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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 [NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996]
For the Fiscal Year Ended December 31, 1996
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: (787) 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 28, 1997 the Corporation had 66,121,855 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates of the Corporation was $2,380,387,000 based upon the reported
closing price of $36.00 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, 1996 are incorporated herein by reference in
response to Item 1 of Part I.
(2) Portions of the Corporation's Proxy Statement relating to the 1997
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
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Item 1 Business.................................................... 3
Item 2 Properties.................................................. 10
Item 3 Legal Proceedings........................................... 11
Item 4 Submission of Matters to a Vote of Security Holders......... 11
PART II
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Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters....................................... 11
Item 6 Selected Financial Data..................................... 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 12
Item 8 Financial Statements and Supplementary Data................. 13
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 13
PART III
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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
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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" or the "Bank"), 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, was incorporated over 100 years ago
in 1893 and is Puerto Rico's largest bank with total assets of $14.0 billion,
deposits of $10.1 billion and stockholder's equity of $1.0 billion at December
31, 1996. The Bank accounted for 84% of the total consolidated assets of the
Corporation at December 31, 1996. The Bank is a full-service commercial bank,
and Puerto Rico's largest banking institution with a delivery system of 178
branches and 327 automated teller machines on the island. The Bank also has the
largest trust operation in Puerto Rico and is the largest servicer of mortgage
loans for investors. In addition, it operates the largest Hispanic bank branch
network in the mainland United States with 29 branches in New York and an agency
in Chicago. As of December 31, 1996, these branches had a total of approximately
$1.5 billion in deposits. The Bank also operates seven branches in the U.S.
Virgin Islands and one branch in the British Virgin Islands. The Bank 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"). In addition, Banco Popular has three subsidiaries, Popular Leasing &
Rental, Inc., Puerto Rico's largest vehicle leasing and daily rental company,
Popular Consumer Services, Inc., a small-loan and secondary mortgage company
with 35 offices in Puerto Rico operating under the name of Best Finance, and
Popular Mortgage, Inc., a mortgage loan company with four offices in Puerto Rico
operating under the name of Puerto Rico Home Mortgage. BP Capital Markets, Inc.
is a direct subsidiary of the Corporation engaged in the business of securities
broker-dealer in Puerto Rico, with institutional brokerage, financial advisory,
and investment 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 of 1956, which through its
wholly-owned subsidiary River Associates, Bancorp, Inc., a Delaware corporation,
owns and operates Banco Popular, Illinois (formerly Pioneer Bank & Trust
Company) a bank organized under the laws of the State of Illinois with five
branches in that state. The deposits of Banco Popular, Illinois are insured by
the FDIC. As of December 31, 1996 the assets of Banco Popular, Illinois were
$467.4 million and its deposits were $375.3 million.
Financial is also the direct owner of all the common stock 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 and it is subject to the supervision of the
Office of Thrift Supervision. As a result of the ownership of Banco Popular,
FSB, the Corporation has become a registered savings and loan holding company
under the Home Owners' Loan Act.
Banco Popular, FSB owns Equity One, Inc., a Delaware corporation
(formerly Spring Financial Services, Inc.) ("Equity One"). Equity One is a
diversified consumer finance company engaged in the business of granting
personal and mortgage loans and providing dealer financing through 102 offices
in 28 states with total assets of $1.1 billion as of December 31, 1996. Equity
One had initially been acquired by Financial on September 30, 1991, prior to
which time Financial had no significant business operations.
On September 30, 1996, Financial acquired all of the common stock of
CombanCorp, a corporation organized under the laws of California and
headquartered in Los Angeles, and a registered bank holding company under the
BHC Act. CombanCorp owns Banco Popular, National Association (California)
("Banco Popular, N.A. (California)"), a national bank with four branches in
California. The deposits of Banco Popular, N.A. (California) are also insured by
the FDIC and it is subject to the supervision of the Office of the Comptroller
of the Currency. As of December 31, 1996, it had assets of $139.5 million and
deposits of $100.9 million.
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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.
The Corporation's business is described on pages 10 through 29 of the
Business Review Section of the Annual Report to Shareholders for the year ended
December 31, 1996, 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, in the United States 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 or agency that is located outside of its "home
state", except that a national bank with the same home state is permitted to do
so as described under "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, Banco Popular, Illinois, Banco Popular, N.A.
(California) 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 Banco Popular, Illinois,
the FDIC and the Illinois Commissioner of Banks and Trust Companies, in the case
of Banco Popular, N.A. (California), the Office of the Comptroller of the
Currency (the "OCC") and in the case of Banco Popular, FSB, the Office of Thrift
Supervision (the "OTS") and the FDIC. Banco Popular, Banco Popular, Illinois,
Banco Popular, N.A. (California) and Banco Popular, FSB are subject to
requirements and restrictions under federal and state law, including
requirements to maintain reserves against 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, Banco Popular, Illinois, Banco
Popular, N.A. (California) 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". 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
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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 is indicated by its actual capital position if it receives a less
than satisfactory examination rating in any one of four categories.
At December 31, 1996, Banco Popular, Banco Popular, Illinois, and Banco
Popular, FSB were well capitalized. At the same date Banco Popular, N.A.
(California) was adequately capitalized. At the end of February 1997, after
receiving an additional capital contribution of one million from Financial,
Banco Popular, N.A. (California) was well capitalized.
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
voting 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, Banco Popular, Illinois, Banco Popular, N.A.
(California) 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, Banco Popular, Illinois, Banco Popular, N.A.
(California) or Banco Popular, FSB, respectively, to the Corporation,
Financial, or PIB, as the case may be, or to any one non-banking subsidiary,
are limited in amount to 10% of the transferring institution's capital stock
and surplus and, with respect to the Corporation and all of its non-banking
subsidiaries, to an aggregate of 20% of the transferring institution's capital
stock and surplus. Furthermore, such loans and extensions of credit are
required to be secured in specified amounts.
Under the Federal Reserve Board policy, a bank holding company such as
the Corporation, is expected to act as a source of financial strength to each of
its subsidiary banks and to commit resources to support each 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, Banco Popular, Illinois,
Banco Popular, N.A. (California) 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
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certain conditions indicating that a default is likely to occur in the absence
of regulatory assistance. Banco Popular, Banco Popular, Illinois, Banco Popular,
N.A. (California) and Banco Popular, FSB are all currently FDIC-insured
depository institutions. In some circumstances (depending upon the amount of the
loss or anticipated loss suffered by the FDIC), cross-guarantee liability may
result in the ultimate failure or insolvency of one or more insured depository
institutions in a holding company structure. Any obligation or liability owned
by a subsidiary bank to its parent company is subordinated to the subsidiary
bank's cross-guarantee liability with respect to commonly controlled insured
depository institutions.
DIVIDEND RESTRICTIONS
The principal regular source of cash flow for the Corporation is
dividends from Banco Popular. Various statutory provisions limit the amount of
dividends Banco Popular can pay to the Corporation without regulatory approval.
As a member bank subject to the regulations of the Federal Reserve Board, Banco
Popular must obtain the approval of the Federal Reserve Board for any dividend
if the total of all dividends declared by the member bank in any calendar year
would exceed the total of its net profits, as defined by the Federal Reserve
Board, for that year, combined with its retained net profits for the preceding
two years. In addition, a member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans that are in arrears with respect to interest by six
months or more unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a member bank is not
permitted to add the balance in its allowance for loan 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, 1996, Banco Popular could have declared a dividend of
approximately $197.1 million without the approval of the Federal Reserve Board.
Illinois law contains similar limitations on the amount of dividends that Banco
Popular, Illinois can pay and the National Bank Act contains similar
limitations, on the amount of dividends Banco Popular, N.A. (California) can
pay. In addition, 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 an 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 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, Banco Popular, Illinois,
Banco Popular, N.A. (California) 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, Banco Popular, Illinois, Banco Popular, N.A.
(California) 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
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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 that, if not
corrected, could 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 reduced the insurance premiums it charges on bank deposits
insured by the Bank Insurance Fund ("BIF") to the statutory minimum of $2,000.00
for "well capitalized" banks, effective January 1, 1996. On September 30, 1996,
the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into
law. DIFA repealed the statutory minimum premium and, currently, premiums
related to deposits assessed by both the BIF and the Savings Association
Insurance Fund ("SAIF") are to be assessed at a rate between 0 cents and 27
cents per $100.00 of deposits. DIFA also provides for a special one-time
assessment imposed on deposits insured by the SAIF to recapitalize the SAIF to
bring it up to statutory required levels. The Corporation accrued for the
one-time assessment in the third quarter of 1996.
DIFA also separates, effective January 1, 1997, the Financing
Corporation ("FICO") assessment to service the interest on its bond obligations
from the BIF and SAIF assessments. The amount assessed on individual
institutions by the FICO will be in addition to the amount, if any, paid for
deposit insurance according to the FDIC's risk-related assessment rate
schedules. FICO assessment rates for the first semiannual period of 1997 were
set at 1.30 basis points annually for BIF-assessable deposits and 6.48 basis
points annually for SAIF-assessable deposits. (These rates may be adjusted
quarterly to reflect changes in assessment bases for the BIF and the SAIF. By
law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the insurance funds are merged or until January
1, 2000, whichever occurs first.) As of December 31, 1996, the Corporation had a
BIF deposit assessment base of approximately $10.1 billion and a SAIF deposit
assessment base of approximately $207 million.
BROKERED DEPOSITS
FDIC regulations adopted under FDICIA govern the receipt of brokered
deposits. Under these regulations, a bank cannot accept, roll over or renew
brokered deposits (which term is defined also to include any deposit with an
interest rate more than 75 basis points above prevailing rates) unless (i) it is
well capitalized or (ii) it is adequately capitalized and receives a waiver from
the FDIC. A bank that is adequately capitalized may not pay an interest rate on
any deposits in excess of 75 basis points over certain prevailing market rates
specified by regulation. There are no such restrictions on a bank that is well
capitalized. The Corporation does not believe the brokered deposits regulation
has had or will have a material effect on the funding or liquidity of Banco
Popular, Banco Popular, Illinois, Banco Popular, N.A. (California) or Banco
Popular, FSB.
CAPITAL ADEQUACY
Information about the capital composition of the Corporation as of
December 31, 1996 and for the four previous years is presented in Table I
"Capital Adequacy Data", on page F-16 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 common equity, retained earnings, minority
interest in unconsolidated subsidiaries, non-cumulative perpetual preferred
stock and a limited amount of cumulative perpetual preferred stock, less
goodwill, other disallowed intangibles and the 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").
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.
In addition, the Federal Reserve Board has established minimum leverage
ratio (Tier 1 Capital to quarterly average assets)
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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" and other indicia of capital strength 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 quarterly average assets less all intangibles. The Federal
Reserve Board has not advised the Corporation of any specific minimum leverage
ratio applicable to it.
Banco Popular is subject to the risk-based and leverage capital
requirements adopted by the Federal Reserve Board. As of December 31, 1996,
Banco Popular had a tier 1 capital ratio of 11.31%, a total capital ratio of
12.57% and a leverage ratio of 6.65%.
Banco Popular, Illinois, Banco Popular, N.A. (California) and Banco
Popular, FSB are subject to similar capital requirements adopted by the FDIC,
the OCC and the OTS, respectively.
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 established 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 this rules deferred tax assets
that can only be realized if an institution earns taxable income in the future
and are limited for regulatory capital purposes to the amount that the
institution expects to realize within one year of the quarter-end report date
based on its projection of taxable income or 10 percent of Tier 1 capital,
whichever is less. 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 beyond current levels.
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
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve approval, to acquire banks
located in states other than the holding company's home state without regard to
whether the transaction is prohibited under state law. In addition, commencing
June 1, 1997, national and state banks with different home states will be
permitted to merge across state lines, with approval of the appropriate federal
banking agency, unless the home state of a participating bank passes legislation
prior to May 31, 1997 expressly prohibiting interstate mergers. States may "opt
in" to permit insterstate branching by merger prior to June 1, 1997, and to
permit de novo insterstate branching. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where any bank involved
in the interstate merger transaction could have established or acquired branches
under applicable federal or state law. A bank that has established a branch in a
state through de novo branching may establish and acquire additional branches in
such state in the same manner and to the same extent as a bank having a branch
in such state as a result of an interstate merger. If a state opts out of
interstate branching within the specified time period, no bank in any other
state may establish a branch in the state which has opted out, whether through
an acquisition or de novo. A foreign bank, like Banco Popular, may branch
interstate by merger or de novo to the same extent as domestic banks in the
foreign bank's home state, which, in the case of Banco Popular, is New York.
Various other legislation, inluding proposals to overhaul the bank
regulatory system, expand bank and bank holding company powers and limit the
investments that a depository institution may make with insured funds, is from
time to time introduced in Congress. 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.
8
9
Puerto Rico Regulation
General
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, 1996, the legal lending limit for the Bank under this provision was
approximately $90 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
that are wholly secured by bonds, securities and other evidence of indebtedness
of the Government of the United States or the Commonwealth, or by current debt
bonds, not in default, of municipalities or instrumentalities of the
Commonwealth.
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.
The Finance Board, which is a part of the Office of the Commissioner,
but also includes as its members the Secretary of the Treasury, the Secretary of
Commerce, the Secretary of Consumer Affairs, the President of the Planning
Board, and the President of the Government Development Bank for Puerto Rico, has
the authority to regulate the maximum interest rates and finance charges that
may be charged on loans to individuals and unincorporated businesses in the
Commonwealth. The current regulations of the Finance Board provide that the
applicable interest rate on loans to individuals and unincorporated businesses
(including real estate development loans but excluding certain other personal
and commercial loans secured by mortgages on real estate properties) is to be
determined by free competition. The Finance Board also has authority to regulate
the maximum finance charges on retail installment sales contracts, which are
currently set at 21%, and for credit card purchases, which are currently set at
26%. There is no maximum rate set for installment sales contracts involving
motor vehicles, commercial, agricultural and industrial equipment, commercial
electric appliances and insurance premiums.
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
9
10
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, 1996, the Corporation employed 7,996 persons. None of
its employees are represented by a collective bargaining group.
ITEM 2. PROPERTIES
As of December 31, 1996, Banco Popular owned (and wholly or partially
occupied) approximately 68 branch premises and other facilities throughout the
Commonwealth and branches premises in New York. In addition, as of such date,
Banco Popular leased properties for branch operations in approximately 113
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 and the auditing department are the main activities conducted at this
facility.
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.
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, 1996 the Corporation owned a 23 story office structure
located at 268 Munoz Rivera Avenue, Hato Rey, Puerto Rico. Banco Popular
occupies approximately 15% of the rented space and the rest of the building is
rented to outside tenants. At the same date, Banco Popular, N.A. (California)
owned a nine story structure located at 354 South Spring Street, Los Angeles,
10
11
California in which office space is mostly rented to outside tenants. A full
service branch of Banco Popular, N.A. (California) operates in this facility.
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 1996 and the previous four years, as well as cash dividends
declared is contained under Table J, "Common Stock Performance", on page F-17
and under the caption "Stockholders' Equity" on page F-15 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.
On April 26, 1996, the Corporation's Board of Directors authorized a
stock split of one share for each share outstandings effected in the form of a
dividend, on July 1, 1996. As a result of the split 33,000,590 shares were
issued, and $198 million were transferred from retained earnings to common
stock.
As of February 28, 1997, the Corporation had 5,628 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 $36.00 per
share.
The Corporation currently has outstanding $125 million subordinated
notes due 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 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. If the recipient is
a foreign corporation or partnership not engaged in trade or business within
Puerto Rico the rate of withholding is 10%.
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
1147", 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.
11
12
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-7 in the MD&A, and is incorporated herein by reference.
The Corporation's ratio of earnings to fixed charges on a consolidated
basis for each of the last five years is as follows:
Year ended December 31,
-----------------------
Ratio of Earnings to Fixed Charges:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Excluding Interest on Deposits 2.0 2.0 2.6 3.0 2.9
Including Interest on Deposits 1.4 1.4 1.5 1.5 1.3
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends:
Excluding Interest on Deposits 2.0 2.0 2.5 3.0 2.9
Including Interest on Deposits 1.4 1.4 1.5 1.5 1.3
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.
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,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Long-term obligations $1,111,713 $ 885,428 $ 489,524 $ 283,855 $ 120,062
Non-Cumulative preferred
stock of the Corporation 100,000 100,000 100,000 -0- -0-
Cumulative perpetual
preferred stock of
Banco Popular -0- -0- -0- 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 L, "Maturity Distribution of Earning Assets", on page F-20 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.
12
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages F-35 through
F-75, 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.
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", "Beneficial
Ownership Reporting Compliance", "Board of Directors and Committees" including
the "Nominees for Election as Directors" and "Executive Officers" of the
Corporation's definitive proxy statement filed with the Securities and Exchange
Commission on or about March 20, 1997 (the "Proxy Statement"), is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation Program", and
under the caption "BanPonce Corporation Performance Graph" 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", and under
"Shares Beneficially Owned by Directors, Nominees and Officers of the
Corporation" 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" 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, 1996
and 1995................................................................... F-36
Consolidated Statements of Income for each of the years in
the three-year period ended December 31, 1996.............................. F-37
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1996........................... F-38
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the three-year period ended
December 31, 1996.......................................................... 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 one report on Form 8-K during the quarter ended
December 31, 1996.
Dated: October 9, 1996
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: 02-13-97 (Principal Executive Officer)
----------
By: S\JORGE A. JUNQUERA
-------------------
Jorge A. Junquera
Senior Executive Vice President
Dated: 02-13-97 (Principal Financial Officer)
----------
By: S\AMILCAR L. JORDAN
-------------------
Amilcar L. Jordan
Senior Vice President
Dated: 02-13-97 (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 02-13-97
--------
S\ALFONSO F. BALLESTER Vice Chairman of
- ---------------------- the Board 02-13-97
Alfonso F. Ballester --------
S\ANTONIO LUIS FERRE Vice Chairman of
- -------------------- the Board 02-13-97
Antonio Luis Ferre --------
S\JUAN J. BERMUDEZ
- ------------------
Juan J. Bermudez Director 02-13-97
--------
S\FRANCISCO J. CARRERAS
- -----------------------
Francisco J. Carreras Director 02-13-97
--------
S\DAVID H. CHAFEY, JR.
- ----------------------
David H. Chafey, Jr. Director 02-13-97
--------
S\LUIS E. DUBON, JR.
- --------------------
Luis E. Dubon, Jr. Director 02-13-97
--------
15
16
S\HECTOR R. GONZALEZ
- --------------------
Hector R. Gonzalez Director 02-13-97
--------
S\JORGE A. JUNQUERA
- -------------------
Jorge A. Junquera Director 02-13-97
--------
S\MANUEL MORALES, JR.
- ---------------------
Manuel Morales, Jr. Director 02-13-97
--------
S\ALBERTO M. PARACCHINI
- -----------------------
Alberto M. Paracchini Director 02-13-97
--------
- -----------------------
Francisco Perez, Jr. Director --------
S\FRANCISCO M. REXACH, JR.
- --------------------------
Francisco M. Rexach, Jr. Director 02-13-97
--------
- --------------------------
Jose E. Rossi Director --------
S\FELIX J. SERRALLES, JR.
- -------------------------
Felix J. Serralles, Jr. Director 02-13-97
--------
S\EMILIO JOSE VENEGAS
- ---------------------
Emilio Jose Venegas Director 02-13-97
--------
S\JULIO E. VIZCARRONDO, JR.
- ---------------------------
Julio E. Vizcarrondo, Jr. Director 02-13-97
--------
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, and related to 6 3/4%
subordinated notes due December 15, 2005 in the aggregate
amount of $125,000,000. (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. (15)
4.12 Form of medium-term fixed rate note of BanPonce Corporation (16)
4.13 Form of medium-term floating rate note of BanPonce Corporation (17)
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)
10.8 Management Incentive Plan for certain Division Supervisors
approved in January, 1987. (10)
10.8.1 BanPonce Corporation Senior Executive Long-Term Incentive Plan
dated October 6, 1994. (11)
10.9 Stock Deferment Plan for outside directors effective on August
15, 1996.
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. (12)
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. (13)
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. (14)
10.13 Banco Popular de Puerto Rico Bank's Note Program up to the
aggregate amount of $600,000,000 executed on September 24,
1996
10.14 BanPonce Financial Corp, 6 3/4% Medium Term Notes, Series C,
due August 9, 2001 in the aggregate principal amount of
$75,000,000.
17
18
12.0 Computation of Ratio of Earnings to Fixed Charges
13.1 Registrants Annual Report to Shareholders for the year ended
December 31, 1996
21.1 Schedule of Subsidiaries
23.1 Consent of Independent Auditors
27.0 Financial Data Schedule (for SEC use only)
99.1 Registrant's Proxy Statement for the April 25, 1997 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(e) 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 10.13 of the 1991 Form
10-K.
(11) Incorporated by reference to Exhibit 10.8.1 of the 1994 Form
10-K.
(12) Incorporated by reference to Exhibit 10.19 of the 1991 Form
10-K.
(13) Incorporated by reference to Exhibit 10.14 of the 1992 Form
10-K.
(14) Incorporated by reference to Exhibit 10.12.2 of the 1994 Form
10-K.
(15) Incorporated by reference to Exhibit 4(c) on Form 8-K filed on
April 13, 1995.
(16) Incorporated by reference to Exhibit 4(a) on Form 8-K filed on
April 13, 1995.
(17) Incorporated by reference to Exhibit 4(b) on Form 8-K filed on
April 13, 1995.
19
- --------------------------------------------------------------------------------
BANPONCE CORPORATION
INDEX FINANCIAL DATA
PAGE
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
Managements 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, 1996 and 1995........... F-36
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1996...................................... F-37
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996...................................... F-38
Consolidated Statements of Changes in Stockholders Equity for each
of the years in the three-year period ended December 31, 1996.................. 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 discussion contains an analysis of the consolidated
financial position and financial performance of BanPonce Corporation and its
subsidiaries (the Corporation), and should be read in conjunction with the
consolidated financial statements, notes and tables included elsewhere in this
report. The Corporation is a bank holding company which offers a wide range of
products and services through its subsidiaries and is engaged in the following
businesses:
- Commercial Banking/Savings and Loans - Banco Popular de Puerto
Rico (Banco Popular), Banco Popular, Illinois, Banco Popular,
FSB, and Banco Popular, N.A. (California)
- Lease Financing - Popular Leasing and Rental, Inc., and
Vehicle Equipment Leasing Company, Inc. (VELCO)
- Mortgage Banking/Consumer Finance - Popular Mortgage, Inc.
(d/b/a Puerto Rico Home Mortgage), Equity One, Inc. (Equity
One) and Popular Consumer Services, Inc. (d/b/a Best Finance)
- Investment Banking - BP Capital Markets, Inc. (BP Capital)
OVERVIEW
On April 26, 1996, the Corporation's Board of Directors authorized a
common stock split in the form of a dividend of one share for each share
outstanding. The new shares were distributed on July 1, 1996, to shareholders of
record as of June 14, 1996. All common stock data included herein has been
restated to reflect the stock split.
BanPonce Corporation faced many challenges during 1996. Factors such as
legislation and acquisitions in the local banking industry all played an
important role. These factors did not hinder the strong results and strategic
development obtained during the year, as the net income amounted to $185.2
million, showing a $38.8 million or 26.5% increase over the $146.4 million
reported in 1995. The earnings performance reflected an increase in net interest
income and improvements in non-interest income, tempered by increases in the
provision for loan losses, operating expenses and income taxes.
Earnings per common share (EPS) for 1996 were $2.68, based on
66,022,312 average shares outstanding, compared with $2.10 for 1995, based on
65,816,300 average shares outstanding. The Corporation's profitability ratios
for 1996 represented returns of 1.14% on assets (ROA) and 16.15% on common
stockholders' equity (ROE), compared with an ROA and ROE of 1.04% and 14.22%,
respectively, in 1995. Table A presents a five-year summary of the components of
net income as a percentage of average assets.
In 1996, the Corporation continued experiencing balance sheet growth
with total assets amounting to $16.8 billion compared with $15.7 billion a year
earlier. BanPonce ranked 42nd in asset size among the U.S. banking companies as
of the end of the third quarter of 1996. In addition, as a result of the
Corporation's emphasis on building diverse and stable sources of funding to
strengthen its operations and sustain future growth, total deposits increased to
$10.8 billion from $9.9 billion a year ago. Borrowings rose $30 million, from
$4.4 billion in 1995.
In line with the emphasis regulatory agencies have placed on capital
strength, stockholders' equity of the Corporation reached $1.26 billion at
December 31, 1996, compared with $1.14 billion at December 31, 1995. The
Corporation's regulatory capital ratios continued to exceed the well-capitalized
guidelines with a Tier I ratio of 11.63%, a total capital ratio of 14.18% and a
leverage ratio of 6.71% at December 31, 1996, compared with 11.91%, 14.65% and
6.66%, respectively, a year earlier.
The Corporation's common stock appreciated 74.1% during 1996, from a
market price of $19.38 at December 31, 1995, to $33.75 on the same date in 1996.
Also, the Board of Directors approved a 20% increase in the quarterly cash
dividend effective for the second quarter of 1996, to $0.18 per common share,
from $0.15 per share paid in the previous quarters.
As explained more thoroughly in the Net Interest Income and Liquidity
Risk sections, during the third quarter of 1996 the U.S. Congress repealed
Section 936 of the U.S. Internal Revenue Code. Section 936 provided certain U.S.
corporations operating on the Island with a tax credit against its federal tax
liability on income derived from business operations and investment activity in
Puerto Rico. The bill approved repealed the Qualified Possession Source
Investment Income (QPSII) effective July 1, 1996, for taxable years beginning
after December 31, 1995, while the income and the wage credit provisions will be
phased out in 10 years. As expected, the repeal of this section caused a
reduction in the volume of 936 funds, but at a significantly lower pace than
originally expected.
In September 1996, President Clinton signed into law, as part of the
Omnibus Budget Reconciliation Act, the "Deposit Insurance Funds Act of 1996"
(the Act). The Act required the capitalization of the Savings Association
Insurance Fund (SAIF) to its
F-2
21
- ---------------------------------------------------------------------------------------------------
TABLE A
Components of Net Income as a Percentage of Average Total Assets
For the Year
- ---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------
Net interest income ................................. 4.18% 4.14% 4.38% 4.61% 4.62%
Provision for loan losses ........................... (0.54) (0.46) (0.44) (0.68) (1.03)
Security and trading gains .......................... 0.02 0.05 0.01 0.01
Other income ........................................ 1.24 1.18 1.15 1.16 1.30
------------------------------------------
4.90 4.91 5.09 5.10 4.90
Operating expenses .................................. (3.33) (3.45) (3.66) (3.86) (3.85)
------------------------------------------
Net income before tax, dividends on preferred stock
of Banco Popular and cumulative effect of
accounting changes ................................ 1.57 1.46 1.43 1.24 1.05
Provision for income tax ............................ (0.43) (0.42) (0.41) (0.26) (0.15)
------------------------------------------
Net income before dividends on preferred stock of
Banco Popular and cumulative effect of
accounting changes ................................ 1.14 1.04 1.02 0.98 0.90
Dividends on preferred stock of Banco Popular ....... (0.01) (0.01)
Cumulative effect of accounting changes ............. 0.05
------------------------------------------
Net income .......................................... 1.14% 1.04% 1.02% 1.02% 0.89%
==========================================
designated reserve level ratio of 1.25% of insured deposits in thrift
institutions and gave the FDIC the legal authority to impose a special one-time
assessment on all SAIF-insured institutions. During the last quarter of 1996,
Banco Popular, FSB recognized $1.1 million in other operating expenses related
to this one-time assessment. The Act also provides that the assessment base for
the payment of interest on obligations issued by the Financing Corporation
(FICO) for the resolution of failed thrifts will be expanded to include all
FDIC-insured depository institutions. Excluding the effect of this one-time
assessment, this legislation will result in an estimated $1.1 million higher
deposit insurance expense for the Corporation during 1997.
During 1996, the economy showed moderate growth and subdued
inflationary pressures. The overall growth of the GDP in 1996 was 3.40%. The
Federal Reserve eased interest rates early in the year, lowering the Federal
Funds rate 25 basis points to 5.25%, without changing the monetary policy for
the rest of the year. However, market rates rose as the financial markets
started pricing with the increasing probability of a tighter monetary policy in
the near-term future.
The Riegle-Neal Interstate Banking and Branching Efficiency Act, which
allows bank holding companies to expand into different states in the United
States, will include the interstate branching provisions effective June 1997.
Since the approval of this act in 1994, acquisitions have taken an even more
active role within the banking industry. This is also the case at BanPonce
Corporation, which continued its geographical expansion and development of new
ways to provide technology and delivery systems outside Puerto Rico.
During the first quarter of 1996, the Corporation purchased 20% of the
common stock of Jamaica's fourth largest financial institution, Citizens Bank.
The Corporation also acquired preferred stock of Citizens Bank, convertible into
an additional 10% of common equity of said institution.
Also, ATH-Dominicana, the first automated teller machine (ATM) network
in the Dominican Republic, began operations on March 25, 1996. This network,
provides customers of banks in the Dominican Republic access to ATMs in Puerto
Rico and the United States. This joint venture of Banco Popular and certain
financial institutions of the Dominican Republic, was the first opportunity to
export Banco Popular's technological infrastructure and expertise outside Puerto
Rico and the U.S. mainland.
With the experience obtained from ATH-Dominicana, the Corporation is in
the process of establishing ATH-Costa Rica, the first ATM network in that
country. Banco Popular, with its shared network ATH (A Toda Hora) and sixteen
banking institutions in Costa Rica, will join to add 70 machines to the 80 ATMs
currently operating, while providing its customers with access to ATMs in Puerto
Rico and the United States, and vice-versa.
F-3
22
- --------------------------------------------------------------------------------------------------------
TABLE B
Selected Financial Data
Year ended December 31,
---------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994
---------------------------------------------
CONDENSED INCOME STATEMENTS
Interest income ....................................... $ 1,272,853 $ 1,105,807 $ 887,141
Interest expense ...................................... 591,540 521,624 351,633
--------------------------------------------
Net interest income .................................. 681,313 584,183 535,508
Security and trading gains (losses) .................... 3,202 7,153 451
Operating income ....................................... 202,270 166,185 140,852
Operating expenses ..................................... 541,919 486,833 447,846
Provision for loan losses .............................. 88,839 64,558 53,788
Income tax ............................................. 70,877 59,769 50,043
Dividends on preferred stock of Banco Popular .......... 385
Cumulative effect of accounting changes ................
--------------------------------------------
Net income ......................................... $ 185,150 $ 146,361 $ 124,749
============================================
Net income applicable to common stock .............. $ 176,800 $ 138,011 $ 120,504
============================================
PER COMMON SHARE DATA*
Net income ........................................... $ 2.68 $ 2.10 $ 1.84
Dividends declared ................................... 0.69 0.58 0.50
Book value ........................................... 17.59 15.81 13.74
Market price ......................................... 33.75 19.38 14.07
Outstanding shares:
Average ............................................. 66,022,312 65,816,300 65,596,486
End of period ....................................... 66,088,506 65,897,272 65,676,256
AVERAGE BALANCES
Net loans ............................................ $ 9,210,964 $ 8,217,834 $ 7,107,746
Earning assets ....................................... 15,306,311 13,244,170 11,389,680
Total assets ......................................... 16,301,082 14,118,183 12,225,530
Deposits ............................................. 10,461,796 9,582,151 8,837,226
Subordinated notes ................................... 147,951 56,850 56,082
Total stockholders' equity ........................... 1,194,511 1,070,482 924,869
PERIOD END BALANCES
Net loans ............................................. $ 9,779,028 $ 8,677,484 $ 7,781,329
Allowance for loan losses ............................. 185,574 168,393 153,798
Earning assets ....................................... 15,484,454 14,668,195 11,843,806
Total assets .......................................... 16,764,103 15,675,451 12,778,358
Deposits .............................................. 10,763,275 9,876,662 9,012,435
Subordinated notes .................................... 125,000 175,000 50,000
Total stockholders' equity ............................ 1,262,532 1,141,697 1,002,423
SELECTED RATIOS
Net interest yield (taxable equivalent basis) ........ 4.77% 4.74% 5.06%
Return on average total assets ....................... 1.14 1.04 1.02
Return on average earning assets ..................... 1.21 1.11 1.10
Return on average common stockholders' equity ........ 16.15 14.22 13.80
Dividend payout ratio to common stockholders ......... 24.63 26.21 27.20
Average net loans/average total deposits ............. 88.04 85.76 80.43
Average earning assets/average total assets .......... 93.90 93.81 93.16
Average stockholders' equity/average net loans ....... 12.97 13.03 13.01
Average stockholders' equity/average assets .......... 7.33 7.58 7.57
Overhead ratio ....................................... 49.38 53.66 57.24
Tier I capital to risk-adjusted assets ............... 11.63 11.91 12.85
Total capital to risk-adjusted assets ................ 14.18 14.65 14.25
Effective tax rate ................................... 27.68 29.00 28.57
*Per 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 share data has been adjusted to reflect two stock
splits effected in the form of a dividend on July 1, 1996 and on April 3, 1989.
F-4
23
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------
$ 772,136 $ 740,354 $ 794,943 $ 565,807 $ 558,273 $ 488,200 $ 410,605
280,008 300,135 387,134 281,561 302,747 261,316 206,778
- ----------------------------------------------------------------------------------------------------------------------
492,128 440,219 407,809 284,246 255,526 226,884 203,827
1,418 625 19,376 91 2,529 689 (366)
123,762 123,879 112,398 70,865 59,550 53,025 40,623
412,276 366,945 345,738 229,563 207,376 190,862 182,593
72,892 97,633 121,681 53,033 42,603 34,750 18,000
28,151 14,259 6,793 9,240 11,456 7,844 5,956
770 770 807
6,185
- ----------------------------------------------------------------------------------------------------------------------
$ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 $ 37,535
======================================================================================================================
$ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142 $ 37,535
======================================================================================================================
$ 1.67 $ 1.40 $ 1.07 $ 1.57 $ 1.40 $ 1.18 $ 0.94
0.45 0.40 0.40 0.40 0.40 0.34 0.33
12.75 11.52 10.50 9.83 9.38 8.38 7.54
15.50 15.13 9.63 8.00 10.75 8.88 6.69
65,402,472 60,922,988 60,071,202 40,233,940 40,028,026 40,000,000 40,000,000
65,464,846 65,309,728 60,187,704 59,884,812 40,074,792 40,000,000 40,000,000
$ 5,700,069 $ 5,150,328 $ 5,302,189 $ 3,377,463 $ 3,132,167 $ 2,869,829 $ 2,510,495
9,894,662 8,779,981 8,199,195 5,461,938 5,318,800 5,182,535 4,597,329
10,683,753 9,528,518 8,944,357 5,836,749 5,676,981 5,523,823 4,918,984
8,124,885 7,641,123 7,198,187 5,039,422 4,782,791 4,571,456 4,211,465
73,967 85,585 94,000 50,000 38,082 119 1,717
793,001 668,990 610,641 407,611 353,844 317,001 286,752
$ 6,346,922 $ 5,252,053 $ 5,195,557 $ 5,365,917 $ 3,276,389 $ 3,056,761 $ 2,737,271
133,437 110,714 94,199 89,335 40,896 33,244 28,423
10,657,994 9,236,024 8,032,556 8,219,279 5,469,921 5,221,873 4,957,221
11,513,368 10,002,327 8,780,282 8,983,624 5,923,261 5,661,398 5,352,745
8,522,658 8,038,711 7,207,118 7,422,711 4,926,304 4,715,837 4,491,612
62,000 74,000 94,000 94,000 50,000 500
834,195 752,119 631,818 588,884 375,807 334,867 301,425
5.50% 6.11% 5.97% 6.30% 5.57% 5.10% 5.04%
1.02 0.89 0.72 1.09 0.99 0.85 0.76
1.11 0.97 0.79 1.16 1.06 0.91 0.82
13.80 12.72 10.57 15.55 15.87 14.87 13.09
25.39 28.33 34.13 25.33 28.14 28.00 35.17
70.16 67.40 73.66 67.02 65.49 62.78 59.61
92.61 92.14 91.67 93.58 93.69 93.82 93.46
13.91 12.99 11.52 12.07 11.30 11.05 11.42
7.42 7.02 6.83 6.98 6.23 .74 5.83
58.34 55.07 52.47 55.80 56.86 60.45 69.83
12.29 12.88 11.01 10.10 9.47 9.19 N/A
13.95 14.85 13.35 12.74 11.76 10.10 N/A
21.30 14.24 9.41 12.73 16.94 14.27 13.70
F-5
24
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE C
Changes in Net Income and Earnings per Common Share
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(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 .................................. $ 138,011 $ 2.10 $ 120,504 $ 1.84 $ 109,404 $ 1.67
Increase (decrease) from changes in:
Net interest income ............................. 97,130 1.47 48,675 0.74 43,380 0.66
Other operating income .......................... 36,085 0.55 25,333 0.38 17,090 0.26
Trading account profit .......................... (1,678) (0.03) 1,558 0.02 (327)
Gain on sale of investment securities ........... (2,273) (0.03) 5,144 0.08 (640) (0.01)
Dividends on preferred stock of Banco Popular 385 0.01 385 0.01
Income tax ...................................... (11,108) (0.17) (9,726) (0.15) (21,892) (0.33)
Provision for loan losses ....................... (24,281) (0.37) (10,770) (0.16) 19,104 0.29
Operating expenses .............................. (55,086) (0.84) (38,987) (0.59) (35,570) (0.54)
---------------------------------------------------------------------
Subtotal ......................................... 176,800 2.68 142,116 2.17 130,934 2.01
Cumulative effect of accounting changes .......... (6,185) (0.09)
Dividends declared on preferred stock ............ (4,105) (0.06) (4,245) (0.07)
Change in average common shares* ................. (0.01) (0.01)
---------------------------------------------------------------------
Net income applicable to common stock ............ $ 176,800 $ 2.68 $ 138,011 $ 2.10 $ 120,504 $ 1.84
=====================================================================
*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 66,022,312 for 1996, 65,816,300
for 1995 and 65,596,486 for 1994, after restating for the stock split effected
in the form of a dividend on July 1, 1996.
