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EXHIBIT 19
EXHIBIT A
TO OUR STOCKHOLDERS
Popular, Inc. (the Corporation) reported an increase in net earnings of
$7.3 million or 15.9%, reaching $53.6 million for the third quarter of 1997,
compared with $46.3 million for the same period of 1996. Earnings per common
share rose to $0.76, compared with $0.67 for the quarter ended September 30,
1996. The increase in earnings reflected a higher level of net interest income
and strong gains in other operating income, tempered by a rise in the provision
for loan losses and higher operating expenses. Net income for the third quarter
of 1997, represented annualized returns on assets (ROA) and common equity (ROE)
of 1.10% and 15.46%, respectively, from 1.10% and 15.94% for the same period a
year earlier.
For the first nine months of 1997, net income was $154.2 million or
$2.22 per common share, up 12.2% from the $137.5 million or $1.99 per common
share obtained during the first nine months of 1996. For the first nine months
of this year, ROA was 1.15% and ROE was 15.93%, compared with 1.14% and 16.29%
for the same period in 1996.
Net interest income rose to $203.0 million or 17.9% for the third
quarter of 1997, from $172.2 million for the same period a year earlier. This
rise resulted from an increase of $2.5 billion in average earning assets
reflecting the Corporation's acquisitions as well as an increase in loans and
investment securities. The fully taxable equivalent net interest yield reached
4.76% for the quarter ended September 30,1997, compared with 4.66% for the same
quarter in 1996.
The provision for loan losses increased to $29.8 million for the third
quarter of 1997, from $22.4 million for the same period a year earlier. Net
charge-offs for the third quarter were $31.5 million or 1.14% of average loans,
compared with $18.8 million or 0.80% of average loans reported for the same
quarter last year. The increase in net charge-offs reflected higher losses in
commercial and consumer loans particularly unsecured personal loans. For the
first nine months of 1997, net charge-offs amounted to $72.3 million or 0.93% of
average loans, compared with $51.8 million or 0.76% for the same period a year
earlier.
Non-performing assets (NPA) at September 30, 1997, amounted to $213
million compared with $153 million a year earlier and $211 million at June 30,
1997. The increase from September 30, 1996, was mainly reflected in the
commercial and mortgage non-performing loans, mostly as a result of the higher
loan volume, the non-performing loans of the banks acquired during the period,
and an increased level of bankruptcy filings. As a percentage of loans,
non-performing assets represented 1.90% on September 30, 1997, 1.60% on
September 30, 1996 and 1.94% on June 30, 1997. When adjusted to conform to
standard industry practice, as further explained in the financial review
section, NPA were $165 million or 1.47% of total loans as of September 30, 1997,
compared with $114 million or 1.19% as of the same date last year. The allowance
for loan losses at September 30, 1997, amounted to $205 million, representing
1.83% of loans, compared with $182 million or 1.90% at the same date in 1996.
In addition to the rise in net interest income, operating earnings
benefited from higher other operating revenues which grew $14.9 million or 29%,
from $51.4 million for the third quarter of 1996 to $66.3 million for the same
period in 1997. Service charges on deposit accounts increased $3.0 million
reflecting a higher volume of deposits, primarily as a result of the
acquisitions since the third quarter of 1996. In addition, our card acquisition
business continued generating higher revenues on higher sales volume from both,
credit cards and debit cards, particularly the latter.
Operating expenses for the three-month period ended September 30, 1997,
totaled $167.3 million compared with $135.4 million for the same quarter a year
earlier. Factors such as the integration of the operations acquired since the
third quarter of 1996, higher personnel costs, expenses related to the expansion
of our delivery channels, implementation of technological advances and growth in
the Corporation's business activities resulted in higher operating expenses.
Operating expenses for the quarter ended September 30,1997, included expenses
related to the institutional campaign launched during 1997 in the U.S. to
further enhance Banco Popular's presence and image as the largest Hispanic bank
in the United States and the promotional efforts related to our new credit card
program in the U.S. featuring the popular television personality Don Francisco.
