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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997 Commission file number 0 -13818
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POPULAR, INC.
(Exact name of registrant as specified in its charter)
Puerto Rico 66-041-6582
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(State of incorporation) (I.R.S. Employer
Identification No.)
Popular Center Building
209 Munoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico 00918
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (787) 765-9800
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Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report) 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock $6.00 Par value 67,682,704
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(Title of Class) (Shares Outstanding as of November 13, 1997)
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POPULAR, INC.
INDEX
Part I - Financial Information Page
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Item 1. Financial Statements
Unaudited consolidated statements
of condition - September 30,
1997, December 31, 1996 and
September 30, 1996. 3
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Unaudited consolidated statements
of income - Three and nine
months ended September 30, 1997 and 1996. 4
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Unaudited consolidated statements
of cash flows - Nine months
ended September 30, 1997 and 1996. 5
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Notes to unaudited consolidated
financial statements. 6-15
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Item 2. Management's discussion and analysis
of financial condition
and results of operation. 16-29
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Part II - Other Information
Item 1. Legal proceedings - None N/A
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Item 2. Changes in securities - None N/A
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Item 3. Defaults upon senior securities - None N/A
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Item 4. Submission of matters to a vote of
security holders - None N/A
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Item 5. Other information 29
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Item 6. Exhibits and reports on Form 8-K 30
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--- Signature 30
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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
September 30, December 31, September 30,
(In thousands) 1997 1996 1996
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ASSETS
Cash and due from banks $ 530,915 $ 492,368 $ 488,151
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Money market investments:
Federal funds sold and securities and
mortgages purchased under agreements
to resell 467,285 778,597 1,152,352
Time deposits with other banks 5,256 19,023 5,348
Banker's acceptances 2,871 2,656 1,954
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475,412 800,276 1,159,654
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Investment securities available-for-sale,
at market value 5,869,770 3,415,934 2,832,553
Investment securities held-to-maturity,
at cost 829,105 1,197,066 1,712,154
Trading account securities, at market value 224,734 292,150 372,354
Loans held-for-sale 238,991 255,129 176,937
Loans 11,287,080 9,854,911 9,743,305
Less - Unearned income 344,010 331,012 330,954
Allowance for loan losses 205,077 185,574 182,372
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10,737,993 9,338,325 9,229,979
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Premises and equipment 390,905 356,697 345,992
Other real estate 12,014 6,076 4,540
Customers' liabilities on acceptances 3,005 3,100 2,053
Accrued income receivable 144,769 95,487 120,220
Other assets 212,070 380,247 177,307
Intangible assets 227,102 131,248 133,684
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$ 19,896,785 $ 16,764,103 $16,755,578
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,293,394 $ 2,330,704 $ 2,082,455
Interest bearing 8,920,773 8,432,571 8,506,526
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11,214,167 10,763,275 10,588,981
Federal funds purchased and
securities sold under
agreements to repurchase 3,897,110 1,875,465 2,787,186
Other short-term borrowings 1,294,693 1,404,006 848,071
Notes payable 1,435,763 986,713 861,933
Senior debentures 30,000 30,000
Acceptances outstanding 3,005 3,100 2,053
Other liabilities 327,267 314,012 292,249
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18,172,005 15,376,571 15,410,473
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Subordinated notes 125,000 125,000 125,000
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Preferred beneficial interests in Popular
North America's junior subordinated
deferrable interest debentures guaranteed
by the Corporation 150,000
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Stockholders' equity :
Preferred stock 100,000 100,000 100,000
Common stock 411,870 396,531 396,292
Surplus 580,806 496,582 479,792
Retained earnings 376,908 267,719 250,022
Treasury stock-at cost (39,560)
Unrealized gains (losses) on securities
available-for-sale, net of
deferred taxes 19,756 1,700 (6,001)
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1,449,780 1,262,532 1,220,105
- --------------------------------------------------------------------------------------------------
$ 19,896,785 $ 16,764,103 $16,755,578
==================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements
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POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarter ended For the nine-months ended
September 30, September 30,
(Dollars in thousands, except
per share amounts) 1997 1996 1997 1996
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INTEREST INCOME:
Loans $ 283,139 $ 235,995 $ 790,296 $ 679,269
Money market investments 8,237 14,566 25,619 34,121
Investment securities 97,522 71,259 257,279 211,646
Trading account securities 4,516 5,277 13,490 14,963
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393,414 327,097 1,086,684 939,999
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INTEREST EXPENSE:
Deposits 95,594 89,851 268,881 259,540
Short-term borrowings 66,117 53,190 169,888 137,745
Long-term debt 28,698 11,820 73,660 39,810
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190,409 154,861 512,429 437,095
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Net interest income 203,005 172,236 574,255 502,904
Provision for loan losses 29,849 22,436 78,949 65,381
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Net interest income after provision
for loan losses 173,156 149,800 495,306 437,523
Service charges on deposit accounts 24,378 21,390 68,411 63,855
Other service fees 25,252 19,035 72,206 55,823
Gain on sale of securities 519 4,911 145 5,620
Trading account profit (loss) 959 (216) 2,209 (661)
Other operating income 15,201 6,279 33,820 28,069
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239,465 201,199 672,097 590,229
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OPERATING EXPENSES:
Personnel costs:
Salaries 55,566 46,672 154,255 137,536
Profit sharing 6,164 5,789 19,392 17,544
Pension and other benefits 17,806 15,632 51,813 48,267
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79,536 68,093 225,460 203,347
Net occupancy expense 10,362 8,700 28,107 26,614
Equipment expenses 16,976 14,624 48,604 42,088
Other taxes 8,215 5,816 21,971 17,245
Professional fees 11,900 9,072 32,726 26,097
Communications 8,743 6,748 24,074 19,561
Business promotion 9,831 6,357 23,768 17,776
Printing and supplies 3,984 2,928 10,755 8,871
Other operating expenses 10,984 8,663 29,958 22,861
Amortization of intangibles 6,810 4,452 16,089 13,536
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167,341 135,453 461,512 397,996
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Income before taxes 72,124 65,746 210,585 192,233
Income tax 18,511 19,473 56,342 54,763
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NET INCOME $ 53,613 $ 46,273 $ 154,243 $ 137,470
===========================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 51,526 $ 44,186 $ 147,981 $ 131,208
==========================================================================================================
EARNINGS PER COMMON SHARE $ 0.76 $ 0.67 $ 2.22 $ 1.99
==========================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
September 30,
(In thousands)
1997 1996
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Cash flows from operating activities:
Net income $ 154,243 $ 137,470
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Adjustments to reconcile
net income to cash provided
by operating activities:
Depreciation and amortization of
premises and equipment 40,073 36,033
Provision for loan losses 78,949 65,381
Amortization of intangibles 16,089 13,536
Gain on sale of investment securities
available-for-sale (145) (5,620)
Loss on disposition of premises and equipment 88 34
Gain on sale of loans (8,525) (7,268)
Amortization of premiums and
accretion of discounts on investments 1,033 7,191
Decrease (increase) in loans held-for-sale 16,138 (64,131)
Amortization of deferred loan fees and costs (2,514) (2,283)
Net decrease (increase) in trading securities 67,436 (41,681)
Net increase in interest receivable (42,295) (6,068)
Net decrease (increase) in other assets 212,347 (28,900)
Net increase in interest payable 7,861 8,780
Net decrease in current and deferred taxes (38,100) (20,937)
Net increase in postretirement benefit obligation 6,229 6,812
Net (decrease) increase in other liabilities (5,594) 15,487
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Total adjustments 349,070 (23,634)
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Net cash provided by operating activities 503,313 113,836
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Cash flows from investing activities:
Net decrease (increase) in money market investments 347,559 (348,268)
Purchases of investment securities held-to-maturity (48,463,368) (17,836,268)
Maturities of investment securities held-to-maturity 48,887,010 17,772,265
Purchases of investment securities available-for-sale (6,922,799) (4,102,815)
Maturities of investment securities available-for-sale 2,346,508 1,933,938
Sales of investment securities available-for-sale 2,646,105 2,542,954
Net disbursements on loans (1,107,479) (1,130,766)
Proceeds from sale of loans 280,659 307,395
Acquisition of loan portfolios (23,131) (37,603)
Assets acquired, net of cash (78,163) (7,164)
Acquisition of premises and equipment (90,516) (56,529)
Proceeds from sale of premises and equipment 27,570 3,026
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (2,150,045) (959,835)
- --------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (563,025) 649,614
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 1,964,387 (213,692)
Net (decrease) increase in other short-term borrowings (109,313) 393,363
Proceeds from issuance of notes payable 678,598 546,712
Payments of notes payable (327,009) (415,207)
Payment of senior debentures (30,000)
Payment of subordinated notes (50,000)
Proceeds from issuance of Series A Capital Securities 150,000
Dividends paid (42,065) (37,920)
Proceeds from issuance of common stock 3,266 3,106
Treasury stock acquired (39,560)
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,685,279 875,976
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Net increase in cash and due from banks 38,547 29,977
Cash and due from banks at beginning of period 492,368 458,174
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Cash and due from banks at end of period $ 530,915 $ 488,151
============================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share information)
NOTE 1- CONSOLIDATION
The consolidated financial statements of Popular, Inc. include the balance sheet
of the Corporation and its wholly-owned subsidiaries, Popular Securities, Inc.;
Popular International Bank, Inc. and its wholly-owned subsidiaries, ATH Costa
Rica, and Popular North America, Inc., including National Bancorp, Inc. Banco
Popular, FSB, Pioneer Bancorp, Inc., CombanCorp., Banco Popular, N.A.