- -------------------------------------------------------------------------------
In the third quarter of 1996, BanPonce completed the acquisition of
CombanCorp, the parent company of Commerce National Bank, which added to the
Corporation three branches in California, located in City of Commerce,
Montebello and Downey, with $75 million in assets and $63 million in deposits.
In Puerto Rico, Banco Popular opened nine branches in supermarkets as
part of an in-store branch initiative and three branches within the premises of
shopping centers in order to provide banking services at our customers'
convenience. Banco Popular, FSB also opened one branch in 1996, further
expanding its presence in New Jersey, for a total of six branches in that
state. Moreover, during 1996 Banco Popular, Illinois, formerly Pioneer Bank,
opened its fifth full-service branch in Chicago and Equity One opened 11 new
offices in the mainland, giving Equity One a total of 102 offices in 28 states.
During the last quarter of 1996, as part of a strategy to emphasize
BanPonce's strong Hispanic ties, the Corporation's subsidary banks operating in
California and Illinois, previously known as Commerce National Bank and Pioneer
Bank & Trust Company, respectively, changed their names to Banco Popular, N.A.
(California) and Banco Popular, Illinois, respectively.
Moving toward 1997, the Corporation has announced the following
acquisitions now awaiting the approval of regulatory agencies:
- National Bancorp, the holding company of American Midwest Bank &
Trust in Chicago, Illinois, with assets of approximately $175
million and deposits of $146 million at November 1996, operating
two branches in Melrose Park.
- CBC Bancorp and its two banking subsidiaries, Capitol Bank & Trust
and Capitol Bank of Westmont, with assets of approximately $315
million and deposits of $280 million.
- Roig Commercial Bank, which operates 25 branches mainly located in
the eastern part of Puerto Rico, with assets of approximately $900
million and deposits of $650 million.
- Seminole National Bank in Sanford, Florida, with assets of
approximately $26 million and deposits of $22 million, operating
three branches in Sanford and Orlando.
Further discussion of operating results and the Corporation's financial
condition is presented in the following narrative and tables. In addition,
Table B provides selected financial data for the last 10 years.
F-6
25
- -------------------------------------------------------------------------------------------------------------
TABLE D
Net Interest Income - Taxable Equivalent Basis
Year ended December 31,
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
---------------------------------------------------------------------------------
AVERAGE Average Average
BALANCE RATE Balance Rate Balance Rate
---------------------------------------------------------------------------------
Earning assets ........ $15,306,311 8.63% $13,244,170 8.68% $11,389,680 8.15%
=================================================================================
Financed by:
Interest
5 bearing funds...... $12,778,488 4.63% $10,991,569 4.75% $ 9,330,838 3.77%
Non-interest
bearing funds ...... 2,527,823 2,252,601 2,058,842
---------------------------------------------------------------------------------
Total ............ $15,306,311 3.86% $13,244,170 3.94% $11,389,680 3.09%
=================================================================================
Net interest income.... $ 729,438 $ 628,233 $ 576,575
=================================================================================
Spread ................ 4.00% 3.93% 4.38%
Net interest yield 4.77 4.74 5.06
- ------------------------------------------------------------------------------------------------------------
Year ended December 31,
- -------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1992
---------------------------------------------------------
Average Average
Balance Rate Balance Rate
---------------------------------------------------------
Earning assets ........ $ 9,894,662 8.33% $ 8,779,981 9.53%
=========================================================
Financed by:
Interest
5 bearing funds ..... $ 8,097,004 3.46% $ 7,277,051 4.12%
Non-interest
bearing funds ...... 1,797,658 1,502,930
---------------------------------------------------------
Total ............ $ 9,894,662 2.83% $ 8,779,981 3.42%
=========================================================
Net interest income.... $ 544,471 $ 536,485
=========================================================
Spread ................ 4.87% 5.41%
Net interest yield .... 5.50 6.11
- -------------------------------------------------------------------------------------
EARNINGS ANALYSIS
The Corporation's net earnings for 1996 amounted to $185.2 million,
compared with $146.4 million a year before, for a rise of 26.5%. The net
income applicable to common stock rose $38.8 million to $176.8 million in 1996,
from $138.0 million in 1995. Table C shows variances, in dollar and per common
share amounts, of the major captions of the Corporation's income statement for
the past three years. The 1996 growth in the earnings applicable to common
stock was principally related to:
- A rise in net interest income due to the growth of $2.1 billion
in the average volume of earning assets driven by a $1.1 billion
increase in the investment portfolio and a $1.0 billion increase
in average loans.
- An increase in non-interest income of $36.1 million, led by a
$15.5 million rise in other income, largely attributed to the
Corporation's leasing and mortgage subsidaries.
- Lower gains on sale of securities.
- Increase in the income tax provision mainly due to a higher
pre-tax income.
- Increase in the provision for loan losses related to the growth
in the loan portfolio and net charge-offs.
- Rise in operating expenses reflecting the growth of the
Corporation as well as increased spending on personnel, technology
and corporate strategic initiatives aimed at enchancing future
revenue growth.
NET INTEREST INCOME
Due to the significant impact the net interest income has in the
Corporation's earnings, special emphasis is given to interest rate risk. The
Corporation constantly monitors the composition and repricing of its assets and
liabilities in order to maximize the net interest income, while maintaining the
interest rate risk within an acceptable level, as further discussed in the Risk
Management section.
Net interest income increased $97.1 million for the year ended December
31, 1996, reaching the $681.3 million, compared with $584.2 million reported in
1995. In 1994, net interest income totaled $535.5 million.
The income derived from certain loans and investments that the
Corporation carries among its earning assets is exempt for income tax purposes.
Therefore, in order to present all interest data on a comparable basis, the
interest income earned on these assets has been converted to fully taxable
equivalent using the applicable statutory tax rates.
For the year ended December 31, 1996, net interest income, on a taxable
equivalent basis, was $729.4 million, or 16.1% higher than the $628.2 million
reported in 1995. This figure amounted to $576.6 million in 1994. A higher
volume of earning assets, partially offset by a higher volume of
interest-bearing liabilities together with a change in the mix of both,
accounted for $71.8 million of the increase, while a higher net interest margin
accounted for the remaining $29.4 million. Table D presents, a
F-7
26
- ---------------------------------------------------------------------------------------------------------------------
TABLE E
Interest Variance Analysis - Taxable Equivalent Basis
1996 vs. 1995 1995 vs. 1994
- ---------------------------------------------------------------------------------------------------------------------
(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 .............. $ 25,661 $ (2,175) $ 23,486 $ 15,883 $ 2,082 $ 17,965
Time deposits with other banks ...... 122 12 134 (112) 38 (74)
Investment securities ............... 26,217 (2,777) 23,440 19,471 27,795 47,266
Trading securities .................. 13,392 (219) 13,173 9,499 (35) 9,464
Loans ............................... 103,667 7,221 110,888 108,062 38,967 147,029
----------------------------------------------------------------------------
Total interest income ............. 169,059 2,062 171,121 152,803 68,847 221,650
----------------------------------------------------------------------------
Interest expense:
Savings, NOW
and money market accounts ......... 7,666 (2,715) 4,951 1,160 8,530 9,690
Other time deposits ................ 24,119 (8,632) 15,487 31,345 41,022 72,367
Short-term borrowings .............. 48,288 (5,128) 43,160 36,413 27,573 63,986
Long-term borrowings ............... 17,189 (10,871) 6,318 15,887 8,061 23,948
----------------------------------------------------------------------------
Total interest expense ............ 97,262 (27,346) 69,916 84,805 85,186 169,991
----------------------------------------------------------------------------
Net interest income ................ $ 71,797 $ 29,408 $ 101,205 $ 67,998 $ (16,339) $ 51,659
============================================================================
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.
- --------------------------------------------------------------------------------
comparative analysis of the net interest income and rates, on a taxable
equivalent basis, for the past five years and Table E presents an analysis of
the major categories of earning assets and interest-bearing liabilities and
their impact on the net interest income due to changes in volume and rates.
Average earning assets increased to $15.3 billion compared with $13.2
billion in 1995 and $11.4 billion in 1994. The increase in average earning
assets for 1996, relates primarily to the rise of $1.1 billion in money market
investments, investments and trading account securities and to the rise in
average loans of $1.0 billion.
Average loans, which comprised 60.2% of the average balance of earning
assets, rose 12.1% reaching $9.2 billion. The rise relates to increases of $479
million in commercial loans, $259 million in mortgage loans and $258 million in
consumer loans. Average leases grew $19 million, while construction loans
averaged $22 million less than in 1995.
Banco Popular, as a result of its business expansion in the United
States and Puerto Rico, contributed $345 million or 72.0% to the increase in
average commercial loans. The rise in mortgage loans was principally attributed
to Equity One, reaching an average of $720 million in mortgage loans in 1996,
compared with $573 million in 1995. Consumer loans at Banco Popular rose $168
million contributing 65.3% of the total increase mainly in the home equity, auto
and credit card portfolios.
The average yield on loans, on a taxable equivalent basis, for the year
ended December 31, 1996, was 10.11% compared with 9.98% in 1995 and 9.47% in
1994. The principal contributor to the rise in the yield on loans was the
consumer loan portfolio, with an increase of 51 basis points, reaching an
average yield of 12.85% compared with 12.34% in 1995. Changes in the pricing
structure of some consumer loan categories together with the implementation of a
matched-maturity internal funds transfer pricing system in Banco Popular and
aggressive marketing campaigns, helped to improve this yield. Also, the yield on
lease financings increased 58 basis points and the yield on mortgage loans rose
10 basis points. On the other hand, the yield on commercial loans, including
construction, decreased to 8.98% for the year ended December 31, 1996, compared
with 9.11% in 1995, as a result of a decrease in the average prime rate in 1996
compared with 1995 and increased competition in the Puerto Rico market.
Investment securities, the Corporation's second largest category of
earning assets, averaged $4.8 billion in 1996, compared with $4.5 billion in
1995. This rise was mostly attained at Banco Popular principally in U.S.
Treasury securities. The income
F-8
27
- --------------------------------------------------------------------------------
derived from U.S. Treasuries is exempt for income tax purposes in Puerto Rico.
The taxable equivalent yield of investment securities for 1996, averaged 6.63%
compared with 6.65% in 1995.
Average money market investments increased $490 million, reaching $893
million compared with $403 million in 1995. This increase relates mainly to BP
Capital, acquired during the second quarter of 1995, whose average balance for
1996 increased 122.9% from $391 million in 1995 to $871 million in 1996. The
average yield on these securities for 1996 was 5.23%, or 50 basis points lower
than the 5.73% reported during 1995. The lower interest rate scenario that
prevailed during 1996 as compared to 1995, caused the decrease in yield due to
the short-term nature of these assets.
BP Capital also contributed to the total increase in trading account
securities, with an increase of $113 million to an average balance of $228
million versus $115 million reported in 1995. Furthermore, Puerto Rico Home
Mortgage had an increase of $96 million in its average trading portfolio. The
taxable equivalent yields on trading account securities for the years ended
December 31, 1996 and 1995 were 6.18% and 6.32%, respectively.
The proportionately higher increase in the average investment
portfolio, which carries a lower yield than the loan portfolio, coupled with the
decrease in the average yield on money market investments, resulted in a
reduction of five basis points in the taxable equivalent yield on earning assets
from 8.68% in 1995 to 8.63% in 1996.
Interest-bearing liabilities increased $1.8 billion, averaging $12.8
billion compared with $11.0 billion during 1995. Of the total increase, 48.4% or
$865 million is attributed to a rise in short-term borrowings, 37.6% to an
increase in interest-bearing deposits and the remainder to an increase in medium
and long-term debt.
The rise in the average balance of short-term borrowings is mainly
attributed to an increase of $579 million due to arbitrage activities at BP
Capital and the issuance of commercial paper by BanPonce Financial, increasing
$180 million on average. The interest cost of short-term borrowings decreased to
5.33% from 5.44% in 1995, mainly as a result of the market conditions that
prevailed in 1996.
Average interest-bearing deposits increased $672 million or 8.7%, from
$7.7 billion reported in 1995 to $8.4 billion in 1996, while average demand
deposits rose 11.3% to $2.1 billion. The Corporation had an increase in average
time deposits of $443 million, while savings deposits rose $183 million and NOW
and money market deposits rose $46 million. Most of the increases in the diverse
categories of deposits relate to Banco Popular de Puerto Rico.
The average cost of interest-bearing deposits decreased 10 basis points
to 4.16%, compared with 4.26% reported in 1995 due to the lower interest rate
environment. Time deposits had a lower cost in 1996, decreasing to 5.25% versus
5.46% in 1995. The average cost of NOW and money market deposits decreased 35
basis points, from 3.62% in 1995 to 3.27% in 1996. On the other hand, savings
accounts increased 7 basis points to 3.04% from 2.97% in 1995. This increase is
partially due to the shift of customers from some lower rate accounts to
accounts paying interest based on tiers. These accounts, created primarily to
provide greater customer convenience, although increase somewhat the cost of
deposits, attracted new customers in order to maintain the Corporation's market
share and strong deposit base.
Average medium and long-term debt increased by $251 million to $906
million and its cost decreased from 7.68% reported in 1995 to 6.25% in 1996. The
decrease in the average cost is principally due to debt issued during 1996 in a
lower interest rate environment and debt with floating interest rates resetting
semiannually or quarterly.
The average cost of interest-bearing liabilities decreased 12 basis
points, from 4.75% in 1995 to 4.63% in 1996, while the cost of funding earning
assets decreased from 3.94% to 3.86% in 1996.
In spite of the decrease of five basis points in the yield on earning
assets, on a taxable equivalent basis, and the increase in the volume of
relatively expensive funds, mainly as a result of arbitrage activities at BP
Capital, the decline in the cost of interest-bearing liabilities had a greater
impact on the net interest margin of the Corporation, which increased to 4.77%,
on a taxable equivalent basis, 3 basis points higher than the 4.74% reported for
1995. Those margins were diluted by 33 basis points and 17 basis points in 1996
and 1995, respectively, as a result of the acquisition of BP Capital in 1995 and
the increase in its average asset size in 1996. Due to its significant volume of
arbitrage activities, this broker/dealer operation had taxable equivalent net
interest yields of 48 and 54 basis points in 1996 and 1995, respectively. The
average asset size of BP Capital is expected to decrease in 1997, as it did at
the end of 1996, as a result of the reduction in the volume of 936 funds.
F-9
28
- --------------------------------------------------------------------------------
As further discussed in the Liquidity Risk section, in August 1996, the
U.S. Congress approved legislation that repealed Section 936 of the Internal
Revenue Code. The bill approved repealed QPSII retroactively for taxable years
beginning after December 31, 1995. As a result, the Corporation experienced a
reduction in the volume of 936 funds during the fourth quarter of 1996, although
at a slower pace than anticipated. These funds are being substituted with
conventional, more expensive funds, which will cause the cost of funds to
increase. However, some 936 corporations have chosen not to withdraw all of
their funds from financial institutions and have, instead, invested those funds
at a longer term to reduce the tollgate taxes applicable upon repatriating those
funds. As a result, the cost of those funds have remained below that of the U.S.
or Eurodollar market. The expected increase in the cost of funds should be
partially offset by several mitigating factors which include a higher rate
charged on commercial loans, whose price was previously indexed to a 936 market
rate, and a lower level of investments required by local regulations to all
recipients of 936 funds which have a yield substantially below market rates. At
December 31, 1996, the Corporation had $2.2 billion in 936 funds, representing
14.3% of its liabilities, compared with $2.3 billion or 15.7% at the end of
1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects management's assessment of the
adequacy of the allowance for loan losses to cover potential write-offs in the
loan portfolio. The provision for loans losses was $88.8 million for 1996,
compared with $64.6 million in 1995, an increase of $24.2 million or 37.6%. The
provision for loan losses for 1994 was $53.8 million. The increase in the
provision for 1996 was based primarily on the rise in the Corporation's loan
portfolio, a rise in net charge-offs and current and expected economic
conditions. Net charge-offs for the year totaled $72.1 million or 0.78% of
average loans, compared with $50.0 million or 0.61% in 1995 and $36.9 million or
0.52% in 1994.
Although all loan categories reflected increases in net charge-offs,
the increase is primarily attributed to a rise in the net charge-offs of
consumer loans which amounted to $29.1 million compared with $17.2 million a
year earlier and lease financings, which rose $7.7 million in net charge-offs
during 1996.
Please refer to the Credit Risk Management and Loan Quality section for
a more detailed analysis of the allowance for loan losses, net charge-offs, and
credit quality statistics.
NON-INTEREST INCOME
Non-interest income, which consists primarily of service charges on
deposit accounts, credit card fees, other fee-based services and other revenues,
rose $36.1 million or 21.7% to $202.3 million in 1996, from $166.2 million in
1995. In 1994, these revenues totaled $140.9 million. This rise was driven by
increases of $15.5 million in other income, $7.2 million in service charges on
deposit accounts, $5.0 million in debit card fees, $3.1 million in credit card
fees and discounts, $2.2 million in credit life insurance fees and $1.6 million
in mortgage servicing fees, net of amortization. As shown in Table F, those
increases helped to improve the ratio of non-interest income to average assets
from 1.18% in 1995, to 1.24% in 1996. In 1994, this ratio was 1.15%. The ratio
of non-interest income to operating expenses also increased from 34.14% in 1995
to 37.32% in 1996.
Service charges on deposit accounts, grew to $85.8 million for the year
ended December 31, 1996, from $78.6 million in 1995 and $71.7 million in 1994.
Factors such as a higher volume of deposits and new deposit products, a broader
variety of services offered to commercial accounts, together with revisions made
to the fee structure, were mainly responsible for the increase in this revenue
category. Measured as a percentage of average deposits, service charges were
0.82% in 1996 and 1995, and 0.81% in 1994.
Other service fees, which represented 38.1% of non-interest income for
the year, increased $13.3 million or 20.9%, from $63.7 million in 1995 to $77.1
million in 1996. Debit card fees, which consist primarily of rental income of
point-of-sale (POS) terminals and interchange income, rose $5.0 million in Banco
Popular. This increase is in line with the growth in the volume of transactions
at POS terminals from a monthly average of approximately 990,000 in December
1995 to 2,048,000 a year later. The number of POS terminals, from which rental
income is derived, increased 57.6% to 11,392 as of December 31, 1996, from 7,229
a year earlier. Credit card fees and discounts rose $3.1 million, reflecting a
higher portfolio level and increased customer activity. In addition, included in
other fees are an additional $2.4 million due to the expanded sale and
administration of investment products such as mutual funds.
F-10
29
- ------------------------------------------------------------------------------------------------------------------
TABLE F
Other Operating Income
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Five-Year
1996 1995 1994 1993 1992 C.G.R
-----------------------------------------------------------------------
Service charges on deposit accounts $ 85,846 $ 78,607 $ 71,727 $ 68,246 $ 63,064 9.31%
Other service fees:
Credit card fees and discounts ... 23,735 20,676 18,620 16,818 16,795 9.21
Credit life insurance fees ....... 7,955 5,766 4,889 4,270 3,286 16.10
Debit card fees .................. 10,430 5,425 3,185 1,704 1,497 55.18
Mortgage servicing fees, net of
amortization .................... 7,534 5,956 2,301 2,936 3,174 21.09
Trust fees ....................... 6,174 5,851 5,159 4,084 4,403 8.78
Other fees ....................... 21,242 20,051 17,086 13,135 13,336 11.84
Other income ...................... 39,354 23,853 17,885 12,569 18,324 16.85
---------------------------------------------------------------------------
Total ........................ $202,270 $166,185 $140,852 $123,762 $123,879 12.47%
===========================================================================
Other operating income
to average assets ............... 1.24% 1.18% 1.15% 1.16% 1.30%
Other operating income
to operating expenses ........... 37.32 34.14 31.45 30.02 33.76
- ------------------------------------------------------------------------------------------------------------------
The largest single category of non-interest income contributing to the
increase in 1996 was other income, which increased $15.5 million or 65.0% and
$21.5 million or 120% over 1995 and 1994, respectively. Other income of the
Corporation's leasing subsidiaries increased $7.5 million, mainly as a result of
higher daily rental income and gains on sales of daily rental units. Also,
Puerto Rico Home Mortgage and Equity One both realized higher gains on sale of
mortgage loans of $3.2 million and $1.4 million, respectively. Moreover, BP
Capital contributed $2.5 million to the increase in other operating income, due
to a higher volume of investment banking and underwriting services.
SECURITY AND TRADING GAINS
The Corporation sold $2.9 billion in investment securities
available-for-sale during 1996, realizing a net gain of $3.1 million. BanPonce
Financial recorded a gain on the sale of equity securities of $7.0 million,
offset by a net loss of $3.9 million recorded in Banco Popular. In 1995, $286
million of the investment securities available-for-sale were sold for a net gain
of $5.4 million, principally due to a gain on the sale of equity securities of
$6.1 million recorded at BanPonce Financial, partially offset by a net loss of
$0.9 million in Banco Popular.
Trading account activities for the year ended December 31, 1996,
resulted in profits of $108 thousand, compared with profits of $1.8 million in
1995. During 1995, profits were attained primarily in Puerto Rico Home Mortgage
and BP Capital, with gains of $1.2 million each, offset by losses of $0.6
million in Banco Popular.
OPERATING EXPENSES
Total operating expenses were $541.9 million for the year ended
December 31, 1996, compared with $486.8 million in 1995 and $447.8 million in
1994. As shown in Table G, the increase of $55.1 million or 11.3% resulted from
a $24.1 million rise in personnel costs together with a $26.0 million increase
in professional fees, business promotion and equipment expenses, tempered by a
reduction in the FDIC assessment of $8.7 million.
Total personnel costs, the Corporation's largest expense category, were
$273.2 million in 1996, an increase of 9.7% compared with $249.1 million in
1995. Total personnel costs for 1994 amounted to $225.7 million. The growth in
personnel costs was led by an increase of $13.4 million in salary expense, due
largely to annual merit increases, greater use of incentive pay to compensate
sales efforts and increased headcount as a result of the continuous expansion.
Full-time equivalent employees (FTE) amounted to 7,996 at December 31, 1996, up
181 from 7,815 at the end of 1995. The increase in FTE results mainly from the
addition of 90 employees at Equity One related with the opening of 11 offices
during 1996, and increased staffing at Banco
F-11
30
- -----------------------------------------------------------------------------------------------------------------------
TABLE G
Operating Expenses
Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Five-Year
1996 1995 1994 1993 1992 C.G.R
---------------------------------------------------------------------------
Salaries ............................... $ 185,946 $ 172,504 $ 160,996 $ 151,432 $ 134,709 7.43%
Pension and other benefits ............. 64,609 57,568 45,546 44,713 36,484 11.42
Profit sharing ......................... 22,692 19,003 19,205 19,766 17,041 11.65
---------------------------------------------------------------------------
Total personnel costs ................. 273,247 249,075 225,747 215,911 188,234 8.63
---------------------------------------------------------------------------
Equipment expenses ..................... 47,957 41,577 35,474 27,964 23,813 16.08
Professional fees ...................... 46,182 34,954 33,757 27,302 22,558 19.12
Net occupancy expense .................. 36,899 32,850 28,440 26,085 25,442 10.40
Communications ......................... 26,470 23,106 20,308 18,203 17,048 8.78
Business promotion ..................... 26,229 17,801 16,271 16,638 12,548 19.59
Other taxes ............................ 23,214 20,872 19,807 15,996 14,608 12.21
Amortization of intangibles ............ 18,054 20,204 18,003 16,176 14,888 5.69
Printing and supplies .................. 11,964 11,069 8,817 8,189 7,290 7.46
Other operating expenses:
FDIC assessment ..................... 1,544 10,257 19,346 17,802 16,372 (36.54)
Transportation and travel ........... 5,852 4,424 3,946 3,554 3,136 13.19
All other ........................... 24,307 20,644 17,930 18,456 21,008 4.77
---------------------------------------------------------------------------
Subtotal ........................... 268,672 237,758 222,099 196,365 178,711 10.23
---------------------------------------------------------------------------
Total .............................. $ 541,919 $ 486,833 $ 447,846 $ 412,276 $ 366,945 9.41%
===========================================================================
Efficiency ratio ....................... 61.33% 64.88% 66.21% 66.94% 65.05%
Personnel costs to average assets ...... 1.68 1.76 1.85 2.02 1.98
Operating expenses to average assets ... 3.32 3.45 3.66 3.86 3.85
Assets per employee (in millions) ...... $ 2.10 $ 2.01 $ 1.68 $ 1.53 $ 1.42
- -----------------------------------------------------------------------------------------------------------------------
Popular pertaining to the implementation of strategic initiatives. Also, the
recently acquired operations of Banco Popular, N.A. (California) increased the
headcount of the Corporation by 40 employees. The assets per employee ratio rose
to $2.10 million in 1996 from $2.01 million in 1995. All FTE figures for 1992
through 1996 have been adjusted to include temporary employees.
Employee benefits, including profit sharing, rose $10.7 million to
$87.3 million in 1996, compared with $76.6 million in 1995. The rise in pension
costs and other fringe benefits was primarily related to increases in medical
plan costs and higher pension and postretirement benefit expenses. Also, an
expense of $1.2 million was incurred by Banco Popular for staff uniforms in
order to emphasize its corporate image at all branches. Furthermore, profit
sharing expense rose $3.7 million, as a result of higher eligible salaries and
stronger profitability ratios at Banco Popular.
Other operating expenses, excluding personnel costs, totaled $268.7
million for the year ended December 31, 1996, compared with $237.8 million in
1995 and $222.1 million in 1994. Professional fees rose $11.2 million to $46.2
million in 1996, from $35.0 million in 1995, reflecting expenditures for
purchased software associated with systems enhancements and for consulting
services related to the Corporation's strategic initiatives. Also, business
promotion rose $8.4 million as part of the ongoing campaign to promote the use
of electronic services at Banco Popular and the launching of new products and
services.
Equipment expenses amounted to $48.0 million in 1996, compared with
$41.6 million in 1995, an increase of $6.4 million or 15.3%. This increase was
mostly attributed to the depreciation related with the continued enhancement of
existing products, technological capabilities and delivery channels, such as the
expansion of the electronic payment system and the network of POS terminals. The
Corporation increased its automated banking machine network by 60 ATMs and
installed 4,163 additional POS terminals. Also, operating expenses for the year
were affected by a $1.1 million expense recorded by Banco Popular, FSB, as a
result of the one-time assessment to capitalize the SAIF. Partially offsetting
these increases, was a reduction in the FDIC assessment of $9.8 million,
excluding the one-time assessment, as a result of the decrease in the assessment
rate during the third quarter of 1995, when the Bank Insurance Fund (BIF)
reached its statutory level.
F-12
31
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE
On October 31, 1994, the Governor of Puerto Rico signed into law the
Puerto Rico Tax Reform Act of 1994 (the Act). The Act made comprehensive
important changes in several major areas of the tax law. In general, the
provisions of the Act were effective for taxable years beginning after June 30,
1995. Accordingly, most changes of the reform were effective for the Corporation
in 1996. The changes that most significantly affected the Corporation's income
tax expense and liability for 1996, are summarized below:
- Reduction in the higher marginal tax rate from 42% to 39%.
- Repeal of the reserve method for determining losses on loans.
Corporations are now required to use the direct charge-off
method and recapture into income, for income tax purposes, the
reserve balance at December 31, 1995 over a four-year period.
- Increase to 100% the dividend received deduction on dividends
received from domestic subsidiaries (previously 85%).
Income tax expense for the year ended December 31, 1996, was $70.9
million compared with $59.8 million in 1995 and $50.0 million in 1994. The
increase in 1996 is primarily due to higher pre-tax earnings by $49.9 million.
The effective tax rate was 27.7% in 1996, 29.0% in 1995 and 28.6% in
1994. Part of the decrease is directly related to the reduction in Puerto Rico,
the Corporation's principal place of business, of the maximum tax rate from 42%
in 1995 to 39% in 1996. The difference between the effective tax rate and the
maximum tax rate is primarily due to the interest income earned on certain
investments and loans which is exempt from income tax, net of the disallowance
of expenses attributable to the exempt income. For further information
concerning the effective tax rate see Note 22 to the Consolidated Financial
Statements.
The Corporation uses an asset and liability approach in accounting for
income taxes, as required by SFAS 109. At December 31, 1996, the Corporation's
net deferred tax assets amounted to $64 million, compared with $32 million at
December 31, 1995. Gross deferred tax assets rose from $67 million to $91
million mainly as a result of the recognition of a deferred tax asset of $19
million related with the repeal of the reserve method of accounting for losses
on loans. Other components of gross deferred tax assets are alternative minimum
tax and other credits, postretirement benefits obligations and other temporary
differences mainly arising from the deferral of loan origination costs and
commissions. When necessary, a valuation allowance is recorded for those
deferred tax assets for which the Corporation cannot determine the likelihood of
their realizability. At December 31,1996, the valuation allowance amounted to
$0.6 million compared with $1.8 million at December 31, 1995.
Gross deferred tax liabilities were $26 million at December 31, 1996,
compared with $33 million at December 31, 1995. The major components of deferred
tax liabilities are differences between assigned values and tax bases of assets
and liabilities recognized in purchase business combinations and other temporary
differences mainly related with unrealized gains on investment securities
available-for-sale.
STATEMENT OF CONDITION ANALYSIS
The Corporation's total assets at December 31, 1996, reached $16.8
billion, reflecting an increase of $1.1 billion or 6.9% when compared with $15.7
billion at December 31, 1995. Total assets at the end of 1994 amounted to $12.8
billion. Most of the growth in total assets pertains to Banco Popular and Equity
One, which increased $787 million, and $224 million, respectively. Average total
assets for 1996 amounted to $16.3 billion compared with $14.1 billion in 1995
and $12.2 billion in 1994.
EARNING ASSETS
Earning assets at December 31, 1996, amounted to $15.5 billion,
compared with $14.7 billion at December 31, 1995 and $11.8 billion at December
31, 1994.
Money market, investment and trading securities totaled $5.7 billion at
December 31, 1996, compared with $6.0 billion at the same date the previous
year. The decrease of $285 million was mainly reflected in investment
securities, which totaled $4.6 billion at the end of 1996, compared with $4.9
billion in 1995. Investment securities held-to-maturity decreased $454 million,
from $1.7 billion in 1995 to $1.2 billion in 1996. Partially offsetting this
reduction, was an increase of $206 million in the investment securities
available-for-sale.
F-13
32
- ----------------------------------------------------------------------------------------------------------------------
TABLE H
Loans Ending Balances
Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Five-Year
1996 1995 1994 1993 1992 C.G.R
--------------------------------------------------------------------------
Commercial, industrial and
agricultural ........................... $3,822,096 $3,205,031 $2,893,534 $2,369,514 $2,133,357 13.88%
Construction ............................ 200,083 215,835 161,265 153,436 172,411 0.54
Lease financing ......................... 516,001 498,750 448,236 375,693 314,905 15.35
Mortgage* ............................... 2,576,887 2,403,631 2,177,763 1,576,044 790,802 30.40
Consumer* ............................... 2,663,961 2,354,237 2,100,531 1,872,235 1,840,578 5.18
--------------------------------------------------------------------------
Total .................................. $9,779,028 $8,677,484 $7,781,329 $6,346,922 $5,252,053 13.48%
==========================================================================
*Includes loans held-for-sale.
- --------------------------------------------------------------------------------
Money market investments totaled $800 million at December 31, 1996,
compared with $799 million at the same date in 1995. Trading account securities
totaled $292 million at December 31, 1996, compared with $331 million at
December 31, 1995.
Loans are the single largest category of the Corporation's earning
assets and the most profitable. As shown in Table H, at December 31, 1996, total
loans net of unearned income, were $9.8 billion compared with $8.7 billion at
the end of 1995, for a 12.7% increase. At the same date in 1994 total loans were
$7.8 billion. At the end of 1996, commercial loans represented 39.1% of the
total portfolio, while construction loans were 2.0%, lease financing 5.3%,
mortgage loans 26.4%, and consumer loans comprised 27.2%. This compares with
37.0%, 2.5%, 5.7%, 27.7% and 27.1% at the end of 1995 for the same categories,
respectively.
The commercial loan portfolio had the largest growth, rising $617
million or 56.0% of the total increase in loans, followed by consumer loans
which increased $310 million and mortgage loans with $173 million for 28.1% and
15.7% of the total increase, respectively. The lease financing portfolio rose
$17 million while the construction loan portfolio decreased $16 million.
The commercial loan portfolio of Banco Popular had an increase of $489
million, reaching $3.7 billion at the end of 1996, compared with $3.2 billion
reported at December 31, 1995. Through continuous marketing efforts both in
Puerto Rico and in the mainland, the Corporation has increased its commercial
portfolio both in the retail and middle market, while offering a wide variety of
other services. In New York and New Jersey strong emphasis has been placed on
Government guaranteed loans and the small and middle market sectors. Also, the
interest rate scenario that prevailed during 1996 moved customers to borrow
money at more attractive rates. These factors resulted in an increase of
approximately $93 million in the Fortune 500 and corporate loans, $260 million
in the middle market loan portfolio and $264 million in the retail loan
portfolio. CombanCorp, acquired at the end of the third quarter of 1996,
contributed $11 million to the total increase in commercial loans.
Consumer loans, which include personal, auto and boat, credit cards and
reserve lines grew $310 million, totaling $2.7 billion at December 31, 1996,
compared with $2.4 billion at the end of 1995. The growth in this loan category
was led by an increase of $213 million at Banco Popular, followed by Equity One
with a $61 million increase and Best Finance with $25 million. At the same date
in 1994, consumer loans totaled $2.1 billion. Of the total portfolio of consumer
loans, 41.2% are secured loans of which 19.4% are secured by mortgages and 3.8%
have cash collateral.
At December 31, 1996, the personal loan portfolio amounted to $1.4
billion, or 52.2% of the total consumer portfolio. This amount compares with
$1.2 billion or 51.9% reported in 1995 for an increase of $170 million or 13.9%.
Specifically at Banco Popular, personal loans rose $99 million to $1.1 billion
for 1996, primarily attributed to loans granted for home improvement purposes
which increased $71 million, from $178 million in 1995 to $249 million in 1996.
Auto loans, which represented 22.0% of the consumer loan portfolio as
of December 31, 1996, rose $91 million to $587 million in 1996, while the credit
card portfolio rose $49 million to $474 million. The growth in both portfolios
was mainly attained at Banco Popular due to strong marketing efforts coupled
with the launching of new products.
F-14
33
- --------------------------------------------------------------------------------
The Corporation had $2.6 billion in mortgage loans, compared with $2.4
billion at the same date in 1995 and $2.2 billion in 1994. Equity One accounted
for $149 million or 86.0% of the increase in mortgage loans. Banco Popular, FSB
increased $41 million and Banco Popular, N.A. (California), acquired at the end
of 1996, contributed $20 million to the increase. On the other hand, Banco
Popular reported a decrease of $37 million for 1996, as a result of the
securitization during the fourth quarter of 1996 of $209 million in conventional
mortgage loans. At December 31, 1996, $201 million of these assets were
classified as securities sold not yet delivered and included as other assets in
the Corporation's Statement of Condition, since they were sold in December 1996,
with settlement date of January 1997.
