanding at any month-end was approximately $869,505,000
(1993 - $695,314,000; 1992 - $208,738,000). The average aggregate balance
outstanding during the year was approximately $738,005,000 (1993 -
$527,523,000; 1992 -$172,729,000). The weighted average interest rate during
the year was 4.75% (1993 - 3.66%; 1992 - 4.32%).
F-45
62
NOTE 12 - NOTES PAYABLE:
Notes payable outstanding at December 31, consist of the following:
1994 1993
----------------------------
(In thousands)
Term notes with maturities ranging from 1996 through 2003
paying semiannual interest at fixed rates ranging from
5.17% to 8.41% (1993 - 5.17% to 7.85%).................................... $300,188 $179,301
Term notes with maturities ranging from 1996 through 1998
paying quarterly interest at rates ranging from 0.35% to
0.75% (1993 - 0.19% to 0.58%) over the 3 month LIBOR
rate (LIBOR rate at December 31, 1994 was 6.50%;
1993 - 3.38%)............................................................. 99,736 44,861
Promissory notes maturing in 1998 with fixed interest rates ranging from
4.51% to 5.50%............................................................ 59,500 29,500
Mortgage notes and other debt with varying rates and terms................... 100 193
-------------------------
$459,524 $253,855
=========================
NOTE 13 - Senior debentures:
Senior debentures at December 31, 1994 consist of a $30,000,000
obligation issued by the Corporation due in January 1997 with interest at
8.25%.
The senior debentures contain various covenants which, among others,
restrict the payment of dividends. The restriction on the payment of dividends
does not impose a limitation on the Corporation's current dividend policy.
NOTE 14 - SUBORDINATED NOTES:
Subordinated notes at December 31, consist of the following:
1994 1993
---------------------------
(In thousands)
Subordinated notes issued by Banco Popular on March 29,
1989 maturing on June 15, 1996, with interest payable
quarterly and consisting of:
8.875% Fixed Rate Notes Series A........................................ $15,000 $15,000
8.6875% Fixed Rate Note Series B........................................ 15,000 15,000
Floating Rate Notes Series A with interest payable at 88% of LIBID rate. 19,000 19,000
Floating Rate Notes Series B with interest payable at 86% of LIBID rate. 1,000 1,000
------------------------
50,000 50,000
------------------------
Subordinated fixed rate notes with interest payable quarterly at 8.50% due
in 1996 (Prepaid in 1994)................................................. 12,000
------------------------
$50,000 $62,000
========================
At December 31, 1994, the LIBID rate was 6.44% (1993 - 3.25%).
These notes are subordinated to the rights of Banco Popular depositors
and other creditors and require Banco Popular to set aside from retained
earnings an amount equal to the principal payment on each note to be used
solely to increase capital. The capital reserve account was established to
comply with the requirements of the subordinated notes. At the notes repayment
date the balance in capital reserves is transferred to the surplus account.
Banco Popular transferred to capital reserves from the retained earnings
account $8,857,000 during 1994 (1993 and 1992 - $10,571,000) as a result of
this requirement. In addition, during 1994, 1993 and 1992, $8,571,000,
$12,000,000 and $20,000,000 were transferred from capital reserves to surplus
upon prepayment of the 8.50%, 7.95% and 10% notes originally maturing in 1996,
1994 and 1993, respectively.
F-46
63
--------------------------------------------------------------------------------
NOTE 15 - Long-term debt maturity requirements:
The aggregate amounts of maturities of notes payable, senior debentures
and subordinated notes are as follows:
Notes Senior Subordinated
Year payable debentures notes Total
--------------------------------------------------------------------------------------------------------------
(In thousands)
1995........................................ $ 11 $ 11
1996........................................ 99,819 $50,000 149,819
1997........................................ 164,576 $30,000 194,576
1998........................................ 129,136 129,136
1999........................................ 41,073 41,073
Later years................................. 24,909 24,909
-------------------------------------------------------------
Total....................................... $459,524 $30,000 $50,000 $539,524
=============================================================
NOTE 16 - PREFERRED STOCK OF BANCO POPULAR:
Banco Popular has 200,000 shares of authorized preferred stock with a par
value of $100. This stock may be issued in 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. On June 30,
1994, Banco Popular redeemed the 110,000 outstanding shares of Treasury Indexed
Preferred Stock Series A (TIPS) at par value.
NOTE 17 - STOCKHOLDERS' EQUITY:
The Corporation has a dividend reinvestment plan under which stockholders
may use their quarterly dividends to reinvest in shares of common stock at a 5%
discount from the average market price at the time of issuance. During 1994,
105,706 shares (1993 - 77,559; 1992 - 102,272), equivalent to $3,196,000 (1993
-$2,106,000; 1992 - $2,209,000) in additional equity, were issued under the
plan.
On December 15, 1994, the Board of Directors of the Corporation approved
a stock repurchase program, which allows the Corporation to repurchase up to
one million shares of its outstanding common stock. The repurchase would be
made in the open market at such times and prices as market conditions shall
warrant.
On May 3, 1993, the Corporation filed, and had ordered effective, a
"shelf" registration with the Securities and Exchange Commission which
registered up to $400 million in unsecured debt securities and/or shares of
preferred stock. Under this "shelf" registration, 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. On June 27, 1994, the
Corporation issued 4,000,000 shares of Series A preferred stock. These shares
are non-convertible and are redeemable at the option of the Corporation on or
after June 30, 1998. The redemption price per share is $26.25 from June 30,
1998 thru June 29, 1999, $26.00 from June 30, 1999 thru June 29, 2000, $25.75
from June 30, 2000 thru June 29, 2001, $25.50 from June 30, 2001 thru June 29,
2002 and $25.00 from June 30, 2002 and thereafter. Dividends on the Series A
preferred stock are non-cumulative and are payable monthly at the annual rate
of 8.35% of the liquidation preference of $25 per share, or $0.173958 per share
per month.
On November 6, 1992, the Corporation issued 2,458,740 shares of common
stock, which generated $57,600,000 of additional capital. All of the shares
were purchased by existing shareholders who exercised their subscription
rights. Net proceeds from the issuance have been used for general corporate
purposes, including investment in and advances to existing subsidiaries.
The Corporation's average number of common shares outstanding used in the
computation of net income per common share was 32,798,243 (1993 - 32,701,236;
1992 - 30,461,494). During the year cash dividends of $1.00 (1993 - $0.90 and
1992 - $0.80) per common share outstanding amounting to $32,796,000 (1993 -
$29,434,000; 1992 - $24,624,000) were declared. In addition, dividends declared
on preferred stock for the year amounted to $4,245,000.
F-47
64
--------------------------------------------------------------------------------
NOTE 18 - INTEREST ON INVESTMENTS:
Interest on investments consisted of the following:
1994 1993 1992
---------------------------------------------
(In thousands)
Money market investments:
Federal funds sold and securities and mortgages
purchased under agreements to resell............. $ 4,858 $ 4,115 $ 5,209
Time deposits with other banks..................... 300 2,259 9,093
Other.............................................. 28 60 112
---------------------------------------------
$ 5,186 $ 6,434 $ 14,414
=============================================
Investment securities:
U.S. Treasury securities........................... $136,178 $163,209 $154,210
Obligations of other U.S. Government agencies and
corporations..................................... 29,088 14,622 19,137
Obligations of Puerto Rico, States and political sub-
divisions........................................ 12,132 11,605 13,235
Collateralized Mortgage Obligations................ 31,785 23,516 20,307
Other.............................................. 5,428 2,992 753
---------------------------------------------
$214,611 $215,944 $207,642
=============================================
Interest income on investment securities for the year ended December 31,
1994 includes tax exempt interest of $175,795,000 (1993 - $189,438,000; 1992 -
$187,923,000).
NOTE 19 - EMPLOYEE BENEFITS:
All regular employees of Banco Popular and its subsidiaries, and VELCO
are covered by a non-contributory defined benefit pension plan. Pension
benefits begin to vest after five years of service and are based on age, years
of credited service and final average compensation, as defined. At December 31,
1994, plan assets primarily consist of U.S. Government obligations, high grade
corporate bonds and listed stocks, including 1,418,215 shares of the
Corporation which have a market value of approximately $39,887,000.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements at December 31:
1994 1993
--------------------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits...................................... ($139,830) ($123,826)
Non-vested benefits.................................. ( 5,994) (9,313)
--------------------------------
Accumulated benefit obligation....................... (145,824) (133,139)
Effect of projected future compensation levels....... (21,365) (54,251)
--------------------------------
Projected benefit obligation......................... (167,189) (187,390)
Plan assets at fair market value consisting primarily
of U.S. Government obligations, high grade
corporate bonds and listed stocks ................... 189,552 203,893
--------------------------------
Plan assets in excess of projected benefit obligation.. 22,363 16,503
Unrecognized net loss from past experience different
from that assumed and effect of changes in
assumptions.......................................... 10,710 19,618
Unrecognized prior service cost........................ (3,112) (2,395)
Unrecognized initial net assets........................ (25,468) (27,929)
--------------------------------
Prepaid pension cost................................... $ 4,493 $ 5,797
================================
F-48
65
--------------------------------------------------------------------------------
Net pension cost for the year ended December 31, included the following
components:
1994 1993 1992
--------------------------------------------
(In thousands)
Service costs - benefits earned during period........ $ 8,359 $ 7,563 $ 6,802
Interest cost on projected benefit obligation........ 13,627 12,454 11,495
Actual loss (return) on plan assets.................. 6,384 (15,404) (24,290)
Net amortization and deferral........................ (27,066) (4,553) 6,025
--------------------------------------------
Net pension cost .................................... $ 1,304 $ 60 $ 32
============================================
At December 31, 1994, the discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.75% (1993 - 7.5%; 1992
- 8.25%) and the rate of increase in future compensation levels was a 4%
inflation assumption plus a merit component ranging from 0.5% to 4.5% (1993 and
1992 - 5.5%). The expected long-term rate of return on assets used in the
computation was 9% for 1994, 1993 and 1992.
In addition, the Corporation provides a defined contributory retirement
and savings plan pursuant to section 401k of the Internal Revenue Code for
substantially all the employees of Equity One and Pioneer. The contributions
are determined based on specific provisions of each plan. The cost of providing
this benefit in 1994 was $558,000 (1993 - $214,000; 1992 - $86,000).
Effective January 1, 1995 the pension plan of VELCO and Banco Popular's
subsidiaries, Popular Leasing and Popular Consumer was replaced by a defined
contribution retirement and savings plan. The pension plan was frozen effective
December 31, 1994 and employees with vested benefits will be entitled to those
benefits based on the terms of the plan.
In addition to providing pension benefits, Banco Popular provides certain
health care benefits for retired employees. Substantially all of the employees
of Banco Popular who are eligible to retire under the pension plan and provided
they reach retirement age while working for Banco Popular may become eligible
for these benefits. The actual disbursement for providing these benefits during
1994 amounted to approximately $2,072,000 (1993 - $1,770,000; 1992 -
$1,400,000).
The components of net postretirement benefit cost for the year ended
December 31, are as follows:
1994 1993
-------------------------
(In thousands)
Service cost......................................... $3,028 $2,054
Interest cost........................................ 4,277 3,163
Net amortization and deferral........................ 585
-------------------------
Net postretirement benefit cost ..................... $7,890 $5,217
=========================
The status of the Corporation's unfunded postretirement benefit plan at
December 31, is as follows:
1994 1993
----------------------------
(In thousands)
Actuarial present value of expected postretirement
benefit obligation:
Retirees ....................................... ($21,470) ($21,676)
Fully eligible active plan participants.......... (11,359) (2,937)
Other active plan participants................... (31,592) (22,985)
Accumulated postretirement benefit obligation ....... (64,421) (47,598)
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions........................................ 9,685 4,926
Unrecognized prior service cost...................... 6,246
----------------------------
Accrued postretirement benefit cost.................. ($48,490) ($42,672)
============================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1994 was 8.75% (1993 - 7.5%).
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation at December 31, 1994 was 12% decreasing by 1%
every year until 5% is reached in the year 2001 and remain at that level
thereafter. A one-
F-49
66
--------------------------------------------------------------------------------
percentage point increase in the health care cost trend rate would increase
the accumulated postretirement benefit obligation as of December 31, 1994 by
$10,775,000 and the sum of the service and interest cost in 1994 by $1,469,000.
Banco Popular also has a profit sharing plan covering substantially all
regular employees. Annual contributions are based on operating income, as
defined in the plan, and are deposited in trust. Profit sharing expense for the
year amounted to $19,967,000 (1993 - $20,594,000; 1992 -$17,736,000). Effective
January 1, 1994, the profit sharing plan was amended to include as part of
Banco Popular's annual contribution, the forfeitures allocated to participant
employees.
Also, Banco Popular established two new non-qualified plans: the
long-term incentive plan for senior management and the Puerto Rico benefit
restoration plan. The latter is an unfunded supplementary pension and profit
sharing plan for those employees whose compensation exceeds the limits
established by ERISA.
The following table sets forth the the amounts recognized in the
consolidated financial statements at December 31, 1994, for the benefit
restoration plan:
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits......................................... ($ 97)
Non-vested benefits..................................... (24)
----
Accumulated benefit obligation.......................... (121)
Effect of projected future compensation levels.......... (614)
----
Projected benefit obligation.............................. (735)
----
Unrecognized net gain from past experience different from
that assumed and effect of changes in assumptions....... (136)
Unrecognized prior service cost........................... 730
----
Accrued pension cost...................................... ($141)
====
Net supplementary pension cost for the year ended December 31, 1994,
included the following components:
(In thousands)
Service costs - benefits earned during period............. $ 62
Interest cost on projected benefit obligation............. 43
Net amortization and deferral............................. 36
----
Net pension cost ......................................... $141
====
NOTE 20 - RENTAL EXPENSE AND COMMITMENTS:
At December 31, 1994, the Corporation was obligated under a number of
non-cancelable leases for land, buildings, and equipment which require rentals
(net of related sublease rentals) as follows:
Minimum Sublease
Year payments rentals Net
--------------------------------------------------------------------------------------------------
(In thousands)
1995................................................. $10,409 $ 722 $ 9,687
1996................................................. 8,834 715 8,119
1997................................................. 7,949 704 7,245
1998................................................. 7,525 620 6,905
1999................................................. 6,641 372 6,269
Later years.......................................... 33,187 2,322 30,865
--------------------------------------
$74,545 $5,455 $69,090
======================================
Total rental expense for the year ended December 31, 1994 was $16,705,000
(1993 - $14,480,000; 1992 - $14,074,000).
NOTE 21 - INCOME TAX
As discussed in Notes 1 and 2, the Corporation adopted SFAS 109 on
January 1, 1993, and the cumulative effect of this change is reported in the
Consolidated Statement of Income for the year ended December 31, 1993. Prior
year's financial statements were not restated to apply the provisions of SFAS
109. This statement requires the recognition of deferred tax assets and
F-50
67
--------------------------------------------------------------------------------
liabilities for the expected future tax consequences of events that have been
recognized in the Corporation's financial statements or tax returns. The
measurement of current and deferred tax liabilities or assets is based on the
regular tax rates which in Puerto Rico are 42% until 1995 and 39% thereafter,
and the provisions of enacted tax laws. In October 1994, a Tax Reform Act was
enacted in Puerto Rico. In general terms, the Tax Reform is effective for
taxable years beginning after June 30, 1995. Among its provisions, the Act
reduces the maximum tax rate for corporations from 42% to 39%. The deferred
taxes of the Corporation were adjusted accordingly, to reflect this tax rate
reduction on those temporary differences and tax attributes that are expected
to reverse or settle on or after January 1, 1996, as required by SFAS 109.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, are as follows:
1994 1993
------------------------------------
(In thousands)
Deferred tax assets:
Alternative minimum tax credits available for
carryforward and other credits available......... $34,045 $54,581
Net operating loss carryforwards available....... 129 1,914
Postretirement benefits obligation
(other than pensions)............................ 19,079 17,682
Other temporary differences........................ 11,746 7,296
------------------------------------
Total gross deferred tax assets...................... 64,999 81,473
------------------------------------
Deferred tax liabilities:
Differences between the assigned values and the tax
bases of the assets and liabilities recognized in
purchase business combinations................... 36,663 41,452
Other temporary differences.......................... 5,439 3,807
------------------------------------
Total gross deferred tax liabilities................. 42,102 45,259
------------------------------------
Deferred tax asset valuation allowance............... 296
------------------------------------
Net deferred tax asset............................... $22,897 $35,918
====================================
At December 31, 1994, the Corporation had $5,728,000 in alternative
minimum tax (AMT) credits that can be carried forward indefinitely to reduce
the regular income tax liability in future years. During 1994, the Corporation
used AMT credits totaling $16,126,000 to reduce its regular tax liability. The
Corporation also had, at the end of 1994, $308,000 in net operating losses
(NOL) available to carry over to offset taxable income in future years. These
NOL carryforwards will expire in 1999. During 1994, the Corporation used NOL
carryforwards amounting to $4,249,000 to reduce its regular taxable income. The
valuation allowance of $296,000 reflected in 1993 is related to a deferred tax
asset arising from NOL carryforwards for which the Corporation could not
determine the likelihood of its realizability. During 1994, the valuation
allowance was reversed upon realization of most of the NOL carryforwards.
Under the Puerto Rico Income Tax Law, the Corporation and its
subsidiaries are treated as separate taxable entities and are not entitled to
file consolidated tax returns. Dividends received by the Corporation from the
subsidiaries (net of an 85% dividend received deduction allowed by the Puerto
Rico Income Tax Law) are subject to Puerto Rico income tax at the normal
corporate tax rates.
Under the provisions of SFAS 109, the Corporation has not recognized a
deferred tax liability on $174,013,000 of unremitted earnings of domestic
subsidiaries arising after January 1, 1993, at the applicable dividend rate,
since the Puerto Rico Income Tax Law provides certain alternatives to remit
those earnings to the Corporation on a tax-free basis.
The aggregate income tax expense applicable to income before provision
for income taxes differs from the amount computed by applying the statutory
rate as follows:
1994 1993 1992
--------------------------------------------------------------------------
% of pre-tax % of pre-tax % of pre-tax
Amount Income Amount Income Amount income
--------------------------------------------------------------------------
(Dollars in thousands)
Computed income tax at statutory rate............ $73,574 42% $55,499 42% $ 42,061 42%
Benefits of net tax exempt interest income....... (25,297) (14) (30,852) (23) (29,135) (29)
Others........................................... 1,766 1 3,504 2 1,333 1
--------------------------------------------------------------------------
Income tax expense.............................. $50,043 29% $28,151 21% $14,259 14%
==========================================================================
F-51
68
--------------------------------------------------------------------------------
The provision for income tax has been reduced as a result of the
elimination from the determination of taxable income of interest income from
exempt securities, net of related expenses, for Puerto Rico income tax
purposes.
The components of income tax expense for the year ended December 31, are
as follows:
1994 1993
-----------------------------------------
(In thousands)
Current income tax expense:
Puerto Rico........................................ $31,461 $20,031
Federal and States................................. 6,235 2,987
-----------------------------------------
Subtotal........................................ 37,696 23,018
-----------------------------------------
Deferred income tax expense (benefit):
Puerto Rico........................................ 11,606 6,090
Federal and States................................. (759) (957)
Adjustment for enacted changes in income tax laws.. 1,500
-----------------------------------------
Subtotal........................................ 12,347 5,133
-----------------------------------------
Total income tax expense........................ $50,043 $28,151
=========================================
The income tax provision includes $64,000, $363,000 and $53,000 in 1994,
1993 and 1992, respectively, related to the gain on sale of securities.
The Corporation's federal income tax provision for 1994, 1993 and 1992
was $4,297,000, $2,230,000, and $481,000, respectively.
NOTE 22 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK:
The Corporation is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to interest rates. These financial
instruments include loan commitments, letters of credit, standby letters of
credit, future contracts, options on future contracts, interest rate swaps and
caps and foreign exchange contracts. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statement of condition. The contract or notional
amounts of these instruments, which are not included in the statement of
condition, are an indicator of the Corporation's activities in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance
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 commitments and conditional
obligations as it does for those reflected on the balance sheet. The derivative
financial instruments are discussed in Note 24.
Financial instruments with off-balance sheet risk at December 31, whose
contract amounts represent potential credit risk are as follows:
1994 1993
-----------------------------------
(In thousands)
Commitments to extend credit:
Credit card lines.................................. $ 741,145 $ 644,977
Commercial lines of credit......................... 1,122,125 1,139,524
Commercial letters of credit......................... 13,353 11,512
Standby letters of credit............................ 76,876 82,642
Contractual commitments to extend credit are legally binding agreements
to lend money to customers at predetermined interest rates for a specified
period of time. Since many of the loan commitments may expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. To extend credit the Corporation evaluates each customer's
credit worthiness. The amount of collateral obtained, if deemed necessary by
the Corporation upon extension of credit, is based on management's credit
evaluation of the counterpart. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and investment securities,
among others.
In general, commercial letters of credit are short-term commitments used
to finance commercial contracts for the shipment of goods. Standby letters of
credit are also issued by the Corporation to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. In most instances, cash items are held by the Corporation to
collateralize these instruments.
F-52
69
--------------------------------------------------------------------------------
A geographic concentration exists within the Corporation's loan portfolio
since most of the Corporation's business activity is with customers located in
Puerto Rico. As of December 31, 1994, the Corporation had no significant
concentrations of credit risk and no significant exposure to highly leveraged
transactions in its loan portfolio.
NOTE 23 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The information about the estimated fair values of financial instruments
required by generally accepted accounting principles is presented hereunder
including some items not recognized in the statement of financial position.
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that creates a contractual obligation or
right to deliver to or receive cash or another financial instrument from a
second entity on potentially favorable terms with the first entity. All
nonfinancial instruments and certain other specific items are excluded from the
fair value disclosure requirements.
For those financial instruments with no quoted market prices available,
fair values have been estimated using present value or other valuation
techniques. These techniques are inherently subjective and are significantly
affected by the assumptions used, including the discount rates, estimates of
future cash flows and prepayment assumptions. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument.
The fair values reflected herein have been determined based on the
prevailing interest rate environment as of December 31, 1994 and 1993,
respectively. In different interest rate environments, fair value results can
differ significantly, especially for certain fixed rate financial instruments
and nonaccrual 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 estimated fair values of the Corporation's financial instruments,
their carrying value and the methodologies used to estimate fair values are
presented below.
Short-term financial instruments:
Short-term financial instruments, both assets and liabilities, have been
valued at their carrying amounts as reflected in the Corporation's Statement of
Condition. For these financial instruments, the carrying value may approximate
fair value because of the relatively short period of time between the
origination of the instruments and their expected realization. Included in this
category are: cash and due from banks, federal funds sold and securities and
mortgages purchased under agreements to resell, time deposits with other banks,
bankers' acceptances, customers' liabilities on acceptances, accrued interest
receivable, securities sold under agreements to repurchase, acceptances
outstanding and accrued interest payable.
Investment and trading securities:
Investment and trading securities are financial instruments which trade
regularly 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. The
fair value of investment securities available-for-sale and trading securities
equals its carrying value since they are marked-to-market for accounting
purposes. These instruments are detailed in the Statement of Condition and in
notes 3, 4 and 24.
Loans held-for-sale:
Estimated fair value of loans held-for-sale as of December 31, 1994, was
$10,600,000 based on secondary market prices.
Loans:
Estimated fair values have been determined for groups of loans with
similar financial characteristics. Loans were segregated by type such as
commercial, construction, residential mortgage, consumer and credit cards. Each
loan category was further segmented based on collateral, interest repricing and
accrual vs. non-accrual status. For variable rate loans with frequent repricing
terms and no significant change in credit risk, fair values were based on
carrying values.
Commercial loans with fixed rates were segregated in commercial real
estate, cash collateral and other. Consumer loans were segregated by type such
as personal, auto, boat, student, reserve lines and home equity loans. Personal
loans were further subdivided in mortgage-guaranteed, cash collateral and
unsecured. The fair values of fixed-rate commercial, construction and consumer
loans were estimated by discounting scheduled cash flows using prevailing
market rates for those loans.
F-53
70
--------------------------------------------------------------------------------
For non-accruing loans, the estimated fair values were based on the
discounted value of estimated cash flows. For these loans, principal-only cash
flows were adjusted to reflect projected charge-offs. Interest cash flows were
determined based on historical collection experience.
Residential mortgage loans were valued using quoted market prices, where
available, and market prices of similar traded loans with similar credit
ratings, interest rates and maturity dates adjusted for estimated prepayments.
For credit card loans, fair value estimates were determined by discounting the
projected income stream of the portfolio, after deducting operating expenses
and estimated credit losses. The unfavorable valuation for the loan portfolio,
in 1994, is due to the sharp increase in the interest rates during the year.
Generally accepted accounting principles do not require, nor the
Corporation has performed, a fair valuation of its lease financing portfolio.
Therefore, for presentation purposes only, leases are shown below with fair
value equal to carrying value.
1994 1993
------------------------------------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
------------------------------------------------------------------------------------------
(In thousands)
Commercial.................... $2,893,534 $2,794,659 $2,369,514 $2,364,891
Construction.................. 161,265 160,616 153,436 156,508
Lease financing............... 448,236 448,236 375,693 375,693
Mortgage...................... 2,167,467 2,092,390 1,576,044 1,623,850
Consumer
(including credit cards).... 2,100,531 2,048,821 1,872,235 1,857,068
Less: Allowance for..........
loan losses............ 153,798 133,437
------------------------------------------------------------------------------------------
$7,617,235 $7,544,722 $6,213,485 $6,378,010
==========================================================================================
Deposits:
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings, NOW and money market accounts, which at
December 31, 1994 and 1993, comprised 65.8% and 67.3% respectively, of the
Corporation's total deposits is 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. The discount rate is estimated
using the rates offered at December 31, 1994 and 1993, respectively, for
deposits with similar remaining maturities.
1994 1993
------------------------------------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
------------------------------------------------------------------------------------------
(In thousands)
Non interest bearing deposits.. $1,950,883 $1,950,883 $1,848,859 $1,848,859
Savings accounts............... 2,849,457 2,849,457 2,737,037 2,737,037
NOW and money market
accounts..................... 1,128,399 1,128,399 1,147,458 1,147,458
Certificates of deposit........ 3,083,696 3,083,253 2,789,304 2,819,174
------------------------------------------------------------------------------------------
$9,012,435 $9,011,992 $8,522,658 $8,552,528
==========================================================================================
Borrowings and long-term debt:
Borrowings and long-term debt, which include other short-term borrowings,
notes payable, senior debentures and subordinated notes, were valued using
quoted market rates for similar instruments at December 31, 1994 and 1993,
respectively. Included within other short-term borrowings at December 31, 1994,
are $150,000,000 (1993 - $119,000,000) in commercial paper issued by the
Corporation which has been valued at its carrying amount because of the
relatively short period of time between its origination and maturity.
1994 1993
------------------------------------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
------------------------------------------------------------------------------------------
(In thousands)
Other short-term borrowings... $573,841 $573,514 $664,173 $665,226
Notes payable ................ 459,524 440,745 253,855 255,649
Senior debentures............. 30,000 29,766 30,000 31,679
Subordinated notes............ 50,000 49,946 62,000 64,282
F-54
71
--------------------------------------------------------------------------------
Commitments to extend credit and standby letters of credit:
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. At December 31, 1994, the
Corporation had $1,863,270,000 and $90,229,000 in commitments to extend credit
and letters of credit, respectively (1993 - $1,784,501,000 and $94,154,000).
The estimated fair value of these financial instruments with no carrying value
was $4,859,000 (1993 - $4,480,000).
NOTE 24 - TRADING AND RISK MANAGEMENT ACTIVITIES:
Risk management activities
The operations of the Corporation are subject to the risk of interest
rate fluctuations to the extent that interest-earning assets and
interest-bearing liabilities mature or reprice at different times or in
differing amounts. Risk management activities are aimed at optimizing net
interest income, consistent with the Corporation's business strategies. The
Corporation employs a number of methods to measure the risks generated by
assets and liabilities arising from both core and risk management activities.
Asset/liability risk management activities are conducted in the context
of the Corporation's sensitivity to interest rate changes. This sensitivity
arises due to interest-earning assets repricing differently from
interest-bearing liabilities. This means that if interest rates are increasing
under a liability-sensitive position, margins usually will narrow as
liabilities reprice upward more quickly than assets. The converse applies when
rates are rising under an asset sensitive position.
The Corporation also carries out hedging strategies as part of its
asset/liability risk management. Various assets and liabilities, such as
investment securities financed by borrowings, are usually hedged to lock in
spreads and reduce the risk of losses in value due to rate changes. The gains
and losses from hedging activities are amortized over the remaining life of
these securities being hedged. Currently, there are no deferred gains and
losses from these activities.
The Corporation occasionally enters into various types of derivative
financial instruments in managing its interest rate risk, as indicated in the
following table:
1994 1993
------------------------------------------ ----------------------------
Notional Average for Fair Notional Fair
amount the year value amount value
------------------------------------------ ----------------------------
(In thousands) (In thousands)
Interest rate swaps.......................... $10,000 $11,667 $ 34 $20,000 $795
Interest rate futures........................ 1,528
Interest rate options and caps............... 20,000 23,958 44 20,000
Interest rate swaptions...................... 8,128 7,288 973
Foreign exchange contracts................... 500 718 500 936 936
For futures contracts, options on futures contracts and interest rate
swaps and caps, the contract or notional amounts do not represent exposure to
credit loss. Instead, the amount potentially subject to credit loss is
substantially less.
The Corporation's credit exposure at December 31, 1994, from derivative
financial instruments held or issued for trading purposes is represented by the
fair value of instruments with a positive fair value at that date, and is
presented along with the notional amounts of the instruments. Options written
do not expose the Corporation to credit risk, except to the extent of the
underlying risk in the debt instrument that the Corporation may be obligated to
acquire under certain written put options. Caps and floors written do not
expose the Corporation to credit risk, since the obligation to perform, if
required, is on the Corporation.
The risk that counterparties to both derivative and cash instruments
might default on their obligations is monitored on an on-going basis. 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 trading and nontrading activities, are
presented in Note 22.
F-55
72
--------------------------------------------------------------------------------
A brief description of the Corporation's objectives for holding or
issuing each class of derivative financial instrument follows:
Interest rate swaps
The Corporation enters into interest rate swap agreements in managing its
interest rate exposure. Interest rate swap agreements generally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal. At December 31, 1994, the Corporation had
outstanding an interest rate swap agreement which was done with a commercial
bank to change the Corporation's interest rate exposure. It was done for a
notional principal amount of $10,000,000 covering the Corporation's interest
rate exposure on half of a $20,000,000 fixed rate medium term note to a
floating rate. This agreement ends at the time the related obligations mature.
The expected weighted average interest rates to be received and paid in the
interest rate swap approximate 6.72% and 6.94%, respectively. Non-performance
by any of the counterparties on this agreement will expose the Corporation to
an interest rate risk which management deems to be immaterial.
Interest rate futures
Financial futures contracts are agreements to buy or sell a notional
amount of a financial instrument at a given time in the future. Options on
futures contracts confer the right from seller to buyer to take a future
position at a stated price. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities values and interest rates.
Interest rate options and caps
Interest rate options are contracts that grant the purchaser, for a
premium payment, the right to either purchase from or sell to the writer of the
option a financial instrument at a specified price within a specified period of
time or on a specified date. 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. The caps outstanding at December 31, 1994,
were acquired in order to minimize the interest rate risk associated with
certain variable rate securities and end at the time the related securities
mature in 1995. Cap rates range from 5.5% to 7.5%.
Interest rate swaptions
The Corporation enters into "swaption" derivative securities, which
combine the characteristics of interest rate swaps and options, for hedging
purposes. The Corporation's principal subsidiary issues certificates of deposit
with returns linked to the Standard and Poor's 500 index (the index). In order
to hedge the cost of these certificates, positions in swaptions are assumed.
The swaptions assumed earn a return to the Corporation equal to the
appreciation in the index throughout the life of the certificate of deposit
issued. In exchange, the Corporation pays the counterparty a fixed rate of
interest.
Foreign exchange contracts
Foreign exchange contracts generally involve the exchange of two
currencies at an agreed rate. Spot contracts require the exchange to occur
within two business days of the contract date. Forward and future contracts to
purchase or sell currencies at a future date settle over periods of up to one
year, in general.
Trading activities
The Corporation maintains limited trading positions in certain derivative
and nonderivative financial instruments and nonfinancial contracts. Most of the
Corporation's trading activities are limited to gains-trading and positioning
securities for resale to retail customers. Trading activities in the
Corporation are subject to strict guidelines approved by the Board of Directors
and included in the investment policy.
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 instruments, based on expectations of future market
conditions. These activities constitute the proprietary trading business and
are held by the Corporation to provide customers with financial products at
competitive prices. As trading strategies depend on both market-making and
proprietary positions, given the relationships between instruments and markets,
those activities are managed in concert in order to maximize net trading
revenue.
All trading instruments are subject to market risk, the risk that future
changes in market conditions may make an instrument less valuable or more
onerous. For example, fluctuations in market prices, interest rates or exchange
rates change the market value of the
F-56
73
--------------------------------------------------------------------------------
instruments. As the instruments are recognized at market value, these changes
directly affect reported income. Exposure to market risk is managed, in
accordance with risk limits set by senior management, by buying or selling
instruments or entering into offsetting positions.
The results of the Corporation's trading activities are summarized in the
income statement as part of the trading account profit or loss and amounted to
a $0.2 million net profit for 1994.
NOTE 25 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS:
During the year ended December 31, 1994, the Corporation and its
subsidiaries paid interest and income taxes amounting to $339,329,000 and
$27,052,000, respectively (1993 - $279,618,000 and $26,690,000; 1992 -
$302,591,000 and $5,096,000). In addition, loans transferred to other real
estate and other property for the year ended December 31, 1994, amounted to
$4,378,000 and $3,173,000, respectively (1993 - $15,121,000 and $3,923,000).
During 1992, the Corporation retained $8,500,000 of $94,000,000 securitized
mortgage loans.
NOTE 26 - LEASE FINANCING RECEIVABLES SOLD:
During 1991 VELCO sold approximately $68,616,000 of lease financing
receivables resulting in a gain of $3,092,000 net of related expenses and
estimated losses for uncollectible receivables. Under the servicing agreements
VELCO retained the servicing of the portfolio sold and Banco Popular was
appointed trustee. At December 31, 1994, the Corporation and VELCO are liable
under limited recourse provisions on the leases sold which do not exceed
$4,500,000.
NOTE 27 - 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 fo these matters will not have a
material adverse effect on the Corporation's financial position or results of
operations.
NOTE 28 - BANPONCE CORPORATION (HOLDING COMPANY ONLY) FINANCIAL INFORMATION:
The following condensed financial information presents the financial
position of the Holding Company only as of December 31, 1994 and 1993 and the
results of its operations and its cash flows for the three years ended December
31, 1994.
STATEMENTS OF CONDITION
December 31,
----------------------
1994 1993
----------------------
(In thousands)
ASSETS
Cash........................................ $ 499 $ 859
Money market investments.................... 8,041 8,467
Investment securities held-to-maturity,
at cost (market value $28,125,000)......... 50,106
Investment securities available-for-sale,
at market value in 1994 and at lower
of cost or market value in 1993
(1993 market value - $1,000,000)........... 3,768 1,000
Investment in Banco Popular, at equity...... 817,750 752,339
Investment in Pioneer Bancorp, at equity.... 35,467
Investment at equity in other subsidiaries.. 110,638 60,932
Advances to subsidiaries.................... 159,270 132,275
Other assets................................ 1,271 184
----------------------
Total assets.......................... $1,186,810 $956,056
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to
repurchase................................. $ 9,850
Commercial paper............................ 132,794 80,300
Senior debentures........................... 30,000 30,000
Accrued expenses and other liabilities...... 11,743 11,561
Stockholder's equity........................ 1,002,423 834,195
----------------------
Total liabilities and
stockholder's equity................. $1,186,810 $956,056
======================
F-57
74
--------------------------------------------------------------------------------
STATEMENTS OF INCOME
Year ended December 31,
--------------------------------
1994 1993 1992
--------------------------------
(In thousands)
Income:
Dividends from Banco Popular ......... $ 32,189 $ 16,000 $ 26,000
Interest on money market and
investment securities ............. 1,606 269 210
Gain on sale of investment securities 145
Other operating income .............. 7 20
Interest on advances to
subsidiaries ...................... 11,750 10,091 3,530
--------------------------------
Total income ...................... 45,552 26,360 29,905
--------------------------------
Expenses:
Interest expense .................... 8,530 6,464 3,509
Operating expenses .................. 424 349 205
--------------------------------
Total expenses .................... 8,954 6,813 3,714
--------------------------------
Income before income taxes
and equity in undistributed
earnings of subsidiaries .......... 36,598 19,547 26,191
Income taxes .......................... 3,484 3,546 1,411
--------------------------------
Income before equity in
undistributed earnings of
subsidiaries ...................... 33,114 16,001 24,780
Equity in undistributed earnings
of subsidiaries ..................... 91,635 93,403 60,336
--------------------------------
Net income ........................ $124,749 $109,404 $85,116
================================
STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------
1994 1993 1992
-------------------------------------
(In thousands)
Cash flows from operating activities:
Net income .......................... $ 124,749 $ 109,404 $ 85,116
-------------------------------------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiaries ....... (91,635) (93,403) (60,336)
Gain on sale of investment
securities ..................... (145)
Net (increase) decrease in
other assets ................... (1,087) 417 (525)
Net increase (decrease) in
other liabilities .............. 157 2,075 (1,028)
-------------------------------------
Total adjustments .......... (92,565) (90,911) (62,034)
-------------------------------------
Net cash provided by
operating activities ....... 32,184 18,493 23,082
-------------------------------------
Cash flows from investing activities:
Net decrease (increase) in
money market investments .......... 426 30,681 (36,648)
Sales of investment securities ...... 3,014
Purchases of investment securities
held-to-maturity .................. (50,106)
Purchases of investment securities
available-for-sale ................ (2,768) (1,000)
Capital contribution to subsidiaries (78,314) (26,062)
Advances to subsidiaries ............ (26,995) (64,508) (42,767)
-------------------------------------
Net cash used in investing
activities ................. (157,757) (33,827) (103,463)
-------------------------------------
Cash flows from financing activities:
Net increase in securities sold under
agreements to repurchase .......... 9,850
Net increase in commercial paper .... 52,494 40,396 39,904
Cash dividends paid ................. (37,017) (27,781) (24,112)
Proceeds from issuance of
preferred stock ................... 96,690
Proceeds from issuance of
common stock ...................... 3,196 2,106 59,809
-------------------------------------
Net cash provided by
financing activities ....... 125,213 14,721 75,601
-------------------------------------
Net decrease in cash ................ (360) (613) (4,780)
Cash at beginning of period ......... 859 1,472 6,252
-------------------------------------
Cash at end of period ............... $ 499 $ 859 $ 1,472
=====================================
The principal source of income for the Holding Company consists of
dividends from Banco Popular. As a member subject to the regulations of the
Federal Reserve Board, Banco Popular 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 Banco Popular may also
be affected by other regulatory requirements and policies, such as the
maintenance of certain minimum capital levels.
F-58
75
--------------------------------------------------------------------------------
NOTE 29 - POPULAR INTERNATIONAL BANK, INC. (A SUBSIDIARY OF BANPONCE
CORPORATION) FINANCIAL INFORMATION:
The following summarized financial information presents the consolidated
financial position of Popular International Bank, Inc. and its subsidiaries as
of November 30, 1994 and 1993, and the results of their operations, cash flows
and changes in stockholder's equity for the two years ended November 30, 1994.
Popular International Bank, Inc., is the holding company of BanPonce Financial
Corp., Equity One, Inc. (formerly Spring Financial Services, Inc.) and Pioneer
Bancorp, Inc. (second-tier subsidiaries).
STATEMENTS OF CONDITION
November 30,
-------------------------
1994 1993
-------------------------
(In thousands)
ASSETS
Cash .............................................. $ 30,084 $ 6,895
-------------------------
Money market investments .......................... 24,329 3,949
-------------------------
Investment securities available-for-sale,
at market value ................................ 126,760
-------------------------
Loans held-for-sale ............................... 10,296
-------------------------
Loans ............................................. 860,819 390,157
Less: Unearned income ........................... 33,584 15,680
Allowance for loan losses ................. 12,082 5,323
-------------------------
815,153 369,154
-------------------------
Other assets ...................................... 21,262 5,871
Intangible assets ................................. 16,352 5,687
-------------------------
Total assets ............................... $1,044,236 $ 391,556
=========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Non-interest bearing .............................. $ 47,002
Interest bearing .................................. 278,800
-------------------------
325,802
-------------------------
Federal funds purchased and securities
sold under agreements to repurchase ............. 13,000
Other short-term borrowings, consisting of
$85,000,000 term notes (1993 -
$89,900,000), a $10,000,000 note with
the Federal Home Loan Bank (FHLB)
(Note 11) and a revolving credit facility
with an affiliate of $69,800,000
(1993 - $33,800,000) ............................ 164,800 $ 123,677
Notes payable (Note 12) ........................... 399,924 224,162
Other liabilities ................................. 25,780 12,445
Stockholder's equity .............................. 114,930 31,272
-------------------------
Total liabilities and
stockholder's equity ..................... $1,044,236 $ 391,556
=========================
STATEMENTS OF INCOME
Year ended
November 30
-----------------------
1994 1993
-----------------------
(In thousands)
Interest and fees:
Interest and fees on loans.................. $ 66,487 $ 33,684
Money market and investment securities...... 5,721 239
-----------------------
72,208 33,923
-----------------------
Interest Expense:
Deposits.................................... 8,091
Short-term borrowings....................... 9,707 4,643
Long-term borrowings........................ 18,060 9,531
-----------------------
35,858 14,174
-----------------------
Net interest income........................... 36,350 19,749
Provision for loan losses..................... 6,973 4,574
-----------------------
Net interest income after provision for
loan losses................................. 29,377 15,175
Service charges on deposit accounts........... 768
Other service fees............................ 2,834 1,945
Other operating income........................ 3,614
-----------------------
36,593 17,120
-----------------------
Operating expenses............................ 23,149 12,067
-----------------------
Income before income tax...................... 13,444 5,053
Income tax.................................... 5,477 2,199
-----------------------
Net income.................................... $ 7,967 $ 2,854
=======================
F-59
76
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended
November 30
-------------------------
1994 1993
-------------------------
(In thousands)
Cash flows from operating activities:
Net income................................... $ 7,967 $ 2,854
-------------------------
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses.................. 6,973 4,574
Depreciation and amortization of
premises and equipment................... 719 151
Amortization of intangibles................ 1,524 1,037
Amortization of deferred loan fees
and costs................................ 4,701 2,072
Gain on sale of loans...................... (3,574) (925)
Net increase in interest receivable........ (1,954) (853)
Net increase in other assets............... (319) (1,167)
Net increase in other liabilities.......... 8,111 5,330
-------------------------
Total adjustments................... 16,181 10,219
-------------------------
Net cash provided by operating
activities........................ 24,148 13,073
-------------------------
Cash flows from investing activities:
Net (increase) decrease in money market
investments................................ (14,980) 8,647
Purchases of investment securities
available-for-sale......................... (52,324)
Sale of investment securities
available-for-sale......................... 36,833
Net disbursements on loans................... (392,454) (197,541)
Proceeds from sale of loans.................. 107,941
Assets acquired, net of cash................. (17,557)
Acquisition of premises and equipment........ (1,964) (283)
-------------------------
Net cash used in investing
activities........................ (334,505) (189,177)
-------------------------
Cash flows from financing activities:
Net increase in deposits..................... 33,097
Net increase in federal funds purchased and
securities sold under agreements to
repurchase................................. 8,000
Net increase in other short-term borrowings.. 38,523 46,940
Proceeds from issuance of notes payable...... 175,762 134,384
Proceeds from issuance of common stock....... 50,000
Capital contribution from Parent company..... 28,164
-------------------------
Net cash provided by financing
activities........................ 333,546 181,324
-------------------------
Net increase in cash and due from banks ....... 23,189 5,220
Cash and due from banks at beginning
of year .................................... 6,895 1,675
-------------------------
Cash and due from banks at end of year......... $ 30,084 $ 6,895
=========================
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
Year ended
November 30
-------------------------
1994 1993
-------------------------
(In thousands)
Preferred Stock:
Par value $25; authorized 25,000,000
shares, none issued
Common Stock:
Par value $5; authorized 1,000,000
shares, 670,000 shares issued
and outstanding
Balance at beginning of the period........... $ 3,100 $ 3,100
Issuance of common stock..................... 250
-------------------------
Balance at end of the period................. 3,350 3,100
-------------------------
Additional paid-in capital:
Balance at beginning of the period........... 25,200 25,200
Issuance of common stock..................... 49,750
Capital contribution from Parent company..... 28,164
-------------------------
Balance at end of the period................. 103,114 25,200
-------------------------
Retained earnings:
Balance at beginning of the period........... 2,972 118
Net income................................... 7,967 2,854
-------------------------
Balance at end of the period................. 10,939 2,972
-------------------------
Net change in the fair value of investment
securities available-for-sale, net of
deferred taxes............................. (2,473)
-------------------------
Total stockholder's equity................. $114,930 $31,272
=========================
F-60
77
--------------------------------------------------------------------------------
NOTE 30 - BANPONCE FINANCIAL CORP. (A SECOND - TIER SUBSIDIARY OF BANPONCE
CORPORATION) FINANCIAL INFORMATION:
The following summarized financial information presents the consolidated
financial position of BanPonce Financial Corp. and its subsidiaries Equity One,
Inc. (formerly Spring Financial Services, Inc.) and Pioneer Bancorp, Inc. as of
November 30, 1994 and 1993, and the results of their operations, cash flows and
changes in stockholder's equity for the two years ended November 30, 1994 and
for the eleven month period from inception date to November 30, 1992 (the
financial information of Pioneer Bancorp, Inc. is only included since its
acquisition effective March 31, 1994).
STATEMENTS OF CONDITION
November 30,
--------------------------
1994 1993
--------------------------
(In thousands)
ASSETS
Cash and due from banks..................... $ 30,026 $ 6,890
--------------------------
Money market investments.................... 23,294 2,926
--------------------------
Investment securities available-for-sale,
at market value........................... 126,760
--------------------------
Loans held-for-sale......................... 10,296
--------------------------
Loans ..................................... 860,819 390,157
Less: Unearned income..................... 33,584 15,680
Allowance for loan losses........... 12,082 5,323
--------------------------
815,153 369,154
--------------------------
Other assets................................ 21,256 5,844
Intangible assets........................... 16,352 5,687
--------------------------
Total assets......................... $1,043,137 $390,501
==========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Non-interest bearing........................ $ 47,002
Interest bearing............................ 278,800
--------------------------
325,802
--------------------------
Federal funds purchased and securities
sold under agreements to repurchase....... 13,000
Other short-term borrowings, consisting of
$85,000,000 term notes (1993 - $89,900,000),
a $10,000,000 note with the Federal Home
Loan Bank (FHLB) (Note 11) and a revolving
credit facility with an affiliate of
$69,800,000 (1993 - $33,800,000).......... 164,800 $123,677
Notes payable (Note 12)..................... 399,924 224,162
Other liabilities........................... 25,779 12,455
Stockholder's equity........................ 113,832 30,207
--------------------------
Total liabilities and
stockholder's equity............. $1,043,137 $390,501
==========================
STATEMENTS OF INCOME
Eleven-month
Year ended period ended
November 30, November 30,
-------------------------------------
1994 1993 1992
-------------------------------------
(In thousands)
Interest and fees:
Loans ............................ $66,486 $33,684 $17,596
Money market and investment
securities....................... 5,683 205 99
-------------------------------------
72,169 33,889 17,695
-------------------------------------
Interest expense:
Deposits........................... 8,091
Short-term borrowings.............. 9,707 4,643 2,408
Long-term borrowings............... 18,060 9,531 5,743
-------------------------------------
35,858 14,174 8,151
-------------------------------------
Net interest income.................. 36,311 19,715 9,544
Provision for loan losses............ 6,973 4,574 2,322
-------------------------------------
Net interest income after provision
for loan losses.................... 29,338 15,141 7,222
Service charges on deposit accounts.. 768
Other service fees................... 2,834 1,945 1,921
Other operating income............... 3,614
-------------------------------------
36,554 17,086 9,143
-------------------------------------
Operating expenses................... 23,144 11,797 8,243
-------------------------------------
Income before tax.................... 13,410 5,289 900
Income tax........................... 5,477 2,199 481
-------------------------------------
Net income........................... $ 7,933 $ 3,090 $ 419
=====================================
F-61
78
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Eleven-month
Year ended period ended
November 30, November 30,
------------------------------------
1994 1993 1992
------------------------------------
(In thousands)
Cash flows from operating activities:
Net income........................... $ 7,933 $ 3,090 $ 419
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation and amortization ..... 719 151 94
Provision for loan losses.......... 6,973 4,574 2,322
Amortization of intangibles........ 1,524 1,037 976
Amortization of deferred loan fees
and costs........................ 4,701 2,072 333
Gain on sale of loans.............. (3,574) (925)
Net increase in interest receivable (1,954) (853) (842)
Net increase in other assets....... (350) (1,159) (880)
Net increase in other liabilities.. 8,111 5,357 3,929
------------------------------------
Total adjustments.............. 16,150 10,254 5,932
------------------------------------
Net cash provided by
operating activities......... 24,083 13,344 6,351
------------------------------------
Cash flows from investing activities:
Net (increase) decrease in money
market investments................. (14,968) 8,371 (11,629)
Purchases of investment securities
available-for-sale................. (52,324)
Sale of investment securities
available-for-sale................. 36,833
Net disbursements on loans........... (392,454) (197,541) (90,485)
Proceeds from sale of loans.......... 107,941
Assets acquired, net of cash......... (17,557)
Acquisition of premises and
equipment.......................... (1,964) (283) (190)
------------------------------------
Net cash used in investing
activities................... (334,493) (189,453) (102,304)
------------------------------------
Cash flows from financing activities:
Net increase in deposits............. 33,097
Net increase in federal funds
purchased and securities sold
under agreements to repurchase..... 8,000
Net increase in other short-term
borrowings......................... 38,523 46,940 50,737
Proceeds from issuance of notes
payable............................ 175,762 134,384 19,779
Proceeds from issuance of common
stock.............................. 50,000
Capital contribution from Parent
company............................ 28,164 25,000
------------------------------------
Net cash provided by
financing activities......... 333,546 181,324 95,516
------------------------------------
Net increase (decrease) in cash and
due from banks....................... 23,136 5,215 (437)
Cash and due from banks at
beginning of period.................. 6,890 1,675 2,112
------------------------------------
Cash and due from banks at end of
period............................... $ 30,026 $ 6,890 $ 1,675
====================================
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
Eleven-month
Year ended period ended
November 30, November 30,
--------------------------------------
1994 1993 1992
--------------------------------------
(In thousands)
Common Stock:
Par value $1; authorized 10,000
shares, 2,000 shares issued
and outstanding
Balance at beginning of the
period.........................
Issuance of common stock......... $ 2
--------------------------------------
Balance at end of the period..... 2
--------------------------------------
Additional paid-in capital:
Balance at beginning of the
period......................... 27,000 $27,000 $ 2,000
Issuance of common stock......... 49,999
Capital contribution from parent
company........................ 28,164 25,000
--------------------------------------
Balance at end of the period..... 105,163 27,000 27,000
--------------------------------------
Retained earnings:
Balance at beginning of the
period......................... 3,207 117 (302)
Net income....................... 7,933 3,090 419
--------------------------------------
Balance at end of the period.. 11,140 3,207 117
--------------------------------------
Net change in the fair value of
investment securities
available-for-sale, net of
deferred taxes................. (2,473)
--------------------------------------
Total stockholder's equity $113,832 $30,207 $27,117
======================================
F-62
79
(Photo of Mr. Richard L. Carrion,
Chairman, President and Chief Executive Officer)
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS:
IT IS A PLEASURE TO REPORT TO YOU ON BANPONCE'S ACTIVITIES DURING THE PAST
YEAR. WE MADE SIGNIFICANT PROGRESS IN ADVANCING OUR STRATEGIC OBJECTIVES AND
ACHIEVED A SUBSTANTIAL PORTION OF OUR FINANCIAL OBJECTIVES, IN SPITE OF
CHANGING ECONOMIC CONDITIONS. MOREOVER, WE BELIEVE THE CORPORATION IS BETTER
POISED TO CONTINUE ITS STEADY GROWTH PATTERN INTO THE FUTURE. IN RECENT YEARS,
BANPONCE HAS concentrated efforts and resources in pursuing three principal
strategic objectives: pioneering the transformation of the payment system in
Puerto Rico, implementing the total quality philosophy and seeking growth
opportunities in markets outside of Puerto Rico and the traditional commercial
banking industry. During 1994, BanPonce made notable progress toward these
objectives.
To promote electronic payments, additional teller machines were installed, the
point-of-sale network expanded, and the use of telephone payment and direct
payment alternatives aggressively promoted. In addition, the line of retail
deposit products was redesigned to include a new pricing structure that
encourages the use of electronic banking. By year-end, the number of monthly
electronic transactions handled through Banco Popular had increased by 45% to
4.5 million per month.
BANPONCE CORPORATION
3
80
LETTER TO SHAREHOLDERS
------------------
At the end of 1994, the majority of the Bank's population had undergone formal
training in the total quality philosophy and every employee was aware of its
significance to our success. Throughout the year, virtually all internal
communications efforts addressed the importance of providing superior customer
service.
In continuing with our geographic and business diversification strategy, the
acquisition of Pioneer Bancorp, Inc., a full-service community bank in Chicago,
was completed during the first quarter of 1994. With the consolidation of Banco
Popular's Chicago branch in August 1994, Pioneer became a three-branch bank
with deposits of $326 million and assets amounting to $385 million by year-end.
Entrance into the New Jersey market was achieved in January 1995 as the
Resolution Trust Corporation (RTC) accepted our bid for four branches of the
former Carteret Savings Bank in New Jersey. The selected branches, with
deposits of approximately $182 million, are concentrated in working class
communities and are currently operating as Banco Popular, FSB.
-"MOREOVER, WE BELIEVE THE
CORPORATION IS BETTER POISED TO CONTINUE ITS STEADY GROWTH
PATTERN INTO THE FUTURE."
Also early in 1995, the acquisition of Puerto Rico Home Mortgage will further
increase BanPonce's diversification of income sources. With the addition of
$1.8 billion in servicing portfolio, BancoPopular will become Puerto Rico's
largest mortgage servicing institution.
Consonant with the income diversification strategy, Banco Popular initiated the
sale of non-traditional products at selected branches during the latter part of
1993. These investment products, including third-party mutual funds and
annuities, are currently sold at 18 of our branches in collaboration with
Marketing One. This third-party marketer, headquartered in Portland, Oregon, is
a very successful franchise dedicated to the sale of investment products at
banking institutions.
Our continued expansion into the financial services industry will be
accelerated through the proposed acquisition of a well-established investment
banking firm in the island. In the beginning of 1995, we signed a letter of
intent to acquire the operations of CS First Boston (Puerto Rico), Inc. This
prominent underwriter has provided general investment banking services to
public and private sector entities for over 50 years in the Puerto Rico market.
BANPONCE CORPORATION
4
81
LETTER TO SHAREHOLDERS
------------------
We look forward to the completion of this transaction as it will enable us to
offer complete financial and investment services, thereby providing better
service to our customers.
In 1994, we took another important step in the expansion into investment
products and services. During December, Banco Popular and PaineWebber P.R.,
Inc., formulated and sold $54 million in shares of the Puerto Rico Investors
Tax Free Fund, Inc. Its objective is to achieve high current incofme, exempt
from federal and Puerto Rico income taxes, to resident individuals and local
corporations. The product is a closed-end fund and is the first one registered
and developed under the Puerto Rico Investment Companies Act.
To finance our continuing expansion while maintaining a strong capital
position, during the second quarter of 1994 the Corporation issued 4 million
shares of non-cumulative preferred stock resulting in $96.7 million in
additional capital. Holders of the preferred stock are receiving monthly cash
dividends at the annual rate of 8.35% and have a liquidation preference of $25
per share. The stock is redeemable on or after June 30, 1998, at the option of
the Corporation, in whole or in part, from time to time. This is the first
issuance of preferred stock for the Corporation and the first in 11 years for
any company in Puerto Rico.
(Graph of Net Income and Earnings per Share)
During 1994, the Corporation had a solid financial performance. Net income
amounted to $124.7 million, representing $3.67 per share, a 14% increase over
the $109.4 million attained in 1993. Net earnings for 1993 included $6.2
million in additional income resulting from the cumulative effect of the
adoption of two accounting standards. Return on average assets and return on
average equity were 1.02% and 13.80%, respectively. In 1993, ROA and ROE were
0.97% and 13.02%, excluding income resulting from the adoption of accounting
changes. The increase in the Corporation's net earnings compared with the prior
year was due to an increase in net interest income, a decrease in the provision
for loan losses and an increase in other revenues. These improvements were
partially offset by an increase in operating expenses and taxes.
BANPONCE CORPORATION
5
82
LETTER TO SHAREHOLDERS
------------------
The Corporation's net interest income increased $41.4 million resulting mainly
from a growth of $1.5 billion in average earning assets, principally in
mortgage and commercial loans. A decrease in the provision for loan losses,
resulting from a $14.8 million or 29% reduction in net charge offs, also
contributed to the increase in earnings. Notwithstanding, the allowance for
loan losses increased to $153.8 million or 1.98% of loans by year-end from
$133.4 million or 2.10% of loans at the same date of 1993. Non-performing
assets declined from $111.2 million or 0.97% of total assets at December 31,
1993, to $107.6 million or 0.84% of total assets at the end of 1994. As a
percentage of non-performing loans, the allowance for loan losses also improved
from 143.77% at the end of 1993 to 163.16% at December 31, 1994.
The increase in other revenues was reflected in other service fees and other
operating income, which rose $8.3 million and $7.3 million, respectively. Other
service fees increased mainly due to credit cards, credit life insurance and
new services including sale of investment products and the distribution of the
Puerto Rico Investors Tax Free Fund. In addition, other operating income
increased by $2.6 million in our Equity One subsidiary. Service charges on
deposit accounts increased $3.5 million, mostly as a result of a higher
commercial account activity in the U.S. operations. Pioneer Bancorp, acquired
during the first quarter, generated $2.0 million in other operating income.
(Graph of Non-Performing Assets and Allowance to Non-Performing Assets)
The Corporation's all other operating expenses increased $25.7 million, mostly
in equipment expenses and professional fees. The increase is related to
investments in technology to provide a more efficient and convenient delivery
of our products and services. In addition, the business expansion has brought
increases in net occupancy, communications and amortization of intangibles.
Total assets at December 31, 1994, were $12.8 billion, reflecting an increase
of 11% compared with $11.5 billion at December 31, 1993. Earning assets at the
end of 1994 totaled $11.8 billion, compared with $10.7 billion at December 31,
1993.
At year-end, stockholders' equity was $1.0 billion, increasing $168.2 million
from the balance in 1993. The increase includes $96.7 million raised during the
above-mentioned preferred stock issue during the second quarter of
BANPONCE CORPORATION
6
83
LETTER TO SHAREHOLDERS
------------------
1994. All capital ratios remain well in excess of regulatory requirements. By
the end of 1994, our Tier I capital to risk-adjusted assets was 12.85%, total
capital to risk-adjusted assets was 14.25%, and we had a leverage ratio of
7.62%. The Corporation adopted SFAS 115 "Accounting for Certain Investments in
Debt and Equity Securities" during the year. As a result, stockholders' equity
at year-end includes an allowance of $19.4 million, net of taxes, in unrealized
holding losses on securities available for sale.
At BanPonce, we are fortunate to have investors who are partners in the
Corporation's long-term growth and development. BanPonce's stock appreciated
217% in the ten-year period from 1984 to 1994. The Corporation's five year
cumulative total return on common stock, including dividend reinvestment, was
57.2% compared with 51.7% for the group of stocks included in the S&P 500
Index. At year-end, the market price of the Corporation's stock was $28.125
compared with $31.50 at December 31, 1993.
(Graph of Five Year Cumulative Total Return)
In December 1994, your Board of Directors authorized BanPonce's repurchase of
up to one million shares of the outstanding stock of the Corporation. The Board
believes that these shares represent a good investment for the Corporation
under current market conditions. Assuming that one million shares were
repurchased at December 31, 1994, the capital ratios would be adjusted as
follows: Tier I capital to risk-adjusted assets, 12.47%; total capital to
risk-adjusted assets, 13.88%; and the leverage ratio, 7.39%. As of this
writing, no shares had been repurchased.
Mr. Roberto W. Esteves, a director of BanPonce Corporation since 1991 and Banco
Popular since 1990, retired from BanPonce's Board of Directors upon reaching
mandatory retirement age. Mr. Esteves remains on the Banco Popular Board of
Directors. Mr. Hugh G. McComas, a director of BanPonce since 1990 and Banco
Popular since 1980, retired from both boards also upon reaching mandatory
retirement age. Their ideas and counsel will be greatly missed.
Mr. Luis Rodriguez-Delgado resigned as director of the Corporation and the Bank
to dedicate himself fully to private commercial activities. Effective January
1995, Mrs. Sila Calderon, a director of BanPonce and
BANPONCE CORPORATION
7
84
LETTER TO SHAREHOLDERS
------------------
Banco Popular since 1990, resigned to pursue a public service career. We are
grateful for their contributions and active participation and wish them success
in all future endeavors.
We remain concerned that the plethora of regulations faced by commercial banks
belies the rhetoric of deregulation and puts commercial banks at a disadvantage
with other participants of the financial services industry. New legislation is
expected to be proposed in 1995 that will address the fundamental issues of
deposit insurance, regulatory reform and expanded powers for commercial bank
holding companies.
-"IN 1994,
WE TOOK ANOTHER IMPORTANT STEP IN THE EXPANSION INTO
INVESTMENT PRODUCTS AND
SERVICES."
We are hopeful that the passage of the Interstate Banking Bill in 1994
indicates a new regulatory climate that will better reflect the realities of a
consolidating industry. In 1995, new legislation that will merge supervisory
agencies is expected to be proposed. This approach should provide greater
efficiencies than are realizable under the current system. In addition,
expected reductions in FDIC deposit insurance premiums for selected banks will
also benefit our institution.
As we look toward the future we remain focused on our three long-term strategic
initiatives: the evolution toward an electronic banking environment,
enhancement of customer service to maximize cross-sell opportunities and
customer retention and growth outside Puerto Rico and the traditional banking
markets.
We believe that the key to our success lies in providing our customers superior
and creative financial services and the most efficient and convenient delivery
alternatives. The principles represented in "Our Creed" and "Our People"
continue to guide us in our efforts year after year. We are convinced that only
the dedication and hard work of our officers and employees and the support and
confidence of our shareholders can make possible our goal of becoming the best
bank in the world.
RICHARD L. CARRION
-------------------------
RICHARD L. CARRION
Chairman
President
Chief Executive Officer
BANPONCE CORPORATION
8
85
1994 YEAR IN REVIEW
1994
Payment System Initiatives
Commitment to Customer Focus
Franchise Expansion
BANPONCE CORPORATION
9
86
1994 YEAR IN REVIEW
STRATEGIC FOCUS
Although BanPonce is aggressively pursuing growth opportunities outside the
Puerto Rico market, the island remains the principal market for the holding
company. The Corporation believes there is still substantial growth potential
in Puerto Rico. Specifically, it believes that it is important for BanPonce to
continue playing a leading role in the transformation of the island's payment
system. This transformation will provide customers with more convenient
services, thereby increasing and enhancing current relationships. At the same
time, it will allow serving additional customers in a more cost effective
manner -- many of whom are unserved today by the financial institutions in
Puerto Rico.
Notwithstanding the new electronic delivery alternatives, banking remains a
service business. To be successful, the Corporation must be committed to the
total quality philosophy in all facets of the business -- delivering
outstanding services that exceed the customers' expectations throughout the
system.
BanPonce is also committed to diversifying sources of income both by geography
and product lines. While the Corporation has achieved outstanding success in
Puerto Rico with its current service offerings, it must seek to diversify and
balance its source of income and continue to provide new and innovative
services to meet the changing needs of its customers. In all of these areas,
1994 proved to be a significant year.
CUSTOMER FOCUS/SERVICE QUALITY
The extensive delivery system, including 166 branches and 296 ATMs as well as
telephone banking services, facilitates reaching a large number of the
customers in the Puerto Rico market. The Corporation's enviable retail banking
franchise can be further buttressed by broadening and strengthening its
customer relationships. Having such an attractive market position, however,
also means being the most visible target for the competition. In recent years,
Banco Popular has faced intense competition from new players that target
attractive niches in the markets the Bank serves. Cooperative credit unions
have also become important competitors in certain areas. Providing the best
customer service is critical to protecting the Bank's franchise from erosion
and continuing its growth by building stronger ties with the customers.
BanPonce's total quality program, which was initiated in 1992, is furnishing
employees with the necessary tools and motivation to support the continuing
evolution toward a customer-driven culture. At the end of 1994, 3,800 employees
or approximately 66% of the Bank's population had been educated in the total
quality philosophy. During the year, process improvement teams were organized
to evaluate and recommend enhancements to processes that affect customer
service.
BANPONCE CORPORATION
10
87
(Several pictures describing Strengthening Customer Relationships)
BANPONCE CORPORATION
11
88
(Several pictures describing Enhancing Franchise Expansion)
BANPONCE CORPORATION
12
89
BANPONCE CORPORATION
1994 YEAR IN REVIEW
To create awareness regarding the importance of providing excellent customer
service, an on-going, internal communications effort under the theme "You are
Banco Popular" is being carried out. The campaign instills a disposition toward
customer service, teaches how to sell the Bank's products and services, and
projects our commitment to total customer satisfaction.
To promote a sales-oriented culture, a sales force pilot program was organized.
This program provides selected branch officers with supplementary sales
training and materials along with added compensation to reward additional
results. During the year, group efforts were focused on selling electronic
services at the branches and special regional outreach activities.
Understanding how the Bank's customers evaluate service at the branches is key
to the continuous improvement of service quality. Banco Popular's service
measurement program was redesigned and tested at nine principal branches during
the latter part of the year. This program, which will be continued and expanded
in 1995, involves independent observers who evaluate the service provided by
branch officers considering various factors that the customers consider
important.
GEOGRAPHIC AND BUSINESS DIVERSIFICATION
BanPonce's strategic vision also includes seeking growth in markets outside
Puerto Rico and the traditional commercial banking industry. During 1994, the
Corporation continued pursuing its long-term expansion outside the island.
The Corporation's New York operation continues to grow. It closed the year with
30 branches and $1.3 billion in deposits. Loan volumes increased substantially
during the year and for the third consecutive year, Banco Popular was the
leading bank in the Small Business Administration (SBA) loan program. It also
launched a very successful and innovative advertising campaign under the slogan
"We Bank on Your Dreams."
In early 1995, the Resolution Trust Corporation (RTC) accepted the
Corporation's offer for four branches of the former Carteret Savings Bank in
New Jersey. Two of the branches are in Newark, one in Montclair and the other
in East Orange. They have approximately $182 million in deposits and will
operate as branches of Banco Popular, FSB, thus marking the Corporation's entry
into the state of New Jersey.
(Graph of Asset Distribution by Geographical Area)
Equity One, the Corporation's mortgage and consumer finance subsidiary,
continued its rapid and well-controlled growth in 1994. The number of offices
grew from 58 in 14 states, to 73 offices in 20 states, and net loans increased
from $374 million to $584 million, with 85% of these loans secured by real
estate. It is expected that Equity One will continue this growth pattern in
1995.
BANPONCE CORPORATION
13
90
1994 YEAR IN REVIEW
In Chicago, the acquisition of Pioneer Bancorp, Inc., was completed in the
first quarter of 1994. Subsequently, the Chicago branch of Banco Popular was
consolidated with Pioneer resulting in a three-branch bank with $326 million
in deposits and $385 million in assets. This transaction will permit further
growth within the Chicago market and evidences the commitment of the
Corporation to better serve the Chicago community. Over the next several years
Pioneer expects to continue to increase its presence in Chicago with additional
offices and, as appropriate, acquisitions.
(Graph of Equity One Asset Growth)
BanPonce will continue to seek expansion opportunities in selected areas of the
Caribbean as well as markets in the U.S. mainland, particularly in those areas
with large Hispanic populations.
The acquisition in early 1995 of Puerto Rico Home Mortgage will bring further
revenue diversification. The added $1.8 billion of servicing will provide Banco
Popular with Puerto Rico's largest servicing portfolio. Puerto Rico Home
Mortgage will operate as a mortgage origination and secondary marketing
subsidiary of Banco Popular, adding its new production to Banco Popular's
expanding mortgage servicing business.
Also in January of 1995, the proposed acquisition of CS First Boston (Puerto
Rico), Inc., will permit rapid expansion beyond the traditional banking
industry. CS First Boston has provided general investment banking services to
public and private sector entities for over 50 years in the Puerto Rico market.
The Corporation is very pleased with the prospect of this transaction,
because it will enable it to offer more complete investment and financial
services in the communities served.
PAYMENT SYSTEM ALTERNATIVES
Based on an extensive study conducted by the Bank in 1994, only 46% of the
adult population in Puerto Rico today has an account with a financial
institution. In addition, only 36% of these customers reported having ATM cards
and only 3% reported ever using telephone bill payment services. On the other
hand, the study revealed that a majority of all retail banking consumers have
at least one banking relationship with Banco Popular. The Bank, therefore, is
well-positioned to not only continue to serve the growing payment system needs
of its current customers, but also the needs of those in Puerto Rico not
currently using the services of financial institutions.
With payment systems transactions in Puerto Rico estimated at approximately 500
million per year, about 43% is handled through Banco Popular. While only a very
small percentage of these payments is processed electronically, today Banco
Popular handles the vast majority of these payments and almost half of all the
checks processed in the island.
BANPONCE CORPORATION
14
91
1994 YEAR IN REVIEW
Looking ahead, there are three significant areas of opportunity for Banco
Popular in the Puerto Rico retail market:
- Serving the unbanked market, which represents more than half of the island,
by offering cost-effective, non-traditional banking alternatives that
leverage Banco Popular's technological capability and payment systems
leadership position.
- Providing higher quality, more efficient, and cost-effective payment services
in Puerto Rico by aggressively promoting electronic payment alternatives.
- Expanding the number of financial services with each customer by offering
high quality innovative services that meet their financial service needs.
For the past several years, the Bank has focused on the transformation of
Puerto Rico's payment system. Pioneering the shift to electronic payments
represents an enormous potential for the Bank. The Bank's market position
allows it to offer cost-effective payment alternatives to its retail and
corporate customers. This strategy also enhances customer service and achieves
efficiencies that allow the Bank to reduce non-interest expenses as electronic
volumes increase.
During 1994, efforts were continued around six major initiatives that were
undertaken in 1993 to achieve this transformation. To promote this objective,
additional teller machines were installed, the point-of-sale network expanded,
retail deposit products redesigned and the use of telephone payment and direct
payment alternatives aggressively promoted.
Even though a small percentage of all transactions is generated by businesses
and the government, the payroll and social aid payments create a large
percentage of all branch visits and in turn generate numerous consumer purchase
transactions. Since many government aid recipients are part of the unserved
segment of the population, these individuals present an opportunity for the
Bank. An account that offers direct deposit and provides electronic access will
soon be marketed to serve this segment. The process will be more convenient and
cost effective because individuals will no longer have to visit a branch to
cash a check and make payments. In 1994, significant progress was made in
promoting direct deposit transactions. These efforts resulted in a 39% increase
in monthly transactions over the previous year. In a three to four year time
frame, the Bank believes it can greatly expand its customer base, revenues and
profitability by meeting the needs of these new customers.
(Graph of Banco Popular Puerto Rico Transaction Distribution)
The expansion of Banco Popular's ATM network and promotion of the ATH card, the
Bank's proprietary
BANPONCE CORPORATION
15
92
1994 YEAR IN REVIEW
ATM card, were priority efforts during the year. As a result, the number of
active ATH cards increased by 28.1% while the number of transactions performed
through the ATH network increased by 19.3%. Similar increases are expected in
1995.
The payment alternatives for ATH card holders continued growing with the
increasing penetration of Electronic Data Capture (EDC) terminals deployed at
merchant establishments. During the year, the number of EDC terminals at the
point-of-sale increased by 127% and the transactions processed through these
terminals by 192%. By the end of the year, Banco Popular was processing more
than 5 million transactions through more than 2,700 retail outlets and
approximately 3,800 EDC terminals. In 1995 this is expected to continue to grow
in the number of terminals and transactions.
To support the electronic payment strategy, the Bank's retail line of deposit
products was reviewed during 1994. Some products were discontinued and two new
products, designed to encourage the use of electronic banking alternatives,
were launched. Both new products, Ahorro A Toda Hora and MultiCuenta Popular,
provide access to electronic services by using the ATH card. The ATH card can
be used for transactions at ATMs and as means of payment at supermarkets and
various other retail outlets in Banco Popular's point-of-sale network. For
added convenience, MultiCuenta Popular customers can opt for the Bank's ATH
International card: a MasterCard debit card accepted at more than 12 million
retail establishments all over the world.
The number of monthly transactions processed through Banco Popular's telephone
bill payment alternative, TelePago, had increased by 58.4% by the end of the
year. The educational campaign promoting its advantages and the expansion of
merchants available through the service continues, and dramatic growth is
expected again in 1995.
Moreover, promotion of direct payment of loans was continued during the year.
The campaign, which offered a 0.25% discount on the interest rates charged on
all new loans with direct payment, proved to be very successful. By the end of
1994, the percentage of all new loans with direct payment had increased from
47% to 54%.
BANPONCE CORPORATION
16
93
(Several pictures describing Pioneering the Shift to Electronic Transactions)
BANPONCE CORPORATION
17
94
1994 YEAR IN REVIEW
THE BANK
AND THE COMMUNITY
As the principal subsidiary of BanPonce Corporation, Banco Popular is the
leading financial institution in Puerto Rico and the prime mover of the local
economy. Throughout its 101 years of service, the Bank has played a key role in
promoting the development of the communities it serves. The Bank's efforts have
always been focused on finding better and more innovative ways of satisfying
the financial needs of the communities, as well as enhancing their social and
economic welfare.
Throughout the year, Banco Popular was involved in projects to provide low- and
moderate-income housing, and increased its already substantial participation in
small business financing. An excellent working partnership has been established
with different government agencies to assess housing needs and the Bank's
participation in proposed projects.
As an example, since 1993 Banco Popular has participated in the development of
the Peninsula de Cantera Project, a $300 million, 15-year plan that combines
the efforts of the municipal and state governments and the private sector to
transform a rundown area into a model for future neighborhood rehabilitation.
The plan includes the development of infrastructure, housing, commercial and
industrial activity, and the generation of new jobs.
In the small business segment, the Bank developed numerous seminars for
businessmen and entrepreneurs throughout Puerto Rico covering such topics as
financing, taxes, insurance, financial planning, inventory control and
accounting practices. The Bank again received recognition by the Small Business
Administration for its participation in their different programs. It was
awarded the Platinum Medal Award in recognition for granting over $97 million
in loans during fiscal year 1994, the leader among commercial banks in the
United States. More than 80% of the loans in the Bank's commercial loan
portfolio were granted to small businesses.
Moreover, the Bank has amply fulfilled its leading role in the support of a
wide array of non-profit organizations as well as cultural and sports events.
Banco Popular has a significant donation and sponsorship program, and in
addition, employees devote a substantial portion of their personal time to
economic, social, charitable, cultural, military, sports, religious, civic and
professional organizations and activities.
BANCO POPULAR FOUNDATION
Established in 1979, the Banco Popular Foundation channels a large portion of
donations for community programs. The Foundation, which strongly fosters a
BANPONCE CORPORATION
18
95
(Several pictures describing Fostering a Better Quality of Life)
BANPONCE CORPORATION
19
96
1994 YEAR IN REVIEW
better quality of life for the people of Puerto Rico, upholds community
development and educational projects through its General Fund.
Education is high on the priority list for the Foundation, which helps several
educational institutions, such as Centro San Francisco, Inc. Moreover, to help
defray part of the college education costs of sons and daughters of Banco
Popular employees, the Foundation established the Rafael Carrion Jr.
Scholarship Fund. In 1994, a total of 47 scholarships were granted for $72,200.
In addition, the Foundation donated $250,000 to the University of
Pennsylvania's Wharton School of Business and Finance to be used as seed money
for scholarships for needy Puerto Rican students. The first recipients will be
selected for the 1995-96 academic year.
BANK DONATIONS
Besides the Banco Popular Foundation disbursements, in 1994 the Bank itself,
through donations and sponsorships, supported more than 400 institutions or
events, selected from more than 1,800 requests. Moreover, as a result of the
sale of videos, compact discs and cassettes of Un Pueblo que Canta, a historic
document that compiled some of the most renowned music of Puerto Rico and that
was broadcast as part of the commemoration of the Bank's centennial the
previous year, more than $300,000 were realized. Proceeds were equally
distributed among the Centros Sor Isolina Ferre, a non-sectarian institution
that promotes stronger family ties through the prevention of juvenile
delinquency and self- and community-development projects; the Peninsula de
Cantera Project; and the AIDS Foundation. Another historical document, El
Espiritu de un Pueblo, was also broadcast in 1994; proceeds from the sale of
the program have been earmarked for the donation program of the Banco Popular
Foundation.
SPONSORSHIPS
Another phase of the Bank's community involvement centers on the sponsorship of
events for non-profit organizations or their fund-raising efforts. In 1994, the
Bank cooperated with numerous small institutions. It was also the major sponsor
of activities for the benefit of such institutions as the Ponce Museum of Art,
the Carlos Baerga Celebrities Softball Game to raise funds for the Roberto
Clemente Sports City, the Casa de Ninos Manuel Fernandez Juncos and SER de
Puerto Rico; and the Gigi Fernandez Invitational Cup, for the benefit of the
National Hispanic Scholarship Fund, the Puerto Rico Tennis Association and the
Yo Si Puedo institution. Likewise, the Bank gave its support to several
professional entities for their continued education and betterment, such as the
Chamber of Commerce, the Manufacturers Association, the Public Accountants
Association, the Overseas Press Club and the Puerto Rico Journalists and
Photojournalists associations, and sponsored seminars geared to small-and
medium-sized businesses.
In Puerto Rico, Banco Popular is almost synonymous with community involvement.
In 1994, the Bank reaffirmed its commitment to the culture, values and
traditions of Puerto Rico and the communities it serves.
BANPONCE CORPORATION
20
97
Subsidiaries Information
(Picture of Organization Chart of BanPonce Corporation)
BANPONCE CORPORATION
21
98
SUBSIDIARIES
Banco Popular
- Full-service commercial banking subsidiary operating mainly in Puerto Rico
and also serving the New York City, Los Angeles and Virgin Islands markets.
- Has three wholly owned subsidiaries: Popular Leasing, Popular Consumer
Services and Popular Mortgage.
- Established in 1893.
Banco Popular, New York
(Picture of Paul E. Carr, Jr.)
Banco Popular, Virgin Islands
(Picture of Valentino I. McBean)
BANPONCE CORPORATION
22
99
SUBSIDIARIES
STATISTICS
- Total assets at $9.3 billion.
- Largest branch network: 166 retail branches. Branches in 67 of 78
municipalities.
- Largest ATM network: 296 ATMs.
- Dominant player in electronic services market.
- Leads in deposit market with $6.9 billion. Holds approximately 31% and 24% of
retail and commercial deposit markets, respectively.
- Market leader in personal loans, holds approximately 50% of market portfolio.
- Biggest player in credit card and check credit business, holds 65% of the
market, including private labels.
- Opened first New York branch in 1961.
- Total assets at $1.4 billion, $1.3 billion in deposits.
- Branches: 30 in the New York City area.
- Focuses on serving the individual and small business market.
- Concentrates on the small business and mortgage loan niches.
- Entered the Virgin Islands market in 1981.
- Total assets of $540 million and $420 million in deposits.
- Largest bank with approximately 30% market share.
- Branches: seven in the U.S. Virgin Islands and one in Tortola, British Virgin
Islands. Two consumer credit centers and two mortgage centers.
KEY HIGHLIGHTS
- Important progress in the migration toward electronic transactions:
electronic transactions increased by 42% compared to an increase of 16% in
total transactions during 1994.
- First institution to receive the Small Business Administration Platinum
Medal. This award recognizes institutions that originate more than $50
million in SBA loans. In 1994, Banco Popular was leader in originations with
over $97 million and is the leading commercial bank in the U.S. in SBA loans.
- Launched first locally managed, tax-free mutual fund in partnership with
PaineWebber.
- Received Small Business Administration Gold Medal for surpassing $10 million
in SBA loan originations. Banco Popular leads originations in the New York
area.
- Launched massive advertising campaign under the theme "We Bank on Your
Dreams."
- Significant increase in mortgage originations during 1994.
- Successful integration of CoreStates First Pennsylvania five-branch operation
acquired in late 1993.
- Introduction of new products and services to the British Virgin Islands.
BANPONCE CORPORATION
23
100
SUBSIDIARIES
Pioneer Bancorp, Inc.
Full-service community bank located on the northwest side of Chicago.
(Picture)
MICHAEL POLANSKI
Popular Consumer Services, Inc.
d/b/a Best Finance
Consumer finance company operating in Puerto Rico. Provides personal
installment loans and second mortgage loans.
(Picture)
EDGARDO NOVOA
Popular Leasing & Rental, Inc.
Engaged in finance leasing and daily rental of motor vehicles and equipment in
the Puerto Rico market.
(Picture)
CARLOS J. MANGUAL
BANPONCE CORPORATION
24
101
SUBSIDIARIES
--------------------
STATISTICS
- Banco Popular entered the market with the acquisition of one branch in 1984.
Pioneer Bank, which was established in 1913, was acquired by BanPonce and
merged with Banco Popular's Chicago branch in 1994.
- Total assets at $400 million, $330 million in deposits.
- Operates three branches in Chicago.
- Operation focuses mainly on serving the individual and small business
markets.
- Established in 1970, acquired by BanPonce in 1987.
- Total assets at $71 million, with over 50,000 accounts and loans at $70
million.
- Operates 27 offices in 24 municipalities throughout Puerto Rico.
- Established by Banco Popular in 1989.
- Total assets at $246 million, lease receivables at $232 million.
- Operates from four strategically located offices throughout Puerto Rico.
- Second largest vehicle leasing company with over 14,000 vehicles,
representing an estimated 36% market share.
KEY HIGHLIGHTS
- Acquisition of Pioneer by BanPonce Corporation in March 1994.
- Integration of Banco Popular's branch into Pioneer Bancorp in August 1994.
- "Outstanding" Community Reinvestment Act rating reaffirmed by the FDIC.
- Established mortgage banking operation.
- During 1994 entered second mortgage loan market to offer mortgages of up to
$40,000.
- Mortgage banking license acquired during 1994.
- Started direct debit services to dealers (ACH): deposits are made directly to
the dealer's bank account.
- Acquired $2 million leasing portfolio from Avis Leasing.
- Opened a daily car rental office in Bayamon.
BANPONCE CORPORATION
25
102
SUBSIDIARIES
--------------------
VELCO/Vehicle Equipment Leasing Company, Inc.
Engaged in finance leasing and daily rental of motor vehicles and equipment in
the Puerto Rico market.
(Picture)
ANDRES F. MORRELL
Equity One, Inc.
Engaged in the business of personal and mortgage loans. The company also
provides retail financing to over 700 merchants and dealers.
(Picture)
THOMAS J. FITZPATRICK
Banco Popular, FSB
A federal savings association located in northeastern New Jersey.
BANPONCE CORPORATION
26
103
SUBSIDIARIES
--------------------
STATISTICS
- Established in 1961, acquired by BanPonce in 1986.
- Total assets at $239 million, lease receivables at $211 million.
- Operates offices in four strategic locations throughout Puerto Rico.
- Leads leasing market in Puerto Rico with over 14,200 vehicles, representing
an estimated 37% market share.
- Established in 1989 as Spring Financial Services, Inc., acquired by BanPonce
in 1991.
- Total assets of approximately $600 million.
- Operates 73 offices in 20 states, mostly Midwestern and Eastern regions of
the United States.
- Loan portfolio exceeding $560 million, 85% secured by real estate.
- Acquired from the Resolution Trust Corporation (RTC) on January 20, 1995.
- Total assets at $208 million, $182 million in deposits.
- Operates four branches: two in Newark, one in Montclair and one in East
Orange.
KEY HIGHLIGHTS
- Introduced a new product called Power Lease: a closed-end leasing agreement
with a repurchase warranty from the dealer or the manufacturer.
- Established a consumer services department.
- Introduced in Puerto Rico seminars on safe driving for fleets and government
agencies through Advance Driver Training Services, Inc.
- Established a pilot program on fleet repair as value-added service.
- Entered servicing market for other institutions; a Fannie Mae-approved
servicer.
- Expanded its mortgage banking activities into FHA/VA programs and secondary
market activity.
- Significant expansion during 1994: loan portfolio increased by over 50%.
- Marks the entrance into the New Jersey market.
BANPONCE CORPORATION
27
104
BOARDS OF DIRECTORS
BANPONCE BANCO POPULAR
CORPORATION DE PUERTO RICO
-------------------------- --------------------------
RICHARD L. CARRION ALBERTO M. PARACCHINI RICHARD L. CARRION LUIS E. DUBON JR., ESQ.
Chairman Private Investor Chairman Partner
President President Dubon & Dubon
Chief Executive Officer FRANCISCO PEREZ JR. Chief Executive Officer
Chairman of the Board ROBERTO W. ESTEVES
ALFONSO F. BALLESTER President ALFONSO F. BALLESTER President
Vice Chairman of the Board Sucrs. Jose Lema & Co., Inc. Vice Chairman of the Board Star Tours International, Inc.
President President Solstar Corp.
Ballester Hermanos, Inc. FRANCISCO M. REXACH JR. Ballester Hermanos, Inc. d/b/a Travel Network
President Caribe Theaters Corp.
MANUEL LUIS DEL VALLE Ready Mix Concrete, Inc. MANUEL LUIS DEL VALLE
Vice Chairman of the Board Vice Chairman of the Board JORGE A. JUNQUERA
Chairman of the Board FELIX J. SERRALLES Chairman of the Board Executive Vice President
Bacardi Corporation NEVARES Bacardi Corporation Banco Popular de Puerto Rico
President
ANTONIO LUIS FERRE Chief Executive Officer ANTONIO LUIS FERRE FRANKLIN A. MATHIAS
Vice Chairman of the Board Destileria Serralles, Inc. Vice Chairman of the Board Retired Executive
President President
El Nuevo Dia EMILIO JOSE VENEGAS El Nuevo Dia MANUEL MORALES JR.
Secretary, Board of Directors Principal
Venegas Construction Corp. JUAN A. ALBORS Selarom Capital Group
JUAN J. BERMUDEZ President HERNANDEZ
Partner Sanson Corporation Chairman ALBERTO M. PARACCHINI
Bermudez & Longo, S.E. Chief Executive Officer Private Investor
JULIO E. VIZCARRONDO JR. Albors Development Corp.
SILA MARIA CALDERON* President FRANCISCO M. REXACH JR.
President Chief Executive Officer SALUSTIANO ALVAREZ President
Commonwealth Investment Desarrollos Metropolitanos, Inc. MENDEZ Ready Mix Concrete, Inc.
Company, Inc. President and Director
SAMUEL T. CESPEDES, Mendez & Company, Inc. JOSE E. ROSSI
FRANCISCO J. CARRERAS ESQ. Chairman of the Board
Educator Secretary JOSE A. BECHARA BRAVO Aireko Construction Corp.
Executive Director Board of Directors President
Fundacion Angel Ramos, Inc. Empresas Bechara, Inc. FELIX J. SERRALLES
ERNESTO N. MAYORAL, NEVARES
WALDEMAR DEL VALLE, ESQ. JUAN J. BERMUDEZ President
ESQ. Assistant Secretary Partner Chief Executive Officer
Partner Board of Directors Bermudez & Longo, S.E. Destileria Serralles, Inc.
Parra, Del Valle, Frau & Limeres
BRUNILDA SANTOS ESTEBAN D. BIRD JULIO E. VIZCARRONDO JR.
LUIS E. DUBON JR., ESQ. DE ALVAREZ, ESQ. President President
Partner Assistant Secretary Chief Executive Officer Chief Executive Officer
Dubon & Dubon Board of Directors Bird Construction Company, Desarrollos Metropolitanos,
Inc. Inc.
HECTOR R. GONZALEZ
President GEORGE BLASINI SAMUEL T. CESPEDES,
Chief Executive Officer Investor ESQ.
TPC Communications of Secretary
PR, Inc., and Teleponce SILA MARIA CALDERON* Board of Directors
Cable TV, Inc. President
Commonwealth Investment ERNESTO N. MAYORAL,
JORGE A. JUNQUERA Company, Inc. ESQ.
Executive Vice President Assistant Secretary
Banco Popular de Puerto Rico FRANCISCO J. CARRERAS Board of Directors
Educator
FRANKLIN A. MATHIAS Executive Director BRUNILDA SANTOS
Retired Executive Fundacion Angel Ramos, Inc. DE ALVAREZ, ESQ.
Assistant Secretary
MANUEL MORALES JR. DAVID H. CHAFEY JR. Board of Directors
Principal Executive Vice President
Selarom Capital Group Banco Popular de Puerto Rico
* Resigned effective January
1995.
BANPONCE CORPORATION
28
105
SENIOR MANAGEMENT
(Picture of Richard L. Carrion, Jorge A. Junquera,
Maria Isabel P. De Burckhart, Humberto Martin, Larry B. Kesler,
Emilio E. Pinero Ferrer, Esq. and David H. Chafey, Jr.)
BANPONCE CORPORATION
29
106
MANAGEMENT
BANPONCE RETAIL BANKING FINANCIAL OPERATIONS
CORPORATION GROUP MANAGEMENT GROUP GROUP
------------------------ ------------------------ ------------------------ ------------------------
RICHARD L. CARRION JORGE A. JUNQUERA DAVID H. CHAFEY JR. HUMBERTO MARTIN
Chairman Executive Vice President Executive Vice President Executive Vice President
President
Chief Executive Officer JORGE BIAGGI ORLANDO BERGES* SEGUNDO BERNIER
Senior Vice President Senior Vice President Senior Vice President
MARIA ISABEL P. DE Hato Rey Region Comptroller Operations
BURCKHART
Executive Vice President FRANCISCO CESTERO LUIS R. CINTRON VICTOR V. ECHEVARRIA
Senior Vice President Senior Vice President Senior Vice President
DAVID H. CHAFEY JR. Caguas/Fajardo Region Trust Management Information
Executive Vice President Systems
NORMAN IRIZARRY JUAN GUERRERO**
JORGE A. JUNQUERA Senior Vice President Senior Vice President EDUARDO FIGUEROA
Executive Vice President Western Region Investments Senior Vice President
Electronic Banking Services
LARRY B. KESLER WILBERT MEDINA ROBERTO R. HERENCIA
Executive Vice President Senior Vice President Senior Vice President PLINIO RODRIGUEZ
Bayamon Region U.S. Credit Products Senior Vice President
HUMBERTO MARTIN Security
Executive Vice President MARITZA MENDEZ JOSE L. LOPEZ CALDERON
Senior Vice President Senior Vice President MARGARITA HERRERA,
EMILIO E. PINERO FERRER, San Juan Region Treasury ESQ.
ESQ. Vice President
Executive Vice President FERNANDO L. MONLLOR U.S. OPERATIONS Compliance
Senior Vice President ---------------------
ORLANDO BERGES* Ponce Region PAUL E. CARR JR. OTHER SUBSIDIARIES
Senior Vice President Senior Vice President ------------------------
MIGUEL RIPOLL New York
TERE LOUBRIEL Senior Vice President VEHICLE EQUIPMENT
Senior Vice President Rio Piedras Region MANUEL J. REMON LEASING COMPANY, INC.
Vice President ------------------------
BANCO POPULAR ELI SEPULVEDA Los Angeles ANDRES F. MORRELL
------------------------ Senior Vice President President
RICHARD L. CARRION Arecibo/Manati Region ADMINISTRATION GROUP
Chairman ------------------------ POPULAR LEASING AND
President RETAIL CREDIT AREA MARIA ISABEL P. DE RENTAL, INC.
Chief Executive Officer ------------------------ BURCKHART ------------------------
LARRY B. KESLER Executive Vice President CARLOS J. MANGUAL
SENIOR MANAGEMENT Executive Vice President President
COUNCIL GUSTAVO DIAZ
------------------------ JORGE J. BESOSA Senior Vice President POPULAR CONSUMER
RICHARD L. CARRION Senior Vice President Marketing SERVICES, INC.
President Individual Lending ------------------------
Chief Executive Officer JORGE E. MARCHAND*** EDGARDO NOVOA
FELIPE FRANCO Senior Vice President President
MARIA ISABEL P. DE Senior Vice President Public Relations and
BURCKHART Mortgage Loans Communications EQUITY ONE, INC.
Executive Vice President ------------------------
VALENTINO I. MCBEAN EDUARDO RODRIGUEZ THOMAS J. FITZPATRICK
DAVID H. CHAFEY JR. Senior Vice President Senior Vice President President
Executive Vice President Virgin Islands Region Human Resources
PIONEER BANCORP, INC.
JORGE A. JUNQUERA COMMERCIAL LIZZIE ROSSO ------------------------
Executive Vice President BANKING GROUP Senior Vice President MICHAEL POLANSKI
------------------------ Strategic Planning President
LARRY B. KESLER EMILIO E. PINERO FERRER,
Executive Vice President ESQ. LUZ M. TOUS DE TORRES *Since January 1995 he is in
Executive Vice President Senior Vice President charge of the New York opera-
HUMBERTO MARTIN Corporate Real Estate tions and the expansion into
Executive Vice President ARNALDO SOTO COUTO New Jersey. Amilcar L. Jordan,
Senior Vice President Esq., is the new Comptroller.
EMILIO E. PINERO FERRER, Construction Loans
ESQ. **Since January 1995 he is in
Executive Vice President CYNTHIA TORO charge of the new Financial
Senior Vice President and Investment Services
TERE LOUBRIEL Commercial Loans Division. Richard Barrios is
Senior Vice President now in charge of Investments.
Internal Auditor RICARDO TORO
Senior Vice President ***Resigned in February 1995.
DENNIS C. TRISTANI Corporate Banking Irma T. Ruiz is now in charge
Senior Vice President of the Division.
Credit Review and Audit KENNETH J. GROSS
Vice President
BRUNILDA SANTOS International
DE ALVAREZ, ESQ.
Vice President
Legal Division
BANPONCE CORPORATION
30
107
1994 10K FINANCIAL SUMMARY
(Picture of 10-K Financial Summary)
BANPONCE CORPORATION
31
108
STOCKHOLDERS' INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS
Price Waterhouse
ANNUAL MEETING
The 1995 annual stockholders' meeting of BanPonce
Corporation will be held on April 21 at 2:00 p.m. at
Banco Popular Center Building in Hato Rey, Puerto Rico.
Telephone (809) 765-9800
Fax (809) 759-7803
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:
Amilcar L.Jordan
Senior Vice President and Comptroller
Banco Popular de Puerto Rico
PO Box 362708
San Juan, PR 00936-2708
Design: BD&E Inc., Pittsburgh, Pennsylvania
Photography: Giovanni Rufino
Photography Illustrations: Jeff Brice
Printing: Westinghouse Printing
(Logo) Printed on recycled paper.
109
BANPONCE
CORPORATION (Logo)
PO Box 362708
San Juan, Puerto Rico 00936-2708