(Florida), CBC Bancorp, Ltd. (second tier subsidiaries), and Equity One, Inc.;
Banco Popular de Puerto Rico and its wholly-owned subsidiaries, Popular Leasing
and Rental, Inc., Popular Finance, Inc. and Popular Home Mortgage, Inc.; and
Metropolitana de Prestamos, Inc., as of September 30, 1997, December 31, 1996
and September 30, 1996, and their related statements of income and cash flows
for the nine-months ended September 30, 1997 and 1996. These statements are, in
the opinion of management, a fair statement of the results of the periods
presented. These results are unaudited, but include all necessary adjustments,
of a normal recurring nature, for a fair presentation of such results. Certain
reclassifications have been made to the prior year consolidated financial
statements to conform to the 1997 presentation.
NOTE 2- ACCOUNTING CHANGES
Effective March 31, 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) 129, "Disclosure of Information about Capital
Structure." This statement establishes standards for disclosing information
about an entity's capital structure. However, it contains no change in
disclosure requirements for entities that were previously subject to the
requirements of Opinions 10 and 15 and SFAS 47.
Effective March 31, 1997, the Corporation adopted SFAS 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. It simplifies the standards for computing earnings
per share previously found in APB Opinion 15, "Earnings per Share," and makes
them comparable to international EPS standards. SFAS 128 replaces the
presentation of primary earnings per share with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Effective January 1, 1997, the Corporation adopted SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which supersedes SFAS 122 "Accounting for Mortgage Servicing Rights." 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 component approach that
focuses on the legal and physical control over the component. Under this
approach, following a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
and derecognizes financial assets for which control has been surrendered and
financial liabilities that have been extinguished. However, the FASB issued SFAS
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
125",
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that delays until January 1, 1998, the effective date of those provisions of the
statement that deal with securities lending, repurchase agreements and similar
transactions. The adoption of this pronouncement did not have a financial impact
on the consolidated financial statements of the Corporation for the nine-month
period ended September 30, 1997.
In addition, 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. Also, it requires mortgage
banking enterprises to assess capitalized mortgage servicing rights for
impairment based on the fair value of those rights. 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. These mortgage servicing rights are amortized in
proportion to and over the periods of estimated net servicing income.
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 exceeds its estimated fair
value. Impairment is recognized through a valuation allowance. As of September
30, 1997, the carrying value, estimated fair value and valuation allowance of
capitalized mortgage servicing rights were $28,053, $35,260 and $16,
respectively (1996- $24,193, $30,864 and $64).
Effective January 1, 1996, the Corporation adopted SFAS 123 "Accounting for
Stock-Based Compensation." This statement establishes a fair value-based method
of accounting for stock-based employee compensation plans. It encourages
entities to adopt this method in lieu of the provisions of APB Opinion 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 de Puerto Rico 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 quarter and nine-month period ended September 30,
1997, the Corporation recognized an expense of $493 and $1,067, respectively,
related to this plan (1996 - $401 and $615).
Effective 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 and certain identifiable
intangibles to be held and used by an entity as well as assets held for
disposition be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. No impairment recognition was required for the quarter ended
September 30 1997, and for the nine-month period ended September 30, 1997, the
Corporation recognized an impairment of $3,561 in the market value of a building
which is held for sale. For the quarter and nine-month period ended September
30, 1996, the Corporation recognized a loss of $700 based on the requirements of
this pronouncement.
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In June 1997, the Financial Accounting Standard Board issued SFAS 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. Comprehensive income has been defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances, except those resulting from investments by owners and
distributions to owners. This pronouncement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The pronouncement does not
require a specific format for the financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. This statement is effective for fiscal years
beginning after December 15, 1997 and reclassification of financial statements
for earlier periods provided for comparative purposes is required.
Also in June 1997, the Financial Accounting Standard Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirements to report information about major customers. This statement is
effective for financial statement for periods beginning after December 15, 1997,
and requires comparative information for earlier years.
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NOTE 3 - INVESTMENT SECURITIES
The average maturities as of September 30, 1997, and market value for the
following investment securities are:
Investment securities available-for-sale:
September 30,
1997 1996
Amortized Market Amortized Market
Cost Value Cost Value
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U.S. Treasury (average maturity of
1 year and 10 months) $4,027,623 $4,043,382 $2,033,960 $2,033,102
Obligations of other U.S. Government
agencies and corporations (average
maturity of 12 years and 2 months) 956,146 966,676 158,782 158,120
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 9 years and 4 months) 47,377 47,890 24,107 24,059
Collateralized mortgage obligations (average
maturity of 2 years and 3 months) 720,600 720,880 296,727 295,953
Mortgage-backed securities (average
maturity of 4 years and 3 months) 60,658 60,167 295,457 290,990
Equity securities (without contractual
maturity) 18,150 18,154 11,512 11,439
Others (average maturity of 3 years
and 7 months) 12,602 12,621 19,050 18,890
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$5,843,156 $5,869,770 $2,839,595 $2,832,553
==========================================================
Investment securities held-to-maturity:
September 30,
1997 1996
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------------
U.S. Treasury (average maturity of 2 months) $ 250,122 $ 250,160 $ 922,075 $ 922,621
Obligations of other U.S. Government
agencies and corporations (average
maturity of 1 month) 289,704 289,500 280,376 279,433
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 5 years and 1 month) 74,160 75,548 188,138 189,687
Collateralized mortgage obligations (average
maturity of 1 year and 9 months) 77,032 76,982 195,276 194,259
Mortgage-backed securities (average
maturity of 3 years and 7 months) 48,827 49,695 54,837 53,989
Equity securities (without contractual
maturity) 70,360 70,360 58,773 58,773
Others (average maturity of 6 years
and 6 months) 18,900 18,870 12,679 12,645
----------------------------------------------------------
$ 829,105 $ 831,115 $1,712,154 $1,711,407
==========================================================
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NOTE 4- PLEDGED ASSETS
Securities and insured mortgage loans of the Corporation of $4,952,973 (1996 -
$3,007,804) are pledged to secure public and trust deposits and securities and
mortgages sold under repurchase agreements.
NOTE 5- COMMITMENTS
In the normal course of business there are letters of credit outstanding and
stand-by letters of credit which at September 30, 1997, amounted to $20,762 and
$117,497. There are also outstanding other commitments and contingent
liabilities, such as guarantees and commitments to extend credit, which are not
reflected in the accompanying financial statements. No losses are anticipated as
a result of these transactions.