The lease financing portfolio amounted to $516 million as of December
31, 1996, compared with $499 million and $448 million as of December 31, 1995
and 1994, respectively. The rise in truck and vehicle sales in Puerto Rico
contributed to the growth in this category.
Construction loans amounted to $200 million in 1996 from $216 million a
year ago and $161 million in 1994. CombanCorp contributed $3 million to this
loan category.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Total deposits at December 31, 1996, amounted to $10.8 billion compared
with $9.9 billion at December 31, 1995, an increase of $887 million. Most of the
increase was attained at Banco Popular, where total deposits increased $732
million, notwithstanding the decrease of $51 million in its 936 deposits. Also,
CombanCorp contributed $63 million to the increase. Of the Corporation's total
deposits at the end of 1996, 79.8% were in Puerto Rico and the Virgin Islands
and the remaining 20.2% were in the U.S. mainland. Total deposits as of December
31, 1994, amounted to $9.0 billion.
Core deposits reached $8.6 billion by the end of 1996, compared with
$7.8 billion a year before. The growth of $775 million resulted from rises of
$195 million in certificates of deposit under $100,000, $203 million in savings
accounts, $309 million in demand deposits, and $68 million in NOW and money
market accounts.
Borrowings, excluding subordinated notes, increased $80 million,
reaching $4.3 billion at December 31, 1996. Major fluctuations in this category
include an increase of $1.2 billion in notes payable and short-term borrowings
principally at Banco Popular of $846 million and $191 million at BanPonce
Financial. Conversely, federal funds purchased and securities sold under
agreements to repurchase decreased $1.1 billion from December 31, 1995, mainly
due to declines in Banco Popular and BP Capital of $888 million and $318
million, respectively.
Subordinated notes decreased $50 million to $125 million outstanding at
December 31, 1996. The decrease resulted from the maturity, on June 15, 1996, of
the subordinated notes issued by Banco Popular in 1989. The $125 million in
subordinated notes outstanding were issued by the Corporation on December 12,
1995, with a 6.75% rate and a maturity date of December 15, 2005. The proceeds
obtained from the issuance were utilized to finance the growth and expansion of
the Corporation.
STOCKHOLDERS' EQUITY
At December 31, 1996, stockholders' equity amounted to $1.26 billion,
an increase of $121 million or 10.6% compared with the balance of $1.14 billion
at the end of 1995. This increase is mainly due to earnings retention. The
Corporation's Dividend Reinvestment and Purchase Plan also contributed to the
increase in stockholders' equity.
As mentioned in the Overview section, on April 26, 1996, the
Corporation's Board of Directors authorized a two-for-one stock split effected
in the form of a dividend and as a result, $198 million were transferred from
retained earnings to common stock.
The Corporation had 4,000,000 shares of preferred stock outstanding at
December 31, 1996. 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.
F-15
34
- ----------------------------------------------------------------------------------------------------------------------
TABLE I
Capital Adequacy Data
As of December 31,
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1996 1995 1994 1993 1992
-----------------------------------------------------------------------
Risk-based capital
Tier I capital ............................. $ 1,121,128 $ 1,003,072 $ 953,266 $ 786,686 $ 722,082
Supplementary (Tier II) capital ............ 246,350 231,091 104,338 106,193 110,704
-----------------------------------------------------------------------
Total capital ........................... $ 1,367,478 $ 1,234,163 $ 1,057,604 $ 892,879 $ 832,786
=======================================================================
Risk-weighted assets
Balance sheet items ....................... $ 9,368,420 $ 8,175,420 $ 7,219,906 $ 6,150,749 $ 5,430,534
Off-balance sheet items ................... 275,397 249,529 199,327 250,102 177,172
-----------------------------------------------------------------------
Total risk-weighted assets ............. $ 9,643,817 $ 8,424,949 $ 7,419,233 $ 6,400,851 $ 5,607,706
=======================================================================
Ratios:
Tier I capital (minimum required - 4.00%) . 11.63% 11.91% 12.85% 12.29% 12.88%
Total capital (minimum required - 8.00%) .. 14.18 14.65 14.25 13.95 14.85
Leverage ratio (minimum required - 3.00%) . 6.71 6.66 7.62 6.95 7.26
Equity to assets .......................... 7.33 7.58 7.57 7.42 7.02
Tangible equity to assets ................. 6.55 6.60 6.55 6.29 5.66
Equity to loans ........................... 12.97 13.03 13.01 13.91 12.99
Internal capital generation rate .......... 10.99 9.36 9.48 10.08 9.04
- ----------------------------------------------------------------------------------------------------------------------
Regulatory guidelines require a minimum Tier I capital of 4%, total
capital to risk-weighted assets ratio of 8% and a leverage ratio of 3%. Banks
and bank holding 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. At December 31, 1996, the Corporation exceeds those
regulatory risk-based capital requirements for well-capitalized institutions by
wide margins, due to the high level of capital and the conservative nature of
the Corporation's assets. Tier I capital to risk-adjusted assets and total
capital ratios at December 31, 1996, were 11.63% and 14.18%, respectively,
compared with 11.91% and 14.65% at the same date in 1995. The Corporation's
leverage ratio was 6.71% at December 31, 1996, compared with 6.66% for the
previous year. Table I shows capital adequacy information for the current and
previous four years.
Intangible assets were $131 million at December 31, 1996, compared
with $143 million at the end of 1995. Total intangibles consisted of $55
million in core deposit intangibles, $46 million in goodwill, $26 million in
mortgage servicing rights and $4 million in other intangibles. At the end of
1995, core deposit intangibles were $66 million, goodwill totaled $46 million,
mortgage servicing rights were $24 million and other intangibles were $7
million. The average tangible equity increased to $1.06 billion for the year
ended December 31, 1996, from $922 million a year before, an increase of $138
million or 15.0%. Total tangible equity at December 31, 1996, was $1.13 billion
compared with $999 million at December 31, 1995. The tangible equity to assets
ratio for 1996 was 6.55% compared with 6.60% in 1995.
Book value per common share increased to $17.59 at December 31, 1996,
compared with $15.81 at year-end 1995. The market value of the Corporation's
common stock at the end of 1996, was $33.75 compared with $19.38 a year
earlier. The total market capitalization was $2.23 billion, compared with $1.28
billion as of December 31, 1995.
The Corporation's stock is traded on the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market System under
the symbol BPOP. Table J shows the range of market quotations and cash
dividends declared for each quarter during the last five years. The preferred
stock of the Corporation is also traded on the NASDAQ National Market System
under the symbol BPOPP. Its market value at December 31, 1996 and 1995 was
$26.25 and $27.25 per share, respectively.
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 1996, 191,235 shares, equivalent
to $4.1 million in additional capital, were issued under the plan. A total of
1,542,463 shares have been issued under this plan since its inception in 1989,
contributing $19.9 million in additional capital.
Dividends declared on common stock during 1996 amounted to $46
million, compared with $38 million in 1995. The Corporation increased its
quarterly dividend from $0.15 to $0.18 per common share, a 20% increase,
effective on July 1, 1996. Total
F-16
35
- -------------------------------------------------------------------------------------------------------------------------------
TABLE J
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
- -------------------------------------------------------------------------------------------------------------------------------
1996 $17.59 24.63% 2.65% 12.59x 191.87%
1ST QUARTER........ $ 23 1/8 $ 19 3/8 $.15
2ND QUARTER........ 23 6/7 21 7/8 .18
3RD QUARTER........ 27 3/4 22 5/8 .18
4TH QUARTER........ 35 25 7/8 .18
1995 15.81 26.21 3.15 9.24 122.55
1st quarter........ $ 15 7/8 $ 14 1/16 $.13
2nd quarter........ 17 3/4 15 5/8 .15
3rd quarter........ 19 1/2 17 3/4 .15
4th quarter........ 19 15/16 19 1/16 .15
1994 13.74 27.20 3.18 7.66 102.37
1st quarter........ $ 16 1/4 $ 15 3/8 $.12
2nd quarter........ 16 3/8 15 1/2 .12
3rd quarter........ 16 5/8 15 3/4 .13
4th quarter........ 16 1/2 13 1/2 .13
1993 12.75 25.39 2.97 9.42 123.58
1st quarter........ $ 15 5/8 $ 13 1/4 $.10
2nd quarter........ 14 1/8 12 3/16 .10
3rd quarter........ 15 1/8 13 1/4 .12
4th quarter........ 16 1/8 14 7/8 .13
1992 11.52 28.33 3.12 10.83 131.35
1st quarter........ $ 12 3/4 $ 9 3/8 $.10
2nd quarter........ 13 7/8 12 .10
3rd quarter........ 13 7/8 12 1/4 .10
4th quarter........ 15 1/8 12 1/4 .10
*Based on the average high and low market price for the four quarters.
Note: All per share data has been adjusted to reflect the stock split
effected in the form of a dividend on July 1, 1996.
- --------------------------------------------------------------------------------
dividends declared per common share for 1996 were $0.69 compared with $0.58 in
1995 and $0.50 in 1994. The dividend payout ratio to common stockholders for
the year was 24.63% compared with 26.21% in 1995. Dividends declared on the
preferred stock amounted to $8.4 million in 1996 and 1995.
RISK MANAGEMENT
The Corporation has established a combined approach in managing its
balance sheet which includes management of interest rate, liquidity and credit
risks.
INTEREST RATE RISK
The Corporation's net interest income is affected by a variety of
factors including interest rate volatility, the spread between different market
rates or basis risk, timing differences between the maturity and repricing of
assets and liabilities, as well as the sensitivity of their rates to market
interest rates. Interest rate risk refers to the probability of a reduction in
earnings due to fluctuations in interest rates. It is a priority for the
Corporation's management to monitor continuously the degree of interest rate
risk assumed, and to ensure that it remains within an acceptable range.
The Asset/Liability Management Committee (ALCO) is primarily
responsible for implementing interest rate risk policies and strategies
approved by the Board of Directors. The Board sets overall policies regarding
the management of interest rate risk and oversees the implementation of those
policies by the ALCO. The main strategic objective of the Corporation's
interest rate risk management is to protect the level and stability of net
interest income from interest rate volatility. Nevertheless, the ALCO may
decide occasionally to position the Corporation in order to benefit from
anticipated changes in interest rates. Such positions are
F-17
36
- --------------------------------------------------------------------------------
maintained for relatively short periods and are structured so they can be
unwound quickly in the case of adverse market movements. The ALCO is composed of
senior officers of the Corporation and meets monthly.
Interest rate risk is managed by the Corporation using various
techniques including beta-adjusted gap analysis, simulations and duration
analysis. Gap analysis presents the difference in repricing volumes between
earning assets and interest-bearing liabilities during future time periods. The
projected repricing balances of earning assets are adjusted for expected
prepayments of securities and loans, while the repricing balances of deposits
are adjusted for the sensitivity of their rates to market interest rates. The
prepayment rates of securities and loans are estimated based upon historical
experience and estimates prepared by major securities dealers. The elasticity
of deposit rates is estimated based on the application of statistical
techniques to the relationship between the deposit rates and LIBOR during a
two-year period. The resulting beta factors are then used to restate the static
gaps in terms of repricing dollars, all with a similar sensitivity to LIBOR.
Tactical, short-term positions are measured by the gap positions within one
year, while structural, longer term positions are expressed by the gap
positions beyond one year. The magnitude of these positions is maintained
within parameters approved by the ALCO, with the objective of protecting the
net interest margin from market volatility.
The results of the beta-adjusted gap analysis, together with risk
management strategies, are validated using simulation analysis under various
market scenarios. Simulation analysis also permits the ALCO to include in its
assessment the effect of the Corporation's business plans on future interest
rate risk. The ALCO uses an "earnings at risk" concept to monitor and help
control the projected volatility of twelve-month projected earnings. The
simulation runs incorporate anticipated balance sheet changes including asset
and liability runoffs, reinvestments and various interest rate scenarios,
including both rising and declining, to ensure that a wide array of possible
market movements are tested.
Duration analysis is an additional tool increasingly used to measure
and monitor the longer term, structural interest rate risk being assumed by the
Corporation. Duration analysis quantifies the sensitivity of the market value
of the Corporation's earning assets and interest-bearing liabilities to changes
in interest rates. The focus of this technique is on economic value, as opposed
to gap analysis which is based upon the book value of assets and liabilities
repricing in future periods, and simulation analysis which concentrates on the
impact of interest rate volatility on earnings. Duration analysis is gaining
acceptance among leading commercial banks, investors and regulators as one of
the best methods of assessing longer term interest rate risk. By taking into
consideration all projected future cash flows and adjusting them for their
present value, it avoids a primary weakness of both gap and simulation
analysis. The ALCO uses duration analysis as an additional tool for managing
interest rate risk, together with gap analysis and simulation runs. These
techniques have different strengths and weaknesses, and all three are used
together in the process of managing interest rate risk in a complementary
manner.
Interest rates in general declined toward the end of 1995 and the
beginning of 1996. However, in February rates started rising due to increasing
evidence of a rebound in the U.S. economy, and continued an upward trajectory
until mid-summer. The actual growth rate of gross domestic product for the
first two quarters of the year did confirm that the economy was staging a
rebound from the sluggish growth of late 1995. At the same time, market rates
rose as the financial markets started pricing with the increasing probability
of a tighter monetary policy in the near-term future.
The Corporation positioned the balance sheet during the year to
benefit slightly from a rising interest rate scenario. Even though the Federal
Reserve did not tighten monetary policy in 1996, as the market at times
expected, interest rates finished the year substantially higher than at the end
of the previous year. The Corporation's net interest margin, on a taxable
equivalent basis, benefitted from the general increase in rates during 1996,
increasing by 3 basis points during the year. Table K presents the
Corporation's gap position at the end of 1996.
As of December 31, 1996, the Corporation had $1.0 billion in
mortgage-backed securities, including collateralized mortgage obligations
(CMOs). CMOs amounted to $593 million or 58.3% of the mortgage-backed
securities portfolio at that date. The portfolio had an estimated average life
of 9.1 years and an estimated average yield to maturity of 6.26%. 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 loan as well as obligations (CMOs) collateralized by such
securities. In most cases, the debtor of the underlying loan has the option of
repaying the principal balance owed at any time.
F-18
37
TABLE K
Interest Rate Sensitivity
As of December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 ................. $ 499,664 $ 278,933 $ 778,597
Short-term interest bearing
deposits in other banks .............. 21,480 100 $ 99 21,679
Investment and trading securities ..... 978,909 247,891 688,963 $ 798,963 $2,190,424 4,905,150
Loans ................................. 2,619,548 362,956 347,537 674,191 5,774,796 9,779,028
Other assets .......................... 200,817 $1,078,832 1,279,649
-----------------------------------------------------------------------------------------
Total ........................... 4,320,418 889,880 1,036,599 1,473,154 7,965,220 1,078,832 16,764,103
-----------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Savings, NOW and money market
accounts ............................ 619,417 3,755,486 4,374,903
Other time deposits ................... 1,622,966 734,970 573,031 404,590 722,111 4,057,668
Federal funds purchased and securities
sold under agreements to repurchase . 1,404,225 230,240 30,000 211,000 1,875,465
Other short-term borrowings ........... 767,398 363,008 111,466 162,134 1,404,006
Notes payable ......................... 104,449 243,000 639,264 986,713
Senior debentures ..................... 30,000 30,000
Subordinated notes .................... 125,000 125,000
Non-interest bearing deposits ......... 2,330,704 2,330,704
Other non-interest bearing liabilities 317,112 317,112
Stockholders' equity .................. 1,262,532 1,262,532
-----------------------------------------------------------------------------------------
Total ............................ 4,548,455 1,571,218 714,497 566,724 5,452,861 $3,910,348 $16,764,103
-----------------------------------------------------------------------------------------
Off-balance sheet financial instruments 25,000 25,000 (20,000) (30,000)
Interest rate sensitive gap ........... $ (203,037) $ (656,338) $ 302,102 $ 906,430 $2,482,359
Cumulative interest rate
sensitivity gap ..................... $ (203,037) $ (859,375) $ (557,273) $ 349,157 $2,831,516
Cumulative sensitive gap to
earning assets ...................... (1.29)% (5.48)% (3.55)% 2.23% 18.05%
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 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 speed,
whereas the YTM may increase in an environment of decreasing prepayment speed.
The opposite is true in the case of portfolios with aggregate discounts. The
mortgage-backed securities portfolio of the Corporation had an aggregate premium
of $2 million, as of December 31, 1996.
The use of derivative products, such as interest rate swaps, is very
limited but, they are also used by the Corporation as a tool to manage interest
rate risk. At December 31, 1996, the notional amount of these off-balance sheet
items was $162 million of which $140 million were interest rate swaps. These
amounts compare with $136 million and $125 million, respectively, at the end of
1995.
LIQUIDITY RISK
Liquidity risk refers to the possibility of not being able to access
the funds needed for the Corporation's business activities. The objective of the
Corporation's liquidity management is to ensure sufficient cash flow to fund the
origination and acquisition
F-19
38
TABLE L
Maturity Distribution of Earning Assets
As of December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
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 ................. $ 800,276 $ 800,276
Investment and trading
securities ............................ 2,280,709 $1,749,229 $ 268,642 $ 502,356 $ 30,163 4,831,099
Loans:
Commercial ............................ 1,627,798 787,620 585,046 361,486 460,146 3,822,096
Construction .......................... 150,473 32,049 5,431 3,504 8,626 200,083
Lease financing ....................... 166,945 343,897 5,159 516,001
Consumer .............................. 949,218 1,513,515 201,228 2,663,961
Mortgage .............................. 283,148 601,480 2,132 1,683,683 6,444 2,576,887
------------------------------------------------------------------------------
Total ................................. $6,258,567 $5,027,790 $ 861,251 $2,757,416 $ 505,379 $15,410,403
==============================================================================
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity
securities held by the Corporation are not included in this table.
of assets, the repayment of deposit withdrawals and wholesale borrowings
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 management is to ensure that adequate funds are
available to meet all foreseeable obligations and at the same time provide a
reasonable cushion for unexpected contingencies, while avoiding excessive
liquidity.
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 obligations and common and preferred stock for
financing the operations of its non-banking subsidiaries, while the banking
subsidiaries obtain most of their financing from retail deposits and wholesale
borrowings.
The Corporation's assets and liabilities represent a source of
substantial liquidity. The investment portfolio has a relatively short duration
and 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 from various sources in the U.S. money markets.
The investment portfolio is the major source of liquidity among the
Corporation's assets. As of December 31, 1996, the investment securities
portfolio totaled $4.6 billion, with an average maturity of 3.3 years. Cash and
money market instruments amounted to $1.3 billion, while U.S. Treasury and
Agency obligations totaled $3.3 billion, or 71.6% of the total portfolio with an
average maturity of 1.5 years. Securities classified as available-for-sale
amounted to $3.4 billion or 74.1% of the total portfolio, with a net unrealized
gain of $3.2 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, 1996, amounted to $9.8 billion,
of which $3.2 billion or 32.5% mature within one year. The repayments of
principal and interest from the portfolio provide a stable source of cash flow
to the Corporation. Table L presents a maturity distribution of the
Corporation's earning assets as of December 31, 1996.
The operations of the Corporation are funded primarily by the deposit
base of its banking subsidiaries. The sources of these deposits have become more
diversified as the Corporation's banking operations in the continental United
States have expanded. This source of funds is usually less volatile than
institutional borrowings and its cost is less sensitive to changes in market
rates. The deposit base includes consumer and commercial demand deposits,
savings accounts and time deposits in denominations below $100,000. The
Corporation's extensive retail network and leadership in electronic banking have
resulted in a significant
F-20
39
TABLE M
Average Total Deposits
For the Year
- ----------------------------------------------------------------------------------------------------------------------
Five-Year
(In thousands) 1996 1995 1994 1993 1992 C.G.R.
---------------------------------------------------------------------------
Private demand .......................... $ 1,726,596 $1,571,405 $1,515,158 $1,396,339 $1,265,230 7.43%
Public demand ........................... 321,249 268,317 273,565 235,323 201,218 13.21
Other non-interest bearing accounts ..... 5,910 5,983 6,967 3,678 3,807 6.83
---------------------------------------------------------------------------
Non-interest bearing ................ 2,053,755 1,845,705 1,795,690 1,635,340 1,470,255 8.22
---------------------------------------------------------------------------
Savings accounts ........................ 3,095,898 2,913,380 2,839,300 2,492,845 2,044,037 13.69
NOW and money market accounts ........... 1,148,727 1,102,593 1,133,106 1,078,075 955,654 8.39
---------------------------------------------------------------------------
Savings deposits .................... 4,244,625 4,015,973 3,972,406 3,570,920 2,999,691 12.10
---------------------------------------------------------------------------
Certificates of deposit:
Under $100,000 ........................ 1,307,323 1,281,873 1,160,063 1,143,624 1,171,242 1.65
$100,000 and over ..................... 1,371,928 1,034,195 590,305 498,093 511,585 16.73
936 ................................... 1,020,064 999,384 1,007,147 1,029,450 1,202,604 (4.14)
---------------------------------------------------------------------------
Certificates of deposit ............. 3,699,315 3,315,452 2,757,515 2,671,167 2,885,431 3.61
---------------------------------------------------------------------------
Public time ............................. 238,377 175,706 177,534 124,629 155,715 5.66
Other time .............................. 225,724 229,315 134,081 122,829 130,031 10.37
---------------------------------------------------------------------------
Other time deposits ................. 464,101 405,021 311,615 247,458 285,746 7.80
---------------------------------------------------------------------------
Interest bearing .................... 8,408,041 7,736,446 7,041,536 6,489,545 6,170,868 7.65
---------------------------------------------------------------------------
Total ............................ $10,461,796 $9,582,151 $8,837,226 $8,124,885 $7,641,123 7.76%
===========================================================================
share of retail deposits in its principal markets. As of December 31, 1996, core
deposits amounted to $8.6 billion or 79.8% of total deposits, an increase of
$775 million or 9.9% from the previous year. As set forth in Table M, on
average, total deposits increased $880 million while core deposits rose $462
million. The size of the Corporation's core deposits located in continental U.S.
markets reached $1.9 billion as of December 31, 1996, compared with $1.6 billion
at the end of 1995. Certificates of deposit with denominations of $100,000 and
over as of December 31, 1996, totaled $2.2 billion, or 20.2% of total deposits.
Their distribution by maturity was as follows:
(In thousands)
3 months or less ................ $1,641,485
3 to 6 months ................... 176,157
6 to 12 months .................. 109,154
over 12 months .................. 246,777
----------
$2,173,573
==========
The Corporation is continuously developing broader sources of financing
for its operations. In addition to retail deposits, wholesale borrowings from
institutional investors in the U.S. money markets represent an increasingly
important source of financing. The latter have become more appealing due to the
recent tax reform that repealed the withholding tax in Puerto Rico on interest
paid to non-residents of the Island. Previously, payments made from Puerto Rico
were subject to a 29% withholding tax. Other borrowings consist primarily of
federal funds purchased, repurchase agreements and commercial paper sold.
Federal funds purchased have maturities of 30 days or less while repurchase
agreements generally mature within three months. Commercial paper is issued with
maturities that do not exceed 270 days. As of December 31, 1996, federal funds
purchased, securities sold under agreements to repurchase and other short-term
borrowings amounted to $3.3 billion, a decrease of $176 million when compared
with the same date a year before.
Intermediate and long-term debt is another source of liquidity. To
obtain longer term financing for its operations, the Corporation issued $424
million in medium-term notes during 1996. For further information on the
maturities of intermediate and long-term debt issued, please refer to notes 12
through 15 of the Consolidated Financial Statements.
F-21
40
During 1996, the Corporation's main subsidiary, Banco Popular, began a
Bank Note program permitting the issuance of a maximum of $600 million in senior
debt securities with maturities of up to 15 years. This program expands the
ability of the Corporation to raise long-term funding in the U.S. capital
markets and further diversifies its sources of liquidity, at a time when 936
funds are expected to decrease more rapidly.
The Corporation deposit base includes 936 deposits, which amounted to
$874 million as of December 31, 1996, or 8.1% of total deposits. In addition,
936 borrowings including repurchase agreements were $1.3 billion, or 8.7% of
total liabilities. The Corporation's total financing from 936 sources, including
both deposits and borrowings, totaled $2.2 billion or 14.3% of total liabilities
as of December 31, 1996. At the end of 1995 these funds totaled $2.3 billion or
15.7% of total liabilities.
During 1996, the United States Congress approved legislation which
increased the federal minimum wage and repealed Section 936 of the Internal
Revenue Code. For the last 20 years, the 936 Section has granted U.S.
Corporations operating in Puerto Rico (936 Corporations) a tax credit against
its federal tax liability for the net revenues derived from both qualifying
active business and certain passive investments held in Puerto Rico banks, known
as Qualified Possession Source Investment Income (QPSII). The tax benefits of
the Section applicable to actively earned income will be phased-out over a
ten-year period, after which they will expire completely. However, the tax
credit on passive earned income, which includes the interest earned by 936
Corporations on investments in financial assets issued in Puerto Rico, was
repealed retroactively for fiscal years commencing after December 31, 1995.
During the ten-year phase-out period, the tax benefits of actively earned income
will be available only to existing operations in Puerto Rico, but they cannot be
extended to new companies or new product lines by existing companies. Financial
institutions and other eligible borrowers in Puerto Rico have benefitted from
the low cost of these funds, although having to comply with certain investment
requirements imposed by local regulations.
The Corporation's management believes that the main effect of the
repeal of Section 936 on the pool of 936 funds in Puerto Rico will be to reduce
substantially the supply of funds within a short period of time. Therefore, it
is expected that the Corporation's volume of 936 funds should decrease
considerably in the near term. Management believes this should not have a
material effect on the Corporation's liquidity. During some time before the
actual repeal of the Section, the Corporation took actions to increase the
sources and availability of financing in the U.S. money and capital markets.
Substantial amounts of credit lines have been developed in the U.S. money
markets which complement the $600 million Bank Note program and $400 million in
credit lines available at the Federal Home Loan Bank of New York, of which the
Corporation is a member. In addition, the Corporation has outstanding $218
million of a $1.0 billion shelf registration with the Securities and Exchange
Commission, which permits the issuance of unsecured debt securities or shares of
preferred stock. Management is confident that the Corporation has sufficient
sources of liquidity to repay on short notice the entire balance of 936 funds
maturing within one year, which amounted to $1.4 billion, or 61.1% of the total
balance of 936 deposits and borrowings as of December 31, 1996. During 1996,
over $440 million in short-term 936 funds were converted into long-term
obligations with an average maturity of 6.7 years.
In July 1996, Moody's Investors Service raised its rating of long-term
unsecured debt issued by the Corporation and its second tier subsidiary,
BanPonce Financial to A3. The rating of subordinated debt was upgraded to Baa1.
BanPonce's certificate of deposit issuer rating by Thomson BankWatch is B.
CREDIT RISK MANAGEMENT AND LOAN QUALITY
One of the Corporation's primary risk exposure is its credit risk,
which represents the possibility of loss from a borrower's failure to perform
according to the terms of a transaction. The Corporation controls and monitors
this risk with policies, procedures and various levels of managerial
involvement.
The strategies utilized to manage credit risk begin with the adherence
to policies and procedures established for the initial underwriting of the
credit portfolio, followed by the ongoing monitoring of the portfolio, including
the early identification of potential problems and their resolution. Also, the
Corporation continues emphasizing the skills and experience of the credit staff
and 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 risk
management purposes. 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.
F-22
41
Credit extensions are approved by credit officers of the respective
lending departments. The number and level of officers approval depend on the
dollar amount and risk characteristics of the credit facility. The Corporation
receives collateral to support credit extensions and commitments, whenever it is
considered necessary. The amount of collateral obtained is based on the credit
assessment of the customer, and may include real or personal property, accounts
receivable, inventory and cash on deposit.
The Corporation's credit risk at December 31, 1996, was concentrated in
its $9.8 billion loan portfolio, which represented 63.2% of earning assets. The
loan portfolio is well-balanced as the Corporation's credit policies and
procedures emphasize diversification among geographical areas, business and
industry groups, to minimize the adverse impact of any single event or set of
occurrences. The credit risk exposure is spread among individual consumers,
small commercial loans and a diverse base of borrowers engaged in a wide variety
of businesses.
The Corporation has over 840,000 consumer loans and over 49,000
commercial lending relationships. Only 43 of these 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 asset composition of the Corporation by
geographical area at December 31, 1996 and 1995, is presented in the following
table.
1996 1995
(Dollars in thousands)
----------------------------------------------------------------
Puerto Rico $12,386,136 73.9% $11,833,155 75.5%
United States 3,756,526 22.4 3,253,791 20.7
U.S. and British Virgin
Islands and Latin America 621,441 3.7 588,505 3.8
---------------------------------------------------------------
$16,764,103 100.0% $15,675,451 100.0%
===============================================================
Included in total assets of Puerto Rico are investments in obligations
of the U.S. Treasury and U.S. Government agencies amounting to $2.9 billion and
$3.4 billion in 1996 and 1995, respectively.
Banco Popular, the Corporation's largest subsidiary, operates 178
branches in Puerto Rico, 29 in New York, seven in the U.S. Virgin Islands and
one in the British Virgin Islands. Puerto Rico's economic outlook is generally
similar to that of the mainland, and the Government of the Island and its
instrumentalities are all investment-grade rated borrowers in the United States
capital markets. As further discussed in the Liquidity Risk section of this
financial review, in August 1996, the U.S. Congress approved legislation that
repealed Section 936 of the Internal Revenue Code. The bill approved repealed
the QPSII credit retroactively for taxable years beginning after December 31,
1995, while the income and wage credits will be phased-out over 10 years. No
significant changes are anticipated on the general economic conditions of Puerto
Rico, as a result of the enactment of this law. Meanwhile, the Corporation
continues diversifying its geographical risk. During 1996, the Corporation
acquired all the common stock of CombanCorp, the bank holding company of the
former Commerce National Bank, located in California. This banking operation
added to the Corporation three branches, $75 million in assets and $63 million
in deposits. Other geographic expansions during 1996, include the first
international investment made in March 1996, with the purchase of 20% of the
common stock of Jamaica's fourth largest financial institution, Citizens Bank,
and other investments in Costa Rica and the Dominican Republic to establish ATM
networks in those countries. Equity One, the Corporation's mortgage and consumer
finance operation in the mainland, had 102 branches in 28 states and $1.1
billion in total assets at December 31, 1996.
F-23
42
The following table presents the net income for 1996 and total assets as of
December 31, 1996, by subsidiary:
(Dollars in thousands) Net Income % Net Income Total Assets % Total Assets
- ----------------------------------------------------------------------------------------------------
Banco Popular $ 150,366 81.21% $13,336,855 79.56%
Equity One, Inc. 12,637 6.83 1,072,655 6.40
Popular Leasing 6,127 3.31 429,950 2.56
Banco Popular, Illinois 1,797 0.97 467,546 2.79
BP Capital Markets 3,349 1.81 693,219 4.14
VELCO 649 0.35 136,250 0.81
Popular Consumer 3,101 1.67 115,918 0.69
Banco Popular, FSB (107) (0.06) 317,084 1.89
Popular Mortgage 574 0.31 154,806 0.92
Banco Popular, N.A. (California) 292 0.16 139,504 0.83
Parent Company, other subsidiaries
and eliminations 6,365 3.44 (99,684) (0.59)
--------------------------------------------------------------
Total $ 185,150 100.00% $16,764,103 100.00%
==============================================================
Consumer Credit Risk - Consumer credit risk arises from exposures to
credit card receivables, home mortgages, personal loans and other installment
credit facilities. At December 31, 1996, consumer and residential mortgage loans
amounted to $2.7 billion and $2.6 billion, respectively, with $916 million in
unused credits card lines. At December 31, 1996, the secured consumer loan
portfolio was $1.1 billion or 41.2% of the total consumer portfolio.
Industry Risk - Total commercial loans, including commercial real
estate and construction loans, amounted to $4.0 billion at year-end. The
Corporation's strategy to emphasize the use of collateral has resulted in a
secured commercial and construction loan portfolio comprised of approximately
$1.2 billion, or 30.1% of the commercial and construction loan portfolios. These
loans are secured by real estate, consisting primarily of residential,
owner-occupied and income producing properties. Furthermore, commercial and
construction loans secured by cash collateral totaled $94 million, or 2.4% of
the commercial and construction portfolio at the end of 1996. Also, at year-end
the Corporation had $1.4 billion in unused commitments under lines of credit to
commercial, industrial and agricultural concerns. Commercial and standby letters
of credit totaled $138 million at December 31, 1996. 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, 1996, $3.3 billion of the
investments 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, $84 million of residential mortgages and $301 million
in commercial loans were insured or guaranteed by the U.S. Government or its
agencies. The Corporation is one of the largest SBA lenders in the United
States. Furthermore, there were $151 million of investment securities
representing obligations of the Puerto Rico Government and political
subdivisions thereof, $67 million of loans issued to or guaranteed by these same
entities and $27 million of loans issued to or guaranteed by the U.S. Virgin
Islands' Government.
NON-PERFORMING ASSETS
As of December 31, 1996, 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 1.58% of loans, compared with
$155 million or 1.79% of total loans and $108 million or 1.38% of total loans at
the end of 1995 and 1994, respectively. Non-performing loans at December 31,
1996, totaled $145 million or 1.49% of loans as compared with $144 million or
1.67% a year earlier. As of December 31, 1994, non-performing loans were $94
million or 1.21% of loans.
As Table N presents, the slight decrease in non-performing assets is
principally due to lower non-performing commercial including construction loans,
and lease financings, tempered by a rise in non-performing mortgage and consumer
loans. The reduction in non-performing commercial loans was primarily due to
continued collection efforts and prudent management of the
F-24
43
TABLE N
Non-Performing Assets
As of December 31,
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
-----------------------------------------------------------
Commercial, industrial and
agricultural ...................... $ 81,534 $ 87,250 $ 53,553 $ 49,517 $ 62,662
Construction ........................ 2,000 4,733 7,994 8,215 8,798
Lease financing ..................... 1,599 5,606 4,027 4,429 4,752
Mortgage ............................ 43,955 32,066 16,510 14,363 11,532
Consumer ............................ 16,320 14,827 12,179 16,290 20,597
Renegotiated accruing loans ......... 3,308 2,742 2,982 5,643 8,380
Other real estate ................... 6,076 7,807 10,390 12,699 15,582
-----------------------------------------------------------
Total ............................. $154,792 $155,031 $107,635 $111,156 $132,303
===========================================================
Accruing loans past-due
90 days or more ................... $ 12,270 $ 11,660 $ 15,012 $ 15,505 $ 23,957
===========================================================
Non-performing assets to loans ...... 1.58% 1.79% 1.38% 1.75% 2.52%
Non-performing assets to assets ..... 0.92 0.99 0.84 0.97 1.32
Interest lost ....................... $ 7,696 $ 7,135 $ 5,441 $ 4,992 $ 7,548
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 portfolio. The more aggressive charge-off policy implemented in
1996 by the Corporation's leasing subsidiaries, caused a reduction in the amount
of non-performing lease financings. Before 1996, charge-offs on the lease
financing portfolio were recorded at the time the unit was repossessed based on
the excess of the lease financing balance over the assessed value of the unit.
Currently, charge-offs are recorded when the lease financing is 120 days
past-due based on the full amount of the outstanding loan balance, and a
recovery is recorded when the unit is repossessed.
On the other hand, Equity One reflected an increase of $14.6 million in
non-performing mortgage loans as a result of the record-breaking level of
personal bankruptcies in the U.S. mainland and the growth in its portfolio.
Partially offsetting this increase was a reduction of $3.0 million in
non-performing mortgage loans at Banco Popular.
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 when payments are delinquent 120 days. Open-end (revolving
credit) consumer loans are charged-off if payments are delinquent 180 days.
Certain loans which would be treated as non-accrual loans pursuant to the
foregoing policy, are treated as accruing loans if they are considered
well-secured and in the process of collection. Under the standard industry
practice, closed-end consumer loans are charged-off when delinquent 120 days,
but 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, 1996, would have been $117
million or 1.19% of loans, and the allowance for loan losses would have been
158.95% of non-performing assets. At December 31, 1995 and 1994, adjusted
non-performing assets would have been $121 million or 1.39% of loans and $78
million or 1.01% of loans, respectively. The allowance for loan losses as a
percentage of non-performing assets as of December 31, 1995 and 1994, would have
been 139.60% and 196.63%, 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, 1996, amounted to $12 million as compared with $12 million in
1995 and $15 million in 1994.
