1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-13818
POPULAR, INC.
Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0416582
Principal Executive Offices:
209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Telephone Number: (809) 765-9800
- --------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($6.00 par value)
8.35% Non-Cumulative Monthly Income Preferred Stock,
1994 Series A (Liquidation Preference $25.00 Per Share)
Series A Participating Cumulative Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
---------------------------------------------
As of February 27, 1998 the Corporation had 67,717,548 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates of the Corporation was $3,540,273,000 based upon the reported
closing price of $52.28 on the NASDAQ National Market System on that date.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Corporation's Annual Report to Shareholders for
the fiscal year ended December 31, 1997 are incorporated herein by reference in
response to Item 1 of Part I.
(2) Portions of the Corporation's Proxy Statement relating to the 1998
Annual Meeting of Stockholders of the Corporation are incorporated herein by
reference to Items 10 through 13 of Part III.
2
TABLE OF CONTENTS
Page
----
PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 11
Item 3 Legal Proceedings........................................... 11
Item 4 Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters...................................... 12
Item 6 Selected Financial Data .................................... 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 13
Item 7A Quantitative and Qualitative Disclosures About Market Risk.. 14
Item 8 Financial Statements and Supplementary Data ............... 14
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................... 14
PART III
Item 10 Directors and Executive Officers of the Registrant ......... 14
Item 11 Executive Compensation ..................................... 14
Item 12 Security Ownership of Certain Beneficial Owners
and Management .......................................... 14
Item 13 Certain Relationships and Related Transactions ............. 14
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K .................................... 15
2
3
PART I
POPULAR, INC.
ITEM 1 BUSINESS
Popular, Inc. (formerly BanPonce Corporation) (the "Corporation") is a
diversified, publicly owned bank holding company, registered under the Bank
Holding Company Act of 1956, as amended (the "BHC Act") and, accordingly,
subject to the supervision and regulation of the Board of Governors of the
Federal Reserve System ("the Federal Reserve Board"). The Corporation was
incorporated in 1984 under the laws of the Commonwealth of Puerto Rico and is
the largest financial institution in Puerto Rico, with consolidated assets of
$19.3 billion, total deposits of $11.7 billion and stockholders' equity of $1.5
billion at December 31, 1997. Based on total assets at June 30, 1997, the
Corporation was the 44th largest bank holding company in the United States. At
the Corporation's annual meeting of shareholders held on April 25, 1997, the
Corporation's shareholders approved a proposal made by the Board of Directors to
change the name of BanPonce Corporation to Popular, Inc.
The Corporation's principal subsidiary, Banco Popular de Puerto Rico
("Banco Popular" or the "Bank"), was incorporated over 100 years ago in 1893 and
is Puerto Rico's largest bank with total assets of $16.0 billion, deposits of
$10.6 billion and stockholders' equity of $1.3 billion at December 31, 1997. The
Bank, on a consolidated basis, accounted for 83% of the total consolidated
assets of the Corporation at December 31, 1997. A consumer-oriented bank, Banco
Popular has the largest retail franchise in Puerto Rico, operating 201 branches
and 391 automated teller machines. The Bank also has the largest trust operation
in Puerto Rico and is the largest servicer of mortgage loans for investors. In
addition, it operates the largest Hispanic bank branch network in the mainland
United States with 29 branches in New York and an agency in Chicago. As of
December 31, 1997, these branches had a total of approximately $1.5 billion in
deposits. The Bank also operates seven branches in the U.S. Virgin Islands and
one branch in the British Virgin Islands. Banco Popular's deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC"). On June 30, 1997, the
Corporation completed the acquisition and merger of Roig Commercial Bank ("RCB")
with and into Banco Popular. RCB operated 25 branches, mainly located in the
eastern part of Puerto Rico, with assets of $791 million and deposits of $584
million as of June 30, 1997. Banco Popular has three subsidiaries, Popular
Leasing & Rental, Inc., Puerto Rico's largest vehicle leasing and daily rental
company, Popular Finance, Inc., (formerly Popular Consumer Services, Inc.), a
small-loan and second mortgage company with 39 offices in Puerto Rico operating
under the name of Popular Finance, and Popular Mortgage, Inc., a mortgage loan
company with four offices in Puerto Rico operating under the name of Popular
Home Mortgage (formerly Puerto Rico Home Mortgage).
The Corporation has two other principal subsidiaries; Popular Securities
Incorporated (formerly BP Capital Markets, Inc.), which engages in the business
of securities broker-dealer in Puerto Rico, with brokerage, financial advisory,
investment and security brokerage operations for institutional and retail
customers and Popular International Bank, Inc. ("PIB"), which in turn owns all
of the outstanding stock of Popular North America, Inc. (formerly BanPonce
Financial Corp) ("PNA"); and ATH Costa Rica, which provides ATM switching and
driving services in San Jose, Costa Rica.
PIB is a wholly-owned subsidiary of the Corporation organized in 1992 under
the laws of the Commonwealth of Puerto Rico and operating as an "international
banking entity" under the International Banking Center Regulatory Act of Puerto
Rico (the "IBC Act"). PIB is principally engaged in providing managerial
services to its subsidiaries.
PNA, a wholly-owned subsidiary of PIB and an indirect wholly-owned
subsidiary of the Corporation, was organized in 1991 under the laws of the State
of Delaware. PNA has five subsidiaries, all of which are wholly-owned: Banco
Popular North America (formerly National Bancorp, Inc.), (BPNA), which is the
holding company of Banco Popular, Illinois; Banco Popular, N.A. Florida ("Banco
Popular (Florida)"), Banco Popular, N.A. (Texas) ("Banco Popular (Texas)"),
Banco Popular, N.A. (California) ("Banco Popular (California)") and Banco
Popular, FSB.
As a result of the ownership of Banco Popular, Illinois, Banco Popular
(California), Banco Popular (Florida) and Banco Popular (Texas), PIB, PNA and
BPNA are registered bank holding companies under the BHC Act.
On May 31, 1997, PNA acquired CBC Bancorp, Ltd. ("CBC") and National
Bancorp, Inc. ("NBI"). CBC, an Illinois corporation, was the parent company of
Capitol Bank and Trust and Capitol Bank of Westmont, with assets of $325.1
million and deposits of $266.2 million at May 31, 1997, operating three branches
in Chicago and Westmont, Illinois through its banking subsidiaries. NBI, a
Delaware corporation, was the parent company of AmericanMidwest Bank and Trust
with assets of $188.8 million and deposits of $141.4 million at May 31, 1997,
operating two branches in Chicago.
3
4
On October 31, 1997, PNA reorganized the structure of its banking operation
in the State of Illinois by merging Capitol Bank and Trust, Capitol Bank of
Westmont and Banco Popular, Illinois (formerly Pioneer Bank and Trust Company)
with and into AmericanMidwest Bank and Trust, whose legal name was changed to
Banco Popular, Illinois. Furthermore, the Corporation merged the holding
companies of those banks into NBI, whose legal name was changed to BPNA,
resulting in a simplified corporate structure where PNA, through its
wholly-owned subsidiary of BPNA, holds all the outstanding common stock of Banco
Popular, Illinois. The deposits of Banco Popular, Illinois are insured by the
Federal Deposit Insurance Corporation ("FDIC"). As of December 31, 1997, the
assets of Banco Popular, Illinois were $965.1 million, its deposits were $779.6
million, and its branch network consisted of 13 branches. In addition, Banco
Popular, Illinois owns all of the outstanding stock of Popular Leasing, USA, a
non-banking subsidiary that offers small ticket equipment leasing in seven
states, with total assets of $14 million as of December 31, 1997.
On April 30, 1997, PNA acquired Seminole National Bank, a bank organized
under the laws of the State of Florida with three branches in that State. In May
1997, Seminole National Bank changed its legal name to Banco Popular, N.A.
Florida. As of December 31, 1997, the assets of Banco Popular (Florida) were
$67.7 million and its deposits were $55.8 million operating six branches in
Florida. The deposits of Banco Popular (Florida) are insured by the FDIC. Also,
on December 1, 1997, PNA acquired all of the common stock of Houston
BanCorporation, Inc., a corporation organized under the laws of the State of
Texas. Houston BanCorporation, Inc. was the bank holding company of Citizens
National Bank, which operated one location in Houston, Texas. In December 1997,
Houston BanCorporation, Inc. was merged with and into PNA, and the legal name of
Citizens National Bank was changed to Banco Popular, N.A. (Texas). As of
December 31, 1997, the assets of Banco Popular (Texas) were $66.5 million and
its deposits were $44.8 million with one branch operating in Houston, Texas. The
deposits of Banco Popular (Texas) are also insured by the FDIC.
Banco Popular (California), is a national bank operating six branches in
California with total assets of $141.7 million and deposits of $104.6 million as
of December 31, 1997. In December 1997, CombanCorp, the holding company of Banco
Popular (California), was merged with and into PNA. The deposits of Banco
Popular (California) are also insured by the FDIC.
Banco Popular, FSB, is a federal savings bank which acquired from the
Resolution Trust Corporation certain assets and all of the deposits of four New
Jersey branches of the former Carteret Federal Savings Bank, a federal savings
bank under Resolution Trust Corporation ("RTC") conservatorship. The deposits of
Banco Popular, FSB are insured by the FDIC and it is subject to the supervision
of the Office of Thrift Supervision. See "Certain Regulatory Matters".
Banco Popular, FSB owns Equity One, Inc., a Delaware corporation ("Equity
One"). Equity One is a diversified consumer finance company engaged in the
business of making personal and mortgage loans and providing dealer financing
through 117 offices in 30 states with total assets of $1.2 billion as of
December 31, 1997. Equity One had initially been acquired by PNA on September
30, 1991, prior to which time PNA had no significant business operations.
The Corporation's business is described on pages 1 through 26 of the
Business Review Section of the Annual Report to Shareholders for the year ended
December 31, 1997, which is incorporated herein by reference.
REGULATION AND SUPERVISION
GENERAL
Each of the Corporation, PIB, PNA and BPNA are bank holding companies
subject to the supervision and regulation by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") under the BHC Act. As a
bank holding company, the Corporation's, PIB's, PNA's and BPNA's activities and
those of their banking and non-banking subsidiaries are limited to the business
of banking and activities closely related or incidental to banking, and none of
the Corporation, PIB, PNA or BPNA may directly or indirectly acquire the
ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company, in the United States including a
bank, without the prior approval of the Federal Reserve Board. In addition, bank
holding companies are generally prohibited under the BHC Act from engaging in
non-banking activities, subject to certain exceptions.
Banco Popular is considered a foreign bank for purposes of the
International Banking Act of 1978 (the "IBA"). Under the IBA Banco Popular is
not permitted to operate a branch or agency, that is located outside of its
"home state", except to the extent that a national bank with the same home state
is permitted to do so as described under "Interstate Banking and Legislation"
below. Puerto
4
5
Rico is not considered a state for purposes of these geographic limitations.
Banco Popular has designated the state of New York as its home state.
In addition, some states have laws prohibiting or restricting foreign banks
from acquiring banks located in such states and treat Puerto Rico's banks
and bank holding companies as foreign banks for such purposes.
Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco
Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to
supervision and examination by applicable federal and state banking agencies
including, in the case of Banco Popular, the Federal Reserve Board and the
Office of the Commissioner of Financial Institutions of Puerto Rico, in the case
of Banco Popular, Illinois, the FDIC and the Illinois Commissioner of Banks and
Trust Companies, in the case of Banco Popular (California), Banco Popular
(Florida) and Banco Popular (Texas) the Office of the Comptroller of the
Currency (the "OCC") and in the case of Banco Popular, FSB, the Office of Thrift
Supervision (the "OTS") and the FDIC. Banco Popular, Banco Popular, Illinois,
Banco Popular (California), Banco Popular (Florida), Banco Popular (Texas) and
Banco Popular, FSB are subject to requirements and restrictions under federal
and state law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon, and limitations on the types of other
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of Banco
Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular
(Florida), Banco Popular (Texas) and Banco Popular, FSB. In addition to the
impact of regulations, commercial banks are affected significantly by the
actions of the Federal Reserve Board as it attempts to control the money supply
and credit availability in order to influence the economy.
FDICIA
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") the federal banking regulators must take prompt corrective action in
respect of depository institutions that do not meet minimum capital
requirements. FDICIA and regulations thereunder established five capital tiers:
"well capitalized", "adequately capitalized," "undercapitalized", "significantly
undercapitalized", and "critically undercapitalized". A depository institution
is deemed well capitalized if it maintains a leverage ratio of at least 5%, a
risk-based Tier 1 capital ratio of at least 6% and a risk-based total capital
ratio of at least 10% and is not subject to any written agreement or directive
to meet a specific capital level. A depository institution is deemed adequately
capitalized if it is not well capitalized but maintains a leverage ratio of at
least 4% (or at least 3% if given the highest regulatory rating and not
experiencing or anticipating significant growth), a risk-based Tier 1 capital
ratio of at least 4% and a risk-based total capital ratio of at least 8%. A
depository institution is deemed undercapitalized if it fails to meet the
standards for adequately capitalized institutions (unless it is deemed
significantly or critically undercapitalized). An institution is deemed
significantly undercapitalized if it has a leverage ratio of less than 3%, a
risk-based Tier 1 capital ratio of less than 3% or a risk-based total capital
ratio of less than 6%. An institution is deemed critically undercapitalized if
it has tangible equity equal to 2% or less of total assets. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives a less than
satisfactory examination rating in any one of four categories.
At December 31, 1997, Banco Popular, Banco Popular, Illinois, Banco Popular
(California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular,
FSB were each well capitalized. An institution's capital category, as determined
by applying the prompt corrective action provisions of law, may not constitute
an accurate representation of the overall financial condition or prospects of
the Corporation or its banking subsidiaries, and should be considered in
conjunction with other available information regarding the Corporation's
financial condition and results of operations.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
5
6
The capital-based prompt corrective action provisions of FDICIA and their
implementing regulations apply to FDIC-insured depository institutions such as
the banking and savings association subsidiaries of the Corporation, PIB, PNA
and BPNA, but they are not directly applicable to holding companies, such as the
Corporation, PIB, PNA and BPNA which control such institutions. However, federal
banking agencies have indicated that, in regulating holding companies, they may
take appropriate action at the holding company level based on their assessment
of the effectiveness of supervisory actions imposed upon subsidiary insured
depository institutions pursuant to such provisions and regulations.
HOLDING COMPANY STRUCTURE
Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco
Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to
restrictions under federal law that limit the transfer of funds between them and
the Corporation, PIB, PNA, BPNA and the Corporation's other non-banking
subsidiaries, whether in the form of loans, other extensions of credit,
investments or asset purchases. Such transfers by Banco Popular, Banco Popular,
Illinois, Banco Popular (California), Banco Popular (Florida), Banco Popular
(Texas) or Banco Popular, FSB, respectively, to the Corporation, PIB, PNA or
BPNA as the case may be, or to any one non-banking subsidiary, are limited in
amount to 10% of the transferring institution's capital stock and surplus and,
with respect to the Corporation and all of its non-banking subsidiaries, to an
aggregate of 20% of the transferring institution's capital stock and surplus.
Furthermore, such loans and extensions of credit are required to be secured in
specified amounts.
Under the Federal Reserve Board policy, a bank holding company such as the
Corporation, PIB, PNA or BPNA is expected to act as a source of financial
strength to each of its subsidiary banks and to commit resources to support each
subsidiary bank. This support may be required at times when, absent such policy,
the bank holding company might not otherwise provide such support. In addition,
any capital loans by a bank holding company to any of its subsidiary depository
institutions are subordinated in right of payment to deposits and to certain
other indebtedness of such subsidiary depository institution. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary
depository institution will be assumed by the bankruptcy trustee and entitled to
a priority of payment. Banco Popular, Banco Popular, Illinois, Banco Popular
(California), Banco Popular (Florida), Banco Popular (Texas) and Banco Popular,
FSB are currently the only depository institutions of the Corporation, PIB, PNA
and BPNA.
Because the Corporation, PIB, PNA and BPNA are holding companies, their
right to participate in the assets of any subsidiary upon the latter's
liquidation or reorganization will be subject to the prior claims of the
subsidiary's creditors (including depositors in the case of subsidiary
depository institutions) except to the extent that the Corporation, PIB, PNA or
BPNA as the case may be, may itself be a creditor with recognized claims against
the subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution (which term includes both banks and savings associations), the
deposits of which are insured by the FDIC, can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default". "Default"
is defined generally as the appointment of a conservator or a receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. Banco Popular, Banco Popular, Illinois, Banco Popular (California),
Banco Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are all
currently FDIC-insured depository institutions of the Corporation. In some
circumstances (depending upon the amount of the loss or anticipated loss
suffered by the FDIC), cross-guarantee liability may result in the ultimate
failure or insolvency of one or more insured depository institutions in a
holding company structure. Any obligation or liability owed by a subsidiary
depository institution to its parent company is subordinated to the subsidiary
bank's cross-guarantee liability with respect to commonly controlled insured
depository institutions.
DIVIDEND RESTRICTIONS
The principal regular source of cash flow for the Corporation is dividends
from Banco Popular. Various statutory provisions limit the amount of dividends
Banco Popular can pay to the Corporation without regulatory approval. As a
member bank subject to the regulation of the Federal Reserve Board, Banco
Popular must obtain the approval of the Federal Reserve Board for any dividend
if the total of all dividends declared by the member bank in any calendar year
would exceed the total of its net profits, as defined by the
6
7
Federal Reserve Board, for that year, combined with its retained net profits for
the preceding two years. In addition, a member bank may not pay a dividend in an
amount greater than its undivided profits then on hand after deducting its
losses and bad debts. For this purpose, bad debts are generally defined to
include the principal amount of loans that are in arrears with respect to
interest by six months or more unless such loans are fully secured and in the
process of collection. Moreover, for purposes of this limitation, a member bank
is not permitted to add the balance in its allowance for loan losses account to
its undivided profits then on hand. A member bank may, however, net the sum of
its bad debts as so defined against the balance in its allowance for loan losses
account and deduct from undivided profits only bad debts as so defined in excess
of that account. At December 31, 1997, Banco Popular could have declared a
dividend of approximately $257.7 million without the approval of the Federal
Reserve Board. Illinois law contains similar limitations on the amount of
dividends that Banco Popular, Illinois can pay and the National Bank Act
contains similar limitations, on the amount of dividends Banco Popular
(California), Banco Popular (Florida) and Banco Popular (Texas) can pay. In
addition, OTS regulations limit the amount of capital distributions (whether by
dividend or otherwise) that any savings association may make without prior OTS
approval, based upon the savings association's regulatory capital levels. These
limitations are applicable to Banco Popular, FSB. Also, in connection with the
acquisition by Banco Popular, FSB, from the RTC of four New Jersey branches of
the former Carteret Federal Savings Bank, the RTC provided Banco Popular, FSB
and the Corporation interim financial assistance. The loan is secured with the
issued and outstanding shares of common stock of Banco Popular, FSB. Pursuant to
the terms of such financing, evidenced by a promissory note (which matures on
January 20, 2000 but is prepayable any time before then), Banco Popular, FSB may
not, among other things, declare or pay any dividends on its outstanding capital
stock (unless such dividends are used exclusively for payment of principal of or
interest on such promissory note) or make any distributions of its assets until
payment in full of such promissory note.
The payment of dividends by Banco Popular, Banco Popular, Illinois, Banco
Popular (California), Banco Popular (Florida), Banco Popular (Texas) or Banco
Popular, FSB may also be affected by other regulatory requirements and policies,
such as the maintenance of adequate capital. If, in the opinion of the
applicable regulatory authority, a depository institution under its jurisdiction
is engaged in, or is about to engage in, an unsafe or unsound practice (that,
depending on the financial condition of the depository institution, could
include the payment of dividends), such authority may require, after notice and
hearing, that such depository institution cease and desist from such practice.
The Federal Reserve Board has issued a policy statement that provides that
insured banks and bank holding companies should generally pay dividends only out
of current operating earnings. In addition, all insured depository institutions
are subject to the capital-based limitations required by the FDICIA. See
"FDICIA".
See "Puerto Rico Regulation" for a description of certain restrictions on
Banco Popular's ability to pay dividends under Puerto Rico law.
FDIC INSURANCE ASSESSMENTS
Banco Popular, Banco Popular, Illinois, Banco Popular (California), Banco
Popular (Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to
FDIC deposit insurance assessments.
Pursuant to FDICIA, the FDIC has adopted a risk-based assessment system,
under which the assessment rate for an insured depository institution varies
according to the level of risk incurred in its activities. An institution's risk
category is based partly upon whether the institution is well capitalized,
adequately capitalized or less than adequately capitalized. Each insured
depository institution is also assigned to one of the following "supervisory
subgroups": "A", "B" or "C". Group "A" institutions are financially sound
institutions with only a few minor weaknesses; Group "B" institutions are
institutions that demonstrate weaknesses that, if not corrected, could result in
significant deterioration; and Group "C" institutions are institutions for which
there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct the
areas of weakness.
The FDIC reduced the insurance premiums it charges on bank deposits insured
by the Bank Insurance Fund ("BIF") to the statutory minimum of $2,000.00 for
"well capitalized" banks, effective January 1, 1996. On September 30, 1996, the
Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law.
DIFA repealed the statutory minimum premium, and currently premiums related to
deposits assessed by both the BIF and the Savings Association Insurance Fund
("SAIF") are to be assessed at a rate of between 0 cents and 27 cents per
$100.00 of deposits. DIFA also provided for a special one-time assessment
imposed on deposits insured by the SAIF to recapitalize the SAIF to bring the
SAIF up to statutory required levels.
7
8
DIFA also separated, effective January 1, 1997, the Financing Corporation
("FICO") assessment to service the interest on its bond obligations from the BIF
and SAIF assessments. The amount assessed on individual institutions by the FICO
will be in addition to the amount, if any, paid for deposit insurance according
to the FDIC's risk-related assessment rate schedules. FICO assessment rates for
the first semiannual period of 1997 were set at 1.30 basis points annually for
BIF-assessable deposits and 6.48 basis points annually for SAIF-assessable
deposits. (These rates may be adjusted quarterly to reflect changes in
assessment bases for the BIF and the SAIF. By law, the FICO rate on
BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits
until the insurance funds are merged or until January 1, 2000, whichever occurs
first). As of December 31, 1997, the Corporation had a BIF deposit assessment
base of approximately $11.0 billion and a SAIF deposit assessment base of
approximately $226 million.
BROKERED DEPOSITS
FDIC regulations adopted under FDICIA govern the receipt of brokered
deposits. Under these regulations, a bank cannot accept, roll over or renew
brokered deposits (which term is defined also to include any deposit with an
interest rate more than 75 basis points above prevailing rates) unless (i) it is
well capitalized or (ii) it is adequately capitalized and receives a waiver from
the FDIC. A bank that is adequately capitalized may not pay an interest rate on
any deposits in excess of 75 basis points over certain prevailing market rates
specified by regulation. There are no such restrictions on a bank that is well
capitalized. The Corporation does not believe the brokered deposits regulation
has had or will have a material effect on the funding or liquidity of Banco
Popular, Banco Popular, Illinois, Banco Popular (California), Banco Popular
(Florida), Banco Popular (Texas) or Banco Popular, FSB.
CAPITAL ADEQUACY
Information about the capital composition of the Corporation as of December
31, 1997 and for the four previous years is presented in Table I "Capital
Adequacy Data", on page F-17 in the "Management Discussion and Analysis of
Financial Condition and Results of Operations" (the "MD&A") and is incorporated
herein by reference.
Under the Federal Reserve Board's risk-based capital guidelines for bank
holding companies and member banks, the minimum guidelines for the ratio of
qualifying total capital ("Total capital") to risk-weighted assets (including
certain off-balance sheet items, such as standby letters of credit) is 8%. At
least half of the Total capital is to be comprised of common equity, retained
earnings, minority interest in unconsolidated subsidiaries, non-cumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, less goodwill, and certain other intangible assets discussed below ("Tier
1 Capital"). The remainder may consist of a limited amount of subordinated debt,
other preferred stock, certain other instruments and a limited amount of loan
and lease loss reserves ("Tier 2 Capital").
The Federal Reserve Board has adopted regulations that require most
intangibles, including core deposit intangibles, to be deducted from Tier 1
Capital. The regulations, however, permit the inclusion of a limited amount of
intangibles related to purchased mortgage servicing rights, purchased credit
card relationships and include a "grandfather" provision permitting the
continued inclusion of certain existing intangibles.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies and member banks. These guidelines
provide for a minimum ratio of Tier 1 Capital to total assets, less goodwill and
certain other intangible assets discussed below (the "leverage ratio") of 3% for
bank holding companies and member banks that meet certain specified criteria,
including that they have the highest regulatory rating. All other bank holding
companies and member banks will be required to maintain a leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. The guidelines
also provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible
assets. Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier 1 leverage ratio" and other indicia of
capital strength in evaluating proposals for expansion or new activities. The
tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1
Capital less all intangibles, to total assets less all intangibles.
Banco Popular is subject to the risk-based and leverage capital
requirements adopted by the Federal Reserve Board. See Consolidated Financial
Statements, Note 19 "Regulatory Capital Requirements" on page F-60 of the MD&A,
for the capital ratios of the Corporation and of Banco Popular.
8
9
Banco Popular, Illinois, Banco Popular (California), Banco Popular
(Florida), Banco Popular (Texas) and Banco Popular, FSB are subject to similar
capital requirements adopted by the FDIC, the OCC and the OTS, respectively.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "FDICIA".
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve Board approval, to acquire
banks located in states other than the holding company's home state, generally
without regard to whether the transaction is prohibited under state law. In
addition, commencing June 1, 1997, national and state banks with different home
states were permitted to merge across state lines, with approval of the
appropriate federal banking agency, unless the home state of a participating
bank passed legislation prior to May 31, 1997 expressly prohibiting interstate
mergers. States may permit de novo interstate branching. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the state
where any bank involved in the interstate merger transaction could have
established or acquired branches under applicable federal or state law. A bank
that has established a branch in a state through de novo branching may establish
and acquire additional branches in such state in the same manner and to the same
extent as a bank having a branch in such state as a result of an interstate
merger. If a state opted out of interstate branching within the specified time
period, no bank in any other state may establish a branch in the state which has
opted out, whether through an acquisition or de novo. A foreign bank, like Banco
Popular, may branch interstate by merger or de novo to the same extent as
domestic banks in the foreign bank's home state, which, in the case of Banco
Popular, is New York.
Various other legislation, including proposals to overhaul the bank
regulatory system, expand bank and bank holding company powers and limit the
investments that a depository institution may make with insured funds, is from
time to time introduced in Congress. The Corporation, PIB, PNA and BPNA cannot
determine the ultimate effect that such potential legislation, if enacted, or
implementing regulations, would have upon their financial condition or results
of operations.
Puerto Rico Regulation
General
As a commercial bank organized under the laws of Puerto Rico, Banco Popular
is subject to the supervision, examination and regulation by the Office of the
Commissioner of Financial Institutions of Puerto Rico (the "Office of the
Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the
"Banking Law").
Section 27 of the Banking Law requires that at least ten percent (10%) of
the yearly net income of Banco Popular be credited annually to a reserve fund.
This apportionment shall be done every year until the reserve fund shall be
equal to the total of paid-in capital on common and preferred stock. At the end
of its most recent fiscal year, Banco Popular had a fund established in
compliance with these requirements.
Section 27 of the Banking Law also provides that when the expenditures of a
bank are greater than the receipts, the excess of the former over the latter
shall be charged against the undistributed profits of the bank, and the balance,
if any, shall be charged against the reserve fund, as a reduction thereof. If
there is no reserve fund sufficient to cover such balance in whole or in part,
the outstanding amount shall be charged against the capital account and no
dividend shall be declared until said capital has been restored to its original
amount and the reserve fund to 20% of the original capital.
Section 16 of the Banking Law requires every bank to maintain a legal
reserve that, except as otherwise provided by the Office of the Commissioner,
shall not be less than 20% of its demand liabilities, excluding government
deposits (federal, state and municipal) which are secured by actual collateral.
Furthermore, if a bank is authorized to establish one or more bank branches in a
State of the United States or in a foreign country, where such branches are
subject to the reserve requirements of that state or country, the Office of the
Commissioner may exempt said branch or branches of the reserve requirements of
Section 16. However, since Banco Popular is a member of the Federal Reserve
System, it has been exempted from such requirements, with respect to deposits
payable in Puerto Rico,
9
10
pursuant to an order of the Board of Governors of the Federal Reserve System
dated November 24, 1982. The reserve requirements of Section 16 apply to those
deposits.
Section 17 of the Banking Law permits Banco Popular to make loans to any
one person, firm, partnership or corporation, up to an aggregate amount of
fifteen percent (15%) of the paid-in capital and reserve fund of the Bank. As of
December 31, 1997, the legal lending limit for the Bank under this provision was
approximately $106 million. If such loans are secured by collateral worth at
least twenty-five percent (25%) more than the amount of the loan, the aggregate
maximum amount may reach one third of the paid-in capital of the Bank, plus its
reserve fund. There are no restrictions under Section 17 on the amount of loans
that are wholly secured by bonds, securities and other evidence of indebtedness
of the Government of the United States or Puerto Rico, or by current debt bonds,
not in default, of municipalities or instrumentalities of Puerto Rico.
Section 14 of the Banking Law authorizes Banco Popular to conduct certain
financial and related activities directly or through subsidiaries, including
finance leasing of personal property, making and servicing mortgage loans and
operating a small loan company. Banco Popular engages in these activities
through its wholly-owned subsidiaries, Popular Leasing & Rental, Inc., Popular
Mortgage, Inc. and Popular Finance Inc, respectively, all of which are organized
and operate in Puerto Rico.
The Finance Board, which is a part of the Office of the Commissioner, but
also includes as its members the Secretary of the Treasury, the Secretary of
Commerce, the Secretary of Consumer Affairs, the President of the Planning
Board, and the President of the Government Development Bank for Puerto Rico, has
the authority to regulate the maximum interest rates and finance charges that
may be charged on loans to individuals and unincorporated businesses in Puerto
Rico. The current regulations of the Finance Board provide that the applicable
interest rate on loans to individuals and unincorporated businesses (including
real estate development loans but excluding certain other personal and
commercial loans secured by mortgages on real estate properties) is to be
determined by free competition. The Finance Board also has authority to regulate
the maximum finance charges on retail installment sales contracts, which are
currently set at 21%, and for credit card purchases, which are currently set at
26%. There is no maximum rate set for installment sales contracts involving
motor vehicles, commercial, agricultural and industrial equipment, commercial
electric appliances and insurance premiums.
On March 4, 1998, legislation was approved in the U.S. House of
Representatives (the "Political Status Act"), proposing a mechanism to settle
permanently the political relationship between Puerto Rico and the United
States, either through full self-government (e.g. statehood or independence,
including as an alternative, free association via a bilateral treaty) or
continued Commonwealth status. Under the proposed legislation, failure to settle
on full self-government after completion of the referenda process provided
therein would result in retention of the current Commonwealth status. It is not
possible at this time to predict when the Political Status Act will be voted on
by the Senate of the U.S. and whether is will be subsequently enacted into law.