NOTE 6- SUBORDINATED NOTES
Subordinated notes of $125,000 as of September 30, 1997 and 1996 consisted of
notes issued by the Corporation on December 12, 1995, maturing on December 15,
2005, with interest payable semi-annually at 6.75%.
NOTE 7- STOCKHOLDERS' EQUITY
Authorized common stock is 180,000,000 shares with a par value of $6 per share
of which 67,656,166 were issued and outstanding at September 30, 1997. On May 8,
1997, the Board of Directors authorized the repurchase of up to 3 million shares
of the outstanding common stock of the Corporation. As of September 30, 1997,
988,800 common shares were purchased at a cost of $39.6 million.
Authorized preferred stock is 10,000,000 shares without par value of which
4,000,000, non-cumulative with a dividend rate of 8.35% and a liquidation
preference value of $25 per share, were issued and outstanding at September 30,
1997.
Popular International Bank, Inc. (PIB) and Popular North America, Inc's (PNA)
bank subsidiaries (Banco Popular, Illinois, Banco Popular, N.A. (California),
Banco Popular, N.A. (Florida) and Banco Popular FSB) have certain statutory
provisions and regulatory requirements and policies, such as the maintenance of
adequate capital, that limit the amount of dividends they can pay. Other than
these limitations, no other restrictions exist on the ability of PIB and PNA to
make dividend and asset distributions to the Corporation, nor on the ability of
PNA's subsidiaries, except for Banco Popular, FSB to make distributions to
PNA. In connection with the acquisition by Banco Popular, FSB from the
Resolution Trust Company (RTC) of four New Jersey branches of the former
Carteret Federal Savings Bank, the RTC provided to Banco Popular, FSB interim
financial assistance in the form of a loan in the amount of $20 million, which
matures on January 20, 2000, but which is prepayable any time before then.
Pursuant to the terms 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 RTC loan) or make any distribution of its assets until payment
in full of such promissory note.
NOTE 8- EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are calculated based on net income applicable to
common stockholders which amounted to $51,526 for the third quarter of 1997
(1996 - $44,186), and $147,981 for the nine months ended September 30, 1997
(1996 - $131,208), after deducting the dividends on preferred stock. EPS are
based on 67,866,284 average shares outstanding for the third quarter of 1997
(1996 - 66,376,616) and 66,794,641 average shares outstanding for the first nine
months of 1997 (1996 - 66,000,086).
NOTE 9- SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the nine-month period ended September 30, 1997 the Corporation paid
interest and income taxes amounting to $469,020 and $76,077, respectively (1996
- - $427,946 and $70,047). In addition, the loans receivable transferred to other
real estate and other property for the nine-month period ended September 30,
1997, amounted to $4,699 and $5,736, respectively (1996 - $2,089 and $3,849).
The Corporation's stockholders' equity at September 30, 1997 includes $19,756
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in unrealized holding gains on securities available-for-sale, net of deferred
taxes, as compared with $6,001 in unrealized losses as of September 30, 1996.
On June 30, 1997, the Corporation completed the acquisition of Roig Commercial
Bank, headquartered in Humacao, Puerto Rico. Each outstanding share of Roig
Commercial Bank was converted into 5.14695 shares of the Corporation's common
stock or $208.12987 in cash, depending on Roig's shareholders' elections.
As a result of the elections 1,544,009 common shares of the Corporation
were issued to Roig's shareholders. In addition, on April 30, 1997, the
Corporation acquired National Bancorp, Inc., the holding company of
AmericanMidwest Bank located in Chicago,Illinois. As a result of this
acquisition each outstanding share of National Bancorp, Inc. was converted
into 8,678 shares of the Corporation's common stock, resulting in the issuance
of 918,263 common shares.
NOTE 10- POPULAR INTERNATIONAL BANK, INC. (A WHOLLY-OWNED SUBSIDIARY OF POPULAR,
INC.) FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular International Bank, Inc. (PIB) and
its wholly-owned subsidiaries, ATH Costa Rica, and Popular North America, Inc.,
including National Bancorp, Inc., Banco Popular, FSB, Pioneer Bancorp, Inc.,
CombanCorp., Banco Popular, N.A. (Florida), CBC Bancorp, LTD, (second-tier
subsidiaries) and Equity One, Inc. as of August 31, 1997 and 1996, and the
results of their operations for the nine-month periods then ended.
Popular, Inc. has not presented separate financial statements and any other
disclosures concerning Popular International Bank, Inc., other than the
following summarized financial information, because management has determined
that such information is not material to holders of debt securities issued by
PIB which is guaranteed by the Corporation.
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POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
August 31,
----------
1997 1996
---- ----
Assets:
Cash $ 62,360 $ 23,143
Money market investments 67,411 44,513
Investment securities 426,065 203,375
Loans 2,048,109 1,419,727
Less: Unearned income 52,997 46,008
Allowance for loan losses 30,413 20,126
------------ ------------
1,964,699 1,353,593
Other assets 164,113 74,731
------------ ------------
Total assets $ 2,684,648 $ 1,699,355
============ ============
Liabilities and Stockholder's Equity:
Deposits $ 1,129,594 $ 632,657
Short-term borrowings 389,140 340,384
Notes payable 688,911 519,224
Other liabilities 40,191 31,993
Preferred beneficial interests in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 -0-
Stockholder's equity 286,812 175,097
------------ ------------
Total liabilities and stockholder's equity $ 2,684,648 $ 1,699,355
============ ============
13
13
POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Quarter ended For the nine-months ended
August 31, August 31,
--------------------- -------------------------
1997 1996 1997 1996
Income:
Interest and fees $ 59,435 $ 37,968 $157,329 $110,235
Other income 10,918 6,850 18,409 17,387
-------- -------- -------- --------
Total income 70,353 44,818 175,738 127,622
-------- -------- -------- --------
Expenses:
Interest expense 32,080 20,196 83,241 59,723
Provision for loan losses 4,395 3,276 12,502 10,288
Operating expenses 25,087 12,198 58,022 33,176
-------- -------- -------- --------
Total expenses 61,562 35,670 153,765 103,187
-------- -------- -------- --------
Income before income tax 8,791 9,148 21,973 24,435
Income tax 3,587 3,987 9,264 9,994
-------- -------- -------- --------
Net income $ 5,204 $ 5,161 $ 12,709 $ 14,441
======== ======== ======== ========
14
14
NOTE 11- POPULAR NORTH AMERICA, INC. (A SECOND-TIER SUBSIDIARY OF POPULAR, INC.)
FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular North America, Inc. (PNA) and its
wholly-owned subsidiaries National Bancorp, Inc., Banco Popular, FSB, Pioneer
Bancorp Inc., CombanCorp, Banco Popular, N.A. (Florida), CBC Bancorp, Ltd., and
Equity One, Inc. (second tier subsidiary) as of August 31, 1997 and 1996, and
the results of their operations for the nine-month periods then ended.
Popular, Inc. has not presented separate financial statements and any other
disclosures concerning Popular North America, Inc., other than the following
summarized financial information, because management has determined that such
information is not material to holders of debt securities issued by PNA which is
guaranteed by the Corporation.
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
August 31,
----------
1997 1996
---- ----
Assets:
Cash $ 62,329 $ 23,114
Money market investments 64,661 43,511
Investment securities 426,015 203,375
Loans 2,048,109 1,419,727
Less: Unearned income 52,997 46,008
Allowance for loan losses 30,413 20,126
------------ ------------
1,964,699 1,353,593
Other assets 161,375 74,554
------------ ------------
Total assets $ 2,679,079 $ 1,698,147
============ ============
Liabilities and Stockholder's Equity:
Deposits $ 1,129,594 $ 632,657
Short-term borrowings 389,140 340,384
Notes payable 688,911 519,224
Other liabilities 39,793 31,974
Preferred beneficial interests in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 -0-
Stockholder's equity 281,641 173,908
------------ ------------
Total liabilities and stockholder's equity $ 2,679,079 $ 1,698,147
============ ============
15
15
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Quarter ended For the nine-months ended
August 31, August 31,
---------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
Income:
Interest and fees $ 60,273 $ 37,951 $155,796 $110,185
Other income 11,133 6,934 18,462 17,471
-------- -------- -------- --------
Total income 71,406 44,885 174,258 127,656
-------- -------- -------- --------
Expenses:
Interest expense 32,395 20,196 83,239 59,723
Provision for loan losses 4,400 3,276 12,502 10,288
Operating expenses 25,479 12,221 57,582 33,245
-------- -------- -------- --------
Total expenses 62,274 35,693 153,323 103,256
-------- -------- -------- --------
Income before income tax 9,132 9,192 20,935 24,400
Income tax 3,672 3,987 9,264 9,994
-------- -------- -------- --------
Net income $ 5,460 $ 5,205 $ 11,671 $ 14,406
======== ======== ======== ========
16
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial review contains the analysis of the consolidated financial
position and financial performance of Popular, Inc. and its subsidiaries (the
Corporation). The Corporation is a regional diversified bank holding company
engaged in the following businesses through its subsidiaries.