F-25
44
Once a loan is placed in non-accrual status the interest previously
accrued and uncollected is charged against current earnings and thereafter,
income is recorded only to the extent of any interest collected. The interest
income that would have been realized had these loans been performing in
accordance with their original terms amounted to $7.7 million for 1996, compared
with $7.1 million for 1995 and $5.4 million in 1994.
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 losses on a monthly basis. In determining the
allowance, management considers the portfolio risk characteristics, prior loss
experience, prevailing and projected economic conditions and loan impairment
measurement.
At December 31, 1996, the allowance for loan losses was $186 million or
1.90% of loans, compared with $168 million or 1.94% at the same date in 1995. At
December 31, 1994, the allowance was $154 million or 1.98% 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 an
adequate 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)
1996 1995 1994 1993 1992
----------------------------------------------------------
Commercial $ 91.8 $ 82.6 $ 73.8 $ 64.0 $ 49.5
Construction 10.5 11.0 10.8 10.6 6.5
Lease financing 3.4 6.4 6.5 5.8 5.4
Consumer 69.6 60.6 56.7 52.0 49.3
Mortgage 10.3 7.8 6.0 1.0
----------------------------------------------------------
$ 185.6 $ 168.4 $ 153.8 $ 133.4 $ 110.7
==========================================================
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." This statement
requires that a loan meeting the definition of impaired be measured at the
present value of expected future cash flows using the loan's effective interest
rate, or as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. A loan is
impaired when, based on the current information and events, it is probable that
a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. At December 31, 1996 and 1995, the
portion of the allowance for loan losses related with impaired loans as defined
by the above pronouncements was $18 million and $8 million, respectively. Please
refer to Notes 1 and 6 to the Consolidated Financial Statements for further
information related with SFAS 114 and 118.
Table O summarizes the movement in the allowance for loan losses and
presents selected loan loss statistics for the past five years. As this table
demonstrates, net loan losses for the year totaled $72.1 million or 0.78% of
average loans, an increase of $22.1 million or 44.2% from $50.0 million or 0.61%
of average loans in 1995. The rise primarily reflected higher charge-offs in the
consumer portfolio, particularly personal loans and credit cards, lease
financing and commercial loan portfolios.
Consumer loans net charge-offs totaled $29.1 million, or 1.18% of
average consumer loans for 1996, compared with $17.2 million, or 0.78% of
average consumer loans for 1995. Within this category, personal loans reflected
an increase of $8.6 million, from $7.0 million or 0.57% of average personal
loans in 1995 to $15.6 million or 1.20% in 1996. This increase is the result of
the growth of $70 million in the average personal loan portfolio together with a
rise in personal bankruptcies during 1996. In addition, credit cards net losses
were $11.0 million or 2.49% of average credit card loans as compared with $9.2
million or 2.35% in 1995.
F-26
45
TABLE O
Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Balance at beginning of year ......... $ 168,393 $ 153,798 $ 133,437 $ 110,714 $ 94,199
Allowances purchased ................. 402 -- 3,473 1,580 --
Provision for loan losses ............ 88,839 64,558 53,788 72,892 97,633
-----------------------------------------------------------------------
257,634 218,356 190,698 185,186 191,832
-----------------------------------------------------------------------
Losses charged to the allowance
Commercial .......................... 38,017 34,383 27,435 29,501 37,700
Construction ........................ 2,369 2,046 1,794 3,060 1,887
Lease financing ..................... 22,129 6,979 6,860 9,150 10,139
Mortgage ............................ 2,189 1,618 1,310 477
Consumer ............................ 43,257 33,681 29,545 35,239 52,454
-----------------------------------------------------------------------
107,961 78,707 66,944 77,427 102,180
-----------------------------------------------------------------------
Recoveries
Commercial .......................... 11,498 9,404 6,950 6,279 3,577
Construction ........................ 207 288 1,374 607 796
Lease financing ..................... 9,749 2,342 3,514 2,081 2,169
Mortgage ............................ 295 243 5 36
Consumer ............................ 14,152 16,467 18,201 16,675 14,520
-----------------------------------------------------------------------
35,901 28,744 30,044 25,678 21,062
-----------------------------------------------------------------------
Net loans charged-off ................ 72,060 49,963 36,900 51,749 81,118
-----------------------------------------------------------------------
Balance at end of year ............... $ 185,574 $ 168,393 $ 153,798 $ 133,437 $ 110,714
=======================================================================
Loans:
Outstanding at year end ........... $9,779,028 $8,677,484 $7,781,329 $6,346,922 $5,252,053
Average ........................... 9,210,964 8,217,834 7,107,746 5,700,069 5,150,328
Ratios:
Allowance for loan losses to year
end loans ......................... 1.90% 1.94% 1.98% 2.10% 2.11%
Recoveries to charge-offs .......... 33.25 36.52 44.88 33.16 20.61
Net charge-offs to average loans ... 0.78 0.61 0.52 0.91 1.58
Net charge-offs earnings coverage .. 4.79x 5.42x 6.21x 3.96x 2.44x
Allowance for loan losses to net
charge-offs ........................ 2.58 3.37 4.17 2.58 1.36
Provision for loan losses to:
Net charge-offs .................. 1.23 1.29 1.46 1.41 1.20
Average loans .................... 0.96% 0.79% 0.76% 1.28% 1.90%
Allowance to non-performing assets ... 119.89 108.62 142.89 120.04 83.68
- -------------------------------------------------------------------------------------------------------------------
As previously mentioned, lease financings net charge-offs increased
$7.8 million, from $4.6 million or 0.95% of average lease financings in 1995 to
$12.4 million or 2.45% in 1996, as a result of the more aggressive charge-off
policy implemented in 1996 by the Corporation's leasing subsidiaries. However,
the level of charge-offs in the leasing portfolio should stabilize during 1997,
while the level of recoveries is expected to increase.
Commercial loans net charge-offs amounted to $26.5 million for 1996,
compared with $25.0 million a year earlier. As a percentage of average
commercial loans, this figure decreased slightly to 0.77% in 1996 from 0.83% in
1995. Net charge-offs in the mortgage portfolio totaled $1.9 million in 1996
compared with $1.4 million in 1995.
F-27
46
STATISTICAL SUMMARY 1992-1996 BANPONCE CORPORATION
STATEMENTS OF CONDITION
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
------------------------------------------------------------------------
ASSETS
Cash and due from banks ....................... $ 492,368 $ 458,173 $ 442,316 $ 368,837 $ 325,497
------------------------------------------------------------------------
Money market investments:
Federal funds sold and securities
and mortgages purchased under
agreements to resell ....................... 778,597 796,417 265,000 247,333 234,163
Time deposits with other banks ............... 19,023 100 100 15,100 50,100
Bankers' acceptances.......................... 2,656 2,202 570 259 858
------------------------------------------------------------------------
800,276 798,719 265,670 262,692 285,121
------------------------------------------------------------------------
Trading securities ............................ 292,150 330,674 1,670 3,017 283
------------------------------------------------------------------------
Investment securities available-for-sale
at market value and at lower of cost or
market value before 1994 ..................... 3,415,934 3,209,974 839,226 715,565 408,127
------------------------------------------------------------------------
Investment securities held-to-maturity, at cost 1,197,066 1,651,344 2,955,911 3,329,798 3,290,440
------------------------------------------------------------------------
Loans held-for-sale ........................... 255,129 112,806 10,296
------------------------------------------------------------------------
Loans ......................................... 9,854,911 8,883,963 8,066,954 6,655,072 5,614,724
Less-Unearned income ......................... 331,012 319,285 295,921 308,150 362,671
Allowance for loan losses ................ 185,574 168,393 153,798 133,437 110,714
------------------------------------------------------------------------
9,338,325 8,396,285 7,617,235 6,213,485 5,141,339
------------------------------------------------------------------------
Premises and equipment ........................ 356,697 325,203 324,160 298,089 260,330
Other real estate ............................. 6,076 7,807 10,390 12,699 15,582
Customers' liabilities on acceptances.......... 3,100 2,208 902 1,392 1,830
Accrued income receivable ..................... 95,487 113,539 78,765 79,285 76,008
Other assets .................................. 380,247 125,742 103,088 95,763 64,890
Intangible assets ............................. 131,248 142,977 128,729 132,746 132,880
------------------------------------------------------------------------
$16,764,103 $15,675,451 $12,778,358 $11,513,368 $10,002,327
========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ........................ $ 2,330,704 $ 2,021,658 $ 1,949,244 $ 1,848,859 $ 1,614,806
Interest bearing ............................ 8,432,571 7,855,004 7,063,191 6,673,799 6,423,905
------------------------------------------------------------------------
10,763,275 9,876,662 9,012,435 8,522,658 8,038,711
Federal funds purchased and securities
sold under agreements to repurchase ........ 1,875,465 3,000,878 1,438,038 951,733 665,222
Other short-term borrowings ................. 1,404,006 454,707 573,841 664,173 206,882
Notes payable ............................... 986,713 730,428 459,524 253,855 90,062
Senior debentures ........................... 30,000 30,000 30,000 30,000 30,000
Acceptances outstanding ..................... 3,100 2,208 902 1,392 1,830
Other liabilities ........................... 314,012 263,871 211,195 182,362 132,501
------------------------------------------------------------------------
15,376,571 14,358,754 11,725,935 10,606,173 9,165,208
------------------------------------------------------------------------
Subordinated notes .......................... 125,000 175,000 50,000 62,000 74,000
------------------------------------------------------------------------
Preferred stock of Banco Popular ............ 11,000 11,000
------------------------------------------------------------------------
Stockholders' equity:
Preferred stock ............................. 100,000 100,000 100,000
Common stock ................................ 396,531 197,692 197,029 196,395 195,929
Surplus ..................................... 496,582 427,282 409,445 386,622 361,982
Retained earnings ........................... 267,719 350,480 272,458 208,607 150,208
Unrealized gains (losses) on investment
securities available-for-sale, net of
deferred taxes ............................. 1,700 16,243 (19,366)
Capital reserves ............................ 50,000 42,857 42,571 44,000
------------------------------------------------------------------------
1,262,532 1,141,697 1,002,423 834,195 752,119
------------------------------------------------------------------------
$16,764,103 $15,675,451 $12,778,358 $11,513,368 $10,002,327
========================================================================
F-28
47
STATISTICAL SUMMARY 1992-1996 BANPONCE CORPORATION
STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per common share
information) 1996 1995 1994 1993 1992
--------------------------------------------------------------------------
INTEREST INCOME:
Loans .............................................. $ 924,076 $ 813,137 $ 667,047 $ 549,388 $ 518,074
Money market investments ........................... 46,697 23,077 5,186 6,434 14,414
Investment securities .............................. 280,610 259,941 214,611 215,944 207,642
Trading account securities ......................... 21,470 9,652 297 370 224
--------------------------------------------------------------------------
Total interest income ............................ 1,272,853 1,105,807 887,141 772,136 740,354
Less - Interest expense ............................ 591,540 521,624 351,633 280,008 300,135
--------------------------------------------------------------------------
Net interest income .............................. 681,313 584,183 535,508 492,128 440,219
Provision for loan losses .......................... 88,839 64,558 53,788 72,892 97,633
--------------------------------------------------------------------------
Net interest income after provision
for loan losses ................................. 592,474 519,625 481,720 419,236 342,586
Gain on sale of investment securities .............. 3,094 5,368 224 864 242
Trading account profit ............................. 108 1,785 227 554 383
All other operating income ......................... 202,270 166,185 140,852 123,762 123,879
--------------------------------------------------------------------------
797,946 692,963 623,023 544,416 467,090
--------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs .................................... 273,247 249,075 225,747 215,911 188,234
All other operating expenses ....................... 268,672 237,758 222,099 196,365 178,711
--------------------------------------------------------------------------
541,919 486,833 447,846 412,276 366,945
--------------------------------------------------------------------------
Income before tax, dividends on preferred
stock of Banco Popular and cumulative
effect of accounting changes ..................... 256,027 206,130 175,177 132,140 100,145
Income tax ......................................... 70,877 59,769 50,043 28,151 14,259
--------------------------------------------------------------------------
Income before dividends on preferred
stock of Banco Popular and cumulative
effect of accounting changes ..................... 185,150 146,361 125,134 103,989 85,886
Dividends on preferred stock of
Banco Popular .................................... 385 770 770
--------------------------------------------------------------------------
Income before cumulative effect of
accounting changes ............................... 185,150 146,361 124,749 103,219 85,116
Cumulative effect of accounting changes ............ 6,185
--------------------------------------------------------------------------
NET INCOME ......................................... $ 185,150 $ 146,361 $ 124,749 $ 109,404 $ 85,116
==========================================================================
NET INCOME APPLICABLE TO COMMON STOCK .............. $ 176,800 $ 138,011 $ 120,504 $ 109,404 $ 85,116
==========================================================================
EARNINGS PER COMMON SHARE*
Before effect of accounting changes .............. $ 2.68 $ 2.10 $ 1.84 $ 1.58 $ 1.40
==========================================================================
Net income ....................................... $ 2.68 $ 2.10 $ 1.84 $ 1.67 $ 1.40
==========================================================================
Dividends declared on common stock:
Cash dividends per common share outstanding ........ $ 0.69 $ 0.58 $ 0.50 $ 0.45 $ 0.40
==========================================================================
*The average common shares used in the computation of earnings and cash dividend
per common share were 66,022,312 for 1996; 65,816,300 for 1995; 65,596,486 for
1994; 65,402,472 for 1993, and 60,922,988 for 1992.
F-29
48
STATISTICAL SUMMARY 1992-1996
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
ON A TAXABLE EQUIVALENT BASIS*
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
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 ...................................... $ 878,138 $ 45,704 5.20% $ 399,413 $ 22,823 5.71%
Time deposits with other banks ................. 12,562 770 6.13 2,661 165 6.20
Bankers' acceptances ........................... 2,202 223 10.13 941 89 9.46
------------------------------------------------------------------------------
Total money market investments ............... 892,902 46,697 5.23 403,015 23,077 5.73
------------------------------------------------------------------------------
U.S. Treasury securities ....................... 3,198,912 222,520 6.96 2,893,797 197,554 6.83
Obligations of other U.S. Government
agencies and corporations .................... 750,287 49,042 6.54 575,024 40,493 7.04
Obligations of Puerto Rico, States and
political subdivisions ....................... 231,363 11,224 4.85 247,176 14,798 5.99
Collateralized mortgage obligations
and mortgage backed securities ............... 553,702 32,117 5.80 580,714 37,610 6.48
Other .......................................... 95,985 5,483 5.71 171,013 6,491 3.80
------------------------------------------------------------------------------
Total investment securities ................ 4,830,249 320,386 6.63 4,467,724 296,946 6.65
------------------------------------------------------------------------------
Trading account securities ....................... 372,196 23,004 6.18 155,597 9,831 6.32
------------------------------------------------------------------------------
Loans (net of unearned income) ................... 9,210,964 930,891 10.11 8,217,834 820,003 9.98
------------------------------------------------------------------------------
Total interest earning assets/
Interest income ........................... 15,306,311 $ 1,320,978 8.63% 13,244,170 $ 1,149,857 8.68%
------------------------------------------------------------------------------
Total non-interest earning assets .......... 994,771 874,013
------------------------------------------------------------------------------
TOTAL ASSETS ............................... $16,301,082 $ 14,118,183
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings and NOW accounts ....................... $ 4,244,625 $ 131,499 3.10% $ 4,015,973 $ 126,548 3.15%
Other time deposits ............................ 4,163,416 218,722 5.25 3,720,473 203,235 5.46
Short-term borrowings .......................... 3,464,892 184,682 5.33 2,600,246 141,522 5.44
Mortgages and notes payable .................... 757,604 46,417 6.13 598,027 46,149 7.72
Subordinated notes ............................. 147,951 10,220 6.91 56,850 4,170 7.34
-----------------------------------------------------------------------------
Total interest bearing liabilities/
Interest expense ......................... 12,778,488 591,540 4.63 10,991,569 521,624 4.75
------------------------------------------------------------------------------
Total non-interest bearing liabilities ..... 2,328,083 2,056,132
------------------------------------------------------------------------------
Total liabilities .......................... 15,106,571 13,047,701
------------------------------------------------------------------------------
Preferred stock of Banco Popular
------------------------------------------------------------------------------
Stockholders' equity ............................. 1,194,511 1,070,482
------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . $16,301,082 $ 14,118,183
==============================================================================
Net interest income on a taxable
equivalent basis ............................... $ 729,438 $ 628,233
------------------------------------------------------------------------------
Cost of funding earning assets ................... 3.86% 3.94%
------------------------------------------------------------------------------
Net interest yield ............................... 4.77% 4.74%
==============================================================================
Effect of the taxable equivalent adjustment 48,125 44,050
------------------------------------------------------------------------------
Net interest income per books .................... $ 681,313 $ 584,183
==============================================================================
* Shows the effect of the tax exempt status of some loans and investments
on their yield, using the applicable statutory income tax rates. The
computation considers the interest expense disallowance as required by
the 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
----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------
$ 114,215 $ 4,858 4.25% $ 117,095 $ 4,115 3.51% $ 144,539 $ 5,209 3.60%
4,916 300 6.10 57,845 2,259 3.91 215,970 9,093 4.21
332 28 8.43 871 60 6.89 1,496 112 7.49
- --------------------------------------------------------------------------------------------------------------------
119,463 5,186 4.34 175,811 6,434 3.66 362,005 14,414 3.98
- --------------------------------------------------------------------------------------------------------------------
2,657,975 164,102 6.17 2,985,634 202,695 6.79 2,443,267 226,038 9.25
526,687 33,969 6.45 274,821 18,033 6.56 317,152 27,838 8.78
259,534 14,074 5.42 227,784 14,253 6.26 212,762 19,345 9.09
712,972 37,535 5.26 523,224 26,944 5.15 288,818 21,780 7.54
- --------------------------------------------------------------------------------------------------------------------
4,157,168 249,680 6.01 4,011,463 261,925 6.53 3,261,999 295,001 9.04
- --------------------------------------------------------------------------------------------------------------------
5,303 368 6.94 7,319 449 6.13 5,649 303 5.36
- --------------------------------------------------------------------------------------------------------------------
7,107,746 672,974 9.47 5,700,069 555,671 9.75 5,150,328 526,902 10.23
- --------------------------------------------------------------------------------------------------------------------
11,389,680 $928,208 8.15% 9,894,662 $824,479 8.33% 8,779,981 $836,620 9.53%
- --------------------------------------------------------------------------------------------------------------------
835,850 789,091 748,537
- --------------------------------------------------------------------------------------------------------------------
$12,225,530 $10,683,753 $9,528,518
====================================================================================================================
$ 3,972,406 $116,858 2.94% $ 3,570,920 $107,454 3.01% $2,999,691 $108,945 3.63%
3,069,130 130,868 4.26 2,918,625 111,994 3.84 3,171,177 144,430 4.55
1,856,649 77,537 4.18 1,337,970 42,392 3.17 903,903 31,711 3.51
376,570 22,420 5.95 195,522 12,801 6.55 116,695 8,245 7.07
56,082 3,950 7.04 73,967 5,367 7.26 85,585 6,804 7.95
- --------------------------------------------------------------------------------------------------------------------
9,330,837 351,633 3.77 8,097,004 280,008 3.46 7,277,051 300,135 4.12
- --------------------------------------------------------------------------------------------------------------------
1,964,399 1,782,748 1,571,477
- --------------------------------------------------------------------------------------------------------------------
11,295,236 9,879,752 8,848,528
- --------------------------------------------------------------------------------------------------------------------
5,425 11,000 11,000
- --------------------------------------------------------------------------------------------------------------------
924,869 793,001 668,990
- --------------------------------------------------------------------------------------------------------------------
$12,225,530 $10,683,753 $9,528,518
====================================================================================================================
$576,575 $544,471 $536,485
- --------------------------------------------------------------------------------------------------------------------
3.09% 2.83% 3.42%
- --------------------------------------------------------------------------------------------------------------------
5.06% 5.50% 6.11%
====================================================================================================================
41,067 52,343 96,266
- --------------------------------------------------------------------------------------------------------------------
$535,508 $492,128 $440,219
====================================================================================================================
F-31
50
STATISTICAL SUMMARY 1994-1996 BANPONCE CORPORATION
QUARTERLY FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
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 .............. $ 332,854 $ 327,097 $ 309,975 $ 302,927 $ 298,311 $ 288,459 $ 268,818 $ 250,219
Net interest income .......... 178,409 172,236 168,208 162,460 156,120 148,415 142,120 137,528
Provision for loan
losses ..................... 23,458 22,436 21,672 21,273 21,227 18,987 12,646 11,698
Non-interest income .......... 55,291 46,488 49,335 51,263 45,276 44,881 40,306 37,507
Gain (loss) on sale of
investment securities ...... (2,525) 4,911 (20) 729 3,306 1,950 66 46
Non-interest expense ......... 143,923 135,453 131,844 130,699 124,197 119,596 124,722 118,318
Income before income
tax, cumulative effect
of accounting changes
and dividends on
preferred stock of
Banco Popular .............. 63,794 65,746 64,007 62,480 59,278 56,663 45,124 45,065
Income taxes ................. 16,114 19,473 17,952 17,338 19,026 18,356 11,063 11,324
Dividends on preferred
stock of Banco Popular .....
----------------------------------------------------------------------------------------------
Net income ................... $ 47,680 $ 46,273 $ 46,055 $ 45,142 $ 40,252 $ 38,307 $ 34,061 $ 33,741
==============================================================================================
Net income applicable
to common stock ............ $ 45,593 $ 44,186 $ 43,967 $ 43,005 $ 38,164 $ 36,220 $ 31,973 $ 31,654
==============================================================================================
Net income per
common share ............... $ 0.69 $ 0.67 $ 0.67 $ 0.65 $ 0.58 $ 0.55 $ 0.49 $ 0.48
----------------------------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
(In millions)
Total assets ................. $ 16,852 $ 16,796 $ 15,988 $ 15,557 $ 15,183 $ 14,709 $ 13,616 $ 12,934
Loans ........................ 9,668 9,387 9,033 8,749 8,548 8,360 8,090 7,864
Interest earning assets ...... 15,794 15,769 15,020 14,631 14,276 13,788 12,815 12,068
Deposits ..................... 10,767 10,548 10,474 10,055 9,848 9,614 9,615 9,245
Interest bearing liabilities.. 13,145 13,285 12,464 12,210 11,912 11,596 10,552 9,871
----------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on assets ............. 1.13% 1.10% 1.16% 1.17% 1.05% 1.03% 1.00% 1.06%
Return on equity ............. 15.76 15.94 16.56 16.39 14.82 14.55 13.47 13.96
- -----------------------------------------------------------------------------
1994
- -----------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
SUMMARY OF OPERATIONS
(In thousands, except per
common share information)
Interest income .............. $ 239,035 $ 228,695 $ 220,000 $ 199,411
Net interest income .......... 137,452 136,699 135,574 125,783
Provision for loan
losses ..................... 12,544 13,544 14,037 13,663
Non-interest income .......... 37,807 36,013 34,407 32,852
Gain (loss) on sale of
investment securities ...... 157 (205) 272
Non-interest expense ......... 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 .............. 48,606 44,412 43,492 38,667
Income taxes ................. 15,980 12,695 11,623 9,745
Dividends on preferred
stock of Banco Popular ..... 192 193
----------------------------------------------
Net income ................... $ 32,626 $ 31,717 $ 31,677 $ 28,729
==============================================
Net income applicable
to common stock ............ $ 30,538 $ 29,560 $ 31,677 $ 28,729
==============================================
Net income per
common share ............... $ 0.47 $ 0.45 $ 0.48 $ 0.44
----------------------------------------------
SELECTED AVERAGE BALANCES
(In millions)
Total assets ................. $ 12,585 $ 12,385 $ 12,301 $ 11,618
Loans ........................ 7,645 7,356 6,958 6,456
Interest earning assets ...... 11,749 11,540 11,449 10,809
Deposits ..................... 8,960 8,841 9,000 8,543
Interest bearing liabilities.. 9,572 9,445 9,440 8,856
----------------------------------------------
SELECTED RATIOS
Return on assets ............. 1.03% 1.02% 1.03% 1.00%
Return on equity ............. 13.54 13.26 14.59 13.78
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. In August 1996,
the U.S. Congress repealed Section 936 with a phase-out period of 10 years on
the credit from earnings from active conduct of trade or business.
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 Ricos Industrial Incentive Act purposes, lowers the rate on
these funds as compared to interest rates paid on similar deposits. In August
1996, the U.S. Congress approved legislation that repealed the exemption on
these funds, effective July 1,1996, for taxable years beginning after December
31, 1995.
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 quarterly average assets. The quarterly
average assets are 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 CHARGE-OFFS - The amount of loans written off as uncollectible, net of the
recovery of loans previously written off as uncollectible.
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.
F-33
52
SPREAD - A percentage difference or margin between the yield on earning assets
and the effective interest rate paid on interest-bearing liabilities.
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.
TRANSFER PRICING - A method by which costs are allocated to the various profit
centers within an organization.
YIELD - Percentage denoting actual return on earning assets.
F-34
53
REPORT OF INDEPENDENT ACCOUNTANTS BANPONCE CORPORATION
Price Waterhouse
San Juan, Puerto Rico
February 21, 1997
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1996, 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.
Price Waterhouse
Stamp 1392144 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,
------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share information)
ASSETS
Cash and due from banks ............................................................. $ 492,368 $ 458,173
------------------------------
Money market investments:
Federal funds sold and securities and mortgages purchased under
agreements to resell ............................................................ 778,597 796,417
Time deposits with other banks .................................................... 19,023 100
Bankers' acceptances .............................................................. 2,656 2,202
------------------------------
800,276 798,719
------------------------------
Trading securities, at market value ................................................. 292,150 330,674
------------------------------
Investment securities available-for-sale, at market value ........................... 3,415,934 3,209,974
------------------------------
Investment securities held-to-maturity, at cost (market value $1,197,641;
1995 - $1,661,933) ................................................................ 1,197,066 1,651,344
------------------------------
Loans held-for-sale ................................................................. 255,129 112,806
------------------------------
Loans ............................................................................... 9,854,911 8,883,963
Less - Unearned income ............................................................ 331,012 319,285
Allowance for loan losses .................................................. 185,574 168,393
------------------------------
9,338,325 8,396,285
------------------------------
Premises and equipment .............................................................. 356,697 325,203
Other real estate ................................................................... 6,076 7,807
Customers' liabilities on acceptances ............................................... 3,100 2,208
Accrued income receivable ........................................................... 95,487 113,539
Other assets ........................................................................ 380,247 125,742
Intangible assets ................................................................... 131,248 142,977
------------------------------
$16,764,103 $15,675,451
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing .............................................................. $ 2,330,704 $ 2,021,658
Interest bearing .................................................................. 8,432,571 7,855,004
------------------------------
10,763,275 9,876,662
Federal funds purchased and securities sold under agreements to repurchase ........ 1,875,465 3,000,878
Other short-term borrowings ....................................................... 1,404,006 454,707
Notes payable ..................................................................... 986,713 730,428
Senior debentures ................................................................. 30,000 30,000
Acceptances outstanding ........................................................... 3,100 2,208
Other liabilities ................................................................. 314,012 263,871
------------------------------
15,376,571 14,358,754
------------------------------
Subordinated notes ................................................................ 125,000 175,000
------------------------------
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 66,088,506 (1995 - 65,897,272) ........................... 396,531 197,692
Surplus ........................................................................... 496,582 427,282
Retained earnings ................................................................. 267,719 350,480
Unrealized gains on investment securities available-for-sale, net of deferred
taxes of $1,490 (1995 - $7,085) ................................................. 1,700 16,243
Capital reserves .................................................................. 50,000
------------------------------
1,262,532 1,141,697
------------------------------
$16,764,103 $15,675,451
==============================
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,
--------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share information)
INTEREST INCOME:
Loans ................................................................... $ 924,076 $ 813,137 $ 667,047
Money market investments ................................................ 46,697 23,077 5,186
Investment securities ................................................... 280,610 259,941 214,611
Trading securities ...................................................... 21,470 9,652 297
--------------------------------------------
1,272,853 1,105,807 887,141
--------------------------------------------
INTEREST EXPENSE:
Deposits ................................................................ 350,221 329,783 247,726
Short-term borrowings ................................................... 184,682 141,522 77,537
Long-term debt .......................................................... 56,637 50,319 26,370
--------------------------------------------
591,540 521,624 351,633
--------------------------------------------
Net interest income ....................................................... 681,313 584,183 535,508
Provision for loan losses ............................................... 88,839 64,558 53,788
--------------------------------------------
Net interest income after provision for loan losses ....................... 592,474 519,625 481,720
Service charges on deposit accounts ..................................... 85,846 78,607 71,727
Other service fees ...................................................... 77,071 63,725 51,240
Gain on sale of investment securities ................................... 3,094 5,368 224
Trading account profit .................................................. 108 1,785 227
Other operating income .................................................. 39,353 23,853 17,885
--------------------------------------------
797,946 692,963 623,023
--------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries ............................................................... 185,946 172,504 160,996
Profit sharing ......................................................... 22,692 19,003 19,205
Pension and other benefits ............................................. 64,609 57,568 45,546
--------------------------------------------
273,247 249,075 225,747
Net occupancy expense ................................................... 36,899 32,850 28,440
Equipment expenses ...................................................... 47,957 41,577 35,474
Other taxes ............................................................. 23,214 20,872 19,807
Professional fees ....................................................... 46,182 34,954 33,757
Communications .......................................................... 26,470 23,106 20,308
Business promotion ...................................................... 26,229 17,801 16,271
Printing and supplies ................................................... 11,964 11,069 8,817
Other operating expenses ................................................ 31,703 35,325 41,222
Amortization of intangibles ............................................. 18,054 20,204 18,003
--------------------------------------------
541,919 486,833 447,846
--------------------------------------------
Income before income tax and dividends on preferred
stock of Banco Popular .................................................. 256,027 206,130 175,177
Income tax ................................................................ 70,877 59,769 50,043
--------------------------------------------
Income before dividends on preferred stock of Banco Popular ............... 185,150 146,361 125,134
Dividends on preferred stock of Banco Popular ............................. 385
--------------------------------------------
NET INCOME ................................................................ $ 185,150 $ 146,361 $ 124,749
============================================
NET INCOME APPLICABLE TO COMMON STOCK ..................................... $ 176,800 $ 138,011 $ 120,504
============================================
EARNINGS PER COMMON SHARE:
NET INCOME .............................................................. $ 2.68 $ 2.10 $ 1.84
============================================
The accompanying notes are an integral part of the
consolidated financial statements.
F-37
56
CONSOLIDATED STATEMENTS OF CASH FLOW BANPONCE CORPORATION
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
----------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................... $ 185,150 $ 146,361 $ 124,749
----------------------------------------------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of premises and equipment .......... 48,481 44,448 38,654
Provision for loan losses ........................................ 88,839 64,558 53,788
Amortization of intangibles ...................................... 18,054 20,204 18,003
Gain on sale of investment securities available-for-sale ......... (3,094) (5,368) (224)
(Gain) loss on disposition of premises and equipment ............. (123) 150 (2,311)
Gain on sale of loans ............................................ (11,060) (8,966) (4,454)
Amortization of premiums and accretion of discounts
on investments .................................................. 8,538 (2,325) 6,277
Amortization of deferred loan origination fees and costs ......... (3,096) 7,131 2,755
Net decrease (increase) in trading securities .................... 38,524 (97,973) 1,347
Increase in loans held-for-sale .................................. (142,323) (36,244)
Net decrease (increase) in accrued income receivable ............. 18,665 (24,378) 2,613
Net increase in other assets ..................................... (221,070) (8,640) (14,519)
Net increase in interest payable ................................. 11,765 2,077 6,226
Net (decrease) increase in current and deferred taxes ............ (19,979) 1,410 19,620
Net increase in postretirement benefit obligation ................ 7,977 6,979 5,818
Net increase in other liabilities ................................ 29,284 6,121 8,187
----------------------------------------------
Total adjustments .............................................. (130,618) (30,816) 141,780
----------------------------------------------
Net cash provided by operating activities ...................... 54,532 115,545 266,529
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments ............................. 11,110 44,298 2,422
Purchases of investment securities held-to-maturity .................. (28,849,896) (11,665,837) (7,290,753)
Maturities of investment securities held-to-maturity ................. 29,302,469 11,754,330 7,671,104
Sales of investment securities held-to-maturity ...................... 13,555
Purchases of investment securities available-for-sale ................ (5,396,828) (1,367,401) (385,963)
Maturities of investment securities available-for-sale ............... 2,297,528 86,379 64,297
Sales of investment securities available-for-sale .................... 2,896,060 286,045 293,712
Net disbursements on loans ........................................... (1,501,808) (1,155,497) (1,435,677)
Proceeds from sale of loans .......................................... 515,357 244,682 193,411
Acquisition of loan portfolios ....................................... (16,983) (66,922) (76,700)
Assets acquired, net of cash ......................................... (7,164) (29,189) (17,557)
Acquisition of premises and equipment ................................ (86,162) (51,318) (64,709)
Proceeds from sale of premises and equipment ......................... 9,662 6,888 8,825
----------------------------------------------
Net cash used in investing activities .......................... (826,655) (1,913,542) (1,024,033)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................................. 823,907 680,847 197,072
Net deposits acquired ................................................ 163,504
Net (decrease) increase in federal funds purchased and
securities sold under agreements to repurchase ...................... (1,125,413) 771,382 481,304
Net increase (decrease) in other short-term borrowings ............... 949,300 (144,028) (92,932)
Proceeds from issuance of notes payable .............................. 423,670 258,181 205,679
Payment of notes payable ............................................. (167,385) (11) (10)
Payment of subordinated notes ........................................ (50,000) (12,000)
Proceeds from issuance of subordinated notes ......................... 125,000
Dividends paid ....................................................... (51,896) (44,521) (37,016)
Proceeds from issuance of common stock ............................... 4,135 3,500 3,196
Proceeds from issuance of preferred stock ............................ 96,690
Redemption of preferred stock ........................................ (11,000)
----------------------------------------------
Net cash provided by financing activities ...................... 806,318 1,813,854 830,983
----------------------------------------------
Net increase in cash and due from banks ............................... 34,195 15,857 73,479
Cash and due from banks at beginning of period ........................ 458,173 442,316 368,837
----------------------------------------------
Cash and due from banks at end of period .............................. $ 492,368 $ 458,173 $ 442,316
==============================================
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,
--------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
PREFERRED STOCK:
Balance at beginning of year ............................................ $ 100,000 $ 100,000
Preferred stock issued .................................................. $ 100,000
--------------------------------------------
Balance at end of year ........................................... 100,000 100,000 100,000
--------------------------------------------
COMMON STOCK:
Balance at beginning of year ............................................ 197,692 197,029 196,395
Transfer from retained earnings resulting from stock split .............. 198,004
Common stock issued under Dividend Reinvestment Plan .................... 835 663 634
--------------------------------------------
Balance at end of year ........................................... 396,531 197,692 197,029
--------------------------------------------
SURPLUS:
Balance at beginning of year ............................................ 427,282 409,445 386,622
Issuance cost of preferred stock ........................................ (3,310)
Proceeds from common stock issued under
Dividend Reinvestment Plan ............................................ 3,300 2,837 2,562
Transfer from retained earnings ......................................... 16,000 15,000 15,000
Transfer from capital reserves .......................................... 50,000 8,571
--------------------------------------------
Balance at end of year ........................................... 496,582 427,282 409,445
--------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year ............................................ 350,480 272,458 208,607
Net income .............................................................. 185,150 146,361 124,749
Cash dividends declared on common stock ................................. (45,557) (37,846) (32,796)
Cash dividends declared on preferred stock .............................. (8,350) (8,350) (4,245)
Transfer to common stock resulting from stock split ..................... (198,004)
Transfer to capital reserves ............................................ (7,143) (8,857)
Transfer to surplus ..................................................... (16,000) (15,000) (15,000)
--------------------------------------------
Balance at end of year ........................................... 267,719 350,480 272,458
--------------------------------------------
UNREALIZED HOLDING GAINS (LOSSES) ON SECURITIES
AVAILABLE-FOR-SALE, NET OF DEFERRED TAXES:
Balance at beginning of year ............................................ 16,243 (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 .............................. (14,543) 35,609 (36,470)
--------------------------------------------
Balance at end of year ........................................... 1,700 16,243 (19,366)
--------------------------------------------
CAPITAL RESERVES:
Balance at beginning of year ............................................ 50,000 42,857 42,571
Transfer from retained earnings ......................................... 7,143 8,857
Transfer to surplus ..................................................... (50,000) (8,571)
--------------------------------------------
Balance at end of year ........................................... 50,000 42,857
--------------------------------------------
Total stockholders' equity ................................................ $ 1,262,532 $ 1,141,697 $ 1,002,423
============================================
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 and its
subsidiaries (the Corporation) 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 BanPonce
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. (Pioneer),
CombanCorp (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
BanPonce Corporation is a bank holding company which provides a wide
variety of financial services through its subsidiaries. Banco Popular, the
Corporation's largest banking subsidiary, is a full-service commercial bank and
Puerto Rico's largest banking institution, with a delivery system of 178
branches throughout Puerto Rico, 29 branches in New York, seven branches in the
U.S. Virgin Islands and one branch in the British Virgin Islands. Banco
Popular, Illinois, a banking subsidiary of Pioneer, operates five branches in
the State of Illinois, while Banco Popular, N.A. (California), a banking
subsidiary of CombanCorp, operates four branches in the State of California.