A change in the political status of Puerto Rico could result in
modifications to or elimination of the Puerto Rico laws providing favorable tax
treatment for certain investment securities such as U.S. Treasury Notes, GNMAs,
etc. It is not possible to predict to what extent any adverse effects of such a
change in political status would be offset by possible beneficial economic
changes resulting from a change in political status, nor the transition period
which would be provided after completion of the referenda process if the
Political Status Act becomes law.
IBC Act
Under the IBC Act, without the prior approval of the Office of the
Commissioner, PIB may not amend its articles of incorporation or issue
additional shares of capital stock or other securities convertible into
additional shares of capital stock unless such shares are issued directly to the
shareholders of PIB previously identified in the application to organize the
international banking entity, in which case notification to the Office of the
Commissioner must be given within ten business days following the date of the
issue. Pursuant to the IBC Act, without the prior approval of the Office of the
Commissioner, PIB may not initiate the sale, encumbrance, assignment, merger or
other transfer of shares if by such transaction a person or persons acting in
concert could acquire direct or indirect control of 10% or more of any class of
the Company's stock. Such authorization must be requested at least 30 days prior
to the transaction.
PIB must submit to the Office of the Commissioner a report of its condition
and results of operation on a quarterly basis and its annual audited financial
statement at the close of its fiscal year. Under the IBC Act, PIB may not deal
with "domestic persons" as such term is defined in the IBC Act. Also, it may
only engage in those activities authorized in the IBC Act, the regulations
adopted thereunder and its license.
10
11
The IBC Act empowers the Office of the Commissioner to revoke or suspend,
after a hearing, the license of an international banking entity if, among other
things, it fails to comply with the IBC Act, regulations issued by the Office of
the Commissioner or the terms of its license or if the Office of the
Commissioner finds that the business of the international banking entity is
conducted in a manner not consistent with the public interest.
Employees
At December 31, 1997, the Corporation employed 8,854 persons. None of its
employees are represented by a collective bargaining group.
ITEM 2. PROPERTIES
As of December 31, 1997, Banco Popular owned (and wholly or partially
occupied) approximately 76 branch premises and other facilities throughout the
Commonwealth and branch premises in New York. In addition, as of such date,
Banco Popular leased properties for branch operations in approximately 133
locations in Puerto Rico, 16 locations in New York and 7 locations in the U.S.
Virgin Islands. The Corporation's management believes that each of its
facilities is well-maintained and suitable for its purpose. The principal
properties owned by the Corporation for banking operations and other services
are described below:
Popular Center, the metropolitan area headquarters building, located at 209
Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story office building.
Approximately 55% of the office space is leased to outside tenants.
Cupey Center Complex, three buildings, one of three stories, and two of two
stories each, located at Cupey, Rio Piedras, Puerto Rico. The computer center,
operational and support services, and a recreational center for employees are
some of the main activities conducted at these facilities. The facilities are
fully occupied by Banco Popular's personnel.
Stop 22 - Santurce building, a twelve story structure located in Santurce,
Puerto Rico. A branch, the accounting department, the human resources division
and the auditing department are the main activities conducted located at this
facility, which is fully occupied by Banco Popular's personnel.
San Juan building, a twelve story structure located at Old San Juan, Puerto
Rico. Banco Popular occupies approximately 40% of the building for a branch
operation, a regional office, an exhibit room and other facilities. The rest of
the building is rented to outside tenants.
Mortgage Loan Center, a six story building, a four story building, and a
one story building, located at 153, 167 and 157 Ponce de Leon Avenue, Hato Rey,
Puerto Rico, respectively, are fully occupied by the mortgage loans and mortgage
servicing departments.
New York building, a nine story structure with two underground levels
located at 7 West 51st. Street, New York City, where approximately 92% of the
office space is used for banking operations. The remaining space is rented or
available for rent to outside tenants.
Banco Popular, Illinois, a three story building located at 4000-4008 West
North Avenue, Chicago, Illinois. A full service branch of Banco Popular,
Illinois, the executive offices, the human resources division and the bank's
operation department, are the main activities conducted at this facility.
Banco Popular (Florida), a two story building located at 5551 Vanguard
Street, Orlando, Florida. Credit cards operations, finance and accounting
department and the bank's operation services are the main activities conducted
at this facility.
Banco Popular (Texas), a one story building located at 1615 Little York
Road, Houston, Texas. A full service branch of Banco Popular (Texas) and the
administrative offices are located at this facility.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various lawsuits
arising in the ordinary course of business. Management believes, based on the
opinion of legal counsel, that the aggregate liabilities, if any, arising from
such actions would not have a material adverse effect on the financial position
of the Corporation.
11
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock (the "Common Stock") is traded on the
National Association of Securities Dealers Automated Quotation (NASDAQ) National
Market System under the symbol BPOP. Information concerning the range of high
and low sales prices for the Corporation's common shares for each quarterly
period during 1997 and the previous four years, as well as cash dividends
declared is contained under Table J, "Common Stock Performance", on page F-18
and under the caption "Stockholders' Equity" on page F-16 in the MD&A, and is
incorporated herein by reference.
At the annual meeting of stockholders on April 25, 1997, the Corporation's
shareholders approved amendments to the Corporation's Restated Articles of
Incorporation to increase the total number of authorized shares of capital stock
to 190,000,000. The authorized capital stock of the Corporation consists of
180,000,000 shares of Common Stock, par value of $6.00 per share, and 10,000,000
shares of Preferred Stock without par value.
Information concerning legal or regulatory restrictions on the payment of
dividends by the Corporation and Banco Popular is contained under the caption
"Regulation and Supervision" in Item 1 herein.
As of February 27, 1998, the Corporation had 6,044 stockholders of record
of its Common Stock, not including beneficial owners whose shares are held in
record names of brokers or other nominees. The last sales price for the
Corporation's Common Stock on such date, as quoted on the NASDAQ was $52.28 per
share.
The Corporation currently has outstanding $125 million subordinated notes
due December 15, 2005 with interest payable semi-annually at 6.75%. These notes
are unsecured subordinated obligations which are subordinated in right of
payment in full to all present and future senior indebtedness of the
Corporation. These notes do not provide for any sinking fund.
On February 1997, BanPonce Trust I, a statutory business trust created
under the laws of the State of Delaware, that is wholly-owned by PNA and
indirectly wholly-owned by the Corporation, through certain underwriters, sold
to institutional investors $150 million of its 8.327% Capital Securities Series
A. These capital securities qualify as Tier I capital and are fully and
unconditionally guaranteed by the Corporation.
On May 8, 1997, the Board of Directors of the Corporation approved a stock
repurchase program which allows the Corporation to repurchase in the open
market, at such times and prices as market condition shall warrant, up to three
million shares of its outstanding common stock. As of December 31, 1997, the
Corporation had purchased 988,800 shares under this program for a total cost of
$39.6 million.
On May 23, 1997, a shelf registration was filed with the Securities and
Exchange Commission, allowing the Corporation 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 December 31,
1997, the Corporation had issued $230 million in medium-term notes under that
shelf registration.
The Puerto Rico Income Tax Act of 1954, as amended, generally imposes a
withholding tax on the amount of any dividends paid by corporations to
individuals, whether residents of Puerto Rico or not, trusts, estates and
special partnerships at a special 10% withholding tax rate. If the recipient is
a foreign corporation or partnership not engaged in trade or business within
Puerto Rico the withholding tax is also 10%.
Prior to the first dividend distribution for the taxable year, individuals
who are residents of Puerto Rico may elect to be taxed on the dividends at the
regular rates, in which case the special 10% tax will not be withheld from such
year's distributions.
United States citizens who are non-residents of Puerto Rico will not be
subject to Puerto Rico tax on dividends if said individual's gross income from
sources within Puerto Rico during the taxable year does not exceed $1,300 if
single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury
Department "Withholding Tax Exemption Certificate for the Purpose of Section
1147", is filed with the withholding agent.
12
13
U.S. income tax law permits a credit against U.S. income tax liability,
subject to certain limitations, for certain foreign income taxes paid or deemed
paid with respect to such dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears in Table B, "Selected
Financial Data" on pages F-4 and F-5 and the text under the caption "Earnings
Analysis", on page F-7 in the MD & A, and is incorporated herein by reference.
The Corporation's ratio of earnings to fixed charges on a consolidated
basis for each of the last five years is as follows:
Year ended December 31,
-----------------------
Ratio of Earnings to Fixed Charges:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Excluding Interest on Deposits 1.8 2.0 2.0 2.6 3.0
Including Interest on Deposits 1.4 1.4 1.4 1.5 1.5
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends:
Excluding Interest on Deposits 1.8 2.0 2.0 2.5 3.0
Including Interest on Deposits 1.4 1.4 1.4 1.5 1.5
For purposes of computing these consolidated ratios, earnings represent
income before income taxes, plus fixed charges. Fixed charges represent all
interest expense (ratios are presented both excluding and including interest on
deposits), the portion of net rental expense which is deemed representative of
the interest factor and the amortization of debt issuance expense.
The Corporation's long-term senior debt and preferred stock on a
consolidated basis for each of the last five years ended December 31, is as
follows:
Year ended December 31,
-----------------------
(In thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Long-term obligations $1,678,696 $1,111,713 $885,428 $489,524 $283,855
Non-Cumulative preferred
stock of the Corporation 100,000 100,000 100,000 100,000 -0-
Cumulative perpetual
preferred stock of
Banco Popular -0- -0- -0- -0- 11,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item appears on page F-2 through F-36 in
the MD&A, and is incorporated herein by reference.
Table L, "Maturity Distribution of Earning Assets", on page F-23 in the
MD&A, has been prepared on the basis of contractual maturities. The Corporation
does not have a policy with respect to rolling over maturing loans, but rolls
over loans only on a case-by-case basis after review of such loans in accordance
with the Corporation's lending criteria.
13
14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the market risk of the Corporation appears on
pages F-19 through F-22 in the MD&A, under the caption "Market Risk" and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages F-37 through F-84,
and on page F-34 under the caption "Statistical Summary - Quarterly Financial
Data", in the MD&A and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Shares Beneficially Owned by
Directors, Nominees and Executive Officers of the Corporation", "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Board of Directors and
Committees" including the "Nominees for Election as Directors" and "Executive
Officers" of the Corporation's definitive proxy statement filed with the
Securities and Exchange Commission on or about March 18, 1998 (the "Proxy
Statement"), is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation Program", and
under the caption "Popular, Inc. Performance Graphs" of the Proxy Statement, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Principal Stockholders" and under
"Shares Beneficially Owned by Directors, Nominees and Executive Officers of the
Corporation" of the Proxy Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Family Relationships" and "Other
relationships and transactions" of the Proxy Statement, is incorporated herein
by reference.
14
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are part of this report and appear on the pages
indicated.
(1) Financial Statements:
Report of Independent Accountants ................................................................... F-37
Consolidated Statements of Condition as of December 31, 1997 and 1996 ............................... F-38
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 1997 .............................................................................. F-39
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 1997 .............................................................................. F-40
Consolidated Statements of Changes in Stockholders' Equity for each of the years in the
three-year period ended December 31, 1997 ...................................................... F-41
Notes to Consolidated Financial Statements .......................................................... F-42
(2) Financial Statement Schedules: No schedules are presented because
the information is not applicable or is included in the
Consolidated Financial Statements described in A.1 above or in the
notes thereto.
(3) Exhibits
The exhibits listed on the Exhibits Index on page 17 of this
report are filed herewith or are incorporated herein by reference.
B. The Corporation filed one report on Form 8-K during the quarter ended
December 31, 1997.
Dated: October 7, 1997
Items reported: Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
15
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POPULAR, INC.
-------------
(Registrant)
By: /s/ RICHARD L. CARRION
-------------------------------
Richard L. Carrion
Chairman of the Board, President
and Chief Executive Officer
Dated: 02-12-98 (Principal Executive Officer)
--------------
By: /S/JORGE A. JUNQUERA
-------------------------------
Jorge A. Junquera
Senior Executive Vice President
Dated: 02-12-98 (Principal Financial Officer)
--------------
By: /s/AMILCAR L. JORDAN
-------------------------------
Amilcar L. Jordan
Senior Vice President
Dated: 02-12-98 (Principal Accounting Officer)
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/RICHARD L. CARRION Chairman of the Board,
- ---------------------------- President and Chief
Richard L. Carrion Executive Officer
02-12-98
--------
/S/ALFONSO F. BALLESTER Vice Chairman of
- ---------------------------- the Board
Alfonso F. Ballester 02-12-98
--------
- ---------------------------- Vice Chairman of
Antonio Luis Ferre the Board --------
/S/SALUSTIANO ALVAREZ MENDEZ
- ----------------------------
Salustiano Alvarez Mendez Director 02-12-98
--------
/S/JUAN J. BERMUDEZ
- ----------------------------
Juan J. Bermudez Director 02-12-98
--------
/S/FRANCISCO J. CARRERAS
- ----------------------------
Francisco J. Carreras Director 02-12-98
--------
/S/DAVID H. CHAFEY, JR.
- ----------------------------
David H. Chafey, Jr. Director 02-12-98
--------
16
17
/S/LUIS E. DUBON, JR.
- ----------------------------
Luis E. Dubon, Jr. Director 02-12-98
--------
/S/HECTOR R. GONZALEZ
- ----------------------------
Hector R. Gonzalez Director 02-12-98
--------
/S/JORGE A. JUNQUERA
- ----------------------------
Jorge A. Junquera Director 02-12-98
--------
/S/MANUEL MORALES, JR.
- ----------------------------
Manuel Morales, Jr. Director 02-12-98
--------
/S/ALBERTO M. PARACCHINI
- ----------------------------
Alberto M. Paracchini Director 02-12-98
--------
/S/FRANCISCO M. REXACH, JR.
- ----------------------------
Francisco M. Rexach, Jr. Director 02-12-98
--------
/S/J. ADALBERTO ROIG, JR.
- ----------------------------
J. Adalberto Roig, Jr. Director 02-12-98
--------
- --------------------------
Felix J. Serralles, Jr. Director --------
/S/JULIO E. VIZCARRONDO, JR.
- ----------------------------
Julio E. Vizcarrondo, Jr. Director 02-12-98
--------
17
18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION FOOTNOTE
- --------------------------------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation and By-Laws of Popular, Inc.
4.1 Form of certificate for common stock. (1a)
4.2 Certificates of Resolution of the Board of Directors of Popular, Inc.
dated August 11, 1988 creating a series of Preferred Stock of the
Corporation designated as Series A Participating Cumulative Preferred
Stock Purchase rights and the designation and amount of such series,
the voting power preferences, and relative, participating, optional,
or other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof. Rights Agreement
dated as of August 11, 1988 by and between Popular, Inc. and Chemical
Bank (as successor to Manufacturers Hanover Trust Company) regarding
the issuance of certain Rights to the Corporation's shareholders
("Rights Agreement"). (2)
4.3 Amendment to Rights Agreement dated as of December 11, 1990. (3)
4.4 Indenture dated October 1, 1991, as supplemented by the First
Supplemental Indenture thereto, dated February 28, 1995, each among
Popular North America, Inc., Popular, Inc. and Guarantor, and
Citibank, N.A., as Trustee, and as further supplemented by the Second
Supplemental Indenture thereto, dated May 8, 1997, among Popular North
America, Inc., Popular, Inc. and Guarantor, and The First National
Bank of Chicago, as Trustee. (2a)
4.5 Form of medium-term fixed rate note of Popular North America, Inc.
guaranteed by Popular, Inc. (2b)
4.6 Form of medium-term floating rate note of Popular North America, Inc.
guaranteed by Popular, Inc. (2c)
4.7 Form of Certificate of 8.35% non-cumulative monthly Income Preferred
Stock, 1994 Series A (Liquidation Preference $25.00 per share). (4)
4.8 Form S-3 filed in connection with the issuance of debt securities and
preferred stock of Popular, Inc. and Popular International Bank, Inc.
and Popular North America, Inc. guaranteed by Popular, Inc. in the
aggregate amount of $1,000,000,000. (5)
4.8.1 Form S-3 filed in connection with the issuance of debt securities and
preferred stock of Popular, Inc., and Popular International, Bank,
Inc. and Popular North America, Inc. guaranteed by Popular, Inc. in
the aggregate amount of $1,000,000,000. (5a)
4.9 Subordinated Indenture of Popular, Inc, dated November 30, 1995,
between Popular, Inc. and the First National Bank of Chicago, as
trustee, and related to 6 3/4% subordinated notes due December 15,
2005 in the aggregate amount of $125,000,000. (6)
4.10 Form of Subordinated Note of Popular, Inc. (7)
4.11 Indenture dated February 15, 1995, as supplemented by the First
Supplemental Indenture thereto, dated May 8, 1997, each among Popular,
Inc. and the First National Bank of Chicago, as Trustee. (8)
4.12 Form of medium-term fixed rate note of Popular, Inc. (9)
4.13 Form of medium-term floating rate note of Popular, Inc (10)
4.14 Form of Fixed Rate Medium-Term Note, Series 3 of Popular, Inc. (10a)
4.15 Form of Floating Rate Medium-Term Note, Series 3, of Popular, Inc. (10b)
4.16 Form of Fixed Rate Medium-Term Note, Series D, of Popular North
America, Inc., endorsed with the guarantee of Popular, Inc. (10c)
4.17 Form of Floating Rate Medium-Term Note, Series D, of Popular North
America, Inc., endorsed with the guarantee of Popular, Inc. (10d)
10.2 Form 8-A Filing filed in connection with the Series A Participating
Cumulative Preferred Stock Purchase Rights. (11)
10.8 Management Incentive Plan for certain Division Supervisors approved in
January, 1987. (12)
10.8.1 Popular, Inc. Senior Executive Long-Term Incentive Plan dated
October 6, 1994. (13)
10.9 Stock Deferment Plan for outside directors effective on August 15, 1996. (14)
10.11 $85,785,000 Banco Popular de Puerto Rico 1992 Grantor Trust 1
Mortgage Pass - Through Certificates, Class A, offering memorandum
dated June 25, 1992. Underwriting Agreement by and between Merrill
Lynch, Pierce, Fenner & Smith, Incorporated acting through its Puerto
Rico branch office and Lehman Brothers Puerto Rico, Inc. and Banco
Popular de Puerto Rico dated June 25, 1992; Insurance Agreement by and
between Municipal Bond Investors Assurance Corporation as Insurer,
Banco Popular de Puerto Rico as Settlor, Banco Popular de Puerto Rico
as Servicer, Banco Central as Collateral Agent and Banco Central as
Trustee dated June 25, 1992. (15)
18
19
10.12.2 Revolving Credit and competitive advance facility and credit
agreement by and between Popular, Inc. and Popular North America, Inc.
and Chemical Bank, as agent bank, for borrowing up to the principal
amount of $500,000,000 dated as of November 3, 1995. (16)
10.13 Banco Popular de Puerto Rico Bank's Note Program up to the aggregate
amount of $600,000,000 executed on September 24, 1996. (17)
10.14 Popular North America, Inc., 6 3/4% Medium Term Notes, Series C, due
August 9, 2001 in the aggregate principal amount of $75,000,000. (18)
12.0 Computation of Ratio of Earnings to Fixed Charges
13.1 Registrants Annual Report to Shareholders for the year ended December
31, 1997
21.1 Schedule of Subsidiaries
23.1 Consent of Independent Auditors
27.0 Financial Data Schedule (for SEC use only)
99.1 Registrant's Proxy Statement for the April 23, 1998 Annual Meeting of
Stockholders
- - - - - - - - - - - - - - - - - - - - - - - -
(1a) Incorporated by reference to exhibit 4.1 of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1990 (the "1990
Form 10-K").
(2) Incorporated by reference to Exhibit 4.3 of Registration Statement No.
33-39028.
(2a) Incorporated by reference to Exhibit 4 (f) of Registration Statement
No. 333-26941.
(2b) Incorporated by reference to Exhibit 2 on Form 8-K filed on October 8,
1991.
(2c) Incorporated by reference to Exhibit 3 on Form 8-K filed on October 8,
1991.
(3) Incorporated by reference to Exhibit 4.4 of Registration Statement No.
33-39028.
(4) Incorporated by reference to Exhibit 4.7 of the 1994 Form 10-k.
(5) Incorporated by reference to Registration Statement No. 33-61601.
(5a) Incorporated by reference to Registration Statement No. 333-26941.
(6) Incorporated by reference to Exhibit 4(e) on Form 8-K filed on
December 13, 1995.
(7) Incorporated by reference to Exhibit 4(p) on Form 8-K filed on
December 13, 1995.
(8) Incorporated by reference to Exhibit 4(d) of Registration Statement
No. 333-26941.
(9) Incorporated by reference to Exhibit 4(a) on Form 8-K filed on April
13, 1995.
(10) Incorporated by reference to Exhibit 4(b) on Form 8-K filed on April
13, 1995.
(10a) Incorporated by reference to Exhibit 4(1) of Form 8-K filed on June
11, 1997.
(10b) Incorporated by reference to Exhibit 4(m) of Form 8-K filed on June
11, 1997.
(10c) Incorporated by reference to Exhibit 4(n) of Form 8-K on June 11,
1997.
(10d) Incorporated by reference to Exhibit 4(o) of Form 8-K filed on June
11, 1997.
(11) Incorporated by reference to Exhibit number 10.2 of Registration
Statement No. 33-00497.
(12) Incorporated by reference to Exhibit 10.13 of the 1991 Form 10-K.
(13) Incorporated by reference to Exhibit 10.8.1 of the 1994 Form 10-K.
19
20
(14) Incorporated by reference to Exhibit 10.9 of the 1996 Form 10-K.
(15) Incorporated by reference to Exhibit 10.14 of the 1992 Form 10-K.
(16) Incorporated by reference to Exhibit 10.12.2 of the 1994 Form 10-K.
(17) Incorporated by reference to Exhibit 10.13 of the 1996 Form 10-K.
(18) Incorporated by reference to Exhibit 10.14 of the 1996 Form 10-K.
20
21
POPULAR, INC.
INDEX FINANCIAL DATA
Page
FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................................... F-2
Statistical Summaries ...................................................................................... F-30
Glossary of Terms .......................................................................................... F-35
FINANCIAL STATEMENTS
Report of Independent Accountants .......................................................................... F-37
Consolidated Statements of Condition as of December 31, 1997 and 1996 ...................................... F-38
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 1997 ......................................................................................... F-39
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 1997 ......................................................................................... F-40
Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year
period ended December 31, 1997 ............................................................................ F-41
Notes to Consolidated Financial Statements ................................................................. F-42
F-1
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial discussion contains an analysis of the consolidated
financial position and financial performance of Popular, Inc. (formerly BanPonce
Corporation) and its subsidiaries (the Corporation) and should be read in
conjunction with the consolidated financial statements, notes and tables
included elsewhere in this report. The Corporation is a bank holding company
which offers a wide range of products and services through its subsidiaries and
is engaged in the following businesses:
- Commercial Banking/Savings and Loans - Banco Popular de Puerto
Rico (BPPR), Banco Popular, N.A (California), Banco Popular, N.A.
(Florida), Banco Popular, Illinois, Banco Popular, FSB and Banco
Popular, N.A. (Texas)
- Lease Financing - Popular Leasing and Rental, Inc. (Popular
Leasing) and Popular Leasing, U.S.A.
- Mortgage Banking/Consumer Finance - Popular Mortgage, Inc. (d/b/a
Popular Home Mortgage), Equity One, Inc. (Equity One) and Popular
Finance, Inc. (Popular Finance)
- Broker/Dealer - Popular Securities, Incorporated (Popular
Securities)
- ATM Processing Services - ATH Costa Rica
OVERVIEW
During 1997, the U.S. economy expanded at a strong pace which reduced the
unemployment rate to cyclical lows, but inflation continued its extraordinary
performance. Gross domestic product increased 3.8% in 1997, which is a rate of
growth considered by many economists to be above the economy's long-term
potential growth rate. The unemployment rate declined to 4.7% in December 1997,
as the economy generated 3.2 million new jobs. Despite the strong performance of
the economy, inflation as measured by the Consumer Price Index, rose 1.7%, the
lowest rate since 1986, which was affected to a large extent by a sharp drop in
oil prices that year. Prices at the wholesale level actually reflected
deflation, as the Producer Price Index declined 1.2% during 1997.
Due to the strength of the economy, particularly early in the year, the
Federal Reserve increased the federal funds rate by 25 basis points in March
1997, with the objective of prolonging the economic expansion and restraining
possible inflationary pressures. Despite continued strong economic growth during
the remainder of the year, monetary policy was kept unchanged. It is possible
that increasing levels of productivity in the American economy together with
intense competition in many markets due to the increasing globalization of many
industries, discouraged any further changes in monetary policy. The financial
markets incorporated this "new" approach to monetary policy in the yield curve,
by reducing sharply the general level of interest rates during the last three
quarters of the year. The yield of Treasury obligations maturing in two and
thirty years declined to 5.65% and 5.92%, respectively. This decline was
intensified by the financial crisis in Asia, which introduced expectations of a
world-wide slowdown in economic growth.
The Corporation's performance for 1997 was highlighted by the investment
in crucial strategic initiatives aimed at creating shareholder value and
increase earnings as well as successfully integrating the acquired operations.
In the annual stockholders meeting on April 25, 1997, the Corporation's
shareholders approved the change of the Corporation's name to Popular, Inc. as a
corporate strategy of marketing and identification of its subsidiaries. As part
of this strategy, the banking subsidiaries changed their name to Banco Popular
and an institutional campaign was launched in the continental U.S. emphasizing
the Bank's strength and history as well as its strong Hispanic ties. Other
non-banking subsidiaries previously known as Puerto Rico Home Mortgage, BP
Capital Markets and Popular Consumer Services (d/b/a Best Finance) changed their
names to Popular Home Mortgage, Popular Securities and Popular Finance,
respectively.
In an effort to continue providing banking services at customers'
convenience, BPPR launched its innovative "PC Bank" in Puerto Rico. This new
product, which is available 24 hours a day, allows customers to obtain balances
of their deposit accounts, credit cards and loans through their personal
computer from the privacy of their home or office. Likewise, clients are able to
verify their most recent transactions, perform payments and transfers within the
accounts and communicate with the bank through electronic mail.
During the second quarter of 1997, the Corporation acquired Seminole
National Bank in Sanford, Florida. Seminole National Bank operated three
branches in Sanford and Orlando. In Illinois, the Corporation acquired National
Bancorp, Inc. and CBC Bancorp, Ltd. National Bancorp, Inc. was the holding
company of American Midwest Bank and Trust, which operated two branches in
Chicago, while CBC Bancorp had two banking subsidiaries, Capitol Bank & Trust
and Capitol Bank of Westmont which operated three branches. Those three banking
operations were subsequently consolidated with Banco Popular, Illinois.
Moreover, in Puerto Rico, the Corporation completed the acquisition of Roig
Commercial Bank (RCB) on June 30, 1997, with its branch
F-2
23
TABLE A
Components of Net Income as a Percentage of Average Total Assets
For the Year
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------------
Net interest income ...................................... 4.26% 4.18% 4.14% 4.38% 4.61%
Provision for loan losses ................................ (0.60) (0.54) (0.46) (0.44) (0.68)
Securities and trading gains ............................. 0.03 0.02 0.05 0.01
Other income.............................................. 1.31 1.24 1.18 1.15 1.16
---------------------------------------------------------------
5.00 4.90 4.91 5.09 5.10
Operating expenses........................................ (3.46) (3.33) (3.45) (3.66) (3.86)
---------------------------------------------------------------
Net income before tax, dividends on preferred stock
of BPPR and cumulative effect of accounting changes .... 1.54 1.57 1.46 1.43 1.24
Provision for income tax.................................. (0.40) (0.43) (0.42) (0.41) (0.26)
---------------------------------------------------------------
Net income before dividends on preferred stock of
BPPR and cumulative effect of
accounting changes...................................... 1.14 1.14 1.04 1.02 0.98
Dividends on preferred stock of BPPR...................... (0.01)
Cumulative effect of accounting changes................... 0.05
---------------------------------------------------------------
Net income................................................ 1.14% 1.14% 1.04% 1.02% 1.02%
===============================================================
- ------------------------------------------------------------------------------------------------------------------------------
network of 25 branches mostly located in the eastern part of the island. In
September, BPPR completed the integration of RCB branches and products. Eight
branches were consolidated into existing BPPR branches and the remaining 17 are
strengthening BPPR's retail network, particularly in the eastern end of the
island, and are providing additional services and convenience to our customers.
Also, during the second quarter, ATH Costa Rica began operations. It is
the first automated teller machine (ATM) network in that country. ATH Costa Rica
and three banking institutions in Costa Rica joined and currently operate 18
ATMs providing their customers with access to ATMs in Puerto Rico and the United
States, and vice-versa.
To enhance the Corporation's ability to secure financing in the U.S.
money and capital markets a shelf registration was filed with the Securities and
Exchange Commission. Under this registration, which became effective on May 22,
1997, the Corporation may issue unsecured debt securities or shares of preferred
stock in an aggregate amount of up to $1 billion. As of December 31, 1997, the
Corporation had issued $230 million in medium-term notes under this shelf
registration.
On December 1, 1997, the Corporation acquired Houston Bancorporation, the
holding company of Citizens National Bank which operated one branch in Houston,
Texas. This acquisition emphasizes the Corporation's objective to create a wide
customer base in markets with a sizable Hispanic population in order to build a
nationwide network and brand that will provide more convenience to its customers
and growth opportunities for the Corporation.
During 1997, other established operations of the Corporation continued
expanding as Banco Popular, N.A. (Florida) opened three new branches during its
first year, for a total of six branches in that state. As of December 31, 1997,
in addition to the six branches in Florida, the Corporation operated 29 bank
branches in New York, 13 in Illinois, eight in New Jersey, six in California and
one in Texas, for a total of 63 branches in the continental U.S. In Puerto Rico
and the Virgin Islands, BPPR opened five full-service branches and six in-store
branches during this year, for a total of 209 branches, while Equity One opened
15 new offices in the mainland for a total of 117 offices in 30 states.
BPPR continued to accomplish a significant progress towards its
electronic initiatives as the number of POS transactions rose 51.3% from 3.2
million in December 1996 to 4.9 million in December 1997, while 4,929 POS
terminals were installed during the year.
F-3
24
TABLE B
Selected Financial Data
-----------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995
-----------------------------------------
CONDENSED INCOME STATEMENTS
Interest income ........................................... $ 1,491,303 $ 1,272,853 $ 1,105,807
Interest expense .......................................... 707,348 591,540 521,624
-----------------------------------------
Net interest income .................................... 783,955 681,313 584,183
Securities and trading gains .............................. 6,202 3,202 7,153
Operating income .......................................... 241,396 202,270 166,185
Operating expenses ........................................ 636,920 541,919 486,833
Provision for loan losses ................................. 110,607 88,839 64,558
Income tax ................................................ 74,461 70,877 59,769
Dividends on preferred stock of BPPR ......................
Cumulative effect of accounting changes ...................
-----------------------------------------
Net income ............................................. $ 209,565 $ 185,150 $ 146,361
=========================================
Net income applicable to common stock .................. $ 201,215 $ 176,800 $ 138,011
=========================================
PER COMMON SHARE DATA*
Net income ................................................ $ 3.00 $ 2.68 $ 2.10
Dividends declared ........................................ 0.80 0.69 0.58
Book value ................................................ 20.73 17.59 15.81
Market price .............................................. 49.50 33.75 19.38
Outstanding shares:
Average ............................................... 67,018,482 66,022,312 65,816,300
End of period ......................................... 67,682,704 66,088,506 65,897,272
AVERAGE BALANCES
Net loans ................................................. $10,548,207 $ 9,210,964 $ 8,217,834
Earning assets ............................................ 17,409,634 15,306,311 13,244,170
Total assets .............................................. 18,419,144 16,301,082 14,118,183
Deposits .................................................. 10,991,557 10,461,796 9,582,151
Subordinated notes ........................................ 125,000 147,951 56,850
Total stockholders' equity ................................ 1,370,984 1,194,511 1,070,482
PERIOD END BALANCES
Net loans ................................................. $11,376,607 $ 9,779,028 $ 8,677,484
Allowance for loan losses ................................. 211,651 185,574 168,393
Earning assets ............................................ 18,060,998 15,484,454 14,668,195
Total assets .............................................. 19,300,507 16,764,103 15,675,451
Deposits .................................................. 11,749,586 10,763,275 9,876,662
Subordinated notes ........................................ 125,000 125,000 175,000
Preferred beneficial interests in Popular North America's
junior subordinated deferrable interest debentures
guaranteed by the Corporation ........................... 150,000
Total stockholders' equity ................................ 1,503,092 1,262,532 1,141,697
SELECTED RATIOS
Net interest yield (taxable equivalent basis) .............. 4.84% 4.77% 4.74%
Return on average total assets ............................. 1.14 1.14 1.04
Return on average common stockholders' equity .............. 15.83 16.15 14.22
Dividend payout ratio to common stockholders ............... 25.19 24.63 26.21
Efficiency ratio ........................................... 62.12 61.33 64.88
Overhead ratio ............................................. 49.66 49.38 53.66
Tier I capital to risk-adjusted assets ..................... 12.17 11.63 11.91
Total capital to risk-adjusted assets ...................... 14.56 14.18 14.65
* Per share data is based on the average number of shares outstanding during the
periods, except for the book value which is based on total shares at the end
of the periods. All per share data has been adjusted to reflect two stock
splits effected in the form of a dividend on July 1, 1996 and on April 3,
1989.
F-4
25
Year ended December 31,
- -----------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------
$ 887,141 $ 772,136 $ 740,354 $ 794,943 $ 565,807 $ 558,273 $ 488,200
351,633 280,008 300,135 387,134 281,561 302,747 261,316
- -----------------------------------------------------------------------------------------------------
535,508 492,128 440,219 407,809 284,246 255,526 226,884
451 1,418 625 19,376 91 2,529 689
140,852 123,762 123,879 112,398 70,865 59,550 53,025
447,846 412,276 366,945 345,738 229,563 207,376 190,862
53,788 72,892 97,633 121,681 53,033 42,603 34,750
50,043 28,151 14,259 6,793 9,240 11,456 7,844
385 770 770 807
6,185
- -----------------------------------------------------------------------------------------------------
$ 124,749 $ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142
=====================================================================================================
$ 120,504 $ 109,404 $ 85,116 $ 64,564 $ 63,366 $ 56,170 $ 47,142
=====================================================================================================
$ 1.84 $ 1.67 $ 1.40 $ 1.07 $ 1.57 $ 1.40 $ 1.18
0.50 0.45 0.40 0.40 0.40 0.40 0.34
13.74 12.75 11.52 10.50 9.83 9.38 8.38
14.07 15.50 15.13 9.63 8.00 10.75 8.88
65,596,486 65,402,472 60,922,988 60,071,202 40,233,940 40,028,026 40,000,000
65,676,256 65,464,846 65,309,728 60,187,704 59,884,812 40,074,792 40,000,000
$ 7,107,746 $ 5,700,069 $ 5,150,328 $ 5,302,189 $ 3,377,463 $ 3,132,167 $ 2,869,829
11,389,680 9,894,662 8,779,981 8,199,195 5,461,938 5,318,800 5,182,535
12,225,530 10,683,753 9,528,518 8,944,357 5,836,749 5,676,981 5,523,823
8,837,226 8,124,885 7,641,123 7,198,187 5,039,422 4,782,791 4,571,456
56,082 73,967 85,585 94,000 50,000 38,082 119
924,869 793,001 668,990 610,641 407,611 353,844 317,001
$ 7,781,329 $ 6,346,922 $ 5,252,053 $ 5,195,557 $ 5,365,917 $ 3,276,389 $ 3,056,761
153,798 133,437 110,714 94,199 89,335 40,896 33,244
11,843,806 10,657,994 9,236,024 8,032,556 8,219,279 5,469,921 5,221,873
12,778,358 11,513,368 10,002,327 8,780,282 8,983,624 5,923,261 5,661,398
9,012,435 8,522,658 8,038,711 7,207,118 7,422,711 4,926,304 4,715,837
50,000 62,000 74,000 94,000 94,000 50,000
1,002,423 834,195 752,119 631,818 588,884 375,807 334,867
5.06% 5.50% 6.11% 5.97% 6.30% 5.57% 5.10%
1.02 1.02 0.89 0.72 1.09 0.99 0.85
13.80 13.80 12.72 10.57 15.55 15.87 14.87
27.20 25.39 28.33 34.13 25.33 28.14 28.00
66.21 66.94 65.05 66.46 64.65 65.82 68.19
57.24 58.34 55.07 52.47 55.80 56.86 60.45
12.85 12.29 12.88 11.01 10.10 9.47 9.19
14.25 13.95 14.85 13.35 12.74 11.76 10.10
F-5
26
TABLE C
Changes in Net Income and Earnings per Common Share
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per common share amounts) DOLLARS PER SHARE Dollars Per share Dollars Per share
--------------------------------------------------------------------------
Net income applicable to common stock
for prior year................................... $176,800 $2.68 $138,011 $2.10 $120,504 $1.84
Increase (decrease) from changes in:
Net interest income.............................. 102,642 1.55 97,130 1.48 48,675 0.74
Other operating income........................... 39,126 0.59 36,085 0.55 25,333 0.38
Trading account profit........................... 3,826 0.06 (1,677) (0.03) 1,558 0.02
Gain on sale of investment securities............ (826) (0.01) (2,274) (0.03) 5,144 0.08
Dividends on preferred stock of BPPR............. 385 0.01
Income tax....................................... (3,584) (0.05) (11,108) (0.17) (9,726) (0.15)
Provision for loan losses........................ (21,768) (0.33) (24,281) (0.37) (10,770) (0.16)
Operating expenses............................... (95,001) (1.44) (55,086) (0.84) (38,987) (0.59)
--------------------------------------------------------------------------
Subtotal......................................... 201,215 3.05 176,800 2.69 142,116 2.17
Dividends declared on preferred stock............ (4,105) (0.06)
Change in average common shares* ................ (0.05) (0.01) (0.01)
--------------------------------------------------------------------------
Net income applicable to common stock ............. $201,215 $3.00 $176,800 $2.68 $138,011 $2.10
==========================================================================
* Reflects the effect of the issuance of shares of common stock for the
acquisitions completed in 1997, net of the shares repurchased during 1997,
plus the shares issued through the Dividend Reinvestment Plan in the years
presented. The average common shares outstanding for the years presented
above were 67,018,482 for 1997, 66,022,312 for 1996 and 65,816,300 for 1995,
after restating for the stock split effected in the form of a dividend of one
share for each share outstanding on July 1, 1996.
Besides investing in strategic initiatives, the Corporation's net income
was $209.6 million for 1997, showing a $24.4 million increase or 13.2% over the
$185.2 million reported in 1996. Earnings per common share (EPS) for the year
ended 1997 were $3.00, or 11.9% higher than the $2.68 reported for 1996. The
Corporation's profitability ratios for 1997 represented returns of 1.14% on
assets (ROA) and 15.83% on common stockholders' equity (ROE), compared with an
ROA and ROE of 1.14% and 16.15%, respectively in 1996. Table A presents a
five-year summary of the components of net income as a percentage of average
assets.
The earnings performance reflected an increase in net interest income of
$102.6 million due to the growth of $2.1 billion in the average volume of
earning assets, driven by a $1.3 billion increase in average loans, as well as a
higher fully taxable equivalent net interest margin of 4.84%, up from 4.77% in
1996. Significant growth was also experienced in several other operating income
categories such as service charges on deposit accounts which grew $8.3 million,
other service fees which increased $21.6 million, trading account profit which
grew $3.8 million and other operating income which increased $9.3 million. These
factors served to offset the impact of increases of $21.8 million in the
provision for loan losses and $95.0 million in operating expenses.
The provision for loans losses rose $21.8 million from $88.8 million in
1996 to $110.6 million in 1997 as a result of the growth in the loan portfolio,
and higher delinquency and net charge-offs. Net charge-offs rose from $72.1
million or 0.78% of average loans in 1996 to $97.8 million or 0.93% of average
loans in 1997, particularly in the consumer and commercial loan portfolios. This
increase is due to the recent deterioration in the credit conditions highlighted
by the rise in personal bankruptcies. In Puerto Rico, the number of personal
bankruptcies filed during 1997 amounted to 15,636 for a 44.9% increase over the
10,792 filed in 1996.
Operating expenses totaled $636.9 million in 1997, as compared with
$541.9 million in 1996, reflecting rises of $33.6 million in personnel expenses,
$9.3 million in equipment expenses, $7.3 million in business promotion and $9.9
million in other operating expenses. The increase in operating expenses was
attributed to increased staffing resulting from acquisitions and strategic
initiatives, growth of the Corporation's business activities, increased spending
on projects to enhance revenue growth as well as optimizing product delivery
channels. In addition, operating expenses for 1997 include some costs pertaining
to the Year 2000. The Corporation has approached this project creating a
company-wide task force and establishing a formal plan, closely monitored by its
Senior Management.
F-6
27
Total assets at December 31, 1997, amounted to $19.3 billion, including
$18.1 billion of interest earning assets of which $11.4 billion were loans.
These amounts compare with $16.8 billion, $15.5 billion and $9.8 billion,
respectively, a year earlier. Also, reflecting the Corporation's emphasis on
building diverse and stable sources of funding to strengthen its operations and
sustain future growth, total deposits increased to $11.7 billion from $10.8
billion a year ago. Borrowings rose $1.1 billion, from $4.4 billion in 1996,
partially as a result of the repeal of Section 936 of the U.S. Internal Revenue
Code, during the third quarter of 1996. Section 936 provided certain U.S.
corporations operating on the Island with a tax credit against its federal tax
liability on income derived from business operations and investment activity in
Puerto Rico. The bill approved repealed the Qualified Possession Source
Investment Income (QPSII) credit effective July 1, 1996, for taxable years
beginning after December 31, 1995, while the income and the wage credits will be
phased out in 10 years. As expected, the repeal of this section caused a
reduction in the volume of funds from former 936 corporations from $2.1 billion
in 1996 to $1.8 billion in 1997.
The Corporation's stockholders' equity reached $1.50 billion at December
31, 1997, compared with $1.26 billion at December 31, 1996. A total of 2,462,272
shares were issued during 1997, in connection with the acquisitions of National
Bancorp, Inc. and RCB. On May 8, 1997, the Board of Directors approved a stock
repurchase program of up to 3 million shares of the outstanding common stock of
the Corporation. As of December 31, 1997, the Corporation had purchased 988,800
shares under this program at a total cost of $39.6 million.
The Corporation's regulatory capital ratios continued to exceed the
well-capitalized guidelines with a Tier I ratio of 12.17%, a total capital ratio
of 14.56% and a leverage ratio of 6.86% at December 31, 1997, compared with
11.63%, 14.18% and 6.71%, respectively, a year earlier. On February 5, 1997, the
Corporation sold to institutional investors $150 million of capital securities.
BanPonce Trust I, a statutory business trust owned by Popular North America,
Inc., issued $150 million of Capital Securities Series A at a rate of 8.327%,
fully guaranteed by Popular North America, Inc. and Popular, Inc. The proceeds
were upstreamed to Popular North America, Inc. as junior subordinated debt under
the same terms and conditions. Cumulative preferred securities having the
characteristics of the Series A Capital Securities, as defined by the Federal
Reserve, qualify as Tier I capital for bank holding companies. Such Tier I
capital treatment provides the Corporation with a cost-effective mean of
obtaining capital for regulatory purposes.
The Corporation's common stock appreciated 46.7% during 1997, to a market
price of $49.50 at December 31, 1997, from $33.75 at the same date in 1996. The
total return on the common stock of Popular, Inc., including price appreciation
and dividends, was 50.3% for 1997.
Further discussion of operating results and the Corporation's financial
condition is presented in the following narrative and tables. In addition, Table
B provides selected financial data for the last 10 years.
EARNINGS ANALYSIS
NET INTEREST INCOME
The principal source of earnings of the Corporation, represents the
excess of the interest earned on earning assets over the interest paid on
rate-related liabilities. As further discussed in the Risk Management section,
the Corporation constantly monitors the composition and repricing of its assets
and liabilities to maintain its net interest income at adequate levels and to
avoid undertaking highly sensitive positions that could affect its earnings
capacity in a volatile interest rate environment.
Net interest income reached $784.0 million for the year ended December
31, 1997, $102.7 million higher than the $681.3 million reported for the same
period in 1996. In 1995, net interest income was $584.2 million.
To enhance the comparability of assets with different tax attributes, the
interest income on tax exempt assets has been adjusted by an amount equal to the
net income taxes which would have been paid had the income been fully taxable.
This tax-equivalent adjustment is derived using the applicable statutory tax
rates and resulted in an amount of $58.9 million in 1997, $48.1 million in 1996
and $44.0 million in 1995.
For the year ended December 31, 1997, net interest income, on a taxable
equivalent basis, was $842.9 million or 15.6% higher than the $729.4 million
reported in 1996. This figure amounted to $628.2 million in 1995. The increase
was mostly related to a higher volume in earning assets, partially offset by a
higher volume of interest bearing liabilities, accounting for $101.5 million of
the increase, while a higher net interest margin on a taxable equivalent basis,
was responsible for the remaining $12.0 million.
F-7
28
TABLE D
Net Interest Income - Taxable Equivalent Basis
Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------
AVERAGE Average Average Average Average
BALANCE RATE Balance Rate Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------------------------------------------------------
Earning assets....... $17,409,634 8.90% $15,306,311 8.63% $13,244,170 8.68% $11,389,680 8.15% $9,894,662 8.33%
=============================================================================================================
Financed by:
Interest
bearing funds ... $14,572,317 4.85% $12,778,488 4.63% $10,991,569 4.75% $ 9,330,837 3.77% $8,097,004 3.46%
Non-interest
bearing funds ... 2,837,317 2,527,823 2,252,601 2,058,843 1,797,658
-------------------------------------------------------------------------------------------------------------
Total.......... $17,409,634 4.06% $15,306,311 3.86% $13,244,170 3.94% $11,389,680 3.09% $9,894,662 2.83%
=============================================================================================================
Net interest income.. $ 842,938 $ 729,438 $ 628,233 $ 576,575 $ 544,471
=============================================================================================================
Spread ............. 4.05% 4.00% 3.93% 4.38% 4.87%
Net interest yield... 4.84 4.77 4.74 5.06 5.50
Note: See five-year statistical summary on page F-32 and F-33 for a more
detailed information on the components of net interest income.
Table D presents a comparative analysis of the net interest income and
rates, on a taxable equivalent basis, for the past five years and Table E
presents an analysis of the major categories of earning assets and rate-related
liabilities and their impact on the net interest income variances due to changes
in volumes and rates for the last two years.
Average earning assets increased to $17.4 billion compared with $15.3
billion in 1996 and $13.2 billion in 1995. The principal contributor to the
increase in average earning assets was the rise of $1.3 billion in average loans
followed by an increase of $1.1 billion in investment securities that was
partially offset by a lower balance of both money market investments and trading
account securities.
Average loans reached $10.5 billion, compared with $9.2 billion reported
in 1996, a 14.5% increase. Average loans is the largest asset category of the
Corporation accounting for 60.6% of its total average earning assets in 1997 and
60.2% in 1996. As Table E shows, the additional loan volume was the main
contributor to the rise in interest income of the Corporation in 1997. Aside
from the growth in average loans at BPPR and Equity One due to the expansion of
their operations, the rise in average loans relates to the acquisitions made
during 1997, primarily RCB which contributed $358 million in loans at June 30,
1997, CBC Bancorp, Ltd and National Bancorp, which contributed $194 million and
$68 million, respectively, at May 31, 1997.
The increase in average loans was mainly attained in commercial and
consumer loans, which increased $740 million and $397 million, respectively,
primarily due to the business expansion and the aforementioned acquisitions.
Average mortgage loans rose $151 million mainly in the United States and the
leasing portfolio increased by $49 million.
The average yield on loans, on a taxable equivalent basis, for the year
ended December 31, 1997, was 10.31% compared with 10.11% in 1996 and 9.98% in
1995. The principal contributor to the rise in the yield on loans was the
commercial loan portfolio, which increased by 28 basis points, reaching an
average yield of 9.26% compared with 8.98% in 1996. The higher interest rate
scenario that prevailed during 1997 compared with 1996, and the fact that some
loans that were previously priced using a 936 market rate as a factor, have
changed their pricing to a higher rate in accordance with the conventional funds
market, were the predominant factors for the improvement in this yield.
The yield on consumer loans for 1997 also improved to 13.07%, 22 basis
points higher than the 12.85% reported for 1996, mostly due to changes made in
the pricing structure of some consumer loan products at BPPR. The yield on
mortgage loans, on a taxable equivalent basis, for the year ended December
31, 1997, was 8.54% compared with 8.51% for 1996.
Investment securities averaged $5.9 billion in 1997, compared with $4.8
billion in 1996. This rise was principally attained at BPPR mainly in U.S.
Treasury and Agency securities. This increase was largely related to arbitrage
activities performed during the year which were profitable for the Corporation
due to the prevailing interest rates and the tax-favored status of these
invest-
F-8
29
TABLE E
Interest Variance Analysis - Taxable Equivalent Basis
1997 VS. 1996 1996 vs. 1995
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands) INCREASE (DECREASE) DUE TO CHANGE IN: Increase (Decrease) Due to Change in:
---------------------------------------------------------------------------------
VOLUME RATE TOTAL Volume Rate Total
---------------------------------------------------------------------------------
Interest income:
Federal funds sold and securities
and mortgages purchased under
agreements to resell .......... $ (13,917) $ 1,131 $ (12,786) $ 25,661 $ (2,175) $ 23,486
Time deposits with other banks .. 26 (13) 13 122 12 134
Investment securities ........... 75,292 13,448 88,740 26,217 (2,777) 23,440
Trading securities .............. (4,562) 1,328 (3,234) 13,392 (219) 13,173
Loans ........................... 143,007 13,567 156,574 103,667 7,221 110,888
--------------------------------------------------------------------------------
Total interest income ......... 199,846 29,461 229,307 169,059 2,062 171,121
--------------------------------------------------------------------------------
Interest expense:
Savings, NOW
and money market accounts ..... 14,273 1,547 15,820 7,666 (2,715) 4,951
Other time deposits ............. (4,625) 5,112 487 24,119 (8,632) 15,487
Short-term borrowings ........... 42,987 10,069 53,056 48,288 (5,128) 43,160
Long-term borrowings ............ 45,681 764 46,445 17,189 (10,871) 6,318
--------------------------------------------------------------------------------
Total interest expense ........ 98,316 17,492 115,808 97,262 (27,346) 69,916
--------------------------------------------------------------------------------
Net interest income ............... $ 101,530 $ 11,969 $ 113,499 $ 71,797 $ 29,408 $ 101,205
=================================================================================
Note: The changes that are not due solely to volume or rate are allocated to
volume and rate based on the proportion of the change in each category.
ments. The interest income derived on U.S. Government Obligations is exempt for
income tax purposes in Puerto Rico. The taxable equivalent yield of investment
securities improved to 6.90% compared with 6.63% reported in 1996. This rise is
mainly related to the higher interest rate scenario that prevailed during the
year as compared with 1996.
Average money market investments decreased $261 million to $632 million,
compared with $893 million in 1996. The decrease relates mainly to a reduction
in eligible activities at Popular Securities, due to a lower balance of funds
from former 936 corporations. The average yield on these money market
investments for 1997 was 5.36%, or 13 basis points higher than the 5.23%
reported during 1996, principally affected by the interest rate environment. The
decrease in the average balance of trading account securities of $71 million was
also caused by the lower balance of these assets at Popular Securities when
compared with 1996. The taxable equivalent yield on trading account securities
for the years ended December 31, 1997 and 1996 were 6.55% and 6.18%,
respectively.
As shown in Table E, the increase in the taxable equivalent yield on
investment securities, money market and trading account, as well as the increase
in the average yield on loans, contributed to the rise in interest income
resulting from changes in rates. For the year ended December 31, 1997, the yield
on earning assets, on a taxable equivalent basis, was 8.90% versus 8.63% for
1996, an improvement of 27 basis points.
On the liability side, the average balance of interest-bearing
liabilities reached $14.6 billion in 1997, $1.8 billion higher than the $12.8
billion reported during 1996. Short-term borrowings increased $816 million,
medium and long term debt rose $688 million and interest bearing deposits rose
$290 million.
The increase in the average balance of short-term borrowings was mostly
to offset the reduction of $511 million in average 936 deposits at BPPR and to
arbitrage opportunities. The average cost of short-term borrowings increased to
5.55% compared with 5.33% reported in 1996, mainly as a result of the market
conditions that prevailed in 1997.
Average interest-bearing deposits increased $290 million or 3.4%, from
$8.4 billion reported in 1996 to $8.7 billion in 1997, while average demand
deposits increased $240 million or 11.7% to $2.3 billion. Savings accounts were
the main contributor to the rise, increasing $297 million, followed by NOW and
money market deposits which rose $133 million. On the other hand, time deposits
decreased by $140 million due to the reduction of $511 million in average 936
deposits, offset by rises in individual and
F-9
30
corporate deposits of $371 million. The acquisition of banking operations in the
mainland during 1997, contributed $264 million in average deposits, while RCB
contributed $584 million at acquisition date. Table M has a detail of average
deposits by category.
The average cost of interest-bearing deposits increased four basis
points to 4.21%, compared with 4.17% reported in 1996. The rise is principally
attributed to the increase of 20 basis points in the average cost of
certificates of deposit that reached 5.45%. Traditionally certificates of
deposit from former 936 corporations had a cost below the U.S. market or the
Eurodollar market. These deposits had an average cost of 4.88% and comprised
5.8% of the total average interest bearing deposits in 1997, compared with 4.55%
and 12.1% in 1996. The reduction in the proportion of deposits from former 936
corporations as well as the increase in their cost were determinant factors for
the increase in the average cost of certificates of deposit. The average cost of
NOW and money market deposits increased from 3.28% in 1996 to 3.35% in 1997,
while the average cost of savings accounts increased five basis points to 3.08%
from 3.03% in 1996.
Average medium and long-term debt increased $688 million, reaching $1.6
billion and its related cost increased from 6.25% reported in 1996 to 6.47% in
1997. The increase in the average cost is principally due to debt issued in 1997
during a higher interest rate environment and debt with floating interest rates
resetting semiannually or quarterly.
The average cost of interest-bearing liabilities increased 22 basis
points, from 4.63% in 1996 to 4.85% in 1997, while the cost of funding earning
assets increased from 3.86% to 4.06% in 1997.
Although the yield on earning assets and the cost of interest bearing
liabilities increased by 27 and 22 basis points, respectively, the higher
proportion of non interest-bearing liabilities, such as demand deposits and
other funding sources, to average earning assets allowed the Corporation to
improve its net interest margin, on a taxable equivalent basis, by seven basis
points to 4.84% for 1997 as compared with 4.77% reported in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects management's assessment of the
adequacy of the allowance for loan losses to cover potential losses inherent in
the loan portfolio after taking into account the net charge-offs for the current
period and loan impairment. The provision for loan losses was $110.6 million for
1997, compared with $88.8 million in 1996, an increase of $21.8 million or
24.5%. The provision for loan losses for 1995 was $64.6 million. 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 year ended December 31, 1997, were $97.8
million or 0.93% of average loans, compared with $72.1 million or 0.78% in 1996
and $50.0 million or 0.61% in 1995.
The increase in net charge-offs was mostly reflected in the consumer
and commercial portfolios. The net charge-offs of consumer loans amounted to
$50.5 million compared with $29.1 million a year earlier and commercial loans
rose $10.8 million in net charge-offs during 1997. Lease financing and
construction loans net charge-offs decreased $5.2 million and $1.7 million,
respectively, when compared with the year ended December 31, 1996. Mortgage
loans net charge-offs amounted to $2.3 million and $1.9 million in 1997 and
1996, respectively.
Please refer to the Credit Risk Management and Loan Quality section for
a more detailed analysis of the allowance for loan losses, net charge-offs, and
credit quality statistics.
NON-INTEREST INCOME
Non-interest income, which consists primarily of service charges on
deposit accounts, credit and debit card fees, other fee-based services and other
revenues, rose $39.1 million or 19.3% to $241.4 million in 1997, from $202.3
million in 1996. In 1995, these revenues totaled $166.2 million.
The rise in non-interest income was mainly the result of the
Corporation's continuing efforts of expanding the range of services offered to
customers and building more customer relationships, taking advantage of its
technological leadership in the Island and its continued expansion. Accordingly,
each year non-interest income has become a more important contributor to the
growth in the Corporation's revenues.
F-10
31
TABLE F
Other Operating Income
Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Five-Year
1997 1996 1995 1994 1993 C.G.R.
- -----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts..... $ 94,141 $ 85,846 $ 78,607 $ 71,727 $ 68,246 8.34%
---------------------------------------------------------------------------------------
Other service fees:
Credit card fees and discounts....... 31,371 23,735 20,676 18,620 16,818 13.31
Other fees........................... 17,676 15,859 17,052 15,896 13,135 5.80
Debit card fees...................... 15,957 10,430 5,425 3,185 1,704 60.53
Sale and administration of
investment products ............. 9,478 5,384 2,999 1,190
Mortgage servicing fees, net of
amortization...................... 9,357 7,534 5,956 2,301 2,936 24.14
Credit life insurance fees........... 7,602 7,955 5,766 4,889 4,270 18.26
Trust fees........................... 7,209 6,174 5,851 5,159 4,084 10.36
---------------------------------------------------------------------------------------
Total other service fees.... 98,650 77,071 63,725 51,240 42,947 18.35
---------------------------------------------------------------------------------------
Other income............................ 48,605 39,353 23,853 17,885 12,569 21.54
Total....................... $241,396 $202,270 $166,185 $140,852 $123,762 14.27%
=======================================================================================
Other operating income
to average assets.................... 1.31% 1.24% 1.18% 1.15% 1.16%
Other operating income
to operating expenses................ 37.90 37.32 34.14 31.45 30.02
The growth during 1997 was driven by increases of $21.6 million in
other service fees, $9.3 million in other income and $8.3 million in service
charges on deposit accounts. As shown in Table F, those increases helped to
improve the ratio of non-interest income to average assets from 1.24% in 1996,
to 1.31%. In 1995, this ratio was 1.18%. The ratio of non-interest income to
operating expenses also increased from 37.32% in 1996 to 37.90% in 1997.
Service charges on deposit accounts grew to $94.1 million for the year
ended December 31, 1997, from $85.8 million in 1996 and $78.6 million in 1995.
This rise mostly 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 and the operations acquired in the U.S. during 1997. Measured
as a percentage of average deposits, service charges were 0.86% in 1997,
compared with 0.82% in 1996 and 1995.
Other service fees, which represented 40.9% of non-interest income for
the year, increased $21.6 million or 28.0%, from $77.1 million in 1996 to $98.7
million in 1997. The growth in other service fees was the result of higher
credit card fees and merchant discounts by $7.6 million and higher debit card
fees by $5.5 million. This increase was principally attained at BPPR, where
credit card fees and discounts rose $5.6 million, as credit card net sales rose
33.3% and the number of active credit card accounts grew 18.8%. Also, debit card
fees which consist primarily of rental income of point-of-sale (POS) terminals
and interchange income rose $5.4 million at BPPR. This increase is in line with
the growth of 54.8% in the volume of transactions at POS terminals from a
monthly average of approximately 2,048,000 in December 1996 to 3,171,000 a year
later. The number of POS terminals, from which rental income is derived,
increased 43.3% to 16,321 as of December 31, 1997, from 11,392 a year earlier.
The expanded sale and administration of investment products such as mutual funds
contributed an additional $4.1 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.
Other operating income for the year ended December 31, 1997, increased
to $48.6 million from $39.3 million reported in 1996 and $23.9 million reported
in 1995. This increase resulted mainly from higher pre-tax gains of $8.4 million
on the sale of mortgage loans during 1997 compared with 1996, related to the
Corporation's mortgage banking activities. Also in 1997, there was a growth in
other income due to the write-off in 1996 of $1.3 million pertaining to the
Corporation's investment in preferred stock of Citizens Bank of Jamaica.
Moreover, the daily rental operations contributed to the increase in other
operating income. Partially offsetting these increases was the recording of a
loss of $3.3 million in the market value of a building which was subsequently
sold in the last quarter of 1997.
F-11
32
TABLE G
Operating Expenses
Year ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Five-Year
1997 1996 1995 1994 1993 C.G.R.
-----------------------------------------------------------------------------------
Salaries................................. $211,741 $185,946 $172,504 $160,996 $151,432 9.47%
Pension and other benefits............... 69,468 64,609 57,568 45,546 44,713 13.75
Profit sharing........................... 25,684 22,692 19,003 19,205 19,766 8.55
----------------------------------------------------------------------------------
Total personnel costs.................. 306,893 273,247 249,075 225,747 215,911 10.27
----------------------------------------------------------------------------------
Equipment expenses....................... 66,446 57,186 47,854 42,229 32,010 20.07
Professional fees........................ 46,767 36,953 28,677 27,002 23,256 18.83
Net occupancy expense.................... 39,617 36,899 32,850 28,440 26,085 9.26
Business promotion ...................... 33,569 26,229 17,801 16,271 16,638 21.75
Communications........................... 33,325 26,470 23,106 20,308 18,203 14.35
Other taxes.............................. 30,283 23,214 20,872 19,807 15,996 15.70
Amortization of intangibles.............. 22,874 18,054 20,204 18,003 16,176 8.97
Printing and supplies.................... 15,539 11,964 11,069 8,817 8,189 16.34
Other operating expenses:
Transportation and travel.............. 7,186 5,852 4,424 3,946 3,554 18.04
FDIC assessment........................ 1,499 1,544 10,257 19,346 17,802 (38.01)
All other.............................. 32,922 24,307 20,644 17,930 18,456 9.40
---------------------------------------------------------------------------------
Subtotal .......................... 330,027 268,672 237,758 222,099 196,365 13.05
---------------------------------------------------------------------------------
Total ............................. $636,920 $541,919 $486,833 $447,846 $412,276 11.66%
==================================================================================
Efficiency ratio......................... 62.12% 61.33% 64.88% 66.21% 66.94%
Personnel costs to average assets........ 1.67 1.68 1.76 1.85 2.02
Operating expenses to average assets..... 3.46 3.32 3.45 3.66 3.86
Assets per employee (in millions)........ $ 2.18 $ 2.10 $ 2.01 $ 1.68 $ 1.53
SECURITIES AND TRADING GAINS
During 1997, the Corporation sold $5.2 billion in investment securities
available-for-sale as part of its asset/liability strategy, realizing a net gain
of $2.3 million. In 1996, $2.9 billion of the investment securities
available-for-sale were sold for a net gain of $3.1 million, reflecting gains of
$7.0 million on the sale of equity securities partially offset by a loss of $3.9
million on the sale of other securities.