- Commercial Banking/Savings and Loans - This business have had
the greatest growth within the past twelve months with five
acquisitions made over that period. On September 30,1996 the
Corporation acquired Banco Popular, N.A. (California), on
April 30,1997 Banco Popular, N.A. (Florida), National Bancorp
and CBC Bancorp, Ltd. on May 31,1997, and on June 30,1997 the
former Roig Commercial Bank (RCB) was merged with and into
Banco Popular de Puerto Rico (BPPR). Previously established
banking operations include BPPR, the Corporation's largest
subsidiary founded in 1893, Banco Popular, Illinois, and Banco
Popular, FSB.
- Lease Financing - Popular Leasing and Rental, Inc. (Popular
Leasing) and Popular Leasing, USA
- Mortgage Banking/Consumer Finance - Popular Home Mortgage,
Inc. (Popular Home Mortgage), Equity One, Inc. (Equity One)
and Popular Finance, Inc. (Popular Finance)
- Broker/Dealer - Popular Securities, Inc. (Popular Securities)
- ATM Processing Services - ATH Costa Rica
This financial review should be read together with the consolidated financial
statements, supplemental financial data and tables included in this report.
NET INCOME
The Corporation's net income for the third quarter of 1997 reached $53.6
million, compared with $46.3 million reported for the same period in 1996, and
$51.1 million reported during the second quarter of 1997. Earnings per common
share (EPS) for the quarter were $0.76, based on 67,866,284 average shares
outstanding, compared with $0.67 for the third quarter of 1996, based on
66,048,673 average shares outstanding and $0.74 for the second quarter of 1997,
based on 66,376,616 average shares outstanding. Return on assets (ROA) and
return on common equity (ROE) for the quarter ended September 30, 1997 were
1.10% and 15.46%, respectively, compared with 1.10% and 15.94% reported during
the same period in 1996 and 1.16% and 16.07% for the second quarter of 1997.
Of the $7.3 million increase in net income for the quarter, $30.8 million was
attributed to a higher net interest income, followed by an increase of $14.9
million in other revenues, partially offset by a rise of $31.9 million in
operating expenses and an increase of $7.4 million in the provision for loan
losses.
17
17
For the nine-month period ended September 30,1997, the Corporation reported net
earnings of $154.2 million, an increase of $16.7 million when compared to the
$137.5 million reported for the same period in 1996. EPS for both periods were
$2.22 and $1.99, respectively, based on 66,794,641 average shares outstanding
for the first nine months of 1997 and 66,000,086 for the same period in 1996.
ROA and ROE for the nine-month period ended September 30,1997, were 1.15% and
15.93%, respectively, compared with 1.14% and 16.29% reported in 1996.
TABLE A
Components of Net Income as a Percentage of Average Total Assets
Third Quarter
- -------------------------------------------------------------------------------
1997 1996
-------------------------------
Net interest income 4.17% 4.08%
Provision for loan losses (0.61) (0.53)
Securities and trading gains 0.03 0.11
Other income 1.33 1.11
----- -----
4.92 4.77
Operating expenses (3.44) (3.21)
---- ----
Income before tax 1.48 1.56
Provision for income tax (0.38) (0.46)
----- -----
Net income 1.10% 1.10%
==== ====
NET INTEREST INCOME
Net interest income for the third quarter of 1997 reached $203.0 million
compared with $172.2 million reported for the same quarter in 1996. On a taxable
equivalent basis, net interest income increased to $218.7 million from $184.1
million in the same quarter of 1996 and $205.1 million in the second quarter of
1997. The rise in net interest income resulted from an increase of $2.5 billion
in the average volume of earning assets together with a higher net interest
yield, on a taxable equivalent basis. For analytical purposes, the interest
earned on tax-exempt assets is adjusted to a taxable equivalent basis assuming
the applicable statutory income tax rates. Table B summarizes the changes in the
composition of average earning assets and interest bearing liabilities and their
respective yields and costs, on a taxable equivalent basis, for the third
quarter of 1997 and 1996.
18
18
TABLE B
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS
(Dollars in millions) Third Quarter
- ----------------------------------------------------------------------------------------------------------------
Average Levels Average Yields
----------------------------------------------------------------------------
1997 1996 Variance 1997 1996 Variance
----------------------------------------------------------------------------
Money market investments $ 608 $ 1,085 ($ 477) 5.37% 5.34% 0.03%
Investment securities 6,387 4,922 1,465 6.90 6.57 0.33
Trading 286 375 (89) 6.76 5.94 0.82
------- ------- ------- ----- ----- ----
7,281 6,382 899 6.77 6,32 0.45
------- ------- ------- ----- ----- ----
Loans:
Commercial 4,692 3,754 938 9.21 9.02 0.19
Leasing 560 514 46 13.09 12.75 0.34
Mortgage 2,783 2,623 160 8.57 8.49 0.08
Consumer 2,999 2,496 503 13.05 12.85 0.20
------- ------- ------- ----- ----- ----
11,034 9,387 1,647 10.29 10.10 0.19
------- ------- ------- ----- ----- ----
TOTAL EARNING ASSETS $18,315 $15,769 $ 2,546 8.89% 8.57% 0.32%
======= ======= ======= ===== ===== ====
Interest bearing deposits:
NOW and money market $ 1,323 $ 1,149 $ 174 3.43% 3.31% 0.12%
Savings 3,558 3,093 465 3.08 3.05 0.03
Time deposits 4,106 4,284 (178) 5.47 5.26 0.21
------- ------- ------- ----- ----- ----
8,987 8,526 461 4.22 4.19 0.03
------- ------- ------- ----- ----- ----
Short-term borrowings 4,481 3,959 522 5.85 5.34 0.51
Medium and long-term debt 1,839 800 1,039 6.20 5.89 0.31
------- ------- ------- ----- ----- ----
Total interest bearing
liabilities 15,307 13,285 2,022 4.94 4.64 0.30
Demand deposits 2,332 2,022 310
Net non-interest bearing funds 676 462 214
------- ------- ------- ----- ----- ----
$18,315 $15,769 $ 2,546 4.13% 3.91% 0.22%
======= ======= ======= ===== ===== ====
NET INTEREST MARGIN 4.76% 4.66% 0.10%
NET INTEREST SPREAD 3.95% 3.93% 0.02%
The increase in average earning assets relates primarily to the rise of $1.6
billion in average loans and the increase in investment securities of $1.5
billion. As seen in table B, commercial and consumer loans, mainly personal,
were the principal contributors to the rise in average loans, accounting for 87%
of the total increase. BPPR accounted for $634 million of the rise in commercial
loans and $360 million of that in consumer loans. These increases responded to
both the growth of the Bank and the acquisition of RCB on June 30, 1997, which
contributed approximately $208 million in commercial loans and $137 million in
consumer loans. Also, the average leasing and mortgage loan portfolios showed
increases, being Equity One the main contributor to the growth in the average
mortgage portfolio. The subsidiaries that were acquired from September 30, 1996
accounted for $368 million of the total increase in average loans.