In addition, Banco Popular, FSB, a federal savings bank, operates six branches
in the State of New Jersey.
Also, 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 102 offices located in 28 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 35 offices in Puerto Rico
operating under the name of Best Finance.
The Corporation is also engaged in vehicle and equipment leasing,
through eight offices in Puerto Rico operated by Popular Leasing and Rental,
Inc. Moreover, the Corporation is engaged in 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 and
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
TRADING SECURITIES
Financial instruments including, to a limited extent, derivatives such
as interest rate futures and options contracts, are utilized by the Corporation
in dealing and other trading activities and 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 Statement of Financial Accounting Standards
(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.
F-40
59
_______________________________________________________________________________
INVESTMENT SECURITIES
On January 1, 1994, the Corporation adopted 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 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. 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.
- 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 initial adoption of this statement resulted in an increase in the
Corporation's stockholders' equity of $17,104,000, net of deferred taxes,
pertaining to the unrealized gains on securities available-for-sale.
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. Net realized gains or losses on sales of
investment securities and unrealized loss valuation adjustments considered
other than temporary, if any, on securities available-for-sale and
held-to-maturity are reported separately in the 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.
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. These instruments are accounted for on an accrual basis. Under the
accrual method, interest income or expense on the derivative contract is
accrued and there is no recognition of unrealized gains and losses on the
derivative in the statement of condition. Premiums on option contracts are
amortized to interest income or interest expense over the life of such
contracts. 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 and 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 lease financing and 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. Interest accrual for lease financing, conventional
mortgage loans and close-end consumer loans, 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 and
leases are charged-off
F-41
60
_______________________________________________________________________________
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.
LEASE FINANCING
The Corporation leases passenger and commercial vehicles and equipment
to individual and corporate customers. The finance method of accounting is
used to recognize revenue on lease contracts that meet the criteria specified
in SFAS 13, "Accounting for Leases," as amended. Aggregate rentals due over
the term of the leases less unearned income, are included in finance lease
contracts receivable. Unearned income is amortized using a method which
results in level rates of return on the principal amounts outstanding. Finance
lease origination fees and costs are deferred and amortized over the average
life of the portfolio as an adjustment to the yield.
All other leases are accounted for under the operating method. Under
this method, revenue is recognized as it becomes due under the terms of the
agreement.
ALLOWANCE FOR LOAN LOSSES
The Corporation follows a systematic methodology to establish and
evaluate the adequacy of the allowance for loan losses to provide for inherent
losses in the loan portfolio as well as in other credit-related balance sheet
and off-balance sheet financial instruments. This methodology includes the
consideration of factors such as economic conditions, portfolio risk
characteristics, prior loss experience, results of periodic credit reviews of
individual loans and financial accounting standards.
The provision for loan losses charged to current operations is based on
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 addresses the accounting by creditors for impairment of certain loans. It
is applicable to all creditors and to all loans, uncollateralized as well as
collateralized, except large groups of smaller balance homogeneous loans that
are collectively evaluated for impairment, loans that are measured at fair
value or at lower of cost or fair value, leases and debt securities as defined
in SFAS 115. It also applies to all loans that are restructured in a troubled
debt restructuring involving a modification of terms. SFAS 114 requires
creditors to set up a valuation allowance, with a corresponding charge to the
provision for loan losses for those loans considered to be impaired.
The Corporation has defined impaired loans as all loans with interest
and/or principal past due 90 days or more and other specific loans for
which, based on current information and events, it is probable that the debtor
will be unable to pay all amounts due according to the contractual terms of the
loan agreement. Loan impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective rate, on the
observable market price 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. Impaired loans for which the
discounted cash flows, collateral value or market price equals or exceeds its
carrying value do not require an allowance. The allowance for impaired loans
is part of the Corporation's overall allowance for loan losses.
Cash payments received on impaired loans are recorded in accordance
with the contractual terms of the loan. The principal portion of the payment
is used to reduce the principal balance of the loan, whereas the interest
portion is recognized as interest income. However, when management believes
the ultimate collectibility of principal is in doubt, the interest portion is
then applied to principal. The adoption of this pronouncement had no impact on
the net income for the years ended December 31, 1996 and 1995.
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 by
the Corporation for mortgages serviced, except for mortgage servicing rights,
advances to investors and escrow balances. Mortgage servicing rights, an
intangible asset, represents the cost of acquiring the contractual right to
service loans for others. 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.
F-42
61
_______________________________________________________________________________
On January 1, 1996, the Corporation adopted SFAS 122, "Accounting for
Mortgage Servicing Rights." This statement requires that mortgage banking
enterprises recognize as separate assets the rights to service mortgage loans
for others, whether those servicing rights are originated or purchased.
Pursuant to the provisions of SFAS 122, the total cost of mortgage loans to be
sold with servicing rights retained is allocated to the mortgage servicing
rights and the loans (without the mortgage servicing rights), based on their
relative fair values. Mortgage servicing rights are amortized in proportion to
and over the period of estimated net servicing income. In addition, it
requires mortgage banking enterprises to assess capitalized mortgage servicing
rights for impairment based on the fair value of those rights.
To estimate the fair value of mortgage servicing rights the Corporation
considers prices for similar assets and the present value of expected future
cash flows associated with the servicing rights calculated using assumptions
that market participants would use in estimating future servicing income and
expense. For purposes of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Corporation stratifies such rights based on
predominant risk characteristics of underlying loans, such as loan type, rate
and term. The amount of impairment recognized, if any, is the amount by which
the capitalized mortgage servicing rights per stratum exceed its estimated fair
value. Impairment is recognized through a valuation allowance.
Total loans serviced were $5,110,000,000 at December 31,
1996(1995-$4,610,000,000). The carrying value, estimated fair value and
valuation allowance of capitalized mortgage servicing rights were $25,890,000,
$32,691,000, and $65,000, respectively, at December 31, 1996. For the year
ended December 31, 1996, the Corporation recognized additional income of
$5,905,000 as a result of the adoption of this pronouncement.
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.
On January 1, 1996, the Corporation adopted 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, certain identifiable
intangibles and goodwill related to those assets to be held and used, and long
lived assets to be disposed of 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. This statement excludes financial instruments,
long-term customer relationships of financial institutions, mortgage and other
servicing rights and deferred tax assets. For the year ended December 31,
1996, the Corporation recorded an impairment loss of $700,000, as further
explained in Note 8, based on the provisions of this pronouncement.
OTHER REAL ESTATE
Other real estate comprises properties acquired through foreclosure.
Upon foreclosure, the recorded amount of the loan is written-down, if required,
to the appraised value 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 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
amortized on the straight-line basis over periods ranging from 7 to 15 years.
SECURITIES SOLD/PURCHASED UNDER AGREEMENTS TO REPURCHASE/RESALE
Repurchase and resale agreements are treated as financing transactions
and are carried at the amounts at which the securities will be reacquired or
resold as specified in the respective agreements. It is the Corporation's
policy to take possession or control of securities purchased under resale
agreements. The Corporation monitors the market value of the underlying
securities as compared to the related receivable, including accrued interest,
and requests additional collateral where deemed appropriate.
F-43
62
_______________________________________________________________________________
INCOME TAXES
The Corporation uses an asset and liability approach to the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Corporation's
financial statements or tax returns. Deferred income tax assets and
liabilities are determined for differences between financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future. The computation is based on enacted tax laws and rates
applicable to periods in which the temporary differences are expected to be
recovered or settled. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
EMPLOYEE'S RETIREMENT PLANS
The Corporation has trusteed, non-contributory retirement and other
benefit plans covering substantially all full-time employees. Pension costs
are computed on the basis of accepted actuarial methods and are charged to
current operations. Net pension costs are based on various actuarial
assumptions regarding future experience under the plan, which include costs for
services rendered during the period, interest costs and return on plan assets,
as well as deferral and amortization of certain items such as actuarial gains
or losses. The funding policy is to contribute 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.
STOCK COMPENSATION
On January 1, 1996, the Corporation adopted SFAS 123, "Accounting for
Stock-Based Compensation." SFAS 123 establishes a fair value-based method of
accounting for stock-based compensation plans. It encourages entities to adopt
this method in lieu of the provisions of Accounting Principles Board (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.
Banco Popular provides a stock-based compensation plan for its Senior
Management. It is a three-year incentive plan under which shares of stock of
the Corporation are granted if long-term corporate performance and objectives
are met. For the year ended December 31, 1996, the Corporation recognized an
expense of $837,000 related to this plan, determined on the estimated fair
value of the stock.
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 1995 and 1994
consolidated financial statements to conform with the 1996 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended by SFAS 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. Those
standards are based on a consistent application of a financial components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial
F-44
63
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. The statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, except for certain provisions related with
repurchase agreements, dollar-roll, securities lending, and similar
transactions, which shall be effective for transfers of financial assets
occurring after December 31, 1997. Management understands that the adoption of
this statement will not have a material effect on the consolidated financial
statements of the Corporation.
NOTE 2 - CASH AND DUE FROM BANKS
The Corporation's subsidiary banks are required by regulatory agencies
to maintain average reserve balances. The amount of those reserve balances was
approximately $335,676,000 at December 31, 1996 (1995 - $299,907,000).
NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
The amortized cost, gross unrealized gains and losses, approximate market value
of investment securities available-for-sale (or fair value for certain
investment securities where no market quotations are available), weighted
average yield and related maturities as of December 31, 1996 and 1995 (1994 -
only market value is present) were as follows:
1996
----------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average
cost gains losses value yield
----------------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of 1 year and
3 months):
Within 1 year ............................................ $ 900,463 $2,325 $ 59 $ 902,729 5.88%
After 1 to 5 years ....................................... 1,335,189 5,492 1,905 1,338,776 6.00
----------------------------------------------------------------
2,235,652 7,817 1,964 2,241,505 5.96
----------------------------------------------------------------
Obligations of other U.S. Government agencies and
corporations (average maturity of 5 years and 8 months):
Within 1 year ............................................ 75,256 120 46 75,330 6.39
After 1 to 5 years ....................................... 73,064 197 460 72,801 5.77
After 5 to 10 years ...................................... 155,231 113 155,344 6.84
----------------------------------------------------------------
303,551 430 506 303,475 6.47
----------------------------------------------------------------
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 4 years and 6 months):
Within 1 year ............................................ 6,832 6 8 6,830 4.64
After 1 to 5 years ....................................... 14,510 198 76 14,632 5.12
After 5 to 10 years ...................................... 12,695 93 90 12,698 5.36
After 10 years ........................................... 671 9 662 5.34
----------------------------------------------------------------
34,708 297 183 34,822 5.12
----------------------------------------------------------------
Collateralized mortgage obligations (average
maturity of 1 year and 10 months):
Within 1 year ............................................ 101,158 16 182 100,992 6.02
After 1 to 5 years ....................................... 304,987 37 645 304,379 6.11
After 5 to 10 years ...................................... 26,125 5 4 26,126 6.07
After 10 years ........................................... 4,593 4,593 6.43
----------------------------------------------------------------
436,863 58 831 436,090 6.09
----------------------------------------------------------------
Mortgage-backed securities (average maturity
of 21 years and 7 months):
Within 1 year ............................................ 7,391 1 223 7,169 5.59
After 1 to 5 years ....................................... 43,695 21 1,017 42,699 5.75
After 5 to 10 years ...................................... 7,482 3 318 7,167 6.98
After 10 years ........................................... 312,901 247 1,064 312,084 6.63
----------------------------------------------------------------
371,469 272 2,622 369,119 6.51
----------------------------------------------------------------
Equity securities (without contractual maturity) ............ 12,145 499 12,644 0.86
----------------------------------------------------------------
Other (average maturity of 13 years and 2 months):
Within 1 year ............................................ 203 1 204 8.19
After 5 to 10 years ...................................... 10,103 2 10,105 8.24
After 10 years ........................................... 8,050 80 7,970 6.90
----------------------------------------------------------------
18,356 3 80 18,279 7.65
----------------------------------------------------------------
$3,412,744 $9,376 $6,186 $3,415,934 6.06%
----------------------------------------------------------------
F-45
64
1995 1994
------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average Market
cost gains losses value yield value
------------------------------------------------------------------
(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% $ 18,822
After 1 to 5 years ....................................... 1,038,016 11,437 494 1,048,959 5.74 530,299
------------------------------------------------------------------
2,437,460 17,433 812 2,454,081 5.98 549,121
------------------------------------------------------------------
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 72,748
After 1 to 5 years ....................................... 231,954 1,258 66 233,146 5.72 80,914
After 5 to 10 years ...................................... 1,239 7 1,232 6.23
After 10 years ........................................... 16,281
------------------------------------------------------------------
295,689 1,459 93 297,055 5.91 169,943
------------------------------------------------------------------
Obligations of Puerto Rico, States and political subdivisions
(average maturity of 2 years and 10 months):
Within 1 year ............................................ 7,072 19 13 7,078 6.34 4,720
After 1 to 5 years ....................................... 16,194 238 127 16,305 5.19 16,202
After 5 to 10 years ...................................... 3,954 212 4,166 7.83 2,336
------------------------------------------------------------------
27,220 469 140 27,549 5.87 23,258
------------------------------------------------------------------
Collateralized mortgage obligations (average maturity
of 2 years and 5 months):
Within 1 year ............................................ 35,526 33 166 35,393 6.07 4,280
After 1 to 5 years ....................................... 74,829 18 329 74,518 6.35 45,727
After 5 to 10 years ...................................... 2,337 2 2,339 6.43 481
After 10 years ........................................... 5,088 5,088 6.35
------------------------------------------------------------------
117,780 53 495 117,338 6.27 50,488
------------------------------------------------------------------
Mortgage-backed securities (average maturity of
19 years and 5 months):
Within 1 year ............................................ 11,747 4 159 11,592 5.64 1,324
After 1 to 5 years ....................................... 50,382 19 556 49,845 5.68 11,445
After 5 to 10 years ...................................... 7,503 147 7,356 5.89 5,917
After 10 years ........................................... 199,053 681 547 199,187 6.79 8,720
------------------------------------------------------------------
268,685 704 1,409 267,980 6.50 27,406
------------------------------------------------------------------
Equity securities (without contractual maturity) ............ 21,759 6,159 27,918 2.16 15,228
------------------------------------------------------------------
Other (average maturity of 8 years and 11 months):
Within 1 year ............................................ 90
After 1 to 5 years ....................................... 3,608
After 5 to 10 years ...................................... 10,000 10,000 8.25
After 10 years ........................................... 8,053 8,053 6.90 84
------------------------------------------------------------------
18,053 18,053 7.65 3,782
------------------------------------------------------------------
$3,186,646 $26,277 $2,949 $3,209,974 6.01% $839,226
==================================================================
The weighted average yield on investment securities available-for-sale
is based on amortized cost, therefore it does not give effect to changes in fair
value.
The aggregate amortized cost and approximate market value of investment
securities available-for-sale at December 31, 1996, by contractual and estimated
maturity, are shown below:
Amortized Cost Market Value
----------------------------
(In thousands)
Within 1 year ............... $1,091,303 $1,093,254
After 1 to 5 years .......... 1,771,445 1,773,287
After 5 to 10 years ......... 211,636 211,440
After 10 years .............. 326,215 325,309
--------------------------
Total ............... 3,400,599 3,403,290
Without contractual
maturity.................. 12,145 12,644
--------------------------
Total investments securities
available-for-sale ....... $3,412,744 $3,415,934
==========================
F-46
65
Proceeds from the sale of investment securities available-for-sale
during 1996 were $2,896,060,000 (1995 - $286,045,000; 1994 - $293,712,000).
Gross realized gains and losses on those sales during the year were $8,504,000
and $5,440,000, respectively (1995 - $6,284,000 and $916,000; 1994 - $1,159,000
and $887,000). The basis on which cost was determined in computing the realized
gains and losses was the specific identification method.
NOTE 4 - INVESTMENT SECURITIES HELD-TO-MATURITY:
The amortized cost, gross unrealized gains and losses, approximate
market value of investment securities held-to-maturity (or fair value for
certain investment securities where no market quotations are available),
weighted average yield and related maturities as of December 31, 1996 and 1995
(1994 - only amortized cost is presented) were as follows:
1996
----------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average
cost gains losses value yield
----------------------------------------------------------------
(In thousands)
U.S. Treasury securities
(average maturity of 6 months):
Within 1 year ............................................ $ 618,934 $ 590 $ 183 $ 619,341 5.83%
----------------------------------------------------------------
618,934 590 183 619,341 5.83
----------------------------------------------------------------
Obligations of other U.S. Government
agencies and corporations (average maturity of 5 months):
Within 1 year ............................................ 119,701 107 119,594 6.17
After 1 to 5 years ....................................... 20,000 525 19,475 3.50
----------------------------------------------------------------
139,701 632 139,069 5.78
----------------------------------------------------------------
Obligations of Puerto Rico, States and political
subdivisions (average maturity of 2 years and 11 months):
Within 1 year ............................................ 98,073 52 56 98,069 3.32
After 1 to 5 years ....................................... 23,993 704 63 24,634 7.33
After 5 to 10 years ...................................... 11,839 624 12,463 8.14
After 10 years ........................................... 17,397 447 17,844 8.95
----------------------------------------------------------------
151,302 1,827 119 153,010 4.98
----------------------------------------------------------------
Collateralized mortgage obligations (average maturity
of 1 year and 6 months):
Within 1 year ............................................ 93,077 37 522 92,592 5.43
After 1 to 5 years ....................................... 59,607 259 364 59,502 6.13
After 5 to 10 years ...................................... 4,582 15 8 4,589 6.24
----------------------------------------------------------------
157,266 311 894 156,683 5.72
----------------------------------------------------------------
Mortgage-backed securities (average maturity of
4 years and 3 months):
Within 1 year ............................................ 9,181 1 37 9,145 7.53
After 1 to 5 years ....................................... 27,813 3 114 27,702 7.52
After 5 to 10 years ...................................... 16,004 2 71 15,935 7.51
After 10 years ........................................... 2,730 74 2,656 7.17
----------------------------------------------------------------
55,728 6 296 55,438 7.50
----------------------------------------------------------------
Equity securities (without contractual
maturity) .................................................. 61,407 61,407 6.06
----------------------------------------------------------------
Other (average maturity of 5 years and 9 months):
Within 1 year ............................................ 250 250 7.50
After 1 to 5 years ....................................... 6,145 5 6,150 2.78
After 5 to 10 years ...................................... 4,197 4,197 7.82
After 10 years ........................................... 2,136 40 2,096 5.31
----------------------------------------------------------------
12,728 5 40 12,693 4.97
----------------------------------------------------------------
$1,197,066 $2,739 $2,164 $1,197,641 5.78%
================================================================
F-47
66
- ------------------------------------------------------------------------------------------------------------------------------
1995 1994
-----------------------------------------------------------------------
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 4 months):
Within 1 year ................................... $ 301,463 $ 3,093 $ 304,556 7.09% $ 875,346
After 1 to 5 years .............................. 623,703 5,289 628,992 6.26 866,363
-----------------------------------------------------------------------
925,166 8,382 933,548 6.53 1,741,709
-----------------------------------------------------------------------
Obligations of other U.S. Government
agencies and corporations (average
maturity of 1 year and 6 months):
Within 1 year ................................... 111,655
After 1 to 5 years .............................. 122,978 27 $1,011 121,994 5.30 207,647
After 5 to 10 years ............................. 3,525
After 10 years .................................. 22,459
-----------------------------------------------------------------------
122,978 27 1,011 121,994 5.30 345,286
-----------------------------------------------------------------------
Obligations of Puerto Rico, States
and political subdivisions (average
maturity of 3 years and 2 months):
Within 1 year ................................... 125,983 80 24 126,039 3.67 144,588
After 1 to 5 years .............................. 34,578 1,222 56 35,744 7.56 37,417
After 5 to 10 years ............................. 12,179 982 13,161 8.51 15,764
After 10 years .................................. 22,455 813 23,268 9.17 21,695
-----------------------------------------------------------------------
195,195 3,097 80 198,212 5.29 219,464
-----------------------------------------------------------------------
Collateralized mortgage obligations (average
maturity of 3 years and 1 month):
Within 1 year ................................... 150,960 85 1,023 150,022 5.11 141,492
After 1 to 5 years .............................. 120,345 316 1,080 119,581 5.57 278,942
After 5 to 10 years ............................. 14,058 153 26 14,185 6.57 40,348
After 10 years .................................. 109 1 110 6.35 1,000
-----------------------------------------------------------------------
285,472 555 2,129 283,898 5.38 461,782
-----------------------------------------------------------------------
Mortgage-backed securities (average maturity
of 4 years):
Within 1 year ................................... 11,694 311 12,005 7.56 14,676
After 1 to 5 years .............................. 32,965 875 2 33,838 7.54 74,712
After 5 to 10 years ............................. 17,877 469 2 18,344 7.48 32,296
After 10 years .................................. 4,111 74 13 4,172 7.15 13,780
-----------------------------------------------------------------------
66,647 1,729 17 68,359 7.50 135,464
-----------------------------------------------------------------------
Equity securities (without contractual maturity) ... 43,558 43,558 6.80 40,127
-----------------------------------------------------------------------
Other (average maturity of 11 years and 11 months):
Within 1 year ................................... 250
After 1 to 5 years .............................. 6,145 17 6,162 2.80 6,145
After 5 to 10 years ............................. 4,027 4,027 7.90 3,527
After 10 years .................................. 2,156 19 2,175 5.58 2,157
-----------------------------------------------------------------------
12,328 36 12,364 4.95 12,079
-----------------------------------------------------------------------
$1,651,344 $13,826 $3,237 $1,661,933 6.13% $2,955,911
=======================================================================
The aggregate amortized cost and approximate market value of investment
securities held-to-maturity at December 31, 1996, by contractual and estimated
maturity, are shown below:
Amortized cost Market value
-------------------------------
(In thousands)
Within 1 year .............. $ 939,216 $ 938,991
After 1 to 5 years ......... 137,558 137,463
After 5 to 10 years ........ 36,622 37,184
After 10 years ............. 22,263 22,596
----------------------------
Total .............. 1,135,659 1,136,234
Without contractual
maturity ................. 61,407 61,407
----------------------------
Total investment securities
held-to-maturity ......... $1,197,066 $1,197,641
============================
F-48
67
In November 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investment in Debt and
Equity Securities." In conjunction with the issuance of this Special Report, the
FASB provided 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. As a result of this window, in December 1995, the Corporation
transferred $1,323,000,000 from securities held-to-maturity to
available-for-sale. During 1996, 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 were $2,652,000 (1994 - $13,555,000). Gross realized
gains and losses on those sales were $30,000 and $0 (1994 - $189,000 and
$237,000), respectively.
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, 1996 ............... $151,203 12% $152,933
December 31, 1995 ............... 195,065 17 198,082
NOTE 5 - PLEDGED ASSETS:
At December 31, 1996, investment securities and loans amounting to
$2,788,401,000 (1995 - $2,920,220,000; 1994 - $2,244,617,000) are pledged to
secure public and trust deposits and securities and mortgages sold under
agreements to repurchase.
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The composition of the loan portfolio at December 31, was as follows:
1996 1995
-------------------------
(In thousands)
Loans secured by real estate:
Insured or guaranteed by the U.S. Government
or its agencies ............................... $ 83,864 $ 119,730
Guaranteed by the Commonwealth of Puerto Rico .... 67,497 72,853
Commercial loans secured by real estate .......... 1,030,383 910,673
Residential conventional mortgages ............... 2,295,723 2,156,388
Construction and land development ................ 181,433 146,430
Consumer ......................................... 536,527 448,561
-------------------------
4,195,427 3,854,635
Financial institutions ........................... 90,345 97,694
Commercial, industrial and agricultural .......... 2,390,267 1,931,924
Lease financing .................................. 639,945 620,646
Consumer for household, credit cards and
other consumer expenditures .................... 2,344,001 2,159,126
Other ............................................ 194,926 219,938
-------------------------
$9,854,911 $8,883,963
=========================
As of December 31, 1996, loans on which the accrual of interest income
had been discontinued amounted to $145,408,000 (1995 - $144,482,000; 1994 -
$94,263,000). If these loans had been accruing interest, the additional interest
income realized would have been approximately $7,696,000 (1995 - $7,135,000;
1994 - $5,441,000). In addition, there are $3,308,000 of renegotiated loans
still accruing interest at December 31, 1996 (1995 - $2,742,000; 1994 -
$2,982,000). Included in the non-accruing loans as of December 31, 1996, were
$16,320,000 (1995 - $14,827,000; 1994 - $12,179,000) in consumer loans.
F-49
68
At December 31, the recorded investment in loans that were considered
impaired under SFAS 114 and the related disclosures are shown below:
December 31,
1996 1995
------------------------
(In thousands)
Impaired loans with a related allowance........................ $59,447 $38,476
Impaired loans that do not require allowance................... 36,700 47,837
------------------------
Total impaired loans................................... $96,147 $86,313
========================
Allowance for impaired loans................................... $17,777 $ 8,093
========================
Impaired loans measured based on fair value of collateral...... $36,700 $43,095
Impaired loans measured based on discounted cash flows......... 59,447 43,218
------------------------
$96,147 $86,313
========================
Average balance of impaired loans during the year.............. $88,165 $90,284
========================
Interest income recognized on impaired loans during the year... $ 3,526 $ 3,187
========================
The changes in the allowance for loan losses for the year ended
December 31, were as follows:
1996 1995 1994
----------------------------------
(In thousands)
Balance at beginning of year........... $ 168,393 $153,798 $133,437
Reserves acquired...................... 402 3,473
Provision for loan losses.............. 88,839 64,558 53,788
Recoveries............................. 35,901 28,744 30,044
Loans charged-off...................... (107,961) (78,707) (66,944)
----------------------------------
Balance at end of year................. $ 185,574 $168,393 $153,798
==================================
The components of the net financing leases receivable at December 31,
were:
1996 1995
---------------------------
(In thousands)
Total minimum lease payments................... $ 495,820 $ 481,431
Estimated residual value of leased property.... 141,561 136,717
Deferred origination costs..................... 2,564 2,498
Less - Unearned financing income....... (123,944) (119,453)
---------------------------
Net minimum lease payments..................... 516,001 501,193
Less - Allowance for loan losses....... (3,415) (6,252)
---------------------------
$ 512,586 $ 494,941
===========================
Estimated residual value is generally established at amounts expected to
be sufficient to cover the Corporations investment.
At December 31, 1996, future minimum lease payments are expected to be
received as follows:
(In thousands)
--------------
1997........................... $178,878
1998........................... 139,657
1999........................... 97,852
2000........................... 55,932
2001 and thereafter............ 23,501
--------
$495,820
========
F-50
69
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, 1995............. $ 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
New loans.............................. 839 184,384 185,223
Payments............................... (211) (200,345) (200,556)
-------------------------------
Balance at December 31, 1996........... $ 2,975 $ 128,387 $ 131,362
===============================
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 1996 1995
----------------------------------------
(In thousands)
Land.................................................. $ 47,315 $ 47,196
---------------------------
Buildings............................................. 15-50 208,317 197,747
Equipment............................................. 3-10 280,945 238,547
Leasehold improvements................................ Various 53,169 50,423
---------------------------
542,431 486,717
Less - Accumulated depreciation and amortization...... 252,393 224,543
---------------------------
290,038 262,174
---------------------------
Construction in progress.............................. 19,344 15,833
---------------------------
$356,697 $325,203
===========================
Depreciation and amortization of premises and equipment for the year
was $48,481,000 (1995 - $44,448,000; 1994 - $38,654,000) of which $9,943,000
(1995 - $9,261,000; 1994 - $8,497,000) was charged to occupancy expense and
$38,538,000 (1995 - $35,187,000; 1994 - $30,157,000) was charged to equipment,
communications and other operating expenses. Occupancy expense is net of rental
income of $16,193,000 (1995 - $15,384,000; 1994 - $15,631,000).
As a result of the adoption of SFAS 121, during 1996, the Corporation
recorded an impairment loss on a building of approximately $700,000, based on
its appraised value, which was included in other operating income in the
consolidated statement of income.
NOTE 9- DEPOSITS:
Total interest bearing deposits as of December 31, consisted of:
1996 1995
---------------------------
(In thousands)
Savings deposits:
Savings accounts...................... $3,201,367 $2,998,529
NOW and money market accounts......... 1,173,496 1,105,467
---------------------------
4,374,863 4,103,996
---------------------------
Certificates of deposit:
Under $100,000........................ 1,884,135 1,688,717
$100,000 and over..................... 2,173,573 2,062,291
---------------------------
4,057,708 3,751,008
---------------------------
$8,432,571 $7,855,004
===========================
F-51
70
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:
1996 1995 1994
--------------------------------------------
(Dollars in thousands)
Federal funds purchased........................ $ 158,336 $ 307,506 $ 332,700
Securities sold under agreements to repurchase. 1,717,129 2,693,372 1,105,338
--------------------------------------------
Total amount outstanding....................... $1,875,465 $3,000,878 $1,438,038
============================================
Maximum aggregate balance outstanding
at any month-end.............................. $2,922,611 $3,000,878 $1,444,148
============================================
Average daily aggregate balance outstanding.... $2,521,929 $2,016,273 $1,120,762
============================================
Weighted average interest rate:
For the year................... 5.12% 5.43% 3.81%
At December 31................. 5.16 5.61 5.27
NOTE 11 - OTHER SHORT-TERM BORROWINGS:
Other short-term borrowings as of December 31, consisted of:
1996 1995
----------------------
(In thousands)
Advances under revolving lines of credit amounting to $240,000,000
(1995 - $293,000,000) with fixed interest rates ranging
from 5.55% to 6.88% at December 31, 1996
(1995 - 5.88% to 6.44%)....................................... $ 65,000 $ 34,400
Commercial paper with various maturities until June 1997 at rates
ranging from 5.05% to 5.75% (1995 - 5.55% to 6.44%)........... 290,091 174,728
Term notes maturing in 1997, paying interest quarterly at floating
interest rates ranging from 0.25% to 0.50% (1995 - 0.45%)
over the 3-month LIBOR rate (LIBOR rate at
December 31, 1996 was 5.56%; 1995 - 5.63%).................... 189,961 14,984
Term note maturing in 1997, paying interest quarterly at floating
interest rate of 0.125% over the 6-month LIBOR rate
(LIBOR rate at December 31, 1996 was 5.60%)................... 10,000
Term notes maturing in 1997, paying interest semiannually at rates
ranging from 5.33% to 8.32%................................... 136,952
Term funds purchased with maturities until October 1997 at rates
ranging from 5.29% to 5.79%................................... 652,000
Term notes maturing in 1996, paying interest quarterly at 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 interest semiannually at fixed rates
ranging from 5.17% to 7.70%................................... 84,946
Advances under revolving lines of credit amounting to $214,000,000
with fixed interest rates ranging from 6.85% to 7.41%
at December 31, 1995.......................................... 34,600
Securities sold not yet purchased..................................... 59,315 25,444
Others................................................................ 687 605
----------------------
$1,404,006 $ 454,707
======================
The weighted average interest rate of other short-term borrowings at
December 31, 1996 was 5.75% (1995 - 5.53%; 1994 - 4.83%). The maximum aggregate
balance outstanding at any month-end was approximately $1,404,006,000 (1995 -
$773,366,000; 1994 - $869,505,000). The average aggregate balance outstanding
during the year was approximately $883,739,000 (1995 - $529,111,000; 1994 -
$738,005,000). The weighted average interest rate during the year was 6.27%
(1995 - 6.05%; 1994 - 4.75%).
F-52
71
NOTE 12 - NOTES PAYABLE:
Notes payable outstanding at December 31, consisted of the following:
1996 1995
------------------
(In thousands)
Term notes with maturities ranging from 1998 through 2005
paying interest semiannually at fixed rates ranging
from 5.40% to 8.41% (1995 - 5.33% to 8.41%).................... $575,360 $367,492
Term notes with maturities ranging from 1998 through 2000
paying interest quarterly at rates ranging from 0.125%
to 0.75% (1995 - 0.125% 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, 1996 were 5.56% and
5.17%, respectively; 1995 - 5.63% and 5.08%,
respectively).................................................. 117,356 254,146
Promissory notes with maturities ranging from 1998
through 2005 with fixed interest rates ranging from
4.51% to 6.35%................................................. 243,700 83,700
Term notes maturing in 1998 paying interest monthly
at LIBOR less 3 basis points with a quarterly reset of
the interest rate.............................................. 25,000 25,000
Term notes maturing in 1999 paying interest monthly
at a fixed rate of 5.92%....................................... 25,000
Mortgage notes and other debt with fixed rates and terms............... 297 90
------------------
$986,713 $730,428
==================
NOTE 13 - SENIOR DEBENTURES:
Senior debentures at December 31, 1996, consisted of a $30,000,000
obligation issued by the Corporation with interest at a fixed rate of 8.25%,
which matured in January 1997.
The senior debentures contained various covenants which, among others,
restricted the payment of dividends. These debentures prohibited the Corporation
from paying dividends or making any other distributions with respect to the
Corporations common stock if such aggregate distribution exceeded $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 had
occurred.
NOTE 14 - SUBORDINATED NOTES:
Subordinated notes at December 31, consisted of the following:
1996 1995
--------------------
(In thousands)
Subordinated notes issued by the Corporation on December 12,
1995, maturing on December 15, 2005, with interest
payable semiannually at 6.75%.......................... $125,000 $125,000
--------------------
Subordinated notes issued by Banco Popular on
March 29, 1989, which matured on June 15, 1996,
with interest payable quarterly and consisting of:
8.875% Fixed Rate Notes Series A....................... 15,000
8.6875% Fixed Rate Note Series B....................... 15,000
Floating Rate Notes Series A with interest payable at
88% of LIBID rate.............................. 19,000
Floating Rate Notes Series B with interest payable at
86% of LIBID rate.............................. 1,000
--------------------
50,000
--------------------
$125,000 $175,000
====================
F-53
72
At December 31, 1995 the LIBID rate was 5.50%.
The notes issued by the Corporation are unsecured obligations which are
subordinated in right of payment to the prior payment in full of all present
and future senior indebtedness of the Corporation. These notes do not provide
for any sinking fund.
The notes issued by Banco Popular were subordinated to the rights of
Banco Popular's depositors and other creditors and required 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.
Banco Popular transferred to capital reserves from the retained earnings
account $7,143,000 and $8,857,000 during 1995 and 1994, respectively, as a
result of this requirement. On June 15, 1996, at the notes repayment date,
the $50,000,000 balance in capital reserves was transferred to the surplus
account. In addition, during 1994, $8,571,000 were transferred from capital
reserves to surplus upon prepayment of an 8.50% note originally maturing in
1996.
NOTE 15 - LONG-TERM DEBT MATURITY REQUIREMENTS:
The aggregate amounts of maturities of notes payable, senior debentures
and subordinated notes were as follows:
Notes Senior Subordinated
Year payable debentures notes Total
-------------------------------------------------------------------------------
(In thousands)
1997................... $ 45 $30,000 $ 30,045
1998................... 218,969 218,969
1999................... 180,838 180,838
2000................... 209,667 209,667
2001................... 158,994 158,994
Later years............ 218,200 $125,000 343,200
-------------------------------------------------------
Total $986,713 $30,000 $125,000 $1,141,713
=======================================================
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 shares of Treasury Indexed
Preferred Stock Series A (TIPS) then outstanding.
NOTE 17 - STOCKHOLDER'S EQUITY:
On April 26, 1996, the Corporation's Board of Directors authorized a
stock split effected in the form of a dividend of one share of stock for each
share outstanding, effective July 1, 1996. As a result of the split, 33,000,590
shares were issued and $198,004,000 were transferred from retained earnings to
common stock. All per share data included herein has been adjusted to reflect
the stock split.