Trading account activities for the year ended December 31, 1997,
resulted in profits of $3.9 million compared with profits of $108 thousand in
1996. In 1997, the Corporation benefitted from favorable market conditions,
particularly related to mortgage-backed securities at Popular Home Mortgage.
OPERATING EXPENSES
Operating expenses for 1997 increased $95.0 million or 17.5%, reaching
$636.9 million compared with $541.9 million in 1996 and $486.8 million in 1995.
As a percentage of average assets, operating expenses increased to 3.46% in 1997
from 3.32% in 1996 and 3.45% in 1995. The operations acquired in the mainland
during the year accounted for approximately $23.0 million of the increase. Also,
the acquisition of RCB on June 30, 1997, which was merged into BPPR, accounted
for approximately $16 million in additional expenses during 1997. Table G
presents a detail of operating expenses and various related ratios for the last
five years.
The Corporation's largest category of operating expenses, personnel
costs, totaled $306.9 million in 1997, an increase of 12.3% compared with $273.2
million in 1996. The growth in personnel costs was led by an increase of $25.8
million in salary expense, resulting from an increase in headcount, primarily
caused by the Corporation's business expansion and acquisitions, and annual
merit increases. Full-time equivalent employees (FTE) amounted to 8,854 at
December 31, 1997, from 7,996 at the end of 1996. The acquisitions completed in
the U.S. added 363.5 FTE, while RCB added 375.5 FTE at the acquisition dates.
The ratio of
F-12
33
assets per employee rose to $2.18 million in 1997 from $2.10 million in 1996,
while personnel costs as a percentage of average assets decreased slightly to
1.67% from 1.68% in 1996. Total personnel costs for 1995 amounted to $249.1
million.
Employee benefits, including profit sharing expense, rose $7.9 million
to $95.2 million in 1997, compared with $87.3 million in 1996. The rise in
pension costs and other fringe benefits was primarily related to increases in
medical plan costs and higher payroll tax expenses resulting from the increase
in salaries. Furthermore, profit sharing expense rose $3.0 million, as a result
of higher eligible salaries and stronger profitability ratios at BPPR.
Other operating expenses, excluding personnel costs, totaled $330.0
million for the year ended December 31, 1997, compared with $268.7 million in
1996 and $237.8 million in 1995. Professional fees increased 26.6% from $37.0
million in 1996 to $46.8 million in 1997. The increase in this category
reflected the Corporation's continued growth and expansion, and higher
expenditures related with consulting and technical support. Business promotion
grew $7.3 million or 28.0% due to the impact of the business expansion, the
growth in business activity, and the development and promotion of new products
and services. Also during 1997, the Corporation launched an institutional
campaign in the continental U.S. to emphasize Banco Popular's presence and image
as a Hispanic bank, and performed significant promotional efforts related to the
new credit card program in U.S. Other taxes also reflected an increase of $7.1
million mainly due to higher levels of taxable property, higher municipal
license taxes in Puerto Rico, and an increase in the tax rate for personal
property in the municipality of San Juan, Puerto Rico, where the Corporation's
headquarters are located.
Equipment and communications expenses grew a combined $16.1 million or
19.3% in 1997. This increase mostly resulted from the expansion of the
electronic payment system and network of POS terminals. By the end of 1997, the
Corporation had increased its automated teller machine (ATM) network by 90
machines, when compared with prior year in order to expand the electronic
delivery capabilities. Other operating expenses, which include transportation
and travel expenses, insurance expenses, interchange and processing fees related
with credit and debit cards, and FDIC assessment among others, increased $9.9
million mostly as a result of the Corporation's growth and expansion and the
increased volume of credit and debit card transactions. Moreover, as a result of
the acquisitions made after the third quarter of 1996, the amortization of
intangibles rose $4.8 million during 1997, when compared with 1996.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. All computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations on normal business activities.
Based on its assessment, the Corporation determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Corporation's management believes that with some modifications to existing
software and conversions to new software, the Year 2000 Issue will be mitigated.
However, if such modifications and conversions are not made, or are not
completed on a timely manner, the Year 2000 Issue could have a material impact
on the operations of the Corporation.
The Corporation has established a company-wide task force and developed
an action plan addressing the Year 2000 Issue, that is currently being
implemented. Under this action plan, the Corporation has initiated formal
communications with all of its major suppliers and customers to determine the
extent to which the Corporation is vulnerable to those third parties failure to
remediate their own Year 2000 Issue. The Corporation's total Year 2000 project
costs and estimates to complete are based on presently available information.
The Corporation will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
total remaining incremental costs of the Year 2000 project is estimated at $11.9
million and will be funded through operating cash flows.
The costs of the project are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those planned. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes and
similar uncertainties.
F-13
34
INCOME TAX EXPENSE
Income tax expense for the year ended December 31,1997, was $74.5
million compared with $70.9 million in 1996 and $59.8 million in 1995. The
increase in 1997 is primarily due to higher pre-tax earnings by $28.0 million
partially offset by higher benefits of net tax exempt interest income and
certain tax credits available to the Corporation in its Puerto Rico operations.
The effective tax rate was 26.2% in 1997, 27.7% in 1996 and 29.0% in
1995. The decrease in the effective tax rate was principally due to an increase
in the exempt interest income, principally from U.S. Treasury and agency
securities as previously explained in the net interest income section. The
difference between the effective tax rates and the maximum tax rate for the
Corporation, which is 39%, is primarily due to the interest income earned on
certain investments and loans which is exempt from income tax, net of the
disallowance of related expenses attributable to the exempt income.
The Corporation uses an asset and liability approach in accounting for
income taxes, as required by SFAS 109. The objective of the SFAS 109 is to
recognize the amount of taxes payable or refundable in the current year and to
recognize deferred tax liabilities or assets for the future tax consequences of
events that have been recognized in the financial statements or tax returns. The
measurement of deferred tax liabilities or assets is based on regular tax rates
and provisions of the tax laws. At December 31, 1997, the Corporation's net
deferred tax assets amounted to $83 million, compared with $64 million at
December 31, 1996. Gross deferred tax assets rose from $90 million to $118
million mainly as a result of the recognition of a deferred tax asset of $32
million related with the repeal of the reserve method of accounting for losses
on loans. Other components of gross deferred tax assets are net operating
losses, tax credits, postretirement benefit obligations and other temporary
differences principally arising from the deferral of loan origination costs and
commissions. When necessary, a valuation allowance is recorded for those
deferred tax assets for which the Corporation cannot determine the likelihood of
their realizability. At December 31, 1997, the valuation allowance amounted to
$0.2 million compared with $0.6 million at December 31, 1996.
Gross deferred tax liabilities were $35 million at December 31, 1997,
compared with $26 million at December 31, 1996. The major components of deferred
tax liabilities are differences between assigned values and tax bases of assets
and liabilities recognized in purchase business combinations and other temporary
differences primarily related with unrealized gains on investment securities
available-for-sale.
On October 31, 1994, the Governor of Puerto Rico signed into law the
Puerto Rico Tax Reform Act of 1994. The Act made comprehensive important changes
in several major areas of the law. In general, the provisions of the Act were
effective for taxable years beginning after June 30, 1995. Accordingly, most
changes of the Reform were effective for the Corporation in 1996. Among the most
significant changes that affect the Corporation are: the reduction in the higher
marginal rate from 42% to 39%, the repeal of the reserve method for determining
losses on loans and the recapture into income for tax purposes of the allowance
for loan losses balance at December 31, 1995 over a period of four years, the
100% dividend received deduction on dividends received from controlled domestic
corporations and the repeal of the 29% withholding tax on interest paid to
non-residents and unaffiliated parties.
Please refer to Note 23 of the Consolidated Financial Statements for
additional information on income taxes.
STATEMENT OF CONDITION ANALYSIS
At December 31, 1997, the Corporation's total assets reached $19.3
billion, reflecting an increase of $2.5 billion or 15.1% when compared with
$16.8 billion at December 31, 1996. The growth in total assets was partially
related to the acquisition of RCB on June 30, 1997, with $791 million in total
assets at that date. Also, the operations acquired in Florida, Illinois and
Texas during 1997 contributed to the growth of the Corporation with $602 million
in total assets at acquisition date. Total assets at the end of 1995 amounted to
$15.7 billion. Average total assets for 1997 amounted to $18.4 billion compared
with $16.3 billion in 1996 and $14.1 billion in 1995.
EARNING ASSETS
Earning assets at December 31, 1997, totaled $18.1 billion, compared
with $15.5 billion at December 31, 1996 and $14.7 billion at December 31, 1995.
Money market investments, investment and trading securities amounted to
$6.7 billion at December 31, 1997, representing an increase of $1.0 billion when
compared with $5.7 billion at December 31, 1996. The increase was mainly
reflected in investment
F-14
35
TABLE H
Loans Ending Balances
As of December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Five-Year
1997 1996 1995 1994 1993 C.G.R.
--------------------------------------------------------------------------------------------
Commercial, industrial and
agricultural........................ $ 4,637,409 $3,822,096 $3,205,031 $2,893,534 $2,369,514 16.82%
Construction.......................... 250,111 200,083 215,835 161,265 153,436 7.72
Lease financing....................... 581,927 516,001 498,750 448,236 375,693 12.92
Mortgage*............................. 2,833,896 2,576,887 2,403,631 2,177,763 1,576,044 29.08
Consumer.............................. 3,073,264 2,663,961 2,354,237 2,100,531 1,872,235 10.80
--------------------------------------------------------------------------------------------
Total .............................. $11,376,607 $9,779,028 $8,677,484 $7,781,329 $6,346,922 16.72%
============================================================================================
*Includes loans held-for-sale.
securities, which totaled $5.6 billion at the end of 1997, compared with $4.6
billion in 1996. The rise in investment securities was mainly due to arbitrage
opportunities undertaken by BPPR during 1997. Investment securities
available-for-sale grew $1.8 billion, from $3.4 billion in 1996 to $5.2 billion
in 1997. Partially offsetting this increase, was a reduction of $0.8 billion in
the investment securities held-to-maturity.
Money market investments reached $814 million at December 31, 1997,
compared with $800 million at the same date in 1996. Trading account securities
totaled $222 million at December 31, 1997, compared with $292 million at
December 31, 1996.
As shown in Table H, total loans at December 31, 1997, amounted to
$11.4 billion, an increase of $1.6 billion or 16.3% over the $9.8 billion
reported at the end of 1996. At the same date in 1995 total loans were $8.7
billion. The commercial loan portfolio had the largest growth, rising $815
million or 51.0% of the total increase in loans, followed by consumer loans
which increased $409 million or 25.6% and mortgage loans with $257 million or
16.1% of the total increase. The lease financing portfolio increased $66 million
while the construction loan portfolio increased $50 million.
Commercial loans reached $4.6 billion at December 31, 1997, compared
with $3.8 billion at the same date last year. The increase in the commercial
loan portfolio was principally attained at BPPR and Banco Popular, Illinois,
which increased $658 million and $179 million, respectively. The growth
experienced at BPPR was mostly the result of the continued marketing efforts
geared at the retail and middle market, primarily through the origination of
"Flexicuenta de Negocios", an innovative product for commercial customers with
integrated deposit, investment and credit facilities. Also, the growth was
achieved through increases in government guaranteed loans, primarily SBA loans,
the development of a sales culture and the acquisitions of RCB in Puerto Rico,
and the acquisitions performed in Illinois, Florida and Texas. At their
acquisition dates, these banking operations contributed $187 million to the
commercial loan portfolio. Commercial loans at December 31, 1995 totaled $3.2
billion.
The Corporation's management expects that the growth in the commercial
loan portfolio will continue during 1998 primarily in the service industries,
small and middle market, and construction and land developers, based on the
introduction of government promoted privately developed housing projects and
infrastructure development projects in Puerto Rico.
During 1997, consumer loans grew to $3.1 billion compared with $2.7
billion at the end of 1996. Consumer loans, which include personal, auto and
boat, credit cards and reserve lines grew $409 million principally at BPPR,
Equity One, Banco Popular, Illinois and Popular Finance by $265 million, $46
million, $39 million and $37 million, respectively. At BPPR, RCB contributed
$137 million as of the acquisition date, while the operations acquired in the
mainland contributed $50 million in consumer loans. At December 31, 1995,
consumer loans totaled $2.4 billion. Of the total portfolio of consumer loans,
46.2% are secured loans of which 22.3% are secured by mortgages and 3.4% have
cash collateral.
The personal loan portfolio amounted to $1.8 billion at December 31,
1997, compared with $1.5 billion reported at December 31, 1996, or 57.9% of the
total consumer loan portfolio as of both dates, an increase of $237 million or
15.4%. Most of the growth was attained at BPPR, where personal loans rose $154
million to $1.4 billion at December 31, 1997.
Auto loans, which represented 19.5% of the consumer loan portfolio as
of December 31, 1997, rose $72 million to $601 million in 1997. The increase in
this category was mostly achieved through business expansion and marketing
efforts. The credit card portfolio rose $78 million to $552 million at December
31, 1997, principally at BPPR, whose portfolio increased $73 million
F-15
36
or 93% of the total increase, due to strong marketing efforts in new products.
Also, the acquisition of RCB contributed $19 million to this increase.
The Corporation had $2.8 billion in mortgage loans as of December 31,
1997, compared with $2.6 billion at the same date in 1996 and $2.4 billion in
1995. This increase was achieved in spite of the sale of $655 million of
mortgage loans during 1997, mostly through the expansion in the United States
and a higher loan origination volume in Puerto Rico.
The lease financing portfolio amounted to $582 million as of December
31, 1997, compared with $516 million and $499 million as of December 31, 1996
and 1995, respectively. Construction loans amounted to $250 million as of
December 31, 1997, from $200 million a year earlier and $216 million as of the
same date in 1995.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Total deposits at December 31, 1997, increased $986 million or 9.2%
reaching $11.7 billion compared with $10.8 billion at December 31, 1996. The
increase was related to the acquisitions performed during 1997, contributing
$1.1 billion in total deposits at their respective acquisition dates. The
increase was achieved notwithstanding the decrease of $367 million in 936
deposits. The geographic distribution of the Corporation's total deposits at the
end of 1997, included 76.9% in Puerto Rico and the Virgin Islands, and the
remaining 23.1% in the U.S. mainland. Total deposits as of December 31, 1995,
amounted to $9.9 billion.
Core deposits totaled $9.7 billion by the end of 1997, compared with
$8.6 billion at the same date last year. The growth resulted principally from
rises of $363 million in certificates of deposit under $100,000, $384 million in
savings accounts, $216 million in demand deposits, and $184 million in NOW and
money market accounts. At their respective acquisition dates, the acquired
operations contributed approximately $918 million to the increase in core
deposits.
Borrowings, excluding subordinated notes increased $1.1 billion, from
$4.3 billion at the end of 1996 to $5.4 billion at December 31, 1997. The rise
was mainly due to increases in federal funds purchased and securities sold under
agreements to repurchase of $848 million and $417 million in notes payable. The
increase in borrowed funds was used primarily to finance the Corporation's loan
growth and arbitrage activities. On May 23, 1997, a shelf registration was filed
with the Securities and Exchange Commission, allowing the Corporation 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 December 31, 1997, the Corporation had issued $230 million in medium-term
notes under that shelf registration.
Guaranteed Preferred Beneficial Interest in Subordinated Debentures
("Capital Securities") were issued during the first quarter of 1997. The
Corporation issued $150 million of those securities at 8.327% through BanPonce
Trust I, a statutory business trust owned by Popular North America (formerly
BanPonce Financial Corp.). The proceeds were upstreamed to Popular North America
as junior subordinated debt under the same terms and conditions. The Captial
Securities qualify as Tier I capital for regulatory purposes.
STOCKHOLDERS' EQUITY
At December 31, 1997, stockholders' equity amounted to $1.50 billion,
an increase of $241 million or 19.0% compared with the balance of $1.26 billion
at the end of 1996. This increase was mainly due to earnings retention, the
issuance of 2,462,272 common shares for the acquisitions of RCB and National
Bancorp, and the shares issued through the Corporation's Dividend Reinvestment
and Purchase Plan. The shares issued for acquisitions resulted in $96 million of
additional capital. As approved in the Corporation's stockholders meeting on
April 25, 1997, the authorized common stock of the Corporation was increased
from 90,000,000 shares to 180,000,000 shares. On May 8, 1997, the Board of
Directors approved a stock repurchase program of up to 3 million shares of the
outstanding common stock of the Corporation. As of December 31, 1997, the
Corporation had purchased 988,800 shares under this program with a total cost of
$39.6 million. The unrealized holding gains on securities available-for-sale,
net of deferred taxes, amounted to $33.3 million at December 31, 1997, compared
with $1.7 million a year ago.
The Corporation had 4,000,000 shares of preferred stock outstanding at
December 31, 1997. These shares are non-convertible and are redeemable at the
option of the Corporation on or after June 30, 1998. Dividends are
non-cumulative and are payable monthly at an annual rate per share of 8.35%
based on the liquidation preference value of $25 per share.
Regulatory guidelines require a minimum Tier I capital of 4%, total
capital to risk-weighted assets ratio of 8% and a leverage ratio of 3%. Banks
and bank holding companies which meet or exceed a Tier I ratio of 6%, a total
capital ratio of 10% and a
F-16
37
TABLE I
Capital Adequacy Data
As of December 31,
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
Risk-based capital:
Tier I capital .......................... $ 1,335,391 $ 1,121,128 $ 1,003,072 $ 953,266 $ 786,686
Supplementary (Tier II) capital ......... 263,115 246,350 231,091 104,338 106,193
----------------------------------------------------------------------------------
Total capital ....................... $ 1,598,506 $ 1,367,478 $ 1,234,163 $ 1,057,604 $ 892,879
==================================================================================
Risk-weighted assets:
Balance sheet items ..................... $ 10,687,847 $ 9,368,420 $ 8,175,420 $ 7,219,906 $ 6,150,749
Off-balance sheet items ................. 287,822 275,397 249,529 199,327 250,102
----------------------------------------------------------------------------------
Total risk-weighted assets .......... $ 10,975,669 $ 9,643,817 $ 8,424,949 $ 7,419,233 $ 6,400,851
==================================================================================
Ratios:
Tier I capital (minimum required-4.00%) . 12.17% 11.63% 11.91% 12.85% 12.29%
Total capital (minimum required-8.00%) .. 14.56 14.18 14.65 14.25 13.95
Leverage ratio (minimum required-3.00%) . 6.86 6.71 6.66 7.62 6.95
Equity to assets ........................ 7.44 7.33 7.58 7.57 7.42
Tangible equity to assets ............... 6.52 6.55 6.60 6.55 6.29
Equity to loans ......................... 13.00 12.97 13.03 13.01 13.91
Internal capital generation rate ........ 10.76 10.99 9.36 9.48 10.08
- --------------------------------------------------------------------------------------------------------------------------------
leverage ratio of 5% are considered well-capitalized by regulatory standards. At
December 31, 1997, the Corporation exceeds those regulatory risk-based capital
requirements for well-capitalized institutions by wide margins, due to the high
level of capital and the conservative nature of the Corporation's assets. Tier I
capital to risk-adjusted assets and total capital ratios at December 31, 1997,
were 12.17% and 14.56%, respectively, compared with 11.63% and 14.18% at the
same date in 1996. The Corporation's leverage ratio was 6.86% at December 31,
1997, compared with 6.71% as of the same date the previous year. Table I shows
capital adequacy information for the current and previous four years.
Intangible assets rose $101 million from $131 million at December 31,
1996. The rise in intangible assets was the result of the acquisitions during
1997, of which RCB accounted for $64 million at acquisition date, while the
operations acquired in the U.S. resulted in $40 million in intangible assets. At
December 31, 1997, total intangibles consisted of $120 million in goodwill, $75
million in core deposit intangibles, $29 million in mortgage servicing rights
and $8 million in other intangibles. At the end of 1996, core deposit
intangibles were $55 million, goodwill totaled $46 million, mortgage servicing
rights were $26 million and other intangibles were $4 million. The average
tangible equity increased to $1.19 billion for the year ended December 31, 1997,
from $1.06 billion a year before, an increase of $128 million or 12.1%. Total
tangible equity at December 31, 1997, was $1.27 billion compared with $1.13
billion at December 31, 1996. The tangible equity to assets ratio for 1997 was
6.52% compared with 6.55% in 1996.
Book value per common share amounted to $20.73 at December 31, 1997,
compared with $17.59 at year-end 1996. The market value of the Corporation's
common stock at the end of 1997, was $49.50 compared with $33.75 a year earlier.
The total market capitalization was $3.4 billion, compared with $2.2 billion as
of December 31, 1996.
The Corporation's stock is traded on the National Association of
Securities Dealers Automated Quotation (NASDAQ) National Market System under the
symbol BPOP. Table J shows the range of market quotations and cash dividends
declared for each quarter during the last five years. The preferred stock of the
Corporation is also traded on the NASDAQ National Market System under the symbol
BPOPP. Its market value at December 31, 1997 and 1996 was $26.00 and $26.25 per
share, respectively.
The Corporation has a Dividend Reinvestment Plan for its stockholders.
This plan offers the stockholders the opportunity to automatically reinvest
their dividends in shares of common stock at a 5% discount from the average
market price at the time of issuance. During 1997, 120,726 shares, equivalent to
$4.6 million in additional capital, were issued under the plan. A total of
1,663,189 shares have been issued under this plan since its inception in 1989,
contributing $24.5 million in additional capital.
Dividends declared on common stock during 1997 totaled $54 million,
compared with $46 million in 1996. The Corporation increased its quarterly
dividend from $0.18 to $0.22 per common share, a 22.2% increase, effective with
the dividend paid on
F-17
38
TABLE J
Common Stock Performance
Cash Book
Market Price Dividends Value Dividend Price/ Market/
--------------- Declared Per Payout Dividend Earnings Book
High Low Per Share Share Ratio Yield * Ratio Ratio
1997 $20.73 25.19% 1.76% 16.50x 238.78%
1ST QUARTER .... $36 3/4 $33 1/16 $ 0.18
2ND QUARTER .... 42 7/8 33 3/4 0.18
3RD QUARTER .... 55 7/8 41 1/8 0.22
4TH QUARTER .... 54 3/8 45 3/4 0.22
1996 17.59 24.63 2.65 12.59 191.87
1st quarter .... $23 1/8 $19 3/8 $ 0.15
2nd quarter .... 23 6/7 21 7/8 0.18
3rd quarter .... 27 3/4 22 5/8 0.18
4th quarter .... 35 25 7/8 0.18
1995 15.81 26.21 3.15 9.24 122.55
1st quarter .... $15 7/8 $14 1/16 $0.13
2nd quarter .... 17 3/4 15 5/8 0.15
3rd quarter .... 19 1/2 17 3/4 0.15
4th quarter .... 19 15/16 19 1/16 0.15
1994 13.74 27.20 3.18 7.66 102.37
1st quarter .... $16 1/4 $15 3/8 $0.12
2nd quarter .... 16 3/8 15 1/2 0.12
3rd quarter .... 16 5/8 15 3/4 0.13
4th quarter .... 16 1/2 13 1/2 0.13
1993 12.75 25.39 2.97 9.42 123.58
1st quarter .... $15 5/8 $13 1/4 $0.10
2nd quarter .... 14 1/8 12 3/16 0.10
3rd quarter .... 15 1/8 13 1/4 0.12
4th quarter .... 16 1/8 14 7/8 0.13
*Based on the average high and low market price for the four quarters.
Note: All per share data has been adjusted to reflect the stock split effected
in the form of a dividend of one share for each share outstanding on July 1,
1996.
October 1, 1997. Total dividends declared per common share for 1997 were
$0.80 compared with $0.69 in 1996 and $0.58 in 1995. The dividend payout ratio
to common stockholders for the year was 25.19% compared with 24.63% in 1996.
Dividends declared on the preferred stock amounted to $8.35 million in 1997 and
1996.
Popular International Bank, Inc. and Popular North America, Inc.'s bank
subsidiaries (Banco Popular, Illinois, Banco Popular, N.A. (California), Banco
Popular, N.A. (Florida), Banco Popular, N.A. (Texas) 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 Popular International Bank, Inc. and Popular North America, Inc. to
make dividend and asset distributions to the Corporation, nor on the ability of
the subsidiaries of Popular North America, Inc., except for Banco Popular, FSB,
to make distributions to Popular North America, Inc. 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 anytime 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 December 31,
1997, the undistributed earnings of Banco Popular, FSB totaled $49 million.
RISK MANAGEMENT
Popular, Inc. has specific policies and procedures which structure and
delineate the management of risks, particularly those related with interest rate
exposure, liquidity and credit, all of which are broadly defined below.
F-18
39
MARKET RISK
Market risk is the risk of economic loss arising from adverse changes
in market rates and prices, such as interest rates, foreign currency exchange
rates, commodity prices, and other relevant market or price changes. The
Corporation's primary market risk exposure is that to interest rates as the net
interest income is affected primarily by interest rate volatility and its impact
on the repricing of assets and liabilities. Interest rate risk refers to the
probability of a reduction in earnings due to fluctuations in interest rates.
Other factors which can influence the Corporation's net interest income are the
spread between different market rates or basis risk, timing differences between
the maturity and repricing of assets and liabilities and the sensitivity of
their rates to market interest rates. It is a priority for the Corporation's
management to monitor continuously the degree of interest rate risk assumed and
ensure that it remains within an acceptable range.
During fiscal 1997, net interest income accounted for 76% of the
Corporation's gross revenues. A major responsibility of the Corporation's Board
of Directors and management is to ensure that interest rate volatility does not
affect adversely net interest income, and hence, profitability.
The Board of Directors is responsible for ensuring that interest rate
risk is managed prudently and it delegates this responsibility on the
Asset/Liability Management Committee (ALCO). The Board approves interest rate
risk policies and oversees its implementation by the ALCO. The objective of the
ALCO is to ensure that the Corporation's net interest income remains stable
despite the potential volatility of interest rates.
TRADING SECURITIES
Another source of market risk for the Corporation is the risk
associated with its trading activities. Financial instruments, including, to a
limited extent, derivatives such as interest rate futures and options contracts,
are utilized by the Corporation in connection with its trading activities and
are carried at market value. In conjunction with mortgage banking activities,
the Corporation records the securitization of mortgage loans held-for-sale as a
sale of mortgage loans and the purchase of a mortgage-backed security classified
as a trading security. Realized and unrealized changes in market values are
recorded separately in the trading profit or loss account in the period in which
the changes occur. Interest revenue and expense arising from trading instruments
are included in the income statement as part of net interest income rather than
in the trading profit or loss account.
Securities sold but not yet purchased, which represent the
Corporation's obligation to deliver securities sold which were not owned at the
time of sale ("short sales"), are recorded at market value.
At December 31, 1997, the Corporation trading portfolio represented
1.2% of total assets or $222 million as compared with 1.7% or $292 million at
December 31, 1996, and was composed of the following:
Weighted
Amount Average Yield
------------------------------
(In thousands)
Mortgage-backed securities ..... $150,094 6.14%
Commercial paper ............... 26,588 5.70
US Treasury and agencies ....... 32,858 5.43
Puerto Rico Government obligations 10,613 5.20
Other .......................... 2,150 6.78
------------------------------
$222,303 5.94%
==============================
The Corporation's trading portfolio as of December 31, 1997, was
comprised primarily of securities issued by Puerto Rico entities or
collateralized by real estate assets located in Puerto Rico. These usually have
certain tax benefits, if purchased by residents of Puerto Rico. The prices of
these securities tend to be less sensitive to changes in interest rates than
similar securities issued by U.S. mainland entities, because of tax treatment
for Puerto Rico investors. Recent changes to local tax laws in Puerto Rico have
decreased the supply of some types of tax-advantaged investments, thereby
reducing the sensitivity of a portion of the Corporation's securities portfolio
to changes in interest rates.
F-19
40
TABLE K
Interest Rate Sensitivity
As of December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
By Repricing Dates
-------------------------------------------------------------------------------
After After
Within three months six months
0-30 31-90 but within but within After one
(Dollars in thousands) days days six months one year year
- -------------------------------------------------------------------------------------------------------------------------
Assets:
Federal funds sold and
securities purchased under
agreements to resell ................ $ 485,184 $ 310,595 $ 7,024
Short-term interest bearing
deposits in other banks ............. 11,187 100
Investment and trading securities ..... 1,088,640 172,295 433,769 $ 245,689 $ 3,929,908
Loans ................................. 3,400,811 556,864 503,157 1,008,750 5,907,025
Other assets ..........................
----------------------------------------------------------------------------
Total ............................. 4,985,822 1,039,854 943,950 1,254,439 9,836,933
----------------------------------------------------------------------------
Liabilities and stockholders' equity:
Savings, NOW and money market
accounts ............................ 703,405 66,828 4,172,249
Other time deposits ................... 1,161,381 846,091 803,395 501,099 948,302
Federal funds purchased and securities
sold under agreements to repurchase . 2,172,914 271,915 87,500 10,000 181,000
Other short-term borrowings ........... 486,968 330,922 195,536 233,866 40,143
Notes payable ......................... 234,439 280,318 23,000 40,500 825,439
Subordinated notes and capital
securities ......................... 275,000
Non-interest bearing deposits .........
Other non-interest bearing liabilities
Stockholders' equity ..................
----------------------------------------------------------------------------
Total ............................. 4,759,107 1,796,074 1,109,431 785,465 6,442,133
----------------------------------------------------------------------------
Off-balance sheet financial instruments 40,000 160,000 (25,000) (175,000)
Interest rate sensitive gap ........... 266,715 (596,220) (165,481) 443,974 3,219,800
Cumulative interest rate
sensitive gap ....................... 266,715 (329,505) (494,986) (51,012) 3,168,788
Cumulative sensitive gap to
earning assets ...................... 1.48% (1.82%) (2.74%) (0.28%) 17.54%
- -------------------------------------------------------------------------------------------------------------------------
Non-interest
bearing
(Dollars in thousands) funds Total
- ----------------------------------------------------------------------
Assets:
Federal funds sold and
securities purchased under
agreements to resell ................ $ 802,803
Short-term interest bearing
deposits in other banks ............. 11,287
Investment and trading securities ..... 5,870,301
Loans ................................. 11,376,607
Other assets .......................... $1,239,509 1,239,509
-------------------------
Total ............................. 1,239,509 19,300,507
-------------------------
Liabilities and stockholders' equity:
Savings, NOW and money market
accounts ............................ 4,942,482
Other time deposits ................... 4,260,268
Federal funds purchased and securities
sold under agreements to repurchase . 2,723,329
Other short-term borrowings ........... 1,287,435
Notes payable ......................... 1,403,696
Subordinated notes and capital
securities ......................... 275,000
Non-interest bearing deposits ......... 2,546,836 2,546,836
Other non-interest bearing liabilities 358,369 358,369
Stockholders' equity .................. 1,503,092 1,503,092
--------------------------
Total ............................. 4,408,297 19,300,507
--------------------------
Off-balance sheet financial instruments
Interest rate sensitive gap ...........