19
19
BPPR had an increase of 26% in the average balance of investment securities,
contributing $1.2 billion to the total rise of $1.5 billion for the quarter. Of
the $1.2 billion increase, $1.1 billion was in U.S. Treasury and Agency
securities, whose income is exempt for income tax purposes in Puerto Rico. The
decrease in the average balance of money market investments for the third
quarter of 1997, is mainly related to the reduction in eligible activities at
Popular Securities, due to a lower balance of 936 funds.
The increase of 32 basis points in the average yield on earning assets is
primarily attributed to the rise of 33 basis points in the fully-taxable
equivalent yield on investment securities and the rise of 19 basis points in the
fully-taxable equivalent yield on loans. The increase of 19 basis points in the
average yield on loans, resulted from higher yields on commercial and consumer
loans, as demonstrated in table B. The yield on commercial loans in Puerto Rico
has been somehow benefited from the elimination of Section 936 of the U.S.
Internal Revenue Code. Some loans that were previously priced using 936 market
rate as factor, have changed its pricing to a higher base in accordance with the
conventional funds market, thus improving the yield of the commercial loan
portfolio. Also, during the first quarter of 1997, the prime rate rose by 25
basis points. Due to the floating characteristics on the pricing of a great
portion of the portfolio, commercial loans are more sensitive to these changes.
The increase of 20 basis points in the average yield on consumer loans was
mostly a result of changes made in the pricing structure of some consumer loan
categories at BPPR.
The average yield on the Corporation's investment securities, also benefited
from the higher interest rate scenario that prevailed during the third quarter
of 1997, as compared with the same quarter of 1996.
On the liability side, $1.0 billion of the total increase in average interest
bearing liabilities of the Corporation for the third quarter of 1997, compared
with the same period of 1996, was attributed to the rise in medium and long-term
debt followed by the increase in short-term borrowings of $522 million and the
rise in interest bearing deposits of $461 million.
The increase in average medium and long-term debt was primarily attributed to
rises in BPPR and the holding companies, both Popular, Inc. and Popular North
America. Also, in February 1997, the Corporation issued $150 million in Capital
Securities which qualified as Tier I capital for regulatory purposes. These
securities mature on February 2027. Most of this debt was used to finance the
growth and expansion of the Corporation.
Average short-term borrowings increased at BPPR by $1.6 billion, mostly due to
the reduction in 936 deposits and arbitrage opportunities. This increase was
partially offset by a decrease of $740 million in Popular Securities as a result
of lower 936 borrowings.
Although most deposit categories showed increases, a decrease of $697 million in
the average balance of 936 certificates of deposits caused the average balance
of certificates of deposit to decline by $178 million. The decline in 936
certificates of deposits was partially offset by an increase in the average
balance of other certificates of deposits of $519 million. Savings accounts
increased $465 million, mainly at BPPR. The increase in average demand deposits
was also principally achieved at BPPR. The acquisition of RCB brought $584
million in deposits at June 30, 1997, while the other operations acquired from
September 30 1996, had $524 million in average deposits for the quarter ended
September 30, 1997.
20
20
The increase of 30 basis points in the total cost of interest bearing
liabilities, from 4.64% to 4.94% for the third quarter of 1997, was mostly due
to the increases of 51 basis points and 31 basis points in the average cost of
short-term borrowings and medium and long-term borrowings, respectively, due to
both a change in the mix of borrowings mainly related to lower 936 borrowings,
and to general market conditions. Also, the increase of three basis points in
the average cost of interest bearing deposits for the quarter ended September
30, 1997, was principally attributed to the rise in the cost of certificates of
deposit from 5.26% in the third quarter of 1996 to 5.47% for the same quarter in
1997. Traditionally 936 certificates of deposit had a cost below the U.S. or the
Eurodollar market. During the third quarter of 1996 these deposits had an
average cost of 4.52% and comprised 13.0% of the total average interest bearing
deposits, compared with 4.96% and 4.6% in the third quarter of 1997. That
reduction in the proportion of 936 deposits as well as the increase in its cost
were determinant factors for the increase in the average cost of certificates of
deposit. As a result of the above, the cost of funding earning assets increased
from 3.91% for the third quarter of 1996 to 4.13% for the same quarter in 1997.
As can be seen in table B, the increase of 32 basis points in the yield on
earning assets partially offset by an increase of 30 basis points in the cost of
interest bearing liabilities resulted in a net interest yield, on a taxable
equivalent basis, of 4.76% for the quarter ended September 30, 1997, up ten
basis points from 4.66% for the same quarter last year. During the second
quarter of 1997, the Corporation reported a net interest yield, on a taxable
equivalent basis, of 4.91%. The decrease in the net interest yield from the
second quarter was due to a higher level of arbitrage activities undertaken
during the third quarter of 1997. Average earning assets grew by $1.6 billion
since the second quarter of 1997.
For the nine-month periods ended September 30,1997 and 1996 the net interest
income, on a taxable equivalent basis, reached $617.3 million and $539.2
million, respectively. The adjustment to convert net interest income per books
to a taxable equivalent basis was $43.0 million for the first nine months of
1997 and $36.3 million for the same period in 1996. The net interest yield, on a
taxable equivalent basis, reported for both periods, was 4.85% and 4.75% for
1997 and 1996, respectively.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses totaled $29.8 million for the third quarter of
1997, a rise of $7.4 million or 33.0% when compared with $22.4 million for the
same quarter of 1996. For the second quarter of 1997 the provision was $25.4
million. For the nine-month period ended September 30, 1997, the provision for
loan losses increased $13.6 million or 20.8%, from $65.4 million for the same
period of 1996. The growth in the loan portfolio, and the increase in net
charge-offs and non-performing assets experienced by the Corporation were
responsible for the increase in the provision. Net charge-offs for the quarter
ended September 30, 1997, reached $31.5 million or 1.14% of average loans,
compared with $18.8 million or 0.80% reported for the same quarter in 1996, and
$22.9 million or 0.90% for the quarter ended on June 30, 1997. Table C presents
information for the quarter ended September 30, 1997 and the previous four
quarters.
21
21
TABLE C
- --------------------------------------------------------------------------------
Quarter Provision for Net Allowance for
Ended Loan Losses Charge-Offs Loan Losses
- --------------------------------------------------------------------------------
(In millions)
September 30, 1997 $ 29.8 $ 31.5 $ 205
June 30, 1997 25.4 22.9 207
March 31, 1997 23.7 17.9 191
December 31, 1996 23.5 20.3 186
September 30, 1996 22.4 18.8 182
Consumer loans net charge-offs increased $6.5 million for the quarter ended
September 30, 1997, compared with the same period of 1996, totaling $14.3
million or 1.90% of average consumer loans. For the third quarter last year,
consumer loans net charge-offs represented 1.24% of its average portfolio. Most
of the rise in credit losses in the consumer category was experienced in BPPR,
that recorded $5.9 million over the amount recognized for the same quarter of
the previous year, principally in personal loans and credit cards which
increased $3.4 million and $2.4 million, respectively. Commercial loans net
charge-offs rose $7.0 million, from $7.0 million in the third quarter of 1996 to
$14.0 million this quarter.
Economic factors such as the increase in personal bankruptcies in the U.S.
mainland and Puerto Rico and the implementation of the Corporation's more
conservative charge-off policy at the acquired banks contributed to the higher
level of net credit losses in the commercial and consumer loan portfolios. Loans
acquired from RCB were responsible for $5.0 million in net charge-offs in this
quarter due to the more conservative charge-off policy at BPPR. Lease financing
and construction loans net charge-offs decreased $1.0 million when compared with
the third quarter of 1996. Mortgage loans net charge-offs amounted to $0.7
million and $0.5 million for the third quarter of 1997 and 1996, respectively.
The increase of $8.6 million in net charge-offs when compared with the second
quarter of 1997, was also reflected in the commercial and consumer loan
categories, which increased $5.1 million and $2.5 million, respectively, as a
result of the same factors mentioned above.