The Corporation's total assets at September 30, 1997, were $19.9
billion compared with $16.8 billion at the same date in 1996 and $19.1 billion
as of June 30, 1997. Total loans reached $11.2 billion, while total deposits
were $11.2 billion.
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Stockholders' equity increased to $1.4 billion at September 30, 1997,
compared with $1.2 billion a year earlier. As of September 30, 1997, the
Corporation had repurchased 988,800 shares of its common stock under the
repurchase program approved by the Board of Directors on May 8, 1997, with a
total cost of $39.6 million. The market value of the Corporation's common stock
at September 30, 1997, rose 96.3% to $53.00 from $27.00 at the same date a year
earlier. When compared with the market value of $40.38 at June 30, 1997, the
Corporation's common stock rose 31.3%. Based on its 67,656,166 common shares
outstanding, the Corporation had a total market capitalization of $3.6 billion
at September 30, 1997. The Corporation enjoys strong risk-weighted capital
ratios with a Tier I ratio of 12.35%, a total capital ratio of 14.75% and a
leverage ratio of 7.02%.
On August 14, 1997, the Board of Directors of the Corporation 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 cash dividends.
Please refer to the financial review section of this quarterly report
for a more detailed discussion of the Corporation's financial performance and
results of operations.
As previously announced, in September 1997, the Corporation agreed to
acquire Houston Bancorporation, the holding company of Citizens National Bank.
This bank, with total assets of $51 million and total deposits of $39 million as
of August 31, 1997, operates one branch located in Houston, Texas. This
acquisition emphasizes our objective to create a wide base in markets with a
sizable Hispanic population in order to build a nationwide network and brand
that will provide more convenience to our customers and growth opportunities for
the Corporation. The acquisition is pending the approval of the regulatory
agencies, and is expected to close during the fourth quarter of 1997.
Meanwhile, the Corporation continues expanding as Banco Popular, N.A.
(Florida) opened two new branches during this quarter, for a total of five
branches in that state. Besides those five branches in Florida, as of September
30,1997, the Corporation operates 29 bank branches in New York, 10 in Illinois,
6 in New Jersey and 4 in California, for a total of 54 branches in the
continental U.S. In Puerto Rico, Banco Popular opened two full service branches
and three in-store branches during this quarter, in an effort to continue
providing customer convenience.
During September, Banco Popular de Puerto Rico completed the
integration of Roig Commercial Bank branches and products. Eight branches were
consolidated into existing Banco Popular branches and the remaining 17 will
strenghten our retail network, particularly in the eastern end of the island,
and provide additional services and conveniece to our customers. We are
confident that this acquisition will provide opportunities for cost reductions
on the expense side and will enhance our ability to generate revenues.
/s/ Richard L. Carrion
Richard L. Carrion
Chairman, President and
Chief Executive Officer
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FINANCIAL REVIEW
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BALANCE SHEET HIGHLIGHTS At September 30, Average for the nine months
(In thousands) 1997 1996 Change 1997 1996 Change
- -------------------------------------------------------------------------------------------------------------------------------
Money market investments $ 475,412 $ 1,159,654 ($ 684,242) $ 644,595 $ 867,609 ($ 223,014)
Investments and trading securities 6,923,609 4,917,061 2,006,548 6,001,053 5,217,378 783,675
Loans 11,182,061 9,589,288 1,592,773 10,329,862 9,057,462 1,272,400
Total assets 19,896,785 16,755,578 3,141,207 17,972,201 16,116,236 1,855,965
Deposits 11,214,167 10,588,981 625,186 10,808,220 10,359,382 448,838
Borrrowings 6,902,566 4,652,190 2,250,376 5,528,794 4,309,390 1,219,404
Stockholders' equity 1,449,780 1,220,105 229,675 1,341,984 1,175,776 166,208
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING HIGHLIGHTS Third Quarter Nine Months
(In thousands, except
per share information 1997 1996 Change 1997 1996 Change
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $203,005 $ 172,236 $ 30,769 $ 574,255 $ 502,904 $ 71,351
Provision for loan losses 29,849 22,436 7,413 78,949 65,381 13,568
Fees and other income 66,309 51,399 14,910 176,791 152,706 24,085