Cumulative interest rate
sensitive gap .......................
Cumulative sensitive gap to
earning assets ......................
- ---------------------------------------------------------------------
INTEREST RATE RISK
Various techniques are employed to assess the degree of interest rate
risk in the Corporation. These include static gap analysis, simulations and
duration analysis. Each focuses on different aspects of the interest rate risk
that is assumed at any point in time, and are therefore used jointly to make
informed judgements about the risk levels and the appropriateness of strategies
under consideration.
Gap analysis measures the volume of assets and liabilities at a point
in time and their repricing during future time periods. The volume of assets
repricing is adjusted to take into consideration the expected prepayment of
certain assets such as mortgage loans and mortgage-backed securities, which can
be prepaid before their contractual maturity. Deposits repricing in future
periods are adjusted to take into consideration the sensitivity of non-time
deposits to market rates. Since these typically reprice with a lag to movements
in short-term market rates and by a lower magnitude, deposits repricing within
one year include an amount of non-time deposits consistent with the historical
relationship of their rates against market interest rates as measured using
statistical techniques. The net balance of assets or liabilities repricing
during future time periods particularly within one year is an indicator of the
degree of short-term interest rate risk being assumed by the Corporation. It is
subject to policy limits approved by the Board. Table K presents the
Corporation's interest rate sensitivity as of December 31, 1997.
F-20
41
In addition to the Corporation's static gap position, other factors
which affect the future level of net interest income include, the relationship
between different market rates as well as their levels, the interest rates of
assets and liabilities due for repricing, and the volume and duration of new
assets and liabilities booked in future periods. Simulation analysis, as further
explained below, measures the impact of these factors on future net interest
income, and serves as another measure of the short-term interest rate risk
assumed by the Corporation. Various interest rate scenarios are utilized in
simulation analysis to assess the stability of net interest income in both
rising and declining rate scenarios.
Whereas static gap and simulation analysis are useful for measuring the
degree of short-term market risk assumed, duration analysis focuses on the level
of longer-term market risk assumed. Duration measures the sensitivity of the
market prices of assets and liabilities to changes in interest rates. It focuses
on economic value, as opposed to gap and simulation analysis which consider
primarily the impact on net interest income. Since duration considers the impact
of rate changes on all the cash flows of assets and liabilities, it is
considered a more comprehensive measure of risk than gap or simulation analysis.
Duration addresses another weakness of other risk measurement methods by stating
all future cash flows of assets and liabilities in terms of their present value.
Sensitivity analysis (from here on sensitivity), is performed at the
corporate level to, among other financial analysis described above, express the
potential loss in future earnings resulting from selected hypothetical changes
in interest rates. Sensitivity includes both trading instruments and other than
trading instruments. Derivative financial instruments, specifically interest
rate swaps, are also included in the sensitivity to achieve more comprehensive
risk management.
Sensitivity is calculated on a monthly basis using a simulation model
which incorporates both actual balance sheet figures detailed by maturity and
interest yields or costs, the expected balance sheet dynamics, reinvestments,
and other non-interest related data. Simulations are run using various interest
rate scenarios to determine potential changes to the future earnings of the
Corporation. These forward looking figures of the Corporation reflect no
significant changes between a most likely to occur interest rate scenario as
compared with both rising and declining interest rate scenarios. The increase in
net interest income on a hypothetical rising rate scenario for the next twelve
months is $7.7 million and the decrease for the same period utilizing a
hypothetical declining rate scenario is $5.7 million.
Computations of the prospective effects of hypothetical interest rate
changes are based on many assumptions, including relative levels of market
interest rates, loan prepayments and deposits decay. They should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate actions the management could take to respond to changes in interest
rates. By their nature, these forward looking choices are only estimates and may
be different from what actually occurs in the future.
Rising and declining interest rate scenarios are estimated monthly, and
are important inputs into the simulation model. These are calculated to
represent the highest increase and decrease which various market rates should
reflect during the following twelve months, with a 95% confidence level. This
means that on average, in nineteen months out of every twenty, actual rate
movements will not exceed the rising or declining rate scenario. The underlying
assumption is that the movement of interest rates approaches a normal
distribution and that its properties can be used to project maximum future
changes in rates with a certain confidence level. The Corporation "backtests"
rising and declining rate scenarios continuously to validate the confidence
levels.
As of December 1997, the simulation's rising and declining rate
scenarios provided for a change of 75 basis points in the federal funds and
prime rates within a 12-month period. Changes for the U.S. Treasury yield curve
under rising and declining scenarios, were estimated at an average of
aproximately 140 basis points. All changes for market rates estimated in the
rising and declining rate scenarios exceeded 10% of their actual level as of the
end of 1997, within a one-year timeframe. The maximum changes assumed for the
prime rate (which is an administered rate) were 75 basis points, or 8.8% of the
8.50% level at which it ended 1997.
During 1997, the general level of interest rates increased during the
first four months while it decreased during the remainder of the year. During
the first quarter, the financial markets were expecting a more restrictive
monetary policy from the Federal Open Market Committee (FOMC) due to
exceptionally strong economic growth and increasing levels of resource
utilization rates. In March, the FOMC increased the federal funds rate 25 basis
points, leaving it unchanged for the remainder of the year.
In early 1997, the Corporation positioned its balance sheet to benefit
from an increase in the general level of interest rates, but as the year
progressed and interest rates started to decline, it extended the duration of
the investment portfolio to address more
F-21
42
effectively the risk posed by declining interest rates. The Corporation's net
interest margin for the year, on a taxable equivalent basis, was 4.84% which
represents an increase of seven basis points over that of the previous year.
As of December 31, 1997, the Corporation had a total of $1.3 billion in
mortgage-backed securities including collateralized mortgage obligations (CMO).
CMOs amounted to $864 million or 66% of the mortgage-backed securities portfolio
at that date. The portfolio had an estimated average life of 9.2 years and an
estimated average yield to maturity of 6.41%. The average life and yield to
maturity of the mortgage-backed securities portfolio is partially affected by
the level of prepayments of the underlying mortgage loans. The portfolio
includes securities which represent an interest in pools of mortgage loans as
well as obligations (CMOs) collateralized by such securities. In most cases, the
debtor of the underlying loans has the option of repaying the principal balance
owed at any time.
A decrease in the general level of interest rates usually results in a
higher level of prepayments of mortgage loans, while an increase would tend to
reduce the level of prepayments. The yield to maturity of mortgage-backed
securities may also be affected by a change in prepayment rates. Mortgage-backed
security portfolios with an aggregate unamortized premium may have a decrease in
their yield to maturity in an environment of increasing prepayment speeds,
whereas the yield to maturity may increase in an environment of decreasing
prepayment speeds. The opposite is true in the case of portfolios with aggregate
discounts. The mortgage-backed securities portfolio of the Corporation had an
aggregate premium of $3.9 million, as of December 31, 1997.
Derivatives are used, to a limited extent, by the Corporation with the
primary objective of controlling exposures to market risk. The primary
instruments used include exchange-traded futures contracts and interest rate
swaps. Financial futures are used primarily for hedging the cost of future debt
issuances as well as protecting the value of assets from market risk. Interest
rate swaps are used primarily to synthetically increase the duration of
borrowings. The notional amount of outstanding interest rate swaps as of
December 31, 1997 was $230 million, which represents an increase of $90 million
compared to the end of the previous year. The following table indicates the
types of derivative financial instruments the Corporation held at December 31,
1997.
-----------------------------------------
Weighted
Notional average Fair
amount rate (%) value
-----------------------------------------
(Dollars in thousands)
Interest rate swaps:
Pay floating/receive fixed ..... $ 15,000 5.94 / 6.42 $ 108
Pay fixed/receive floating ...... 215,000 6.24 / 5.88 (1,678)
Interest rate swaptions ......... 32,271 5.86 23,277
Interest rate options............ 60,917 533
Interest rate caps............... 3,413 41
Interest rate floors............. 3,413 (46)
Foreign exchange contracts ...... 1,234
LIQUIDITY RISK
The objective of the Corporation's liquidity management is to ensure the
ability to raise financing for its current operations and future growth.
Liquidity is a function of the ability to raise funds through borrowings in the
financial markets, as well as obtain funding through the use of the
Corporation's assets.
Other objectives pursued in the Corporation's liquidity management are the
diversification of funding sources and the control of interest rate risk.
Management tries to diversify the sources of financing used by the Corporation
in order to avoid undue reliance on any particular source. Since the duration
and repricing characteristics of the Corporation's borrowings determine to a
major extent the overall interest rate risk of the Corporation, they are also
actively managed.
The Corporation's assets and liabilities represent substantial sources of
liquidity. Among the Corporation's assets, the investment securities and loan
portfolios can be used to raise financing, while among the liabilities, various
mechanisms are used to borrow funds. These include gathering retail and
corporate deposits in the markets in which the Corporation competes, repurchase
agreements, unsecured short-term borrowings in the U.S. money markets,
commercial paper, medium term notes, bank notes and others. Notes 9 through 16
to the financial statements present details of the Corporations's deposits and
borrowings by type, as of December 31, 1997 and 1996.
F-22
43
TABLE L
Maturity Distribution of Earning Assets
As of December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Maturities
------------------------------------------------------------------------------------------
After one year
through five years After five years
--------------------------------------------------------
Fixed Variable Fixed Variable
One year interest interest interest interest
(In thousands) or less rates rates rates rates Total
- -----------------------------------------------------------------------------------------------------------------------------------
Money market securities................ $ 760,160 $ 45,200 $ 22 $ 8,708 $ 814,090
Investment and trading
securities........................... 1,266,772 $3,465,706 458,832 525,564 43,460 5,760,334
Loans:
Commercial........................... 2,116,970 864,377 647,453 421,179 587,430 4,637,409
Construction......................... 184,937 39,845 4,755 13,245 7,329 250,111
Lease financing...................... 163,114 412,001 6,812 581,927
Consumer............................. 1,026,818 1,856,070 7,170 183,102 104 3,073,264
Mortgage......................... 628,176 748,463 20 1,457,183 54 2,833,896
----------------------------------------------------------------------------------------
Total............................ $6,146,947 $7,386,462 $1,163,430 $2,607,107 $ 647,085 $17,951,031
========================================================================================
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity
securities held by the Corporation are not included in this table.
- -------------------------------------------------------------------------------
The investment securities portfolio is a major source of liquidity within
the Corporation's assets. It consists primarily of U.S. Treasury and Agency
obligations. As of December 31, 1997, the entire portfolio totaled $5.6 billion
with an average life of 3.9 years. The net unrealized gain of the portfolio at
that time amounted to $45.3 million. U.S. Treasury and Agency securities
amounted to $4.1 billion or 73% of the total portfolio, with an average life of
2.2 years. Securities classified available-for-sale totaled $5.2 billion or 93%
of the total portfolio, and the net unrealized gain amounted to $44.5 million.
As shown in Table L, $1.3 billion or 22% of the investment securities portfolio
had a maturity of one year or less at the end of 1997.
The Corporation's loan portfolio is another liquidity source since it
generates substantial cash flow as a result of principal and interest payments
and principal prepayments. In particular, mortgage loans and some types of
consumer loans have active secondary markets and can be sold or pledged for
borrowings. Also, some loans can be securitized or sold outright in the
secondary markets. Table L presents a maturity distribution of the loan
portfolio as of December 31, 1997. As of that date $4.1 billion or 36% of the
loan portfolio matured within one year.
Despite the increasing importance of wholesale borrowings at the
Corporation, deposits are the single most important funding source. They tend to
be less volatile than institutional borrowings and their cost is less sensitive
to changes in market rates. Deposits include retail and commercial demand
deposit accounts as well as time deposits and savings accounts. The Corporation
has obtained substantial shares of the deposits in its principal markets, due to
the extensive branch network and leadership in electronic banking. As of
December 31, 1997, the Corporation's core deposits amounted to $9.7 billion or
83% of total deposits, an increase of $1.2 billion or 13.7% from the previous
year. As presented in Table M, during fiscal 1997 average total deposits
increased $530 million over the previous year, while average core deposits rose
$579 million. The volume of the Corporation's core deposits located in
continental U.S. markets increased to $2.6 billion as of December 31, 1997 from
$1.9 billion as of the end of the previous year. Certificates of deposit with
denominations of $100,000 and over as of December 31, 1997, totaled $2.0
billion, or 17.1% of total deposits. Their distribution by maturity was as
follows:
(In thousands)
3 months or less........... $1,271,197
3 to 6 months.............. 307,860
6 to 12 months............. 147,748
over 12 months............. 286,475
----------
$2,013,280
==========
F-23
44
TABLE M
Average Total Deposits
For the Year
- -----------------------------------------------------------------------------------------------------------------------
Five-Year
(In thousands) 1997 1996 1995 1994 1993 C.G.R.
------------------------------------------------------------------------------
Private demand........................ $ 1,972,052 $ 1,726,596 $1,571,405 $1,515,158 $1,396,339 9.28%
Public demand......................... 317,248 321,249 268,317 273,565 235,323 9.53
Other non-interest bearing accounts... 4,367 5,910 5,983 6,967 3,678 2.78
------------------------------------------------------------------------------
Non-interest bearing............ 2,293,667 2,053,755 1,845,705 1,795,690 1,635,340 9.30
------------------------------------------------------------------------------
Savings accounts...................... 3,393,279 3,095,898 2,913,380 2,839,300 2,492,845 10.67
NOW and money market accounts......... 1,281,298 1,148,727 1,102,593 1,133,106 1,078,075 6.04
------------------------------------------------------------------------------
Savings deposits................ 4,674,577 4,244,625 4,015,973 3,972,406 3,570,920 9.28
------------------------------------------------------------------------------
Certificates of deposit:
Under $100,000...................... 1,216,583 1,307,323 1,281,873 1,160,063 1,143,624 0.76
$100,000 and over................... 1,865,720 1,371,928 1,034,195 590,305 498,093 29.53
936 ................................ 508,789 1,020,064 999,384 1,007,147 1,029,450 (15.81)
------------------------------------------------------------------------------
Certificates of deposit......... 3,591,092 3,699,315 3,315,452 2,757,515 2,671,167 4.47
------------------------------------------------------------------------------
Public time........................... 215,243 238,377 175,706 177,534 124,629 6.69
Other time............................ 216,978 225,724 229,315 134,081 122,829 10.78
------------------------------------------------------------------------------
Other time deposits............. 432,221 464,101 405,021 311,615 247,458 8.63
------------------------------------------------------------------------------
Interest bearing................ 8,697,890 8,408,041 7,736,446 7,041,536 6,489,545 7.11
------------------------------------------------------------------------------
Total $10,991,557 $10,461,796 $9,582,151 $8,837,226 $8,124,885 7.54%
==============================================================================
Borrowings from institutional sources are an increasingly important source
of financing for the Corporation. The Corporation's short-term borrowings
include federal funds purchased, repurchase agreements and commercial paper.
Federal funds purchased and repurchase agreements usually have maturities
within 90 days, while commercial paper sold matures within 270 days. As of
December 31, 1997, the outstanding balance of federal funds purchased,
repurchase agreements and commercial paper sold amounted to $2.7 billion, an
increase of $848 million as compared to the previous year.
Long-term borrowings diversify the Corporation's funding sources and are a
useful tool for adjusting the average duration of the Corporation's
liabilities. These include primarily bank notes and medium term notes, which
are sold to investors both directly and through a selling group of dealers. As
of December 31, 1997, outstanding medium term notes and bank notes amounted to
$1.4 billion, an increase of $417 million over the previous year. For
information on the maturities of medium and long-term debt issued, please refer
to notes 12 through 16 to the Consolidated Financial Statements.
The Corporation's deposits and borrowings include funds from former 936
corporations. The outstanding balance of deposits and borrowings from former
936 corporations as of December 31, 1997, amounted to $1.8 billion, a decrease
of $358 million as compared with the previous year. Total deposits and
borrowings from former 936 corporations as of December 31, 1997, amounted to
9.9% of total liabilities, a decrease as compared with the previous year when
these funds amounted to 13.7% of liabilities.
Section 936 of the Internal Revenue Code was eliminated in 1996, in the
legislation which increased the federal minimum wage. This legislation repealed
the exemption from federal taxation of interest income earned from investments
in financial assets issued in Puerto Rico, effective for fiscal years
commencing after December 31, 1995. Since most investments by former 936
companies in financial assets issued in Puerto Rico are now subject to federal
taxation, these have decreased in volume, particularly short-term investments.
The exposure of the Corporation to short-term funds from former 936
corporations has decreased substantially since the repeal of Section 936. As of
December 31, 1997, these funds maturing in less than one year amounted to $960
million which represents a decrease of 29% as compared with the previous year
when the amount of these funds was $1.3 billion.
F-24
45
CREDIT RISK MANAGEMENT AND LOAN QUALITY
One of the Corporation's primary risk exposure is its credit risk, which
represents the possibility of loss from a borrower's failure to perform
according to the terms of a transaction. The Corporation controls and monitors
this risk with policies, procedures and various levels of managerial
involvement.
The strategies utilized to manage credit risk begin with the adherence to
policies and procedures established for the initial underwriting of the credit
portfolio, followed by the ongoing monitoring of the portfolio, including the
early identification of potential problems and their resolution. Also, the
Corporation continues emphasizing the skills and experience of the credit staff
and improving the processing technology. Furthermore, the Corporation has an
independent Credit Review and Audit Division, which performs ongoing independent
reviews of specific loans for credit quality, proper documentation and risk
management purposes. This division is centralized and independent of the lending
function. It also manages the credit rating system and tests the adequacy of the
allowance for loan losses in accordance with generally accepted accounting
principles (GAAP) and regulatory standards.
Credit extensions are approved by credit officers of the respective lending
departments. The number and level of officers approval depend on the dollar
amount and risk characteristics of the credit facility. The Corporation receives
collateral to support credit extensions and commitments, whenever it is
considered necessary. The amount of collateral obtained is based on the credit
assessment of the customer, and may include real or personal property, accounts
receivable, inventory and cash on deposit.
The Corporation's credit risk at December 31, 1997, was concentrated in its
$11.4 billion loan portfolio, which represented 63% of earning assets. The loan
portfolio is well-balanced as the Corporation's credit policies and procedures
emphasize diversification among geographical areas, business and industry
groups, to minimize the adverse impact of any single event or set of
occurrences. The credit risk exposure is spread among individual consumers,
small commercial loans and a diverse base of borrowers engaged in a wide variety
of businesses.
The Corporation has over 843,000 consumer loans and over 52,000 commercial
lending relationships. Only 40 of these relationships have loans outstanding
over $10 million. Highly leveraged transactions and credit facilities to finance
speculative real estate ventures are minimal and there are no LDC loans.
The following risk concentration categories existed at year-end.
Geographic Risk - The asset composition of the Corporation by geographical
area at December 31, 1997 and 1996 is presented in the following table:
1997 1996
(Dollars in thousands)
-----------------------------------------------------------
Puerto Rico $14,189,332 73.5% $12,386,136 73.9%
United States 4,616,196 23.9 3,756,526 22.4
U.S. and British Virgin
Islands and Latin America 494,979 2.6 621,441 3.7
-----------------------------------------------------------
$19,300,507 100.0% $16,764,103 100.0%
===========================================================
At December 31, 1997, BPPR, the Corporation's largest subsidiary, operated
201 branches in Puerto Rico, 29 in New York, seven in the U.S. Virgin Islands
and one in the British Virgin Islands. Puerto Rico's economic outlook is
generally similar to that of the mainland, and the Government of the Island and
its instrumentalities are all investment-grade rated borrowers in the United
States capital markets. As previously discussed in the Liquidity Risk section of
this financial review, in August 1996, the U.S. Congress approved legislation
that repealed Section 936 of the Internal Revenue Code. The bill approved
repealed the Qualified Possession Source Investment Income (QPSII) credit
retroactively for taxable years beginning after December 31, 1995, while the
income and wage credits are being phased-out in 10 years. No significant changes
have been experienced on the general economic conditions of Puerto Rico as a
result of the enactment of this law. Meanwhile, the Corporation continues
diversifying its geographical risk. In 1997, the Corporation acquired Seminole
National Bank, located in Florida. This banking operation operated three
branches, with $19 million in loans and $23 million in deposits at acquisition
date. Also in 1997, the Corporation acquired National Bancorp Inc. and CBC
Bancorp, located in Illinois. These acquisitions added $261 million in loans and
$408 million in deposits. In Puerto Rico, the Corporation completed the
acquisition of RCB. This acquisition added $361 million in
F-25
46
loans and $584 million in deposits. At the end of 1997, the Corporation expanded
the operation to Texas with the acquisition of Houston BanCorporation, which
added $39 million in loans and $41 million in deposits. Equity One, the
Corporation's mortgage and consumer finance operation in the mainland, had 117
branches in 30 states and $1.2 billion in total assets at December 31, 1997,
compared with 102 branches in 28 states and $1.1 billion in total assets at
December 31, 1996. The following table presents the net income for 1997 and
total assets as of December 31, 1997, by subsidiary:
% of % of
Consolidated Consolidated
(Dollars in thousands) Net Income Net Income Total Assets Assets
- --------------------------------------------------------------------------------------------------------------------------
Banco Popular de Puerto Rico $178,725 85.28% $15,179,575 78.65%
Equity One, Inc. 16,592 7.92 1,222,443 6.33
Popular Leasing 8,534 4.07 598,895 3.10
Banco Popular, Illinois 4,378 2.09 979,132 5.07
Popular Securities 2,325 1.11 651,565 3.38
Popular Finance 4,437 2.12 152,514 0.79
Banco Popular, FSB 933 0.45 338,896 1.76
Popular Home Mortgage 1,951 0.93 144,782 0.75
Banco Popular, N.A. (California) 664 0.32 141,734 0.73
Banco Popular, N.A. (Florida) (8,861) (4.23) 67,717 0.35
Parent Company, other subsidiaries
and eliminations (113) (0.06) (176,746) (0.91)
----------------------------------------------------------------
Total $209,565 100.00% $19,300,507 100.00%
================================================================
Consumer Credit Risk - Consumer credit risk arises from exposures to
credit card receivables, home mortgages, personal loans and other installment
credit facilities. At December 31, 1997, consumer and residential mortgage loans
amounted to $3.1 billion and $2.8 billion, respectively, with $964 million in
unused credits card lines. At December 31, 1997, the secured consumer loan
portfolio was $1.4 billion or 46.2% of the total consumer portfolio.
Industry Risk - Total commercial loans, including commercial real estate
and construction loans, amounted to $4.9 billion at year-end. The Corporation's
strategy to emphasize the use of collateral has resulted in a secured commercial
and construction loan portfolio comprised of approximately $1.4 billion, or
28.2% of the total commercial and construction loan portfolios. These loans are
secured by real estate, consisting primarily of residential, owner-occupied and
income producing properties. Furthermore, commercial and construction loans
secured by cash collateral totaled $206 million, or 4.2% of the commercial and
construction portfolio at the end of 1997. Also, at December 31, 1997, the
Corporation had $1.7 billion in unused commitments under lines of credit to
commercial, industrial and agricultural concerns. Commercial and standby letters
of credit totaled $73 million at December 31, 1997. There are no significant
concentrations in any one industry with a substantial portion of the customers
having credit needs of less than $100,000.
Government Risk - As of December 31, 1997, $4.1 billion of the investment
securities represented exposure to the U.S. Government in the form of U.S.
Treasury securities and obligations of U.S. Government agencies and
corporations. In addition, $90 million of residential mortgages and $375 million
in commercial loans were insured or guaranteed by the U.S. Government or its
agencies. The Corporation is one of the largest SBA lenders in the United
States. Furthermore, there was $114 million of investment securities
representing obligations of the Puerto Rico Government and political
subdivisions thereof, $63 million of loans issued to or guaranteed by these same
entities and $32 million of loans issued to or guaranteed by the U.S. Virgin
Islands' Government.
NON-PERFORMING ASSETS
Non-performing assets consist of past due loans on which no interest income is
being accrued, renegotiated loans and other real estate. As shown in Table N, as
of December 31, 1997, non-performing assets amounted to $212 million or 1.87% of
loans, compared with $155 million or 1.58% of total loans and $155 million or
1.79% of total loans at the end of 1996 and 1995, respectively. Non-performing
loans at December 31, 1997, totaled $194 million or 1.71% of loans as compared
with $145 million or 1.49% a year earlier. As of December 31, 1995,
non-performing loans were $144 million or 1.67% of loans.
F-26
47
TABLE N
Non-Performing Assets
As of December 31,
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
Commercial, industrial and
agricultural........................ $105,880 $ 81,534 $ 87,250 $ 53,553 $ 49,517
Construction.......................... 2,704 2,000 4,733 7,994 8,215
Lease financing....................... 1,569 1,599 5,606 4,027 4,429
Mortgage.............................. 53,449 43,955 32,066 16,510 14,363
Consumer.............................. 30,840 16,320 14,827 12,179 16,290
Renegotiated accruing loans........... 6 3,308 2,742 2,982 5,643
Other real estate..................... 18,012 6,076 7,807 10,390 12,699
-------------------------------------------------------------------------------
Total .......................... $212,460 $154,792 $155,031 $107,635 $111,156
===============================================================================
Accruing loans past-due
90 days or more..................... $ 20,843 $ 12,270 $ 11,660 $ 15,012 $ 15,505
===============================================================================
Non-performing assets to loans........ 1.87% 1.58% 1.79% 1.38% 1.75%
Non-performing loans to loans......... 1.71 1.49 1.67 1.21 1.46
Non-performing assets to assets....... 1.10 0.92 0.99 0.84 0.97
Interest lost......................... $ 11,868 $ 7,696 $ 7,135 $ 5,441 $ 4,992
Note: The Corporation's policy is to place commercial and construction loans
on non-accrual status if payments of principal or interest are past-due
60 days or more. Lease financing receivables and conventional
residential mortgage loans are placed on non-accrual status if payments
are delinquent 90 days or more. Close-end consumer loans are placed on
non-accrual when they become 90 days or more past-due and are
charged-off when they are 120 days past-due. Open-end consumer loans
are not placed on non-accrual status and are charged-off when they are
180 days past-due. Loans past-due 90 days or more and still accruing
are not considered as non-performing loans.
The increase in non-performing assets was reflected in non-performing
commercial loans, consumer loans, other real estate owned and mortgage loans
which rose $24 million, $15 million, $12 million and $9 million, respectively.
The rise in the commercial non-performing portfolio was principally a result of
the classification as non-accrual of an $11 million commercial income-producing
real estate loan in the U.S. Virgin Islands and an increase of $13 million in
the U.S. banking operations of the Corporation partially related to the
acquisitions, with particular emphasis on the implementation of the
Corporation's more conservative non-accrual policy, as further explained below.
Also, the higher loan volume was a leading factor for the increase. The
aforementioned commercial loan in the U.S. Virgin Islands was subsequently
collected during the first quarter of 1998. The non-performing consumer loans
increased principally as a result of the higher level of personal bankruptcies
which caused an increase in delinquency levels. In the non-performing mortgage
loan category, Equity One reached $25 million at December 31, 1997, an increase
of $7 million when compared with $18 million at the same date last year. Most of
this increase 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 September 30, 1997, increased 23% over the
same period a year before. The other real estate category increased $6 million
at Equity One and $5 million at BPPR, mostly as a result of successful
collection efforts through the legal process of several real estate secured
loans.
The Corporation reports its non-performing assets on a more conservative
basis than most U.S. banks. The Corporation's policy is to place commercial
loans on non-accrual status if payments of principal or interest are delinquent
60 days rather than the standard industry practice of 90 days. Financing leases,
conventional mortgages and close-end consumer loans are placed on non-accrual
status if payments are delinquent 90 days. Closed-end consumer loans are
charged-off when payments are delinquent 120 days. Open end (revolving credit)
consumer loans are charged-off if payments are delinquent 180 days. Certain
loans which would be treated as non-accrual loans pursuant to the foregoing
policy, are treated as accruing loans if they are considered well-secured and in
the process of collection. Under the standard industry practice, close-end
consumer loans are charged-off when delinquent 120 days, but are not customarily
placed on non-accrual status prior to being charged-off.
Assuming the standard industry practice of placing commercial loans on
non-accrual status when payments of principal and interest are past due 90 days
or more and excluding the closed-end consumer loans from non-accruing, the
Corporation's non-performing assets at December 31, 1997, would have been $167
million or 1.47% of loans, and the allowance for loan losses would have been
126.9% of non-performing assets. At December 31, 1996 and 1995, adjusted
non-performing assets would have
F-27
48
TABLE O
Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year............. $ 185,574 $ 168,393 $ 153,798 $ 133,437 $ 110,714
Allowances purchased..................... 13,237 402 3,473 1,580
Provision for loan losses................ 110,607 88,839 64,558 53,788 72,892
----------------------------------------------------------------------------------
309,418 257,634 218,356 190,698 185,186
----------------------------------------------------------------------------------
Losses charged to the allowance:
Commercial............................. 55,734 38,017 34,383 27,435 29,501
Construction........................... 600 2,369 2,046 1,794 3,060
Lease financing........................ 23,085 22,129 6,979 6,860 9,150
Mortgage............................... 2,612 2,189 1,618 1,310 477
Consumer............................... 65,559 43,257 33,681 29,545 35,239
----------------------------------------------------------------------------------
147,590 107,961 78,707 66,944 77,427
----------------------------------------------------------------------------------
Recoveries:
Commercial............................. 18,385 11,498 9,404 6,950 6,279
Construction........................... 122 207 288 1,374 607
Lease financing........................ 15,890 9,749 2,342 3,514 2,081
Mortgage............................... 356 295 243 5 36
Consumer............................... 15,070 14,152 16,467 18,201 16,675
----------------------------------------------------------------------------------
49,823 35,901 28,744 30,044 25,678
----------------------------------------------------------------------------------
Net loans charged-off.................... 97,767 72,060 49,963 36,900 51,749
----------------------------------------------------------------------------------
Balance at end of year................... $ 211,651 $ 185,574 $ 168,393 $ 153,798 $ 133,437
==================================================================================
Loans:
Outstanding at year end................ $11,376,607 $9,779,028 $8,677,484 $7,781,329 $6,346,922
Average................................ 10,548,207 9,210,964 8,217,834 7,107,746 5,700,069
Ratios:
Allowance for loan losses to year
end loans............................ 1.86% 1.90% 1.94% 1.98% 2.10%
Recoveries to charge-offs.............. 33.76 33.25 36.52 44.88 33.16
Net charge-offs to average loans......... 0.93 0.78 0.61 0.52 0.91
Net charge-offs earnings coverage...... 4.04X 4.79x 5.42x 6.21x 3.96x
Allowance for loan losses to net
charge-offs.......................... 2.16 2.58 3.37 4.17 2.58
Provision for loan losses to:
Net charge-offs.................... 1.13 1.23 1.29 1.46 1.41
Average loans...................... 1.05% 0.96% 0.79% 0.76% 1.28%
Allowance to non-performing assets..... 99.62 119.89 108.62 142.89 120.04
- ------------------------------------------------------------------------------------------------------------------------------
been $117 million or 1.19% of loans and $121 million or 1.39% of loans,
respectively. The allowance for loan losses as a percentage of non-performing
assets as of December 31, 1996 and 1995, would have been 159.0% and 139.6%,
respectively.