For the nine-month period ended September 30, 1997, net charge-offs showed an
increase of $20.5 million, reaching $72.3 million or 0.93% of average loans,
from $51.8 million or 0.76% of average loans for the same period of 1996. Net
credit losses related to the consumer and commercial loan portfolios showed
increases of $13.7 million and $10.7 million, respectively. Conversely, lease
financing and construction loans net charge-offs decreased $3.1 million and $1.1
million, respectively, when compared to prior year. The decrease in net
charge-offs in the lease financing portfolio resulted from a higher level of
recoveries, as a result of a more conservative charge-off policy implemented in
1996 by Popular Leasing. Mortgage loans net charge-offs amounted to $1.6 million
and $1.4 million for the nine-month periods ended September 30, 1997 and 1996,
respectively.
22
22
TABLE D
Allowance for Loan Losses and Selected Loan Losses Statistics
Third Quarter First Nine Months
(Dollars in thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
Balance at beginning of period $206,719 $178,330 185,574 $168,393
Allowance purchased 402 12,832 402
Provision for loan losses 29,849 22,436 78,949 65,381
-----------------------------------------------------
236,568 201,168 277,355 234,176
-----------------------------------------------------
Losses charged to the allowance:
Commercial 17,726 8,814 41,368 27,214
Construction 300 510 600 1,703
Lease financing 5,498 6,166 17,615 14,360
Mortgage 848 549 1,854 1,605
Consumer 18,141 11,159 45,759 31,340
-----------------------------------------------------
42,513 27,198 107,196 76,222
-----------------------------------------------------
Recoveries:
Commercial 3,767 1,798 11,139 7,702
Construction 31 108 112 130
Lease financing 3,190 3,029 12,249 5,938
Mortgage 171 37 277 230
Consumer 3,863 3,430 11,141 10,418
-----------------------------------------------------
11,022 8,402 34,918 24,418
-----------------------------------------------------
Net loans charged-off 31,491 18,796 72,278 51,804
-----------------------------------------------------
Balance at end of period $205,077 $182,372 $205,077 $182,372
=====================================================
Ratios:
Allowance for losses to loans 1.83% 1.90% 1.83% 1.90%
Allowance to non-performing assets 96.38 118.89 96.38 118.89
Allowance to non-performing loans 102.15 124.71 102.15 124.71
Non-performing assets to loans 1.90 1.60 1.90 1.60
Non-performing assets to total assets 1.07 0.92 1.07 0.92
Net charge-offs to average loans 1.14 0.80 0.93 0.76
Provision to net charge-offs 0.95x 1.19x 1.09x 1.26x
Net charge-offs earnings coverage 3.24 4.69 4.01 4.97
As shown in table D, at September 30, 1997, the allowance for loan losses
reached $205 million, representing 1.83% of loans, as compared with $182 million
or 1.90% at the same date in 1996, and $207 million or 1.89% at June 30, 1997.
Management considers that the allowance for loan losses is adequate to absorb
potential write-offs in the loan portfolio based on the methodology established
for its evaluation, which includes portfolio risk characteristics, prior loss
experience, results of periodic credit reviews, current and anticipated economic
conditions and loan impairment measurement.
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 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 homogenous loans are collectively evaluated for
impairment based on experience. All other loans are evaluated on a loan-by-loan
basis. 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 Corporation had $121 million in loans considered impaired at September 30,
1997, of which $85 million had a related allowance for possible losses of
23
23
$19 million. As of the same date last year, loans considered impaired amounted
to $89 million of which $54 million had a related allowance for loan losses of
$15 million. Average impaired loans during the third quarter of 1997 and 1996
were $124 million and $89 million, respectively. The Corporation recognized
interest income on impaired loans of $2.1 million and $1.1 million,
respectively, for the quarters ended September 30, 1997 and 1996.
CREDIT QUALITY
As shown in table E, non-performing assets (NPA) as of September 30, 1997,
amounted to $213 million or 1.90% of loans, compared with $153 million or 1.60%
at the end of the third quarter of 1996. NPA were $211 million or 1.94% of loans
at June 30, 1997. The allowance for loan losses as a percentage of NPA was 96.4%
at September 30, 1997, compared with 118.9% at the same date last year. The
reduction in the allowance coverage ratio is primarily attributed to the
increase of $19.6 million in the level of non-performing assets at Equity One, a
portfolio with minimal charge-offs given the nature of its collateral and the
increase of $36 million in non-performing assets at BPPR, of which a large
portion is secured.
TABLE E
- --------------------------------------------------------------------------------
NPA Allowance
as a % as a %
Date NPA of Loans of NPA
- --------------------------------------------------------------------------------
(Dollars in millions)
September 30, 1997 $ 213 1.90% 96.4%
June 30, 1997 211 1.94 97.9
March 31, 1997 174 1.76 110.0
December 31, 1996 155 1.58 119.9
September 30, 1996 153 1.60 118.9
NPA consist of past-due loans on which no interest income is being accrued,
renegotiated loans and other real estate. The Corporation reports NPA on a more
conservative basis than most U.S. banks. The standard industry practice is to
place non-performing commercial loans on non-accrual status when payments of
principal or interest are delinquent 90 days. However, the Corporation's policy
is to place commercial loans on non-accrual status when payments of principal or
interest are delinquent 60 days. Lease financing, conventional mortgage and
closed-end consumer loans are placed on non-accrual status when payments are
delinquent 90 days. Closed-end consumer loans are charged-off against the
allowance when delinquent 120 days. Open-end (revolving credit) consumer loans
are charged-off when payments are delinquent 180 days. Certain loans which would
be treated as non-accrual loans pursuant to the foregoing policy, are treated as
accruing loans if they are considered well secured and in the process of
collection. 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.
24
24
Assuming 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 loans, non-performing
assets as of September 30, 1997, amounted to $165 million or 1.47% of loans, and
the allowance for loan losses would be 124.5% of non-performing assets. At
September 30, 1996 and June 30, 1997, adjusted non-performing assets were $114
million and $163 million, respectively, or 1.19% and 1.49% of loans.
Non-performing loans totaled $201 million as of September 30, 1997, compared
with $146 million at the same date last year and $198 million as of June 30,
1997. Most of the increase from September 30, 1996, was reflected in
non-performing commercial, including construction, mortgage and consumer loans
which rose $30 million, $17 million and $8 million, respectively. The increase
in non-performing commercial loans, including construction, was mainly
attributable to the classification on non-accrual of a $9.8 million commercial
income-producing real estate loan in the U.S. Virgin Island region of BPPR.
Furthermore, the non-performing loans of the banks acquired after the third
quarter of 1996, contributed to the increase in this category, driven by the
implementation of the Corporation's conservative policy as explained above. In
the non-performing mortgage loan category, Equity One reached $27.6 million at
September 30, 1997, an increase of $13.3 million when compared with $14.3
million at the same date last year. Most of the rise relates to its continued
loan growth coupled with an increased level of personal bankruptcies in the
mainland. Bankruptcy filings in the U.S. during the 12-month period ended on
June 30, 1997, increased 26% over the same period a year before. The
non-performing consumer loans increased $6.5 million at BPPR. The other real
estate category increased $7.5 million principally at Equity One. Non-performing
lease financings decreased $0.2 million when compared with the amount reported
at September 30, 1996.
Accruing loans that are contractually past-due 90 days or more as to principal
or interest as of September 30, 1997, amounted to $16 million compared with $12
million at September 30, 1996, and $15 million at June 30, 1997.
OTHER OPERATING INCOME
Other operating income, excluding securities and trading gains, amounted to
$64.8 million for the three-month period ended September 30, 1997, compared with
$46.7 million for the same quarter in 1996, an increase of $18.1 million or
38.8%. This rise in other income was driven by increases of $8.9 million in
other operating income, $6.2 million in other services fees, and $3.0 million in
service charges on deposit accounts. For the first nine-months, these revenues
grew 18.1% to $174.4 million in 1997 from $147.7 million in 1996.
Service charges on deposit accounts totaled $24.4 million for the quarter ended
September 30, 1997, compared with $21.4 million for the same quarter of 1996.
This increase resulted from the growth in the activity of commercial accounts,
particularly at BPPR, and a higher volume of deposits driven by the acquisition
of RCB on June 30, 1997. In addition, the operations acquired in the U.S. from
September 30, 1996, contributed approximately $0.8 million to these service
charges for the quarter. For the nine-month period ended September 30, 1997,
service charges on deposit accounts amounted to $68.4 million, or $4.5 million
higher than $63.9 million reported for the same period in 1996.