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 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 1996,
191,236 shares (1995 - 221,016; 1994 - 211,412), equivalent to $4,135,000
(1995 - $3,500,000; 1994 - $3,196,000) in additional equity, were issued under
the plan.
The Corporation has 10,000,000 shares of authorized preferred stock
with no par value. This stock may be issued in one or more series, and the
shares of each series shall have such rights and preferences as shall be fixed
by the Board of Directors when authorizing the issuance of that particular
series. One 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 through June 29, 1999, $26.00 from June 30,
1999 through June 29, 2000, $25.75 from June 30, 2000 through June 29, 2001,
$25.50 from June 30, 2001 through 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.
F-54
73
The Corporation's average number of common shares outstanding used in
the computation of net income per common share was 66,022,312 (1995 -
65,816,300; 1994 - 65,596,486). During the year, cash dividends of $0.69 (1995 -
$0.58; 1994 - $0.50) per common share outstanding amounting to $45,557,000
(1995 - $37,846,000; 1994 - $32,796,000) were declared. In addition, dividends
declared on preferred stock amounted to $8,350,000 (1995 - $8,350,000; 1994 -
$4,245,000).
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
The Corporation is subject to various regulatory capital requirements
imposed by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgements by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and ratios of Tier
I and total capital to risk-weighted assets, and of Tier I capital to average
assets (leverage ratio) as defined in the regulations. Management has determined
that as of December 31, 1996, the Corporation exceeded all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the Corporation was well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Corporations actual and required ratios and amounts of total
risk-based capital, Tier I risk-based capital and Tier I leverage, as of
December 31, were as follows:
Regulatory requirements
---------------------------------------
To be well capitalized
under prompt
Actual For capital corrective action
adequacy purposes provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------
As of December 31, 1996: (In thousands)
Total Capital (to Risk-Weighted Assets)
Consolidated .................... $1,367,478 14.18% $771,505 8% $964,382 10%
Banco Popular ................... 1,017,755 12.57 647,624 8 809,530 10
Banco Popular, FSB .............. 117,989 16.14 58,480 8 73,100 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated .................... $1,121,128 11.63% $385,753 4% $578,629 6%
Banco Popular ................... 915,825 11.31 323,812 4 485,718 6
Banco Popular, FSB .............. 108,751 14.88 29,240 4 43,860 6
Tier I Capital (to Average Assets):
Consolidated .................... $1,121,128 6.71% $501,357 3% $835,595 5%
Banco Popular ................... 915,825 6.65 412,944 3 688,239 5
Banco Popular, FSB .............. 108,751 8.99 36,300 3 60,500 5
F-55
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Regulatory requirements
---------------------------------------
To be well capitalized
under prompt
Actual For capital corrective action
adequacy purposes provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------
As of December 31, 1995: (In thousands)
Total Capital (to Risk-Weighted Assets):
Consolidated .................... $1,234,163 14.65% $673,996 8% $842,495 10%
Banco Popular ................... 899,085 13.01 553,041 8 691,302 10
Banco Popular, FSB .............. 84,388 15.48 43,615 8 54,518 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated .................... $1,003,072 11.91% $336,998 4% $505,497 6%
Banco Popular ................... 811,895 11.74 276,521 4 414,781 6
Banco Popular, FSB .............. 77,502 14.22 21,807 4 32,711 6
Tier I Capital (to Average Assets):
Consolidated .................... $1,003,072 6.66% $451,813 3% $753,022 5%
Banco Popular ................... 811,895 6.45 377,457 3 629,094 5
Banco Popular, FSB .............. 77,502 7.90 29,413 3 49,022 5
NOTE 19 - INTEREST ON INVESTMENTS:
Interest on investments consisted of the following:
1996 1995 1994
----------------------------------
(In thousands)
Money market investments:
Federal funds sold and securities
and mortgages purchased under agreements to resell ......... $ 45,697 $ 22,823 $ 4,858
Time deposits with other banks ............................... 776 165 300
Other ........................................................ 224 89 28
----------------------------------
$ 46,697 $ 23,077 $ 5,186
==================================
Investment securities:
U.S. Treasury securities ..................................... $189,300 $167,657 $136,178
Obligations of other
U.S. Government agencies and corporations ................. 43,157 35,697 29,088
Obligations of Puerto Rico,
States and political subdivisions ......................... 10,902 12,948 12,132
Collateralized mortgage obligations .......................... 26,265 26,435 24,525
Mortgage-backed securities ................................... 6,456 10,892 9,485
Other ........................................................ 4,530 6,312 3,203
----------------------------------
$280,610 $259,941 $214,611
==================================
Interest income on investment securities for the year ended December
31, 1996, includes tax exempt interest of $229,958,000 (1995 - $202,209,000;
1994 - $175,795,000). Exempt interest relates to obligations of the U.S., States
and Puerto Rico governments.
NOTE 20 - EMPLOYEE BENEFITS:
Pension plan:
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, 1996, plan assets
consisted primarily of U.S. Government obligations, high grade corporate bonds
and listed
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75
stocks, including 2,836,430 shares (1995 - 2,836,430) of the Corporation with a
market value of approximately $95,730,000 (1995 - $54,956,000). Dividends paid
on shares of the Corporation held by the plan during 1996 amounted to $1,957,000
(1995 - $1,560,000).
The following table sets forth the plans funded status and amounts
recognized in the consolidated financial statements at December 31:
1996 1995
-------------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits ............................... $(172,272) $(189,593)
Non-vested benefits ........................... (38,117) (7,283)
-------------------------
Accumulated benefit obligation ........................ (210,389) (196,876)
Effect of projected future compensation levels ........ (32,773) (33,578)
-------------------------
Projected benefit obligation .......................... (243,162) (230,454)
Plan assets at fair market value ...................... 293,362 228,115
-------------------------
Plan assets in excess of (less than) projected
benefit obligation ............................ 50,200 (2,339)
Unrecognized net (gain) loss from past
experience different from that assumed
and effect of changes in assumptions .......... (27,101) 26,673
Unrecognized prior service cost ....................... (2,620) (2,866)
Unrecognized initial net assets ....................... (20,547) (23,007)
-------------------------
Accrued pension cost .................................. $ (68) $ (1,539)
=========================
Net pension cost for the year ended December 31, included the following
components:
1996 1995 1994
------------------------------------
(In thousands)
Service costs - benefits earned during the period ..... $ 9,860 $ 6,791 $ 8,359
Interest cost on projected benefit obligation ........ 16,645 14,798 13,627
Actual (return) loss on plan assets ................... (68,965) (48,665) 6,384
Net amortization and deferral ......................... 46,273 29,257 (27,066)
------------------------------------
Net pension costs ..................................... 3,813 2,181 1,304
Cost of early retirement window ....................... 3,851
------------------------------------
Total pension cost ............................ $ 3,813 $ 6,032 $ 1,304
====================================
At December 31, 1996, the discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.50% (1995 -
7.25%; 1994 - 8.75%). Rates of future compensation levels reflected a 4%
inflation assumption plus a merit component ranging from 0.5% to 4.5% for 1996,
1995 and 1994. The expected long-term rate of return on assets used in the
computation was 9% for 1996, 1995 and 1994.
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, including pension and postretirement benefit costs.
Retirement and savings plan:
The Corporation also provides contributory retirement and savings plans
pursuant to sections 165(e) of the Puerto Rico Internal Revenue Code and section
401(k) of the U.S. Internal Revenue Code, as applicable, for substantially all
the employees of BP Capital, Equity One, Pioneer, Popular Consumer, Popular
Leasing, Popular Mortgage and Velco. Employer contributions are determined based
on specific provisions of each plan. The cost of providing this benefit in 1996
was $2,163,000 (1995 - $1,247,000; 1994 - $558,000).
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. All contributions are
invested in shares of the Corporation. Total savings plan expense was $863,000
in 1996 (1995 - $621,000). The savings plan held 368,117 (1995 - 140,970) shares
of common stock of the Corporation with a market value of approximately
$12,424,000 at December 31, 1996 (1995 $2,731,000).
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76
Postretirement health care benefits:
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 1996 amounted to approximately $2,556,000 (1995 - $2,152,000;
1994 - $2,072,000).
The components of net postretirement benefit cost for the year ended
December 31, were as follows:
1996 1995 1994
-----------------------------
(In thousands)
Service cost-benefits attributable to service
during the period ............................. $ 3,584 $2,658 $3,028
Interest cost on accumulated postretirement
benefit obligation ........................... 5,719 5,435 4,277
Net amortization and deferral ......................... 1,230 597 585
-----------------------------
Net postretirement benefit cost ............... 10,533 8,690 7,890
Cost of early retirement window ....................... 688
-----------------------------
Total postretirement benefit cost ............. $10,533 $9,378 $7,890
=============================
The status of the Corporations unfunded postretirement benefit plan at December
31, was as follows:
1996 1995
-----------------------
(In thousands)
Actuarial present value of expected postretirement benefit
obligation:
Retirees ................................................ $(26,929) $(23,419)
Fully eligible active plan participants ................. (12,569) (16,507)
Other active plan participants .......................... (44,470) (45,745)
-----------------------
Accumulated postretirement benefit obligation ................... (83,968) (85,671)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions .................................. 14,981 24,226
Unrecognized prior service cost ................................. 5,376 5,811
-----------------------
Accrued postretirement benefit cost ............................. $(63,611) $(55,634)
=======================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1996 was 7.50% (1995 - 7.25%).
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation at December 31, 1995 was 11%,
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, 1996, by $14,369,000 and the sum of the service and interest cost in 1996 by
$1,864,000.
Profit sharing plan:
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 $22,859,000 (1995 - $19,577,000; 1994 -
$19,967,000).
Long-term incentive plan:
Banco Popular established in 1994 a long-term incentive plan for its
senior management. Under this plan, each January 1st the Board of Directors
awards senior management a specified number of shares of common stock of the
Corporation contingent upon reaching some pre-defined performance measures over
periods of three years. The dividends attributable to these shares are also part
of the award. The final number of shares awarded is subject to a factor based on
the level of attainment. Banco Popular applied APB Opinion 25 and related
Interpretations in accounting for the plans in 1994 and 1995. Accordingly,
compensation expense was recognized based on the prevailing stock price until
measurement date. The measurement date is the date when the ultimate number of
shares to be granted is known.
F-58
77
The 1996 awards are being accounted for under the provisions of SFAS
123, therefore, compensation cost is determined based on the fair value of the
stock at the grant date. The compensation expense related to each award is
recognized when probable, based on the best estimate of the outcome of the
performance condition, on a straight-line basis over the vesting period.
The compensation cost recognized for the performance-based plan was
$837,000 in 1996 (1995 - $284,000; 1994 - $135,000).
Puerto Rico benefit restoration plan:
Banco Popular also has a non-qualified 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:
1996 1995
---------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits ............................... $ (324) $ (83)
Non-vested benefits ........................... (1)
---------------------
Accumulated benefit obligation ................ (324) (84)
Effect of projected future compensation levels ........ (1,849) (1,130)
---------------------
Projected benefit obligation .................. (2,173) (1,214)
Unrecognized net loss from past
experience different from that assumed
and effect of changes in assumptions .......... 847 164
Unrecognized prior service cost ....................... 624 678
---------------------
Accrued supplementary pension cost .................... $ (702) $ (372)
=====================
Net supplementary pension cost for the year ended December 31, included
the following components:
1996 1995 1994
-----------------------
(In thousands)
Service costs - benefits earned
during the period ................... $172 $109 $ 62
Interest cost on projected benefit
obligation .......................... 94 69 43
Net amortization and deferral ............... 64 53 36
-----------------------
Net supplementary pension cost .............. $330 $231 $141
=======================
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NOTE 21 - RENTAL EXPENSE AND COMMITMENTS:
At December 31, 1996, 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)
1997................ $11,857 $ 711 $11,146
1998................ 10,672 656 10,016
1999................ 9,606 354 9,252
2000................ 8,473 231 8,242
2001................ 7,062 195 6,867
Later years ........ 51,892 565 51,327
-------------------------------
$99,562 $ 2,712 $96,850
===============================
Total rental expense for the year ended December 31, 1996, was
$21,196,000 (1995 - $18,037,000; 1994 - $16,705,000).
NOTE 22 - INCOME TAX:
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 $1,480,000 in 1996 (1995 - $1,981,000; 1994 -
$64,000).
1996 1995 1994
-------------------------------------
(In thousands)
Current income tax expense:
Puerto Rico .............................. $ 84,668 $ 58,067 $ 31,461
Federal and States ....................... 18,192 9,624 6,235
-------------------------------------
Subtotal ......................... 102,860 67,691 37,696
=====================================
Deferred income tax expense (benefit):
Puerto Rico .............................. (26,769) (9,501) 11,606
Federal and States ....................... (5,214) 1,006 (759)
Adjustment for enacted changes
in income tax laws ..................... 573 1,500
-------------------------------------
Subtotal ......................... (31,983) (7,922) 12,347
=====================================
Total income tax expense ......... $ 70,877 $ 59,769 $ 50,043
=====================================
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:
1996 1995 1994
------------------------------------------------------------------
% of pre-tax % of pre-tax % of pre-tax
Amount Income Amount Income Amount Income
------------------------------------------------------------------
(Dollars in thousands)
Computed income tax at
statutory rate ..................... $ 99,851 39% $ 86,574 42% $ 73,574 42%
Benefits of net tax exempt
interest income .................... (29,118) (11) (24,604) (12) (25,297) (14)
Federal and States taxes and other ......... 144 (2,201) (1) 1,766 1
------------------------------------------------------------------
Income tax expense ......................... $ 70,877 28% $ 59,769 29% $ 50,043 29%
==================================================================
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 reduced the maximum tax rate for
corporations from 42% to 39%.
F-60
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The deferred taxes of the Corporation were adjusted accordingly in 1994 and
1995, to reflect this tax rate reduction on those temporary differences and tax
attributes that were expected to reverse or settle on or after January 1, 1996.
The Act also repealed the reserve method of determining losses on loans and
requires taxpayers to use the direct charge-off method and recapture the reserve
balance at December 31, 1995 into income for tax purposes over a four-year
period. As a result of this change, the Corporation is required to pay
$14,640,000 annually from 1996 through 1999. A deferred tax asset is recorded
accordingly, to recognize the difference between the tax and accounting bases
of the allowance for loan losses.
Under SFAS 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Corporations deferred tax assets and liabilities
at December 31, were as follows:
1996 1995
-------------------
(In thousands)
Deferred tax assets:
Alternative minimum tax credits available for
carryforward and other credits ............................... $24,303 $26,613
Net operating loss carryforwards available ........................... 292 1,418
Postretirement benefit obligation
(other than pensions) ........................................ 24,966 21,708
Allowance for loan losses ............................................ 18,670
Other temporary differences .......................................... 22,144 16,745
-------------------
Total gross deferred tax assets ...................................... 90,375 66,484
Deferred tax liabilities:
Differences between the assigned values and the
tax bases of assets and liabilities recognized
in purchase business combinations ............................ 17,735 19,477
Other temporary differences .......................................... 7,910 13,049
-------------------
Total gross deferred tax liabilities ................................. 25,645 32,526
-------------------
Valuation allowance .................................................. 577 1,788
-------------------
Net deferred tax asset ............................................... $64,153 $32,170
===================
At December 31, 1996, the Corporation had $24,303,000 in alternative
minimum tax credits and other credits expiring in annual installments through
year 2014 that will reduce the regular income tax liability in future years.
During 1996, the Corporation used alternative minimum tax (AMT) and other
credits totaling $1,720,000 (1995 - $7,432,000) to reduce its regular tax
liability. The Corporation had, at the end of 1996, $748,000 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 1996, the
Corporation used NOL carryforwards amounting to $2,645,000 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.
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.
A valuation allowance of $577,000 (1995 - $1,788,000) is reflected in
1996, 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, 1996.
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 previous years, 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.
F-61
80
The Corporation's subsidiaries in the United States file a consolidated
federal income tax return. The Corporation's federal income tax provision for
1996 was $12,281,000 (1995 - $9,265,000, 1994 - $4,297,000). The intercompany
settlements of taxes paid is based on tax sharing agreements which generally
allocates taxes to each entity based on a separate return basis.
NOTE 23 - OFF-BALANCE SHEET LENDING ACTIVITIES AND CONCENTRATION OF CREDIT RISK:
Off-balance sheet risk:
The Corporation is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financial needs of its
customers and to manage its own risk arising from movements in 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 amount of these instruments, which are not included in the statement of
condition, is 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 statement of
condition.
Financial instruments with off-balance sheet risk at December 31, whose
contract amounts represent potential credit risk were as follows:
1996 1995
-------------------------
(In thousands)
Commitments to extend credit:
Credit card lines ................................... $ 915,589 $ 846,732
Commercial lines of credit .......................... 1,374,670 1,105,219
Other unused commitments ............................ 48,693 11,898
Commercial letters of credit ................................ 21,921 19,012
Standby letters of credit ................................... 115,681 119,983
Commitments to purchase mortgage and consumer loans ......... 2,203 69,539
Commitments to extend credit:
Contractual commitments to extend credit are legally binding agreements
to lend money to customers at predetermined interest rates for a specified
period of time. To extend credit the Corporation evaluates each customer's
creditworthiness. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include cash, accounts receivable, inventory, property, plant and
equipment and investment securities, among others. The Corporation's exposure to
credit loss in the event of nonperformance by the customer is represented by the
contractual amount of the commitment to extend credit. Since many of the loan
commitments may expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements.
Letters of credit:
There are two principal types of letters of credit: commercial and
standby letters of credit. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. In most instances, cash items are held by the Corporation to
collateralize these instruments.
In general, commercial letters of credit are short-term instruments
used to finance a commercial contract for the shipment of goods from a seller to
a buyer. This type of letter of credit ensures prompt payment to the seller in
accordance with the terms of the contract. Although the commercial letter of
credit is contingent upon the satisfaction of specified conditions, it
represents a credit exposure if the buyer defaults on the underlying
transaction.
Standby letters of credit are also issued by the Corporation to
disburse funds to a third party beneficiary if the Corporation's customer fails
to perform under the terms of an agreement with the beneficiary. These letters
of credit are used by the customer as a credit enhancement and typically expire
without being drawn upon.
F-62
81
Other commitments:
The Corporation entered into a commitment to purchase up to
$100,000,000 of mortgage loans from another institution. This commitment expires
on March 13, 1997. The purchased mortgage loans will continue to be serviced by
the originating institution. As of December 31, 1996, loans purchased under this
agreement totaled $97,797,000 and were classified as loans held-for-sale.
Geographic concentration:
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, 1996, the Corporation had no significant
concentrations of credit risk and no significant exposure to highly leveraged
transactions in its loan portfolio.
The asset composition of the Corporation by geographical area at December 31,
was as follows:
1996 1995
-------------------------------------------------
(Dollars in thousands)
Puerto Rico $12,386,136 73.9% $11,833,155 75.5%
United States 3,756,526 22.4 3,253,791 20.7
U.S. and British Virgin
Islands and Latin America 621,441 3.7 588,505 3.8
-------------------------------------------------
$16,764,103 100.0% $15,675,451 100.0%
=================================================
Included in total assets of Puerto Rico are investments in obligations
of the U.S. Treasury and U.S. Government agencies amounting to $2.9 billion and
$3.4 billion in 1996 and 1995, respectively.
NOTE 24 - 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 condition.
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that creates a contractual obligation or
right to deliver to or receive cash or another financial instrument from a
second entity on potentially favorable terms with the first entity. All
nonfinancial instruments and certain other specific items are excluded from the
fair value disclosure requirements
For those financial instruments with no quoted market prices available,
fair values have been estimated using present value or other valuation
techniques. These techniques are inherently subjective and are significantly
affected by the assumptions used, including the discount rates, estimates of
future cash flows and prepayment assumptions. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument.
The fair values reflected herein have been determined based on the
prevailing interest rate environment as of December 31, 1996 and 1995,
respectively. In different interest rate environments, fair value results can
differ significantly, specially for certain fixed rate financial instruments and
non-accrual assets. In addition, the fair values presented do not attempt to
estimate the value of the Corporation's fee generating businesses and
anticipated future business activities, that is, they do not represent the
Corporation's value as a going concern. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Corporation.
The 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 Statements 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.
F-63
82
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 their carrying value since they are marked-to-market for accounting
purposes. These instruments are detailed in the Statements of Condition and in
notes 3, 4 and 25.
Loans held-for-sale:
Estimated fair value of loans held-for-sale as of December 31, 1996,
was $257,183,000 (1995 - $124,877,000) 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 into 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 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 below with fair value equal to its
carrying value.
1996 1995
----------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
----------------------------------------------------------
(In thousands)
Commercial ................................ $3,822,096 $3,821,956 $3,205,031 $3,210,962
Construction .............................. 200,083 200,576 215,835 211,469
Lease financing ........................... 516,001 516,001 498,750 498,750
Mortgage .................................. 2,381,332 2,399,493 2,320,786 2,350,543
Consumer (including credit cards) ......... 2,604,387 2,656,156 2,324,276 2,264,492
Less: Allowance for loan losses .......... 185,574 168,393
----------------------------------------------------------
$9,338,325 $9,594,182 $8,396,285 $8,536,216
==========================================================
Deposits:
As specified by SFAS 107, "Disclosures about Fair Value of Financial
Instruments," 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, 1996 and 1995, comprised 62% 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, 1996 and 1995, respectively, for deposits with similar remaining
maturities.
F-64
83
1996 1995
------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
------------------------------------------------------------
(In thousands)
-----------------------------------------------------------
Non-interest bearing deposits ......... $ 2,330,704 $ 2,330,704 $2,021,658 $2,021,658
Savings accounts ...................... 3,201,367 3,201,367 2,998,529 2,998,529
NOW and money market
accounts ...................... 1,173,496 1,173,496 1,105,467 1,105,467
Certificates of deposit ............... 4,057,708 4,060,727 3,751,008 3,795,430
-----------------------------------------------------------
$10,763,275 $10,766,294 $9,876,662 $9,921,084
===========================================================
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, 1996 and 1995,
respectively. Included within other short-term borrowings at December 31, 1996,
were $290,091,000 (1995 - $174,728,000) 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.
1996 1995
------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
------------------------------------------------------------
(In thousands)
------------------------------------------------------------
Other short-term borrowings ....... $1,404,006 $1,404,744 $454,707 $454,738
Notes payable ..................... 986,713 989,970 730,428 737,662
Senior debentures ................. 30,000 30,000 30,000 29,686
Subordinated notes ................ 125,000 116,699 175,000 174,004
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, 1996, the
Corporation had $2,338,952,000 and $137,602,000 in commitments to extend credit
and letters of credit, respectively (1995 - $1,963,849,000 and $138,995,000).
The estimated fair value of these financial instruments with no carrying value
was $9,137,000 (1995 - $10,778,000).
NOTE 25 - RISK MANAGEMENT AND TRADING ACTIVITIES
The Corporation's exposure to market risk relates to changes in
interest rates or in the fair value of the underlying financial instruments and,
to a limited extent, to fluctuations in foreign currency exchange rates. The
operations 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. Among the various methods
used by the Corporation to measure the risks generated by assets and liabilities
are beta-adjusted gap analysis, simulations and duration analysis.
In managing its market risk the Corporation enters, to a limited
extent, into certain derivative instruments that expose it to credit risk, which
represent the risk that the counterparties might default on their obligations.
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 23.
The following table indicates the types of derivative financial
instruments the Corporation held at December 31. The credit exposure is
represented by the fair value of the instruments with a positive market value.
The table should be read in conjunction with the descriptions of these products
and the Corporation's objectives for holding them immediately following.
F-65
84
1996 1995
------------------------------------------------------------------------
Notional Average for the Fair Notional Average for the Fair
amount year value amount year value
------------------------------------------------------------------------
(In thousands)
Interest rate swaps:
Pay floating/receive fixed ........ $ 25,000 $ 21,250 $ 98 $ 10,000 $10,000 $ 43
Pay fixed/receive floating ........ 115,000 115,000 (13) 115,000 53,300 (1,261)
Interest rate caps ................ 13,250
Interest rate swaptions ........... 22,149 14,683 1,233 9,889 9,324 2,572
Foreign exchange contracts ........ 178 748 963 484
Interest rate swaps:
Interest rate swap agreements generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal. Net interest settlements on interest rate swaps are
recorded as an adjustment to interest income or interest expense of the hedged
item.
1996 1995
-------------------------------------------
(Dollars in thousands)
Activity of interest rate swaps hedges for
the year:
Beginning balance .................. $ 125,000 $ 10,000
New swaps .......................... 15,000 115,000
-------------------------------------------
Ending balance ..................... $ 140,000 $ 125,000
===========================================
Average receive rate range ......... 5.50% to 6.72% 5.81% to 6.72%
Average pay rate range ............. 5.81% to 7.89% 5.69% to 6.53%
The agreements were entered into to change the Corporation's interest
rate exposure and they end at the time the related obligation matures. The
variable rates are based on the three-month and six-month LIBOR rates.
Nonperformance by any of the counterparties on this agreement will expose the
Corporation to an interest rate risk which management deems to be immaterial.
Interest rate caps:
The Corporation uses protected interest rate agreements (CAPS) to
reduce its vulnerability to adverse interest rate fluctuations. Interest rate
caps are option-like contracts where the Corporation pays an up front premium
for the right to receive the amount, if any, by which a specified market
interest rate exceeds the fixed cap rate. The premium paid is amortized to
income over the life of the agreement.
Foreign exchange contracts:
To satisfy the needs of its customers, from time to time, the
Corporation enters into foreign exchange contracts in the spot or futures
market. Spot contracts require the exchange of two currencies at an agreed rate
to occur within two business days of the contract date. Forward and futures
contracts to purchase or sell currencies at a future date settle over periods of
up to one year, in general. Future and forward contracts are recorded at market
value.
Securities sold not yet purchased:
The Corporation enters in securities sold not yet purchased
transactions for hedging strategies and for trading purposes. 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 interest
rate fluctuations. At December 31, 1996, securities sold short amounting to
$59,315,000 (1995 - $25,444,000) were used to hedge $59,819,000 (1995 -
$30,461,000) of auto loans held-for-sale. The securities sold short are recorded
as other short-term borrowings on the statements of condition at market. Gains
and losses are deferred until gains or losses on the related hedged item are
recognized. At December 31, 1996, the Corporation had deferred gains and losses
of $195,000 and $41,000, respectively, related to these activities. At December
31, 1995, there were no deferred gains and losses from these activities.
Open positions on securities sold short for trading purposes are
usually closed at each month-end. The volume of such transactions is not
significant, as further discussed.
F-66
85
Trading activities:
The Corporation maintains limited trading positions in certain
financial instruments and nonfinancial contracts including, to a limited extent,
derivatives. 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 of 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 sensitive 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 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 futures and options written for trading
purposes were $3,210,000 and $6,079,000, respectively, at December 31, 1996. For
1995, the contract amount of forwards, futures and options were $9,900,000,
$16,416,000 and $11,692,000, respectively. The following tables indicates the
fair value and net gains (losses) of derivatives financial instruments held for
trading purposes.
Fair Value
---------------------------------------------------------------
At December 31, 1996 Average for the period Net gains
Assets Liabilities Assets Liabilities (losses)
---------------------------------------------------------------
(In thousands)
Futures contracts ........ $0 $135 $140 $34 $(274)
Options .................. 0 73 0 48 121
Fair Value
---------------------------------------------------------------
At December 31, 1996 Average for the period Net gains
Assets Liabilities Assets Liabilities (losses)
---------------------------------------------------------------
(In thousands)
Forwards 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 26 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS:
During the year ended December 31, 1996, the Corporation paid interest
and income taxes amounting to $579,733,000 and $76,324,000, respectively (1995 -
$515,960,000 and $42,383,000; 1994 - $339,329,000 and $27,052,000). In addition,
loans transferred to other real estate and other property for the year ended
December 31, 1996, amounted to $3,333,000 and $5,640,000, respectively (1995 -
$5,404,000 and $3,792,000). In December 1995, the Corporation transferred
$1,323,000,000 from securities held-to-maturity to securities
available-for-sale.
NOTE 27 - CONTINGENT LIABILITIES:
The Corporation is a defendant in a number of legal proceedings arising
in the normal course of business. Management believes, based on the opinion of
legal counsel, that the final disposition of these matters will not have a
material adverse effect on the Corporation's financial position or results of
operations.
F-67
86
NOTE 28 - BANPONCE CORPORATION (HOLDING COMPANY ONLY) FINANCIAL INFORMATION:
The following condensed financial information presents the financial
position of the Holding Company only as of December 31, 1996 and 1995 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996.
STATEMENTS OF CONDITION
December 31,
--------------------------
1996 1995
--------------------------
(In thousands)
ASSETS
Cash .................................................... $ 191 $ 213
Money market investments ................................ 55,024 7,460
Investment securities available-for-sale, at
market value............................................ 69,486 69,816
Investment in Banco Popular, at equity .................. 1,009,648 896,427
Investment in Pioneer Bancorp, at equity ................ 39,820 38,531
Investment in Banco Popular, FSB, at equity ............. 130,577 103,688
Investment in CombanCorp, at equity ..................... 12,566
Investment in other subsidaries, at equity .............. 47,365 46,703
Advances to subsidiaries ................................ 634,257 533,317
Premises and equipment .................................. 39,176 40,793
Other assets ............................................ 3,348 2,434
--------------------------
Total assets ............................ $2,041,458 $1,739,382
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase .......... $ 52,084 $ 52,275
Commercial paper ........................................ 164,379 174,728
Other short-term borrowings ............................. 65,000 34,400
Notes payable ........................................... 320,539 162,500
Senior debentures ....................................... 30,000 30,000
Accrued expenses and other liabilities .................. 21,924 18,782
Subordinated notes ...................................... 125,000 125,000
Stockholders' equity .................................... 1,262,532 1,141,697
--------------------------
Total liabilities and stockholders'
equity ................................. $2,041,458 $1,739,382
==========================
STATEMENTS OF INCOME
Year ended December 31,
------------------------------------
1996 1995 1994
------------------------------------
(In thousands)
Income:
Dividends from subsidiaries .................................. $ 42,608 $ 76,600 $ 32,189
Interest on money market and investment securities ........... 4,828 3,897 1,606
Other operating income ....................................... 2,394 1,347 7
Interest on advances to subsidiaries ......................... 42,047 26,258 11,750
------------------------------------
Total income ......................................... 91,877 108,102 45,552
------------------------------------
Expenses:
Interest expense ............................................. 42,761 25,824 8,530
Operating expenses ........................................... 1,698 671 424
------------------------------------
Total expenses ....................................... 44,459 26,495 8,954
------------------------------------
Income before income taxes and equity in undistributed
earnings of subsidiaries ..................................... 47,418 81,607 36,598
Income taxes ......................................................... 1,109 6,787 3,484
------------------------------------
Income before equity in undistributed earnings of subsidiaries ....... 46,309 74,820 33,114
Equity in undistributed earnings of subsidiaries ..................... 138,841 71,541 91,635
------------------------------------
Net income ........................................... $185,150 $146,361 $124,749
====================================
F-68
87
STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------
1996 1995 1994
------------------------------------
(In thousands)
Cash flows from operating activities:
Net income ......................................................... $185,150 $146,361 $124,749
------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries ............... (138,841) (71,541) (91,635)
Dividend in kind received from a subsidiary .................... (41,600)
Depreciation of premises and equipment ......................... 1,621 829
Amortization of premiums and accretion of discounts on
investments .................................................. 22 23
Net increase in other assets ................................... (914) (1,163) (1,087)
Net decrease in current taxes .................................. (3,182)
Net increase in other liabilities .............................. 4,554 5,363 157
------------------------------------
Total adjustments ........................................ (136,740) (108,089) (92,565)
------------------------------------
Net cash provided by operating activities ................ 48,410 38,272 32,184
------------------------------------
Cash flows from investing activities:
Net (increase) decrease in money market investments ................ (47,564) 581 426
Purchases of investment securities held-to-maturity ................ (50,106)
Purchases of investment securities available-for-sale .............. (1,538) (14,178) (2,768)
Maturities of investment securities available-for-sale ............. 883
Capital contribution to subsidiaries ............................... (30,000) (16,130) (78,314)
Distribution from subsidiary ....................................... 392
Advances to subsidiaries ........................................... (100,940) (374,047) (26,995)
Acquisition of premises and equipment .............................. (3) (22)
------------------------------------
Net cash used in investing activities .................... (178,770) (403,796) (157,757)
------------------------------------
Cash flows from financing activities:
Net (decrease) increase in securities sold under
agreements to repurchase ......................................... (191) 42,425 9,850
Net (decrease) increase in commercial paper ........................ (10,349) 41,934 52,493
Net increase in other short-term borrowings ........................ 30,600 34,400
Net increase in notes payable ...................................... 158,039 162,500
Cash dividends paid ................................................ (51,896) (44,521) (37,016)
Proceeds from issuance of subordinated notes ....................... 125,000
Proceeds from issuance of preferred stock .......................... 96,690
Proceeds from issuance of common stock ............................. 4,135 3,500 3,196
------------------------------------
Net cash provided by financing activities ............... 130,338 365,238 125,213
------------------------------------
Net decrease in cash ............................................... (22) (286) (360)
Cash at beginning of period ........................................ 213 499 859
------------------------------------
Cash at end of period .............................................. $ 191 $ 213 $ 499
====================================
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 29 - POPULAR INTERNATIONAL BANK, INC. (A SUBSIDIARY OF BANPONCE
CORPORATION) FINANCIAL INFORMATION:
The following summarized financial information presents the
consolidated financial position of Popular International Bank, Inc. and its
subsidiaries as of November 30, 1996 and 1995, and the results of their
operations, cash flows and changes in stockholder's equity for each of the three
years in the period ended November 30, 1996. Popular International Bank, Inc. is
the holding company of BanPonce Financial Corp., including Pioneer Bancorp Inc.,
CombanCorp and Banco Popular, FSB (second-tier subsidiaries) and its
wholly-owned subsidiary Equity One, Inc.
F-69
88
STATEMENTS OF CONDITION
November 30,
---------------------------
1996 1995
---------------------------
(In thousands)
ASSETS
Cash ......................................................... $ 31,171 $ 25,052
--------------------------
Money market investments ..................................... 49,184 20,840
--------------------------
Investment securities available-for-sale, at market value .... 205,249 270,262
--------------------------
Investment securities held-to-maturity ....................... 12,232
--------------------------
Loans held-for-sale .......................................... 48,068 23,555
--------------------------
Loans ........................................................ 1,545,262 1,158,513
Less: Unearned income ................................ 47,420 43,375
Allowance for loan losses ............................ 22,920 16,242
--------------------------
1,474,922 1,098,896
--------------------------
Other assets ................................................. 50,672 35,488
Intangible assets ............................................ 31,232 30,340
Total assets ......................................... $1,902,730 $1,504,433
==========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Non-interest bearing ...................................... $ 94,297 $ 55,730
Interest bearing .......................................... 593,195 494,096
--------------------------
687,492 549,826
--------------------------
Federal funds purchased and securities sold under agreements
to repurchase ........................................ 5,075 4,035
Other short-term borrowings, consisting of $375,625 in term
notes (1995 - $99,930), and a revolving credit
facility with an affiliate of $35,000
(1995 - $40,000) ..................................... 410,625 139,930
Notes payable (Note 12) ...................................... 579,277 634,139
Other liabilities ............................................ 38,722 37,368
Stockholder's equity ......................................... 181,539 139,135
--------------------------
Total liabilities and stockholder's equity .......... $1,902,730 $1,504,433
==========================
STATEMENTS OF INCOME
Year ended November 30,
------------------------------------
1996 1995 1994
------------------------------------
(In thousands)
Interest and fees:
Loans ........................................................ $136,824 $101,442 $ 66,487
Money market and investment securities ....................... 16,188 18,948 5,721
------------------------------------
153,012 120,390 72,208
------------------------------------
Interest expense:
Deposits ..................................................... 24,000 21,225 8,091
Short-term borrowings ........................................ 22,572 6,595 9,707
Long-term borrowings ......................................... 35,265 39,847 18,060
------------------------------------
81,837 67,667 35,858
------------------------------------
Net interest income .................................................. 71,175 52,723 36,350
Provision for loan losses ............................................ 14,299 8,651 6,973
------------------------------------
Net interest income after provision for loan losses .................. 56,876 44,072 29,377
Service charges on deposit accounts .................................. 2,735 1,844 768
Other service fees ................................................... 4,663 3,813 2,834
Gain on sale of securities ........................................... 7,026 6,239
Other operating income ............................................... 5,342 6,738 3,614
------------------------------------
76,642 62,706 36,593
------------------------------------
Operating expenses ................................................... 46,509 35,782 23,149
------------------------------------
Income before income tax ............................................. 30,133 26,924 13,444
Income tax ........................................................... 12,978 10,629 5,477
------------------------------------
Net income ........................................................... $ 17,155 $ 16,295 $ 7,967
====================================
F-70
89
STATEMENTS OF CASH FLOWS
Year ended November 30,
--------------------------------------
1996 1995 1994
--------------------------------------
(In thousands)
Cash flows from operating activities:
Net income ............................................................. $ 17,155 $ 16,295 $ 7,967
--------------------------------------
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of premises and equipment ................ 1,833 1,136 719
Provision for loan losses .............................................. 14,299 8,651 6,973
Amortization of intangibles ............................................ 3,460 3,321 1,524
Amortization of deferred loan fees and costs ........................... (1,922) 6,467 4,701
Amortization of premiums and accretion of discounts on
investments .......................................................... 267 446
Loans held-for-sale .................................................... (24,513)
Gain on sale of investment securities available-for-sale ............... (7,026) (6,239)
Gain on sale of loans .................................................. (8,049) (6,676) (3,574)
Net increase in interest receivable .................................... (1,286) (5,375) (1,954)
Net increase in other assets ........................................... (1,915) (5,046) (319)
Net decrease in current and deferred taxes ............................. (1,942)
Net increase in other liabilities ...................................... 5,392 7,509 8,111
--------------------------------------
Total adjustments ...................................... (21,402) 4,194 16,181
--------------------------------------
Net cash provided by operating activities .............. (4,247) 20,489 24,148
--------------------------------------
Cash flows from investing activities:
Net (increase) decrease in money market investments .................... (15,676) 3,489 (14,980)
Purchases of investment securities held-to-maturity .................... (6,214)
Purchases of investment securities available-for-sale .................. (71,955) (358,811) (52,324)
Sale of investment securities available-for-sale ....................... 61,205 183,091 36,833
Maturities of investment securities available-for-sale ................. 98,011 50,000
Net disbursements on loans ............................................. (574,754) (357,540) (392,454)
Proceeds from sale of loans ............................................ 285,771 70,155 107,941
Acquisition of loan portfolios ......................................... (18,059)
Assets acquired, net of cash ........................................... (2,656) (17,557)
Acquisition of premises and equipment .................................. (4,794) (4,941) (1,964)
--------------------------------------
Net cash used in investing activities .................. (231,062) (432,616) (334,505)
--------------------------------------
Cash flows from financing activities:
Net increase in deposits ............................................... 42,735 43,211 33,097
Net deposits acquired .................................................. 163,504
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase .................................. 1,040 (8,965) 8,000
Net increase (decrease) in other short-term borrowings ................. 222,514 (24,870) 38,523
Proceeds from issuance of notes payable ................................ 30,024 234,215 175,762
Payments of notes payable .............................................. (84,885)
Proceeds from issuance of common stock ................................. 150
Capital contribution from Parent company ............................... 29,850 78,164
--------------------------------------
Net cash provided by financing activities .............. 241,428 407,095 333,546
--------------------------------------
Net increase (decrease) in cash and due from banks ............................. 6,119 (5,032) 23,189
Cash and due from banks at beginning of year ................................... 25,052 30,084 6,895
--------------------------------------
Cash and due from banks at end of year ......................................... $ 31,171 $ 25,052 $ 30,084
======================================
F-71
90
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
Year ended November 30,
--------------------------------------
1996 1995 1994
--------------------------------------
(In thousands)
Preferred Stock:
Par value $25; authorized 25,000,000 shares, none issued
Common Stock:
Par value $5; authorized 1,000,000 shares, 700,000 shares
issued and outstanding (1995 - 670,000; 1994 - 670,000)
Balance at beginning of the period ..................................... $ 3,350 $ 3,350 $ 3,100
Issuance of common stock ............................................... 150 250
--------------------------------------
Balance at end of the period ........................................... 3,500 3,350 3,350
--------------------------------------
Additional paid-in capital:
Balance at beginning of the period ..................................... 103,114 103,114 25,200
Issuance of common stock ............................................... 49,750
Capital contribution from Parent company ............................... 29,850 28,164
--------------------------------------
Balance at end of the period ........................................... 132,964 103,114 103,114
--------------------------------------
Retained earnings:
Balance at beginning of the period ..................................... 27,234 10,939 2,972
Net income ............................................................. 17,155 16,295 7,967
--------------------------------------
Balance at end of the period ........................................... 44,389 27,234 10,939
--------------------------------------
Unrealized holding gains (losses) on investment securities
available-for-sale, net of deferred taxes:
Balance at beginning of the period ..................................... 5,437 (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 ...................... (4,751) 7,910 (1,737)
--------------------------------------
Balance at end of period ............................................... 686 5,437 (2,473)
--------------------------------------
Total stockholder's equity ..................................... $181,539 $139,135 $114,930
======================================
NOTE 30 - BANPONCE FINANCIAL CORP. (A SECOND-TIER SUBSIDIARY OF BANPONCE
CORPORATION) FINANCIAL INFORMATION:
The following summarized financial information presents the
consolidated financial position of BanPonce Financial Corp. and its subsidiaries
CombanCorp, Banco Popular, FSB, including its wholly-owned subsidiary Equity
One, Inc., and Pioneer Bancorp, Inc. (second tier subsidiaries) as of November
30, 1996 and 1995, and the results of their operations, cash flows and changes
in stockholder's equity for each of the three years in the period ended November
30, 1996 (the financial information of Banco Popular, FSB is only included since
its inception on January 23, 1995 and CombanCorp since its acquisition on
September 30, 1996).
F-72
91
STATEMENTS OF CONDITION
November 30,
---------------------------
1996 1995
---------------------------
(In thousands)
ASSETS
Cash and due from banks ........................................... $ 29,936 $ 25,012
---------------------------
Money market investments .......................................... 46,399 19,819
---------------------------
Investment securities available-for-sale, at market value ......... 205,181 267,026
---------------------------
Investment securities held-to-maturity ............................ 12,232 3,236
---------------------------
Loans held-for-sale ............................................... 48,068 23,555
---------------------------
Loans ............................................................. 1,545,262 1,158,513
Less: Unearned income ..................................... 47,420 43,375
Allowance for loan losses ................................ 22,920 16,242
---------------------------
1,474,922 1,098,896
---------------------------
Other assets ...................................................... 50,525 35,370
Intangible assets ................................................. 31,232 30,340
---------------------------
Total assets ...................................... $1,898,495 $1,503,254
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Non-interest bearing ...................................... $ 94,297 $ 55,730
Interest bearing .......................................... 593,195 494,096
---------------------------
687,492 549,826
---------------------------
Federal funds purchased and securities sold under agreements
to repurchase ............................................. 5,075 4,035
Other short-term borrowings, consisting of $375,625 term notes
(1995 - $99,930) and a revolving credit facility with an
affiliate of $35,000 (1995 - $40,000) .................... 410,625 139,930
Notes payable (Note 12) ........................................... 579,277 634,139
Other liabilities ................................................. 38,699 37,343
Stockholder's equity .............................................. 177,327 137,981
---------------------------
Total liabilities and stockholder's equity ................ $1,898,495 $1,503,254
===========================
STATEMENTS OF INCOME
Year ended November 30,
--------------------------------------
1996 1995 1994
--------------------------------------
(In thousands)
Interest and fees:
Loans ........................................................ $136,824 $101,442 $ 66,486
Money market and investment securities ....................... 16,107 18,888 5,683
--------------------------------------
152,931 120,330 72,169
--------------------------------------
Interest expense:
Deposits ..................................................... 24,000 21,225 8,091
Short-term borrowings ........................................ 22,572 6,595 9,707
Long-term borrowings ......................................... 35,265 39,847 18,060
--------------------------------------
81,837 67,667 35,858
--------------------------------------
Net interest income .................................................. 71,094 52,663 36,311
Provision for loan losses ............................................ 14,299 8,651 6,973
--------------------------------------
Net interest income after provision for loan losses .................. 56,795 44,012 29,338
Service charges on deposit accounts .................................. 2,735 1,844 768
Other service fees ................................................... 4,663 3,813 2,834
Gain on sale of securities ........................................... 7,026 6,239
Other operating income ............................................... 5,457 6,738 3,614
--------------------------------------
76,676 62,646 36,554
--------------------------------------
Operating expenses ................................................... 46,600 35,778 23,144
------------------------------------
Income before tax .................................................... 30,076 26,868 13,410
Income tax ........................................................... 12,978 10,629 5,477
--------------------------------------
Net income ........................................................... $ 17,098 $ 16,239 $ 7,933
======================================
F-73
92
STATEMENTS OF CASH FLOWS
Year ended November 30,
--------------------------------------
1996 1995 1994
--------------------------------------
(In thousands)
Cash flows from operating activities:
Net income .................................................................. $ 17,098 $ 16,239 $ 7,933
--------------------------------------
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of premises and equipment ............. 1,833 1,136 719
Provision for loan losses ........................................... 14,299 8,651 6,973
Amortization of intangibles ......................................... 3,460 3,321 1,524
Amortization of deferred loan fees and costs ........................ (1,922) 6,467 4,701
Amortization of premiums and accretion of discounts on
investments ...................................................... 267 446
Loan held-for-sale .................................................. (24,513)
Gain on sale of investment securities available-for-sale ............ (7,026) (6,239)
Gain on sale of loans ............................................... (8,049) (6,676) (3,574)
Net increase in interest receivable ................................. (1,286) (5,368) (1,954)
Net increase in other assets ........................................ (1,884) (4,940) (350)
Net increase in current and deferred taxes .......................... (1,942)
Net increase in other liabilities ................................... 5,392 7,483 8,111
--------------------------------------
Total adjustments ........................................... (21,371) 4,281 16,150
--------------------------------------
Net cash provided by operating activities ................... (4,273) 20,520 24,083
--------------------------------------
Cash flows from investing activities:
Net (increase) decrease in money market investments ......................... (13,912) 3,476 (14,968)
Purchases of investment securities held-to-maturity ......................... (6,214)
Purchases of investment securities available-for-sale ....................... (71,888) (358,811) (52,324)
Sale of investment securities available-for-sale ............................ 61,205 183,091 36,833
Maturities of investment securities available-for-sale ...................... 98,011 50,000
Net disbursements on loans .................................................. (574,754) (357,540) (392,454)
Proceeds from sale of loans ................................................. 285,771 70,155 107,941
Acquisition of loan portfolios .............................................. (18,059)
Assets acquired, net of cash ................................................ (2,656) (17,557)
Acquisition of premises and equipment ....................................... (4,794) (4,941) (1,964)
--------------------------------------
Net cash used in investing activities ....................... (229,231) (432,629) (334,493)
--------------------------------------
Cash flows from financing activities:
Net increase in deposits .................................................... 42,735 43,211 33,097
Net deposits acquired ....................................................... 163,504
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase ................................. 1,040 (8,965) 8,000
Net increase (decrease) in other short-term borrowings ...................... 222,514 (24,870) 38,523
Proceeds from issuance of notes payable ..................................... 30,024 234,215 175,762
Payments of note payable .................................................... (84,885)
Capital contribution from Parent company .................................... 27,000 78,164
--------------------------------------
Net cash provided by financing activities ................... 238,428 407,095 333,546
--------------------------------------
Net increase (decrease) in cash and due from banks .................................. 4,924 (5,014) 23,136
Cash and due from banks at beginning of period ...................................... 25,012 30,026 6,890
--------------------------------------
Cash and due from banks at end of period ............................................ $ 29,936 $ 25,012 $ 30,026
======================================
F-74
93
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
Year ended November 30,
---------------------------------------
1996 1995 1994
---------------------------------------
(In thousands)
Preferred Stock:
Par value $0.10; 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 $ 2
Issuance of common stock ................................................ $ 2
---------------------------------------
Balance at end of the period ............................................ 2 2 2
---------------------------------------
Additional paid-in capital:
Balance at beginning of the period ...................................... 105,163 105,163 27,000
Issuance of common stock ................................................ 49,999
Capital contribution from parent company ........................ 27,000 28,164
---------------------------------------
Balance at end of the period ............................................ 132,163 105,163 105,163
---------------------------------------
Retained earnings:
Balance at beginning of the period ...................................... 27,379 11,140 3,207
Net income .............................................................. 17,098 16,239 7,933
---------------------------------------
Balance at end of the period ............................................ 44,477 27,379 11,140
---------------------------------------
Unrealized holding gains (losses) on investment securities
available-for-sale, net of deferred taxes:
Balance at beginning of the period ...................................... 5,437 (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 ....................... (4,752) 7,910 (1,737)
---------------------------------------
Balance at end of period ................................................ 685 5,437 (2,473)
---------------------------------------
Total stockholder's equity .............................. $177,327 $137,981 $113,832
=======================================
F-75
94
[BANPONCE CORPORATION LOGO]
95
EXHIBIT 13.1
BanPonce Corporation - 1996 Annual Report
COMPUTERIZED ARTS GRAPHIC DESIGN:
[BANPONCE CORPORATION LOGO]
Extending a Tradition of Service
Into the Future
96
CONTENTS
Profile 1
Letter to Shareholders 5
Strengthening Our Main Market 10
Expanding Our Business Franchise 14
Diversifying Our Financial Services 18
Enhancing Our Commitment
to a Quality Organization 22
Community Involvement 26
Line of Business 30
Board of Directors 31
Management 32
10-K Financial Summary 33
97
Profile
BanPonce Corporation is a regional diversified, publicly owned bank holding
company with $16.8 billion in assets. Its headquarters are located in San Juan,
Puerto Rico. The Corporation has three subsidiaries: Banco Popular de Puerto
Rico, Popular International Bank, Inc., and BP Capital Markets, Inc.
Banco Popular de Puerto Rico, BanPonce's principal subsidiary, is a
full-service commercial bank with $13.3 billion in assets. Through its own
subsidiaries -- Popular Consumer Services, Inc., Popular Leasing and Rental,
Inc., and Popular Mortgage, Inc. -- it offers small personal loans, vehicle and
equipment leasing, and mortgage loans.
Popular International Bank, Inc., is an entity incorporated under the
Puerto Rico International Banking Center Act, which authorizes the establishment
of banks in Puerto Rico to do business exclusively offshore. BanPonce Financial
Corp., incorporated in Delaware, is Popular International's sole subsidiary. The
subsidiaries of BanPonce Financial are BancoPopular, FSB, operating in New
Jersey; Pioneer Bancorp, Inc., and its own subsidiary Banco Popular (Illinois);
and CombanCorp, and its subsidiary Banco Popular N.A. (California). Equity One,
Inc., a diversified consumer financial company, is, in turn, an operating
subsidiary of Banco Popular, FSB.
BP Capital Markets, Inc. a direct subsidiary of BanPonce is a securities
broker-dealer in Puerto Rico, engaged in institutional brokerage, financial
advisory, and investment and security brokerage operations.
For more details about the subsidiaries, please refer to page 30.
BanPonce is subject to the supervision and regulation of the Board of
Governors of the Federal Reserve System. Banco Popular de Puerto Rico 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 (Illinois) is subject to the supervision of the Federal Deposit
Insurance Corporation and the Illinois Commissioner of Banks and Trust
Companies. Banco Popular, N.A. (California) is subject to the supervision of the
Office of the Comptroller of the Currency. Banco Popular, FSB, and Equity One,
Inc., are subject to the supervision of the Office of Thrift Supervision. BP
Capital Markets is subject to the supervision of the National Association of
Securities Dealers.
98
BanPonce Corporation - 1996 Annual Report
10-Year Summary
BanPonce is an organization unique in the international financial services
marketplace. BanPonce is best known for its banking subsidiary Banco Popular,
which is built on a tradition of strong leadership and is Puerto Rico's premier
banking institution. The Corporation possesses an unwavering commitment to the
communities it serves, a dedication to Total Quality and a passion for making
banking more convenient and accessible for all customers.
BanPonce is also a diverse, multifaceted organization encompassing a broad
range of financial services--including mortgage banking, leasing, consumer
finance, investment banking and processing services. Through careful management
and a vision for the future, BanPonce continues to be a respected and solid
financial performer in the industry.
While strengthening its competitive position at home, BanPonce is
expanding its franchise into the United States and Caribbean region, with the
strategic objective of becoming the dominant Hispanic financial services
provider in every market in which it operates.
BanPonce is bringing a tradition of service into the future of financial
services.
[GRAPH] Assets by Geographical Area (percentage)
[GRAPH] Earnings Per Share
[GRAPH] Banking Offices
[GRAPH] ATMs Owned and Driven
99
10-Year Summary (1987~1996)
- -----------------------------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per common share data)
Selected Financial Information
Net Interest Income $ 203.8 226.9 255.5 284.2 407.8 440.2 492.1 535.5 584.2 681.3
Non-Interest Income 40.3 53.7 62.1 71.0 131.8 124.5 125.2 141.3 173.3 205.5
Operating Expenses 182.6 190.9 207.4 229.6 345.7 366.9 412.3 447.8 486.8 541.9
Net Income 37.5 47.1 56.2 63.4 64.6 85.1 109.4 124.7 146.4 185.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $5,352.7 5,661.4 5,923.3 8,983.6 8,780.3 10,002.3 11,513.4 12,778.4 15,675.5 16,764.1
Net Loans 2,737.2 3,056.8 3,276.4 5,365.9 5,195.6 5,252.1 6,346.9 7,781.3 8,677.5 9,779.0
Deposits 4,491.6 4,715.8 4,926.3 7,422.7 7,207.1 8,038.7 8,522.7 9,012.4 9,876.7 10,763.3
Total Stockholders' Equity 301.4 334.9 375.8 588.9 631.8 752.1 834.2 1,002.4 1,141.7 1,262.5
ROA 0.76% 0.85% 0.99% 1.09% 0.72% 0.89% 1.02% 1.02% 1.04% 1.14%
ROE 13.09% 14.87% 15.87% 15.55% 10.57% 12.72% 13.80% 13.80% 14.22% 16.15%
- -----------------------------------------------------------------------------------------------------------------------------------
Per CommonShare
Earnings $ 0.94 1.18 1.40 1.57 1.07 1.40 1.67 1.84 2.10 2.68
Dividends (Declared) 0.33 0.34 0.40 0.40 0.40 0.40 0.45 0.50 0.58 0.69
Book Value 7.54 8.38 9.38 9.83 10.50 11.52 12.75 13.74 15.81 17.59
Market Price 6.69 8.88 10.75 8.00 9.63 15.13 15.50 14.07 19.38 33.75
- -----------------------------------------------------------------------------------------------------------------------------------
Assets by Geographical Area
P.R. 94.22% 93.45% 92.18% 88.59% 86.67% 87.33% 79.42% 75.86% 75.49% 73.88%
U.S. 5.01% 5.50% 6.28% 9.28% 10.92% 10.27% 16.03% 19.65% 20.76% 22.41%
Caribbean 0.77% 1.05% 1.54% 2.13% 2.41% 2.40% 4.55% 4.49% 3.75% 3.71%
- -----------------------------------------------------------------------------------------------------------------------------------
Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Delivery System
Banking Branches
P.R. 126 126 128 173 161 162 165 166 166 178
Caribbean 3 3 3 3 3 3 8 8 8 8
U.S. 9 10 10 24 24 30 32 34 40 44
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-total 138 139 141 200 188 195 205 208 214 230
- -----------------------------------------------------------------------------------------------------------------------------------
Popular Consumer Services 14 17 17 26 26 26 26 27 30 35
Popular Leasing 4 9 9 9 8 10 9 8
Equity One 27 41 58 73 91 102
Popular Mortgage 3 4
BP Capital 1
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-total 14 17 21 35 62 76 92 110 133 150
- -----------------------------------------------------------------------------------------------------------------------------------
Total 152 156 162 235 250 271 297 318 347 380
- -----------------------------------------------------------------------------------------------------------------------------------
ATMs
Owned
P.R. 136 153 151 211 206 211 234 262 281 327
V.I. 3 3 3 3 3 3 8 8 8 9
U.S. 6 11 26 38 53
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-total 139 156 154 214 209 220 253 296 327 389
- -----------------------------------------------------------------------------------------------------------------------------------
Driven
P.R. 63 68 65 54 73 81 86 88 120 162
Caribbean 102
Sub-total 63 68 65 54 73 81 86 88 120 264
- -----------------------------------------------------------------------------------------------------------------------------------
Total 202 224 219 268 282 301 339 384 447 653
- -----------------------------------------------------------------------------------------------------------------------------------
Transactions (in millions)
Electronic Transactions 12.4 14.9 16.1 18.0 23.9 28.6 33.2 43.0 56.6 78.0
Items Processed 137.7 139.3 137.9 137.0 166.1 170.4 171.8 174.5 175.0 173.7
- -----------------------------------------------------------------------------------------------------------------------------------
Employees (FTEs)* 4,699 5,131 5,213 7,023 7,006 7,024 7,533 7,606 7,815 7,996
- -----------------------------------------------------------------------------------------------------------------------------------
* For the years 1990-1996 seasonals are included converted FTEs.
100
BanPonce Corporation - 1996 Annual Report
OUR CREED
Banco Popular is a local institution dedicating its efforts exclusively to the
enhancement of the social and economic conditions in Puerto Rico and inspired by
the most sound principles and fundamental practices of good banking. Banco
Popular pledges its efforts and resources to the development of a banking
service for Puerto Rico within strict commercial practices and so efficient that
it could meet the requirements of the most progressive community in the world.
These words, written by don Rafael Carrion Pacheco, Executive Vice President and
President (1927-1956), embody the philosophy of Banco Popular.
OUR PEOPLE
The men and women who work for our institution, from the highest executive to
the employees who handle the most routine tasks, feel a special pride in serving
our customers with care and dedication. All of them feel the personal
satisfaction of belonging to the "Banco Popular Family," which fosters affection
and understanding among its members, and which at the same time firmly complies
with the highest moral and ethical standards of behavior.
These words by don Rafael Carrion Jr., President and Chairman of the Board
(1956-1991) evidencing our commitment to human resources, were written to
commemorate Banco Popular's 95th anniversary.
101
Letter to Shareholders
Mr. Richard L. Carrion
(PHOTO) Chairman, President and
Chief Executive Officer
TO OUR SHAREHOLDERS
The year 1996 was, in general, a great year for the banking industry; we were no
exception. Steady economic growth, low inflation and relatively low interest
rates allowed us to increase our earnings by 27%.
BanPonce Corporation reported net income of $185.2 million for the year, an
increase of $38.8 million from the results obtained in 1995. This represents a
return on assets of 1.14% and a return on common equity of 16.15%, an
improvement from the previous year's 1.04% and 14.22% respectively. Earnings per
common share were $2.68 compared with $2.10 for 1995 after adjusting for the
stock split effected on July 1, 1996.
We took advantage of this favorable environment and of our financial
performance to advance our strategic objectives. Over the past decade our
fundamental strategy has gradually evolved. The main principles of this strategy
are:
- - Strengthening our competitive position in Puerto Rico, our main market.
- - Expanding our business franchise in the Caribbean and the United States,
particularly in areas with large Hispanic population.
- - Continue diversifying our financial services in order to offer more
alternatives to our customers.
- - Enhancing our commitment to the quality of our organization and the
services we provide our customers.
In spite of our growing presence in the United States and the Caribbean,
our core business continues to be in Puerto Rico. In order to enhance our
already strong market position, it is necessary to align our distribution system
with the different market segments we aspire to serve. To accomplish this, we
will rely increasingly on technology to allow us to offer more services to more
customers in more places. Increased convenience for our customers and ultimately
lowering operating costs have been our two guiding forces. We continue to invest
in electronic banking initiatives that will allow us to grow for many more
years. The following are some of the advances we made during the year in this
area:
- - Late in the year, we offered teen-agers in Puerto Rico ATH POP, the
first completely electronic savings account that also has access to the Bank's
ATH network, (ATH is the Spanish acronym for at all hours, the name Banco
Popular has given to its ATM network) and to more than 11,000 point-of-sale
terminals throughout the island. In its first month, we opened more than 10,000
new accounts. ATH POP complements our Populoso account, a savings account
designed for children.
- - We reached an agreement with Cruz Azul, one of the largest medical
insurance providers on the island, to electronically process payments to medical
service providers. Nearly 3,000 terminals were installed of approximately 7,000
to be installed upon completion of the project. This system has considerably cut
down on costs and has spawned substantial efficiencies for both service
providers and Cruz Azul.
5
102
BanPonce Corporation - 1996 Annual Report
- - We introduced our customers to automatic lending machines, known as
Rapi-Prestamo. In doing so, we became one of the first banks in the hemisphere
to provide its customers with automatic lending machines.
- - We established an Internet Web site, http://www.banco popular.com, where
customers and potential customers can obtain more information about our many
products and services and the Corporation in general.
- - We established a pilot program among our employees to do their banking
through their personal computers. PC Banking will be offered to all our
customers during 1997.
- - We launched another telephone service called TelePrestamo, by which
customers can apply for personal loans, credit cards and reserve credit lines
and receive final approval on the first call.
Our point-of-sale debit and credit card transactions and TelePago, our
Pay-by-Phone service, all reflected healthy growth. In just six years, from 1990
to 1996, our electronic transactions in Puerto Rico have grown from 27% to 66%
of all transactions.
Enthused by this performance we continued to explore new ways of reaching
our customers. After introducing financial services into retail stores in Puerto
Rico during the 1980s with the establishment of "Expreso Popular" facilities, we
took this concept a step further and opened nine in-store branches on the
island's three main supermarket chains. These in-store branches provide
customers the ability to perform transactions electronically and information on
products and services. We increased our service hours in all branches. Moreover,
in the case of our in-store and shopping center branches, we aligned our service
hours with the store or shopping center so that our customers can have the
convenience of doing their banking while they shop. We also opened six new
modern branches and remodeled nine more.
To provide complete financial services to high net worth customers, Private
Financial Group, a division of Banco Popular specialized in serving this segment
of the market, considerably expanded its services and reach by launching its
Private Management Account. This product conveniently combines a tiered
interest-bearing account with a preferred rate line of credit in a statement
that consolidates all financial relation-ships. Our commercial customers also
benefited from the relaunching of FlexiCuenta, our unique commercial account
that provides customers with checking, line of credit, investment services and
can be tailored to each business' specific needs.
In our most significant expansion, as the year closed, we reached an
agreement to purchase Roig Commercial Bank, established in 1922. The Roig bank
has a significant banking franchise focused on the eastern part of Puerto Rico
and approximately $900 million in assets. This acquisition will enhance the
service provided to customers in this area of the island, where we expect
continued economic growth, and further buttresses our competitive position in
Puerto Rico.
The solid financial climate of the past few years has given us the
opportunity to pursue our geographical expansion. By year end, through
acquisitions or letters of intent as well as the expansion of current
businesses, our presence in the continental United States had grown to the
following:
- - 29 branches of Banco Popular de Puerto Rico in New York.
- - Six branches of Banco Popular, FSB in New Jersey.
- - Five branches of Banco Popular, Illinois (formerly Pioneer Bank) in
Chicago. We have an agreement to purchase two bank holding companies awaiting
regulatory approval, National Bancorp, Inc. with two branches and CBC Bancorp
with three branches.
- - Four in Los Angeles, now all under the name of Banco Popular, N.A.
(California) after the acquisition of CombanCorp, which had three branches, and
the addition of our existing Banco Popular branch in Los Angeles.
[GRAPH Electronic Transactions (percentage)]
6
103
Letter to Shareholders
"Our superior electronic banking capabilities and the quality
of our infrastructure in Puerto Rico have allowed us to explore
a promising new income-generating area..."
- - During 1996 we reached an agreement to purchase Seminole National Bank
in Florida, with three branches. This will mark our entry into this attractive
market.
- - Equity One, our U.S. mortgage and consumer finance subsidiary, expanded
its operation to 102 offices in 28 states. Most of our business in the United
States consists of recent acquisitions. Our objective is to create a wide base
in markets with a sizable Hispanic population. We are building a nationwide
network and brand that will offer us opportunities for growth for many years to
come. In the Caribbean region, we also made headway during the year. By March
we had completed the acquisition of 20% of Citizens Bank in Jamaica, the third
largest banking institution in that country with 14 branches and $350 million
in assets.
In April, we inaugurated ATH Dominicana, an automatic teller machine
network, in the Dominican Republic. By year end, we had connected 102 ATM
machines to our ATH network consisting of seven participating banks at the
moment. Electronic transactions in the Dominican Republic surged, reaching
approximately 600,000 monthly transactions. During the year we also added POS
capabilities. On the heels of this deal, we reached a similar agreement in Costa
Rica. The ATH network in this country will be operational early 1997 and will
connect 16 banks. Both networks will be operated from our facilities in Puerto
Rico. Our superior electronic banking capabilities and the quality of our
infrastructure in Puerto Rico have allowed us to explore a promising new
income-generating area: banking services to other banking institutions in the
region. We are actively pursuing opportunities for growth in this region.
Our efforts to continue diversifying our service offerings continued. In
conjunction with PaineWebber, we issued Puerto Rico Investors Tax-Free Fund IV
and Puerto Rico Tax-Free Target Maturity Fund. At year end these funds had
approximately $816 million in assets, which generated $2.4 million in management
and administration fees. We also continued to expand our retail distribution
network for investment products through the offices of Marketing One in selected
branches. We are in the process of bringing these investment professionals
in-house through our Popular Securities subsidiary. We remain alert to
regulatory changes that may allow us to distribute insurance services to our
customer base.
Continuing with our commitment to quality in all aspects of our
organization, last year we aggressively pursued several initiatives in this
area. We invested a considerable amount in our personnel, offering them numerous
seminars and workshops to provide them the tools to improve service to our
customers. At the retail level we adopted a new corporate image program that
included uniforms for our branch staff. More importantly, Total Quality measures
produced savings in specific processes and areas.
In January of 1996, we announced a significant management change designed
to improve the capabilities of our two most senior officers as well as to send a
message to the rest of the organization of the commitment and flexibility that
will be increasingly required to succeed in the future. Jorge A. Junquera and
David H. Chafey Jr., both Senior Executive Vice Presidents of BanPonce
Corporation, exchanged their areas of responsibility. David now oversees our
retail banking operation, alternative delivery systems and our private banking
group while Jorge is now our Chief Financial Officer and is also responsible for
our trust business, U.S. operations and Caribbean expansion. The results have
been excellent. Both have augmented their managerial capacity with the change
and each benefited the
7
104
BanPonce Corporation - 1996 Annual Report
We will continue to adhere to Jacob Safra's dictum: "If you choose
to sail upon the seas of banking, build your bank as you would
your boat, with the strength to sail safely through any storm."
Bank by bringing new outlooks to their new areas of responsibility. We feel
strongly that our managerial structure must mirror our strategic objectives. At
the end of the year, we promoted Carlos Rom and Roberto R. Herencia to our
Senior Management Council. Carlos and Roberto were directly responsible for our
Caribbean and U.S. geographical expansions, respectively. We feel they will
further reinforce our senior management to effectively oversee our growing
geographical diversity.
[GRAPH]
Our accomplishments have always been a reflection of the quality of our
Board of Directors. It was with great sorrow that we lost one of BanPonce's
board members, Waldemar del Valle. Mr. Del Valle passed away during the year,
after having served on the board for 21 years. Roberto Esteves, a member of
Banco Popular's board, retired after serving for 6 years on the Banco Popular
board. We are grateful for their many insights and their years of service.
In 1996, we also faced the repeal of Section 936 of the U.S. Internal
Revenue Code. This section of the U.S. Code allowed U.S. companies operating on
the island to obtain a tax credit against the federal tax liability derived from
business operations and investment income in Puerto Rico. The bill that was
finally approved eliminated the benefits that applied to investment income
immediately and will phase out the operation income and wage credit in 10 years.
The immediate effect of this repeal was a slight rise in the cost of our funds
as we began to replace 936 funds with higher-cost liabilities. We are convinced
that the Puerto Rican economy can adjust successfully to the eradication of
Section 936.
We will continue to adhere to Jacob Safra's dictum: "If you choose to sail
upon the seas of banking, build your bank as you would your boat, with the
strength to sail safely through any storm." We are on the right course. We
continue to pledge our efforts to provide excellent service to our customers and
superior returns to our shareholders.
/s/ Richard L. Carrion
- ------------------------
Richard L. Carrion
Chairman
President
Chief Executive Officer
8
105
Letter to Shareholders
(PHOTO Senior Management Group)
SENIOR MANAGEMENT COUNCIL
Seated in front:
Richard L. Carrion
Chairman
President
Chief Executive Officer
From the left:
Roberto R. Herencia
Executive Vice President
Humberto Martin
Executive Vice President
Emilio E. Pinero Ferrer, Esq.
Executive Vice President
David H. Chafey Jr.
Senior Executive Vice President
Larry B. Kesler
Executive Vice President
Maria Isabel P. de Burckhart
Executive Vice President
Carlos Rom
Executive Vice President
Jorge A. Junquera
Senior Executive Vice President
9
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BanPonce Corporation - 1996 Annual Report
(PHOTO) Computerized Arts Graphic Design:
STRENGTHENING OUR MAIN MARKET
by providing more services to more customers in more places
10
107
Strengthening Our Main Market
(PHOTO) Computerized Arts Grapic Design:
Puerto Rico continues to be the Corporation's main market, representing
74% of assets and 82% of net income for 1996. In this market, Banco Popular de
Puerto Rico holds the largest market share in both the commercial and retail
businesses. The Bank also possesses the largest delivery franchise in Puerto
Rico, with 178 points of customer contact and 327 automatic teller machines at
year end. Parallel to the institution's expansion and diversification strategy,
the Corporation has continued to strengthen and maintain its competitive
position in this market by developing and carrying out strategies aimed at
providing more services to more customers in more places.
11
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BanPonce Corporation - 1996 Annual Report
(PHOTO) New Branch
Through the use of technology, Banco Popular has developed a new prototype of
the branch of the future.
Efforts throughout 1996 focused on aligning the delivery system with the
different market segments to provide additional convenience and service to our
customers. By year end, Banco Popular's traditional delivery system consisted of
eight large financial service centers, 134 full-service branches, 27 Expreso
Popular, and nine in-store branches.
Banco Popular first introduced financial service facilities in retail
stores with the Expreso Popular concept during the 1980s. The new in-store
branch concept, introduced during 1996, builds on this initiative by providing
customers with access to electronic transactions, account openings and other
deposit and loan products. Conveniently located in Pueblo Xtra, Amigo and Grande
supermarkets, three of the largest supermarket chains in Puerto Rico, these
locations provide expanded hours of service by operating during store hours. In
addition, during the year all full-service branches expanded service hours to 4
p.m. and 66 branches are also open on Saturdays and 11 on Sundays and holidays,
providing customers with additional convenience to conduct their financial
transactions.
In line with Banco Popular's electronic initiatives, which focus on
transforming paper-based transactions into electronic transactions, a new branch
prototype was developed and constructed in the affluent Montehiedra community.
This new concept emphasizes the changing role of the branch into a sales and
service facility and away from traditional transactions. Seen as a preview of
the branch of the future, the Montehiedra branch was outfitted with automatic
teller machines, telephones and six auto lanes to perform transactions. It also
provides customers with valuable product and service information through an
interactive touch screen catalog that provides basic description and rate
information for all products and services.
Private Financial Group, a specialized unit to provide com-plete financial
services to high net worth customers, considerably expanded its services and
reach. This unit provides traditional banking products and services as well as
investment products through the personalized service of a private banker. During
1996, Private Financial Group launched its Private Management Account (PMA).
This product combines a scaled, interest-bearing checking account and a
preferred rate line of credit in a statement that consolidates all Banco Popular
relationships. By year end, Private Financial Group had more than doubled its
client base and income by providing this segment with the most convenient
financial services alternative.
Through the development of alternative delivery systems, like PC Home
Banking, Banco Popular is able to better serve upscale customers. Banking on the
PC provides customers with direct access to their accounts and the ability to
perform transactions. Currently being offered through an employee pilot program,
PC Home Banking will be offered to all customers during the first quarter of
1997. This product complements our already existing 24-hour telephone service
TeleBanco, a telephone information service, and TelePago, a telephone payment
system. During 1996, hours of service for customer representatives for both
TeleBanco and TelePago were expanded to 11 p.m.