Other expenses 185,852 154,926 30,926 517,854 452,759 65,095
Net income $ 53,613 $ 46,273 $ 7,340 $ 154,243 $ 137,470 $ 16,773
Net income applicable to common stock $ 51,526 $ 44,186 $ 7,340 $ 147,981 $ 131,208 $ 16,773
Earnings per common share 0.76 0.67 0.09 2.22 1.99 0.23
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SELECTED STATISTICAL Third Quarter Nine Months
Information 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS Return on assets 1.10% 1.10% 1.15% 1.14%
Return on common equity 15.46 15.94 15.93 16.29
Net interest speard (taxable equivalent) 3.95 3.93 4.02 4.00
Net interest yield (taxable equivalent) 4.76 4.66 4.85 4.75
Effective tax rate 25.67 29.62 26.75 28.49
Overhead ratio 49.77 48.80 49.58 48.77
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CAPITALIZATION RATIO Equity to assets 7.35% 7.16% 7.47% 7.30%
Tangible equity to assets 6.23 6.42 6.60 6.50
Equity to loans 12.89 12.81 12.99 12.98
Internal capital generation 10.31 10.75 10.85 11.06
Tier I capital to risk-adjusted assets 12.35 11.58 12.35 11.58
Total capital to risk-adjusted assets 14.75 14.17 14.75 14.17
Leverage ratio 7.02 6.52 7.02 6.52
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COMMON STOCK DATA Market Price
High $55.88 $27.75 $55.88 $27.75
Low 41.13 22.63 33.06 19.38
End 53.00 27.00 53.00 27.00
Book value at period end 19.95 16.96 19.95 16.96
Dividends declared 0.22 0.18 0.58 0.51
Dividend payout ratio 23.30% 26.89% 24.19% 24.13%
Price/earnings ratio 18.21x 10.51x 18.21x 10.51x
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SELECTED DATA Common shares outstanding 67,656,166 66,048,673
Full-time equivalent employees 8,696 7,937
Branches (banking operations) 260 222
Automated teller machines 442 367
Stockholders 5,947 5,520
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FINANCIAL REVIEW
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.
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
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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.
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TABLE B
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS
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(DOLLARS IN MILLIONS) THIRD QUARTER
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AVERAGE LEVELS AVERAGE YIELDS
1997 1996 VARIANCE 1997 1996 VARIANCE
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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
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7,281 6,382 899 6.77 6.32 0.45
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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
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11,034 9,387 1,647 10.29 10.10 0.19
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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
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8,987 8,526 461 4.22 4.19 0.03
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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
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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
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$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.
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.
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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.
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.
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TABLE C
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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.
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 $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.
7
8
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
Allowances 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
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
8
9
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 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.
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
9
10
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
=================================
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,
10
11
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.
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.
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
11
12
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.
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 12.35%, 14.75% and 7.02%, respectively, as compared with
11.58%, 14.17% and 6.52%, at September 30, 1996.