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Other service fees rose to $25.2 million for the third quarter of 1997, from
$19.0 million for the same quarter in 1996. The increase in other service fees
was principally attained at BPPR, whose credit card fees and discounts rose $1.6
million, as credit card net sales rose 34.7% and the number of credit card
active accounts grew 20.5%. Also at BPPR, debit card fees rose $1.2 million as a
result of the sustained growth in the volume of transactions at point-of-sale
(POS) terminals. The volume of transactions at POS terminals increased from a
monthly average of 1.9 million in September 1996 to 2.9 million a year later. In
addition, fees related to the sale and administration of investment products
rose $1.4 million mainly as a result of the fees earned by the new retail
division of Popular Securities which started operations at the end of the second
quarter of 1997. For the first nine months of 1997, other service fees increased
$16.4 million as compared to the same period in 1996, reaching $72.2 million.
Other operating income increased to $15.2 million from $6.3 million for the
third quarter of 1996. The increase was mostly due to a pre-tax gain of $3.4
million resulting from the securitization and sale of $103 million of loans at
Equity One. Also, there was a non-recurring income of $1.7 million as the
Corporation recovered a portion of its investment in preferred stock of Citizens
Bank of Jamaica previously written down. Moreover, there were higher gains
realized on the sale of mortgage loans, which amounted to $1.8 million for the
quarter ended September 30, 1997, compared with $0.5 million for the same period
in 1996, and higher daily rental revenues realized by Popular Leasing. Other
operating income for the nine-month period ended September 30, 1997, reached
$33.8 million compared with $28.1 million for the same period last year.
For the third quarter of 1997, the Corporation recognized a net gain of $0.5
million on the sale of securities and a net trading account profit of $1.0
million compared with a net gain of $4.9 million and a loss of $0.2 million,
respectively, for the same quarter last year.
TABLE F
OTHER OPERATING INCOME
Third Quarter
- --------------------------------------------------------------------------------
1997 1996 Change
- --------------------------------------------------------------------------------
(Dollars in thousands)
Service charges on deposit
accounts $24,378 $21,390 $2,988
Other service fees:
Credit card fees and discounts 7,449 5,795 1,654
Credit life insurance fees 2,419 2,056 363
Debit card fees 4,036 2,717 1,319
Mortgage servicing fees, net of
amortization 2,443 1,974 469
Trust fees 1,949 1,486 463
Other fees 6,957 5,007 1,950
Other income 15,201 6,279 8,922
------- ------- -------
Total $64,832 $46,704 $18,128
======= ======= =======
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OPERATING EXPENSES
Operating expenses for the third quarter of 1997 were $167.3 million compared
with $135.4 million for the same quarter in 1996, an increase of $31.9 million
or 23.5% principally reflecting higher personnel costs, business promotion and
professional fees. For the first nine months of 1997, operating expenses rose to
$461.5 million from $398.0 million for the same period in 1996.
Personnel costs totaled $79.5 million for the third quarter of 1997, increasing
$11.4 million from $68.1 million for the same period of 1996. Salaries accounted
for a significant portion of this increase rising $8.9 million or 19.1% reaching
$55.6 million for the quarter ended September 30, 1997, compared with $46.7
million for the same period in 1996. This rise mostly resulted from an increment
in the number of employees due to business expansion and acquisitions. Full time
equivalent employees were 8,696 at September 30, 1997, up 759 from 7,937 as of
the same date a year earlier. Profit sharing expense rose $0.4 million primarily
due to the improvement in BPPR profitability ratios. Moreover, pension costs and
other fringe benefits increased $2.2 million to $17.8 million for the third
quarter of 1997, reflecting the impact of the increase in salaries and higher
health insurance expenses. In addition, staff training and staff uniforms showed
increases as a result of the Corporation efforts to maintain a well-trained work
force and its emphasis on corporate image at all branches. The operations of
Banco Popular, N.A. (California), Banco Popular, N.A. (Florida), National
Bancorp, Capitol Bancorp, and ATH Costa Rica, acquired from September 30, 1996,
accounted for $3.7 million in personnel costs for the quarter ended September
30, 1997. For the nine-month period ended September 30, 1997, personnel costs
reached $225.5 million compared with $203.3 million for the nine-month period
ended September 30, 1996.
Operating expenses, excluding personnel costs, increased $20.4 million, reaching
$87.8 million for the third quarter of 1997, compared with $67.4 million for the
same period in 1996. The increase in these operating expenses was reflected in
most expense categories, mainly as a result of the Corporation's continued
growth and expansion. Business promotion and professional fees grew a combined
$6.3 million, reflecting expenditures for the development and promotion of new
products and services, consulting and technical support, the institutional
campaign launched in the continental U.S. to emphasize Banco Popular's presence
and image as a Hispanic bank and the promotional efforts related to the new
credit card program in the U.S. Other taxes increased $2.4 million due to the
growth in the Corporation's business volume and the increase in the tax rate for
personal property tax in the municipality of San Juan, Puerto Rico, where the
Corporation's headquarters are located. Furthermore, as a result of the
acquisitions made after the third quarter of 1996, the amortization of
intangibles increased by $2.4 million, when comparing the third quarter of 1997,
with the same quarter in 1996. Equipment expenses also increased $2.4 million
mostly as a result of the costs related to the expansion of the electronic
payment system and the network of automated teller machines (ATM) and POS
terminals. During the three-month period ended September 30, 1997, POS terminals
increased 1,729 bringing the current total to 15,296 terminals and the ATM
network increased to 442 machines when compared with 367 at the same date last
year. The operations acquired from September 30, 1996, accounted for $8.0
million in other operating expenses, excluding personnel costs, for the
three-month period ended on September 30, 1997. For the first nine months of
1997, these operating expenses amounted to $236.1 million, or $41.4 million over
the amount reported for the same period in 1996.
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Income tax expense for the quarter ended September 30, 1997, decreased $1.0
million to $18.5 million, from $19.5 million recorded for the same quarter of
1996, in spite of a higher income before tax realized by the Corporation. The
decrease is mostly the result of an increment in tax exempt income and
agricultural tax credits taken in Puerto Rico by BPPR. The effective tax rate
for the third quarter of 1997, decreased to 25.7% from 29.6% for the same period
in 1996. For the nine-month periods ended September 30, 1997 and 1996, income
tax expense amounted to $56.3 million and $54.8 million, respectively.
BALANCE SHEET COMMENTS
The Corporation's total assets at September 30, 1997, reached $19.9 billion, an
increase of 18.7% when compared with $16.8 billion at September 30, 1996. BPPR
accounted for most of the growth, reflecting an increase of $2.9 billion in
assets, as result of a higher volume of investment securities, the acquisition
of RCB on June, 30, 1997, and loan growth. Also, the operations acquired after
September 30, 1996 in Florida and Illinois accounted for $563 million of the
increase in total assets as of September 30, 1997. Total assets at June 30,
1997, were $19.1 billion. Average assets for the first nine months of 1997 were
$18.0 billion compared with $16.1 billion for the same period in 1996, an
increase of 11.5%. Average assets for the year ended December 31, 1996 were
$16.3 billion.
Earning assets at September 30, 1997, increased to $18.6 billion compared with
$15.7 billion at September 30, 1996, and $17.8 billion at June 30, 1997. Total
loans amounted to $11.2 billion at September 30, 1997, compared with $9.6
billion a year ago and $10.9 billion at June 30, 1997. Most loan categories
showed increases during this quarter. Commercial, including construction, and
consumer loans continued reflecting a strong growth, increasing $918 million and
$492 million, respectively, as compared with September 30, 1996. BPPR accounted
for the largest growth in both portfolios, showing increases of $625 million in
commercial loans and $346 million in consumer loans. The banks acquired after
September 30, 1996 contributed $193 million to the increase in commercial loans.