Accruing loans that are contractually past-due 90 days or more as to
principal or interest, but are well-secured and in the process of collection as
of December 31, 1997, amounted to $21 million as compared with $12 million in
1996 and 1995.
Once a loan is placed in non-accrual status the interest previously accrued
and uncollected is charged against current earnings and thereafter, income is
recorded only to the extent of any interest collected. The interest income that
would have been realized had these loans been performing in accordance with
their original terms amounted to $11.9 million for 1997, compared with $7.7
million for 1996 and $7.1 million in 1995.
F-28
49
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level sufficient to
provide for estimated loan losses based on evaluations of known and inherent
risks in the loan portfolio. The Corporation's management evaluates the adequacy
of the allowance for loan losses on a monthly basis. In determining the
allowance, management considers the portfolio risk characteristics, prior loss
experience, prevailing and projected economic conditions and loan impairment
measurement. A loan is considered impaired when, based on the current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. At
December 31, 1997 and 1996, the portion of the allowance for loan losses related
to impaired loans was $19 million and $18 million, respectively. Please refer to
Notes 1 and 6 to the Consolidated Financial Statements for further information
related to impaired loans.
At December 31, 1997, the allowance for loan losses was $212 million or
1.86% of loans, compared with $186 million or 1.90% at the same date in 1996. At
December 31, 1995, the allowance was $168 million or 1.94% of loans. Based on
current and expected economic conditions, the expected level of net loan losses
and the methodology established to evaluate the adequacy of the allowance for
loan losses, management considers that the Corporation continues enjoying an
adequate position in its allowance for loan losses.
Broken down by major loan categories, the allowance for the last five years
was as follows:
ALLOWANCE FOR LOAN LOSSES
AT DECEMBER 31,
(IN MILLIONS)
1997 1996 1995 1994 1993
-----------------------------------------------------------------
Commercial $101.5 $ 91.8 $ 82.6 $ 73.8 $ 64.0
Construction 10.6 10.5 11.0 10.8 10.6
Lease financing 5.9 3.4 6.4 6.5 5.8
Consumer 82.8 69.6 60.6 56.7 52.0
Mortgage 10.9 10.3 7.8 6.0 1.0
-----------------------------------------------------------------
$211.7 $185.6 $168.4 $153.8 $133.4
=================================================================
Table O summarizes the movement in the allowance for loan losses and
presents selected loan loss statistics for the past five years. As this table
demonstrates, net loan losses for the year totaled $97.8 million or 0.93% of
average loans, an increase of $25.7 million or 36.6% from $72.1 million or 0.78%
of average loans in 1996. The rise primarily reflected higher net charge-offs in
the consumer and commercial loan portfolios, partially offset by a reduction in
net losses in the lease financing portfolio.
Consumer loans net charge-offs totaled $50.5 million or 1.76% of average
consumer loans for 1997, compared with $29.1 million, or 1.18% of average
consumer loans for 1996. Within this category, personal loans reflected an
increase of $14.3 million, from $15.6 million or 1.10% of average personal loans
in 1996 to $29.9 million or 1.79% in 1997. This increase is the result of the
growth of $254 million in the average personal loan portfolio together with the
record breaking levels in personal bankruptcies during 1997. In addition, credit
cards net losses amounted to $15.7 million or 3.08% of the average credit card
portfolio as compared with $11.0 million or 2.49% in 1996.
Commercial loans net charge-offs amounted to $37.3 million in 1997,
compared with $26.5 million a year earlier. As a percentage of average
commercial loans, this figure increased to 0.85% in 1997 from 0.77% in 1996. The
increase in commercial loans net losses was influenced by the implementation of
the Corporation's more conservative charge-off policy at the acquired banks and
the portfolio growth. Net charge-offs in the mortgage portfolio totaled $2.3
million in 1997 compared with $1.9 million in 1996.
Lease financings net charge-offs decreased $5.2 million, from $12.4 million
or 2.45% of average lease financings in 1996 to $7.2 million or 1.30% in 1997,
as a result of a more conservative charge-off policy implemented in 1996 by the
Corporation's leasing subsidiary in Puerto Rico, which resulted in a subsequent
increase in the level of recoveries in 1997 by $6.1 million, while charge-offs
stabilized. However, the level of recoveries in the leasing portfolio should
stabilize during 1998.
F-29
50
STATISTICAL SUMMARY 1993-1997 POPULAR, INC.
STATEMENTS OF CONDITION
As of December 31,
(In thousands) 1997 1996 1995 1994 1993
---------------------------------------------------------------------
ASSETS
Cash and due from banks.................................. $ 463,151 $ 492,368 $ 458,173 $ 442,316 $ 368,837
---------------------------------------------------------------------
Money market investments:
Federal funds sold and securities and mortgages
purchased under agreements to resell................. 802,803 778,597 796,417 265,000 247,333
Time deposits with other banks........................ 9,013 19,023 100 100 15,100
Bankers' acceptances.................................. 2,274 2,656 2,202 570 259
---------------------------------------------------------------------
814,090 800,276 798,719 265,670 262,692
---------------------------------------------------------------------
Trading securities....................................... 222,303 292,150 330,674 1,670 3,017
---------------------------------------------------------------------
Investment securities available-for-sale,
at market value and at lower of cost or
market value before 1994.............................. 5,239,005 3,415,934 3,209,974 839,226 715,565
---------------------------------------------------------------------
Investment securities held-to-maturity, at cost 408,993 1,197,066 1,651,344 2,955,911 3,329,798
---------------------------------------------------------------------
Loans held-for-sale...................................... 265,204 255,129 112,806 10,296
---------------------------------------------------------------------
Loans.................................................... 11,457,675 9,854,911 8,883,963 8,066,954 6,655,072
Less-Unearned income............................. 346,272 331,012 319,285 295,921 308,150
Allowance for loan losses................... 211,651 185,574 168,393 153,798 133,437
---------------------------------------------------------------------
10,899,752 9,338,325 8,396,285 7,617,235 6,213,485
---------------------------------------------------------------------
Premises and equipment................................... 364,892 356,697 325,203 324,160 298,089
Other real estate........................................ 18,012 6,076 7,807 10,390 12,699
Customers' liabilities on acceptances.................... 1,801 3,100 2,208 902 1,392
Accrued income receivable................................ 118,677 95,487 113,539 78,765 79,285
Other assets............................................. 252,040 380,247 125,742 103,088 95,763
Intangible assets........................................ 232,587 131,248 142,977 128,729 132,746
---------------------------------------------------------------------
$19,300,507 $16,764,103 $15,675,451 $12,778,358 $11,513,368
=====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ................................ $ 2,546,836 $ 2,330,704 $ 2,021,658 $ 1,949,244 $ 1,848,859
Interest bearing .................................... 9,202,750 8,432,571 7,855,004 7,063,191 6,673,799
---------------------------------------------------------------------
11,749,586 10,763,275 9,876,662 9,012,435 8,522,658
Federal funds purchased and securities
sold under agreements to repurchase.................. 2,723,329 1,875,465 3,000,878 1,438,038 951,733
Other short-term borrowings........................... 1,287,435 1,404,006 454,707 573,841 664,173
Notes payable......................................... 1,403,696 986,713 730,428 459,524 253,855
Senior debentures..................................... 30,000 30,000 30,000 30,000
Acceptances outstanding............................... 1,801 3,100 2,208 902 1,392
Other liabilities..................................... 356,568 314,012 263,871 211,195 182,362
17,522,415 15,376,571 14,358,754 11,725,935 10,606,173
---------------------------------------------------------------------
Subordinated notes................................... 125,000 125,000 175,000 50,000 62,000
---------------------------------------------------------------------
Preferred stock of Banco Popular..................... 11,000
---------------------------------------------------------------------
Preferred beneficial interest in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation........................................ 150,000
---------------------------------------------------------------------
Stockholders' equity:
Preferred stock....................................... 100,000 100,000 100,000 100,000
Common stock.......................................... 412,029 396,531 197,692 197,029 196,395
Surplus............................................... 602,023 496,582 427,282 409,445 386,622
Retained earnings..................................... 395,253 267,719 350,480 272,458 208,607
Treasury stock - at cost.............................. (39,559)
Unrealized gains (losses) on investment...............
securities available-for-sale, net of deferred taxes.. 33,346 1,700 16,243 (19,366)
Capital reserves...................................... 50,000 42,857 42,571
---------------------------------------------------------------------
1,503,092 1,262,532 1,141,697 1,002,423 834,195
---------------------------------------------------------------------
$19,300,507 $16,764,103 $15,675,451 $12,778,358 $11,513,368
=====================================================================
F-30
51
STATISTICAL SUMMARY 1993-1997 POPULAR, INC.
STATEMENTS OF INCOME
For the year ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per common share
information) 1997 1996 1995 1994 1993
--------------------------------------------------------------------------
INTEREST INCOME:
Loans.......................................... $1,080,408 $ 924,076 $ 813,137 $667,047 $549,388
Money market investments....................... 33,923 46,697 23,077 5,186 6,434
Investment securities.......................... 358,736 280,610 259,941 214,611 215,944
Trading account securities..................... 18,236 21,470 9,652 297 370
--------------------------------------------------------------------------
Total interest income....................... 1,491,303 1,272,853 1,105,807 887,141 772,136
Less - Interest expense........................ 707,348 591,540 521,624 351,633 280,008
--------------------------------------------------------------------------
Net interest income......................... 783,955 681,313 584,183 535,508 492,128
Provision for loan losses...................... 110,607 88,839 64,558 53,788 72,892
--------------------------------------------------------------------------
Net interest income after provision
for loan losses........................... 673,348 592,474 519,625 481,720 419,236
Gain on sale of investment securities.......... 2,268 3,094 5,368 224 864
Trading account profit ........................ 3,934 108 1,785 227 554
All other operating income..................... 241,396 202,270 166,185 140,852 123,762
--------------------------------------------------------------------------
920,946 797,946 692,963 623,023 544,416
--------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs................................ 306,893 273,247 249,075 225,747 215,911
All other operating expenses................... 330,027 268,672 237,758 222,099 196,365
--------------------------------------------------------------------------
636,920 541,919 486,833 447,846 412,276
--------------------------------------------------------------------------
Income before tax, dividends on preferred
stock of BPPR and cumulative
effect of accounting changes................ 284,026 256,027 206,130 175,177 132,140
Income tax..................................... 74,461 70,877 59,769 50,043 28,151
--------------------------------------------------------------------------
Income before dividends on preferred
stock of BPPR and cumulative
effect of accounting changes................ 209,565 185,150 146,361 125,134 103,989
Dividends on preferred stock of BPPR........... 385 770
Income before cumulative effect of
accounting changes.......................... 209,565 185,150 146,361 124,749 103,219
Cumulative effect of accounting changes........ 6,185
--------------------------------------------------------------------------
NET INCOME..................................... $ 209,565 $ 185,150 $ 146,361 $124,749 $109,404
==========================================================================
NET INCOME APPLICABLE TO COMMON STOCK.......... $ 201,215 $ 176,800 $ 138,011 $120,504 $109,404
==========================================================================
EARNINGS PER COMMON SHARE*
Before effect of accounting changes......... $ 3.00 $ 2.68 $ 2.10 $ 1.84 $ 1.58
==========================================================================
Net income.................................. $ 3.00 $ 2.68 $ 2.10 $ 1.84 $ 1.67
==========================================================================
Dividends declared on common stock:
Cash dividends per common share outstanding.... $ 0.80 $ 0.69 $ 0.58 $ 0.50 $ 0.45
==========================================================================
*The average common shares used in the computation of earnings and cash dividend
per common share were 67,018,482 for 1997; 66,022,312 for 1996; 65,816,300 for
1995; 65,596,486 for 1994; and 65,402,472 for 1993.
F-31
52
STATISTICAL SUMMARY 1993-1997
AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
ON A TAXABLE EQUIVALENT BASIS*
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE Average Average
BALANCE INTEREST RATE Balance Interest Rate
-----------------------------------------------------------------------------
ASSETS
Interest earning assets:
Federal funds sold and securities and
mortgages purchased under agreements
to resell....................................... $ 595,715 $ 31,504 5.29% $ 878,138 $ 45,704 5.20%
Time deposits with other banks.................... 34,271 2,181 6.36 12,562 770 6.13
Bankers' acceptances.............................. 2,463 238 9.66 2,202 223 10.13
-----------------------------------------------------------------------------
Total money market investments.................. 632,449 33,923 5.36 892,902 46,697 5.23
-----------------------------------------------------------------------------
U.S. Treasury securities.......................... 3,553,347 249,739 7.03 3,198,912 222,520 6.96
Obligations of other U.S. Government
agencies and corporations....................... 967,973 69,709 7.20 531,711 34,725 6.53
Obligations of Puerto Rico, States and
political subdivisions.......................... 141,625 9,716 6.86 231,363 11,224 4.85
Collateralized mortgage obligations and
mortgage-backed securities...................... 1,150,214 72,245 6.28 772,278 46,434 6.01
Other .......................................... 114,201 7,718 6.76 95,985 5,483 5.71
-----------------------------------------------------------------------------
Total investment securities................... 5,927,360 409,127 6.90 4,830,249 320,386 6.63
-----------------------------------------------------------------------------
Trading account securities.......................... 301,618 19,770 6.55 372,196 23,004 6.18
-----------------------------------------------------------------------------
Loans (net of unearned income)...................... 10,548,207 1,087,466 10.31 9,210,964 930,891 10.11
-----------------------------------------------------------------------------
Total interest earning assets/
Interest income............................. 17,409,634 $1,550,286 8.90% 15,306,311 $1,320,978 8.63%
-----------------------------------------------------------------------------
Total non-interest earning assets............. 1,009,510 994,771
-----------------------------------------------------------------------------
TOTAL ASSETS.................................. $18,419,144 $16,301,082
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:.......................
Savings and NOW accounts........................ $ 4,674,577 $ 147,321 3.15% $ 4,244,625 $ 131,499 3.10%
Other time deposits............................... 4,023,313 219,207 5.45 4,163,416 218,722 5.25
Short-term borrowings............................ 4,280,900 237,738 5.55 3,464,892 184,682 5.33
Mortgages and notes payable...................... 1,345,650 83,936 6.24 757,604 46,417 6.13
Subordinated notes............................... 125,000 8,558 6.85 147,951 10,220 6.91
Guaranteed preferred beneficial interest in
Popular North America's subordinated
debentures..................................... 122,877 10,588 8.62
-----------------------------------------------------------------------------
Total interest bearing liabilities/
Interest expense........................... 14,572,317 707,348 4.85 12,778,488 591,540 4.63
-----------------------------------------------------------------------------
Total non-interest bearing liabilities....... 2,475,843 2,328,083
-----------------------------------------------------------------------------
Total liabilities............................ 17,048,160 15,106,571
-----------------------------------------------------------------------------
Preferred stock of BPPR..........................
-----------------------------------------------------------------------------
Stockholders' equity................................ 1,370,984 1,194,511
-----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $18,419,144 $16,301,082
=============================================================================
Net interest income on a taxable
equivalent basis.................................. $ 842,938 $ 729,438
-----------------------------------------------------------------------------
Cost of funding earning assets...................... 4.06% 3.86%
-----------------------------------------------------------------------------
Net interest yield.................................. 4.84% 4.77%
=============================================================================
Effect of the taxable equivalent adjustment..... 58,983 48,125
-----------------------------------------------------------------------------
Net interest income per books....................... $ 783,955 $ 618,313
=============================================================================
* Shows the effect of the tax exempt status of some loans and investments on
their yield, using the applicable statutory income tax rates. The computation
considers the interest expense disallowance as required by the Puerto Rico
Internal Revenue Code. This adjustment is shown in order to compare the yields
of the tax exempt and taxable assets on a taxable basis.
Note: Average loan balances include the average balance of non-accruing
loans. No interest income is recognized for these loans in accordance with the
Corporation's policy.
F-32
53
POPULAR, INC.
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------
$ 399,413 $ 22,823 5.71% $ 114,215 $ 4,858 4.25% $ 117,095 $ 4,115 3.51%
2,661 165 6.20 4,916 300 6.10 57,845 2,259 3.91
941 89 9.46 332 28 8.43 871 60 6.89
- -----------------------------------------------------------------------------------------------------------------------
403,015 23,077 5.73 119,463 5,186 4.34 175,811 6,434 3.66
- -----------------------------------------------------------------------------------------------------------------------
2,893,797 197,554 6.83 2,657,975 164,102 6.17 2,985,634 202,695 6.79
428,563 30,912 7.21 526,687 33,969 6.45 274,821 18,033 6.56
247,176 14,798 5.99 259,534 14,074 5.42 227,784 14,253 6.26
727,175 47,191 6.49
171,013 6,491 3.80 712,972 37,535 5.26 523,224 26,944 5.15
- -----------------------------------------------------------------------------------------------------------------------
4,467,724 296,946 6.65 4,157,168 249,680 6.01 4,011,463 261,925 6.53
- -----------------------------------------------------------------------------------------------------------------------
155,597 9,831 6.32 5,303 368 6.94 7,319 449 6.13
- -----------------------------------------------------------------------------------------------------------------------
8,217,834 820,003 9.98 7,107,746 672,974 9.47 5,700,069 555,671 9.75
- -----------------------------------------------------------------------------------------------------------------------
13,244,170 $1,149,857 8.68% 11,389,680 $928,208 8.15% 9,894,662 $824,479 8.33%
- -----------------------------------------------------------------------------------------------------------------------
874,013 835,850 789,091
- -----------------------------------------------------------------------------------------------------------------------
$14,118,183 $12,225,530 $10,683,753
=======================================================================================================================
$ 4,015,973 $ 126,548 3.15% $ 3,972,406 $116,858 2.94% $ 3,570,920 $107,454 3.01%
3,720,473 203,235 5.46 3,069,130 130,868 4.26 2,918,625 111,994 3.84
2,600,246 141,522 5.44 1,856,649 77,537 4.18 1,337,970 42,392 3.17
598,027 46,149 7.72 376,570 22,420 5.95 195,522 12,801 6.55
56,850 4,170 7.34 56,082 3,950 7.04 73,967 5,367 7.26
- -----------------------------------------------------------------------------------------------------------------------
10,991,569 521,624 4.75 9,330,837 351,633 3.77 8,097,004 280,008 3.46
- -----------------------------------------------------------------------------------------------------------------------
2,056,132 1,964,399 1,782,748
- -----------------------------------------------------------------------------------------------------------------------
13,047,701 11,295,236 9,879,752
- -----------------------------------------------------------------------------------------------------------------------
5,425 11,000
- -----------------------------------------------------------------------------------------------------------------------
1,070,482 924,869 793,001
- -----------------------------------------------------------------------------------------------------------------------
$14,118,183 $12,225,530 $10,683,753
=======================================================================================================================
$ 628,233 $576,575 $544,471
- -----------------------------------------------------------------------------------------------------------------------
3.94% 3.09% 2.83%
- -----------------------------------------------------------------------------------------------------------------------
4.74% 5.06% 5.50%
=======================================================================================================================
44,050 41,067 52,343
- -----------------------------------------------------------------------------------------------------------------------
$ 584,183 $535,508 $492,128
=======================================================================================================================
F-33
54
STATISTICAL SUMMARY 1995-1997 POPULAR, INC.
QUARTERLY FINANCIAL DATA
1997 1996
- --------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST Fourth Third
QUARTER QUARTER QUARTER QUARTER Quarter Quarter
- --------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
(In thousands, except per
common share information)
Interest income ............ $404,619 $393,414 $359,005 $ 334,265 $ 332,854 $327,097
Interest expense ........... 194,919 190,409 168,399 153,621 154,445 154,861
------------------------------------------------------------------------
Net interest income ...... 209,700 203,005 190,606 180,644 178,409 172,236
Provision for loan
losses ................... 31,657 29,849 25,413 23,688 23,458 22,436
Non-interest income ........ 68,684 65,790 54,941 55,915 55,291 46,488
Gain (loss) on sale of
investment securities .... 2,122 519 1,286 (1,659) (2,525) 4,911
Non-interest expense ....... 175,408 167,341 152,046 142,125 143,923 135,453
------------------------------------------------------------------------
Income before income
tax ...................... 73,441 72,124 69,374 69,087 63,794 65,746
Income taxes ............... 18,119 18,511 18,283 19,548 16,114 19,473
------------------------------------------------------------------------
Net income ................. $ 55,322 $ 53,613 $ 51,091 $ 49,539 $ 47,680 $ 46,273
========================================================================
Net income applicable
to common stock .......... $ 53,234 $ 51,526 $ 49,003 $ 47,452 $ 45,593 $ 44,186
========================================================================
Net income per
common share .......... $ 0.78 $ 0.76 $ 0.74 $ 0.72 $ 0.69 $ 0.67
------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
(In millions)
Total assets ............... $ 19,745 $ 19,348 $ 17,625 $ 16,917 $ 16,852 $ 16,796
Loans ...................... 11,196 11,034 10,164 9,778 9,668 9,387
Interest earning assets .... 18,698 18,315 16,729 15,856 15,794 15,769
Deposits ................... 11,536 11,318 10,620 10,477 10,767 10,548
Interest bearing liabilities 15,717 15,639 13,737 13,147 13,145 13,285
------------------------------------------------------------------------
SELECTED RATIOS
Return on assets ........... 1.11% 1.10% 1.16% 1.19% 1.13% 1.10%
Return on equity ........... 15.56 15.46 16.07 16.32 15.76 15.94
1996 1995
- -------------------------------------------------------------------------------------------------------
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
(In thousands, except per
common share information)
Interest income ............ $309,975 $302,927 $298,311 $ 288,459 $ 268,818 $250,219
Interest expense ........... 141,767 140,467 142,191 140,044 126,698 112,691
------------------------------------------------------------------------
Net interest income ...... 168,208 162,460 156,120 148,415 142,120 137,528
Provision for loan
losses ................... 21,672 21,273 21,227 18,987 12,646 11,698
Non-interest income ........ 49,335 51,263 45,276 44,881 40,306 37,507
Gain (loss) on sale of
investment securities .... (20) 729 3,306 1,950 66 46
Non-interest expense ....... 131,844 130,699 124,197 119,596 124,722 118,318
-----------------------------------------------------------------------
Income before income
tax ...................... 64,007 62,480 59,278 56,663 45,124 45,065
Income taxes ............... 17,952 17,338 19,026 18,356 11,063 11,324
----------------------------------------------------------------------
Net income ................. $ 46,055 $ 45,142 $ 40,252 $ 38,307 $ 34,061 $ 33,741
========================================================================
Net income applicable
to common stock .......... $ 43,967 $ 43,055 $ 38,164 $ 36,220 $ 31,973 $ 31,654
========================================================================
Net income per
common share .......... $ 0.67 $ 0.65 $ 0.58 $ 0.55 $ 0.49 $ 0.48
------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
(In millions)
Total assets ............... $ 15,988 $ 15,557 $ 15,183 $ 14,709 $ 13,616 $ 12,934
Loans ...................... 9,033 8,749 8,548 8,360 8,090 7,864
Interest earning assets .... 15,020 14,631 14,276 13,788 12,815 12,068
Deposits ................... 10,474 10,055 9,848 9,614 9,615 9,245
Interest bearing liabilities 12,464 12,210 11,912 11,596 10,552 9,871
------------------------------------------------------------------------
SELECTED RATIOS
Return on assets ........... 1.16% 1.17% 1.05% 1.03% 1.00% 1.06%
Return on equity ........... 16.56 16.39 14.82 14.55 13.47 13.96
F-34
55
GLOSSARY OF TERMS
936 CORPORATIONS - Subsidiaries of U.S. firms operating in Puerto Rico and other
offshore areas under Section 936 of the U.S. Internal Revenue Code. Section 936
provided certain tax benefits on Puerto Rico source earnings from the active
conduct of a trade or business or from qualified investments. In August 1996,
the U.S. Congress repealed Section 936 with a phase-out period of 10 years on
the credit from earnings from active conduct of trade or business and repealed
the exemption on qualified investment income.
936 DEPOSITS - Funds of 936 corporations deposited in banks usually in the form
of time deposits. The restriction that these funds must be reinvested in
eligible assets, if income derived from them was to be considered tax-exempt for
U.S. and Puerto Rico's Industrial Incentive Act purposes, used to lower the rate
on these funds as compared with interest rates paid on similar deposits. In
August 1996, the U.S. Congress approved legislation that repealed the federal
tax exemption on these funds, effective July 1, 1996, for taxable years
beginning after December 31, 1995.
BASIS POINT - Equals to one-hundredth of one percent. Used to express changes or
differences in interest yields and rates.
CORE DEPOSITS - A deposit category that includes all non-interest bearing
deposits, savings deposits and certificates of deposit under $100,000. These
deposits are considered a stable source of funds.
EARNING ASSETS - Assets that earn interest, such as loans, investment
securities, money market investments and trading account securities.
EARNINGS PER COMMON SHARE - Net income less dividends on preferred stock of the
Corporation, divided by the average number of common shares outstanding during
the periods presented.
ELIGIBLE ACTIVITIES - Loans, investments and other authorized uses of funds
deposited by 936 Corporations, required by the related regulation, to promote
activity in certain economic areas.
GAP - The difference that exists at a specific period of time between the
maturities or repricing terms of interest-sensitive assets and
interest-sensitive liabilities.
INTEREST-BEARING LIABILITIES - Liabilities on which interest is paid such as
saving deposits, certificates of deposit, other time deposits, borrowings,
subordinated notes and capital securities.
INTEREST-SENSITIVE ASSETS/LIABILITIES - Interest-earning assets/interest-bearing
liabilities for which interest rates are adjustable within a specified time
period due to maturity or contractual arrangements.
LEVERAGE RATIO - Ratio adopted by the Federal Reserve System to assist in the
assessment of the capital adequacy of state member banks. This ratio is
calculated by dividing Tier I capital by quarterly average assets. The quarterly
average assets are reduced by goodwill, any other intangible asset deducted from
Tier I capital and the disallowed portion of deferred tax assets.
LIQUIDITY - A combination of assets that assures currently available supplies of
funds necessary to meet deposit withdrawals, loan demand and repayment of
borrowings as they become due. The need for liquid funds is normally satisfied
from daily operations and the maturity management of money market investments
and investment securities as well as from available sources of financing.
NET CHARGE-OFFS - The amount of loans written-off as uncollectible, net of the
recovery of loans previously written-off.
NET INCOME APPLICABLE TO COMMON STOCK - Net income less dividends paid on the
Corporation's preferred stock.
NET INTEREST INCOME - The difference between interest income and fees on earning
assets and interest expense on liabilities.
NET INTEREST YIELD - A percentage computed by dividing net interest income by
average earning assets.
NON-PERFORMING ASSETS - Includes loans on which the accrual of interest income
has been discontinued due to default on interest and/or principal payments or
other factors indicative of doubtful collection, renegotiated loans and
foreclosed real estate properties.
RETURN ON ASSETS - Net income as a percentage of average total assets.
RETURN ON EQUITY - Net income applicable to common stock as a percentage of
average common stockholders' equity.
F-35
56
RISK-BASED CAPITAL - Guidelines for the regulatory measurement of capital
adequacy. These guidelines set forth how capital is to be measured and how total
assets are to be risk-adjusted. Total risk-adjusted assets include assets and
off-balance sheet items adjusted by the appropriate credit risk category, based
on the type of obligor or, where relevant, the guarantor, or the nature of the
collateral.
SPREAD - A percentage difference or margin between the yield on earning assets
and the effective interest rate paid on interest-bearing liabilities.
STOCKHOLDERS' EQUITY - Excess of assets over liabilities that constitutes the
stockholders ownership participation in the Corporation's financial resources.
SUPPLEMENTARY (TIER II) CAPITAL - Consists of the allowance for loan losses and
qualifying term subordinated notes.
TANGIBLE EQUITY - Consists of stockholders' equity less intangible assets.
TAXABLE EQUIVALENT BASIS - An adjustment of income on tax-exempt earning assets
to an amount that would yield the same after-tax income had the income been
subject to taxation. The result is to equate the true earnings value of
tax-exempt and taxable income.
TIER I CAPITAL - Consists of common stockholders' equity (including the related
surplus, retained earnings and capital reserves), non-cumulative perpetual
preferred stock less goodwill, other non-qualifying intangible assets and the
disallowed portion of deferred tax assets.
YIELD - Percentage denoting actual return on earning assets.
F-36
57
REPORT OF INDEPENDENT ACCOUNTANTS
San Juan, Puerto Rico
February 20, 1998
To the Board of Directors
and Stockholders of
Popular, Inc.
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Popular, Inc. and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/S/ Price Waterhouse
Price Waterhouse
Stamp 1457872 of the P.R.
Society of Certified Public
Accountants has been affixed
to the file copy of this report.
F-37
58
CONSOLIDATED STATEMENTS OF CONDITION POPULAR, INC.
December 31,
----------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share information)
ASSETS
Cash and due from banks ........................................................ $ 463,151 $ 492,368
---------------------------
Money market investments:
Federal funds sold and securities and mortgages purchased under
agreements to resell ....................................................... 802,803 778,597
Time deposits with other banks .............................................. 9,013 19,023
Bankers' acceptances ........................................................ 2,274 2,656
---------------------------
814,090 800,276
---------------------------
Trading securities, at market value ............................................ 222,303 292,150
---------------------------
Investment securities available-for-sale, at market value ...................... 5,239,005 3,415,934
---------------------------
Investment securities held-to-maturity, at cost (market value $409,798;
1996 - $1,197,641) .......................................................... 408,993 1,197,066
---------------------------
Loans held-for-sale ............................................................ 265,204 255,129
---------------------------
Loans .......................................................................... 11,457,675 9,854,911
Less - Unearned income ...................................................... 346,272 331,012
Allowance for loan losses ............................................ 211,651 185,574
---------------------------
10,899,752 9,338,325
---------------------------
Premises and equipment ......................................................... 364,892 356,697
Other real estate .............................................................. 18,012 6,076
Customers' liabilities on acceptances .......................................... 1,801 3,100
Accrued income receivable ...................................................... 118,677 95,487
Other assets ................................................................... 252,040 380,247
Intangible assets .............................................................. 232,587 131,248
---------------------------
$ 19,300,507 $16,764,103
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ....................................................... $ 2,546,836 $ 2,330,704
Interest bearing ........................................................... 9,202,750 8,432,571
---------------------------
11,749,586 10,763,275
Federal funds purchased and securities sold under agreements to repurchase .. 2,723,329 1,875,465
Other short-term borrowings ................................................. 1,287,435 1,404,006
Notes payable ............................................................... 1,403,696 986,713
Senior debentures ........................................................... 30,000
Acceptances outstanding ..................................................... 1,801 3,100
Other liabilities ........................................................... 356,568 314,012
---------------------------
17,522,415 15,376,571
---------------------------
Subordinated notes .......................................................... 125,000 125,000
---------------------------
Preferred beneficial interest in Popular North America's junior subordinated
deferrable interest debentures guaranteed by the Corporation ............. 150,000
---------------------------
Stockholders' equity:
Preferred stock, $25 liquidation value; 10,000,000 shares authorized;
4,000,000 issued and outstanding ........................................... 100,000 100,000
Common stock, $6 par value; authorized 180,000,000 shares;
issued and outstanding 67,682,704 (1996 - 66,088,506) ...................... 412,029 396,531
Surplus ..................................................................... 602,023 496,582
Retained earnings ........................................................... 395,253 267,719
Treasury stock-at cost ...................................................... (39,559)
Unrealized gains on investment securities available-for-sale, net of deferred
taxes of $11,180 (1996 - $1,490) ........................................... 33,346 1,700
---------------------------
1,503,092 1,262,532
---------------------------
$ 19,300,507 $16,764,103
===========================
The accompanying notes are an integral part of the consolidated financial
statements.