12
13
CONSOLIDATED STATEMENTS OF CONDITION
September 30,
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks .................................................. $ 530,915 $ 488,151
------------ ------------
Money market investments:
Federal funds sold and securities and mortgages
purchased under agreements to resell ................................. 467,285 1,152,352
Time deposits with other banks ........................................ 5,256 5,348
Bankers' acceptances .................................................. 2,871 1,954
------------ ------------
475,412 1,159,654
------------ ------------
Investment securities available-for-sale,
at market value ........................................................ 5,869,770 2,832,553
Investment securities held-to-maturity,
at cost ................................................................ 829,105 1,712,154
Trading account securities, at market value .............................. 224,734 372,354
Loans held-for-sale ...................................................... 238,991 176,937
Loans .................................................................... 11,287,080 9,743,305
Less-Unearned income ................................................... 344,010 330,954
Allowance for loan losses ......................................... 205,077 182,372
------------ ------------
10,737,993 9,229,979
------------ ------------
Premises and equipment ................................................... 390,905 345,992
Other real estate ........................................................ 12,014 4,540
Customers' liabilities on acceptances .................................... 3,005 2,053
Accrued income receivable ................................................ 144,769 120,220
Other assets ............................................................. 212,070 177,307
Intangible assets ........................................................ 227,102 133,684
------------ ------------
$ 19,896,785 $ 16,755,578
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ................................................. $ 2,293,394 $ 2,082,455
Interest bearing ..................................................... 8,920,773 8,506,526
------------ ------------
11,214,167 10,588,981
Federal funds purchased and securities sold
under agreements to repurchase ........................................ 3,897,110 2,787,186
Other short-term borrowings ............................................ 1,294,693 848,071
Notes payable .......................................................... 1,435,763 861,933
Senior debentures ...................................................... 30,000
Acceptances outstanding ................................................ 3,005 2,053
Other liabilities ...................................................... 327,267 292,249
------------ ------------
18,172,005 15,410,473
------------ ------------
Subordinated notes ..................................................... 125,000 125,000
------------ ------------
Preferred beneficial interests in Popular North America's junior
subordinated deferrable interest debentures guaranteed by the
Corporation ........................................................... 150,000
------------ ------------
Stockholders' equity:
Preferred stock ........................................................ 100,000 100,000
Common stock ........................................................... 411,870 396,292
Surplus ................................................................ 580,806 479,792
Retained earnings ...................................................... 376,908 250,022
Treasury stock - at cost ............................................... (39,560)
Unrealized gains (losses) on securities available-for-sale, net of
deferred taxes ........................................................ 19,756 (6,001)
------------ ------------
1,449,780 1,220,105
------------ ------------
$ 19,896,785 $ 16,755,578
============ ============
The accompanying notes are an integral part of these financial statements.
13
14
CONSOLIDATED STATEMENTS OF INCOME
Quarter ended For the nine months ended
September 30, September 30,
(Dollars in thousands, except per share information) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------
393,414 327,097 1,086,684 939,999
------------------------------------------------------
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
------------------------------------------------------
190,409 154,861 512,429 437,095
------------------------------------------------------
Net interest income ............................... 203,005 172,236 574,255 502,904
Provision for loan losses ......................... 29,849 22,436 78,949 65,381
------------------------------------------------------
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 (losws) .................... 959 (216) 2,209 (661)
Other operating income ............................ 15,201 6,279 33,820 28,069
------------------------------------------------------
239,465 201,199 672,097 590,229
------------------------------------------------------
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
------------------------------------------------------
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
------------------------------------------------------
167,341 135,453 461,512 397,996
------------------------------------------------------
Income before taxes ............................... 72,124 65,746 210,585 192,233
Income tax ........................................ 18,511 19,473 56,342 54,763
------------------------------------------------------
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 financial statements.
14
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
September 30,
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 154,243 $ 137,470
------------ ------------
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 ............................. (5,591) 15,487
------------ ------------
Total adjustments ......................................................... 349,073 (23,634)
------------ ------------
Net cash provided by operating activities ................................. 503,316 113,836
------------ ------------
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 ............................................. (140,602) (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 .................................... (2,212,484) (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 ................................... 65,702 3,106
Treasury stock acquired .................................................. (39,560)
------------ ------------
Net cash provided by financing activities ................................. 1,747,715 875,976
------------ ------------
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
------------ ------------
Cash and due from banks at end of period .................................. $ 530,915 $ 488,151
============ ============
The accompanying notes are an integral part of these financial statements.
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NOTES TO 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 National
Bancorp, Inc., ATH Costa Rica, and Popular North America, Inc. including Banco
Popular, FSB, Pioneer Bancorp, Inc., Comban Corp., 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 and 1996, and their
related statements of income and cash flows for the nine-month periods then
ended. 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", 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.
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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 indentifiable
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.
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:
Investments securities available-for-sale:
September 30,
1997 1996
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------------------
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
------------------------------------------------------------------
$5,843,156 $5,869,770 $2,839,595 $2,832,553
==================================================================
Investaments 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
==================================================================
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.
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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 Septmeber 30,
1997.
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 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.
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DIRECTORS AND OFFICERS
BOARD OF DIRECTORS VIRGIN ISLANDS OFFICE
80 Kronprindsens Gade
Richard L. Carrion, Chairman Kronprindsens Quarter
Alfonso F. Ballester, Vice Chairman Charlotte Amalie, St. Thomas
Antonio Luis Ferre, Vice Chairman U.S. Virgin Islands 00802
Juan A. Albors Hernandez* Telephone: (809) 774-2300
Salustiano Alvarez Mendez**
Jose A. Bechara Bravo* BANCO POPULAR, FSB
Juan J. Bermudez 500 Bloomfield Avenue
Esteban D. Bird* Newark, New Jersey 07107
Francisco J. Carreras Telephone: (201) 484-6525
David H. Chafey, Jr.
Luis E. Dubon, Jr. BANCO POPULAR, ILLINOIS
Hector R. Gonzalez 4000 West North Avenue
Jorge A. Junquera Diez Chicago, Illinois 60639
Manuel Morales, Jr. Telephone: (773) 772-8600
Alberto M. Paracchini
Francisco M. Rexach, Jr. BANCO POPULAR, N.A. (CALIFORNIA)
J. Adalberto Roig, Jr. 6001 E. Washington Blvd.
Felix J. Serralles Nevares City of Commerce, California 90040
Julio E. Vizcarrondo, Jr. Telephone: (213) 724-8800
Samuel T. Cespedes, Secretary BANCO POPULAR, N.A. (FLORIDA)
5551 Vanguard Street
* Director of Banco Popular de Puerto Rico only Suite 100
** Director of Popular Inc. only Orlando, Florida, 32819
Telephone: (407) 370-8000
EXECUTIVE OFFICERS
CBC BANCORP, LTD.
Richard L. Carrion, Chairman of the Board, 4801 West Fullerton Ave.
President and Chief Executive Officer Chicago, Illinois 60639
David H. Chafey, Jr., Senior Executive Vice Telephone: (773) 622-7621
President
Jorge A. Junquera Diez., Senior Executive EQUITY ONE, INC.
Vice President 523 Fellowship Road, Suite 220
Maria Isabel Burckhart, Executive Vice Mt. Laurel, New Jersey 08054
President Telephone: (609) 273-1119
Roberto R. Herencia, Executive Vice President
Larry Kesler, Executive Vice President
Humberto Martin, Executive Vice President METROPOLITANA DE PRESTAMOS, INC.
Emilio E. Pinero, Executive Vice President State Road #2 Km. 6.8
Carlos Rom, Jr., Executive Vice President Villa Caparra
Carlos J. Vazquez, Executive Vice President Guaynabo, Puerto Rico 00966
Telephone: (787) 792-9292
CENTRAL OFFICE
NATIONAL BANCORP, INC.
Banco Popular Center, Hato Rey 1600 West Lake Street
209 Munoz Rivera Avenue One Winston Plaza
San Juan, Puerto Rico 00918 Melrose Park, Illinois 60160
Telephone: (787) 765-9800 Telephone: (708) 681-8600
POPULAR FINANCE, INC.
SUBSIDIARIES 10 Salud Street
ATH COSTA RICA El Senorial Condominium, Suite 613
Ponce, Puerto Rico 00731
Cond. en Oficinas Ofiplaza del Este Telephone: (787) 844-2860
Edit. D- Piso 1, San Pedro,
150 metros Oeste de la POPULAR HOME MORTGAGE, INC.
Rotonda de la Bandera 268 Ponce de Leon Avenue
San Jose, Costa Rica San Juan, Puerto Rico 00918
Telephone: (011) 506-280-9796 Telephone: (787) 753-0245
BANCO POPULAR DE PUERTO RICO POPULAR LEASING AND RENTAL, INC.
Offices M-1046 Federico Costa St.
Tres Monjitas Industrial Development
PUERTO RICO OFFICE Sam Juan, Puerto Rico 00903
Banco Popular Center, Hato Rey Telephone: (787) 751-4848
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918 POPULAR SECURITIES, INC.
Telephone: (787) 765-9800 1020 Popular Center
Hato Rey, Puerto Rico 00918
NEW YORK OFFICE Telephone: (787) 766-4200
7 West 51st St.
New York, N.Y. 10019
Telephone: (212) 315-2800
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