12
109
Strengthening Our Main Market
(PHOTO) Employee Offering Services to a Customer
In addition, new merchants were added to TelePago and the service was
extended to Banco Popular's customers in the U.S. Virgin Islands. By year end,
TelePago was handling 268,000 monthly transactions and TeleBanco received
approximately 947,000 monthly calls. This amounts to an increase of 66% and
27%, respectively, over 1995 figures.
TelePrestamo was another telephone service launched in mid-year.
Applicants for personal loans, credit cards and reserve credit lines can call,
talk to a credit officer and have final approval on the first call, in less
than 20 minutes. By December, 25% of all loans and credit cards booked were
approved by TelePrestamo.
To attract customers at an earlier age and be able to develop these
contacts into lifelong relationships, during 1996 Banco Popular introduced ATH
POP, an innovative product for the teen-age segment. This completely electronic
savings account provides teen-agers with access to Banco Popular's ATM network,
A Toda Hora (ATH), and to our more than 11,000 point-of-sale (POS) terminals
throughout Puerto Rico. The Bank's POS network grew significantly during 1996 by
adding 4,163 new terminals and 3,034 new merchants. By year end, approximately 3
million monthly transactions were being handled for a 100% increase compared
with 1995.
Banco Popular's Internet Web site, launched in July 1996 at
http://www.bancopopular.com, provides information on products and services and
special Bank programs. The site also allows customers to apply for loans, credit
cards and register in TelePago in an electronically safe environment.
In addition to these electronic alternatives, retail customers have
responded very favorably to our credit product offerings. PREMIA a credit card
product launched in December 1995 that offers cash back and prizes had more than
20,000 customers by year end. Our co-branded card with Pueblo Supermarkets, the
largest food chain in Puerto Rico, increased its client base by 69% and its
portfolio by 79% during 1996.
Commercial customers in Puerto Rico also benefited from the implementation
of strategies tailored to different market segments. In coordination with The
Wharton School of the University of Pennsylvania, Banco Popular's corporate
customers benefited from seminars on subjects such as hyper competition,
family-owned businesses and succession planning. Banco Popular's small and
middle market benefited from special programs such as "Banca del Ferretero" in
which Banco Popular provides hardware stores specialized financing arrangements
for their customers. Also, FlexiCuenta, our commercial account, was enhanced and
re-launched during 1996. This product provides customers with checking,
investment features and a line of credit, all in the same account and tailored
to the individual needs of the commercial customer. These efforts contributed
significantly to an increase in the commercial loan portfolio and commercial fee
income of 14% and 10%, respectively, when compared to the previous year.
These strategies and the plans that have been set in motion for the coming
years have focused on developing new and innovative ways to profitably service
all segments of the market. In December, BanPonce signed an agreement to
purchase Roig Commercial Bank, a full-service, commercial bank with
approximately $900 million in assets, $656 million in deposits and 25 branches.
Roig Commercial Bank, established in 1922, has a long history of service and
success in the Puerto Rican financial services market. The completion of this
acquisition will strengthen the Corporation's retail and commercial delivery
franchise throughout Puerto Rico and will help Banco Popular provide better
service to customers in the eastern region where Roig branches are located.
(PHOTO In-Store Branch)
ABOVE: THE NEW BRANCHES FOCUS ON THE SALE OF PRODUCTS AND SERVICES INSTEAD OF
TRADITIONAL TRANSACTIONS.
Below: In-store branches offer more convenience and extended hours.
Electronic Services
Compounded Annual Growth Rate (since services establishment)
(services) (percentage)
ATM 23
POS 53
TeleBanco 187
TelePago 451
110
BanPonce Corporation - 1996 Annual Report
(PHOTO) Computerized Arts Graphic Design
EXPANDING OUR BUSINESS FRANCHISE
in the Caribbean and the United States
14
111
Expanding Our Business Franchise
(PHOTO) Computerized Arts Graphic Design
BanPonce's coordinated expansion strategy in the continental United
States market and in the Caribbean and Latin America is based on two of the
Corporation's competitive advantages: its familiarity with the U.S. Hispanic
market and BanPonce's expertise in electronic payment systems.
15
112
BanPonce Corporation - 1996 Annual Report
The expansion in the United States has been mostly in areas with a high
concentration of Hispanics.
(PHOTO) Four Persons Poses as Hispanic Family
By renaming banks acquired in the United States as Banco Popular and entering
new markets, such as Florida, as well as Equity One's expansion, the Corporation
is on its way to establish a national brand that will support BanPonce's
expansion efforts in the United States and in the Caribbean and Latin America.
Through strategic acquisitions in California and Illinois, BanPonce's
deposits and loan portfolios in the United States have grown significantly to
attain the efficiency and economies of scale necessary to enhance the
profitability of these operations. In September, the acquisition of CombanCorp,
a $70-million asset bank holding company in the Los Angeles County, was
finalized. CombanCorp's three branches, formerly operating as Commerce National
Bank, were renamed Banco Popular N.A. (California), increasing the Corporation's
presence in the Los Angeles area to $140 million in assets and a total of four
branches at year end.
In Illinois, Pioneer Bank, which was acquired in 1994 with approximately
$468 million in assets and five branches was renamed Banco Popular (Illinois).
In addition, in 1996 BanPonce agreed to purchase AmericanMidwest Bank and Trust
(National Bancorp Inc.) and Capitol Bank & Trust and Capitol Bank of Westmont
(CBC Bancorp). These institutions will add five additional branches and $490
million in assets. During 1996, we also entered a new and important market by
signing a definite agreement to acquire Seminole Bank in the city of Sanford,
north of Orlando, Florida. This is a highly attractive market for Banco Popular,
with a high
16
113
Expanding Our Business Franchise
concentration of Hispanic population, much of which are Puerto Ricans who have
moved into the area within the past 10 years. All of these acquisitions are
currently awaiting the necessary regulatory approvals.
Equity One, the Corporation's consumer finance subsidiary in the United
States, reached $1.1 billion in assets and increased its presence by
establishing 11 new branches, for a total of 102 branches located throughout 28
states. During 1996, Equity One expanded its loan products by offering FHA and
VA mortgage loans.
By renaming banks acquired in the United States as Banco Popular and
entering new markets, such as Florida, as well as Equity One's expansion, the
Corporation is on its way to establish a national brand that will support
BanPonce's expansion efforts in the United States and in the Caribbean and Latin
America.
In addition to establishing electronic initiatives in the Dominican
Republic and Costa Rica as part of the Corporation's diversification strategy,
Banco Popular acquired a 20% equity stake of Citizens Bank in Jamaica in March
1996. Located in the city of Kingston, Citizens, with approximately $350 million
in assets, has 14 branches throughout the island and is the third largest bank
in terms of assets. This acquisition strengthens the Corporation's expansion in
the Caribbean.
(GRAPH) [Income from the U.S. and Caribbean Region (percentage of total income]
Equity One now has 102 branches spread throughout 28 states.
U.S. Expansion
Chicago, IL
New York, NY
Los Angeles, CA
Banking States
- --------------
California 4 [PHOTO]
Illinois 5
New Jersey 6 Chicago City
New York 29
Florida* 3 New York City
TOTAL OFFICES 47
Los Angeles City
Non-Banking States - Equity One, Inc.
- -------------------------------------
Alabama 1
Connecticut 1
Delaware 1
Florida 9
Georgia 2
Illinois 2
Indiana 2
Iowa 1
Kentucky 4
Maine 1
Maryland 2
Massachusetts 2
Michigan 2
Minnesota 1
Missouri 1
New Hampshire 1
New Jersey 6
New York 1
North Carolina 17
Ohio 1
Pennsylvania 5
Rhode Island 1
South Carolina 10
Tennessee 3
Utah 1
Virginia 21
West Virginia 2
Wisconsin 1
TOTAL OFFICES 102
*Pending completion of acquisition
(GRAPH) U.S. Geographic Presence of BanPonce Corporation Subsidiary
17
114
BanPonce Corporation - 1996 Annual Report
(PHOTO) Computerized Arts Graphic Design
DIVERSIFYING OUR FINANCIAL SERVICES
to offer more alternatives to our customers
18
115
Diversifying Our Financial Services
(PHOTO) Computerized Arts Graphic Design
During 1996, BanPonce continued to diversify its sources of income by
providing our customers with more investment products and services, electronic
payment alternatives, and by exporting the Corporation's technological expertise
to the Dominican Republic and Costa Rica. In addition, BP Capital Markets,
Popular Leasing, Popular Mortgage, Equity One and Best Finance, BanPonce's
investment banking, leasing, mortgage and consumer finance subsidiaries,
continued expanding their businesses to provide non-traditional banking products
and services. At year end 14% of the Corporation's income derived from these
non-traditional banking sources.
19
116
BanPonce Corporation - 1996 Annual Report
(PHOTO) A group of employees giving support
Banco Popular is capitalizing on its technological expertise to service other
banks in the region.
BanPonce's diversification efforts have also focused on providing innovative
alternatives to electronically process payments.
In February, in conjunction with PaineWebber (Puerto Rico) Inc., BanPonce
structured and launched its fourth Puerto Rico Investors Tax-Free Fund. The
Puerto Rico Tax-Free Target Maturity Fund, an additional investment fund, was
also offered during the year. These funds are non-diversified closed-end
management investment funds that provide local investors with a high-level of
tax-exempt current income. At year end these funds had approximately $816
million, which generated $2.4 million in management and administration fees.
BanPonce's diversification efforts have also focused on providing
innovative alternatives to electronically process payments. During 1996, Banco
Popular and Cruz Azul, the second largest medical insurance provider in Puerto
Rico, established a partnership to electronically process payments from the
insurer to doctors. This system eliminates paper-based transactions and
facilitates processing by including all coverage information on the card, thus
accelerating payments and reducing fraud and claims. By year end, terminals had
been installed in almost 3,000 physicians' offices, generating 38,000 monthly
transactions. The success in this area has prompted a bank in Chile and one in
the Philippines to consult with Banco Popular on how to establish similar
systems in their respective countries.
Emerging markets abound in the Caribbean and Central American region and
possibilities for profits and growth exist in these markets for those willing to
search for opportunities and take the risk. Being in the region, Banco Popular
is in a unique position to identify these opportunities and capitalize on our
technological expertise, particularly in electronic networks and transaction
processing. Thus, in April of 1996, Banco Popular began to operate ATH
Dominicana, a joint venture with Codetel, the largest Dominican Republic
telephone company, and Banco Popular Dominicano, the
(PHOTO) a hand showing ATH Card
117
Diversifying Our Financial Services
country's largest bank (no relation to BPPR), to provide ATM switching and
driving services to banks, and establish the first ATM network in the country.
By year end, ATH Dominicana connected seven banks and was operating a network of
102 machines. Building on this network, we are currently expanding our
electronic services and establishing a point-of-sale network in that country.
Similarly, in June 1996 the Corporation reached an agreement with 16 Costa
Rican banks to provide ATM switching and driving services. This network should
be in operation by the first quarter of 1997, and by year end should be composed
of approximately 200 automatic teller machines.
BanPonce's non-banking subsidiaries also expanded their reach and
businesses during 1996. BP Capital Markets, the Corporation's investment banking
subsidiary, managed 18 transactions totaling over $2.4 billion. Of these, 12
were completed in Puerto Rico and six in the United States. BP Capital Markets
actively participated in the financing of tourism-related projects in Puerto
Rico, such as the Westin Rio Mar Beach Resort & Country Club, The Ritz-Carlton
San Juan Hotel & Casino, Hostal El Convento and Hampton Inn Hotel. Over the past
three years, the hotel sector has been booming on the island and BP Capital's
business has reflected this trend.
Popular Leasing, Banco Popular's leasing subsidiary, completed the
consolidation of operations with Velco, BanPonce's leasing subsidiary. It also
opened a new location in Humacao for a total of eight locations throughout
Puerto Rico. During the year, Popular Leasing expanded its products offering by
providing insurance premium financing services.
Popular Consumer Services, Inc. (d/b/a Best Finance), Banco Popular's
consumer loan subsidiary, expanded from 30 to 35 offices in Puerto Rico, and had
asset growth of over 19%. Best Finance also expanded significantly its new
second mortgage business, which tripled during 1996.
ATH Dominicana
Number of Machines Number of Transactions
- ------------------ ----------------------
3/96 12/96 3/96 12/96
61 102 275,000 566,000
Banco Popular established ATM networks to provide switching and driving
services in the Dominican Republic and Costa Rica.
(GRAPH) Dominican Republic and Costa Rica geographic map
21
118
BanPonce Corporation - 1996 Annual Report
(PHOTO) Computerized Arts Graphic Design:
ENHANCING OUR COMMITMENT
TO A QUALITY ORGANIZATION
to better serve our customers
22
119
Enhancing Our Commitment to a Quality Organization
(PHOTO) Computerized Arts Graphic Design
Expanding on our established commitment with Total Quality and excellence
in everything we do, this year we have taken additional steps with the clear
objective of positioning the Corporation for the challenges of the new century.
New businesses, in new geographical areas, and increased client sophistication
and service expectations will require that the Corporation and its employees
possess the ability to constantly innovate to maintain BanPonce's competitive
edge and remain the financial service provider of choice at all times.
23
120
BanPonce Corporation ~ 1996 Annual Report
(PHOTO) - Two employee on a Teamwork
Above: Through coaching and training, teamwork was emphasized in 1996.
Below: The Bank developed a new corporate image for branch employees in Puerto
Rico.
To accomplish this goal successfully, employees have to be provided with
the necessary environment, skills and tools to meet the constantly changing
requirements of the financial services industry.
Throughout the year, several strategies were implemented to improve
organizational effectiveness and strengthen the individual capacities of the
employees.
During 1996, we made considerable inroads as we introduced initiatives to
optimize the effectiveness of the organizational system. We concentrated our
efforts in aligning individual and collective efforts throughout the Corporation
toward the achievement of high-priority issues. We made headway in facilitating
the necessary discipline to accomplish objectives in a coordinated and
synchronized fashion. Some of the initiatives put in place during the year
included the complete revision of the strategic planning process, the
introduction of service agreement contracts between areas of the Bank, team
training for personnel in newly established branches and the implementation of
re-engineering techniques to make processes more efficient and generate savings.
The strategic planning process was refocused to facilitate coordination
within units. The implementation of this new system has resulted in improved
teamwork, coordination and prioritization. Similarly, the established service
agreements between the Operations Group and the Retail Banking and Commercial
Banking groups have achieved a more clear understanding of the needs of the
involved parties with the main objective of working together to offer improved
customer service. Re-engineering of the purchasing and platform processes have
also resulted
(PHOTO) - Two employee modeling the new uniforms for Branch personnel
24
121
Enhancing Our Commitment to a Quality Organization
(PHOTO) - A group of Employees attending to a Workshop
Above: Trainings have been instrumental in improving customer service.
Below Left: Our branch facilities and well-trained personnel reflect an emphasis
on a sales and service culture.
Below Right: The Bank's training center disseminates the Total Quality
philosophy across the Corporation.
in substantial improvements in customer service and significant cost reductions.
In addition to these initiatives, we continued our Total Quality efforts through
the implementation of Process Improvement Teams in key businesses and
departments. The effectiveness of the organizational system is only possible if
the individual capabilities of the employees are also strengthened. During the
year, a corporatewide survey was conducted in Puerto Rico to ensure that the
initiatives that are being implemented were responding to the needs of the
Corporation and employees.
Individual initiatives to strengthen the capabilities of our employees
included a new corporate image that comprises stylish new uniforms, attitude
training and a new merchandising system. These individual initiatives are being
supported by the implementation of a new evaluation system that promotes
increased differentiation between high and low performers.
Proud of the achievements in this area during 1996, we recognize that to
accomplish the long-term goals of Total Quality will require that each employee
begin each work day with a renewed commitment to do things right the first time
and basing all decisions with the customer in mind.
(PHOTO) - A employee attending a customer
(PHOTO) - Exhibition At Training Center
122
BanPonce Corporation - 1996 Annual Report
(PHOTO) - Computerized Arts Graphic Design:
COMMUNITY INVOLVEMENT
enhancing the social and economic conditions of the
communities we serve
26
123
Community Involvement
(PHOTO) - Computerized Arts Graphic Design:
The economic welfare of a business is closely tied to the welfare of its
surrounding community. Since 1893 Banco Popular and its employees have
recognized these by actively participating and contributing to all aspects of
community life.
27
124
BanPonce Corporation - 1996 Annual Report
(PHOTO) - Children at Education Program
ABOVE: THE BANCO POPULAR FOUNDATION SUPPORTS GROUPS PRIMARILY WORKING IN THREE
AREAS: COMMUNITY DEVELOPMENT, EDUCATION AND HEALTH.
BELOW: THE BANK RAISED FUNDS TO HELP NEEDY INSTITUTIONS AFFECTED BY THE
HURRICANE.
More importantly, over the years Banco Popular has readily responded in
times of need. In 1996, Puerto Rico was hit by Hurricane Hortense. Banco Popular
immediately reactivated its Reconstruction Fund with an initial donation of
$100,000 and invited the public to contribute to the fund. Jointly with the
Fondo Dotal Enrique Marti Coll and the Caimito Tree Nursery, Banco Popular
promoted a tree sale to replace those destroyed by the hurricane and to help
raise money for the Reconstruction Fund. The fund raised a total of $150,000,
which was distributed among 13 institutions that suffered severe damages. In New
York, Bank employees fully participated in a telethon and other activities to
help raise funds for hurricane victims on the island.
Similarly, in Costa Rica, where Banco Popular is establishing an ATH
network, the Corporation donated $25,000 to help relief efforts after Hurricane
Cesar hit the country.
The most significant community work of the Corporation is done through the
Banco Popular Foundation, a non-profit organization established in 1979 to
support efforts dedicated to enhancing the quality of life of Puerto Ricans.
Through the Foundation, grants and donations are channeled to organizations that
have high community participation and which are primarily dedicated to promoting
community development, education and health.
The Banco Popular Foundation has quickly risen to the forefront of
non-profit organizations on the island because of its generosity and the quality
of the projects it has chosen to support.
Last year, the Foundation undertook over 15 major projects. The highlight
of the year was the project to expand the Jane Stern Dorado Community Library
with the adoption of an innovative campaign, designed to promote local
contributions. The Foundation made possible for them to match contributions for
their expansion program.
Additionally, the Foundation continued to invest in community development
projects, housing development for disadvantaged communities, cultural
organizations, AIDS support groups and organizations that work with the
homeless.
The well-being of a country rests primarily on the solid education of its
leaders. The Rafael Carrion Jr. Scholarship awarded its second scholarship for a
Puerto Rican student to attend The Wharton School of the University of
Pennsylvania. This scholarship is designed to enhance the quality of the future
business leaders of the island.
FONDO DE RECONSTRUCCION
BANCO POPULAR 1996
28
125
Community Involvement
Aside from this scholarship, the Foundation has a strong college
scholarship program for the sons and daughters of employees. In 1996, this
program significantly grew, as the Foundation granted 82 scholarships, up from
64 in 1995.
Banco Popular also administers a donations program independent of the
Foundation. During the course of 1996, over 1,000 donations were made to support
a wide range of activities, from the purchase of uniforms for Little League
teams to partially funding drug prevention campaigns.
Approximately 50% of the funds in 1996 were distributed to community civic
organizations. The remaining funds were distributed among educational
institutions or scholarships, cultural affairs and sport activities.
The Bank contributed to Puerto Rico's international presence in sports by
being a major sponsor of the World Gymnastic Championship held in San Juan. It
also actively participated in activities related to the visit of the
International Olympic Committee's evaluating commission to San Juan, as one of
the cities bidding for the 2004 Games.
Major support for cultural activities is also one of the Bank's strengths.
Opera, theater, popular music and the annual Ponce Museum of Art fund-raising
gala are some of the areas in which the Bank plays a major role in enriching
community life. For the fourth consecutive year, the Bank produced a musical
documentary with the participation of more than 20 local and international
artists. The latest program, Al Compas de un Sentimiento, was a tribute to the
great Puerto Rican composer Pedro Flores, who was also acclaimed in many Latin
American countries. It was broadcast as a Christmas gift to the people of Puerto
Rico and Hispanic populations in United States markets in which the Bank has a
presence.
During the year, the Bank continued to contribute to the enrichment of
public discourse by organizing two major exhibits at the Rafael Carrion Pacheco
Exhibition Hall in San Juan. Over 6,000 people visited The Disposable Island:
The Garbage Problem in Puerto Rico, which had been inaugurated in the fourth
quarter of 1995. Many more people visited the exhibit to listen to guest
lecturers.
In the last quarter, Banco Popular opened its 11th exhibition: Ready!
Puerto Rico in International Sports (1930-2004). This exhibit drew record crowds
in 1996. Over the years, sports have acted as a unifying element contributing to
personal and collective advancement.
Active community participation is not limited to the Corporation and Banco
Popular. Many of the Bank's employees are active members in civic organizations
throughout the island, contributing many hours to improving their surroundings.
This proactive stance is not limited to Puerto Rico; many of the Bank employees
in New York have been actively involved in events designed to raise funds for
worthy causes such as the March of Dimes, AidsWalk and Making Strides.
Whether through the Foundation, the Bank, or through its thousands of
employees, the Corporation endeavors to enrich the quality of the communities
it serves.
Above: Sports-related activities are actively supported by the Bank.
Below left: The Bank produced and broadcast its fourth musical documentary as a
gift to the communities it serves.
(PHOTO) - Athletes at Track & Field starting Line
(PHOTO) - Mr. Richard L. Carrion presented a musical documentary Al Compas de un
Sentimentio.
(PHOTO) - Banco Popular Foundation Library
29
126
Lines of Business
Lines of Business (by location)
COMMERCIAL BANKING/
SAVINGS AND LOANS
PUERTO RICO
BANCO POPULAR
- - Full-service commercial and retail banking subsidiary.
- - Established in 1893.
- - Total assets of $11.0 billion.
- - Largest branch network in Puerto Rico with 178 branches.
- - Most extensive ATM network "ATH" (at all times) with 327 ATMs.
- - Leader in deposit market with $8.1 billion.
- - Leader in loan market with $5.8 billion.
- - Dominant player in electronic services.
- - Banco Popular has at least one relationship with 66.6% of the banking
consumer market in Puerto Rico.
UNITED STATES
BANCO POPULAR
(NEW YORK, CALIFORNIA AND ILLINOIS)
- - Banco Popular branch network operating in New York, California and
Chicago.
- - Opened first branch in 1961.
- - Total assets of $2.4 billion, and $2 billion in deposits.
- - Largest Hispanic branch network.
- - Operates 29 branches in the New York City area, four in Los Angeles
county, and five in Chicago.
- - Focus on serving individual, small businesses, and mortgage lending.
BANCO POPULAR, FSB (NEW JERSEY)
- - Subsidiary of BanPonce Financial Corp.; a federal savings bank operating
six branches in New Jersey.
- - Total assets of $317 million, $212 million in total deposits and $142.6
million in total loans.
- - Established through the acquisition of the former Carteret Federal
Savings Bank.
CARIBBEAN
BANCO POPULAR
(BRITISH AND U.S. VIRGIN ISLANDS)
- - Banco Popular branch network in British and U.S. Virgin Islands.
- - Entered the Virgin Islands market in 1981.
- - Total assets of $620 million and $466 million deposits.
- - Largest bank in the U.S. Virgin Islands with approximately 30% market
share.
- - Operates seven branches in the U.S. Virgin Islands and one in Tortola,
British Virgin Islands; two consumer credit centers and two mortgage
centers.
MORTGAGE BANKING
PUERTO RICO
POPULAR MORTGAGE, INC.
(D/B/A PUERTO RICO HOME MORTGAGE)
- - BANCO POPULAR'S MORTGAGE BANKING SUBSIDIARY.
- - Acquired in April 1995.
- - Total assets of $155 million.
- - Operates four offices located in the San Juan metropolitan area.
LEASING BUSINESS
PUERTO RICO
POPULAR LEASING AND RENTAL, INC.
- - Popular Leasing, established in 1989, is engaged in finance leasing,
equipment leasing and daily motor and equipment rental in the Puerto
Rico market.
- - Total assets of $566 million.
- - Operates five sales offices and eight daily rental outlets.
UNITED STATES
POPULAR LEASING USA
- - Recently established subsidiary to offer small ticket equipment leasing.
CONSUMER FINANCE
PUERTO RICO
POPULAR CONSUMER SERVICES, INC.
(D/B/A BEST FINANCE)
- - Small loan and secondary mortgage subsidiary.
- - Established in 1970, acquired by BanPonce in 1987.
- - Total assets of $116 million, with more than 54,000 accounts and $116
million in loans.
- - Five new offices were opened in 1996 for a total of 35.
UNITED STATES
EQUITY ONE, INC.
- - Banco Popular, FSB; subsidiary engaged in the business of personal and
mortgage loans and retail financing.
- - Established in 1989, acquired by BanPonce in 1991.
- - Total assets of $1.1 billion.
- - Increased number of offices from 91 to 102; opened operations in two new
states for a total of 28 states.
INVESTMENT BANKING
PUERTO RICO
BP CAPITAL MARKETS, INC.
- - Securities broker-dealer in Puerto Rico, with brokerage, financial
advisory, investment and security brokerage operations.
- - Acquired from CS First Boston in April 1995.
- - Executed a large variety of transactions that included public finance,
corporate finance, asset finance, mortgage finance, real estate,
investment funds, and merger and acquisition transactions.
- - Provided underwriting and/or investment banking services in 18 financing
transactions totaling approximately $2.4 billion.
PROCESSING SERVICES
CARIBBEAN
ATH DOMINICANA
- - Joint venture with Banco Popular Dominicano and Codetel to establish
the ATH network.
- - By year end seven banks were connected to the network, which operated
102 ATM machines.
ATH COSTA RICA
- - Reached an agreement with 16 Costa Rican banks to provide ATM switching
and driving services.
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127
BOARDS OF DIRECTORS
BOARDS OF DIRECTORS
BANPONCE CORPORATION
RICHARD L. CARRION
Chairman
President
Chief Executive Officer
ALFONSO F. BALLESTER
Vice Chairman of the Board
President
Ballester Hermanos, Inc.
ANTONIO LUIS FERRE
Vice Chairman of the Board
President
El Nuevo Dia
JUAN J. BERMUDEZ
Partner
Bermudez & Longo, S.E.
FRANCISCO J. CARRERAS
Educator
Executive Director
Fundacion Angel Ramos, Inc.
DAVID H. CHAFEY JR.
Senior Executive Vice President
BanPonce Corporation and
Banco Popular de Puerto Rico
LUIS E. DUBON JR., ESQ.
Partner
Dubon & Dubon
HECTOR R. GONZALEZ
President
Chief Executive Officer
TPC Communications of
PR, Inc., and Teleponce Cable
TV, Inc.
JORGE A. JUNQUERA
Senior Executive Vice President
BanPonce Corporation and
Banco Popular de Puerto Rico
MANUEL MORALES JR.
Principal
Selarom Capital Group
ALBERTO M. PARACCHINI
Private Investor
FRANCISCO PEREZ JR.
Chairman of the Board
President
Sucrs. Jose Lema & Co., Inc.
FRANCISCO M. REXACH JR.
President
Ready Mix Concrete, Inc.
JOSE E. ROSSI
President
V & Q Management, Inc.
FELIX J. SERRALLES NEVARES
President
Chief Executive Officer
Destileria Serralles, Inc.
EMILIO JOSE VENEGAS
Secretary, Board of Directors
Venegas Construction Corp.
President
Sanson Corporation
JULIO E. VIZCARRONDO JR.
President
Chief Executive Officer
Desarrollos Metropolitanos, Inc.
SAMUEL T. CESPEDES, ESQ.
Secretary
Board of Directors
ERNESTO N. MAYORAL, ESQ.
Assistant Secretary
Board of Directors
BRUNILDA SANTOS DE ALVAREZ,
ESQ.
Assistant Secretary
Board of Directors
BANCO POPULAR DE PUERTO RICO
RICHARD L. CARRION
Chairman
President
Chief Executive Officer
ALFONSO F. BALLESTER
Vice Chairman of the Board
President
Ballester Hermanos, Inc.
ANTONIO LUIS FERRE
Vice Chairman of the Board
President
El Nuevo Dia
JUAN A. ALBORS HERNANDEZ
Chairman
Chief Executive Officer
Albors Development Corp.
SALUSTIANO ALVAREZ MENDEZ
President and Director
Mendez & Company, Inc.
JOSE A. BECHARA BRAVO
President
Empresas Bechara Inc.
JUAN J. BERMUDEZ
Partner
Bermudez & Longo, S.E.
ESTEBAN D. BIRD
President
Chief Executive Officer
Bird Construction Company, Inc.
FRANCISCO J. CARRERAS
Educator
Executive Director
Fundacion Angel Ramos, Inc.
DAVID H. CHAFEY JR.
Senior Executive Vice President
BanPonce Corporation and
Banco Popular de Puerto Rico
LUIS E. DUBON JR., ESQ.
Partner
Dubon & Dubon
HECTOR R. GONZALEZ
President
Chief Executive Officer
TPC Communications of
PR, Inc., and Teleponce Cable
TV, Inc.
JORGE A. JUNQUERA
Senior Executive Vice President
BanPonce Corporation and
Banco Popular de Puerto Rico
FRANKLIN A. MATHIAS
Retired Executive
MANUEL MORALES JR.
Principal
Selarom Capital Corp.
ALBERTO M. PARACCHINI
Private Investor
FRANCISCO M. REXACH JR.
President
Ready Mix Concrete, Inc.
FELIX J. SERRALLES NEVARES
President
Chief Executive Officer
Destileria Serralles, Inc.
JULIO E. VIZCARRONDO JR.
President
Chief Executive Officer
Desarrollos Metropolitanos, Inc.
SAMUEL T. CESPEDES, ESQ.
Secretary
Board of Directors
ERNESTO N. MAYORAL, ESQ.
Assistant Secretary
Board of Directors
BRUNILDA SANTOS DE ALVAREZ,
ESQ.
Assistant Secretary
Board of Directors
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128
MANAGEMENT
MANAGEMENT
BANPONCE CORPORATION
RICHARD L. CARRION
Chairman
President
Chief Executive Officer
DAVID H. CHAFEY JR.
Senior Executive Vice President
JORGE A. JUNQUERA
Senior Executive Vice President
MARIA ISABEL P. DE BURCKHART
Executive Vice President
ROBERTO R. HERENCIA
Executive Vice President
LARRY B. KESLER
Executive Vice President
HUMBERTO MARTIN
Executive Vice President
EMILIO E. PINERO FERRER, ESQ.
Executive Vice President
CARLOS ROM JR.
Executive Vice President
AMILCAR L. JORDAN, ESQ.
Senior Vice President
FELIX VILLAMIL
Senior Vice President
BANCO POPULAR
RICHARD L. CARRION
Chairman
President
Chief Executive Officer
SENIOR MANAGEMENT COUNCIL
RICHARD L. CARRION
President
Chief Executive Officer
DAVID H. CHAFEY JR.
Senior Executive Vice President
JORGE A. JUNQUERA
Senior Executive Vice President
MARIA ISABEL P. DE BURCKHART
Executive Vice President
ROBERTO R. HERENCIA
Executive Vice President
LARRY B. KESLER
Executive Vice President
HUMBERTO MARTIN
Executive Vice President
EMILIO E. PINERO FERRER, ESQ.
Executive Vice President
CARLOS ROM JR.
Executive Vice President
OFFICE OF THE PRESIDENT
TERE LOUBRIEL
Senior Vice President
Total Quality
BRUNILDA SANTOS DE ALVAREZ,
ESQ.
Senior Vice President
Legal Division
FELIX VILLAMIL
Senior Vice President
Internal Auditor
RETAIL BANKING GROUP
DAVID H. CHAFEY JR.
Senior Executive Vice President
JORGE BIAGGI
Senior Vice President
Hato Rey Region
FRANCISCO CESTERO
Senior Vice President
Caguas/Fajardo Region
NORMAN IRIZARRY
Senior Vice President
Western Region
CARLOS J. MANGUAL
Senior Vice President
Ponce Region
WILBERT MEDINA
Senior Vice President
Bayamon Region
MARITZA MENDEZ
Senior Vice President
San Juan Region
MIGUEL RIPOLL
Senior Vice President
Rio Piedras Region
ELI SEPULVEDA JR.
Senior Vice President
Arecibo/Manati Region
JUAN GUERRERO
Senior Vice President
Financial and Investment
Services
NESTOR O. RIVERA
Senior Vice President
Retail Banking
LIZZIE ROSSO
Senior Vice President
Alternative Delivery Channels
RETAIL CREDIT GROUP
LARRY B. KESLER
Executive Vice President
JORGE J. BESOSA
Senior Vice President
Individual Lending
FELIPE FRANCO
Senior Vice President
Mortgage Loans
VALENTINO I. MCBEAN
Senior Vice President
Virgin Islands Region
COMMERCIAL BANKING GROUP
EMILIO E. PINERO FERRER, ESQ.
Executive Vice President
ARNALDO SOTO COUTO
Senior Vice President
Construction Loans
CYNTHIA TORO
Senior Vice President
Business Banking
RICARDO TORO
Senior Vice President
Corporate Banking
MARIA FUENTES
Vice President
Structured Finance
FINANCIAL MANAGEMENT GROUP
JORGE A. JUNQUERA
Senior Executive Vice President
ROBERTO R. HERENCIA
Executive Vice President
U.S. Expansion
CARLOS ROM JR.
Executive Vice President
Caribbean and Latin America
Expansion
RICHARD BARRIOS
Senior Vice President
Investments and Treasury
ORLANDO BERGES
Senior Vice President
New York/New Jersey Region
LUIS R. CINTRON, ESQ.
Senior Vice President
Trust
AMILCAR L. JORDAN, ESQ.
Senior Vice President
Comptroller
IVAN PAGAN
Vice President
Mergers and Acquisitions
ADMINISTRATION GROUP
MARIA ISABEL P. DE BURCKHART
Executive Vice President
EDUARDO RODRIGUEZ
Senior Vice President
Human Resources
LUIS F. RODRIGUEZ VILLAMIL
Senior Vice President
Marketing
LUZ M. TOUS DE TORRES
Senior Vice President
Corporate Real Estate
GINORIS LOPEZ-LAY
Vice President
Strategic Planning
EVELYN VEGA SELLA
Vice President
Public Relations and
Communications
OPERATIONS GROUP
HUMBERTO MARTIN
Executive Vice President
SEGUNDO BERNIER
Senior Vice President
Operations
VICTOR V. ECHEVARRIA
Senior Vice President
Management Information
Systems
EDUARDO FIGUEROA
Senior Vice President
Electronic Banking Services
PLINIO RODRIGUEZ
Senior Vice President
Security
MARGARITA HERRERA, ESQ.
Vice President
Consumer Compliance
RAFAEL LUGO SOTOMAYOR, ESQ.
Vice President
Financial Compliance
MARTA RAMOS
Vice President
Community Reinvestment
OTHER SUBSIDIARIES
BP CAPITAL MARKETS, INC.
KENNETH MCGRATH
President
BANCO POPULAR (ILLINOIS)
S. MICHAEL POLANSKI
President
BANCO POPULAR, FSB
RICHARD L. CARRION
President
BANCO POPULAR N.A. (CALIFORNIA)
RICHARD F. DEMERJIAN
President
EQUITY ONE, INC.
THOMAS J. FITZPATRICK
President
POPULAR CONSUMER SERVICES, INC.
D/B/A BEST FINANCE
Edgardo Novoa
President
POPULAR LEASING AND RENTAL, INC.
ANDRES F. MORRELL
President
POPULAR LEASING USA
BRUCE D. HORTON
President
POPULAR MORTGAGE, INC.
D/B/A PUERTO RICO HOME
MORTGAGE
CHURCHILL CAREY
President
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129
10-K
FINANCIAL SUMMARY
33
130
STOCKHOLDERS' INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS
Price Waterhouse
ANNUAL MEETING
The 1997 annual stockholders' meeting of BanPonce
Corporation will be held on Friday, April 25, at 10:00 a.m.
at Centro Europa Building in San Juan, Puerto Rico.
Telephone (787) 765-9800
Fax (787) 759-7803
ADDITIONAL INFORMATION
Copies of the Annual Report to the Securities and
Exchange Commission on Form 10-K and any other
financial information may be obtained by writing to:
Amilcar L. Jordan
Senior Vice President
Banco Popular de Puerto Rico
PO Box 362708
San Juan, PR 00936-2708
DESIGN:
BD&E Inc., Pittsburgh,Pennsylvania
ILLUSTRATION:
Raul Colon
PHOTOGRAPHY:
Mark Bolster
PRINTING:
Arthurs-Jones, Inc.