F-38
59
CONSOLIDATED STATEMENTS OF INCOME POPULAR, INC.
Year ended December 31,
-----------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share information)
INTEREST INCOME:
Loans .................................................... $1,080,408 $ 924,076 $ 813,137
Money market investments ................................. 33,923 46,697 23,077
Investment securities .................................... 358,736 280,610 259,941
Trading securities ....................................... 18,236 21,470 9,652
-----------------------------------------
1,491,303 1,272,853 1,105,807
-----------------------------------------
INTEREST EXPENSE:
Deposits ................................................. 366,528 350,221 329,783
Short-term borrowings .................................... 237,738 184,682 141,522
Long-term debt ........................................... 103,082 56,637 50,319
-----------------------------------------
707,348 591,540 521,624
-----------------------------------------
Net interest income ........................................ 783,955 681,313 584,183
Provision for loan losses .................................. 110,607 88,839 64,558
-----------------------------------------
Net interest income after provision for loan losses ........ 673,348 592,474 519,625
Service charges on deposit accounts ...................... 94,141 85,846 78,607
Other service fees ....................................... 98,650 77,071 63,725
Gain on sale of investment securities .................... 2,268 3,094 5,368
Trading account profit ................................... 3,934 108 1,785
Other operating income ................................... 48,605 39,353 23,853
-----------------------------------------
920,946 797,946 692,963
-----------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries ................................................ 211,741 185,946 172,504
Profit sharing .......................................... 25,684 22,692 19,003
Pension and other benefits .............................. 69,468 64,609 57,568
-----------------------------------------
306,893 273,247 249,075
Net occupancy expense .................................... 39,617 36,899 32,850
Equipment expenses ....................................... 66,446 57,186 47,854
Other taxes .............................................. 30,283 23,214 20,872
Professional fees ........................................ 46,767 36,953 28,677
Communications ........................................... 33,325 26,470 23,106
Business promotion ....................................... 33,569 26,229 17,801
Printing and supplies .................................... 15,539 11,964 11,069
Other operating expenses ................................. 41,607 31,703 35,325
Amortization of intangibles .............................. 22,874 18,054 20,204
-----------------------------------------
636,920 541,919 486,833
-----------------------------------------
Income before income tax ................................... 284,026 256,027 206,130
Income tax ................................................. 74,461 70,877 59,769
-----------------------------------------
NET INCOME.................................................. $ 209,565 $ 185,150 $ 146,361
=========================================
NEW INCOME APPLICABLE TO COMMON STOCK ...................... $ 201,215 $ 176,800 $ 138,011
=========================================
EARNINGS PER COMMON SHARE:
NEW INCOME .............................................. $ 3.00 $ 2.68 $ 2.10
=========================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-39
60
CONSOLIDATED STATEMENTS OF CASH FLOWS
POPULAR, INC.
Year ended December 31,
----------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 209,565 $ 185,150 $ 146,361
----------------------------------------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of premises and equipment ... 54,523 48,481 44,448
Provision for loan losses ................................. 110,607 88,839 64,558
Amortization of intangibles ............................... 22,874 18,054 20,204
Gain on sale of investment securities available-for-sale .. (2,268) (3,094) (5,368)
Loss (gain) on disposition of premises and equipment ...... 2,681 (123) 150
Gain on sale of loans ..................................... (23,315) (11,060) (8,966)
Amortization of premiums and accretion of discounts
on investments .......................................... 2,746 8,538 (2,325)
Amortization of deferred loan origination fees and costs .. (3,019) (3,096) 7,131
Net decrease (increase) in trading securities ............ 69,847 38,524 (97,973)
Increase in loans held-for-sale ........................... (10,075) (142,323) (36,244)
Net (increase) decrease in accrued income receivable ...... (15,872) 18,665 (24,378)
Net decrease (increase) in other assets ................... 175,286 (221,070) (8,640)
Net increase in interest payable .......................... 6,668 11,765 2,077
Net (decrease) increase in current and deferred taxes ..... (28,555) (19,979) 1,410
Net increase in postretirement benefit obligation ......... 7,323 7,977 6,979
Net increase in other liabilities ......................... 4,887 29,284 6,121
----------------------------------------
Total adjustments .................................. 374,338 (130,618) (30,816)
----------------------------------------
Net cash provided by operating activities .......... 583,903 54,532 115,545
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments ...................... 9,671 11,110 44,298
Purchases of investment securities held-to-maturity ........... (68,040,431) (28,849,896) (11,665,837)
Maturities of investment securities held-to-maturity .......... 68,835,925 29,302,469 11,754,330
Purchases of investment securities available-for-sale ......... (8,635,781) (5,396,828) (1,367,401)
Maturities of investment securities available-for-sale ........ 2,191,521 2,297,528 86,379
Sales of investment securities available-for-sale ............. 5,212,194 2,896,060 286,045
Net disbursements on loans .................................... (1,468,552) (1,501,808) (1,155,497)
Proceeds from sale of loans ................................... 521,853 515,357 244,682
Acquisition of loan portfolios ................................ (48,481) (16,983) (66,922)
Assets acquired, net of cash .................................. (83,404) (7,164) (29,189)
Acquisition of premises and equipment ......................... (120,226) (86,162) (51,318)
Proceeds from sale of premises and equipment .................. 68,082 9,662 6,888
----------------------------------------
Net cash used in investing activities .............. (1,557,629) (826,655) (1,913,542)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits ........................... (68,957) 823,907 680,847
Net deposits acquired ......................................... 163,504
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase .............. 790,607 (1,125,413) 771,382
Net (decrease) increase in other short-term borrowings ........ (116,571) 949,300 (144,028)
Proceeds from issuance of notes payable ....................... 1,246,237 423,670 258,181
Payment of notes payable ...................................... (932,853) (167,385) (11)
Payment of senior debentures .................................. (30,000)
Payment of subordinated notes ................................. (50,000)
Proceeds from issuance of Capital Securities .................. 150,000
Proceeds from issuance of subordinated notes .................. 125,000
Dividends paid ................................................ (59,037) (51,896) (44,521)
Proceeds from issuance of common stock ........................ 4,642 4,135 3,500
Treasury stock acquired ....................................... (39,559)
----------------------------------------
Net cash provided by financing activities .......... 944,509 806,318 1,813,854
----------------------------------------
Net (decrease) increase in cash and due from banks .............. (29,217) 34,195 15,857
Cash and due from banks at beginning of period .................. 492,368 458,173 442,316
----------------------------------------
Cash and due from banks at end of period ........................ $ 463,151 $ 492,368 $ 458,173
========================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-40
61
CONSOLIDATED STATEMENTS OF CHANGES POPULAR, INC.
IN STOCKHOLDERS' EQUITY
Year ended December 31,
----------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(In thousands)
PREFERRED STOCK
Balance at beginning and end of year .......................... $ 100,000 $ 100,000 $ 100,000
----------------------------------------
COMMON STOCK
Balance at beginning of year .................................. 396,531 197,692 197,029
Transfer from retained earnings resulting from stock split .... 198,004
Common stock issued in acquisitions ........................... 14,774
Common stock issued under Dividend Reinvestment Plan .......... 724 835 663
----------------------------------------
Balance at end of year .............................. 412,029 396,531 197,692
----------------------------------------
SURPLUS:
Balance at beginning of year .................................. 496,582 427,282 409,445
Proceeds from common stock issued under
Dividend Reinvestment Plan .................................. 3,918 3,300 2,837
Common stock issued in acquisitions ........................... 81,523
Transfer from retained earnings ............................... 20,000 16,000 15,000
Transfer from capital reserves ................................ 50,000
----------------------------------------
Balance at end of year ............................. 602,023 496,582 427,282
----------------------------------------
RETAINED EARNINGS:
Balance at beginning of year .................................. 267,719 350,480 272,458
Net income .................................................... 209,565 185,150 146,361
Cash dividends declared on common stock ....................... (53,681) (45,557) (37,846)
Cash dividends declared on preferred stock .................... (8,350) (8,350) (8,350)
Transfer to common stock resulting from stock split ........... (198,004)
Transfer to capital reserves .................................. (7,143)
Transfer to surplus ........................................... (20,000) (16,000) (15,000)
----------------------------------------
Balance at end of year ............................. 395,253 267,719 350,480
----------------------------------------
UNREALIZED HOLDING GAINS (LOSSES) ON SECURITIES
AVAILABLE-FOR-SALE, NET OF DEFERRED TAXES:
Balance at beginning of year .................................. 1,700 16,243 (19,366)
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes ................... 31,646 (14,543) 35,609
----------------------------------------
Balance at end of year ............................. 33,346 1,700 16,243
----------------------------------------
TREASURY STOCK-AT COST .......................................... (39,559)
----------------------------------------
CAPITAL RESERVES:
Balance at beginning of year .................................. 50,000 42,857
Transfer from retained earnings ............................... 7,143
Transfer to surplus ........................................... (50,000)
----------------------------------------
Balance at end of year ............................. 50,000
----------------------------------------
Total stockholders' equity ...................................... $1,503,092 $1,262,532 $1,141,697
========================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-41
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS POPULAR, INC.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Popular, Inc. (formerly BanPonce
Corporation) and its subsidiaries (the Corporation) conform with generally
accepted accounting principles and with general practices within the banking
industry. The following is a description of the more significant of these
policies:
CONSOLIDATION
The consolidated financial statements include the accounts of Popular, Inc.
and its wholly-owned subsidiaries. The following summarizes the Corporation's
organization:
- Popular, Inc. (holding company)
- Banco Popular de Puerto Rico (BPPR)
- Popular Leasing and Rental, Inc.
- Popular Finance, Inc.
- Popular Mortgage, Inc.
- Popular Securities Incorporated
- Popular International Bank, Inc.
- ATH Costa Rica
- Popular North America, Inc.
- Banco Popular, N.A. (California)
- Banco Popular, N.A. (Florida)
- Banco Popular, N.A. (Texas)
- Banco Popular North America
- Banco Popular, Illinois
-Popular Leasing, USA
- Banco Popular, FSB
- Equity One
All intercompany accounts and transactions have been eliminated in
consolidation.
ACQUISITIONS
On April 30, 1997, the Corporation acquired Seminole National Bank in
Sanford, Florida. At the date of acquisition, this bank operated three branches
in Sanford and Orlando, with $19 million in loans and $23 million in deposits.
On May 31, 1997, the Corporation acquired National Bancorp, Inc., the holding
company of American Midwest Bank located in Chicago, Illinois. As part 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. Also, on May 31, 1997, the Corporation completed the
acquisition of CBC Bancorp, which had two banking subsidiaries, Capitol Bank &
Trust and Capitol Bank of Westmont. These acquisitions in the State of Illinois
added $261 million in loans and $408 million in deposits.
On June 30, 1997, the Corporation completed the acquisition of Roig
Commercial Bank (RCB), headquartered in Humacao, Puerto Rico. The merger
agreement stipulated a payment of 50% in cash and the other 50% in common stock
of Popular, Inc. Each outstanding share of RCB was converted into 5.14695 shares
of the Corporation's common stock or $208.12987 in cash depending on RCB's
shareholders' elections. As a result, 1,544,009 common shares of the Corporation
were issued to RCB's shareholders. This acquisition added $361 million in loans
and $584 million in deposits.
On December 1, 1997, the Corporation acquired Houston Bancorporation, the
holding company of Citizens National Bank. This bank operated one branch located
in Houston, Texas. This acquisition added $39 million in loans and $45 million
in deposits.
In September 1996, the Corporation completed the acquisition of Banco
Popular, N.A. (California), formerly Commerce National Bank, adding $23 million
in loans and $63 million in deposits. At the acquisition date, this bank
operated three branches located in City of Commerce, Montebello and Downey.
All of the above acquisitions were accounted for as purchases and therefore
results were included in the consolidated statements of income from the date of
acquisition.
F-42
63
NATURE OF OPERATIONS
Popular, Inc. is a bank holding company which provides a wide variety of
financial services through its subsidiaries. BPPR, the Corporation's largest
banking subsidiary, is a full-service commercial bank and Puerto Rico's largest
banking institution, with a delivery system of 201 branches throughout Puerto
Rico, 29 branches in New York, seven branches in the U.S. Virgin Islands and one
branch in the British Virgin Islands. Banco Popular, Illinois, a banking
subsidiary of Banco Popular North America, operates 13 branches in the State of
Illinois, Banco Popular, N.A. (California), operates six branches in the State
of California, Banco Popular, N.A. (Florida) operates six branches in the State
of Florida, while Banco Popular, N.A. (Texas) operates one branch in the State
of Texas. In addition, Banco Popular, FSB, a federal savings bank, operates
eight branches in the State of New Jersey.
Also, the Corporation offers consumer finance services through its
subsidiaries, Equity One, Inc., Popular Mortgage, Inc. and Popular Finance, Inc.
Equity One, Inc. is a diversified mortgage and consumer finance company engaged
in the business of granting personal and mortgage loans and providing dealer
financing through 117 offices located in 30 states in the U.S. mainland. Popular
Mortgage is a mortgage loan company with three offices in Puerto Rico, and
Popular Finance, Inc. is a small loan company with 44 offices in Puerto Rico.
The Corporation is also engaged in vehicle and equipment leasing, through
10 offices in Puerto Rico operated by Popular Leasing and Rental, Inc. and
equipment leasing through seven offices operated by Popular Leasing, USA.
Moreover, the Corporation is engaged in investment banking and broker / dealer
activities through its subsidiary Popular Securities.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
TRADING SECURITIES
Financial instruments, including, to a limited extent, derivatives such as
interest rate futures and options contracts, are utilized by the Corporation in
trading activities and are carried at market value. In conjunction with mortgage
banking activities, the Corporation records the securitization of mortgage loans
held-for-sale as a sale of mortgage loans and the purchase of a mortgage-backed
security classified as a trading security. Realized and unrealized changes in
market values are recorded separately in the trading profit or loss account in
the period in which the changes occur. Interest revenue and expense arising from
trading instruments are included in the income statement as part of net interest
income rather than in the trading profit or loss account.
Securities sold but not yet purchased, which represent the Corporation's
obligation to deliver securities sold which were not owned at the time of sale,
are recorded at market value.
INVESTMENT SECURITIES
The investment securities are classified in three categories and accounted
for as follows:
- - Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as securities
held-to-maturity and reported at amortized cost. The Corporation may
not sell or transfer held-to-maturity securities without calling into
question its intent to hold other debt securities to maturity, unless a
non-recurring or unusual event that could not have been reasonably
anticipated has occurred.
- - Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
- - Debt and equity securities not classified as either securities
held-to-maturity or trading securities are classified as securities
available-for-sale and reported at fair value, with unrealized gains
and losses excluded from earnings and reported net of deferred taxes in
a separate component of stockholders' equity.
The amortization of premiums is deducted and the accretion of discounts is
added to interest income based on the interest method over the outstanding
period of the related securities. Net realized gains or losses on sales of
investment securities and
F-43
64
unrealized loss valuation adjustments considered other than temporary, if any,
on securities available-for-sale and held-to maturity are reported separately in
the statement of income. The Corporation anticipates prepayments of principal in
the calculation of the effective yield and average maturity for collateralized
mortgage obligations and mortgage-backed securities.
RISK MANAGEMENT INSTRUMENTS
The Corporation occasionally uses derivative financial instruments, such as
interest rate caps and swaps, in the management of its interest rate exposure.
These instruments are accounted for primarily on an accrual basis. Under the
accrual method, interest income or expense on the derivative contract is accrued
and there is no recognition of unrealized gains and losses on the derivative in
the balance sheet. Premiums on option contracts are amortized to interest income
or interest expense over the life of such contracts. Income and expenses arising
from the instruments are recorded in the category appropriate to the related
asset or liability.
Gains and losses related to contracts that are effective hedges are
deferred and recognized in income in the same period as gains and losses on the
hedged item. Gains and losses on early termination of contracts that modify the
characteristics of specified assets or liabilities are deferred and amortized as
an adjustment to the yield of the related assets or liabilities over their
remaining lives.
LOANS HELD-FOR-SALE
Loans held-for-sale are stated at the lower of cost or market, cost being
determined based on the outstanding loan balance less unearned income, and fair
market value determined on an aggregate basis according to secondary market
prices. The amount by which cost exceeds market value, if any, is accounted for
as a valuation allowance with changes included in the determination of net
income for the period in which the change occurs.
LOANS
Loans are stated at the outstanding balance less unearned income and
allowance for loan losses. Loan origination fees and costs incurred in the
origination of new loans are deferred and amortized using the interest method
over the life of the loan as an adjustment to interest yield. Unearned interest
on lease financing and installment loans is recognized as income on a basis
which results in approximate level rates of return over the term of the loans.
Recognition of interest income on commercial and construction loans is
discontinued when loans are 60 days or more in arrears on payments of principal
or interest or when other factors indicate that collection of principal and
interest is doubtful. Interest accrual for lease financing, conventional
mortgage loans and close-end consumer loans is ceased when loans are 90 days or
more past due. Loans designated as non-accruing are not returned to an accrual
status until interest is received on a current basis and those factors
indicative of doubtful collection cease to exist. Close-end consumer loans and
leases are charged-off against the allowance for loan losses after becoming 120
days past due. Open-end (revolving credit) consumer loans are charged-off after
becoming 180 days past due. Income is generally recognized on open-end loans
until the loans are charged-off.
LEASE FINANCING
The Corporation leases passenger and commercial vehicles and equipment to
individual and corporate customers. The finance method of accounting is used to
recognize revenue on lease contracts that meet the criteria specified in SFAS
13, "Accounting for Leases", as amended. Aggregate rentals due over the term of
the leases less unearned income are included in finance lease contracts
receivable. Unearned income is amortized using a method which results in
approximate level rates of return on the principal amounts outstanding. Finance
lease origination fees and costs are deferred and amortized over the average
life of the portfolio as an adjustment to the yield.
All other leases are accounted for under the operating method. Under this
method, revenue is recognized as it becomes due under the terms of the
agreement.
ALLOWANCE FOR LOAN LOSSES
The Corporation follows a systematic methodology to establish and evaluate
the adequacy of the allowance for loan losses to provide for inherent losses in
the loan portfolio as well as in other credit-related balance sheet and
off-balance sheet financial instruments. This methodology includes the
consideration of factors such as economic conditions, portfolio risk
characteristics, prior loss experience, results of periodic credit reviews of
individual loans and financial accounting standards.
F-44
65
The provision for loan losses charged to current operations is based on an
evaluation of the risk characteristics of the loan portfolio and the economic
conditions. Loan losses are charged and recoveries are credited to the allowance
for loan losses.
The Corporation has defined impaired loans as all loans with interest
and/or principal past due 90 days or more and other specific loans for which,
based on current information and events, it is probable that the debtor will be
unable to pay all amounts due according to the contractual terms of the loan
agreement. Loan impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective rate, on the observable
market price or, on the fair value of the collateral if the loan is collateral
dependent. Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment based on past experience. All other loans are evaluated
on a loan-by-loan basis. Once a specific measurement methodology is chosen it is
consistently applied unless there is a significant change in the financial
position of the borrower. Impaired loans for which the discounted cash flows,
collateral value or market price equals or exceeds its carrying value do not
require an allowance. The allowance for impaired loans is part of the
Corporation's overall allowance for loan losses.
Cash payments received on impaired loans are recorded in accordance with
the contractual terms of the loan. The principal portion of the payment is used
to reduce the principal balance of the loan, whereas the interest portion is
recognized as interest income. However, when management believes the ultimate
collectibility of principal is in doubt, the interest portion is then applied to
principal.
MORTGAGE BANKING
Mortgage loan servicing includes collecting monthly mortgagor payments,
forwarding payments and related accounting reports to investors, collecting
escrow deposits for the payment of mortgagor property taxes and insurance, and
paying taxes and insurance from escrow funds when due. Also, the Corporation is
required to foreclose on loans in the event of default by the mortgagor, and to
make full payment on foreclosed loans. No asset or liability is recorded by the
Corporation for mortgages serviced, except for mortgage servicing rights,
advances to investors and escrow balances. Mortgage servicing rights, an
intangible asset, represents the cost of acquiring the contractual right to
service loans for others. Mortgage loan servicing fees, which are based on a
percentage of the principal balances of the mortgages serviced, are credited to
income as mortgage payments are collected.
On January 1, 1996, the Corporation adopted SFAS 122, "Accounting for
Mortgage Servicing Rights." This statement was superseded by SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" adopted by the Corporation in January 1997. 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. The total cost of mortgage loans to be sold with
servicing rights retained is allocated to the mortgage servicing rights and the
loans (without the mortgage servicing rights), based on their relative fair
values. Mortgage servicing rights are amortized in proportion to and over the
period of estimated net servicing income. In addition, it requires mortgage
banking enterprises to assess capitalized mortgage servicing rights for
impairment based on the fair value of those rights.
To estimate the fair value of mortgage servicing rights the Corporation
considers prices for similar assets and the present value of expected future
cash flows associated with the servicing rights calculated using assumptions
that market participants would use in estimating future servicing income and
expense. For purposes of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Corporation stratifies such rights based on
predominant risk characteristics of underlying loans, such as loan type, rate
and term. The amount of impairment recognized, if any, is the amount by which
the capitalized mortgage servicing rights per stratum exceed its estimated fair
value. Impairment is recognized through a valuation allowance.
Total loans serviced were $5,400,000,000 at December 31, 1997 (1996 -
$5,110,000,000). The carrying value, estimated fair value and valuation
allowance of capitalized mortgage servicing rights were $29,772,000,
$36,259,000, and $14,000, respectively, at December 31, 1997.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on a straight-line basis over the
estimated useful life of each type of asset. Amortization of leasehold
improvements is computed over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter. Costs of
maintenance and repairs which do not improve or extend the life of the
respective assets are expensed as incurred. Costs of renewals and betterments
are capitalized. When assets are disposed of, their cost and related accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
the operations as realized or incurred, respectively.
F-45
66
On January 1, 1996, the Corporation adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets, certain identifiable intangibles
and goodwill related to those assets to be held and used, and long-lived assets
to be disposed of by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. This statement excludes financial instruments, long-term
customer relationships of financial institutions, mortgage and other servicing
rights and deferred tax assets. For the year ended December 31, 1997, the
Corporation recorded an impairment loss of $3,295,000 (1996- $700,000), as
further explained in Note 8, based on the provisions of this pronouncement.
OTHER REAL ESTATE
Other real estate comprises properties acquired through foreclosure. Upon
foreclosure, the recorded amount of the loan is written-down, if required, to
the appraised value less estimated costs of disposal of the real estate acquired
by charging the allowance for loan losses. Subsequent to foreclosure, the
properties are carried at the lower of carrying value or fair value less
estimated costs of disposal. Gains or losses on the sale of these properties are
credited or charged to expense of operating other real estate. The cost of
maintaining and operating such properties is expensed as incurred.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and other identifiable intangible
assets acquired, mainly core deposits and mortgage servicing rights. The values
of core deposits, assembled work force and credit customer relationships are
amortized using various methods over the periods benefited, which range from 4
to 10 years. Goodwill represents the excess of the Corporation's cost of
purchased operations over the fair value of the net assets acquired and is
amortized on the straight-line basis over periods ranging from 7 to 15 years.
SECURITIES SOLD/PURCHASED UNDER AGREEMENTS TO REPURCHASE/RESALE
Repurchase and resale agreements are treated as financing transactions and
are carried at the amounts at which the securities will be reacquired or resold
as specified in the respective agreements. It is the Corporation's policy to
take possession or control of securities purchased under resale agreements. The
Corporation monitors the market value of the underlying securities as compared
to the related receivable, including accrued interest, and requests additional
collateral where deemed appropriate.
INCOME TAXES
The Corporation uses an asset and liability approach to the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Corporation's financial statements or
tax returns. Deferred income tax assets and liabilities are determined for
differences between financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future. The computation
is based on enacted tax laws and rates applicable to periods in which the
temporary differences are expected to be recovered or settled. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
EMPLOYEES' RETIREMENT PLANS
The Corporation has trusteed, non-contributory retirement and other benefit
plans covering substantially all full-time employees. Pension costs are computed
on the basis of accepted actuarial methods and are charged to current
operations. Net pension costs are based on various actuarial assumptions
regarding future experience under the plan, which include costs for services
rendered during the period, interest costs and return on plan assets, as well as
deferral and amortization of certain items such as actuarial gains or losses.
The funding policy is to contribute funds to the plan as necessary to provide
for services to date and for those expected to be earned in the future. To the
extent that these requirements are fully covered by assets in the plan, a
contribution may not be made in a particular year.
OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation provides certain health and life insurance benefits for
eligible retirees and their dependents. The cost of postretirement benefits,
which is determined based on actuarial assumptions and estimates of the costs of
providing these benefits in the future, is accrued during the years that the
employee renders the required service.
F-46
67
STOCK COMPENSATION
On January 1, 1996, the Corporation adopted SFAS 123, "Accounting for
Stock-Based Compensation." SFAS 123 establishes a fair value-based method of
accounting for stock-based compensation plans. It encourages entities to adopt
this method in lieu of the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the
price of its stock.
BPPR provides a stock-based compensation plan for its Senior Management. It
is a three-year incentive plan under which shares of stock of the Corporation
are granted if long-term corporate performance and objectives are met. For the
year ended December 31, 1997, the Corporation recognized an expense of
$1,493,000 (1996- $837,000) related to this plan, determined on the estimated
fair value of the stock.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
In January 1997, the Corporation adopted, SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
as amended by SFAS 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. These standards are based on a consistent application of a
financial components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. Certain provisions related with repurchase agreements,
dollar-roll, securities lending, and similar transactions shall be effective for
transfers of financial assets occurring after December 31, 1997. The adoption of
this statements did not have a material effect on the consolidated financial
statements of the Corporation.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS 129, "Disclosure of Information about Capital Structure." This statement
established standards for disclosing information about an entity's capital
structure and is effective for financial statements for periods ending after
December 15, 1997. However, it contains no change in disclosure requirements for
entities that were previously subject to the requirements of APB Opinions 10 and
15 and SFAS 47.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income, reduced by
dividends on preferred stock, by the weighted average number of common shares of
the Corporation outstanding during the year.
Effective in 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.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
RECLASSIFICATION
Certain minor reclassifications have been made to the 1996 and 1995
consolidated financial statements to conform with the 1997 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB 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 gen-
F-47
68
eral-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. This
statement affects only financial statement presentation.
Also in June 1997, the FASB 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 statements for
periods beginning after December 15, 1997, and requires comparative information
for earlier years. This statement affects only financial statement presentation
and, therefore, management understands that its adoption will not have a
material effect, if any, on the Corporation's financial position or results of
operations.
NOTE 2 - CASH AND DUE FROM BANKS:
The Corporation's subsidiary banks are required by regulatory agencies to
maintain average reserve balances. The amount of those average reserve balances
was approximately $375,820,000 at December 31, 1997 (1996 - $335,676,000).
NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE:
The amortized cost, gross unrealized gains and losses, approximate market
value (or fair value for certain investment securities where no market
quotations are available), weighted average yield and maturities of investment
securities available-for-sale as of December 31, 1997 and 1996 (1995 - only
market value is presented) were as follows:
F-48
69
1997
------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average
cost gains losses value yield
------------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of 1 year and 11
months):
Within 1 year.................................................. $ 361,577 $ 938 $ 13 $ 362,502 6.21%
After 1 to 5 years............................................. 2,746,232 19,625 3 2,765,854 6.11
------------------------------------------------------------
3,107,809 20,563 16 3,128,356 6.12
------------------------------------------------------------
Obligations of other U.S. Government agencies and
corporations (average maturity of 4 years and 6 months):
Within 1 year.................................................. 199,100 50 169 198,981 5.73
After 1 to 5 years............................................. 306,661 1,108 124 307,645 6.27
After 5 to 10 years............................................ 301,062 790 1,988 299,864 6.82
------------------------------------------------------------
806,823 1,948 2,281 806,490 6.34
------------------------------------------------------------
Obligations of Puerto Rico, States and political sub-
divisions (average maturity of 3 years and 7 months):
Within 1 year.................................................. 9,820 33 30 9,823 5.22
After 1 to 5 years............................................. 7,437 150 31 7,556 5.71
After 5 to 10 years............................................ 17,944 266 18,210 6.29
After 10 years................................................. 25,437 208 96 25,549 6.32
------------------------------------------------------------
60,638 657 157 61,138 6.06
------------------------------------------------------------
Collateralized mortgage obligations (average maturity
of 2 years and 4 months):
Within 1 year.................................................. 230,192 121 137 230,176 6.43
After 1 to 5 years............................................. 510,313 293 246 510,360 6.44
After 5 to 10 years............................................ 44,424 47 32 44,439 6.43
After 10 years................................................. 15,231 1 9 15,223 6.49
------------------------------------------------------------
800,160 462 424 800,198 6.44
------------------------------------------------------------
Mortgage-backed securities (average maturity
of 24 years and 8 months):
Within 1 year................................................. 82,330 546 135 82,741 5.92
After 1 to 5 years............................................ 14,625 219 40 14,804 6.34
After 5 to 10 years........................................... 16,360 408 14 16,754 6.96
After 10 years................................................ 280,051 5,482 61 285,472 6.78
------------------------------------------------------------
393,366 6,655 250 399,771 6.59
------------------------------------------------------------
Equity securities (without contractual maturity)................. 21,844 17,352 39,196 3.67
------------------------------------------------------------
Other (average maturity of 11 years and 5 months):
After 5 to 10 years........................................... 2,889 2 2,887 6.50
After 10 years................................................ 950 19 969 6.26
------------------------------------------------------------
3,839 19 2 3,856 6.44
------------------------------------------------------------
$ 5,194,479 $47,656 $ 3,130 $5,239,005 6.23%
============================================================
F-49
70
1996 1995
-------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average Market
costs gains losses value yield Value
--------------------------------------------------------------------
(In thousands)
U.S. Treasury securities (average maturity of
1 year and 3 months):
Within 1 year........................................ $ 900,463 $ 2,325 $ 59 $ 902,729 5.88% $1,405,122
After 1 to 5 years................................... 1,335,189 5,492 1,905 1,338,776 6.00 1,048,959
--------------------------------------------------------------------
2,235,652 7,817 1,964 2,241,505 5.96 2,454,081
--------------------------------------------------------------------
Obligations of other U.S. Government agencies and
corporations (average maturity of 5 years and
8 months):
Within 1 year...................................... 75,256 120 46 75,330 6.39 62,677
After 1 to 5 years................................. 73,064 197 460 72,801 5.77 233,146
After 5 to 10 years................................ 155,231 113 155,344 6.84 1,232
--------------------------------------------------------------------
303,551 430 506 303,475 6.47 297,055
--------------------------------------------------------------------
Obligations of Puerto Rico, States and political sub-
divisions (average maturity of 4 years and 6 months):
Within 1 year...................................... 6,832 6 8 6,830 4.64 7,078
After 1 to 5 years................................. 14,510 198 76 14,632 5.12 16,305
After 5 to 10 years................................ 12,695 93 90 12,698 5.36 4,166
After 10 years..................................... 671 9 662 5.34
--------------------------------------------------------------------
34,708 297 183 34,822 5.12 27,549
--------------------------------------------------------------------
Collateralized mortgage obligations (average maturity
of 1 year and 10 months):
Within 1 year...................................... 101,158 16 182 100,992 6.02 35,393
After 1 to 5 years................................. 304,987 37 645 304,379 6.11 74,518
After 5 to 10 years................................ 26,125 5 4 26,126 6.07 2,339
After 10 years..................................... 4,593 4,593 6.43 5,088
--------------------------------------------------------------------
436,863 58 831 436,090 6.09 117,338
--------------------------------------------------------------------
Mortgage-backed securities (average maturity
of 21 years and 7 months):
Within 1 year..................................... 7,391 1 223 7,169 5.59 11,592
After 1 to 5 years................................ 43,695 21 1,017 42,699 5.75 49,845
After 5 to 10 years............................... 7,482 3 318 7,167 6.98 7,356
After 10 years.................................... 312,901 247 1,064 312,084 6.63 199,187
--------------------------------------------------------------------
371,469 272 2,622 369,119 6.51 267,980
--------------------------------------------------------------------
Equity securities (without contractual maturity) 12,145 499 12,644 0.86 27,918
--------------------------------------------------------------------
Other (average maturity of 13 years and 2 months):
Within 1 year..................................... 203 1 204 8.19
After 5 to 10 years............................... 10,103 2 10,105 8.24 10,000
After 10 years.................................... 8,050 80 7,970 6.90 8,053
--------------------------------------------------------------------
18,356 3 80 18,279 7.65 18,053
--------------------------------------------------------------------
$3,412,744 $ 9,376 $ 6,186 $3,415,934 6.06% $3,209,974
====================================================================
The weighted average yield on investment securities available-for-sale is
based on amortized cost, therefore it does not give effect to changes in fair
value.