The commercial loan portfolio totaled $4.8 billion as of September 30, 1997, an
increase of 24.1% from $3.8 billion as of the same date last year. Consumer
loans increased 19.3%, from $2.6 billion at September 30, 1996, to $3.0 billion
as of September 30, 1997. Mortgage loans rose to $2.8 billion, an increase of
$136 million or 5.1% as compared with September 30, 1996. Most of the increase
was attained at Equity One contributing $120 million to the rise in the mortgage
loan portfolio. The lease financing portfolio rose $47 million or 9.1%, totaling
$567 million as of September 30, 1997, compared with $520 million at September
30, 1996.
Money market investments decreased to $475 million at September 30, 1997,
compared with $1.2 billion as of the same date in 1996, mainly due to the
reduction in size of Popular Securities as a result of lower 936 funds.
Investment securities as of September 30, 1997, totaled $6.7 billion compared
with $4.5 billion as of September 30, 1996 and $5.7 billion at June 30, 1997.
The increase was mostly experienced at BPPR, whose investment securities
increased by $1.9 billion, as a result of arbitrage opportunities undertaken and
the acquisition of RCB. The consolidated figures include $5.9 billion in
investment securities available-for-sale as of September 30, 1997, and $2.8
billion as of September 30, 1996. At September 30, 1997, trading account
securities totaled $225 million compared with $372 million as of the same date
last year.
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As a result of the acquisitions previously mentioned, intangible assets rose $93
million from $134 million as of September 30, 1996, to $227 million at the same
date in 1997. The acquisition of RCB accounted for $64 million of intangibles,
while National Bancorp, Inc. and CBC Bancorp, Ltd. had $40 million in intangible
assets at September 30, 1997.
On the liability side, total deposits reached $11.2 billion at September 30,
1997, from $10.6 billion at September 30, 1996, an increase of $625 million, in
spite of a reduction of $700 million in 936 deposits. Interest bearing deposits
rose $414 million and non-interest bearing deposits increased $211 million. The
acquisition of RCB on June 30, 1997, contributed $584 million in total deposits.
National Bancorp, Inc. and CBC Bancorp, Ltd. had $142 million and $263 million,
respectively, in total deposits as of September 30, 1997. Total deposits at June
30, 1997 were $11.4 billion.
Federal funds purchased and securities sold under agreements to repurchase, and
other short-term borrowings increased $1.6 billion, from $3.6 billion at
September 30,1996 to $5.2 billion as of September 30, 1997. BPPR accounted for
most of the growth, as a result of the reduction in 936 deposits and arbitrage
activities. Notes payable rose $574 million, particularly at Popular North
America and Popular, Inc. Borrowed funds were used primarily to finance loan
growth, business expansion and arbitrage activities. Moreover, on May 23, 1997,
the Corporation and two of its subsidiaries, filed a shelf registration with the
Securities and Exchange Commission, that allows them to issue medium-term notes,
unsecured debt securities and preferred stock in an aggregate amount of up to $1
billion. These securities are guaranteed by the Corporation. As of September 30,
1997, the Corporation had issued $130 million in medium-term notes under this
shelf registration.
During the first quarter of 1997, the Corporation issued $150 million in Capital
Securities, at 8.327%, through BanPonce Trust I, a statutory business trust
owned by Popular North America. The proceeds were upstreamed to Popular North
America as junior subordinated debt under the same terms and conditions. The
Capital Securities qualify as Tier I capital for regulatory purposes. Such Tier
I treatment provides the Corporation with a more cost-effective means of
obtaining capital for regulatory purposes.
The Corporation's stockholders' equity at September 30, 1997, amounted to $1.45
billion, compared with $1.22 billion at September 30, 1996. The increase is
mainly due to the issuance of 2,462,272 common shares for the acquisitions of
RCB on June 30, 1997, and National Bancorp on May 31, 1997 and earnings
retention. Common stock issued provided $96 million in additional capital. Also,
the Dividend Reinvestment Plan contributed $4.3 million in additional capital
since September 30, 1996. The Board of Directors approved, on May 8, 1997, a
stock repurchase program of up to 3 million shares of the outstanding common
stock of the Corporation. Purchases of stock are made when market conditions so
warrant. As of September 30, 1997, the Corporation had purchased 988,800 shares
under this program with a total cost of $39.6 million. The Corporation's
stockholders' equity at September 30, 1997 includes $19.8 million, net of
deferred taxes, in unrealized holding gains on securities available-for-sale,
compared with $6.0 million in unrealized losses on securities available-for-sale
at September 30, 1996. Stockholders' equity at June 30, 1997 amounted to $1.42
billion.
On August 14, 1997, the Board of Directors of Popular, Inc. declared a cash
dividend of $0.22 per common share payable on October 1, 1997, to shareholders
of record as of September 12, 1997. This represents a 22.2% increase over the
$0.18 per share paid in previous quarterly dividends.
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29
The market value of the Corporation's common stock at September 30, 1997,
increased 96.3% to $53.00 per share, compared with $27.00 at September 30, 1996
and 31.3% over $40.38 at June 30, 1997. The Corporation's total market
capitalization at September 30, 1997, was $3.6 billion compared with $1.8
billion at September 30, 1996, and $2.8 billion at June 30, 1997. Book value per
common share increased to $19.95 as of September 30, 1997, from $16.96 as of the
same date last year. The market value of the Corporation's preferred stock at
September 30, 1997, was $26.88 per share compared with $26.50 at September 30,
1996 and June 30, 1997.
Capital ratios continue well over regulatory requirements. The Corporation ended
the third quarter of 1997 with Tier I, total capital and leverage ratios of
12.06%, 14.47% and 6.88%, respectively, as compared with 11.58%, 14.17% and
6.52%, at September 30, 1996.
Popular International Bank, Inc. (PIB) and Popular North America, Inc's (PNA)
bank subsidiaries (Banco Popular, Illinois, Banco Popular, N.A. (California),
Banco Popular, N.A. (Florida) and Banco Popular, FSB) have certain statutory
provisions and regulatory requirements and policies, such as the maintenance of
adequate capital, that limit the amount of dividends they can pay. Other than
these limitations, no other restrictions exist on the ability of PIB and PNA to
make dividend and asset distributions to the Corporation, nor on the ability of
PNA's subsidiaries, except for Banco Popular, FSB to make distributions to
PNA. In connection with the acquisition by Banco Popular, FSB from the
Resolution Trust Company (RTC) of four New Jersey branches of the former
Carteret Federal Savings Bank, the RTC provided to Banco Popular, FSB interim
financial assistance in the form of a loan in the amount of $20 million, which
matures on January 20, 2000, but which is prepayable any time before then.
Pursuant to the terms 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 RTC loan) or make any distribution of its assets until payment
in full of such promissory note. As of September 30, 1997 the undistributed
earnings of Banco Popular, FSB totaled $45 million.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 31, 1997, Popular, Inc. reorganized the structure of its operation in
the State of Illinois by merging Capitol Bank of Westmont, Capitol Bank and
Trust and Banco Popular Illinois with and into AmericanMidwest Bank & Trust. The
resulting bank is operating under the name Banco Popular Illinois. Furthermore,
the Corporation merged the holding companies of each of the Illinois banks. The
result is a simplified corporate structure where Popular North America, Inc.
through its wholly-owned subsidiary, National Bancorp, Inc., holds all the
outstanding stock of Banco Popular Illinois.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Description Exhibit Reference
----------- ------------------- ---------
19 Quarterly Report to shareholders for the Exhibit "A"
period ended September 30, 1997
27 Financial Data Schedule (for SEC use only) Exhibit "B"
b) Two reports on Form 8-K were filed for the quarter ended September 30, 1997:
Dated: July 1, 1997 and July 7, 1997
Items reported: Item 5 - Other Events
Item 7 - Financial Statements, Pro-Forma, Financial
Information and Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
POPULAR, INC.
(Registrant)
Date: November 13, 1997 By: /S/ Jorge A. Junquera
-------------------- -----------------------------
Jorge A. Junquera
Senior Executive Vice President
Date: November 13, 1997 By: /S/ Amilcar L. Jordan
-------------------- --------------------
Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller