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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
- -- THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
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
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Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0416582
Principal Executive Offices:
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209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Telephone Number: (809) 765-9800
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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 .
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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. [ ]
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As of February 29, 1996 the Corporation had 32,974,936 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates of the Corporation was $1,450,897,000 based upon the reported
closing price of $44.00 on the NASDAQ National Market System on that date.
DOCUMENTS INCORPORATED BY REFERENCE
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(1) Portions of the Corporation's Annual Report to Shareholders for the
fiscal year ended December 31, 1995 are incorporated herein by reference in
response to Item 1 of Part I.
(2) Portions of the Corporation's Proxy Statement relating to the 1996
Annual Meeting of Stockholders of the Corporation are incorporated herein by
reference to Items 10 through 13 of Part III.
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TABLE OF CONTENTS
Page
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PART I
Item 1 Business ............................................. 3
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.................. 12
Item 8 Financial Statements and Supplementary Data .......... 12
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 12
PART III
Item 10 Directors and Executive Officers of the Registrant ... 13
Item 11 Executive Compensation ............................... 13
Item 12 Security Ownership of Certain Beneficial Owners
and Management ...................................... 13
Item 13 Certain Relationships and Related Transactions ....... 13
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................. 14
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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"), BP Capital
Markets, Inc. ("BP Capital") 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 banking
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 $12.9 billion in
assets, $9.4 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 and a federal agency in Chicago. In addition, Banco Popular has
three subsidiaries, Popular Leasing & Rental, Inc., one of Puerto Rico's
largest vehicle leasing and daily rental companies, Popular Consumer Services,
Inc., a small-loan company with 30 offices in Puerto Rico operating under the
name of Best Finance, and Popular Mortgage, Inc., a mortgage loan company with
three offices in Puerto Rico operating under the name of Puerto Rico Home
Mortgage. VELCO is a wholly owned subsidiary of the Corporation engaged in
finance leasing of motor vehicles to corporations and professionals. Effective
April 30, 1995, BP Capital Markets, Inc. became a direct subsidiary of the
Corporation engaged in the business of a securities broker-dealer in Puerto
Rico, with financial advisory and security brokerage operations.
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 is principally engaged in
providing managerial services to its subsidiaries. Financial is the direct
owner of all the 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 three branches in that
state. The deposits of Pioneer Bank & Trust are insured by the FDIC. As of
December 31, 1995 the assets of Pioneer were $435.0 million and its deposits
were $366.9 million.
On January 20, 1995 Financial became the direct owner of all issued and
outstanding shares of Banco Popular, FSB, a federal savings bank which acquired
from the Resolution Trust Corporation ("RTC") certain assets and all of the
deposits of four New Jersey branches of the former Carteret Federal Savings
Bank, a federal savings bank under Resolution Trust Corporation
conservatorship. The deposits of Banco Popular, FSB are insured by the FDIC.
As a result of becoming the owner of all shares of Banco Popular, FSB, the
Corporation has become 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 contributed all the issued and
outstanding shares of its wholly-owned subsidiary Equity One, 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 mortgage and
consumer finance company engaged in the business of granting personal and
mortgage loans and providing dealer financing through 91 offices located in 26
states with total assets of $848.5 million as of December 31, 1995.
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 and savings bank 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.
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The Corporation's business is described on pages 7 through 24 of the
Business Review Section of the Annual Report to Shareholders for the year ended
December 31, 1995, information which is incorporated herein by reference.
REGULATION AND SUPERVISION
GENERAL
The Corporation is a bank holding company subject to the supervision and
regulation of 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 Banco Popular is
not permitted to operate a branch located outside of its "home state", except
to the extend a domestic bank may do so. See "Interstate Banking and Other
Recent Legislation" below. 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 Banco Popular
to conform said branch's existence to the legal requirements set forth above.
Banco Popular has petitioned the Federal Reserve Board for authorization 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, 1995, 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 capital ratio 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 that indicated by its actual capital position if it receives a
less than satisfactory examination rating in any one of four categories.
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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,
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, Financial or PIB, as the
case may be, or to any 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. The
Federal Reserve Board has requested public comment on a proposed definition of
"Capital Stock and Surplus" for these purposes. Under the proposed definition,
"Capital and Surplus" would be equal to Tier I and Tier 2 capital included in
the calculation of the bank's risk-based capital including the amount of the
bank's allowance for loan and lease losses not included in the calculation.
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 subsidiary bank.
This support may be required at times when, absent such policy, the bank
holding company might not otherwise provide such support. 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. 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. Banco Popular, Pioneer and
Banco Popular, FSB are currently the only depository institution subsidiaries
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.
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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 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, 1995, Banco Popular could have declared a dividend
of approximately $158,754,000 without the approval of the Federal Reserve
Board. Illinois law contains similar limitations on the amount of dividends
that Pioneer can pay. In addition, the Office of Thrift Supervision ("OTS")
regulations limit the amount of capital distributions (whether by dividend or
otherwise) that any savings association may make without prior OTS approval,
based upon the savings association's regulatory capital levels. These
limitations are applicable to Banco Popular, FSB. Also, in connection with the
acquisition by Banco Popular, FSB, from the RTC of four New Jersey branches of
the former Carteret Federal Savings Bank, the RTC provided Banco Popular, FSB
and Financial interim financial assistance. The assistance consisted of a
5-year term loan for $19.5 million, payable in the year 2000 in a single lump
sum installment and accruing interest, payable quarterly, at a floating rate of
12.5 basis points over the rate payable on the 13-week U.S. Treasury Bill. The
loan is secured with the issued and outstanding shares of common stock of Banco
Popular, FSB. Pursuant to the term of such financing, Banco Popular, FSB may
not, among other things, declare or pay any stock dividends on its outstanding
capital stock (unless such dividends are used exclusively for payment of
principal of or interest on such promissory note) or make any distributions of
its assets until payment in full of such promissory note.
The payment of dividends by Banco Popular, Pioneer or Banco Popular, FSB
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 depository institution, could
include the payment of dividends), such authority may require, after notice and
hearing, that such depository institution 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 required by the
FDICIA. See "FDICIA".
See "Puerto Rico Regulation" for a description of certain restrictions on
Banco Popular's ability to pay dividends under Puerto Rico law.
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. The FDIC has the authority
to raise or lower assessment rates on insured deposits and to impose additional
special assessments in order to achieve certain statutorily mandated reserve
ratios in each fund. Any such increase would have an adverse effect upon the
net earnings of Banco Popular, Pioneer and Banco Popular, FSB and, therefore,
the Corporation. Effective June 1, 1995 the FDIC established a new Bank
Insurance Fund ("BIF") assessment rate providing for assessments of from 4
cents for each $100 of deposits to 41 cents per $100, depending upon the
institution's assigned risk category.
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On November 14, 1995, the Board of Directors of the FDIC approved a
further reduction in the assessment schedule for BIF deposits. Effective
January 1, 1996, the assessment schedule now ranges from 0 to 27 cents per $100
of deposits. Deposits at Banco Popular, FSB are included in the Savings
Association Insurance Fund ("SAIF"). Effective June 1, 1995, SAIF deposits
became subject to assessment at rates of 23 cents to 31 cents per $100 of
deposits.
As part of the currently pending Budget Reconciliation Act for fiscal year
1996, the House-Senate Conference Committee has proposed an assessment on all
FDIC-insured depository institutions to provide funds for payment of interest
on Financing Corporation debt when due. If enacted, this proposal would result
in minimum BIF insurance premiums that are expected to be approximately 2.5
cents on each $100 in deposits subject to BIF assessments.
Various legislative proposals regarding the future of BIF and SAIF have
been reported recently. Several of these proposals include a one-time special
assessment for SAIF deposits (which could under certain proposals be as high at
0.85% of each insured institution's SAIF deposit assessment base) and a
subsequent reduced level of annual premiums for SAIF deposits comparable to the
rate for BIF deposits.
CAPITAL ADEQUACY
Information about the capital composition of the Corporation as of
December 31, 1995 and for the four previous years is presented in Table N
"Capital Adequacy Data", on page F-25 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, other disallowed intangibles and a
disallowed portion of deferred tax assets ("Tier 1 Capital"). The remainder
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
("Tier 2 Capital").
In addition, the Federal Reserve Board has established minimum leverage
ratio (Tier 1 Capital to quarterly average assets) guidelines for bank holding
companies and member banks. These guidelines provide for a minimum leverage
ratio of 3% for bank holding companies and member banks that meet certain
specified criteria, including that they have the highest regulatory rating.
All other bank holding companies and member banks 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 Board 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
originated and purchased mortgage servicing rights, purchased credit card
relationships and include a "grandfather" provision permitting the continued
inclusion of certain existing intangibles.
Banco Popular is subject to the risk-based and leverage capital
requirements adopted by the Federal Reserve Board. As of December 31, 1995,
Banco Popular had a tier 1 capital ratio of 11.74%, a total capital ratio of
13.01% and a leverage ratio of 6.45%.
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. See "FDICIA".
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 rules 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
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based on its projection of taxable income or 10 percent of Tier 1 capital,
whichever is less. This final rule was effective on April 1, 1995. In
addition, the Federal Reserve Board has 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 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 terms.
Interstate Banking and Other Recent Legislation
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Act"), which became effective on September 29, 1994, bank
holding companies are permitted to acquire banks located in any state
regardless of the state law in effect at the time. The Interstate Act also
provides for the nationwide interstate branching of domestic banks. Under the
Interstate Act, both national and state-chartered banks will be permitted to
merge across state lines (and thereby create interstate branches) commencing on
June 1, 1997. States are permitted to "opt-out" of the interstate branching
authority by taking action prior to the commencement date. States may also
"opt-in" early (i.e., prior to June 1, 1997) to the insterstate branching
provisions and to permit de novo branching.
In addition to the matters discussed above, there have been proposed a
number of legislative and regulatory proposals designed to strengthen the
Federal deposit insurance system and to improve the overall financial stability
of the U.S. banking system, and to provide for other changes in the bank
regulatory structure, including proposals to reduce regulatory burdens on
banking organizations and to expand the nature of products and services banks
and bank holding companies may offer. It is impossible to predict whether or in
what form these proposals may be adopted in the future, and, if adopted, what
their effect will be on the Corporation or its subsidiaries.
Puerto Rico Regulation
As a commercial bank organized under the laws of the Commonwealth of
Puerto Rico (the "Commonwealth"), Banco Popular is subject to the supervision,
examination and regulation of 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 latter
shall 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, 1995, the legal lending limit for the Bank under this provision
was approximately $88 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,
8
9
not in default, of municipalities or instrumentalities of the Commonwealth.
Section 14 of the Banking Law authorizes Banco Popular to conduct certain
financial and related activities directly or through subsidiaries, including
lease financing of personal property, operating small loans companies and
mortgage loans activities. Banco Popular engages in these activities through
its wholly-owned subsidiaries, Popular Leasing & Rental, Inc., Popular Consumer
Services, Inc. and Popular Mortgage, Inc., respectively, 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 Company's stock. Such authorization must be requested at
least 30 days prior to 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 consistent with the public interest.
Employees
At December 31, 1995, the Corporation employed 7,681 persons. None of its
employees are represented by a collective bargaining group.
ITEM 2. PROPERTIES
As of December 31, 1995, Banco Popular owned (and wholly or partially
occupied) approximately 67 branch premises and other facilities throughout the
Commonwealth, 17 branches premises in New York, and a branch premises in Los
Angeles. In addition, as of such date, Banco Popular leased properties for
branch operations in approximately 104 locations in Puerto Rico, 16 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.
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.
9
10
San Juan building, a twelve story structure located at Old San Juan,
Puerto Rico. Banco Popular 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.
Mortgage Loan Center, a seven story building and a four story building,
located at 153 and 167 Ponce de Leon Avenue, Hato Rey, Puerto Rico,
respectively, are fully occupied by the mortgage loans and mortgage servicing
departments.
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. A full service branch of Banco Popular operates in this
facility.
New York building, a nine story structure with two underground levels
located at 7 West 51st. Street, New York City, where approximately 92% of the
office space is used for banking operations. The remaining space is rented or
available for rent to outside tenants.
At December 31, 1995 the Corporation owned a 23 story office structure
located at 268 Munoz Rivera Avenue, Hato Rey, Puerto Rico. Banco Popular
occupies approximately 10% of the rented space and the rest of the building is
rented 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 believes, based on the
opinion of legal counsel, that the aggregate liabilities, if any, arising from
such actions would not have a material adverse effect on the financial position
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's common stock (the "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 1995 and the previous four years, as well as cash
dividends declared is contained under Table O, "Stock Performance", on page
F-26 and under the captions "Common Stock" and "Dividends" on pages F-26 and
F-27, 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 on 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 29, 1996, the Corporation had 5,377 stockholders of record
of its Common Stock, 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 $44.00 per
share.
On October 6, 1995, the Corporation filed, and had ordered effective a
"shelf" registration with the Securities and Exchange Commission which
registered $1 billion in either senior or subordinated notes or shares of
preferred stock. Under this "shelf" registration, the Corporation issued
$125,000,000 in subordinated notes on December 12, 1995, maturing on December
15, 2005 with interest payable semi-annually at 6.75%. These notes are
unsecured subordinated obligations which are subordinated in right of payment
in full to all present
10
11
and future senior indebtedness of the Corporation. These notes do not provide
for any sinking fund.
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 10% withholding tax rate (20% up to June 30,
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 10%, (25% up to June 30,
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 10% tax 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 married, and form AS 2732 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 page F-6 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,
-----------------------
Ratio of Earnings to Fixed Charges:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Excluding Interest on Deposits 2.0 2.6 3.0 2.9 2.1
Including Interest on Deposits 1.4 1.5 1.5 1.3 1.2
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends:
Excluding Interest on Deposits 2.0 2.5 3.0 2.9 2.0
Including Interest on Deposits 1.4 1.5 1.5 1.3 1.2
For purposes of computing these consolidated ratios, earnings represent
income before income taxes, plus fixed charges. 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 and the amortization of debt issuance expense.
11
12
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) 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Long-term obligations $885,428 $489,524 $283,855 $120,062 $103,752
Non-Cumulative preferred
stock of the Corporation $100,000 $100,000 $ -0- $ -0- $ -0-
Cumulative perpetual
preferred stock of
Banco Popular $ -0- $ -0- $ 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 page F-2 through F-34
under the caption "MD&A, and is incorporated herein by reference.
Table K, "Maturity Distribution of Earning Assets", on page F-21 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-35 through F-71,
and on page F-32 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.
12
13
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 19, 1996 (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 18 and under the caption "BanPonce Corporation Performance
Graph" on page 18 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.
13
14
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 Auditors ....................................................... F-35
Consolidated Statements of Condition as of December 31, 1995 and 1994 ................ F-36
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 1995................................................................... F-37
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1995 .......................................... F-38
Consolidated Statements of Changes in Stockholders' Equity for each of the
years in the three-year period ended December 31, 1995 ............................. F-39
Notes to Consolidated Financial Statements ........................................... F-40
(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 17 of this report are
filed herewith or are incorporated herein by reference.
B. The Corporation filed three reports on Form 8-K for the quarter ended
December 31, 1995.
Dated: October 6, 1995, October 12, 1995 and December 13, 1995
Items reported: Item 5 - Other Event
Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits
14
15
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: 02-08-96 (Principal Executive Officer)
-------------
By: S\JORGE A. JUNQUERA
-------------------
Jorge A. Junquera
Senior Executive Vice President
Dated: 02-08-96 (Principal Financial Officer)
-------------
By: S\AMILCAR L. JORDAN
-------------------
Amilcar L. Jordan
Senior Vice President
Dated: 02-08-96 (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 02-08-96
--------
S\ALFONSO F. BALLESTER Vice Chairman of
- ---------------------- the Board 02-08-96
Alfonso F. Ballester --------
S\ANTONIO LUIS FERRE Vice Chairman of
- -------------------- the Board 02-08-96
Antonio Luis Ferre --------
S\JUAN J. BERMUDEZ
- ------------------
Juan J. Bermudez Director 02-08-96
--------
S\FRANCISCO J. CARRERAS
- -----------------------
Francisco J. Carreras Director 02-08-96
--------
- --------------------------
Waldemar Del Valle Director
--------
15
16
S\LUIS E. DUBON, JR.
- --------------------
Luis E. Dubon, Jr. Director 02-08-96
--------
S\HECTOR R. GONZALEZ
- --------------------
Hector R. Gonzalez Director 02-08-96
--------
S\JORGE A. JUNQUERA
- -------------------
Jorge A. Junquera Director 02-08-96
--------
S\FRANKLIN A. MATHIAS
- ---------------------
Franklin A. Mathias Director 02-08-96
--------
S\MANUEL MORALES, JR.
- ---------------------
Manuel Morales, Jr. Director 02-08-96
--------
S\ALBERTO M. PARACCHINI
- -----------------------
Alberto M. Paracchini Director 02-08-96
--------
S\FRANCISCO PEREZ, JR.
- ----------------------
Francisco Perez, Jr. Director 02-08-96
--------
S\FRANCISCO M. REXACH, JR.
- --------------------------
Francisco M. Rexach, Jr. Director 02-08-96
--------
- -----------------------
Felix J. Serralles, Jr. Director
--------
S\EMILIO JOSE VENEGAS
- ---------------------
Emilio Jose Venegas Director 02-08-96
--------
S\JULIO E. VIZCARRONDO, JR.
- ---------------------------
Julio E. Vizcarrondo, Jr. Director 02-08-96
--------
16
17
EXHIBIT 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 August 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
Corporation 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 Corporation 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 rate 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 Series A (Liquidation Preference $25.00
per share). (4)
4.8 Form S-3 filed in connection with the issuance of debt
securities and preferred stock of BanPonce Corporation,
Popular International Bank, Inc. and BanPonce Financial Corp.,
and guaranteed by BanPonce Corporation in the aggregate amount
of $1,000,000,000. (5)
4.9 Subordinated indenture of BanPonce Corporation, dated
November 30, 1995, between BanPonce Corporation and the First
National Bank of Chicago, as trustee. (6)
4.10 Form of Subordinated note of BanPonce Corporation. (7)
4.11 Indenture, dated as of February 15, 1995, between BanPonce
Corporation and the First National Bank of Chicago, as
trustee. (18)
4.12 Form of medium-term fixed rate note of BanPonce Corporation (19)
4.13 Form of medium-term floating rate note of BanPonce
Corporation (20)
10.2 Form 8-A Filing filed in connection with the Series A
Participating Cumulative Preferred Stock Purchase Rights. (8)
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. (9)
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. (10)
10.3.2 Waiver of Section 5.4 and 5.5 of the Senior Notes Agreement,
dated January 18, 1995 and Amended and Restated Senior Notes
Agreement dated May 18, 1994 by and among BanPonce
Corporation, New York Life Insurance Company and New York Life
Insurance and Annuity Company. (11)
10.3.3 Amended and Restated Senior Notes Agreement dated September
20, 1995 by and among BanPonce Corporation, New York Life
Insurance Company and New York Life Insurance and Annuity
Company.
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. (12)
10.8 Management Incentive Plan for certain Division Supervisors
approved in January, 1987. (13)
10.8.1 BanPonce Corporation Senior Executive Long-Term Incentive
Plan dated October 6, 1994. (14)
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. (15)
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 Agreement 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. (16)
17
18
10.12.2 Revolving Credit and competitive advance facility and
credit agreement by and between BanPonce Corporation and
BanPonce Financial Corp. and Chemical Bank, as agent bank,
for borrowing up to the principal amount of $500,000,000
dated as of November 3, 1995. (17)
12.0 Computation of Ratio of Earnings to Fixed Charges
13.1 Registrants Annual Report to Shareholders for the year ended December 31, 1995
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 26, 1996 Annual
Meeting of Stockholders
- --------------------------------
(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 and to Exhibit 4(a) on Form 8-K filed on February 28, 1995.
(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 4.7 of the 1994 Form 10-k.
(5) Incorporated by reference to Registration Statement No. 33-61601.
(6) Incorporated by reference to Exhibit 4(c) on Form 8-K filed on
December 13, 1995.
(7) Incorporated by reference to Exhibit 4(p) on Form 8-K filed on
December 13, 1995.
(8) Incorporated by reference to Exhibit number 10.2 of Registration
Statement No. 33-00497.
(9) Incorporated by reference to Exhibit 10.6 of the 1991 Form 10-K.
(10) Incorporated by reference to Exhibit 10.3.1 of the 1994 Form 10-K.
(11) Incorporated by reference to Exhibit 10.3.2 of the 1994 Form 10-K.
(12) Incorporated by reference to Exhibit 10.22 of the 1990 Form 10-K.
(13) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K.
(14) Incorporated by reference to Exhibit 10.8.1 of the 1994 Form 10-K.
(15) Incorporated by reference to Exhibit 10.19 of the 1991 Form 10-K.
(16) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K.
(17) Incorporated by reference to Exhibit 10.12.2 of the 1994 Form 10-K.
(18) Incorporated by reference to Exhibit 4(c) on Form 8-K filed on April 13,
1995.
(19) Incorporated by reference to Exhibit 4(a) on Form 8-K filed on April 13,
1995.
(20) Incorporated by reference to Exhibit 4(b) on Form 8-K filed on April 13,
1995.
18
19
BANPONCE CORPORATION
INDEX 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-28
Glossary of Terms ............................................................ F-33
FINANCIAL STATEMENTS
Report of Independent Accountants............................................. F-35
Consolidated Statements of Condition as of December 31,1995 and 1994 ......... F-36
Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 1995 ............................................. F-37
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31,1995 .............................................. F-38
Consolidated Statements of Changes in Stockholders' Equity for each of the
years in the three-year period ended December 31, 1995...................... F-39
Notes to Consolidated Financial Statements ................................... F-40
F-1
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
This financial review contains an analysis of the performance of BanPonce
Corporation (the Corporation) and its subsidiaries, Banco Popular de Puerto
Rico (Banco Popular), including its wholly-owned subsidiaries Popular Leasing
and Rental, Inc. (Popular Leasing), Popular Consumer Services, Inc. (Popular
Consumer), and Popular Mortgage, Inc. (d/b/a Puerto Rico Home Mortgage);
Vehicle Equipment Leasing Company, Inc. (Velco); BP Capital Markets, Inc. (BP
Capital); Popular International Bank, Inc. and its wholly-owned subsidiary
BanPonce Financial Corp. (BanPonce Financial), including Pioneer Bancorp, Inc.
(Pioneer) and Banco Popular, FSB (FSB), second tier subsidiaries, and Equity
One, Inc. (Equity One).
SUMMARY
As 1995 began, the economy was showing an inflationary trend and the
Federal Reserve Board (FED) continued pursuing the less accommodative monetary
policy put in place the year before. In February 1995, the FED raised
short-term interest rates for the seventh time within a twelve-month period.
However, by mid-year signs of a slowdown in the economy were evident and the
FED reversed course by cutting the federal funds rate 25 basis points to 5.75%.
The economy continued showing signs of sluggishness and short-term rates were
notched to 5.50% in December. If this economic environment continues, an easier
monetary policy is predictable and further steps toward ease are expected in
1996.
This economic environment, characterized by interest rate volatility,
continuous developments in the regulatory arena and a growing amount of
business combinations and mergers, demands a large degree of dynamism and
adequate risk management from financial institutions.
The Corporation continued to assess its corporate strategies, implement
organizational changes and make investments designed to enhance its
opportunities in the future. Effective January 23, 1995, FSB, a newly created
corporation, acquired from the Resolution Trust Corporation (RTC) four branches
and $182 million in deposits, of the former Carteret Federal Savings Bank in
New Jersey. In addition, two new branches were opened in August 1995 further
expanding FSB's presence in that state. On March 31, 1995, Banco Popular
acquired approximately $123 million in assets and a $1.8 billion mortgage
servicing portfolio from Puerto Rico Home Mortgage, a local mortgage
origination and servicing operation. With this acquisition, the Corporation
became the largest mortgage loan servicer in Puerto Rico. On April 30, 1995,
the Corporation completed the acquisition of CS First Boston, Puerto Rico,
Inc., with total assets of approximately $752 million. This securities
underwriter and broker/dealer operation, now operating under the name of BP
Capital Markets, reinforces the Corporation's ability to provide investment
banking and financial services to the public and private sector entities and
provides a greater variety of products for our customer base.
Equity One, the Corporation's mortgage and consumer finance operation in
the U.S. mainland, opened 20 new offices during 1995, increasing its number of
offices to a total of 91 in 26 states. The expansion of the subsidiaries and
the New York operations of Banco Popular resulted in an increase of $743
million or 29.6% in assets outside Puerto Rico which at year-end represented
more than 24% of the total assets of the Corporation. Net income from sources
outside of Puerto Rico represented 16.2% in 1994, increasing to 20.5% in 1995.
Continuing with the Corporation's strategy and efforts to provide
technology and delivery systems in Puerto Rico and outside, Banco Popular
entered into an agreement with Banco Popular Dominicano and other financial
institutions in the Dominican Republic to establish the infrastructure to
process ATM (automated teller machines) transactions on that sister-island.
This agreement will drive the Corporation's electronic payment system
initiative even further, while providing additional sources of revenues to the
Corporation. In Puerto Rico, 1995 was a year of tremendous progress toward our
objective of transforming the payment system by installing 22 ATMs and 3,439
additional point-of-sale terminals for a total of 7,229.
Undoubtedly, 1995 was a year of expansion and growth for the Corporation,
a year in which BanPonce produced solid earnings again. Net income for 1995
totaled $146.4 million, an improvement of 17.3% from the net earnings of $124.7
million reported in 1994. Earnings per common share (EPS) for 1995 were $4.19
compared with $3.67 in 1994, based on average common shares outstanding for
1995 and 1994 of 32,908,150 and 32,798,243, respectively. The Corporation's
profitability ratios for 1995 represented returns of 1.04% on assets (ROA) and
14.22% on common stockholders' equity (ROE) compared with a ROA and ROE of
1.02% and 13.80%, respectively, in 1994. Table A presents a five-year summary
of the components of net income as a percentage of average assets.
As can be seen in Table A, the non-interest revenues of the Corporation
increased, while operating expenses as a percentage of total assets decreased.
On the other hand, net interest income as a percentage of total assets
decreased, particularly due to the prevailing interest rate scenario and the
acquisition of BP Capital which has a significant volume of arbitrage
activities with a taxable equivalent net interest yield of 54 basis points.
F-2
21
- -------------------------------------------------------------------------------------------
TABLE A
Components of Net Income as a Percentage of Average Total Assets
For the Year
- -------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------
Net interest income ............................... 4.14% 4.38% 4.61% 4.62% 4.56%
Provision for loan losses ......................... (0.46) (0.44) (0.68) (1.03) (1.36)
Security and trading gains ........................ 0.05 0.01 0.01 0.22
Other income ...................................... 1.18 1.15 1.16 1.30 1.25
--------------------------------------
4.91 5.09 5.10 4.90 4.67
Operating expenses ................................ (3.45) (3.66) (3.86) (3.85) (3.86)
--------------------------------------
Net income before tax, dividends on preferred stock
of Banco Popular and cumulative effect of
accounting changes ............................... 1.46 1.43 1.24 1.05 0.81
Provision for income tax .......................... (0.42) (0.41) (0.26) (0.15) (0.08)
--------------------------------------
Net income before dividends on preferred stock of
Banco Popular and cumulative effect of
accounting changes ............................... 1.04 1.02 0.98 0.90 0.73
Dividends on preferred stock of Banco Popular ..... (0.01) (0.01) (0.01)
Cumulative effect of accounting changes ........... 0.05
--------------------------------------
Net income ........................................ 1.04% 1.02% 1.02% 0.89% 0.72%
======================================
Total assets of the Corporation reached $15,675 million at December
31,1995, up 22.7% over the 1994 level of $12,778 million. Most of the growth is
related to Banco Popular, which increased $1,166 million in total assets, and
BP Capital which had $1,013 million in total assets at December 31, 1995. FSB
and Puerto Home Rico Mortgage had total assets of $216 million and $108
million, respectively, at the end of 1995. Total loans amounted to $8,677
million at December 31,1995, compared with $7,781 million a year ago.
Non-performing assets (NPA) at December 31, 1995, increased to $155
million from $108 million a year before. The ratio of NPA to total assets also
rose from 0.84% at the end of 1994 to 0.99% in 1995. Assuming the standard
industry practice, as described in the Non-Performing Assets section of this
financial review, NPA represented 0.77% of total assets at the end of 1995,
compared with 0.61% in 1994.
Net loan charge-offs during 1995 were $50 million, or 0.61% of average
loans, compared with $36.9 million, or 0.52% of average loans in 1994. As a
result of the increase in net charge-offs, the provision for loan losses
increased $10.8 million from $53.8 million in 1994 to $64.6 million in 1995.
The allowance for loan losses also rose from $154 million in 1994 to $168
million in 1995. The allowance for loan losses represented 1.94% of loans and
108.62% of non-performing assets at December 31,1995, compared with 1.98% and
142.89%, respectively, at December 31, 1994.
Total deposits were $9,877 million at December 31, 1995, compared with
$9,012 million a year ago. Most of the increase was attained at Banco
Popular, where total deposits increased $638 million. Also contributing to this
increase were $183 million in deposits of FSB.
At December 31, 1995, the stockholders' equity of the Corporation was
$1,142 million, compared with $1,002 million at December 31, 1994. The growth
was mainly attributed to the retention of earnings generated during the year,
the issuance of shares under the Dividend Reinvestment Plan and a positive
change in the allowance for unrealized gains on securities available-for-sale
required by SFAS 115. The Corporation's capital ratios continue to exceed by a
wide margin the well-capitalized regulatory guidelines. At December 31, 1995,
the Corporation's Tier I capital ratio was 11.91% compared with 12.85% at
December 31,1994. Total risk-based capital ratio was 14.65%, compared with
14.25% in 1994. The Corporation's leverage ratio was 6.66% at December 31,
1995, compared with 7.62% at December 31, 1994.
The Corporation paid annual dividends of $1.10 per share on its common
stock during 1995, compared with $1.00 and $0.85 in 1994 and 1993,
respectively. In April 1995, the Board of Directors of the Corporation
approved an increase of $0.05 per common share in its quarterly dividend. This
represented a 20% increase over the $0.25 per share paid in previous quarters.
The
F-3
22
- -------------------------------------------------------------------------------------------------
TABLE B
Selected Financial Data
----------------------------------
(Dollars in thousands, except per share data) 1995 1994 1993
----------------------------------
CONDENSED INCOME STATEMENTS
Interest income ................................ $ 1,105,807 $ 887,141 $ 772,136
Interest expense ............................... 521,624 351,633 280,008
-----------------------------------
Net interest income ......................... 584,183 535,508 492,128
Security and trading gains (losses) ............ 7,153 451 1,418
Operating income ............................... 166,185 140,852 123,762
Operating expenses ............................. 486,833 447,846 412,276
Provision for loan losses ...................... 64,558 53,788 72,892
Income tax ..................................... 59,769 50,043 28,151
Dividends on preferred stock of Banco Popular .. 385 770
Cumulative effect of accounting changes ........ 6,185
-----------------------------------
Net income .................................. $ 146,361 $ 124,749 $ 109,404
===================================
Net income applicable to common stock ....... $ 138,011 $ 120,504 $ 109,404
===================================
PER COMMON SHARE DATA*
Net income ..................................... $ 4.19 $ 3.67 $ 3.35
Dividends declared ............................. 1.15 1.00 0.90
Book value ..................................... 31.62 27.48 25.49
Oustanding shares:
Average ..................................... 32,908,150 32,798,243 32,701,236
End of period ............................... 32,948,636 32,838,128 32,732,423
AVERAGE BALANCES
Net loans ....................................... $ 8,217,834 $ 7,107,746 $ 5,700,069
Earning assets .................................. 13,244,170 11,389,680 9,894,662
Total assets .................................... 14,118,183 12,225,530 10,683,753
Deposits ........................................ 9,582,151 8,837,226 8,124,885
Subordinated notes .............................. 56,850 56,082 73,967
Total stockholders' equity ...................... 1,070,482 924,869 793,001
PERIOD END BALANCES
Net loans ....................................... $ 8,677,484 $ 7,781,329 $ 6,346,922
Allowance for loan losses ....................... 168,393 153,798 133,437
Earning assets .................................. 14,668,195 11,843,806 10,657,994
Total assets .................................... 15,675,451 12,778,358 11,513,368
Deposits ........................................ 9,876,662 9,012,435 8,522,658
Subordinated notes .............................. 175,000 50,000 62,000
Total stockholders' equity ...................... 1,141,697 1,002,423 834,195
SELECTED RATIOS
Net interest yield (taxable equivalent basis) .. 4.74% 5.06% 5.50%
Net operating expense/average earning assets ... 2.42 2.70 2.92
Return on average total assets ................. 1.04 1.02 1.02
Return on average earning assets ............... 1.11 1.10 1.11
Return on average common stockholders' equity .. 14.22 13.80 13.80
Dividend payout ratio to common stockholders ... 26.21 27.20 25.39
Average net loans/average total deposits ....... 85.76 80.43 70.16
Average earning assets/average total assets .... 93.81 93.16 92.61
Average stockholders' equity/average net loans . 13.03 13.01 13.91
Average stockholders' equity/average assets .... 7.58 7.57 7.42
Overhead ratio ................................. 53.66 57.24 58.34
Tier I capital to risk-adjusted assets ......... 11.91 12.85 12.29
Total capital to risk-adjusted assets .......... 14.65 14.25 13.95
Effective tax rate ............................. 29.00 28.57 21.30
*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
23
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------------------------------
$ 740,354 $ 794,943 $ 565,807 $ 558,273 $ 488,200 $ 410,605 $ 365,513
300,135 387,134 281,561 302,747 261,316 206,778 183,253
440,219 407,809 284,246 255,526 226,884 203,827 182,260
625 19,376 91 2,529 689 (366) 7,253
123,879 112,398 70,865 59,550 53,025 40,623 33,204
366,945 345,738 229,563 207,376 190,862 182,593 166,982
97,633 121,681 53,033 42,603 34,750 18,000 11,500
14,259 6,793 9,240 11,456 7,844 5,956 6,778
770 807
- -----------------------------------------------------------------------------------------------------------------
$ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 $ 37,535 $ 37,457
=================================================================================================================
$ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 $ 37,535 $ 37,457
=================================================================================================================
$ 2.79 $ 2.15 $ 3.15 $ 2.81 $ 2.36 $ 1.88 $ 1.97
0.80 0.80 0.80 0.80 0.685 0.66 0.61
23.03 21.00 19.67 18.76 16.75 15.07 13.86
30,461,494 30,035,601 20,116,970 20,014,013 20,000,000 20,000,000 19,000,000
32,654,864 30,093,852 29,942,406 20,037,396 20,000,000 20,000,000 20,000,000
$ 5,150,328 $ 5,302,189 $ 3,377,463 $ 3,132,167 $ 2,869,829 $ 2,510,495 $ 1,974,648
8,779,981 8,199,195 5,461,938 5,318,800 5,182,535 4,597,329 3,949,899
9,528,518 8,944,357 5,836,749 5,676,981 5,523,823 4,918,984 4,257,327
7,641,123 7,198,187 5,039,422 4,782,791 4,571,456 4,211,465 3,655,492
85,585 94,000 50,000 38,082 119 1,717 8,178
668,990 610,641 407,611 353,844 317,001 286,752 247,679
$ 5,252,053 $ 5,195,557 $ 5,365,917 $ 3,276,389 $ 3,056,761 $ 2,737,271 $ 2,266,437
110,714 94,199 89,335 40,896 33,244 28,423 26,903
9,236,024 8,032,556 8,219,279 5,469,921 5,221,873 4,957,221 4,135,121
10,002,327 8,780,282 8,983,624 5,923,261 5,661,398 5,352,745 4,525,241
8,038,711 7,207,118 7,422,711 4,926,304 4,715,837 4,491,612 3,820,223
74,000 94,000 94,000 50,000 500 2,500
752,119 631,818 588,884 375,807 334,867 301,425 277,090
6.11% 5.97% 6.30% 5.57% 5.10% 5.04% 5.70
2.77 2.85 2.91 2.78 2.66 3.09 3.39
0.89 0.72 1.09 0.99 0.85 0.76 0.88
0.97 0.79 1.16 1.06 0.91 0.82 0.95
12.72 10.57 15.55 15.87 14.87 13.09 15.12
28.33 34.13 25.33 28.14 28.00 35.17 31.08
67.40 73.66 67.02 65.49 62.78 59.61 54.02
92.14 91.67 93.58 93.69 93.82 93.46 92.78
12.99 11.52 12.07 11.30 11.05 11.42 12.54
7.02 6.83 6.98 6.23 5.74 5.83 5.82
55.07 52.47 55.80 56.86 60.45 69.83 69.42
12.88 11.01 10.10 9.47 9.19 N/A N/A
14.85 13.35 12.74 11.76 10.10 N/A N/A
14.24 9.41 12.73 16.94 14.27 13.70 15.32
Note: On December 31, 1990, Banco Popular de Puerto Rico and the former BanPonce Corporation merged. Due to the effective date of
the merger, the selected financial information for 1990 and prior years shown above is presented as follows:
- - All references to assets and liabilities as of December 31, 1990 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 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.
F-5
24
- ----------------------------------------------------------------------------
dividend payout ratio for 1995 was 26.21% compared with 27.20% in 1994. The
Corporation also paid $8.4 million in dividends on its preferred stock in 1995
compared with $4.2 million in 1994.
Moving ahead to 1996, BanPonce Corporation faces a year of great
challenges and opportunities. The recent and expected downward movements in
market interest rates, coupled with the Corporation's asset/liability structure
at the end of 1995, should help to slightly improve its net interest yield.
Also, the Puerto Rico Tax Reform Act enacted in 1994, which is effective for
taxable years beginning after June 30, 1995, includes several changes that will
benefit the Corporation's results of operations for 1996 and future years. The
highest marginal tax rate was reduced from 42% to 39% and the dividend received
deduction on dividends received from subsidiaries in the Island was increased
from 85% to 100%.
The Federal Deposit Insurance Corporation (FDIC) reduced the minimum
assessment rate in 1995 when the Bank Insurance Fund (BIF) reached its
statutory level, from 23 to 4 basis points. Effective on January 1, 1996, the
FDIC assessment rate was further reduced from 4 basis points to a minimum of
$2,000 per year. On the other hand, there is a proposed legislation in the
U.S. Congress, which if enacted, will result in the imposition of a one time
assessment on the deposits held by savings institutions to recapitalize the
Savings Association Insurance Fund (SAIF). The assessment which is expected to
represent between 75 and 90 basis points, could have an impact in FSB of
approximately $900,000, net of taxes.
The Corporation's leasing subsidiaries, Velco and Popular Leasing will
continue their consolidation plans, which began during 1995. The synergies
expected with this consolidation should improve the productivity and efficiency
of the operations, attain improvements in financial returns and result in
better service to our customers.
In November 1995, the U.S. Congress passed the Revenue Reconciliation Bill
of 1995 (the Bill), which if enacted into law, would repeal Section 936 of the
Internal Revenue Code of 1986, as amended (the Code). While the budget
legislation of which the Bill was a part was subsequently vetoed by President
Clinton, the Corporation believes that the eventual budget legislation is
likely to address Section 936 of the Code, whether in the manner provided in
the Bill or in some other form. There can be no assurances as to whether, when,
or in what form the Bill or similar legislation will be enacted into law.
While the final impact of any proposed repeal of Section 936 of the Code
cannot be determined at this time, its repeal could have an adverse effect on
the general economic condition of Puerto Rico, the Corporation's predominant
service area. The repeal of Section 936 of the Code could also make it
necessary for the Corporation to consider using alternate sources of funding
that may be more expensive than the current cost of 936 funds. The Corporation
believes it would be able to replace 936 funds as a source of funds at an
incremental cost, but that any such cost would be unlikely to have a material
adverse effect on its liquidity or the results of its operations. In recent
years, the Corporation has taken some steps to reduce any potential adverse
impact of the repeal of Section 936 of the Code, including diversifying its
sources of funding, limiting the maximum exposure to 936 funds and increasing
its presence in the U.S. mainland.
To further enhance the Corporation's ability to secure financing in the
U.S. capital markets a "shelf" registration in the amount of $1 billion was
filed with the Securities and Exchange Commission. Under this registration,
which became effective on September 27, 1995, the Corporation may issue
unsecured debt securities, which may be either senior or subordinated notes, or
shares of preferred stock.
EARNINGS ANALYSIS
The Corporation's net earnings for 1995 amounted to $146.4 million,
compared with $124.7 million a year before. The net income applicable to common
stock was $138 million in 1995 and $120.5 million in 1994. Table C shows the
variances, in dollar and per common share amounts, of the major captions of the
Corporation's income statement for the past three years. The 1995 earnings
growth was primarily attributable to:
- - Increase in net interest income due to the growth of $1,854 million in the
average volume of earning assets.
- - Increase in other operating income, principally in other service fees as a
result of higher mortgage servicing fees, credit card fees and other fees
collected by the Corporation on new products and services, and service
charges on deposit accounts.
- - Higher gains on the sale of securities, principally at BanPonce Financial.
- - Increase in operating expenses, mainly personnel costs, due to the effect
of the salaries and benefits of the new operations of BP Capital, Puerto
Rico Home Mortgage and FSB, the continued business expansion of the
Corporation and the annual merit increases. Also, the implementation of a
voluntary early retirement plan in Banco Popular, which was available
until May 1, 1995, accounted for $4.5 million of the increase.
- - Increase in the provision for loan losses as a result of a rise in net
charge-offs and an increase in the Corporation's loan portfolio.
- - Higher income tax expense primarily due to a higher pre-tax income.
F-6
25
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE C
Changes in Net Income and Earnings per Common Share
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per common share amounts) Dollars Per share Dollars Per share Dollars Per share
-------------------------------------------------------------
Net income applicable to common stock
for prior year .............................. $120,504 $ 3.67 $109,404 $ 3.35 $85,116 $ 2.79
Increase (decrease) from changes in:
Net interest income ......................... 48,675 1.48 43,380 1.32 51,909 1.70
Other operating income ...................... 25,333 0.77 17,090 0.52 (117)
Gain on sale of investment securities ....... 5,144 0.16 (640) (0.02) 622 0.02
Trading account profit ...................... 1,558 0.05 (327) (0.01) 171 0.01
Dividends on preferred stock of
Banco Popular ............................ 385 0.01 385 0.01
Income tax .................................. (9,726) (0.30) (21,892) (0.67) (13,892) (0.46)
Provision for loan losses ................... (10,770) (0.33) 19,104 0.58 24,741 0.81
Operating expenses .......................... (38,987) (1.19) (35,570) (1.09) (45,331) (1.49)
-------------------------------------------------------------
Subtotal .................................... 142,116 4.32 130,934 3.99 103,219 3.38
Cumulative effect of accounting changes ..... (6,185) (0.18) 6,185 0.20
Dividends declared on preferred stock ....... (4,105) (0.12) (4,245) (0.13)
Change in average common shares* ............ (0.01) (0.01) (0.23)
-------------------------------------------------------------
Net income applicable to common stock ........ $138,011 $ 4.19 $120,504 $ 3.67 $109,404 $ 3.35
=============================================================
*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 32,908,150 for 1995; 32,798,243 for 1994 and 32,701,236
for 1993.
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income is the main source of earnings of the Corporation.
The net interest income results from the interaction of changes in the balances
and rates earned on earning assets and paid on rate related liabilities. As
further discussed in the Asset/Liability Management section, the Corporation
through its Asset Liability Committee (ALCO), closely monitors and manages the
mix and maturity structure of its assets and liabilities in order to maximize
net interest income and minimize interest rate risk.
For the year ended December 31, 1995, net interest income reached $584.2
million, $48.7 million higher than the $535.5 million reported in 1994. In
1993, net interest income totaled $492.1 million. On a taxable equivalent
basis, net interest income was $628.2 million compared with $576.6 million in
1994 and $544.5 million in 1993. The increase of $51.6 million in 1995 results
from a rise of $68.0 million due to higher average earning assets, partially
offset by a reduction of $16.4 million due to a lower net interest margin on a
taxable equivalent basis. Table D presents, on a taxable equivalent basis, the
weighted average yield on the Corporation's earning assets, the weighted
average interest cost on interest bearing liabilities, the interest rate
spread, as well as the net interest margin for the last five years. Table E
presents the information for various categories of earning assets and
rate-related liabilities regarding variances in net interest income attributed
to both the change in volume and the change in rate. The information presented
has been converted to a taxable equivalent basis using the applicable statutory
income tax rates.
Average earning assets increased 16.3% to $13,244 million for the year
ended December 31, 1995, from $11,390 million reported during the same period
in 1994. The increase in average earning assets was due to the increase in
average loans of $1,110 million and the increase in investment securities,
money market and trading account securities of $744 million.
Average loans for the year ended December 31, 1995, were $8,218 million
compared with $7,108 million in 1994 and $5,700 million in 1993. These amounts
represent a fairly stable 62.0% and 62.4% of total average earning assets for
1995 and 1994, respectively, and 57.6% in 1993. This increase was primarily
attained in commercial, including construction, mortgage and consumer loans,
which rose $444 million, $349 million and $244 million in average,
respectively.
In commercial loans, Banco Popular was the principal contributor to the
total increase. Equity One, with its aggressive expansion program in the United
States, increased its average mortgage loan portfolio by 38.3% or $159 million.
Banco Popular also had a significant increase in average mortgage loans,
reaching $1,642 million for the year 1995, an increase of $130 million.
F-7
26
- -------------------------------------------------------------------------------------------------------------------------------
TABLE D
Net Interest Income - Taxable Equivalent Basis
Year ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
-------------------------------------------------------------------------------------------------------
Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------------------------------------------
Earning assets ....... $13,244,170 8.68% $11,389,680 8.15% $9,894,662 8.33% $8,779,981 9.53% $8,199,195 10.69%
========================================================================================================
Financed by:
Interest
bearing funds ..... $10,991,569 4.75% $ 9,330,838 3.77% $8,097,004 3.46% $7,277,051 4.12% $6,816,787 5.68%
Non-interest
bearing funds ..... 2,252,601 2,058,842 1,797,658 1,502,930 1,382,408
--------------------------------------------------------------------------------------------------------
Total ....... $13,244,170 3.94% $11,389,680 3.09% $9,894,662 2.83% $8,779,981 3.42% $8,199,195 4.72%
========================================================================================================
Net interest income .. $ 628,233 $ 576,575 $ 544,471 $ 536,485 $ 489,541
========================================================================================================
Spread ............... 3.93% 4.38% 4.87% 5.41% 5.01%
Net interest yield ... 4.74 5.06 5.50 6.11 5.97
- ---------------------------------------------------------------------------------------------------------------------------------
The increase in average consumer loans in Banco Popular accounted for 73.4% of
the total increase in consumer loans of the Corporation, and was mostly
attained in secured loans, including home improvement and auto loans.
The average yield on loans, on a taxable equivalent basis, increased to
9.98% for the year ended December 31,1995, compared with 9.47% in 1994 and
9.75% in 1993. The average yield on commercial loans, including construction,
increased 92 basis points reaching 9.11% in 1995, mainly due to a higher
average prime rate in 1995 as compared to 1994. The yield on mortgage loans
increased 20 basis points in 1995 to 8.41%, while the yield on consumer loans
reached 12.34%, 39 basis points higher than the 11.95% reported in 1994. Within
consumer loans, the yield on personal loans increased 42 basis points to 10.71%
in 1995, while the yield on auto loans decreased, from 11.35% in 1994 to 10.69%
in 1995 and the yield on credit card loans was nine basis points lower in 1995
reaching 15.69%. Due to the fixed rate maturity of the mortgage and consumer
loan portfolios, their yields do not react to changes in market interest rates
as quickly as the commercial portfolio, particularly in a rising rate scenario,
like the one experienced during 1994 and the first half of 1995. The increase
in yields in rising rate scenarios is caused mainly by new volumes, while in
declining rate environments these portfolios may reprice faster due to a higher
volume of prepayments and refinancings.
Investment securities, the second largest component of average earning
assets, averaged $311 million more than in 1994, reaching $4,468 million in
1995. FSB, which started operations in January 1995, accounted for $134 million
of that increase. Banco Popular also increased $59 million in average. The
Corporation uses limited off-balance sheet derivative products, mainly interest
rate swaps, to adjust the mix and repricing characteristics of assets and
liabilities, as a tool for managing interest rate risk. At December 31,1995,
the notional amount of these off-balance sheet items was $136 million, of which
$125 million were interest rate swaps.
The average yield on investment securities, on a taxable equivalent basis,
was 6.65% compared with 6.01% in 1994. The increase in the average yield
relates primarily to the maturity and sale during 1995 of lower yielding
investment securities whose proceeds were reinvested during a higher interest
rate scenario. Average money market investments and trading account securities
increased $283.6 million and $150.3 million, respectively, during 1995. The
increase relates principally to the acquisition of BP Capital during the second
quarter of 1995, which contributed $345.8 million to the consolidated average
money market investments and had average trading account securities of $115.5
million for the year ended December 31, 1995. The average yield on money market
investments increased 139 basis points reaching 5.73% in 1995. Conversely, the
average yield on trading securities decreased 62 basis points.
As a result of the above, the average yield on earning assets, on a
taxable equivalent basis, improved 53 basis points, from 8.15% in 1994 to 8.68%
in 1995.
F-8
27
- ----------------------------------------------------------------------------------------------------------------------------
TABLE E
Interest Variance Analysis - Taxable Equivalent Basis
1995 VS. 1994 1994 vs. 1993
- ----------------------------------------------------------------------------------------------------------------------------
(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 ......... $ 15,883 $ 2,082 $ 17,965 ($ 103) $ 953 $ 850
Time deposits with other banks .. (112) 38 (74) (2,202) 104 (2,098)
Investment securities ........... 19,471 27,795 47,266 9,275 (21,521) (12,246)
Trading securities .............. 9,499 (35) 9,464 (134) 53 (81)
Loans ........................... 108,062 38,967 147,029 124,764 (7,461) 117,303
---------------------------------------------------------------------------------
Total interest income ........ 152,803 68,847 221,650 131,600 (27,872) 103,728
---------------------------------------------------------------------------------
Interest expense:
Savings and NOW accounts ........ 1,160 8,530 9,690 11,727 (2,324) 9,403
Other time deposits ............. 31,345 41,022 72,367 5,959 12,916 18,875
Short-term borrowings ........... 36,413 27,573 63,986 19,305 15,839 35,144
Long-term borrowings ............ 15,887 8,061 23,948 10,089 (1,887) 8,202
---------------------------------------------------------------------------------
Total interest expense ........ 84,805 85,186 169,991 47,080 24,544 71,624
---------------------------------------------------------------------------------
Net interest income .............. $ 67,998 ($16,339) $ 51,659 $ 84,520 ($ 52,416) $ 32,104
=================================================================================
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.
- ----------------------------------------------------------------------------------------------------------------------------
On the liability side, average interest bearing liabilities increased
$1,661 million to $10,992 million in 1995. The increase was due to the increase
in average interest bearing deposits of $695 million and a higher volume of
borrowings by $966 million.
Average deposits reached $9,582 million in 1995 compared with $8,837
million in 1994 and $8,125 million in 1993. The category that contributed the
most to the $745 million increase was time deposits which rose $651 million,
averaging $3,720 million for 1995. The increase in time deposits is typical of
rising rate environments, where deposits migrate from savings, NOW and money
market accounts to higher return accounts. Average time deposits at Banco
Popular increased $478 million, while Pioneer and FSB accounted for the rest
of the increase. Average saving accounts increased $74 million in 1995, while
NOW and money market averaged $31 million less than in 1994.
The average cost of time deposits increased 120 basis points from 4.26% in
1994 to 5.46% in 1995. Also, the average cost of NOW and money market deposits
increased from 3.17% in 1994 to 3.60% in 1995, while the average cost of
savings accounts rose from 2.85% in 1994 to 2.98% in 1995. As a result of the
change in the mix of deposits and the higher rates, as explained above, the
average cost of interest bearing deposits increased 74 basis points to 4.26% in
1995 as compared with 3.52% in 1994 and 3.38% reported in 1993.
Average short-term borrowings increased $744 million in 1995. BP Capital,
through its arbitrage activities was responsible for $498 million of the
increase and Banco Popular accounted for $136 million of the rise. Average
long-term debt increased to $655 million from $433 million in 1994, mainly due
to a higher average balance of debt issued by BanPonce Financial to finance
Equity One operations. The average cost of long-term debt in 1995 was 7.68%, or
158 basis points higher than the 6.10% reported in 1994. The average cost of
interest bearing liabilities reached 4.75%, compared with 3.77% in 1994.
As a result of the increase in relatively expensive funding, combined with
the liability sensitive position of the Corporation as of the beginning of the
year, the net interest yield, on a taxable equivalent basis, decreased to 4.74%
in 1995 compared with 5.06% in 1994 and 5.50% in 1993. Also, the acquisition
of BP Capital, with approximately $506 million in average earning assets during
the year, was responsible for the decrease in net interest margin due to its
significant volume of arbitrage activities. BP Capital had a net interest
yield, on a taxable equivalent basis, of 54 basis points. The latter
represented a dilution of approximately 17 basis points in the net interest
yield of the Corporation for 1995.
Assuming lower market interest rates, the continuation of tax advantages
related to the funds held by 936 companies in Puerto Rico banks and the
Corporation's cumulative six month negative gap position as of December 31,
1995, prospects for 1996 are that net interest
F-9
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TABLE F
Other Operating Income
Year ended December 31,
- -------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
------------------------------------------------
Service charges on deposit accounts $ 78,607 $ 71,727 $ 68,246 $ 63,064 $ 55,000
Other service fees:
Credit card fees and discounts ... 22,163 18,620 16,818 16,795 15,268
Credit life insurance fees ....... 5,766 4,889 4,270 3,286 3,772
Debit card fees .................. 5,425 3,185 1,704 1,497 1,149
Mortgage servicing fees, net of
amortization ................... 5,956 2,301 2,936 3,174 2,893
Trust fees ....................... 5,851 5,159 4,084 4,403 4,053
Other fees ....................... 18,564 17,086 13,135 13,336 12,199
Other income ...................... 23,853 17,885 12,569 18,324 18,064
------------------------------------------------
Total ........................... $166,185 $140,852 $123,762 $123,879 $112,398
================================================
Other operating income
to average assets ................ 1.18% 1.15% 1.16% 1.30% 1.26%
Other operating income
to operating expenses ............ 34.14 31.45 30.02 33.76 32.51
- -------------------------------------------------------------------------------------
yield, on a taxable equivalent basis, will slightly improve as it did in the
last quarter of 1995. The Corporation's net interest yield, on a taxable
equivalent basis, increased from 4.64% in the third quarter of 1995, to 4.72%
in the last quarter of 1995.
SECURITY AND TRADING GAINS
During 1995, the Corporation sold $286 million in investment securities
available-for-sale for a net gain of $5.4 million. BanPonce Financial, through
the sale of investments in equity securities, contributed with $6.1 million to
these revenues, partially offset by a net loss of $0.9 million recorded in
Banco Popular. In 1994, $293 million of the investment securities available-for
sale were sold 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.
Trading account activities for the year ended December 31, 1995, resulted
in profits of $1.8 million, compared with profits of $0.2 million in 1994.
These profits were attained primarily by the Corporation's new operations of
Puerto Rico Home Mortgage and BP Capital, with gains of $1.2 million each,
partially offset by a loss of $0.6 million in Banco Popular.
OTHER OPERATING INCOME
Other operating income has become an increasingly important contributor to
the growth in the Corporation's revenues. The Corporation has increased its
other income by expanding the range of services offered to customers and by
building more customer relationships, taking advantage of its technological
leadership in the Island and its expansion outside Puerto Rico.
These revenues, which consist primarily of service charges on deposit
accounts, credit card fees, other fee-based services and other revenues, grew
to $166.2 million in 1995 from $140.9 million in 1994, an 18% increase. The new
operations of BP Capital, Puerto Rico Home Mortgage and FSB contributed $3.4
million to the increase. In 1993, these revenues totaled $123.8 million. As a
percentage of average assets, other operating income increased to 1.18% in 1995
from 1.15% in 1994 and 1.16% in 1993. Also, the ratio of other operating income
to operating expenses showed a positive variance, rising to 34.14% in 1995 from
31.45% in 1994 and 30.02% in 1993.
Service charges on deposit accounts, which represented 47.3% of the
Corporation's other operating revenues, rose to $78.6 million for the year
ended December 31, 1995, from $71.7 million in 1994 and $68.2 million in 1993.
As a percentage of average deposits, service charges were 0.82% in 1995
compared with 0.81% in 1994 and 0.84% in 1993. Service charges on deposit
accounts increased $5.8 million at Banco Popular largely attributed to a
broader variety of services offered to the commercial
F-10
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TABLE G
Operating Expenses
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
-------------------------------------------------------------------------------------
Salaries ........................... $172,504 $160,996 $151,432 $134,709 $129,928
Pension and other benefits ......... 57,568 45,546 44,713 36,484 37,626
Profit sharing ..................... 19,003 19,205 19,766 17,041 13,080
-------------------------------------------------------------------------------------
Total personnel costs ........ 249,075 225,747 215,911 188,234 180,634
-------------------------------------------------------------------------------------
Equipment expenses ................. 41,577 35,474 27,964 23,813 22,755
Professional fees .................. 34,954 33,757 27,302 22,558 19,254
Net occupancy expense .............. 32,850 28,440 26,085 25,442 22,497
Communications ..................... 23,106 20,308 18,203 17,048 17,377
Other taxes ........................ 20,872 19,807 15,996 14,608 13,049
Amortization of intangibles ........ 20,204 18,003 16,176 14,888 13,687
Business promotion ................. 17,801 16,271 16,638 12,548 10,723
Printing and supplies .............. 11,069 8,817 8,189 7,290 8,349
Other operating expenses:
FDIC assessment ................... 10,257 19,346 17,802 16,372 15,007
Transportation and travel ......... 4,424 3,946 3,554 3,136 3,150
All other ......................... 20,644 17,930 18,456 21,008 19,256
-------------------------------------------------------------------------------------
Subtotal ..................... 237,758 222,099 196,365 178,711 165,104
-------------------------------------------------------------------------------------
Total ........................ $486,833 $447,846 $412,276 $366,945 $345,738
=====================================================================================
Efficiency ratio ................... 64.88% 66.21% 66.94% 65.05% 66.46%
Personnel costs to average assets .. 1.76 1.85 2.02 1.98 2.02
Operating expenses to average assets 3.45 3.66 3.86 3.85 3.86
Assets per employee (in millions) .. $ 2.04 $ 1.69 $ 1.55 $ 1.44 $ 1.28
- ------------------------------------------------------------------------------------------------------------------------------
customers together with revisions made to the fee structure and higher fees
collected on returned checks. Pioneer with a full year of operations in 1995
and the new operation of FSB also contributed to the increase in this category.
Other service fees, which represented 38.3% of other operating income for
the year, increased $12.5 million or 24.4%, from $51.2 million in 1994 to $63.7
million in 1995. This increase was mainly attained at Banco Popular. One of
the key factors for the rise in this revenue category was an increase in
mortgage servicing fees by $3.7 million, as a result of the acquisition of
Puerto Rico Home Mortgage's servicing portfolio of $1.8 billion on March
31,1995. Other fees that showed significant growth were credit card fees and
debit card fees, with increases of $3.5 million and $2.2 million, respectively,
and fees related to the sale and administration of investment products, which
increased $1.8 million, particularly as a result of the issuance of three
mutual funds since December of 1994. Also, credit life insurance fees increased
$0.9 million and fees collected on the growing volume of transactions at
point-of-sale (POS) terminals rose $0.7 million. Moreover, additional fees were
generated for the new collection and payment processing services provided to
certain government agencies in Puerto Rico.
Other operating income for the period ended December 31, 1995, increased
to $23.9 million from $17.9 million reported in 1994 and $12.6 million in 1993.
This increase resulted mainly from higher gains realized on the sale of
mortgage loans by Equity One by $3.1 million and the gains of $1.1 million
realized by Puerto Rico Home Mortgage. Also, BP Capital contributed $1.7
million in other operating income from its investment banking and underwriting
services. Furthermore, other operating revenues of the Corporation's leasing
subsidiaries increased $2.3 million mostly related to higher gains on sales of
daily rental units and higher daily rental income in Puerto Rico.
OPERATING EXPENSES
Operating expenses for 1995 increased $39 million or 8.7%, reaching $486.8
million compared with $447.8 million in 1994 and $412.3 million in 1993.
However, as a percentage of average assets, operating expenses decreased to
3.45% in 1995 from 3.66% in 1994 and 3.86% in 1993. The acquisitions of Puerto
Rico Home Mortgage, BP Capital and FSB during the first half of 1995 accounted
for approximately $12 million of the increase. Table G presents a detail of
operating expenses for the last five years.
F-11
30
- -------------------------------------------------------------------------------
Personnel costs, which represented 51.2% of total operating expenses for
1995, increased $23.3 million or 10.3% to $249.1 million compared with $225.8
million in 1994 and $215.9 million in 1993. Salaries, the principal component
of personnel costs, increased $11.5 million from $161 million in 1994 to $172.5
million in 1995. The aforementioned acquisitions during 1995 accounted for $4.1
million of the total increase in salary expense. The remainder of the
increase, which represented a rise of 4.6%, was mainly attributable to annual
merit increases, the continued expansion of Equity One's operations which
increased its headcount by 100 full-time equivalents (FTE) and a full year of
operations of Pioneer acquired on March 31, 1994. The Corporation had 7,681
FTEs at December 31, 1995 compared with 7,549 at the same date last year. The
assets per employee ratio rose to $2.04 million in 1995 from $1.69 million in
1994.
Pension costs and other fringe benefits, including profit sharing, rose
$11.8 million to $76.6 million in 1995, compared with $64.8 million in 1994 and
$64.5 million in 1993. Most of this increase was experienced in Banco Popular,
as a result of the implementation of a voluntary early retirement plan for
employees meeting certain eligibility requirements. The plan, which was
available until May 1, 1995, had a total cost of $4.5 million. Also
responsible for the rise in this expense category were higher medical plan
costs and increases in pension costs and postretirement benefits. Moreover,
during this year Banco Popular implemented a tax qualified savings plan
covering substantially all its regular employees, which resulted in additional
costs of approximately $0.6 million. Partially offsetting these increases was a
reduction of $0.2 million in the profit sharing expense, which amounted to $19
million for the year ended December 31, 1995. This reduction is a result of an
amendment to the plan, effective in 1995, in order to encourage stronger
profitability ratios.
All other operating expenses rose $15.7 million or 7.1% to $237.8 million,
compared with $222.1 million during 1994 and $196.4 million in 1993. This
increase was net of a reduction in the FDIC assessment of $9.1 million, caused
by a decrease in the assessment rate during the third quarter, retroactive
to June 1, 1995, when the Bank Insurance Fund (BIF) reached its statutory
level. The operations of the new subsidiaries, Puerto Rico Home Mortgage, BP
Capital and FSB accounted for $7.3 million of the increase.
Equipment expenses amounted to $41.6 million in 1995, compared with $35.5
million in 1994, an increase of $6.1 million or 17.2%, mainly as a result of
the depreciation costs related to the expansion of the electronic payment
system, the network expansion of point-of-sale (POS) terminals and the
installation of a new teller system. During 1995, the Corporation increased its
automated teller machine (ATM) network by 33 and 3,439 additional POS terminals
were connected in order to expand our electronic delivery capabilities.
Net occupancy expense increased $4.4 million to $32.8 million in 1995 from
$28.4 million in 1994. Banco Popular accounted for most of the increase, due
mainly to the collection in 1994 of $1.3 million of building rental payments
in arrears from prior years. The net occupancy expense of the operations
acquired in 1995 amounted to $0.8 million. Also, these acquired operations
accounted for most of the $2.2 million rise in the amortization of intangibles.
Printing and supplies and communication expenses also rose $2.3 million
and $2.8 million, respectively, reflecting the expansion of the Corporation's
business activities and the development of new products and services. In
addition, Banco Popular increased its reserve for sundry losses during 1995 to
cover for losses incurred in the U.S. Virgin Islands as a result of hurricane
Marilyn.
INCOME TAX EXPENSE
Income tax expense for the year ended December 31, 1995, amounted to $59.8
million compared with $50 million in 1994. The increase is principally due to
higher pre-tax earnings by $31 million, lower benefits of net tax exempt
interest income and an increase of $5 million in federal and state taxes. This
increase was partially offset by a reduction in the deferred tax liability for
certain capital assets with different book and tax bases that was originally
recorded using the regular income tax rate instead of the capital gain tax
rate. In addition, a deferred tax liability of $6.4 million was reversed upon
the step-up in the tax bases of real property that were distributed as a
dividend in kind from Banco Popular to its parent company in 1995. This amount
was partially offset by the recognition of an income tax expense of $2.6
million at the parent company for its tax liability on the dividend and other
related charges of $2.5 million recorded at Banco Popular, for a net effect of
$1.3 million in the Corporation's net income. Income tax expense in 1993 was
$28.2 million. The substantial increase in 1994 as compared with 1993, was
mainly due to $43 million more in earnings and a reduction of $5.6 million in
benefits arising from net tax exempt interest income.
The effective tax rate rose to 29% in 1995, from 28.6% in 1994 and 21.3%
in 1993. The difference between the effective tax rates and the maximum tax
rate for the Corporation, which is 42%, is primarily due to the interest income
earned on certain investments and loans that are exempt from income taxes net
of the disallowance of related expenses for said assets.
F-12
31
- --------------------------------------------------------------------------------
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 amount of taxes payable or
refundable in the current year and to recognize deferred tax liabilities or
assets for the future tax consequences of events that have been recognized in
the financial statements or tax returns. The measurement of deferred tax
liabilities or assets is based on regular tax rates and provisions of the
enacted tax laws. At the date of adoption of SFAS 109 the Corporation
recorded, as a cumulative effect of this accounting change, a credit to income
and a deferred tax asset of $29 million.
At December 31,1995, the Corporation's net deferred tax asset amounted to
$32 million compared with $27 million at December 31,1994. The major components
of gross deferred tax assets, which amounted to $67 million at the end of 1995
compared with $69 million in 1994, are alternative minimum tax and other
credits, postretirement benefit obligations as required by SFAS 106, and other
temporary differences mainly arising from the deferral of loan origination
costs and commissions as required by SFAS 91. When necessary, a valuation
allowance has been recorded for those deferred assets for which the Corporation
cannot determine the likelihood of its realizability. At December 31,1995, the
valuation allowance amounted to $1.8 million. Management has determined, based
on the available evidence of earnings performance and expected dates of
reversal of temporary differences, that it is very likely that the net deferred
assets will be realized.
Deferred tax liabilities have also been created based on the requirements
of SFAS 109. The major components of gross deferred tax liabilities, which
amounted to $33 million at December 31, 1995, compared with $42 million as of
the same date in 1994, pertain to the difference between the assigned values
and the tax bases of the assets and liabilities recognized in purchase business
combinations and other temporary differences.
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 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:
- Reduction in the higher marginal tax rate from 42% to 39%.
- Repeal of the reserve method for determining losses on
loans. The taxpayer will be required to use the direct charge-off
method and recapture into income for tax purposes the reserve balance
at December 31,1995 over a period of four years.
- Deduction is now permitted for the amortization of
goodwill on assets acquired after June 30,1995, using the
straight-line amortization method over a 15-year period.
- Dividends from local corporations will be taxed at 10%
effective in 1995.
- Repeal of the 29% withholding tax on interest paid to
non-residents and unaffiliated parties.
- 100% dividend received deduction on dividends received
from domestic subsidiaries.
During 1995, the Corporation recorded an adjustment of $600 thousand
compared with $1.5 million recorded in 1994, reducing the net deferred tax
asset to give effect to the change in tax rate enacted in 1994.
Please refer to Note 21 of the Consolidated Financial Statements for
additional tax information.
BALANCE SHEET COMMENTS
The Corporation's total assets at December 31, 1995 reached $15,675
million, reflecting an increase of 22.7% as compared with $12,778 million at
December 31, 1994. Total assets at the end of 1993 amounted to $11,513 million.
Average total assets for 1995 amounted to $14,118 million compared with $12,226
million in 1994 and $10,684 million in 1993. Most of the growth relates to
Banco Popular, which increased $1,166 million in total assets. The new
subsidiaries, BP Capital with $1,013 million in total assets at December 31,
1995, FSB with $216 million and Puerto Rico Home Mortgage with total assets of
$108 million at the end of 1995, together with Equity One with an increase of
$228 million, also contributed to the increase.
Earning assets at December 31, 1995, amounted to $14,668 million, compared
with $11,844 million at December 31, 1994 and $10,658 million at December 31,
1993. Total loans reached $8,677 million as of December 31, 1995, compared with
$7,781 million at the end of 1994 and $6,347 million at the end of 1993. All
loan categories showed increases. During the year, commercial loans,
including construction, increased $366 million or 12.0%, while consumer loans
increased $254 million or 12.1% and mortgage loans grew $226 million or 10.4%.
Money market, investment and trading account securities totaled $5,991
million at December 31, 1995 compared with $4,062 million at the same date last
year. The increase of $1,929 million or 47.5% was reflected mainly in
investment securities, which totaled $4,861 million at the end of 1995 from
$3,795 million in 1994. These figures include $3,210 million in investment
F-13
32
- ------------------------------------------------------------------------------
securities available-for-sale as of December 31, 1995, as compared with $839
million as of December 31, 1994. In November 1995, the Financial Accounting
Standards Board (FASB) issued a Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". In conjunction with the issuance of this Special Report the FASB
provided for a one-time "window" to reclassify securities from the
held-to-maturity portfolio to the available-for-sale or trading portfolios
before January 1, 1996, without calling into question the intent to hold other
debt securities to maturity in the future. As a result of this window, at the
end of 1995 the Corporation transferred $1.3 billion from securities
held-to-maturity to available-for-sale.
Money market investments amounted to $799 million at December 31, 1995,
compared with $266 million at the same date in 1994. BP Capital had $760
million in money market investments at the end of the year. Trading account
securities increased $329 million from $2 million at December 31, 1994 to $331
million at December 31, 1995. Most of this growth is related to the
operations acquired during the year. BP Capital and Puerto Rico Home Mortgage
trading portfolios amounted to $246 million and $73 million, respectively, at
year-end. In accordance with the provisions of SFAS 115, Puerto Rico Home
Mortgage classifies its mortgage-backed securities as trading securities, in
conjunction with its mortgage banking activities. Through the acquisition of
Puerto Rico Home Mortgage, the Corporation is well-positioned to more
aggressively market fixed rate products for sale into the secondary market.
Total deposits at December 31, 1995, amounted to $9,877 million compared
with $9,012 million at December 31, 1994, an increase of $865 million. Most of
the increase was attained at Banco Popular, where total deposits increased $638
million. Also, FSB contributed to the increase with $183 million at December
31, 1995. Total deposits as of December 31, 1993 amounted to $8,523 million.
Core deposits reached $7,814 million by the end of 1995, compared with
$7,345 million at the end of 1994. The increase of $469 million resulted
principally from a growth of $272 million in certificates of deposit under
$100,000, $147 million in savings accounts and $73 million in demand deposits.
NOW and money market accounts declined $23 million.
Borrowings increased $1,715 million, from $2,501 million at the end of
1994 to $4,216 million at December 31, 1995. The rise is mainly due to an
increase of $1,563 million in federal funds purchased and securities sold
under agreements to repurchase due mainly to the operation of BP Capital,
which at December 31, 1995 had $985 million in securities sold under
agreements to repurchase. Also, federal funds purchased and securities sold
under agreements to repurchase in Banco Popular showed an increase of $548
million mainly due to arbitrage opportunities and asset/liability management
strategies. In addition, the medium-term notes issued by BanPonce Financial and
the Corporation to finance the growth in operations of their subsidiaries
increased by $322 million.
Subordinated notes increased to $175 million, from $50 million
outstanding a year ago, due to the issuance by the Corporation, on December 12,
1995, of $125 million in notes carrying an interest rate of 6.75% and maturing
on December 15, 2005.
The following analysis of the Corporation's balance sheet components will
focus on the three major topics: Credit Risk Analysis, Asset/Liability
Management and Stockholders' Equity.
Credit Risk Analysis/Credit Management
The Corporation keeps monitoring its policies and procedures to manage the
level and composition of risk in its credit portfolio. The objective of credit
risk management is to reduce the risk of losses resulting from customers'
failure to perform according to the terms of a transaction.
The strategies for managing credit risk include among others, the
establishment of policies and procedures for the initial underwriting and
ongoing monitoring of the credit portfolio. In addition, the Corporation
continues enforcing the policies of maintaining a highly skilled and
experienced staff to continue improving the processing technology.
Furthermore, the Corporation has an independent Credit Review and Audit
Division, which performs ongoing, independent reviews of specific loans for
credit quality, proper documentation and the risk management process. This
division is centralized and independent of the lending function. It also
manages the credit rating system and tests the adequacy of the allowance for
loan losses in accordance with generally accepted accounting principles (GAAP)
and regulatory standards.
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, 1995, the Corporation's credit risk was centered in its
$8,677 million loan portfolio, which represented 59.2% of earning assets. The
portfolio composition at the end of 1995 was as follows: 37% in commercial
loans, 28% in residen-
F-14
33
- ------------------------------------------------------------------------------
tial mortgage loans, 27% in consumer loans, 6% in lease financing and 2% in
construction loans, which is the same composition the Corporation had a year
ago.
During 1995, net charge-offs increased as compared with prior year, mainly
in the consumer and commercial loan portfolios. The major reasons for these
increases were a higher level of commercial and consumer bankruptcies during
the year, the growth in the portfolios and the charge-off of a major corporate
loan that accounted for 37% of the total commercial loans net credit losses.
Despite the increase in loan losses, the Corporation continues enjoying a
strong allowance position and continues closely monitoring non-performing and
classified assets. During 1996, management will be directing its efforts to
continue emphasizing the secured portion of the commercial and consumer
portfolios as part of the tools to improve credit quality.
The Corporation's credit risk is well balanced as 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 780,000 consumer loans and over 50,000 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 - The Corporation's asset composition at the end of 1995
reflected 75% of total assets concentrated in Puerto Rico, 21% in the
United States and the remaining 4% in the U.S. and British Virgin Islands.
Banco Popular, the Corporation's largest subsidiary, operates 166 branches
in Puerto Rico, 30 in New York, seven branches in the U.S. Virgin Islands,
one in the British Virgin Islands and one branch in Los Angeles. The
Puerto Rico's economic prospects are generally regarded as stable and the
Government of the Island and its instrumentalities are all
investment-grade rated borrowers in the United States capital markets. As
mentioned in the Liquidity Risk section of this financial review, the
United States Congress is being considering the repeal of Section 936 of
the Internal Revenue Code. At this time there can be no assurances as to
whether, when or in what form legislation to that matter will be enacted
into law, and the final impact its repeal could have on the general
economic condition of Puerto Rico. In January 1995, the Corporation
reinforced its presence in the United States and incorporated Banco
Popular, FSB, which acquired from the Resolution Trust Corporation four
branches of the former Carteret Federal Savings Bank in New Jersey and
opened two de novo branches in August 1995. FSB had $216 million in
assets and $183 million in deposits as of December 31, 1995. Also, on
March 31, 1995, the Corporation acquired Puerto Rico Home Mortgage, a
mortgage company with $1,800 million in its mortgage servicing portfolio.
With this acquisition, Banco Popular became the largest mortgage loan
servicer in Puerto Rico with $3,711 million in mortgages serviced. The
Corporation's servicing portfolio as of December 31, 1995 totaled $4,610
million. Furthermore, on April 30, 1995, the Corporation acquired the CS
First Boston's Puerto Rico operations, which had $1,013 million in assets
at year-end. This move reinforced the Corporation's capital markets effort
and will also bolster the Corporation's expertise and distribution
capability in investment products. In 1994, the Corporation acquired
Pioneer, in the State of Illinois, with an important Hispanic customer
base, operating three branches. At the end of the year total assets and
deposits of Pioneer amounted to $435 million and $367 million,
respectively. Equity One, the Corporation's mortgage and consumer finance
operation acquired in 1991, has now 91 branches in 26 eastern and
midwestern states and $849 million in total assets at the end of the
year. The following table presents the net income for 1995 and total
assets as of December 31, 1995 by subsidiary:
NET INCOME TOTAL ASSETS
-------------------------------
(In thousands)
Banco Popular de Puerto Rico ....... $124,742 $12,549,906
Equity One, Inc. ................... 9,545 848,525
Popular Leasing and Rental, Inc. ... 3,157 322,201
Pioneer Bancorp, Inc. .............. 2,405 435,010
Popular Consumer Services, Inc. .... 2,186 90,652
BP Capital Markets, Inc. ........... 1,363 1,012,593
Vehicle Equipment Leasing Company .. 1,113 230,436
Popular Mortgage, Inc. ............. 71 107,771
Banco Popular, FSB ................. 3 215,874
Parent company, other subsidiaries
and eliminations................... 1,776 (137,517)
------------------------------
$146,361 $15,675,451
==============================
F-15
34
<Caption
- ----------------------------------------------------------------------------------------------
TABLE H
Loans Ending Balances
For the Year
- ----------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993 1992 1991
------------------------------------------------------------------
Commercial, industrial and
agricultural ............ $3,210,975 $2,893,534 $2,369,514 $2,133,357 $1,995,500
Construction ............. 209,891 161,265 153,436 172,411 194,741
Lease financing .......... 498,750 448,236 375,693 314,905 252,727
Mortgage* ................ 2,403,631 2,177,763 1,576,044 790,802 683,506
Consumer* ................ 2,354,237 2,100,531 1,872,235 1,840,578 2,069,083
-------------------------------------------------------------------
Total ................. $8,677,484 $7,781,329 $6,346,922 $5,252,053 $5,195,557
===================================================================
*Includes loans held-for-sale.
- ----------------------------------------------------------------------------------------------
It has been the Corporation's philosophy of generally limiting 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, 1995, consumer and residential mortgage loans
amounted to $2,354 million and $2,404 million, respectively, with $847
million in unused credit card lines. At the same date, non-performing
consumer and mortgage loans amounted to $15 million and $32 million,
respectively, and net charge-offs in the consumer portfolio totaled $17
million, including $9 million in credit card loans and $8 million in other
consumer loans. Mortgage loans net charge-offs amounted to $1 million in
1995. As previously mentioned, management continues emphasizing the growth
in the secured portion of the portfolio. At December 31, 1995, the secured
consumer loan portfolio was $1,023 million or 43% of the total portfolio,
compared with 44% in 1994 and 38% in 1993.
Industry Risk - Total commercial loans, including commercial real estate loans,
amounted to $3,211 million at year-end. The Corporation's strategy to
emphasize the use of collateral has resulted in a secured commercial loan
portfolio comprised of approximately $911 million, or 28% of the
commercial portfolio secured by real estate, consisting primarily of
residential, owner-occupied and income producing properties. Furthermore,
commercial loans secured by cash collateral totaled $262 million or 8% of
the commercial portfolio at the end of 1995. Construction loans amounted
to $210 million at year-end. Also, at year-end the Corporation had $1,105
million in unused commitments under lines of credit to commercial,
industrial and agricultural concerns. Commercial and stand by letters of
credit totaled $139 million at December 31, 1995. 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, 1995, $4,501 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, $127 million of residential
mortgages and $238 million in commercial loans are insured or guaranteed
by the U.S. Government or its agencies. The Corporation is one of the
largest SBA lenders in the mainland. Furthermore, there are $200 million
of investment securities representing obligations of the Puerto Rico
Government and political subdivisions thereof, with another $170 million
of loans issued to or guaranteed by these same entities and $30 million of
loans issued to or guaranteed by the United States Virgin Islands'
Government.
LOANS
Total loans at December 31, 1995, amounted to $8,677 million, an
increase of $896 million or 11.5%, over the $7,781 million reported at the end
of 1994. Total loans at December 31, 1993 were $6,347 million. All loan
categories showed increases in 1995. The commercial loan portfolio accounted
for $317 million or 35.4% of the total increase followed by the consumer loan
portfolio, which accounted for $254 million or 28.3% of the increase, and
mortgage loans with $226 million or 25.2% of the increase. Lease financing and
construction loan portfolios grew by $51 million or 11.3% and $49 million or
30.2%, respectively, as compared with the balances a year ago.
The commercial loan portfolio consists primarily of commercial and
industrial loans and commercial loans secured by real estate. This portfolio
increased from $2,894 million at December 31, 1994 to $3,211 million at the
same date in 1995. Commercial loans totaled $2,370 million at December 31,
1993. Most of the increase was attained at Banco Popular as a result of an
endeavor to strengthen relationships with retail and mid-sized businesses with
emphasis on the origination of government guaranteed loans, primarily SBA
loans. The middle market and retail loan portfolios rose $162 million and the
Fortune 500 and corpo-
F-16
35
- --------------------------------------------------------------------------------
rate loans increased $118 million, while the SBA guaranteed loans increased $36
million as compared with 1994. The New York operation accounted for 62% of the
increase at Banco Popular, due to the ongoing expansion in the New York
metropolitan area and continued marketing efforts.
Management anticipates that this growth will continue among commercial and
industrial loans during 1996, based on recent and expected reductions in
market interest rates. Economic sectors such as service industries, middle
market, corporate loans, and agricultural loans are the sectors in which
management anticipates higher growth. Furthermore, significant increases in
loan demand are expected in the tourism industry sector and privately developed
infrastructure projects in the Puerto Rico market.
Total consumer loans, which include personal, auto and boat, credit cards,
reserve lines and student loans, amounted to $2,354 million at December 31,
1995, compared with $2,101 million at year-end 1994 and $1,872 million as of
December 31, 1993. Most of the growth was reflected in Banco Popular with an
increase of $175 million and Equity One with an increase of $58 million, due to
business expansion and strong marketing efforts by both entities during the
year.
The personal loan portfolio amounted to $1,112 million or 47% of the total
consumer portfolio at December 31, 1995. The personal loan portfolio was
comprised of approximately 23% in secured mortgage loans, 10% with cash
collateral and the remainder was unsecured. Total secured personal loan
portfolio was 33% at the end of 1995, remaining at almost the same level of
34% at the end of prior year.
Auto and boat secured loans represent about 20% of the total consumer loan
portfolio, revolving credit (credit cards plus reserve lines of credit)
represents 22% and home improvement loans represents about 8%. The remaining 3%
is student loans and small dealer contracts. During the second quarter of 1995
Banco Popular sold most of its student loan portfolio to the Student Loan
Marketing Association (Sallie Mae). In the future, Banco Popular will operate
exclusively as an intermediary between the colleges and Sallie Mae through a
referral type program. This portfolio totaled approximately $51 million at the
time of sale and $5 million at year-end.
During the latter part of 1995 Banco Popular implemented a new technology
for processing consumer loan credit applications which provides a faster and
more efficient service at potentially reduced costs. This new technology will
provide loans through more electronic means including loans by phone and by
automated stand alone machines.
The mortgage loan portfolio rose to $2,404 million at December 31, 1995,
compared with $2,178 million and $1,576 million at the end of 1994 and 1993,
respectively. Equity One accounted for 68% of the total increase. Also, the new
subsidiaries, FSB and Puerto Rico Home Mortgage contributed with $44 million
to the increase, followed by Pioneer with an increase of $29 million over 1994.
Marketing efforts and business expansion were the key factors for the rise in
the portfolio.
The lease financing portfolio amounted to $499 million as of December 31,
1995, compared with $448 million and $376 million as of December 31, 1994 and
1993, respectively. The rise in truck and vehicle sales in Puerto Rico
contributed to the growth in this loan category.
Construction loans increased to $210 million from $161 million a year ago
and $153 million at December 31, 1993, mainly due to the construction,
expansion and rehabilitation of mid-size and large regional shopping centers
throughout Puerto Rico during 1995. Also, Equity One, as part of its business
expansion granted construction lines of credit to developers which totaled $22
million at the end of 1995.
Non-Performing Assets
As shown on Table I, as of December 31, 1995, non-performing assets, which
consist of past-due loans on which no interest income is being accrued,
renegotiated loans and other real estate, amounted to $155 million or 1.79% of
loans, compared with $107.6 million or 1.38% of total loans and $111.2 million
or 1.75% of total loans at the end of 1994 and 1993, respectively.
Non-performing loans at December 31, 1995 totaled $144.5 million or 1.67% of
loans as compared with $94.3 million or 1.21% a year earlier. As of December
31, 1993, non-performing loans were $92.8 million or 1.46% of loans.
The increase in non-performing assets is principally due to higher
non-performing commercial loans which increased $33.7 million and mortgage
loans which increased $15.6 million. The rise in non-performing commercial
loans is mainly due to the continued growth in the portfolio and an increase in
the overall level of commercial bankruptcies in Puerto Rico, from 591 cases in
1994 to 679 cases in 1995. Although most of the increase in non-performing
commercial loans relates to small and middle market loans, approximately 49% of
the increase relates to loans secured by real estate or that are government
guaranteed. The rise in non-performing mortgage loans was mostly experienced by
Banco Popular in its portfolio in the U.S. Virgin Islands due to the effects of
hurricane Marilyn on the economy of the islands. Non-performing lease financing
increased $1.6 million, while
F-17
36
- ----------------------------------------------------------------------------------------------------------
TABLE I
Non-Performing Assets
As of December 31,
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
----------------------------------------------------------------------
Commercial, industrial and
agricultural .................... $ 87,250 $ 53,553 $ 49,517 $ 62,662 $ 79,642
Construction ..................... 4,733 7,994 8,215 8,798 8,213
Lease financing .................. 5,606 4,027 4,429 4,752 5,449
Mortgage ......................... 32,066 16,510 14,363 11,532 10,374
Consumer ......................... 14,827 12,179 16,290 20,597 25,049
Renegotiated accruing loans ...... 2,742 2,982 5,643 8,380 520
Other real estate ................ 7,807 10,390 12,699 15,582 7,012
----------------------------------------------------------------------
Total ........................ $155,031 $107,635 $111,156 $132,303 $136,259
======================================================================
Accruing loans past-due
90 days or more ................. $ 11,660 $ 15,012 $ 15,505 $ 23,957 $ 32,658
======================================================================
Non-performing assets to loans ... 1.79% 1.38% 1.75% 2.52% 2.62%
Non-performing assets to assets .. 0.99 0.84 0.97 1.32 1.55
Interest lost .................... $ 7,135 $ 5,441 $ 4,992 $ 7,548 $ 10,983
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.
Loans past-due 90 days or more and still accruing are not considered as non-performing loans.
- ----------------------------------------------------------------------------------------------------------
non-performing construction loans decreased $3.3 million, other real estate
decreased $2.6 million and renegotiated loans were down $200,000.
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 close-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.
Assuming the standard industry practice of placing commercial loans on
non-accrual status when payments of principal or interest are past due 90 days
or more and excluding the closed-end consumer loans from non-accruing, the
Corporation's non-performing assets at December 31, 1995, would have been
$120.6 million or 1.39% of loans, and the allowance for loan losses would have
been 139.60% of non-performing assets. At December 31, 1994 and 1993, adjusted
non-performing assets would have been $78.2 million or 1.01% of loans and $80.9
million or 1.27% of loans, respectively.
Accruing loans that are contractually past-due 90 days or more as to
principal or interest, but are well secured and in the process of collection as
of December 31, 1995, amounted to $11.7 million as compared with $15.0 million
in 1994 and $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 $7.1 million for 1995 compared
with $5.4 million for 1994 and $5.0 million in 1993.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level sufficient to
provide for estimated loan losses based on the evaluation of known and inherent
risks in the loan portfolio. The Corporation's management evaluates the
adequacy of the allowance for loan
F-18
37
- -------------------------------------------------------------------------------------------------
TABLE J
Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
Balance at beginning of year ........ $ 153,798 $ 133,437 $ 110,714 $ 94,199 $ 89,335
Allowances purchased ................ 3,473 1,580 1,556
Provision for loan losses ........... 64,558 53,788 72,892 97,633 121,681
----------------------------------------------------------
218,356 190,698 185,186 191,832 212,572
----------------------------------------------------------
Losses charged to the allowance
Commercial ......................... 34,383 27,435 29,501 37,700 24,849
Construction ....................... 2,046 1,794 3,060 1,887 2,450
Lease financing .................... 6,979 6,860 9,150 10,139 4,316
Mortgage ........................... 1,618 1,310 477
Consumer ........................... 33,681 29,545 35,239 52,454 97,700
----------------------------------------------------------
78,707 66,944 77,427 102,180 129,315
----------------------------------------------------------
Recoveries
Commercial ......................... 9,404 6,950 6,279 3,577 4,300
Construction ....................... 288 1,374 607 796
Lease financing .................... 2,342 3,514 2,081 2,169 154
Mortgage ........................... 243 5 36
Consumer ........................... 16,467 18,201 16,675 14,520 6,488
----------------------------------------------------------
28,744 30,044 25,678 21,062 10,942
----------------------------------------------------------
Net loans charged-off ............... 49,963 36,900 51,749 81,118 118,373
----------------------------------------------------------
Balance at end of year .............. $ 168,393 $ 153,798 $ 133,437 $ 110,714 $ 94,199
==========================================================
Loans:
Outstanding at year end ............ $8,677,484 $7,781,329 $6,346,922 $5,252,053 $5,195,557
Average ............................ 8,217,834 7,107,746 5,700,069 5,150,328 5,302,189
Ratios:
Allowance for loan losses to year
end loans ......................... 1.94% 1.98% 2.10% 2.11% 1.81%
Recoveries to charge-offs .......... 36.52 44.88 33.16 20.61 8.46
Net charge-offs to average loans ... 0.61 0.52 0.91 1.58 2.23
Net charge-offs earnings coverage .. 5.42x 6.21x 3.96x 2.44x 1.64x
Allowance for loan losses to net
charge-offs ....................... 3.37 4.17 2.58 1.36 0.80
Provision for loan losses to:
Net charge-offs ................. 1.29x 1.46 1.41 1.20 1.03
Average loans ................... 0.79% 0.76% 1.28% 1.90% 2.29%
Allowance to non-performing assets 108.62 142.89 120.04 83.68 69.13
- -------------------------------------------------------------------------------------------------
losses on a monthly basis. In determining the allowance, management considers
the portfolio risk characteristics, prior loss experience and prevailing and
projected economic conditions.
The provision for loan losses was $64.6 million for 1995, compared with
$53.8 million in 1994, an increase of $10.8 million or 20%. The provision for
loan losses for 1993 was $72.9 million. The increase in the provision for 1995
is the result of a rise in the Corporation's loan portfolio and increases in
net charge-offs and non-performing loans. Net charge-offs for the year totaled
$50 million or 0.61% of average loans, compared with $36.9 million or 0.52% in
1994 and $51.7 million or 0.91% in 1993.
All loan categories reflected increases in loan losses. Commercial loans
net charge-offs increased $4.5 million or 21.9% as compared with 1994, while
construction and lease financing net loan losses increased $1.3 million each.
The increase in credit losses in commercial loans was mainly due to the
charge-off of a major corporate loan which accounted for 37% of the total
commercial loans net charge-offs. Excluding this major charge-off, net losses
on the commercial portfolio decreased by $4.8 million. The increase in
construction and lease financing net charge-offs were mainly the result of the
growth in the portfolios of 30.2% and 11.3%, respectively, combined with the
consistent application of the Corporation's charge-off policy and the eco-
F-19
38
- -------------------------------------------------------------------------------
nomic conditions that prevailed during 1995. During this year, commercial
bankruptcies increased 17%. Mortgage loans net charge-offs almost remained at
the same level of prior year.
Consumer loans' net charge-offs increased $5.9 million or 51.7% compared
with prior year, from $11.3 million in 1994 to $17.2 million in 1995. This
increase was the result of the growth in the portfolio coupled with a general
increase in consumer indebtedness and an increase of 11% in the level of
personal bankruptcies. Consumer loans net charge-offs amounted to $18.6 million
in 1993. As a percentage of average consumer loans, net charge-offs were 0.78%
in 1995, compared with 0.58% in 1994 and 1.02% in 1993.
The increase in the consumer loans net charge-offs was mainly in personal
loans where net charge-offs increased $4.9 million, from $2.1 million or 0.10%
of average loans in 1994 to $7.0 million or 0.66% this year. In 1993, personal
loans' net charge-offs were $5.7 million or 0.65% of average loans. Student and
credit card net loan losses increased $0.6 million and $0.5 million
respectively, as compared with 1994.
Given a potential slowdown in the economy, the uncertainty over the future
of Section 936, and the increased level of bankruptcies, partially offset by
the expected lower interest rate scenario and the positive economic impact of
government related infrastructure/development projects during an election year,
the Corporation expects the level of loan losses to increase slightly at the
beginning of 1996, with an improvement toward the end of the year.
Notwithstanding, the Corporation will continue to use prudent lending standards
and will increase the use of predictive credit scoring mechanisms.
At December 31, 1995, the allowance for loan losses was $168.4 million or
1.94% of loans, as compared with $153.8 million or 1.98% for 1994. At December
31, 1993, the allowance was $133.4 million or 2.10% of loans. Based on current
and expected economic conditions, the expected level of net loan losses and the
methodology established to evaluate the adequacy of the allowance for loan
losses, management considers that the Corporation continues enjoying a strong
position in its allowance for loan 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)
1995 1994 1993 1992 1991
-------------------------------------
Commercial ....... $ 82.6 $ 73.8 $ 64.0 $ 49.5 $34.4
Construction ..... 11.0 10.8 10.6 6.5 3.5
Lease financing .. 6.4 6.5 5.8 5.4 5.4
Consumer ......... 60.6 56.7 52.0 49.3 50.9
Mortgage ......... 7.8 6.0 1.0
-------------------------------------
$168.4 $153.8 $133.4 $110.7 $94.2
=====================================
Table J summarizes the movement in the allowance for loan losses and
presents selected loan loss statistics for the past five years.
Effective January 1, 1995, the Corporation adopted the Statement of
Financial Accounting Standards (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", as further
explained on Note 6 to the Consolidated Financial Statements. As a result of
this adoption, the Corporation had $86 million in loans considered impaired of
which $38 million have a related allowance for possible loan losses of $8
million as of December 31, 1995. No increase in the provision for loan losses
was necessary as a result of the impairment measurement.
ASSET/LIABILITY MANAGEMENT
The Corporation's net interest income is affected primarily by the impact
of interest rate volatility on the repricing of its assets and liabilities.
Timing differences between the repricing of assets and liabilities can change
future net interest income, depending on the size of the differences and the
degree of interest rate changes. Other factors which can influence the
Corporation's net interest income are the current yields and costs of earning
assets and interest bearing liabilities, the sensitivity of these to changes in
market rates, and the correlation or spread between different interest rates.
F-20
39
- ----------------------------------------------------------------------------------------------------------
TABLE K
Maturity Distribution of Earning Assets
As of December 31, 1995
- ----------------------------------------------------------------------------------------------------------
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 .. $ 798,719 $ 798,719
Investment and trading
securities .............. 2,369,991 $2,363,486 $ 387,039 5,120,516
Loans:
Commercial .............. 1,368,000 699,568 $448,949 382,374 $312,084 3,210,975
Construction ............ 143,555 27,332 6,536 19,456 13,012 209,891
Lease financing ......... 125,705 362,293 10,752 498,750
Consumer ................ 636,702 1,536,191 181,344 2,354,237
Mortgage ................ 291,937 801,477 1,298,583 11,634 2,403,631
--------------------------------------------------------------------------------
Total. ................ $5,734,609 $5,790,347 $455,485 $2,279,548 $336,730 $14,596,719
================================================================================
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity securities held by the
Corporation are not included in this table.
- -----------------------------------------------------------------------------------------------------------
The Asset/Liability Management Committee (ALCO) is responsible for
implementing interest rate risk management policies approved by the Board of
Directors as well as risk management strategies. The main objective of ALCO is
to protect the stability of the Corporation's net interest income in changing
interest rate scenarios, although at times it may be decided to position the
Corporation for anticipated changes in the interest rate cycle. Such positions
are monitored very closely and are structured to be adjusted quickly in the
case of adverse or unexpected market movements. ALCO is comprised of a group of
senior officers of the Corporation and meets on a monthly basis.
Various techniques are used for managing interest rate risk including
beta-adjusted gap analysis, simulations and to a limited extent, duration
analysis. Gap analysis reviews the difference in repricing volumes between
assets and liabilities on the current balance sheet during future time periods
making adjustments for expected prepayments from the loan and investments
portfolio and the elasticity of the Corporation's deposit rates against market
rates. Prepayment rates are estimated by using a combination of historical
experience and estimates prepared by primary dealers. The elasticity of deposit
rates is determined by applying regression analysis to quantify their
relationship with LIBOR during a two-year period. The resulting beta factors
are then used to restate the volume of deposits repricing in terms of dollars
equally sensitive to LIBOR, as are borrowings in the money markets. Tactical
risk positions are stated in terms of cumulative repricing gap positions within
one year, and structural positions are expressed in terms of repricing gap
positions beyond one year. The size of these positions is maintained within
parameters approved by ALCO with the objective of protecting net interest
income from adverse market movements.
Simulation analysis is employed to validate the results of the
beta-adjusted gap analysis, and submit risk management strategies to testing
under various market scenarios. It also permits ALCO to include in its
assessment the effect of the Corporation's business plans on future interest
rate risk. ALCO uses an "earnings at risk" concept to limit the projected
volatility of 12-month projected earnings. The simulation runs incorporate the
expected balance sheet dynamics including asset and liability run-offs,
reinvestments and various interest rate scenarios, including both rising and
declining, to ensure that a wide array of possible market movements are tested.
LIQUIDITY RISK
The financing of the Corporation's business activities gives rise to
liquidity risk. The objective of the Corporation's liquidity management is to
ensure sufficient cash flow to fund the origination and acquisition of assets,
the repayment of deposit withdrawals and wholesale borrowing maturities, and
meet operating expenses. In general, there is an opportunity cost involved in
maintaining excessive amounts of liquidity, therefore one objective of the
Corporation's financial management is to ensure that adequate funds are
available to meet all foreseeable obligations and at the same time provide a
cushion for reasonable unexpected contingencies.
F-21
40
- ---------------------------------------------------------------------------------------------------
TABLE L
Average Total Deposits
For the Year
- ---------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993 1992 1991
-----------------------------------------------------------
Private demand ....................... $1,571,405 $1,515,158 $1,396,339 $1,265,230 $1,206,443
Public demand ........................ 268,317 273,565 235,323 201,218 172,722
Other non-interest bearing accounts .. 5,983 6,967 3,678 3,807 4,247
-----------------------------------------------------------
Non-interest bearing ............ 1,845,705 1,795,690 1,635,340 1,470,255 1,383,412
-----------------------------------------------------------
Savings accounts ..................... 2,913,380 2,839,300 2,492,845 2,044,037 1,629,806
NOW and money market accounts ........ 1,102,593 1,133,106 1,078,075 955,654 767,984
-----------------------------------------------------------
Savings deposits ................ 4,015,973 3,972,406 3,570,920 2,999,691 2,397,790
-----------------------------------------------------------
Certificates of deposit:
Under $100,000 ...................... 1,281,873 1,160,063 1,143,624 1,171,242 1,204,546
$100,000 and over ................... 1,034,195 590,305 498,093 511,585 633,126
936 ................................. 999,384 1,007,147 1,029,450 1,202,604 1,260,491
-----------------------------------------------------------
Certificates of deposit ......... 3,315,452 2,757,515 2,671,167 2,885,431 3,098,163
-----------------------------------------------------------
Public time .......................... 175,706 177,534 124,629 155,715 181,019
Other time ........................... 229,315 134,081 122,829 130,031 137,803
-----------------------------------------------------------
Other time deposits ............. 405,021 311,615 247,458 285,746 318,822
-----------------------------------------------------------
Interest bearing ................ 7,736,446 7,041,536 6,489,545 6,170,868 5,814,775
-----------------------------------------------------------
Total ........................ $9,582,151 $8,837,226 $8,124,885 $7,641,123 $7,198,187
===========================================================
Liquidity is monitored and managed at both the parent company level and
the subsidiaries level. The parent company depends primarily on the issuance
of commercial paper, medium-term notes, subordinated notes and common and
preferred stock for financing the operations of its non-bank subsidiaries,
while the banking subsidiaries obtain most of their financing from retail
deposits and wholesale borrowings.
Substantial liquidity is available in the Corporation's assets and
liabilities. The investment portfolio consists primarily of securities issued
by the U.S. Treasury and Agencies, while the loan portfolio is relatively
short-term. Funding sources include a large, stable base of retail deposits
which is complemented by wholesale borrowings in the U.S. money markets.
The major source of liquidity among the Corporation's assets is the
investment portfolio. As of December 31, 1995, the Corporation's investment
portfolio totaled $4,861 million, with an average maturity of 2.54 years. Cash
and money market instruments amounted to $1,257 million, while U.S. Treasury
and Agencies obligations totaled $3,799 million, or 78% of the total portfolio
with an average maturity of 1.17 years.
Securities classified as held-to-maturity amounted to $1,651 million or
34% of the total portfolio as of December 31, 1995. Securities classified as
available-for-sale amounted to $3,210 million or 66% of the total portfolio,
with an unrealized gain of $23 million. This portfolio can be sold in the
secondary markets with minimal transaction costs and can be financed in the
money markets at competitive rates.
The loan portfolio as of December 31, 1995 amounted to $8,677 million, of
which $2,566 million or 29.6% mature within one year. The repayments of
principal and interest from the portfolio provide a stable source of cash flow
to the Corporation.
The operations of the Corporation are funded primarily by the deposit base
of its banking subsidiaries. This source of funds is much less volatile than
institutional borrowings and its cost is less sensitive to changes in market
rates. The core deposit base includes consumer and commercial demand deposits,
savings, NOW and money market accounts and time deposits in denominations below
$100,000. The Corporation's extensive retail network and leadership in
electronic banking have resulted in the largest share of retail deposits in its
local market. As of December 31, 1995, the Corporation's core deposits amounted
to $7,814 million or 79% of total deposits, an increase of $469 million or 6.4%
from the previous year. Certificates of deposit with denominations
F-22
41
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE M
Interest Rate Sensitivity
As of December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
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 .................... $ 307,877 $ 377,557 $ 685,434
Short-term interest bearing
deposits in other banks ................. 113,185 $ 100 113,285
Investment and trading securities ........ 802,760 319,316 672,755 $ 652,890 $2,744,271 5,191,992
Loans .................................... 2,002,428 315,667 414,457 658,307 5,286,625 8,677,484
Other assets ............................. $1,007,256 1,007,256
---------------------------------------------------------------------------------------
Total ............................. 3,226,250 1,012,540 1,087,312 1,311,197 8,030,896 1,007,256 15,675,451
---------------------------------------------------------------------------------------
Liabilities and equity:
Savings, NOW and Money Market
accounts* ............................... 378,071 3,662,167 4,040,238
Other time deposits ...................... 1,267,980 629,814 511,989 379,786 1,025,197 3,814,766
Short-term interest bearing liabilities .. 2,170,426 790,812 147,502 55,471 291,374 3,455,585
Long-term interest bearing liabilities ... 164,664 19,484 50,003 6 701,271 935,428
Non-interest bearing deposits ............ 2,021,658 2,021,658
Other non-interest bearing liabilities ... 266,079 266,079
Stockholders' equity ..................... 1,141,697 1,141,697
---------------------------------------------------------------------------------------
Total ............................. 3,981,141 1,440,110 709,494 435,263 5,680,009 $3,429,434 $15,675,451
---------------------------------------------------------------------------------------
Off-balance sheet financial instruments 40,000 65,000 (105,000)
Interest rate sensitive gap .............. ($714,891) ($362,570) $ 377,818 $ 875,934 $2,245,887
Cumulative interest rate
sensitivity gap ......................... ($714,891) ($1,077,461) ($699,643) $ 176,291 $2,422,178
Cumulative sensitive gap to
earning assets .......................... (4.87%) (7.35%) (4.77%) 1.20% 16.51%
*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.
- ----------------------------------------------------------------------------------------------------------------------------------
of $100,000 and over as of December 31, 1995 totaled $2,062 million, or 21% of
total deposits. Their distribution by maturity was as follows:
(In thousands)
3 months or less.... .. $1,656,516
3 to 6 months. ........ 135,249
6 to 12 months ........ 136,605
over 12 months ........ 133,921
----------
$2,062,291
==========
The Corporation utilizes other borrowings to complement its deposit base
in financing its operations. Other borrowings consist primarily of federal
funds purchased, repurchase agreements, and other short-term borrowings.
Federal funds purchased have maturities of 30 days or less while repurchase
agreements generally mature within three months. As of December 31, 1995, other
borrowings amounted to $3,456 million, an increase of $1,444 million over the
amount as of the end of 1994.
Another source of liquidity is the issuance of medium and long-term debt.
To obtain longer term financing for its operations, during 1995 the Corporation
issued $388 million in medium term notes, and $125 million in subordinated
obligations. For more detail on the maturities of medium and long-term debt
issued, please refer to Notes 12 through 15 to the Consolidated Financial
Statements.
F-23
42
- --------------------------------------------------------------------------------
During 1995, the Corporation filed a "shelf registration" with the
Securities and Exchange Commission, which permits the issuance of unsecured
debt securities or shares of preferred stock by BanPonce and various of its
subsidiaries in an amount up to $1.0 billion. This registration facilitates the
Corporation's immediate access to financing in the U.S. money and capital
markets.
The Corporation's deposit base includes Section 936 deposits which
amounted to $879 million as of December 31, 1995, or 8.9% of total deposits.
Also, 936 borrowings including repurchase agreements, subordinated notes and
promissory notes were $1,350 million, or 9.4% of total liabilities as of the
same date. The Corporation's total financing from 936 sources, including both
deposits and borrowings totaled $2,229 million or 15.5% of total liabilities as
of December 31, 1995.
Internal guidelines are used by the Corporation which limit the maximum
exposure to 936 funds that may be assumed, to maintain their volume within
prudent levels. The maximum levels of 936 funds maintained are deemed
consistent with the ability of the Corporation to replace them rapidly. An
important objective of the Corporation's liquidity management is to ensure
that alternative sources of financing are readily available to replace 936
funds completely, in a cost efficient manner.
As part of an effort to balance the U.S. Government's fiscal deficit
within the next seven years, President Clinton and the U.S. Congress are
proposing changes to Section 936 of the Internal Revenue Code. The proposed
changes may have the effect of phasing out the federal tax credit applicable to
investment income from financial assets in Puerto Rico, which includes
investments in obligations issued by the Corporation. Therefore, the future
availability of 936 funds is dependent upon the proposed changes by Congress
and President Clinton.
The Corporation's management is confident that sufficient liquidity is
available in the investment portfolio to repay on short notice the entire
balance of 936 funds maturing within one year, which amounts to 81.6% of the
total balance of 936 borrowings and certificates of deposit as of December 31,
1995. In addition to the $1 billion shelf registration, this liquidity source
is complemented by the ability of the Corporation to borrow in the U.S. money
markets, where it has available a substantial amount of credit lines and is an
active participant on a daily basis. Furthermore, the Corporation is member of
the Federal Home Loan Bank of New York, where it has available approximately
$400 million in additional lines of credit.
In November 1995, Standard and Poor's affirmed its ratings on BanPonce
Corporation and its second tier subsidiary, BanPonce Financial, a
Delaware-based corporation. Senior and subordinated debt were affirmed at BBB+
and BBB, respectively, while commercial paper obligations ratings were affirmed
at A-2. BanPonce's certificate of deposit issuer rating by Thompson BankWatch
is B.
INTEREST RATE SENSITIVITY
After a general environment of sharply rising interest rates in 1994,
rates reversed course and declined almost as dramatically in 1995. An
unexpected slowdown in the growth rate of the U.S. economy gave rise to a
significant correction in the U.S. Treasury yield curve. The debt markets moved
during 1995 from incorporating in spot rates continued tightening by the FED to
incorporating the expectation of several easings. This resulted in decreases of
more than 200 basis points among portions of the U.S. Treasury yield curve
during the year, as the FED did indeed start to ease monetary policy in July
1995.
The Corporation positioned its balance sheet during the year to benefit
from declining rates. Short-term, tactical gaps were maintained negative during
the year since in the declining rate environment that characterized 1995 a
higher volume of liabilities than assets was repriced. This position should
benefit the Corporation's net interest income in the early part of 1996,
assuming a declining interest rate scenario.
The net interest yield, on a taxable equivalent basis, of the Corporation
for the year ended December 31, 1995, was 4.74%, compared with 5.06% in 1994.
The decrease was due primarily to the acquisition of the operations of CS First
Boston Puerto Rico, Inc., which now operates as BP Capital Markets. BP Capital
maintained average earning assets of $506 million during 1995, with a net
interest yield of 0.54%, which diluted the Corporation's net interest yield in
1995 by approximately 17 basis points.
As of December 31, 1995, the Corporation had a total of $737 million in
mortgage-backed securities including collateralized mortgage obligations
(CMOs). CMOs amounted to $403 million or 54.6% of the mortgage-backed
securities portfolio, at that date. The portfolio had an estimated average life
of nine years and an estimated average yield to maturity of 6.12%. The average
life and yield to maturity of the mortgage-backed securities portfolio, is
affected partially by the level of prepayments of the underlying mortgage
loans. The portfolio includes securities which represent an interest in pools
of mortgage loans, as well as obligations (CMOs) collateralized by such
securities. In most cases, the debtor of the underlying loans has the option of
repaying the principal balance owed at any time.
A decrease in the general level of interest rates usually results in a
higher level of prepayments of mortgage loans, while an increase would tend to
reduce the level of prepayments. The yield to maturity (YTM) of mortgage-backed
securities may also be affected by a
F-24
43
- -----------------------------------------------------------------------------------------------------------
TABLE N
Capital Adequacy Data
As of December 31,
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
------------------------------------------------------------
Risk-based capital
Tier I capital ............................. $1,003,072 $953,266 $786,686 $ 722,082 $598,034
Supplementary (Tier II) capital ............ 231,091 104,338 106,193 110,704 127,181
------------------------------------------------------------
Total capital ........................... $1,234,163 $1,057,604 $892,879 $ 832,786 $725,215
============================================================
Risk-weighted assets
Balance sheet items ........................ $8,175,420 $7,219,906 $6,150,749 $5,430,534 $5,240,345
Off-balance sheet items .................... 249,529 199,327 250,102 177,172 191,927
------------------------------------------------------------
Total risk-weighted assets .............. $8,424,949 $7,419,233 $6,400,851 $5,607,706 $5,432,272
============================================================
Ratios:
Tier I capital (minimum required - 4.00%) .. 11.91% 12.85% 12.29% 12.88% 11.01%
Total capital (minimum required - 8.00%) ... 14.65 14.25 13.95 14.85 13.35
Leverage ratio (minimum required - 3.00%) 6.66 7.62 6.95 7.26 6.64
Equity to assets ........................... 7.58 7.57 7.42 7.02 6.83
Tangible equity to assets .................. 6.60 6.55 6.29 5.66 5.46
Equity to loans ............................ 13.03 13.01 13.91 12.99 11.52
Internal capital generation rate ........... 9.36 9.48 10.08 9.04 6.64
- -----------------------------------------------------------------------------------------------------------
change in prepayment rates. Mortgage-backed security portfolios with an
aggregate unamortized premium may have a decrease in their yield to maturity in
an environment of increasing prepayment speeds, whereas the YTM may increase in
an environment of decreasing prepayment speeds. The opposite is true in the
case of portfolios with aggregate discounts. The mortgage-backed securities and
CMOs portfolios of the Corporation had an aggregate premium of $5.1 million as
of December 31, 1995.
STOCKHOLDERS' EQUITY
At December 31, 1995, stockholders' equity amounted to $1,142 million, an
increase of almost $140 million or 13.9% compared with the balance of $1,002
million at year-end 1994. This increase is mainly due to earnings retention, a
positive change in the allowance required by SFAS 115 and the additional shares
issued under the Dividend Reinvestment Plan. The Corporation's stockholders'
equity at December 31, 1995 includes an allowance of $16.2 million, net of
deferred taxes, in unrealized holding gains on securities available-for-sale,
compared with unrealized holding losses of $19.4 million a year ago. Also, the
additional shares issued under the Dividend Reinvestment Plan contributed $3.5
million in additional capital since December 31, 1994.
On June 27, 1994 the Corporation issued 4 million 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 comfortably exceeds the regulatory risk-based capital
requirements for well-capitalized institutions, 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, 1995, were 11.91%
and 14.65%, compared with 12.85% and 14.25%, respectively, at year-end 1994. The
total capital ratio was positively affected by the $125 million subordinated
notes issued by the Corporation on December 12, 1995. The Corporation's leverage
ratio was 6.66% at December 31, 1995, compared with 7.62% for the previous year.
Banks and bankholding companies which meet or exceed a Tier I ratio of 6%, a
total capital ratio of 10% and a leverage ratio of 5% are considered
well-capitalized by regulatory standards. Table N shows capital adequacy
information for the current and previous four years.
Intangible assets were $143 million at December 31, 1995, compared with
$129 million at the end of 1994, or an increase of $14 million. Total
intangibles consisted of $66 million in core deposits intangible, $46 million
in goodwill, $24 million in mortgage servicing rights and $7 million in other
intangibles. At year-end 1994, core deposits intangible was $60 million,
goodwill totaled $49 million, mortgage servicing rights were $8 million and
other intangibles were $12 million, including $2 million in credit cardholder
intangibles. The average tangible equity increased to $922 million for the year
ended December 31, 1995, from $792 million a year before, an increase of $130
million or 16.4%. Total tangible equity at December 31, 1995 was $999 million
F-25
44
- ---------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------
1995 $31.62 26.21% 3.15% 9.24x 122.55%
1st QUARTER ............ $31 3/4 $28 1/8 $.25
2nd QUARTER ............ 35 1/2 31 1/4 .30
3rd QUARTER ............ 39 35 1/2 .30
4th QUARTER ............ 39 7/8 38 1/8 .30
1994 27.48 27.20 3.18 7.66 102.37
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
* Based on the average high and low market price for the four quarters.
- ---------------------------------------------------------------------------------------------------------------
compared with $874 million at December 31, 1994. The tangible equity to assets
ratio increased accordingly, to 6.60% in 1995 from 6.55% in 1994.
In 1994, 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. No purchase of stock has been made
under this program.
COMMON STOCK
Book value per share increased to $31.62 at December 31, 1995, compared
with $27.48 at year-end 1994. The market value of the Corporation's common
stock at December 31, 1995 was $38.75, compared with $28.13 at December 31,
1994. The Corporation's total market capitalization at the end of the year was
$1,277 million, compared with $924 million as of December 31, 1994.
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 1995, 110,508 shares, equivalent
to $3.5 million in additional capital were issued under the plan. A total of
675,614 shares have been issued under this plan since its inception in 1989,
contributing $15.8 million in additional capital.
F-26
45
- --------------------------------------------------------------------------------
PREFERRED STOCK
The preferred stock of the Corporation is also traded on the NASDAQ
National Market System under the symbol BPOPP. The market value of the
preferred stock as of December 31, 1995, was $27.25 per share compared with
$24.75 as of the same date last year.
DIVIDENDS
Dividends declared on common stock during 1995 totaled $38 million,
compared with $33 million in 1994. The Corporation, following its policy of
maintaining a dividend payout ratio close to 30%, increased its quarterly
dividend from $0.25 to $0.30 per common share, or a 20% increase, effective in
the third quarter of 1995. The annual dividend per common share declared for
1995 was $1.15 compared with $1.00 in 1994 and $0.90 in 1993. The dividend
payout ratio to common stockholders for the year was 26.21% compared with
27.20% a year before.
Dividends declared on the preferred stock amounted to $8.3 million in 1995
compared with $4.2 million in 1994. The Corporation's preferred stock was
issued on June 27, 1994.
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 in
Note 23 to the Consolidated Financial Statements as 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-27
46
STATISTICAL SUMMARY 1991-1995 BANPONCE CORPORATION
STATEMENTS OF CONDITION
- ---------------------------------------------------------------------------------------------------------------------
As of December 31,
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993 1992 1991
--------------------------------------------------------------------
ASSETS
Cash and due from banks .................. $ 458,173 $ 442,316 $ 368,837 $ 325,497 $ 311,384
--------------------------------------------------------------------
Money market investments:
Federal funds sold and securities
and mortgages purchased under
agreements to resell .................. 796,417 265,000 247,333 234,163 139,530
Time deposits with other banks .......... 100 100 15,100 50,100 340,100
Bankers' acceptances. ................... 2,202 570 259 858 1,703
--------------------------------------------------------------------
798,719 265,670 262,692 285,121 481,333
--------------------------------------------------------------------
Investment securities held-to-maturity, at cost 1,651,344 2,955,911 3,329,798 3,290,440 2,354,009
--------------------------------------------------------------------
Investment securities available-for-sale
at market value and at lower of cost or
market value before 1994 ................ 3,209,974 839,226 715,565 408,127
--------------------------------------------------------------------
Trading securities ....................... 330,674 1,670 3,017 283 1,657
--------------------------------------------------------------------
Loans held-for-sale ...................... 112,806 10,296
--------------------------------------------------------------------
Loans .................................... 8,883,963 8,066,954 6,655,072 5,614,724 5,575,976
Less-Unearned income ............. 319,285 295,921 308,150 362,671 380,419
Allowance for loan losses ........ 168,393 153,798 133,437 110,714 94,199
--------------------------------------------------------------------
8,396,285 7,617,235 6,213,485 5,141,339 5,101,358
--------------------------------------------------------------------
Premises and equipment ................... 325,203 324,160 298,089 260,330 253,054
Other real estate ........................ 7,807 10,390 12,699 15,582 7,012
Customers' liabilities on acceptances .... 2,208 902 1,392 1,830 1,691
Accrued income receivable ................ 113,539 78,765 79,285 76,008 59,027
Other assets ............................. 125,742 103,088 95,763 64,890 71,026
Intangible assets ........................ 142,977 128,729 132,746 132,880 138,731
--------------------------------------------------------------------
$15,675,451 $12,778,358 $11,513,368 $10,002,327 $8,780,282
====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing .................. $ 2,021,658 $ 1,949,244 $ 1,848,859 $ 1,614,806 $1,499,352
Interest bearing ...................... 7,855,004 7,063,191 6,673,799 6,423,905 5,707,766
--------------------------------------------------------------------
9,876,662 9,012,435 8,522,658 8,038,711 7,207,118
Federal funds purchased and securities
sold under agreements to repurchase .. 3,000,878 1,438,038 951,733 665,222 449,114
Other short-term borrowings ........... 454,707 573,841 664,173 206,882 143,724
Notes payable ......................... 730,428 459,524 253,855 90,062 73,752
Senior debentures ..................... 30,000 30,000 30,000 30,000 30,000
Acceptances outstanding ............... 2,208 902 1,392 1,830 1,691
Other liabilities ..................... 263,871 211,195 182,362 132,501 138,065
--------------------------------------------------------------------
14,358,754 11,725,935 10,606,173 9,165,208 8,043,464
--------------------------------------------------------------------
Subordinated notes .................... 175,000 50,000 62,000 74,000 94,000
--------------------------------------------------------------------
Preferred stock of Banco Popular ...... 11,000 11,000 11,000
--------------------------------------------------------------------
Stockholders' equity:
Preferred stock ....................... 100,000 100,000
Common stock .......................... 197,692 197,029 196,395 195,929 180,563
Surplus ............................... 427,282 409,445 386,622 361,982 287,539
Retained earnings ..................... 350,480 272,458 208,607 150,208 110,287
Unrealized gains (losses) on investment
securities available-for-sale, net of
deferred taxes ....................... 16,243 (19,366)
Capital reserves ...................... 50,000 42,857 42,571 44,000 53,429
--------------------------------------------------------------------
1,141,697 1,002,423 834,195 752,119 631,818
--------------------------------------------------------------------
$15,675,451 $12,778,358 $11,513,368 $10,002,327 $8,780,282
====================================================================
F-28
47
STATISTICAL SUMMARY 1991-1995 BANPONCE CORPORATION
STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------
For the year ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except per common share
information) 1995 1994 1993 1992 1991
------------------------------------------------------------------------
INTEREST INCOME:
Loans ................................... $ 813,137 $667,047 $549,388 $518,074 $579,463
Money market investments ................ 23,077 5,186 6,434 14,414 33,590
Investment securities ................... 259,941 214,611 215,944 207,642 181,413
Trading account securities .............. 9,652 297 370 224 477
------------------------------------------------------------------------
Total interest income ................. 1,105,807 887,141 772,136 740,354 794,943
Less - Interest expense ................. 521,624 351,633 280,008 300,135 387,134
------------------------------------------------------------------------
Net interest income ................... 584,183 535,508 492,128 440,219 407,809
Provision for loan losses ............... 64,558 53,788 72,892 97,633 121,681
------------------------------------------------------------------------
Net interest income after provision
for loan losses ...................... 519,625 481,720 419,236 342,586 286,128
Gain on sale of investment securities ... 5,368 224 864 242 18,617
Trading account profit .................. 1,785 227 554 383 759
All other operating income .............. 166,185 140,852 123,762 123,879 112,398
------------------------------------------------------------------------
692,963 623,023 544,416 467,090 417,902
------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs ......................... 249,075 225,747 215,911 188,234 180,634
All other operating expenses ............ 237,758 222,099 196,365 178,711 165,104
------------------------------------------------------------------------
486,833 447,846 412,276 366,945 345,738
------------------------------------------------------------------------
Income before tax, dividends on preferred
stock of Banco Popular and cumulative
effect of accounting changes .......... 206,130 175,177 132,140 100,145 72,164
Income tax .............................. 59,769 50,043 28,151 14,259 6,793
------------------------------------------------------------------------
Income before dividends on preferred
stock of Banco Popular and cumulative
effect of accounting changes .......... 146,361 125,134 103,989 85,886 65,371
Dividends on preferred stock of
Banco Popular ......................... 385 770 770 807
------------------------------------------------------------------------
Income before cumulative effect of
accounting changes .................... 146,361 124,749 103,219 85,116 64,564
Cumulative effect of accounting changes.. 6,185
------------------------------------------------------------------------
NET INCOME .............................. $ 146,361 $124,749 $109,404 $ 85,116 $ 64,564
========================================================================
NET INCOME APPLICABLE TO COMMON STOCK ... $ 138,011 $120,504 $109,404 $ 85,116 $ 64,564
========================================================================
EARNINGS PER COMMON SHARE*
Before effect of accounting changes ... $ 4.19 $ 3.67 $ 3.16 $ 2.79 $ 2.15
========================================================================
Net income ............................ $ 4.19 $ 3.67 $ 3.35 $ 2.79 $ 2.15
========================================================================
Dividends declared on common stock:
Cash dividends per common share outstanding $ 1.15 $ 1.00 $ 0.90 $ 0.80 $ 0.80
========================================================================
* The average common shares used in the computation of earnings and cash
dividend per common share were 32,908,150 for 1995; 32,798,243 for 1994;
32,701,236 for 1993; 30,461,494 for 1992, and 30,035,601 for 1991.
F-29
48
STATISTICAL SUMMARY 1991-1995
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
ON A TAXABLE EQUIVALENT BASIS*
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
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 ......................................... $ 399,413 $ 22,823 5.71% $ 114,215 $ 4,858 4.25%
Time deposits with other banks ...................... 2,661 165 6.20 4,916 300 6.10
Bankers' acceptances ................................ 941 89 9.46 332 28 8.43
-----------------------------------------------------------------------
Total money market investments .................. 403,015 23,077 5.73 119,463 5,186 4.34
-----------------------------------------------------------------------
U.S. Treasury securities .............................. 2,893,797 197,554 6.83 2,657,975 164,102 6.17
Obligations of other U.S. Government
agencies and corporations ....................... 575,024 40,493 7.04 526,687 33,969 6.45
Obligations of Puerto Rico, States and
political subdivisions ............................ 247,176 14,798 5.99 259,534 14,074 5.42
Collateralized mortgage obligations ................... 580,714 37,610 6.48
Other ................................................. 171,013 6,491 3.80 712,972 37,535 5.26
-----------------------------------------------------------------------
Total investment securities ..................... 4,467,724 296,946 6.65 4,157,168 249,680 6.01
-----------------------------------------------------------------------
Trading account securities ............................ 155,597 9,831 6.32 5,303 368 6.94
-----------------------------------------------------------------------
Loans (net of unearned income) ........................ 8,217,834 820,003 9.98 7,107,746 672,974 9.47
-----------------------------------------------------------------------
Total interest earning assets/
Interest income ............................... 13,244,170 $ 1,149,857 8.68% 11,389,680 $ 928,208 8.15%
-----------------------------------------------------------------------
Total non-interest earning assets ............... 874,013 835,850
-----------------------------------------------------------------------
TOTAL ASSETS .......................................... $14,118,183 $12,225,530
=======================================================================
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Savings and NOW accounts ........................... $ 4,015,973 $ 126,548 3.15% $ 3,972,406 $ 116,858 2.94%
Other time deposits ................................ 3,720,473 203,235 5.46 3,069,130 130,868 4.26
Short-term borrowings .............................. 2,600,246 141,522 5.44 1,856,649 77,537 4.18
Mortgages and notes payable ........................ 598,027 46,149 7.72 376,570 22,420 5.95
Subordinated notes ................................. 56,850 4,170 7.34 56,082 3,950 7.04
-----------------------------------------------------------------------
Total interest bearing liabilities/
Interest expense .............................. 10,991,569 521,624 4.75 9,330,837 351,633 3.77
-----------------------------------------------------------------------
Total non-interest bearing liabilities .......... 2,056,132 1,964,399
-----------------------------------------------------------------------
Total liabilities ............................... 13,047,701 11,295,236
-----------------------------------------------------------------------
Preferred stock of Banco Popular ................... 5,425
-----------------------------------------------------------------------
Stockholders' equity .................................. 1,070,482 924,869
-----------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ........ $14,118,183 $12,225,530
=======================================================================
Net interest income on a taxable
equivalent basis ...................................... $ 628,233 $ 576,575
-----------------------------------------------------------------------
Cost of funding earning assets ........................ 3.94% 3.09%
-----------------------------------------------------------------------
Net interest yield .................................... 4.74% 5.06%
=======================================================================
Effect of the taxable equivalent adjustment ..... 44,050 41,067
-----------------------------------------------------------------------
Net interest income per books ......................... 584,183 $ 535,508
=======================================================================
*Shows the effect on the tax exempt status of some loans and investments on
their yield, using the applicable statutory incomme tax rates. The
computation concerns 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-30
49
BANPONCE CORPORATION
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
$ 117,095 $ 4,115 3.51% $ 144,539 $ 5,209 3.60% $ 76,095 $ 4,448 5.85%
57,845 2,259 3.91 215,970 9,093 4.21 427,536 28,886 6.76
871 60 6.89 1,496 112 7.49 2,848 256 8.99
- ------------------------------------------------------------------------------------------------------------------------------------
175,811 6,434 3.66 362,005 14,414 3.98 506,479 33,590 6.63
- ------------------------------------------------------------------------------------------------------------------------------------
2,985,634 202,695 6.79 2,443,267 226,038 9.25 1,596,986 179,103 11.22
274,821 18,033 6.56 317,152 27,838 8.78 332,002 32,241 9.71
227,784 14,253 6.26 212,762 19,345 9.09 212,180 22,243 10.48
523,224 26,944 5.15 288,818 21,780 7.54 241,064 19,328 8.02
- ------------------------------------------------------------------------------------------------------------------------------------
4,011,463 261,925 6.53 3,261,999 295,001 9.04 2,382,232 252,915 10.62
- ------------------------------------------------------------------------------------------------------------------------------------
7,319 449 6.13 5,649 303 5.36 8,295 650 7.84
- ------------------------------------------------------------------------------------------------------------------------------------
5,700,069 555,671 9.75 5,150,328 526,902 10.23 5,302,189 589,520 11.12
- ------------------------------------------------------------------------------------------------------------------------------------
9,894,662 $ 824,479 8.33% 8,779,981 $ 836,620 9.53% 8,199,195 $ 876,675 10.69%
789,091 748,537 745,162
- ------------------------------------------------------------------------------------------------------------------------------------
$10,683,753 $ 9,528,518 $ 8,944,357
====================================================================================================================================
$ 3,570,920 $ 107,454 3.01% $ 2,999,691 $ 108,945 3.63% $ 2,397,790 $ 113,165 4.72%
2,918,625 111,994 3.84 3,171,177 144,430 4.55 3,416,985 210,552 6.16
1,337,970 42,392 3.17 903,903 31,711 3.51 855,702 51,142 5.98
195,522 12,801 6.55 116,695 8,245 7.07 52,310 3,965 7.58
73,967 5,367 7.26 85,585 6,804 7.95 94,000 8,310 8.84
- ------------------------------------------------------------------------------------------------------------------------------------
8,097,004 280,008 3.46 7,277,051 300,135 4.12 6,816,787 387,134 5.68
- ------------------------------------------------------------------------------------------------------------------------------------
1,782,748 1,571,477 1,505,929
- ------------------------------------------------------------------------------------------------------------------------------------
9,879,752 8,848,528 8,322,716
- ------------------------------------------------------------------------------------------------------------------------------------
11,000 11,000 11,000
- ------------------------------------------------------------------------------------------------------------------------------------
793,001 668,990 610,641
- ------------------------------------------------------------------------------------------------------------------------------------
$10,683,753 $ 9,528,518 $ 8,944,357
====================================================================================================================================
$ 544,471 $ 536,485 $ 489,541
- ------------------------------------------------------------------------------------------------------------------------------------
2.83% 3.42% 4.72%
- ------------------------------------------------------------------------------------------------------------------------------------
5.50% 6.11% 5.97
====================================================================================================================================
52,343 96,266 81,732
- ------------------------------------------------------------------------------------------------------------------------------------
$ 492,128 $ 440,219 $ 407,809
====================================================================================================================================
F-31
50
BANPONCE CORPORATION
STATISTICAL SUMMARY 1993-1995
QUARTERLY FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
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 .................. $298,311 $288,459 $268,818 $250,219 $239,035 $228,695 $220,000 $199,411
Net interest income .............. 156,120 148,415 142,120 137,528 137,452 136,699 135,574 125,783
Provision for loan
losses ......................... 21,227 18,987 12,646 11,698 12,544 13,544 14,037 13,663
Non-interest income .............. 45,276 44,881 40,306 37,507 37,807 36,013 34,407 32,852
Gain (loss) on sale of
investment securities .......... 3,306 1,950 66 46 157 (205) 272
Non-interest expense ............. 124,197 119,596 124,722 118,318 114,266 114,551 112,452 106,577
Income before income
tax, cumulative effect
of accounting changes
and dividends on
preferred stock of
Banco Popular .................. 59,278 56,663 45,124 45,065 48,606 44,412 43,492 38,667
Income taxes ..................... 19,026 18,356 11,063 11,324 15,980 12,695 11,623 9,745
Dividends on preferred
stock of Banco Popular ......... 192 193
Cumulative effect of
accounting changes .............
----------------------------------------------------------------------------------------------
Net income ....................... $ 40,252 $ 38,307 $ 34,061 $ 33,741 $ 32,626 $ 31,717 $ 31,677 $ 28,729
==============================================================================================
Net income applicable
to common stock ................ $ 38,164 $ 36,220 $ 31,973 $ 31,654 $ 30,538 $ 29,560 $ 31,677 $ 28,729
==============================================================================================
Net income per common
share before cumulative effect
of accounting changes........... $ 1.15 $ 1.10 $ 0.98 $ 0.96 $ 0.93 $ 0.90 $ 0.96 $ 0.88
----------------------------------------------------------------------------------------------
Net income per
common share ................... $ 1.15 $ 1.10 $ 0.98 $ 0.96 $ 0.93 $ 0.90 $ 0.96 $ 0.88
----------------------------------------------------------------------------------------------
Selected Average Balances
(In millions)
Total assets ..................... $ 15,183 $ 14,709 $ 13,616 $ 12,934 $ 12,585 $ 12,385 $ 12,301 $ 11,618
Loans ............................ 8,548 8,360 8,090 7,864 7,645 7,356 6,958 6,456
Interest earning assets .......... 14,276 13,788 12,815 12,068 11,749 11,540 11,449 10,809
Deposits............ 9,848 9,614 9,615 9,245 8,960 8,841 9,000 8,543
Interest bearing liabilities 11,912 11,596 10,552 9,871 9,572 9,445 9,440 8,856
----------------------------------------------------------------------------------------------
Selected Ratios
Return on assets 1.05% 1.03 % 1.00% 1.06% 1.03% 1.02% 1.03% 1.00%
Return on equity 14.82 14.55 13.47 13.96 13.54 13.26 14.59 13.78
- ----------------------------------------------------------------------------------
1993
- ----------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------
Summary of operations
(In thousands, except per
common share information)
Interest income .................. $ 199,780 $196,709 $191,220 $184,427
Net interest income .............. 126,490 125,174 122,703 117,761
Provision for loan
losses ......................... 14,737 17,442 19,166 21,547
Non-interest income .............. 34,000 30,178 31,905 28,233
Gain (loss) on sale of
investment securities .......... 332 86 446
Non-interest expense ............. 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 .................. 38,291 36,806 35,004 22,039
Income taxes ..................... 9,875 8,459 7,306 2,511
Dividends on preferred
stock of Banco Popular ......... 192 193 192 193
Cumulative effect of
accounting changes .............
----------------------------------------------
Net income ....................... $ 28,224 $28,154 $27,506 $ 25,520
==============================================
Net income applicable
to common stock ................ $ 28,224 $28,154 $27,506 $ 25,520
Net income per common ==============================================
share before cumulative effect
of accounting changes........... $ 0.87 $ 0.86 $ 0.84 $ 0.59
----------------------------------------------
Net income per
common share ................... 0.87 $ 0.86 $ 0.84 $ 0.78
----------------------------------------------
SELECTED AVERAGE BALANCES
(In millions)
Total assets ..................... $ 11,374 $ 10,855 $ 10,472 $ 10,017
Loans ............................ 6,219 5,849 5,466 5,254
Interest earning assets .......... 10,543 10,064 9,693 9,264
Deposits............ 8,426 8,074 8,005 7,992
Interest bearing liabilities 8,612 8,249 7,946 7,569
----------------------------------------------
SELECTED RATIOS
Return on assets 0.98% 1.03% 1.05% 1.03%
Return on equity 13.59 13.90 14.09 13.60
F-32
51
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 - Equals 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, any
other intangible asset deducted from Tier I capital and the disallowed portion
of deferred tax assets.
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.
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-33
52
- -----------------------------------------------------------------------------
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, other non-qualifying intangible assets and the
disallowed portion of deferred tax assets.
YIELD - Percentage denoting actual return on earning assets.
F-34
53
REPORT OF INDEPENDENT ACCOUNTANTS BanPonce Corporation
- -------------------------------------------------------------------------------
San Juan, Puerto Rico
February 16, 1996
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, 1995 and
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, 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, in 1994 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 pension 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
Stamp 1327081 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report.
F-35
54
CONSOLIDATED STATEMENTS OF CONDITION BanPonce Corporation
- ------------------------------------------------------------------------------------------------------
December 31,
-------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share information)
ASSETS
Cash and due from banks ......................................... $ 458,173 $ 442,316
Money market investments: -----------------------------
Federal funds sold and securities and mortgages purchased
under agreements to resell .................................. 796,417 265,000
Time deposits with other banks ................................ 100 100
Bankers' acceptances .......................................... 2,202 570
------------------------------
798,719 265,670
------------------------------
Investment securities held-to-maturity, at cost (market value
$1,661,933; 1994 - $2,886,851) ................................ 1,651,344 2,955,911
------------------------------
Investment securities available-for-sale, at market value ....... 3,209,974 839,226
------------------------------
Trading securities, at market value ............................. 330,674 1,670
------------------------------
Loans held-for-sale ............................................. 112,806 10,296
------------------------------
Loans ........................................................... 8,883,963 8,066,954
Less - Unearned income ........................................ 319,285 295,921
Allowance for loan losses .............................. 168,393 153,798
------------------------------
8,396,285 7,617,235
------------------------------
Premises and equipment .......................................... 325,203 324,160
Other real estate ............................................... 7,807 10,390
Customers' liabilities on acceptances ........................... 2,208 902
Accrued income receivable ....................................... 113,539 78,765
Other assets .................................................... 125,742 103,088
Intangible assets ............................................... 142,977 128,729
------------------------------
$15,675,451 $12,778,358
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ........................................ $ 2,021,658 $ 1,949,244
Interest bearing ............................................ 7,855,004 7,063,191
------------------------------
9,876,662 9,012,435
Federal funds purchased and securities sold under agreements
to repurchase ............................................... 3,000,878 1,438,038
Other short-term borrowings ................................... 454,707 573,841
Notes payable ................................................. 730,428 459,524
Senior debentures ............................................. 30,000 30,000
Acceptances outstanding ....................................... 2,208 902
Other liabilities ............................................. 263,871 211,195
------------------------------
14,358,754 11,725,935
------------------------------
Subordinated notes ............................................ 175,000 50,000
------------------------------
Stockholders' equity:
Preferred stock, $25 liquidation value; 10,000,000 shares
authorized; 4,000,000 issued and outstanding ................ 100,000 100,000
Common stock, $6 par value; authorized 90,000,000 shares;
issued and outstanding 32,948,636 (1994 - 32,838,128) ....... 197,692 197,029
Surplus ....................................................... 427,282 409,445
Retained earnings ............................................. 350,480 272,458
Unrealized gains (losses) on investment securities
available-for-sale, net of deferred taxes of $7,085
(1994 - $6,893) ............................................... 16,243 (19,366)
Capital reserves .............................................. 50,000 42,857
------------------------------
1,141,697 1,002,423
------------------------------
$15,675,451 $12,778,358
==============================
The accompanying notes are an integral part of the consolidated financial
statements.
F-36
55
CONSOLIDATED STATEMENTS OF INCOME BanPonce Corporation
- --------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------
1995 1994 1993
--------------------------------------------
(In thousands, except per share information)
INTEREST INCOME:
Loans ..................... $ 813,137 $667,047 $549,388
Money market investments .. 23,077 5,186 6,434
Investment securities ..... 259,941 214,611 215,944
Trading securities ........ 9,652 297 370
--------------------------------------------
1,105,807 887,141 772,136
--------------------------------------------
INTEREST EXPENSE:
Deposits .................. 329,783 247,726 219,448
Short-term borrowings ..... 141,522 77,537 42,392
Long-term debt ............ 50,319 26,370 18,168
--------------------------------------------
521,624 351,633 280,008
--------------------------------------------
Net interest income........ 584,183 535,508 492,128
Provision for loan losses. 64,558 53,788 72,892
--------------------------------------------
Net interest income after
provision for loan
losses. ................. 519,625 481,720 419,236
Service charges on deposit
accounts................. 78,607 71,727 68,246
Other service fees........ 63,725 51,240 42,947
Gain on sale of
investment securities.... 5,368 224 864
Trading account profit.... 1,785 227 554
Other operating income.... 23,853 17,885 12,569
--------------------------------------------
692,963 623,023 544,416
--------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries ................. 172,504 160,996 151,432
Profit sharing ........... 19,003 19,205 19,766
Pension and other
benefits ............... 57,568 45,546 44,713
--------------------------------------------
249,075 225,747 215,911
Net occupancy expense ..... 32,850 28,440 26,085
Equipment expenses ........ 41,577 35,474 27,964
Other taxes ............... 20,872 19,807 15,996
Professional fees ......... 34,954 33,757 27,302
Communications ............ 23,106 20,308 18,203
Business promotion......... 17,801 16,271 16,638
Printing and supplies ..... 11,069 8,817 8,189
Other operating expenses... 35,325 41,222 39,812
Amortization of
intangibles............... 20,204 18,003 16,176
--------------------------------------------
486,833 447,846 412,276
--------------------------------------------
Income before income tax,
dividends on preferred stock
of Banco Popular and cumulative
effect of accounting
changes .................. 206,130 175,177 132,140
Income tax ................. 59,769 50,043 28,151
--------------------------------------------
Income before dividends on
preferred stock of Banco Popular
and cumulative effect of
accounting changes ....... 146,361 125,134 103,989
Dividends on preferred stock of
Banco Popular ........... 385 770
--------------------------------------------
Income before cumulative effect
of accounting changes..... 146,361 124,749 103,219
Cumulative effect of accounting
changes................... 6,185
--------------------------------------------
NET INCOME ................. $ 146,361 $124,749 $109,404
============================================
NET INCOME APPLICABLE TO
COMMON STOCK ............. $ 138,011 $120,504 $109,404
============================================
EARNINGS PER COMMON SHARE:
Income before cumulative effect
of accounting changes ..... $ 4.19 $ 3.67 $ 3.16
Cumulative effect of accounting
changes .................. .19
--------------------------------------------
NET INCOME ................. $ 4.19 $ 3.67 $ 3.35
============================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
56
CONSOLIDATED STATEMENTS OF CASH FLOWS BANPONCE CORPORATION
- -----------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
(In thousands)
Cash Flows from Operating Activities:
Net income .......................................................... $ 146,361 $ 124,749 $ 109,404
-----------------------------------------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of premises and equipment ......... 44,448 38,654 28,535
Provision for loan losses ....................................... 64,558 53,788 72,892
Amortization of intangibles ..................................... 20,204 18,003 16,176
Gain on sale of investment securities available-for-sale ........ (5,368) (224) (864)
Loss (gain) on disposition of premises and equipment ............ 150 (2,311) (604)
Amortization of premiums and accretion of discounts
on investments ............................................... (2,325) 6,277 14,708
Increase in loans held-for-sale ................................. (36,244)
Amortization of deferred loan origination fees and costs ........ 7,131 2,755 2,508
Net increase in postretirement benefit obligation ............... 6,979 5,818 42,672
Net (increase) decrease in trading securities ................... (97,973) 1,347 (2,734)
Net (increase) decrease in accrued income receivable ............ (24,378 2,613 (2,528)
Net (increase) decrease in other assets ......................... (8,640) (14,519) 12,860
Net increase (decrease) in interest payable ..................... 2,077 6,226 (2,167)
Net increase (decrease) in current and deferred taxes ........... 1,410 19,620 (42,953)
Net increase in other liabilities ............................... 6,121 8,187 14,336
-----------------------------------------
Total adjustments ........................................ (21,850) 146,234 152,837
-----------------------------------------
Net cash provided by operating activities ................ 124,511 270,983 262,241
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments ............................ 44,298 2,422 22,429
Purchases of investment securities held-to-maturity ................. (11,665,837) (7,290,753) (3,935,926)
Maturities of investment securities held-to-maturity ................ 11,754,330 7,671,104 3,887,806
Sales of investment securities held-to-maturity ..................... 13,555 12,059
Purchases of investment securities available-for-sale ............... (1,367,401) (385,963) (408,200)
Maturities of investment securities available-for-sale .............. 86,379 64,297
Sales of investment securities available-for-sale ................... 286,045 293,712 83,621
Net disbursements on loans .......................................... (1,155,497) (1,435,677) (691,638)
Proceeds from sale of loans ......................................... 235,716 188,957 21,810
Acquisition of loan portfolios ...................................... (66,922) (76,700) (367,053)
Assets acquired, net of cash ........................................ (29,189) (17,557)
Acquisition of premises and equipment ............................... (51,318) (64,709) (81,945)
Proceeds from sale of premises and equipment ........................ 6,888 8,825 19,026
-----------------------------------------
Net cash used in investing activities .................... (1,922,508) (1,028,487) (1,438,011)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................................ 680,847 197,072 112,095
Net deposits acquired ............................................... 163,504 237,096
Net increase in federal funds purchased and
securities sold under agreements to repurchase .................... 771,382 481,304 286,511
Net (decrease) increase in other short-term borrowings .............. (144,028) (92,932) 457,291
Proceeds from issuance of notes payable ............................. 258,181 205,679 163,801
Payment of notes payable ............................................ (11) (10) (9)
Payment of subordinated notes ....................................... (12,000) (12,000)
Proceeds from issuance of subordinated notes ........................ 125,000
Dividends paid ...................................................... (44,521) (37,016) (27,781)
Proceeds from issuance of common stock .............................. 3,500 3,196 2,106
Proceeds from issuance of preferred stock ........................... 96,690
Redemption of preferred stock ....................................... (11,000)
-----------------------------------------
Net cash provided by financing activities ................ 1,813,854 830,983 1,219,110
-----------------------------------------
Net increase in cash and due from banks ............................... 15,857 73,479 43,340
Cash and due from banks at beginning of period ........................ 442,316 368,837 325,497
-----------------------------------------
Cash and due from banks at end of period .............................. $ 458,173 $ 442,316 $ 368,837
=========================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-38
57
CONSOLIDATED STATEMENTS OF CHANGES BANPONCE CORPORATION
IN STOCKHOLDERS' EQUITY
Year ended December 31,
----------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
(In thousands)
PREFERRED STOCK:
Balance at beginning of year ........................................ $ 100,000
Preferred stock issued .............................................. $ 100,000
------------------------------------
Balance at end of year .................................... 100,000 100,000
------------------------------------
COMMON STOCK:
Balance at beginning of year ........................................ 197,029 196,395 $ 195,929
Common stock issued under Dividend Reinvestment Plan .................. 663 634 466
------------------------------------
Balance at end of year .................................... 197,692 197,029 196,395
------------------------------------
SURPLUS:
Balance at beginning of year ........................................ 409,445 386,622 361,982
Issuance cost of preferred stock .................................... (3,310)
Proceeds from common stock issued under
Dividend Reinvestment Plan ........................................ 2,837 2,562 1,640
Transfer from retained earnings ..................................... 15,000 15,000 11,000
Transfer from capital reserves ...................................... 8,571 12,000
------------------------------------
Balance at end of year ................................... 427,282 409,445 386,622
------------------------------------
RETAINED EARNINGS:
Balance at beginning of year ........................................ 272,458 208,607 150,208
Net income .......................................................... 146,361 124,749 109,404
Cash dividends declared on common stock ............................. (37,846) (32,796) (29,434)
Cash dividends declared on preferred stock .......................... (8,350) (4,245)
Transfer to capital reserves ........................................ (7,143) (8,857) (10,571)
Transfer to surplus ................................................. (15,000) (15,000) (11,000)
------------------------------------
Balance at end of year ................................... 350,480 272,458 208,607
------------------------------------
UNREALIZED HOLDING GAINS (LOSSES) ON SECURITIES
AVAILABLE-FOR-SALE, NET OF DEFERRED TAXES:
Balance at beginning of year ........................................ (19,366)
Unrealized holding gains on adoption of change in
accounting for investment securities, net of deferred taxes ....... 17,104
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes ......................... 35,609 (36,470)
------------------------------------
Balance at end of year ................................... 16,243 (19,366)
------------------------------------
CAPITAL RESERVES:
Balance at beginning of year ........................................ 42,857 42,571 44,000
Transfer from retained earnings ..................................... 7,143 8,857 10,571
Transfer to surplus ................................................. (8,571) (12,000)
------------------------------------
Balance at end of year ................................... 50,000 42,857 42,571
------------------------------------
Total stockholders' equity ............................................ $1,141,697 $1,002,423 $ 834,195
The accompanying notes are an integral part of the consolidated financial
statements.
F-39
58
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); BP Capital Markets, Inc.; Banco Popular de Puerto Rico
(Banco Popular) and its wholly-owned subsidiaries Popular Leasing and Rental,
Inc., Popular Consumer Services, Inc. and Popular Mortgage, Inc.; Popular
International Bank, Inc. and its wholly-owned subsidiary BanPonce Financial
Corp., including Banco Popular, FSB, Pioneer Bancorp, Inc. (second tier
subsidiaries) and Equity One, Inc. All intercompany accounts and transactions
have been eliminated in consolidation. The preferred stock of Banco Popular,
which was redeemed on June 30, 1994, and dividends related thereto have been
treated as minority interest in the accompanying consolidated financial
statements.
NATURE OF OPERATIONS
The Corporation is a bank holding company, which provides a wide variety of
financial services through its subsidiaries. Banco Popular, the Corporation's
principal bank subsidiary, is a full-service commercial bank and Puerto Rico's
largest banking institution, with a delivery system of 166 branches throughout
Puerto Rico, 30 branches in New York, one in Los Angeles, California, seven
branches in the U.S. Virgin Islands and one branch in the British Virgin
Islands. Pioneer, another banking subsidiary, operates three branches in the
State of Illinois, and Banco Popular, FSB, a federal savings bank, operates six
branches in the State of New Jersey.
In addition, the Corporation offers consumer finance services through its
subsidiaries, Equity One, Inc., Popular Mortgage, Inc. and Popular Consumer
Services, Inc. Equity One, Inc. is a diversified mortgage and consumer finance
company engaged in the business of granting personal and mortgage loans and
providing dealer financing through 91 offices located in 26 states in the U.S.
mainland. Popular Mortgage is a mortgage loan company with three offices in
Puerto Rico operating under the name of Puerto Rico Home Mortgage and Popular
Consumer Services, Inc. is a small-loan company with 30 offices in Puerto Rico
operating under the name of Best Finance.
The Corporation is also engaged in the vehicle and equipment leasing
business, through its subsidiaries Popular Leasing and Rental, Inc. and Velco,
with seven offices in Puerto Rico. The Corporation is also engaged in the
business of investment banking and broker/dealer activities through its
subsidiary, BP Capital Markets, Inc.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVESTMENT SECURITIES
On January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards (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 deferred 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.
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
tempo-
F-40
59
- -----------------------------------------------------------------------------
rary, 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. In conjunction with
mortgage banking activities, the Corporation records the securitization of
mortgage loans held-for-sale as a sale of mortgage loans and the purchase of a
mortgage-backed security classified as a trading security, in accordance with
the provisions of SFAS 115. 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 in the trading profit or loss account.
Securities sold but not yet purchased, which represent the Corporation's
obligation to deliver securities sold which were not owned at the time of sale,
are recorded at market value.
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 termination 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.
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 using the interest method
over the life of the loan as an adjustment to 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
closeend consumer loans, interest accrual is ceased when loans are 90 days or
more past-due. Loans designated as non-accruing are not returned to an accrual
status until interest is received on a current basis and those factors
indicative of doubtful collection cease to exist. 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 creditrelated 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.
On January 1, 1995, the Corporation adopted 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." SFAS
114 requires creditors to set up a
F-41
60
- --------------------------------------------------------------------------------
valuation allowance with a corresponding charge to the provision for loan losses
for loans considered to be impaired. The Corporation has defined impaired loans
as all loans with interest and/or principal 90 days or more past-due and other
specific loans which based on current information and events, it is probable
that the debtor will be unable to pay all amounts due according to the
contractual terms of the loan agreement. Loan impairment is measured based on
the present value of expected future cash flows discounted at the loan's
effective rate, on the observable market price or, on the fair value of the
collateral if the loan is collateral dependent. Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment based on past
experience. All other loans are evaluated on a loan-by-loan basis. Once a
specific measurement methodology is chosen it is consistently applied unless
there is a significant change in the financial position of the borrower. Cash
payments received on impaired loans are recorded in accordance with the
contractual terms of the loan. The principal portion of the payment is used to
reduce the principal balance of the loan, whereas the interest portion is
recognized as interest income. However, when management believes the ultimate
collectibility of principal is in doubt, interest is then applied to principal.
MORTGAGE BANKING
Mortgage loan servicing includes collecting monthly mortgagor payments,
forwarding payments and related accounting reports to investors, collecting
escrow deposits for the payment of mortgagor property taxes and insurance, and
paying taxes and insurance from escrow funds when due. Also, the Corporation is
required to foreclose on loans in the event of default by the mortgagor, and to
make full payment on foreclosed loans. No asset or liability is recorded in the
Corporation for mortgages serviced, except for purchased servicing rights,
advances to investors and escrow balances. Mortgage loan servicing fees, which
are based on a percentage of the principal balances of the mortgages serviced,
are credited to income as mortgage payments are collected.
Purchased mortgage servicing rights, an intangible asset, represents the
cost of purchasing the contractual right to service loans originated by others.
The acquisition cost of purchased mortgage servicing rights is deferred and
amortized in proportion to and over the period of the estimated servicing
income. Purchased mortgage servicing rights totaled $23,966,000 at December 31,
1995 (1994 - $7,267,000). Loans serviced were $4,610,000,000 at December 31,
1995 (1994 - $2,431,000,000).
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 as realized or incurred, respectively.
OTHER REAL ESTATE
Other real estate comprises properties acquired through foreclosure
proceedings. 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, the properties are
carried at the lower of carrying value or fair value less estimated cost of
disposal. 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.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and other identifiable intangible
assets acquired, mainly core deposits and purchased mortgage servicing rights.
The values of core deposits, assembled work force and credit customer
relationships are amortized using various methods over the periods benefitted,
which range from 4 to 10 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 periods
ranging from 7 to 15 years.
INCOME TAXES
In accordance with the provisions of SFAS 109, the Corporation uses an asset
and liability approach to the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Corporation's financial statements or tax returns. In
estimating future tax consequences, all expected future events other than
future enactments of changes in the tax laws or rates are considered.
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 and are charged to current operations.
Net pension costs
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- --------------------------------------------------------------------------------
are based on various actuarial assumptions regarding future experience under
the plan, which include costs for services rendered during the period, interest
costs and return on plan assets, as well as deferral and amortization of
certain items such as actuarial gains or losses. The funding policy is to
contribute 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,
which is determined based on actuarial assumptions and estimates of the costs
of providing these benefits in the future, is accrued during the years that the
employee renders the required service.
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 1994 and 1993
consolidated financial statements to conform with the 1995 presentation.
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES:
Effective January 1, 1995, the Corporation adopted 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 loan's observable market price or, on the fair value of the collateral if
the loan is collateral dependent. For the year ended December 31, 1995, no
increase in the provision for loan losses was necessary as a result of the
impairment measurement.
Effective January 1, 1994, the Corporation adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." As a result, at December
31, 1995, the Corporation had a net unrealized gain on securities
available-for-sale, which are carried at market value, of $23,328,000 which was
included in stockholders' equity at $16,243,000 net of deferred taxes (1994 -
unrealized loss of $26,259,000 or $19,366,000, net of deferred taxes).
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 in the net income for 1993 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 Statement of Income to adopt
SFAS 109 netted $28,921,000 or $0.89 per common share. This amount is reflected
in 1993 net income as part of the cumulative effect of a change in accounting
principle. It primarily represents the impact of recognizing deferred tax
assets for the benefit of certain credits and loss carryforwards that could not
be recognized under SFAS 96.
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The statement is effective
for fiscal years beginning after December 15, 1995. Management estimates that
the adoption of this statement will have no material effect on the
Corporation's consolidated financial statements.
F-43
62
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In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights." This statement requires that a mortgage banking enterprise recognize
as separate assets the rights to service mortgage loans for others, whether
those servicing rights are originated or purchased. Also, it requires that the
mortgage banking enterprise assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. The statement is
effective for fiscal years beginning after December 15, 1995. Management
estimates that the adoption of this statement will have no material effect on
the consolidated financial statements of the Corporation.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." This statement establishes a fair value-based method of
accounting for stock-based employee compensation plans. It encourages entities
to adopt this method in lieu of the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", for all arrangements under which
employees receive shares of stock or other equity instruments of the employer
or the employer incurs liabilities to employees in amounts based on the price
of its stock. If this method is not adopted in the financial statements, the
results of applying it must, nevertheless, be disclosed. The accounting and
disclosure requirements of this statement are effective for transactions
entered into in fiscal years that begin after December 15, 1995. Management
estimates that the adoption of this statement will have no material effect on
the consolidated financial statements of the Corporation.
NOTE 3 - INVESTMENT SECURITIES HELD-TO-MATURITY:
The amortized cost, gross unrealized gains and losses, approximated 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, 1995 and 1994 (1993 - only amortized cost is
presented) are as follows:
1995
-------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average
cost gains losses value yield
-------------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of 1 year and 4 months):
Within 1 year ............................................. $ 301,463 $3,093 $304,556 7.09%
After 1 to 5 years ........................................ 623,703 5,289 628,992 6.26
------------------------------------------------------------
925,166 8,382 933,548 6.53
------------------------------------------------------------
Obligations of other U.S. Government agencies and
corporations (average maturity of 1 year and 6 months):
After 1 to 5 years ........................................ 122,978 27 $1,011 121,994 5.30
------------------------------------------------------------
122,978 27 1,011 121,994 5.30
------------------------------------------------------------
Obligations of Puerto Rico, States and political sub-
divisions (average maturity of 3 years and 2 months):
Within 1 year ............................................. 125,983 80 24 126,039 3.67
After 1 to 5 years ........................................ 34,578 1,222 56 35,744 7.56
After 5 to 10 years ....................................... 12,179 982 13,161 8.51
After 10 years ............................................ 22,455 813 23,268 9.17
-------------------------------------------------------------
195,195 3,097 80 198,212 5.29
------------------------------------------------------------
Collateralized mortgage obligations (average maturity
of 3 years and 1 month):
Within 1 year ............................................. 150,960 85 1,023 150,022 5.11
After 1 to 5 years ........................................ 120,345 316 1,080 119,581 5.57
After 5 to 10 years ....................................... 14,058 153 26 14,185 6.57
After 10 years ............................................ 109 1 110 6.35
-------------------------------------------------------------
285,472 555 2,129 283,898 5.38
-------------------------------------------------------------
Mortgage-backed securities (average maturity of 4 years):
Within 1 year ............................................. 11,694 311 12,005 7.56
After 1 to 5 years ........................................ 32,965 875 2 33,838 7.54
After 5 to 10 years ....................................... 17,877 469 2 18,344 7.48
After 10 years ............................................ 4,111 74 13 4,172 7.15
-------------------------------------------------------------
66,647 1,729 17 68,359 7.50
-------------------------------------------------------------
Equity securities (without contractual maturity) ............. 43,558 43,558 6.80
------------------------------------------------------------
Other (average maturity of 11 years and 11 months):
After 1 to 5 years ........................................ 6,145 17 6,162 2.80
After 5 to 10 years ....................................... 4,027 4,027 7.90
After 10 years ............................................ 2,156 19 2,175 5.58
------------------------------------------------------------
12,328 36 12,364 4.95
------------------------------------------------------------
$ 1,651,344 $13,826 $3,237 $1,661,933 6.13%
============================================================
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63
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1994 1993
---------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average Amortized
cost gains losses value yield cost
---------------------------------------------------------------
(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% $1,597,481
After 1 to 5 years ........................................ 866,363 21,079 845,284 5.60 627,670
---------------------------------------------------------------
1,741,709 17 32,316 1,709,410 5.17 2,225,151
---------------------------------------------------------------
Obligations of other U.S. Government agencies and corporations
(average maturity of 2 years):
Within 1 year ............................................. 111,655 10 167 111,498 5.92 215,355
After 1 to 5 years ........................................ 207,647 8,588 199,059 5.29 65,012
After 5 to 10 years ....................................... 3,525 152 3,373 6.08 28
After 10 years ............................................ 22,459 16 596 21,879 6.65 8,266
---------------------------------------------------------------
345,286 26 9,503 335,809 5.59 288,661
---------------------------------------------------------------
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 3.53 152,091
After 1 to 5 years ......................................... 37,417 814 93 38,138 7.30 39,170
After 5 to 10 years ........................................ 15,764 479 255 15,988 6.62 24,939
After 10 years ............................................. 21,695 827 32 22,490 8.96 40,474
---------------------------------------------------------------
219,464 2,178 471 221,171 4.96 256,674
---------------------------------------------------------------
Collateralized mortgage obligations (average maturity of 1 year
and 11 months):
Within 1 year .............................................. 141,492 4,279 137,213 5.09
After 1 to 5 years ......................................... 278,942 14,454 264,488 5.19
After 5 to 10 years ........................................ 40,348 1,378 38,970 5.94
After 10 years ............................................. 1,000 23 977 5.17
---------------------------------------------------------------
461,782 20,134 441,648 5.22
---------------------------------------------------------------
Mortgage-backed securities (average maturity of 4 years and
11 months):
Within 1 year .............................................. 14,676 893 13,783 6.85
After 1 to 5 years ......................................... 74,712 4,935 69,777 6.36
After 5 to 10 years ........................................ 32,296 2,051 30,245 7.07
After 10 years ............................................. 13,780 1,013 12,767 6.95
---------------------------------------------------------------
135,464 8,892 126,572 6.65
---------------------------------------------------------------
Equity securities (without contractual maturity) .............. 40,127 40,127 6.00
---------------------------------------------------------------
Other (average maturity of 7 years and 7 months):
Within 1 year .............................................. 250 250 6.75 228,344
After 1 to 5 years ......................................... 6,145 17 6,162 2.70 294,378
After 5 to 10 years ........................................ 3,527 3,527 7.89 23,393
After 10 years ............................................. 2,157 18 2,175 5.69 13,197
---------------------------------------------------------------
12,079 35 12,114 4.84 559,312
---------------------------------------------------------------
$2,955,911 $2,256 $71,316 $2,886,851 5.29% $3,329,798
================================================================
The aggregate amortized cost and approximated market value of investment
securities held-to-maturity at December 31, 1995, by contractual and estimated
maturity, are shown below:
Amortized cost Market value
----------------------------
(In thousands)
Within 1 year ............. $ 590,100 $ 592,622
After 1 to 5 years ........ 940,714 946,311
After 5 to 10 years ....... 48,141 49,717
After 10 years ............ 28,831 29,725
------------------------
Total ................ 1,607,786 1,618,375
Without contractual
maturity ................ 43,558 43,558
------------------------
Total investment securities
held-to-maturity ........ $1,651,344 $1,661,933
========================
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In November 1995, the Financial Accounting Standards Board (FASB) issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". In conjunction with the
issuance of this Special Report the FASB provided for a one-time "window" to
reclassify securities from the held-to-maturity portfolio, to
available-for-sale or trading before January 1, 1996, without calling into
question the intent to hold other debt securities to maturity in the future. As
a result of this window, the Corporation transferred $1,323,000,000 from
securities held-to-maturity to available-for-sale. During 1994, investment
securities held-to-maturity with an amortized cost of $13,603,000 were called
by the issuer or sold due to a significant deterioration in the issuer's
creditworthiness. Proceeds from the sale of those securities during 1994 were
$13,555,000 (1993 - $12,059,000). Gross realized gains and losses on those
sales during 1994 were $189,000 and $237,000, respectively (1993 - $445,000
and $2,000).
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, 1995 ........... $195,065 17% $198,082
December 31, 1994 ........... 219,314 22 221,021
NOTE 4 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
The amortized cost, gross unrealized gains and losses, approximated 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, 1995 and 1994 (1993- only amortized cost is
presented) are as follows:
1995
----------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average
cost gains losses value yield
----------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of 1 year):
Within 1 year ............................................... $1,399,444 $ 5,996 $318 $1,405,122 6.16%
After 1 to 5 years .......................................... 1,038,016 11,437 494 1,048,959 5.74
--------------------------------------------------------
2,437,460 17,433 812 2,454,081 5.98
--------------------------------------------------------
Obligations of other U.S. Government agencies and corporations
(average maturity of 1 year and 11 months):
Within 1 year ............................................... 62,496 201 20 62,677 6.62
After 1 to 5 years .......................................... 231,954 1,258 66 233,146 5.72
After 5 to 10 years ......................................... 1,239 7 1,232 6.23
--------------------------------------------------------
295,689 1,459 93 297,055 5.91
--------------------------------------------------------
Obligations of Puerto Rico, States and political sub-divisions
(average maturity of 2 years and 10 months):
Within 1 year ............................................... 7,072 19 13 7,078 6.34
After 1 to 5 years .......................................... 16,194 238 127 16,305 5.19
After 5 to 10 years ......................................... 3,954 212 4,166 7.83
--------------------------------------------------------
27,220 469 140 27,549 5.87
--------------------------------------------------------
Collateralized mortgage obligations (average maturity of 2 years
and 5 months):
Within 1 year ............................................... 35,526 33 166 35,393 6.07
After 1 to 5 years .......................................... 74,829 18 329 74,518 6.35
After 5 to 10 years ......................................... 2,337 2 2,339 6.43
After 10 years .............................................. 5,088 5,088 6.35
--------------------------------------------------------
117,780 53 495 117,338 6.27
--------------------------------------------------------
Mortgage-backed securities (average maturity of 19 years and 5
months):
Within 1 year ............................................... 11,747 4 159 11,592 5.64
After 1 to 5 years .......................................... 50,382 19 556 49,845 5.68
After 5 to 10 years ......................................... 7,503 147 7,356 5.89
After 10 years .............................................. 199,053 681 547 199,187 6.79
--------------------------------------------------------
268,685 704 1,409 267,980 6.50
--------------------------------------------------------
Equity securities (without contractual maturity) ............... 21,759 6,159 27,918 2.16
--------------------------------------------------------
Other (average maturity of 8 years and 11 months):
After 5 to 10 years ......................................... 10,000 10,000 8.25
After 10 years .............................................. 8,053 8,053 6.90
--------------------------------------------------------
18,053 18,053 7.65
--------------------------------------------------------
$3,186,646 $26,277 $2,949 $3,209,974 6.01%
========================================================
F-46
65
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average Amortized
cost gains losses value yield cost
------------------------------------------------------------------
(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 $550,021
After 5 to 10 years ......................................... 80,934
---------------------------------------------------------------
569,599 483 20,961 549,121 6.25 630,955
---------------------------------------------------------------
Obligations of other U.S. Government agencies and corporations
(average maturity of 7 years and 1 month):
Within 1 year ............................................... 73,190 1 443 72,748 6.35 25,000
After 1 to 5 years .......................................... 82,578 1,664 80,914 6.79 50,126
After 10 years .............................................. 16,573 292 16,281 6.98
---------------------------------------------------------------
172,341 1 2,399 169,943 6.62 75,126
---------------------------------------------------------------
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
---------------------------------------------------------------
Collateralized 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
---------------------------------------------------------------
Mortgage-backed securities (average maturity of 7 years
and 5 months):
Within 1 year ............................................... 1,339 15 1,324 6.81
After 1 to 5 years .......................................... 11,935 490 11,445 6.34
After 5 to 10 years ......................................... 6,364 447 5,917 6.21
After 10 years .............................................. 9,280 560 8,720 6.77
---------------------------------------------------------------
28,918 1,512 27,406 6.47
---------------------------------------------------------------
Equity secutities (without contractual maturity) ............... 15,407 63 242 15,228 6.62
---------------------------------------------------------------
Other (average maturity of 1 year and 4 months):
Within 1 year ............................................... 90 90 6.63
After 1 to 5 years .......................................... 3,726 118 3,608 7.74 8,484
After 10 years .............................................. 91 7 84 6.07 1,000
---------------------------------------------------------------
3,907 125 3,782 7.68 9,484
---------------------------------------------------------------
$865,485 $ 559 $ 26,818 $ 839,226 6.33% $715,565
===============================================================
The weighted average yield on investment securities available-for-sale is
based on amortized cost, therefore it does not give effect to changes in fair
value.
F-47
66
- -------------------------------------------------------------------------------
The aggregate amortized cost and approximated market value of investment
securities available-for-sale at December 31, 1995, by contractual and
estimated maturity, are shown below:
Amortized Market
Cost Value
----------------------
(In thousands)
Within 1 year ............. $1,516,285 $1,521,862
After 1 to 5 years ........ 1,411,375 1,422,773
After 5 to 10 years ....... 25,033 25,093
After 10 years ............ 212,194 212,328
----------------------
Total 3,164,887 3,182,056
Without contractual
maturity ................ 21,759 27,918
----------------------
Total investment securities
available-for-sale ...... $3,186,646 $3,209,974
======================
Proceeds from the sale of investment securities available-for-sale during
1995 were $286,045,000 (1994 - $293,712,000; 1993 - $83,621,000). Gross
realized gains and losses on those sales during the year were $6,284,000 and
$916,000, respectively, (1994 - $l,159,000 and $887,000; 1993 - $421,000 and
$0). In computing the realized gains and losses, cost was determined using the
specific identification method.
NOTE 5 - PLEDGED ASSETS:
Investment securities and loans amounting to $2,920,220,000 (1994 -
$2,244,617,000; 1993 - $1,917,840,000) 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:
1995 1994
-----------------------
(In thousands)
Loans secured by real estate:
Insured or guaranteed by the U.S. Government
or its agencies ............................ $ 151,201 $ 133,120
Guaranteed by the Commonwealth of Puerto Rico 72,853 75,476
Commercial loans secured by real estate ...... 910,673 1,047,155
Other ........................................ 2,261,129 2,067,755
----------------------
3,395,856 3,323,506
Financial institutions ....................... 97,694 68,160
Commercial, industrial and agricultural ...... 1,931,924 1,428,216
Real estate (construction) ................... 146,430 161,860
Lease financing .............................. 620,646 553,605
Individuals - for household, credit cards
and other consumer expenditures ............ 2,470,647 2,199,872
Other ........................................ 220,766 331,735
----------------------
$8,883,963 $8,066,954
======================
As of December 31, 1995, loans on which the accrual of interest income had
been discontinued amounted to $144,482,000 (1994 - $94,263,000; 1993 -
$92,814,000). If these loans had been accruing interest, the additional
interest income realized would have been approximately $7,135,000 (1994 -
$5,441,000; 1993 - $4,992,000). In addition, there are $2,742,000 of
renegotiated loans still accruing interest at December 31, 1995 (1994 -
$2,982,000; 1993 - $5,643,000). Included in the non-accruing loans as of
December 31, 1995 are $14,827,000 (1994 - $12,179,000; 1993 - $16,290,000) in
consumer loans.
As of December 31, 1995, the recorded investment in loans that are considered
to be impaired under SFAS 114 was $86,313,000, of which $38,476,000 have a
related allowance for possible loan losses of $8,093,000. As of December
31,1995, out of total impaired loans of $86,313,000, approximately $43,218,000
were measured based on the present value of expected future cash flows
discounted at the loan's effective rate and $43,095,000 were measured based on
the fair value of the collateral. Average
F-48
67
- --------------------------------------------------------------------------------
impaired loans for the year ended December 31, 1995 were $90,284,000. The
Corporation recognized interest income of $3,187,000 in impaired loans during
the year ended December 31, 1995.
The changes in the allowance for loan losses for the year ended December
31, were as follows:
1995 1994 1993
--------------------------------------
(In thousands)
Balance at beginning of year .. $153,798 $133,437 $110,714
Reserve for acquired loans .... 3,473 1,580
Provision for loan losses ..... 64,558 53,788 72,892
Recoveries .................... 28,744 30,044 25,678
Loans charged-off ............. (78,707) (66,944) (77,427)
--------------------------------------
Balance at end of year ........ $168,393 $153,798 $133,437
======================================
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, 1994 .... $ 2,034 $ 91,484 $ 93,518
New loans ..................... 2,708 307,783 310,491
Payments ...................... (425) (267,928) (268,353)
----------------------------------
Balance at December 31, 1994 .. 4,317 131,339 135,656
New loans ..................... 180 258,259 258,439
Payments ...................... (2,150) (245,250) (247,400)
----------------------------------
Balance at December 31, 1995 .. $ 2,347 $ 144,348 $ 146,695
==================================
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 1995 1994
-------------------------------
(In thousands)
Land .......................................... $ 47,196 $ 41,918
------------------
Buildings ..................................... 15-50 197,747 202,854
Equipment ..................................... 3-10 238,547 220,623
Leasehold improvements ........................ Various 50,423 46,288
------------------
486,717 469,765
Less -Accumulated depreciation and amortization 224,543 207,802
------------------
262,174 261,963
------------------
Construction in progress ...................... 15,833 20,279
------------------
$325,203 $324,160
==================
Depreciation and amortization of premises and equipment for the year was
$44,448,000 (1994 - $38,654,000; 1993 - $28,535,000) of which $9,261,000 (1994
- - $8,497,000; 1993 - $7,646,000) was charged to occupancy expense and
$35,187,000 (1994 - $30,157,000; 1993 - $20,889,000) was charged to equipment,
communications and other operating expenses. Occupancy expense is net of rental
income of $15,384,000 (1994 - $15,631,000; 1993 - $14,097,000).
F-49
68
- --------------------------------------------------------------------------------
NOTE 9 - DEPOSITS:
Total interest bearing deposits as of December 31, consist of:
1995 1994
----------------------
(In thousands)
Savings deposits:
Savings accounts ........................ $2,998,529 $2,851,096
NOW and money market accounts ........... 1,105,467 1,128,399
----------------------
4,103,996 3,979,495
----------------------
Certificates of deposit:
Under $100,000 .......................... 1,688,717 1,416,355
$100,000 and over ....................... 2,062,291 1,667,341
----------------------
3,751,008 3,083,696
----------------------
$7,855,004 $7,063,191
======================
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:
1995 1994 1993
--------------------------------------
(Dollars in thousands)
Federal funds purchased ...................................... $ 307,506 $ 332,700 $ 9,100
Securities sold under agreements to repurchase ............... 2,693,372 1,105,338 942,633
--------------------------------------
Total amount outstanding....................................... $3,000,878 $1,438,038 $ 951,733
=====================================
Maximum aggregate balance outstanding at any
month-end.................................................... $3,000,878 $1,444,148 $1,108,578
=====================================
Average aggregate balance outstanding.......................... $2,016,273 $1,120,762 $ 832,651
=====================================
Weighted average interest rate:
For the year................................................. 5.43% 3.81% 2.77%
At December 31 .............................................. 5.61 5.27 2.91
NOTE 11 - OTHER SHORT-TERM BORROWINGS:
Other short-term borrowings as of December 31, consist of:
1995 1994
--------------------
(In thousands)
Advances under revolving lines of credit amounting to $214,000,000 (1994 -
$224,000,000) with fixed interest rates ranging from 6.85% to 7.41%
(1994 - floating rates ranging from 5.25% to 6.38%). ............................................... $ 34,600 $153,100
Advances under revolving line of credit amounting to $293,000,000 with floating
interest rates ranging from 5.88% to 6.44%. ........................................................ 34,400
Term federal funds purchased with maturities until June 1995 at rates ranging
from 6.13% to 6.19%. ............................................................................... 175,000
Commercial paper with various maturities until June 1996 at rates ranging from
5.55% to 6.44% (1994 - 5.10% to 7.00%). ............................................................ 174,728 150,023
Term notes maturing in 1996, paying quarterly interest at 0.45% (1994 - 0.19%
to 0.63%) over the 3 month LIBOR rate (LIBOR rate at December 31, 1995
was 5.63%; 1994 - 6.50%). .......................................................................... 14,984 49,983
Term notes maturing in 1996, paying quarterly interest rates ranging from 0.10%
to 0.125% over the 3 month LIBOR rate (LIBOR rate at December 31, 1995
was 5.63%). ........................................................................................ 85,000
Term notes due in 1996 paying semiannual interest at fixed rates ranging from
5.17% to 7.70% (1994 - 5.25% to 7.85%) ........................................................... 84,946 24,994
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
Securities sold short ............................................................................... 25,444
Others .............................................................................................. 605 751
--------------------
$454,707 $573,841
====================
F-50
69
- --------------------------------------------------------------------------------
The weighted average interest rate of other short-term borrowings at
December 31, 1995 was 5.53% (1994 - 4.83%; 1993 - 3.40%). The maximum
aggregate balance outstanding at any month-end was approximately $773,366,000
(1994 - $869,505,000; 1993 - $695,314,000). The average aggregate balance
outstanding during the year was approximately $529,111,000 (1994 -
$738,005,000; 1993 -$527,523,000). The weighted average interest rate during
the year was 6.05% (1994 - 4.75%; 1993 - 3.66%).
NOTE 12 - NOTES PAYABLE:
Notes payable outstanding at December 31, consist of the following:
1995 1994
-----------------
(In thousands)
Term notes with maturities ranging from 1997 through 2003 paying
semiannual interest at fixed rates ranging from 5.33% to 8.41%
(1994 - 5.17% to 8.41%). .................................................. $367,492 $300,188
Term notes with maturities ranging from 1997 through 2000 paying quarterly
interest at rates ranging from 0.125% to 0.75% (1994 - 0.35% to 0.75%) over
the 3 month LIBOR rate and 3 month US Treasury Bill rate (LIBOR and
US Treasury Bill rates at December 31, 1995 were 5.63% and 5.08%;
1994 - 6.50% and 5.69%, respectively). .................................... 254,146 99,736
Promissory notes maturing in 1998 with fixed interest rates ranging from
4.51% to 5.50%. ........................................................... 83,700 59,500
Term notes maturing in 1998 paying monthly interest at LIBOR less 3 basis
points with a quarterly reset of the interest rate payable. ............... 25,000
Mortgage notes and other debt with varying rates and terms. ................ 90 100
------------------
$730,428 $459,524
==================
NOTE 13 - SENIOR DEBENTURES:
Senior debentures at December 31, 1995 consist of a $30,000,000 obligation
issued by the Corporation due in January 1997 with interest at a fixed rate of
8.25%.
The senior debentures contain various covenants which, among others,
restrict the payment of dividends. These debentures 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 ocurred
and is continuing.
NOTE 14 - SUBORDINATED NOTES:
Subordinated notes at December 31, consist of the following:
1995 1994
-----------------
(In thousands)
Subordinated notes issued by the Corporation on December 12, 1995, maturing
on December 15, 2005, with interest payable semi-annually at 6.75% ........ $125,000
-----------------
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
-----------------
$175,000 $50,000
=================
At December 31, 1995, the LIBID rate was 5.56% (1994 - 6.44%).
On September 27, 1995, the Corporation filed and had ordered effective a
"shelf" registration with the Securities and Exchange Commission which
registered $1 billion in either senior or subordinated notes, or shares of
preferred stock. Under this "shelf" registration, the Corporation issued
$125,000,000 in subordinated notes on December 12, 1995. These notes are
unsecured subordinated obligations which are subordinated in right of payment
to the prior payment in full of all present and future senior indebtedness of
the Corporation. These notes do not provide for any sinking fund.
F-51
70
- --------------------------------------------------------------------------------
The notes issued by Banco Popular 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 $7,143,000 during 1995 (1994 - $8,857,000 and 1993 -
$10,571,000) as a result of this requirement. In addition, during 1994 and
1993, $8,571,000 and $12,000,000 were transferred from capital reserves to
surplus upon prepayment of the 8.50% and 7.95% notes originally maturing in
1996 and 1994, respectively.
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)
1996 ....................... $ 12 $ 50,000 $ 50,012
1997 ....................... 327,135 $30,000 357,135
1998 ....................... 164,207 164,207
1999 ....................... 51,039 51,039
2000 ....................... 134,854 134,854
Later years ................ 53,181 125,000 178,181
---------------------------------------------
Total................... $730,428 $30,000 $175,000 $935,428
=============================================
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 at par value the 110,000 outstanding shares of
Treasury Indexed Preferred Stock Series A (TIPS).
NOTE 17 - STOCKHOLDERS' EQUITY:
The Corporation has a dividend reinvestment plan under which stockholders
may reinvest their quarterly dividends in shares of common stock at a 5%
discount from the market price at the time of issuance. During 1995, 110,508
shares (1994 - 105,706; 1993 - 77,559), equivalent to $3,500,000 (1994 -
$3,196,000; 1993 - $2,106,000) 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 in the open
market, at such times and prices as market conditions shall warrant, up to one
million shares of its outstanding common stock. No stock has been repurchased
under this program.
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 $25.00 per share, or
$0.173958 per share per month.
The Corporation's average number of common shares outstanding used in the
computation of net income per common share was 32,908,150 (1994 - 32,798,243;
1993 - 32,701,236). During the year cash dividends of $1.15 (1994 - $1.00 and
1993 - $0.90) per common share outstanding amounting to $37,846,000 (1994 -
$32,796,000 ; 1993 - $29,434,000) were declared. In addition, dividends
declared on preferred stock for the year amounted to $8,350,000 (1994 -
$4,245,000).
F-52
71
- --------------------------------------------------------------------------------
NOTE 18 - INTEREST ON INVESTMENTS:
Interest on investments consisted of the following:
1995 1994 1993
----------------------------------------
(In thousands)
Money market investments:
Federal funds sold and securities and mortgages
purchased under agreements to resell ............... $ 22,823 $ 4,858 $ 4,115
Time deposits with other banks ...................... 165 300 2,259
Other ............................................... 89 28 60
----------------------------------------
$ 23,077 $ 5,186 $ 6,434
========================================
Investment securities:
U.S. Treasury securities ............................ $167,657 $136,178 $163,209
Obligations of other U.S. Government agencies and
corporations ....................................... 35,697 29,088 14,622
Obligations of Puerto Rico, States and political sub-
divisions .......................................... 12,948 12,132 11,605
Collateralized mortgage obligations ................. 26,435 24,525 23,516
Mortgage-backed securities .......................... 10,892 9,485
Other ............................................... 6,312 3,203 2,992
----------------------------------------
$259,941 $214,611 $215,944
========================================
Interest income on investment securities for the year ended December 31,
1995 includes tax exempt interest of $202,209,000 (1994 - $175,795,000; 1993
- - $189,438,000).
NOTE 19 - EMPLOYEE BENEFITS:
All regular employees of Banco Popular 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, 1995, plan assets consist primarily
of U.S. Government obligations, high grade corporate bonds and listed stocks,
including 1,418,215 shares (1994 - 1,418,215) of the Corporation with a market
value of approximately $54,956,000 (1994 - $39,887,000). Dividends paid on
shares of the Corporation held by the plan during 1995 amounted to $1,560,000
(1994 - $1,418,000).
The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements at December 31:
1995 1994
---------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits ..................................... ($189,593) ($139,830)
Non-vested benefits ................................. (7,283) ( 5,994)
---------------------
Accumulated benefit obligation ...................... (196,876) (145,824)
Effect of projected future compensation levels ...... (33,578) (21,365)
---------------------
Projected benefit obligation ........................ (230,454) (167,189)
Plan assets at fair market value consisting primarily
of U.S. Government obligations, high grade
corporate bonds and listed stocks ................... 228,115 189,552
---------------------
Plan assets (less than) in excess of projected
benefit obligation .................................. (2,339) 22,363
Unrecognized net loss from past experience different
from that assumed and effect of changes in
assumptions ......................................... 26,673 10,710
Unrecognized prior service cost ...................... (2,866) (3,112)
Unrecognized initial net assets ...................... (23,007) (25,468)
---------------------
(Accrued) prepaid pension cost ....................... $ (1,539) $ 4,493
=====================
F-53
72
- --------------------------------------------------------------------------------
Net pension cost for the year ended December 31, included the following
components:
1995 1994 1993
------------------------------------------
(In thousands)
Service costs - benefits earned during the period .. $ 6,791 $ 8,359 $ 7,563
Interest cost on projected benefit obligation ...... 14,798 13,627 12,454
Actual (return) loss on plan assets ................ (48,665) 6,384 (15,404)
Net amortization and deferral ...................... 29,257 (27,066) (4,553)
------------------------------------------
Net pension costs ................................ 2,181 1,304 60
Cost of early retirement window .................... 3,851
------------------------------------------
Total pension cost ................................ $ 6,032 $ 1,304 $ 60
==========================================
At December 31, 1995, the discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.25% (1994 - 8.75%; 1993
- - 7.50%) and the rate of increase in future compensation levels was 4% plus a
merit component ranging from 0.5% to 4.5% (1994 - 4.5%; 1993 - 5.5%). The
expected long-term rate of return on assets used in the computation was 9% for
1995, 1994 and 1993.
In 1995, Banco Popular implemented a voluntary early retirement plan
(window) for employees meeting certain eligibility requirements. The plan was
available from January 1, 1995 until May 1, 1995 and had a total cost of
$4,539,000, which is included in the total pension and postretirement benefit
costs.
In addition, the Corporation provides defined contributory retirement and
savings plans pursuant to sections 165(e) and 401(k) of the Puerto Rico Tax
Code and the Internal Revenue Code, respectively, for substantially all the
employees of BP Capital, Equity One, Pioneer, Popular Consumer, Popular
Leasing, Popular Mortgage and Velco. Employer's contributions are determined
based on specific provisions of each plan. The cost of providing this benefit
in 1995 was $1,247,000 (1994 - $558,000; 1993 - $214,000).
The Corporation also established in 1995 a contributory savings plan
available to employees of Banco Popular. Employees are fully vested in the
employer's contribution after seven years of service. The Corporation's
matching contributions are invested in shares of the Corporation. Total savings
plan expense was $621,000 in 1995. The savings plan held 70,485 shares of
common stock of the Corporation with a market value of approximately $2,731,000
at December 31, 1995.
Effective January 1, 1995, the pension plan of Velco and Banco Popular's
subsidiaries, Popular Leasing and Popular Consumer was replaced by defined
contribution retirement and savings plans. 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 1995 amounted to approximately $2,152,000 (1994 - $2,072,000;
1993 - $1,770,000).
The components of net postretirement benefit cost for the year ended
December 31, are as follows:
1995 1994 1993
----------------------------
(In thousands)
Service costs - benefits attributable to service
during the period ............................... $2,658 $3,028 $2,054
Interest cost on accumulated postretirement
benefit obligation .............................. 5,435 4,277 3,163
Net amortization and deferral .................... 597 585
---------------------------
Net postretirement benefit cost ................. 8,690 7,890 5,217
Cost of early retirement window .................. 688
---------------------------
Total postretirement benefit cost ............... $9,378 $7,890 $5,217
===========================
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The status of the Corporation's unfunded postretirement benefit plan at
December 31, as follows:
1995 1994
--------------------
(In thousands)
Actuarial present value of expected postretirement
benefit obligation:
Retirees ......................................... ($23,419) ($21,470)
Fully eligible active plan participants .......... (16,507) (11,359)
Other active plan participants .................. (45,745) (31,592)
-------------------
Accumulated postretirement benefit obligation ...... (85,671) (64,421)
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions ....................................... 24,226 9,685
Unrecognized prior service cost .................... 5,811 6,246
-------------------
Accrued postretirement benefit cost ............... ($55,634) ($48,490)
===================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1995 was 7.25% (1994 -
8.75%).
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation at December 31, 1995 was 12%, gradually
decreasing to 5% by the year 2001 and remaining at that level thereafter. A
one-percentage point increase in the health care cost trend rate would increase
the accumulated postretirement benefit obligation as of December 31, 1995 by
$14,650,000 and the sum of the service and interest cost in 1995 by $1,421,000.
Banco Popular also has a profit sharing plan covering substantially all
regular employees. Annual contributions are determined based on the bank's
profitability ratios, as defined in the plan, and are deposited in trust.
Profit sharing expense for the year amounted to $19,577,000 (1994 -
$19,967,000; 1993 - $20,594,000). 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 in 1994 two new non-qualified plans: a
long-term incentive plan for senior management and a 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 amounts recognized in the consolidated
financial statements at December 31, for the benefit restoration plan:
1995 1994
------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits .................................... ($83) ($97)
Non-vested benefits ................................ (1) (24)
-----------------
Accumulated benefit obligation ..................... (84) (121)
Effect of projected future compensation levels ...... (1,130) (614)
-----------------
Projected benefit obligation ....................... (1,214) (735)
Unrecognized net loss (gain) from past experience
different from that assumed and effect of changes in
assumptions ........................................ 164 (136)
Unrecognized prior service cost ..................... 678 730
-----------------
Accrued pension cost ............................... ($372) ($141)
=================
Net supplementary pension cost for the year ended December 31, included
the following components:
1995 1994
-----------------
(In thousands)
Service costs - benefits earned during the period ... $109 $ 62
Interest cost on projected benefit obligation ....... 69 43
Net amortization and deferral ....................... 53 36
-----------------
Net pension cost ................................... $231 $141
=================
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NOTE 20 - RENTAL EXPENSE AND COMMITMENTS:
At December 31, 1995, 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)
1996 ................................... $ 10,990 $ 821 $ 10,169
1997 ................................... 9,542 792 8,750
1998 ................................... 8,354 663 7,691
1999 ................................... 7,267 477 6,790
2000 ................................... 6,219 350 5,869
Later years ............................. 32,990 1,741 31,249
-------------------------------------
$ 75,362 $4,844 $ 70,518
=====================================
Total rental expense for the year ended December 31, 1995 was
$18,037,000 (1994 - $16,705,000; 1993 - $14,480,000).
NOTE 21 - INCOME TAX
The Corporation provides for income taxes based on the provisions of SFAS
109, "Accounting for Income Taxes", since January 1, 1993. The cumulative
effect of the change in accounting for income taxes that resulted from the
adoption of SFAS 109, was reported in the Consolidated Statement of Income for
the year ended December 31, 1993.
According to SFAS 109, deferred income tax assets and liabilities are
computed for differences between financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the
future. The computation is based on enacted tax laws and rates applicable to
periods in which the temporary differences are expected to be recovered or
settled. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
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. The Act also repeals the reserve method for determining
losses on loans and requires the taxpayer to use the direct charge-off method
and recapture into income for tax purposes over a four-year period the reserve
balance at December 31, 1995. As a result, the Corporation will be required to
pay $14,835,000 annually over the next four years, and to recognize a deferred
tax asset for the temporary difference that will be created.
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities at December 31, are
as follows:
1995 1994
-------------------------------
(In thousands)
Deferred tax assets:
Alternative minimum tax credits
available for carryforward and
other credits......................... $26,613 $34,045
Net operating loss carryforwards
available............................. 1,418 129
Postretirement benefit obligation
(other than pensions) ............... 21,708 19,079
Other temporary differences ........... 16,745 15,867
-------------------------------
Total gross deferred tax assets ......... 66,484 69,120
-------------------------------
Deferred tax liabilities:
Differences between the assigned
values and the tax bases of the
assets and liabilities recognized in
purchase business combinations ....... 19,477 36,663
Other temporary differences ........... 13,049 5,439
-------------------------------
Total gross deferred tax liabilities ... 32,526 42,102
-------------------------------
Valuation allowance ..................... 1,788
-------------------------------
Net deferred tax asset ................. $32,170 $27,018
===============================
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At December 31, 1995, the Corporation had $684,000 in alternative minimum
tax (AMT) credits that can be carried forward indefinitely to reduce the
regular income tax liability in future years. The Corporation also had
$25,929,000 in other credits expiring in annual installments through year 2014
that will also reduce the regular income tax liability in future years. During
1995, the Corporation used AMT and other credits totaling $7,432,000 (1994 -
$16,126,000) to reduce its regular tax liability. The Corporation also had, at
the end of 1995, $3,636,000 in net operating losses (NOL) available to carry
over to offset taxable income in future years. These NOLs are available to
carryforward until year 2000. During 1995, the Corporation used NOL
carryforwards amounting to $308,000 to reduce its regular taxable income.
Other temporary differences included as deferred assets are mainly due to the
temporary differences arising from the deferral of loan origination costs and
commissions as required by SFAS 91.
In accordance with SFAS 109, a deferred tax liability was created on
differences between the assigned values and the tax bases of assets and
liabilities related with purchase business combinations and for other temporary
differences.
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. Until December 31, 1995, dividends received by the
Corporation from its subsidiaries (net of an 85% dividend received deduction
allowed by the former Puerto Rico Income Tax Law) were subject to Puerto Rico
income tax at the normal corporate tax rates. Technical amendments to the
Puerto Rico Income Tax Reform provide a 100% dividend received deduction,
effective on January 1, 1996. In 1994 and 1993, the Corporation did not
recognize a deferred tax liability on the unremitted earnings of domestic
subsidiaries since the Puerto Rico Income Tax Law provided certain alternatives
to remit those earnings to the Corporation on a tax-free basis.
A valuation allowance of $1,788,000 is reflected in 1995, related to
deferred tax assets arising from NOL carryforwards and temporary differences
for which the Corporation could not determine the likelihood of its
realizability. Based on the information available, the Corporation expects to
fully realize all other items comprising the net deferred tax as of December
31, 1995.
The components of income tax expense for the years ended December 31, are
summarized below. Included in these amounts are income taxes related to the
gain on securities transactions of $1,981,000 in 1995 (1994 - $64,000; 1993 -
$363,000).
1995 1994 1993
-----------------------------------------
(In thousands)
Current income tax expense:
Puerto Rico ........................... $58,067 $31,461 $20,031
Federal and States ................... 9,624 6,235 2,987
-----------------------------------------
Subtotal ........................... 67,691 37,696 23,018
-----------------------------------------
Deferred income tax expense (benefit):
Puerto Rico ........................... (9,501) 11,606 6,090
Federal and States ................... 1,006 (759) (957)
Adjustment for enacted changes in
income tax laws ..................... 573 1,500
----------------------------------------
Subtotal ........................... (7,922) 12,347 5,133
----------------------------------------
Total income tax expense ............. $59,769 $50,043 $28,151
========================================
The reasons for the difference between the income tax expense applicable to
income before provision for income taxes and the amount computed by applying
the statutory rate were as follows:
1995 1994 1993
------------------------------------------------------------------------
% of pre-tax % of pre-tax % of pre-tax
Amount income Amount income Amount income
------------------------------------------------------------------------
(Dollars in thousands)
Computed income tax at statutory rate ..... $86,574 42% $73,574 42% $55,499 42%
Benefits of net tax exempt interest income. (24,604) (12) (25,297) (14) (30,852) (23)
Federal and States taxes ................. 10,630 5 5,476 3 2,230 1
Others ................................... (12,831) (6) (3,710) (2) 1,274 1
-----------------------------------------------------------------------
Income tax expense ....................... $59,769 29% $50,043 29% $28,151 21%
=======================================================================
The statutory rate of 42% is the actual rate for most of the
Corporation's income before income tax. Other statutory rates range from 35%
to 42%. The provision for income tax has been reduced principally 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.
F-57
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The Corporation's federal income tax provision for 1995 was $9,265,000
(1994 - $4,297,000, 1993 -$2,230,000).
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, futures contracts, options on futures 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 these 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:
1995 1994
-------------------------
(In thousands)
Commitments to extend credit:
Credit card lines ..................... $ 846,732 $ 741,145
Commercial lines of credit ............. 1,105,219 1,122,125
Home equity lines ..................... 11,898
Commercial letters of credit ........... 19,012 13,353
Standby letters of credit ............... 119,983 76,876
Commitments to purchase consumer loans ... 69,539
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
creditworthiness. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterpart. Collateral held
varies but may include cash, 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.
The Corporation entered into a commitment to purchase up to $100,000,000 of
auto loans from another institution on or before December 31, 1996. The
purchased auto loans will continue to be serviced by the originating
institution. Approximately every five months, the purchased auto loans will be
sold by the Corporation to a grantor trust. As of December 31, 1995,
outstanding loans totalled $30,461,000 and are classified as loans
held-for-sale.
A geographic concentration exists within the Corporation's loan portfolio
since most of its business activity is with customers located in Puerto Rico.
As of December 31, 1995, 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.
F-58
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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, 1995 and 1994,
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 Consolidated
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, 1995, was
$124,877,000 (1994 - $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, credit cards, 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. 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.
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 with fair value equal to
carrying value.
F-59
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1995 1994
---------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
---------------------------------------------------------------
(In thousands)
Commercial ................... $3,210,975 $3,216,906 $2,893,534 $2,794,659
Construction ................. 209,891 205,525 161,265 160,616
Lease financing .............. 498,750 498,750 448,236 448,236
Mortgage ..................... 2,320,786 2,350,543 2,167,467 2,092,390
Consumer
(including credit cards) ..... 2,324,276 2,264,492 2,100,531 2,048,821
Less: Allowance for
loan losses ............ 168,393 153,798
--------------------------------------------------------------
$8,396,285 $8,536,216 $7,617,235 $7,544,722
==============================================================
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, 1995 and 1994, comprised 62% and 65.8% 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, 1995 and 1994, respectively, for
deposits with similar remaining maturities.
1995 1994
----------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
----------------------------------------------------------------
(In thousands)
Non interest bearing deposits .. $2,021,658 $2,021,658 $1,949,244 $1,949,244
Savings accounts ............... 2,998,529 2,998,529 2,851,096 2,851,096
NOW and money market
accounts ...................... 1,105,467 1,105,467 1,128,399 1,128,399
Certificates of deposit ........ 3,751,008 3,795,430 3,083,696 3,083,253
--------------------------------------------------------------
$9,876,662 $9,921,084 $9,012,435 $9,011,992
==============================================================
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, 1995 and 1994,
respectively. Included within other short-term borrowings at December 31, 1995,
are $174,728,000 (1994 - $150,023,000) 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.
1995 1994
------------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
------------------------------------------------------------------
(In thousands)
Other short-term borrowings .. $454,707 $454,738 $573,841 $573,514
Notes payable ................ 730,428 737,662 459,524 432,957
Senior debentures ............ 30,000 29,686 30,000 29,766
Subordinated notes ........... 175,000 174,004 50,000 49,946
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, 1995,
the Corporation had $1,963,849,000 and $138,995,000 in commitments to extend
credit and letters of credit, respectively (1994 - $1,863,270,000 and
$90,229,000). The estimated fair value of these financial instruments with no
carrying value was $10,778,000 (1994 - $4,859,000).
F-60
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NOTE 24 - RISK MANAGEMENT AND TRADING 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 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. At December
31, 1995, securities sold short of $25,444,000 were used to hedge $30,461,000
of auto loans held-for-sale. At December 31, 1995, 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. The following table
indicates the types of derivative financial instruments the Corporation had at
December 31:
1995 1994
---------------------------------------------------------------
Notional Average for Fair Notional Average for Fair
amount the year value amount the year value
---------------------------------------------------------------
(In thousands) (In thousands)
Interest rate swaps:
Pay floating/receive fixed ..... $10,000 $10,000 $43
Pay fixed/receive floating ..... 115,000 53,300 (1,261) $10,000 $11,667 $34
Interest rate futures ........... 1,528
Interest rate options and caps .. 13,250 20,000 23,958 44
Interest rate swaptions ......... 9,889 9,324 2,572 8,128 7,288 973
Foreign exchange contracts ...... 963 484 500 718
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, 1995, from derivative
financial instruments held or issued for other than 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 ongoing 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.
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, 1995, the Corporation had
several interest rate swap agreements having a total notional amount of
$125,000,000. These agreements were done with commercial banks to change the
Corporation's interest rate exposure and they end at the time the related
obligation matures. The expected weighted average interest rates to be received
and paid from these interest rate swaps range from 5.81% to 6.72% and 5.69% to
6.53%, respectively. The variable rates are based on the three-month and
six-month LIBOR rates. 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.
F-61
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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.
Interest rate swaptions
The Corporation enters into "swaption" derivative securities, which
combine the characteristics of interest rate swaps and options, for hedging
purposes. Banco Popular 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. These swaptions 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 futures contracts
to purchase or sell currencies at a future date settle over periods 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 the purchase of debt securities
for the purpose of selling them in the near term 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 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 contract amounts of forwards, futures and options written for trading
purposes were $9,900,000, $16,416,000 and $11,692,000, respectively, at
December 31, 1995. The following table indicates the fair value and net gains
(losses) of derivatives financial instruments held for trading purposes:
F-62
81
- --------------------------------------------------------------------------------
Fair value
--------------------------------------------------------------------
At December 31, 1995 Average for the period Net gains
Assets Liabilities Assets Liabilities (losses)
--------------------------------------------------------------------
(In thousands)
Forward and futures
contracts ......... $0 $680 $ 0 $349 ($2,429)
Options ........... 0 45 68 139 2,393
The Corporation's credit exposure from off-balance sheet derivative
financial instruments held or issued for trading purposes is represented by the
fair value of the instruments with a positive fair value at that date.
NOTE 25 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS:
During the year ended December 31, 1995, the Corporation and its
subsidiaries paid interest and income taxes amounting to $515,960,000 and
$42,383,000, respectively (1994 - $339,329,000 and $27,052,000; 1993 -
$279,618,000 and $26,690,000). In addition, loans transferred to other real
estate and other property for the year ended December 31, 1995, amounted to
$10,188,000 and $3,792,000, respectively (1994 - $4,378,000 and $3,173,000). In
December 1995, the Corporation transferred $1,323,000,000 from securities
held-to-maturity to securities available-for-sale.
NOTE 26 - CONTINGENT LIABILITIES:
The Corporation is a defendant in a number of legal proceedings arising in
the normal course of business. Management believes, based on the opinion of
legal counsel, that the final disposition of these matters will not have a
material adverse effect on the Corporation's financial position or results of
operations.
NOTE 27 - 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, 1995 and 1994 and the
results of its operations and its cash flows for the three years ended December
31, 1995.
F-63
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- ---------------------------------------------------------------------------------------------------
STATEMENTS OF CONDITION
December 31,
------------------------------------
1995 1994
------------------------------------
(In thousands)
ASSETS
Cash ........................................................ $ 213 $ 499
Money market investments .................................... 7,460 8,041
Investment securities held-to-maturity, at cost (market value
in 1994 - $48,125) ......................................... 50,106
Investment securities available-for-sale, at market value ... 69,816 3,768
Investment in Banco Popular, at equity ...................... 896,427 817,750
Investment in Pioneer Bancorp, at equity .................... 38,531 33,113
Investment in Banco Popular, FSB, at equity ................. 103,688
Investment in other subsidiaries, at equity ................. 46,703 112,992
Advances to subsidiaries .................................... 533,317 159,270
Premises and equipment ...................................... 40,793
Other assets ................................................ 2,434 1,271
------------------------------------
Total assets ............................................... $1,739,382 $1,186,810
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase .............. $ 52,275 $ 9,850
Commercial paper ............................................ 174,728 132,794
Other short-term borrowings ................................. 34,400
Notes payable ............................................... 162,500
Senior debentures ........................................... 30,000 30,000
Accrued expenses and other liabilities ...................... 18,782 11,743
Subordinated notes .......................................... 125,000
Stockholders' equity ........................................ 1,141,697 1,002,423
------------------------------------
Total liabilities and stockholders' equity ................. $1,739,382 $1,186,810
====================================
STATEMENTS OF INCOME
Year ended December 31,
-------------------------------------------
1995 1994 1993
-------------------------------------------
(In thousands)
Income:
Dividends from Banco Popular ................................... $ 76,600 $ 32,189 $ 16,000
Interest on money market and investment securities ............. 3,897 1,606 269
Other operating income ......................................... 676 7
Interest on advances to subsidiaries ........................... 26,258 11,750 10,091
-------------------------------------------
Total income .................................................. 107,431 45,552 26,360
-------------------------------------------
Expenses:
Interest expense ............................................... 25,824 8,530 6,464
Operating expenses ............................................. 424 349
-------------------------------------------
Total expenses ................................................ 25,824 8,954 6,813
-------------------------------------------
Income before income taxes and equity in undistributed
earnings of subsidiaries ....................................... 81,607 36,598 19,547
Income taxes .................................................... 6,787 3,484 3,546
-------------------------------------------
Income before equity in undistributed earnings of subsidiaries .. 74,820 33,114 16,001
Equity in undistributed earnings of subsidiaries ................ 71,541 91,635 93,403
-------------------------------------------
Net income .................................................... $146,361 $124,749 $109,404
===========================================
F-64
83
- -----------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------------------
1995 1994 1993
---------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income ................................................ $146,361 $124,749 $109,404
---------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries ....... (71,541) (91,635) (93,403)
Dividend in kind received from a subsidiary ............ (41,600)
Depreciation of premises and equipment ................. 829
Amortization of premiums and accretion of discounts on
investments ........................................... 23
Net (increase) decrease in other assets ................ (1,163) (1,087) 417
Net increase in other liabilities ...................... 5,363 157 2,075
---------------------------------------------
Total adjustments ................................. (108,089) (92,565) (90,911)
---------------------------------------------
Net cash provided by operating activities ......... 38,272 32,184 18,493
---------------------------------------------
Cash flows from investing activities:
Net decrease in money market investments .................. 581 426 30,681
Purchases of investment securities held-to-maturity (50,106)
Purchases of investment securities available-for-sale (14,178) (2,768)
Capital contribution to subsidiaries ......................... (16,130) (78,314)
Advances to subsidiaries ..................................... (374,047) (26,995) (64,508)
Acquisition of premises and equipment ........................ (22)
---------------------------------------------
Net cash used in investing activities ................ (403,796) (157,757) (33,827)
---------------------------------------------
Cash flows from financing activities:
Net increase in securities sold under agreements to repurchase 42,425 9,850
Net increase in commercial paper ............................. 41,934 52,493 40,396
Net increase in other short-term borrowings .................. 34,400
Net increase in notes payable ................................ 162,500
Cash dividends paid .......................................... (44,521) (37,016) (27,781)
Proceeds from issuance of subordinated notes ................. 125,000
Proceeds from issuance of preferred stock .................... 96,690
Proceeds from issuance of common stock ....................... 3,500 3,196 2,106
---------------------------------------------
Net cash provided by financing activities ............ 365,238 125,213 14,721
---------------------------------------------
Net decrease in cash ......................................... (286) (360) (613)
Cash at beginning of period .................................. 499 859 1,472
---------------------------------------------
Cash at end of period ........................................ $ 213 $ 499 $ 859
=============================================
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.
NOTE 28 - 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, 1995 and 1994, and the results of their operations, cash flows
and changes in stockholder's equity for the three years ended November 30,
1995. Popular International Bank, Inc., is the holding company of BanPonce
Financial Corp., including Pioneer Bancorp, Inc. and Banco Popular, FSB
(second-tier subsidiaries) and its wholly-owned subsidiary Equity One, Inc.
F-65
84
- --------------------------------------------------------------------------------------
STATEMENTS OF CONDITION
November 30,
----------------------
1995 1994
----------------------
(In thousands)
ASSETS
Cash ........................................................ $ 25,052 $ 30,084
----------------------
Money market investments .................................... 20,840 24,329
----------------------
Investment securities available-for-sale, at market value ... 270,262 126,760
----------------------
Loans held-for-sale ......................................... 23,555 10,296
----------------------
Loans ....................................................... 1,158,513 860,819
Less: Unearned income ...................................... 43,375 33,584
Allowance for loan losses ............................ 16,242 12,082
----------------------
1,098,896 815,153
----------------------
Other assets ................................................ 35,488 21,262
Intangible assets ........................................... 30,340 16,352
----------------------
Total assets .......................................... $1,504,433 $1,044,236
======================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Non-interest bearing ...................................... $55,730 $ 47,002
Interest bearing .......................................... 494,096 278,800
----------------------
549,826 325,802
----------------------
Federal funds purchased and securities
sold under agreements to repurchase ................... 4,035 13,000
Other short-term borrowings, consisting of $99,930 term notes
(1994 - $85,000), a $10,000 note with the Federal Home
Loan Bank (FHLB) in 1994 (Note 11) and a revolving
credit facility with an affiliate of $40,000
(1994 - $69,800) ...................................... 139,930 164,800
Notes payable (Note 12) ..................................... 634,139 399,924
Other liabilities ........................................... 37,368 25,780
Stockholder's equity ........................................ 139,135 114,930
----------------------
Total liabilities and stockholder's equity ........... $1,504,433 $1,044,236
======================
STATEMENTS OF INCOME
Year ended November 30,
---------------------------------
1995 1994 1993
---------------------------------
(In thousands)
Interest and fees:
Interest and fees on loans ......................... $101,442 $66,487 $33,684
Money market and investment securities.............. 18,948 5,721 239
---------------------------------
120,390 72,208 33,923
---------------------------------
Interest expense:
Deposits ........................................... 21,225 8,091
Short-term borrowings .............................. 6,595 9,707 4,643
Long-term borrowings ............................... 39,847 18,060 9,531
---------------------------------
67,667 35,858 14,174
---------------------------------
Net interest income .................................. 52,723 36,350 19,749
Provision for loan losses ............................ 8,651 6,973 4,574
---------------------------------
Net interest income after provision for loan losses .. 44,072 29,377 15,175
Service charges on deposit accounts .................. 1,844 768
Other service fees ................................... 3,813 2,834 1,945
Gain on sale of securities ........................... 6,239
Other operating income ............................... 6,738 3,614
---------------------------------
62,706 36,593 17,120
---------------------------------
Operating expenses ................................... 35,782 23,149 12,067
---------------------------------
Income before income tax ............................. 26,924 13,444 5,053
Income tax ........................................... 10,629 5,477 2,199
---------------------------------
Net income ........................................... $ 16,295 $ 7,967 $ 2,854
=================================
F-66
85
- --------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended November 30,
-----------------------------------
1995 1994 1993
-----------------------------------
(In thousands)
Cash flows from operating activities:
Net income ...................................................... $ 16,295 $ 7,967 $ 2,854
-----------------------------------
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of premises and equipment ....... 1,136 719 151
Provision for loan losses ..................................... 8,651 6,973 4,574
Amortization of intangibles ................................... 3,321 1,524 1,037
Amortization of deferred loan fees and costs .................. 6,467 4,701 2,072
Amortization of premiums and accretion of discounts on
investments .................................................. 446
Gain on sale of investment securities available-for-sale ...... (6,239)
Net increase in interest receivable ........................... (5,375) (1,954) (853)
Net increase in other assets .................................. (5,046) (319) (1,167)
Net increase in other liabilities ............................. 7,509 8,111 5,330
-----------------------------------
Total adjustments ...................................... 10,870 19,755 11,144
-----------------------------------
Net cash provided by operating activities .............. 27,165 27,722 13,998
-----------------------------------
Cash flows from investing activities:
Net decrease (increase) in money market investments ............. 3,489 (14,980) 8,647
Purchases of investment securities available-for-sale ........... (358,811) (52,324)
Sale of investment securities available-for-sale ................ 183,091 36,833
Maturities of investment securities available-for-sale .......... 50,000
Net disbursements on loans ...................................... (357,540) (392,454) (198,466)
Proceeds from sale of loans ..................................... 63,479 104,367
Acquisition of loan portfolios .................................. (18,059)
Assets acquired, net of cash .................................... (17,557)
Acquisition of premises and equipment ........................... (4,941) (1,964) (283)
-----------------------------------
Net cash used in investing activities .................. (439,292) (338,079) (190,102)
-----------------------------------
Cash flows from financing activities:
Net increase in deposits ........................................ 43,211 33,097
Net deposits acquired ........................................... 163,504
Net (decrease) increase in federal funds purchased and securities
sold under agreements to repurchase ........................... (8,965) 8,000
Net (decrease) increase in other short-term borrowings .......... (24,870) 38,523 46,940
Proceeds from issuance of notes payable ......................... 234,215 175,762 134,384
Capital contribution from Parent company ........................ 78,164
-----------------------------------
Net cash provided by financing activities .............. 407,095 333,546 181,324
-----------------------------------
Net (decrease) increase in cash and due from banks ............... (5,032) 23,189 5,220
Cash and due from banks at beginning of year ..................... 30,084 6,895 1,675
-----------------------------------
Cash and due from banks at end of year ........................... $ 25,052 $ 30,084 $ 6,895
===================================
F-67
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- --------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
Year ended November 30,
--------------------------------------
1995 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 (1993 - 620,000)
Balance at beginning of the period ............................ $ 3,350 $ 3,100 $ 3,100
Issuance of common stock ...................................... 250
--------------------------------------
Balance at end of the period .................................. 3,350 3,350 3,100
--------------------------------------
Additional paid-in capital:
Balance at beginning of the period ............................ 103,114 25,200 25,200
Issuance of common stock ...................................... 49,750
Capital contribution from Parent company ...................... 28,164
--------------------------------------
Balance at end of the period .................................. 103,114 103,114 25,200
--------------------------------------
Retained earnings:
Balance at beginning of the period ............................ 10,939 2,972 118
Net income .................................................... 16,295 7,967 2,854
--------------------------------------
Balance at end of the period .................................. 27,234 10,939 2,972
--------------------------------------
Unrealized holding gains (losses) on investment securities
available-for-sale, net of deferred taxes:
Balance at beginning of the period ............................ (2,473)
Unrealized holding losses on adoption of change in
accounting for investment securities, net of deferred taxes .. (736)
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes .................... 7,910 (1,737)
--------------------------------------
Balance at end of period ...................................... 5,437 (2,473)
--------------------------------------
Total stockholder's equity ................................... $139,135 $114,930 $ 31,272
======================================
NOTE 29 - 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 Banco
Popular, FSB, including its wholly-owned subsidiary Equity One, Inc., and
Pioneer Bancorp, Inc.(second tier subsidiaries) as of November 30, 1995 and
1994, and the results of their operations, cash flows and changes in
stockholder's equity for the three years ended November 30, 1995 (the financial
information of Banco Popular, FSB and Pioneer Bancorp, Inc. are only included
since its inception on January 23, 1995 and its acquisition effective March 31,
1994, respectively).
F-68
87
- --------------------------------------------------------------------------------------------------
STATEMENTS OF CONDITION
November 30,
----------------------------
1995 1994
----------------------------
(In thousands)
ASSETS
Cash and due from banks ......................................... $ 25,012 $ 30,026
--------------------------
Money market investments ........................................ 19,819 23,294
--------------------------
Investment securities available-for-sale, at market value ....... 270,262 126,760
--------------------------
Loans held-for-sale ............................................. 23,555 10,296
--------------------------
Loans ........................................................... 1,158,513 860,819
Less: Unearned income ......................................... 43,375 33,584
Allowance for loan losses ............................... 16,242 12,082
-------------------------
1,098,896 815,153
-------------------------
Other assets .................................................... 35,370 21,256
Intangible assets ............................................... 30,340 16,352
--------------------------
Total assets ............................................. $1,503,254 $1,043,137
==========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Non-interest bearing .......................................... $ 55,730 $ 47,002
Interest bearing .............................................. 494,096 278,800
--------------------------
549,826 325,802
Federal funds purchased and securities sold under agreements --------------------------
to repurchase ................................................. 4,035 13,000
Other short-term borrowings, consisting of $99,930 term notes
(1994 - $85,000), a $10,000 note with the Federal
Home Loan Bank (FHLB) for 1994 (Note 11) and a revolving
credit facility with an affiliate of $40,000 (1994 - $69,800) 139,930 164,800
Notes payable (Note 12) ......................................... 634,139 399,924
Other liabilities ............................................... 37,343 25,779
Stockholder's equity ............................................ 137,981 113,832
--------------------------
Total liabilities and stockholder's equity ............... $1,503,254 $1,043,137
==========================
STATEMENTS OF INCOME
Year ended November 30,
--------------------------------------
1995 1994 1993
--------------------------------------
(In thousands)
Interest and fees:
Loans .............................................. $101,442 $ 66,486 $33,684
Money market and investment securities ............. 18,888 5,683 205
---------------------------------------
120,330 72,169 33,889
Interest expense:
Deposits ........................................... 21,225 8,091
Short-term borrowings .............................. 6,595 9,707 4,643
Long-term borrowings ............................... 39,847 18,060 9,531
---------------------------------------
67,667 35,858 14,174
---------------------------------------
Net interest income .................................. 52,663 36,311 19,715
Provision for loan losses ............................ 8,651 6,973 4,574
---------------------------------------
Net interest income after provision for loan losses .. 44,012 29,338 15,141
Service charges on deposit accounts .................. 1,844 768
Other service fees ................................... 3,813 2,834 1,945
Gain on sale of securities ........................... 6,239
Other operating income ............................... 6,738 3,614
---------------------------------------
62,646 36,554 17,086
---------------------------------------
Operating expenses ................................... 35,778 23,144 11,797
---------------------------------------
Income before tax .................................... 26,868 13,410 5,289
Income tax ........................................... 10,629 5,477 2,199
---------------------------------------
Net income ........................................... $ 16,239 $ 7,933 $ 3,090
=======================================
F-69
88
- -------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended November 30,
--------------------------------------------
1995 1994 1993
--------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income ....................................................... $ 16,239 $ 7,933 $ 3,090
-------------------------------------------
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of premises and equipment ........ 1,136 719 151
Provision for loan losses ...................................... 8,651 6,973 4,574
Amortization of intangibles .................................... 3,321 1,524 1,037
Amortization of deferred loan fees and costs ................... 6,467 4,701 2,072
Amortization of premiums and accretion of discounts on
investments .................................................. 446
Gain on sale of investment securities available-for-sale ....... (6,239)
Net increase in interest receivable ............................ (5,368) (1,954) (853)
Net increase in other assets ................................... (4,940) (350) (1,159)
Net increase in other liabilities .............................. 7,483 8,111 5,357
-------------------------------------------
Total adjustments .......................................... 10,957 19,724 11,179
-------------------------------------------
Net cash provided by operating activities .................. 27,196 27,657 14,269
-------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in money market investments .............. 3,476 (14,968) 8,371
Purchases of investment securities available-for-sale ............ (358,811) (52,324)
Sale of investment securities available-for-sale ................. 183,091 36,833
Maturities of investment securities available-for-sale ........... 50,000
Net disbursements on loans ....................................... (357,540) (392,454) (198,466)
Proceeds from sale of loans ...................................... 63,479 104,367
Acquisition of loan portfolios ................................... (18,059)
Assets acquired, net of cash ..................................... (17,557)
Acquisition of premises and equipment ............................ (4,941) (1,964) (283)
-------------------------------------------
Net cash used in investing activities ...................... (439,305) (338,067) (190,378)
-------------------------------------------
Cash flows from financing activities:
Net increase in deposits ......................................... 43,211 33,097
Net deposits acquired ............................................ 163,504
Net (decrease) increase in federal funds purchased and securities
sold under agreements to repurchase ............................ (8,965) 8,000
Net (decrease) increase in other short-term borrowings ........... (24,870) 38,523 46,940
Proceeds from issuance of notes payable .......................... 234,215 175,762 134,384
Capital contribution from Parent company ......................... 78,164
-------------------------------------------
Net cash provided by financing activities ................. 407,095 333,546 181,324
-------------------------------------------
Net (decrease) increase in cash and due from banks .. (5,014) 23,136 5,215
Cash and due from banks at beginning of period ..... 30,026 6,890 1,675
-------------------------------------------
Cash and due from banks at end of period ........... $ 25,012 $ 30,026 $ 6,890
===========================================
F-70
89
- ------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
Year ended November 30,
--------------------------------------
1995 1994 1993
--------------------------------------
(In thousands)
Preferred Stock:
Par value $0.1; authorized 10,000,000 shares, none issued
Common Stock:
Par value $1; authorized 10,000 shares, 2,000 shares issued
and outstanding
Balance at beginning of the period ............................ $ 2
Issuance of common stock ...................................... $ 2
--------------------------------------
Balance at end of the period .................................. 2 2
--------------------------------------
Additional paid-in capital:
Balance at beginning of the period ............................ 105,163 27,000 $27,000
Issuance of common stock ...................................... 49,999
Capital contribution from parent company ...................... 28,164
-------------------------------------
Balance at end of the period .................................. 105,163 105,163 27,000
-------------------------------------
Retained earnings:
Balance at beginning of the period ............................ 11,140 3,207 117
Net income .................................................... 16,239 7,933 3,090
-------------------------------------
Balance at end of the period ................................. 27,379 11,140 3,207
-------------------------------------
Unrealized holding gains (losses) on investment securities
available-for-sale, net of deferred taxes:
Balance at beginning of the period ............................ (2,473)
Unrealized holding losses on adoption of change in
accounting for investment securities, net of deferred taxes .. (736)
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes .................... 7,910 (1,737)
--------------------------------------
Balance at end of period ...................................... 5,437 (2,473)
--------------------------------------
Total stockholder's equity ............................... $137,981 $113,832 $30,207
======================================
F-71