The aggregate amortized cost and approximate market value of investment
securities available-for-sale at December 31, 1997, by contractual or estimated
maturity, are shown below:
Amortized cost Market value
--------------------------------
(In thousands)
Within 1 year........................ $ 883,019 $ 884,223
After 1 to 5 years................... 3,585,268 3,606,219
After 5 to 10 years.................. 382,679 382,154
After 10 years....................... 321,669 327,213
--------------------------------
Total ..................... 5,172,635 5,199,809
Without contractual maturity......... 21,844 39,196
--------------------------------
Total investment securities
available-for-sale................ $ 5,194,479 $5,239,005
================================
F-50
71
Proceeds from the sale of investment securities available-for-sale during
1997 were $5,212,194,000 (1996 - $2,896,060,000; 1995 - $286,045,000). Gross
realized gains and losses on those sales during the year were $6,266,000 and
$3,998,000 respectively (1996 - $8,504,000 and $5,440,000; 1995 - $6,284,000 and
$916,000). The basis on which cost was determined in computing the realized
gains and losses was the specific identification method.
NOTE 4 - INVESTMENT SECURITIES HELD-TO-MATURITY:
The amortized cost, gross unrealized gains and losses, approximate market
value (or fair value for certain investment securities where no market
quotations are available), weighted average yield and maturities of investment
securities held-to-maturity as of December 31, 1997 and 1996 (1995 - only
amortized cost is presented) were as follows:
1997
--------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average
cost gains losses value yield
--------------------------------------------------------
(In thousands)
Obligations of other U.S. Government
agencies and corporations (average maturity of 2 months):
Within 1 year ......................................... $ 156,422 $ 6 $ 100 $156,328 5.49%
--------------------------------------------------------
Obligations of Puerto Rico, States
and political subdivisions (average
maturity of 6 years and 9 months):
Within 1 year ........................................... 8,455 34 16 8,473 7.39
After 1 to 5 years ...................................... 17,726 199 6 17,919 7.36
After 5 to 10 years ..................................... 11,465 761 47 12,179 8.16
After 10 years .......................................... 15,280 199 15,479 8.93
--------------------------------------------------------
52,926 1,193 69 54,050 7.99
--------------------------------------------------------
Collateralized mortgage obligations (average
maturity of 1 year and 11 months):
Within 1 year ........................................... 26,031 5 98 25,938 6.04
After 1 to 5 years ...................................... 34,956 69 80 34,945 6.57
After 5 to 10 years ..................................... 2,691 11 2 2,700 6.61
--------------------------------------------------------
63,678 85 180 63,583 6.36
--------------------------------------------------------
Mortgage-backed securities (average maturity
of 3 years and 7 months):
Within 1 year ........................................... 8,586 69 87 8,568 7.44
After 1 to 5 years ...................................... 23,252 193 237 23,208 7.44
After 5 to 10 years ..................................... 12,635 112 127 12,620 7.43
After 10 years .......................................... 1,522 22 1,500 6.70
--------------------------------------------------------
45,995 374 473 45,896 7.41
--------------------------------------------------------
Equity securities (without contractual
maturity) ............................................... 70,771 70,771 5.23
--------------------------------------------------------
Other (average maturity of 6 years and
4 months):
Within 1 year ........................................... 3,150 3,150 5.96
After 1 to 5 years ...................................... 5,645 4 5,649 2.34
After 5 to 10 years ..................................... 4,229 4,229 8.24
After 10 years .......................................... 6,177 35 6,142 8.01
--------------------------------------------------------
19,201 4 35 19,170 6.06
--------------------------------------------------------
$ 408,993 $ 1,662 $ 857 $409,798 6.15%
========================================================
F-51
72
1996 1995
------------------------------------------------------------------------
Weighted
Amortized Unrealized Unrealized Market average Amortized
cost gains losses value yield cost
------------------------------------------------------------------------
(In thousands)
U.S. Treasury securities
(average maturity of 6 months):
Within 1 year..................................... $ 618,934 $ 590 $ 183 $ 619,341 5.83% $ 301,463
------------------------------------------------------------------------
After 1 to 5 years................................ 623,703
------------------------------------------------------------------------
618,934 590 183 619,341 5.83 925,166
------------------------------------------------------------------------
Obligations of other U.S. Government
agencies and corporations (average maturity of
5 months):
Within 1 year..................................... 119,701 107 119,594 6.17
After 1 to 5 years................................ 20,000 525 19,475 3.50 122,978
------------------------------------------------------------------------
139,701 632 139,069 5.78 122,978
------------------------------------------------------------------------
Obligations of Puerto Rico, States
and political subdivisions (average
maturity of 2 years and 11 months):
Within 1 year..................................... 98,073 52 56 98,069 3.32 125,983
After 1 to 5 years................................ 23,993 704 63 24,634 7.33 34,578
After 5 to 10 years............................... 11,839 624 12,463 8.14 12,179
After 10 years.................................... 17,397 447 17,844 8.95 22,455
------------------------------------------------------------------------
151,302 1,827 119 153,010 4.98 195,195
------------------------------------------------------------------------
Collateralized mortgage obligations (average
maturity of 1 year and 6 months):
Within 1 year..................................... 93,077 37 522 92,592 5.43 150,960
After 1 to 5 years................................ 59,607 259 364 59,502 6.13 120,345
After 5 to 10 years............................... 4,582 15 8 4,589 6.24 14,058
After 10 years.................................... 109
------------------------------------------------------------------------
157,266 311 894 156,683 5.72 285,472
------------------------------------------------------------------------
Mortgage-backed securities (average maturity
of 4 years and 3 months):
Within 1 year..................................... 9,181 1 37 9,145 7.53 11,694
After 1 to 5 years................................ 27,813 3 114 27,702 7.52 32,965
After 5 to 10 years............................... 16,004 2 71 15,935 7.51 17,877
After 10 years.................................... 2,730 74 2,656 7.17 4,111
-----------------------------------------------------------------------
55,728 6 296 55,438 7.50 66,647
-----------------------------------------------------------------------
Equity securities (without contractual
maturity) 61,407 61,407 6.06 43,558
-----------------------------------------------------------------------
Other (average maturity of 5 years
and 9 months):
Within 1 year.................................... 250 250 7.50
After 1 to 5 years............................... 6,145 5 6,150 2.78 6,145
After 5 to 10 years.............................. 4,197 4,197 7.82 4,027
After 10 years................................... 2,136 40 2,096 5.31 2,156
------------------------------------------------------------------------
12,728 5 40 12,693 4.97 12,328
------------------------------------------------------------------------
$1,197,066 $ 2,739 $ 2,164 $ 1,197,641 5.78% $1,651,344
========================================================================
The aggregate amortized cost and approximate market value of investment
securities held-to-maturity at December 31, 1997, by contractual or estimated
maturity, are shown below:
Amortized cost Market value
---------------------------------
(In thousands)
Within 1 year........................ $202,644 $202,457
After 1 to 5 years................... 81,579 81,721
After 5 to 10 years.................. 31,020 31,728
After 10 years....................... 22,979 23,121
-------------------------------
Total ..................... 338,222 339,027
Without contractual maturity......... 70,771 70,771
-------------------------------
Total investment securities
held-to-maturity................... $408,993 $409,798
================================
F-52
73
During 1996, investment securities held-to-maturity with an amortized cost
of $2,622,000 were called by the issuer. Proceeds from the sale of those
securities were $2,652,000. Gross realized gain on this transaction was $30,000.
Investments in obligations that are payable from and secured by the same
source of revenue or taxing authority, other than the U.S. government, and that
exceeded 10 percent of stockholders' equity were as follows:
Percent of
Amortized stockholders' Market
cost equity value
------------------------------------
(Dollars in thousands)
Issuer:
Government of Puerto Rico,
its agencies and instrumentalities:
December 31, 1996................... $151,203 12% $152,933
NOTE 5 - PLEDGED ASSETS:
At December 31, 1997, investment securities and loans amounting to
$4,067,567,000 (1996 - $2,788,401,000; 1995 - $2,920,220,000) are pledged to
secure public and trust deposits and securities and mortgages sold under
agreements to repurchase.
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The composition of the loan portfolio at December 31, was as follows:
1997 1996
----------------------------
(In thousands)
Loans secured by real estate:
Insured or guaranteed by the U.S. Government
or its agencies ........................................ $ 79,673 $ 83,864
Guaranteed by the Commonwealth of Puerto Rico ............ 63,035 67,497
Commercial loans secured by real estate .................. 1,109,213 1,030,383
Residential conventional mortgages ....................... 2,432,183 2,295,723
Construction and land development ........................ 190,509 181,433
Consumer ................................................. 605,204 536,527
----------------------------
4,479,817 4,195,427
Financial institutions .................................... 53,145 90,345
Commercial, industrial and agricultural ................... 3,245,706 2,390,267
Lease financing ........................................... 722,031 639,945
Consumer for household, credit cards and
other consumer expenditures ............................ 2,700,661 2,344,001
Other ..................................................... 256,315 194,926
----------------------------
$ 11,457,675 $ 9,854,911
============================
As of December 31, 1997, loans on which the accrual of interest income had
been discontinued amounted to $194,442,000 (1996 - $145,408,000; 1995 -
$144,482,000). If these loans had been accruing interest, the additional
interest income realized would have been approximately $11,868,000 (1996 -
$7,696,000; 1995 - $7,135,000). In addition, there is $6,000 of renegotiated
loans still accruing interest at December 31, 1997 (1996 - $3,308,000; 1995 -
$2,742,000). Included in the non-accruing loans as of December 31, 1997 was
$30,840,000 (1996 - $16,320,000; 1995 - $14,827,000) in consumer loans.
F-53
74
At December 31, the recorded investment in loans that were considered
impaired and the related disclosures are shown below:
December 31,
---------------------------
1997 1996
(In thousands)
Impaired loans with a related allowance ........................... $ 82,338 $ 59,447
Impaired loans that do not require allowance ...................... 37,313 36,700
---------------------------
Total impaired loans ........................................ $ 119,651 $ 96,147
============================
Allowance for impaired loans ...................................... $ 18,808 $ 17,777
============================
Impaired loans measured based on fair value of collateral ......... $ 39,636 $ 36,700
Impaired loans measured based on discounted cash flows ............ 80,015 59,447
---------------------------
$ 119,651 $ 96,147
============================
Average balance of impaired loans during the year ................. $ 113,208 $ 88,165
============================
Interest income recognized on impaired loans during the year ...... $ 6,327 $ 3,526
============================
The changes in the allowance for loan losses for the year ended December
31, were as follows:
1997 1996 1995
----------------------------------------
(In thousands)
Balance at beginning of year ................ $ 185,574 $ 168,393 $ 153,798
Reserves acquired ........................... 13,237 402
Provision for loan losses ................... 110,607 88,839 64,558
Recoveries .................................. 49,823 35,901 28,744
Loans charged-off ........................... (147,590) (107,961) (78,707)
----------------------------------------
Balance at end of year ...................... $ 211,651 $ 185,574 $ 168,393
========================================
The components of the net financing leases receivable at December 31, were:
1997 1996
------------------------------
(In thousands)
Total minimum lease payments.................................... $564,981 $495,820
Estimated residual value of leased property .................... 154,034 141,561
Deferred origination costs .................................... 3,016 2,564
Less - Unearned financing income .......................... (140,104) (123,944)
------------------------------
Net minimum lease payments ..................................... 581,927 516,001
Less - Allowance for loan losses ........................ (5,869) (3,415)
------------------------------
$576,058 $512,586
==============================
Estimated residual value is generally established at amounts expected to be
sufficient to cover the Corporation's investment.
At December 31, 1997, future minimum lease payments are expected to be
received as follows:
(In thousands)
--------------
1998 ........................... $200,841
1999 ........................... 152,963
2000 ........................... 110,537
2001 ............................ 70,168
2002 and thereafter ............ 30,472
--------
$564,981
========
F-54
75
NOTE 7 - Related party transactions:
The Corporation grants loans to its directors, executive officers and to
certain related individuals or organizations in the ordinary course of business.
The movement and balance of these loans were as follows:
Officers Directors Total
--------------------------------------
(In thousands)
Balance at January 1, 1996..... $ 2,347 $ 144,348 $ 146,695
New loans...................... 839 184,384 185,223
Payments....................... (211) (200,345) (200,556)
--------------------------------------
Balance at December 31, 1996... 2,975 128,387 131,362
New loans...................... 291 117,762 118,053
Payments....................... (661) (137,539) (138,200)
--------------------------------------
Balance at December 31, 1997... $ 2,605 $ 108,610 $ 111,215
======================================
These loans have been consummated on terms no more favorable than those
that would have been obtained if the transaction had been with unrelated
parties.
NOTE 8 - PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost less accumulated depreciation and
amortization as follows:
Useful life
in years 1997 1996
-----------------------------------------
(In thousands)
Land............................................... $ 51,286 $ 47,315
-------------------------
Buildings.......................................... 15-50 188,833 208,317
Equipment.......................................... 3-10 336,826 280,945
Leasehold improvements............................. Various 55,837 53,169
-------------------------
581,496 542,431
Less - Accumulated depreciation and amortization... 297,244 252,393
-------------------------
284,252 290,038
-------------------------
Construction in progress........................... 29,354 19,344
-------------------------
$364,892 $356,697
=========================
Depreciation and amortization of premises and equipment for the year was
$54,523,000 (1996- $48,481,000; 1995 - $44,448,000) of which $10,341,000 (1996 -
$9,943,000; 1995 - $9,261,000) was charged to occupancy expense and $44,182,000
(1996 - $38,538,000; 1995 - $35,187,000) was charged to equipment,
communications and other operating expenses. Occupancy expense is net of rental
income of $16,442,000 (1996 - $16,193,000; 1995 - $15,384,000).
In accordance with SFAS 121, during 1997, the Corporation recorded an
impairment loss on a building, which was sold later in the year, of
approximately $3,295,000 (1996- $700,000), based on an appraisal value, which
was included in other operating income.
F-55
76
NOTE 9- DEPOSITS:
Total interest bearing deposits as of December 31, consisted of:
1997 1996
---------------------------
(In thousands)
Savings deposits:
Savings accounts ......................................... $ 3,584,963 $ 3,201,367
NOW and money market accounts ............................ 1,357,519 1,173,496
---------------------------
4,942,482 4,374,863
---------------------------
Certificates of deposit:
Under $100,000 ........................................... 2,246,988 1,884,135
$100,000 and over ........................................ 2,013,280 2,173,573
---------------------------
4,260,268 4,057,708
---------------------------
$ 9,202,750 $ 8,432,571
===========================
NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE:
The following table summarizes certain information on federal funds purchased
and securities sold under agreements to repurchase as of December 31:
1997 1996 1995
----------------------------------------
(Dollars in thousands)
Federal funds purchased .......................... $ 389,040 $ 158,336 $ 307,506
Securities sold under agreements to repurchase ... 2,334,289 1,717,129 2,693,372
----------------------------------------
Total amount outstanding ......................... $2,723,329 $1,875,465 $3,000,878
========================================
Maximum aggregate balance outstanding
at any month-end ................................ $3,897,110 $2,922,611 $3,000,878
========================================
Average daily aggregate balance outstanding ...... $2,836,290 $2,521,929 $2,016,273
========================================
Weighted average interest rate:
For the year ................... 5.01% 5.12% 5.43%
At December 31.................. 5.51 5.16 5.61
F-56
77
NOTE 11 - OTHER SHORT-TERM BORROWINGS:
Other short-term borrowings as of December 31, consisted of:
1997 1996
------------------------
(In thousands)
Advances under revolving lines of credit amounting to $605,000,000 (1996 - $240,000,000)
with fixed interest rates ranging from 5.95% to 6.75% at December 31, 1997
(1996 - 5.55% to 6.88%) .......................................................................... $ 81,700 $ 65,000
Commercial paper with various maturities until June 1998 at rates ranging from 5.70% to
5.99% (1996 - 5.05% to 5.75%) .................................................................... 183,999 290,091
Term notes maturing in 1998, paying interest monthly at LIBOR less 3 basis points with a quarterly
reset of interest rate ........................................................................... 25,000
Term notes maturing in 1998, paying interest quarterly at floating interest rates ranging from 0.25%
to 0.75% (1996 - 0.25% to 0.50%) over 3-month LIBOR rate (LIBOR rate at December 31, 1997
was 5.81%; 1996 - 5.56%) ......................................................................... 66,488 189,961
Term notes maturing in 1998, paying interest semiannually at rates ranging from
5.40% to 8.12% (1996 - 5.33% to 8.32%) ........................................................... 111,509 136,952
Term funds purchased with maturities until July 1998 at rates ranging from 5.64% to 5.93%
(1996 - 5.29% to 5.79%) .......................................................................... 680,000 652,000
Term notes with maturities until December 1998 with fixed rates ranging from 4.40% to 5.87% ........ 138,500
Term notes maturing in 1997, paying interest quarterly at floating interest rates of 0.125% over the
6-month LIBOR rate (LIBOR rate at December 31, 1996 was 5.60%) ................................... 10,000
Securities sold not yet purchased .................................................................. 59,315
Others ............................................................................................. 239 687
------------------------
$1,287,435 $1,404,006
========================
The weighted average interest rate of other short-term borrowings at
December 31, 1997 was 5.60% (1996 - 5.75%; 1995 - 5.53%). The maximum aggregate
balance outstanding at any month-end was approximately $1,985,452,000 (1996 -
$1,404,006,000; 1995 - $773,366,000). The average aggregate balance outstanding
during the year was approximately $1,609,035,000 (1996 - $883,739,000; 1995 -
$529,111,000). The weighted average interest rate during the year was 5.94%
(1996 - 6.27%; 1995 - 6.05%).
F-57
78
NOTE 12 - NOTES PAYABLE:
Notes payable outstanding at December 31, consisted of the following:
1997 1996
------------------------
(In thousands)
Term notes with maturities ranging from 1999 through 2005
paying interest semiannually at fixed rates ranging
from 5.50% to 8.41% (1996 - 5.40% to 8.41%) .................................... $904,884 $575,360
Term notes with maturities ranging from 1999 through 2005
paying interest quarterly at rates ranging from 0.10% to
0.46% (1996 - 0.125% to 0.75%) over the 3-month LIBOR rate
and 3-month US Treasury Bill rate (LIBOR and US Treasury
Bill rates at December 31, 1997 were 5.81% and 5.35%,
respectively;
1996 - 5.56% and 5.17%, respectively) .......................................... 194,366 117,356
Term notes maturing in 1999 paying interest monthly
at a fixed rate of 5.92% ....................................................... 25,000 25,000
Promissory notes with maturities ranging from 1999
through 2003 with fixed interest rates ranging from
5.50% to 6.35% (1996 - 4.62% to 6.35%) ......................................... 49,200 43,700
Promissory notes with maturities ranging from 2000 through
2005 with floating interest rates ranging from 87% to 92% of
the 3-month LIBID rate (LIBID rate at December 31, 1997
was 5.69%; 1996 - 5.44%) ....................................................... 230,000 200,000
Term notes maturing in 1998 paying interest monthly
at LIBOR less 3 basis points with a quarterly reset of
the interest rate .............................................................. 25,000
Mortgage notes and other debt with fixed rates and terms ......................... 246 297
------------------------
$1,403,696 $986,713
========================
NOTE 13 - SENIOR DEBENTURES:
Senior debentures at December 31, 1996, consisted of a $30,000,000
obligation issued by the Corporation with interest at a fixed rate of 8.25%,
which matured in January 1997.
The senior debentures contained various covenants which, among others,
restricted the payment of dividends. These debentures prohibited the Corporation
from paying dividends or making any other distributions with respect to the
Corporation's common stock if such aggregate distribution exceeded $50,000,000
plus 50% of consolidated net income (or minus 100% of consolidated net loss),
computed on a cumulative basis from January 1, 1992 to the date of payment of
any such dividends or other distributions or if an event of default had
occurred.
NOTE 14 - SUBORDINATED NOTES:
Subordinated notes at December 31, 1997 and 1996, consisted of $125,000,000
notes issued by the Corporation on December 12, 1995, maturing on December 15,
2005, with interest payable semiannually at 6.75%. The notes issued by the
Corporation are unsecured obligations which are subordinated in right of payment
to the prior payment in full of all present and future senior indebtedness of
the Corporation. These notes do not provide for any sinking fund.
NOTE 15 - PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH AMERICA'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED BY THE CORPORATION:
On February 5, 1997, BanPonce Trust I, a statutory business trust created
under the laws of the State of Delaware that is wholly-owned by Popular North
America and indirectly wholly-owned by the Corporation, sold to institutional
investors $150,000,000 of its 8.327% Capital Securities Series A (liquidation
amount $1,000 per Capital Security) through certain underwriters. The proceeds
of the issuance, together with the proceeds of the purchase by Popular North
America of $4,640,000 of its 8.327% common securities (liquidation amount $1,000
per common security) were used to purchase $154,640,000 aggregate principal
amount of Popular North America's 8.327% Junior Subordinated Deferrable Interest
Debentures, Series A (the "Junior
F-58
79
- --------------------------------------------------------------------------------
Subordinated Debentures"). These capital securities qualify as Tier I capital,
are fully and unconditionally guaranteed by the Corporation, and are presented
in the Consolidated Statements of Condition as "Guaranteed Preferred Beneficial
Interest in Popular North America's Subordinated Debentures." The obligations of
Popular North America under the Junior Subordinated Debentures and its
guarantees of the obligations of BanPonce Trust I are fully and unconditionally
guaranteed by the Corporation. The assets of BanPonce Trust I consisted of
$154,640,000 of Junior Subordinated Debentures and a related accrued interest
receivable of $4,292,000. The Junior Subordinated Debentures mature on February
1, 2027; however, under certain circumstances, the maturity of the Junior
Subordinated Debentures (which shortening would result in a mandatory redemption
of the Capital Securities) may be shortened.
NOTE 16 - LONG-TERM DEBT MATURITY REQUIREMENTS:
The aggregate amounts of maturities of notes payable, capital securities and
subordinated notes were as follows:
Notes Capital Subordinated
Year payable Securities notes Total
-------------------------------------------------------------------------------------
(In thousands)
1998.................... $ 30 $ 30
1999.................... 355,385 355,385
2000.................... 432,342 432,342
2001.................... 203,973 203,973
2002.................... 184,043 184,043
Later years............. 227,923 $150,000 $125,000 502,923
---------------------------------------------------------
Total................... $1,403,696 $150,000 $125,000 $1,678,696
=========================================================
NOTE 17 - PREFERRED STOCK OF BPPR:
BPPR has 200,000 shares of authorized preferred stock with a par value of
$100. This stock may be issued in series, and the shares of each series shall
have such rights and preferences as shall be fixed by the Board of Directors
when authorizing the issuance of that particular series. At December 31, 1997,
there are no such shares issued or outstanding.
NOTE 18 - STOCKHOLDERS' EQUITY:
The Corporation has 180,000,000 shares of authorized common stock with par
value of $6 per share. At December 31, 1997, there were 67,682,704 (1996 -
66,088,506) shares issued and outstanding. On May 8, 1997, the Board of
Directors of the Corporation approved a stock repurchase program which allows
the Corporation to repurchase in the open market, at such times and prices as
market conditions shall warrant, up to three million shares of its outstanding
common stock. As of December 31, 1997, the Corporation had purchased 988,800
shares under this program for a total cost of $39,559,000.
On April 26, 1996, the Corporation's Board of Directors authorized a stock
split of one share of stock for each share outstanding effected in the form of a
dividend, effective July 1, 1996. As a result of the split, 33,000,590 shares
were issued and $198,004,000 was transferred from retained earnings to common
stock. All per share data included herein have been adjusted to reflect the
stock split.
The Corporation has a dividend reinvestment plan under which stockholders
may reinvest their quarterly dividends in shares of common stock at a 5%
discount from the market price at the time of issuance. During 1997, shares
totaling 120,726 (1996 - 191,236; 1995 - 221,016), equivalent to $4,642,000
(1996 - $4,135,000; 1995 - $3,500,000) in additional equity, were issued under
the plan.
The Corporation has 10,000,000 shares of authorized preferred stock with no
par value. This stock may be issued in one or more series, and the shares of
each series shall have such rights and preferences as shall be fixed by the
Board of Directors when authorizing the issuance of that particular series. The
Corporation has 4,000,000 shares issued and outstanding of Series A preferred
stock. These shares are non-convertible and are redeemable at the option of the
Corporation on or after June 30, 1998. The redemption price per share is $26.25
from June 30, 1998 through June 29, 1999, $26.00 from June 30, 1999 through June
29, 2000, $25.75 from June 30, 2000 through June 29, 2001, $25.50 from June 30,
2001 through June 29, 2002 and $25.00 from June 30, 2002 and thereafter.
Dividends on the Series A preferred stock are non-cumulative and are payable
monthly at the annual rate of 8.35% of the liquidation preference of $25.00 per
share.
F-59
80
The Corporation's average number of common shares outstanding used in the
computation of net income per common share was 67,018,482 (1996 - 66,022,312;
1995 - 65,816,300). During the year, cash dividends of $0.80 (1996 - $0.69 and
1995 - $0.58) per common share outstanding amounting to $53,681,000 (1996 -
$45,557,000; 1995 - $37,846,000) were declared. In addition, dividends declared
on preferred stock amounted to $8,350,000 (1996 - $8,350,000; 1995 -
$8,350,000).
Popular International Bank, Inc. and Popular North America, Inc.'s bank
subsidiaries (Banco Popular, Illinois, Banco Popular, N.A. (California), Banco
Popular, N.A. (Florida), Banco Popular, N.A. (Texas) 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 Popular International Bank, Inc. and Popular North America, Inc. to
make dividend and asset distributions to the Corporation, nor on the ability of
the subsidiaries of Popular North America, Inc., except for Banco Popular, FSB,
to make distributions to Popular North America, Inc. 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 19 - REGULATORY CAPITAL REQUIREMENTS:
The Corporation is subject to various regulatory capital requirements
imposed by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory requirements. The Corporation's capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of Tier I and
total capital to risk-weighted assets, and of Tier I capital to average assets
(leverage ratio) as defined in the regulations. Management has determined that
as of December 31, 1997, the Corporation exceeded all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the Corporation was well capitalized under the
regulatory framework for prompt corrective action and there are no conditions or
events since that date that management believes have changed the institution's
category.
The Corporation's actual and required ratios and amounts of total
risk-based capital, Tier I risk-based capital and Tier I leverage, as of
December 31, were as follows:
F-60
81
Regulatory requirements
------------------------------------------
To be well capitalized
under prompt
For capital corrective action
Actual adequacy purposes provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
As of December 31, 1997: (In thousands)
Total Capital (to Risk-Weighted Assets):
Consolidated .......................... $1,598,506 14.56% $878,054 8% $1,097,567 10%
BPPR .................................. 1,165,509 12.58 741,226 8 926,533 10
Banco Popular, FSB .................... 131,722 15.11 69,745 8 87,181 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated .......................... $1,335,391 12.17% $439,027 4% $ 658,540 6%
BPPR .................................. 1,048,899 11.32 370,613 4 555,920 6
Banco Popular, FSB .................... 120,697 13.84 34,872 4 52,309 6
Tier I Capital (to Average Assets):
Consolidated .......................... $1,335,391 6.86% $583,831 3% $ 973,052 5%
BPPR .................................. 1,048,899 6.36 494,917 3 824,862 5
Banco Popular, FSB .................... 120,697 8.02 45,134 3 75,224 5
Regulatory requirements
------------------------------------------
To be well capitalized
under prompt
For capital corrective action
Actual adequacy purposes provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
As of December 31, 1996: (In thousands)
Total Capital (to Risk-Weighted Assets):
Consolidated .......................... $1,367,478 14.18% $771,505 8% $ 964,382 10%
BPPR .................................. 1,017,755 12.57 647,624 8 809,530 10
Banco Popular, FSB .................... 117,989 16.14 58,480 8 73,100 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated .......................... $1,121,128 11.63% $385,753 4% $ 578,629 6%
BPPR .................................. 915,825 11.31 323,812 4 485,718 6
Banco Popular, FSB .................... 108,751 14.88 29,240 4 43,860 6
Tier I Capital (to Average Assets):
Consolidated .......................... $1,121,128 6.71% $501,357 3% $ 835,595 5%
BPPR .................................. 915,825 6.65 412,944 3 688,239 5
Banco Popular, FSB .................... 108,751 8.99 36,300 3 60,500 5
F-61
82
NOTE 20 - INTEREST ON INVESTMENTS:
Interest on investments consisted of the following:
1997 1996 1995
------------------------------------
(In thousands)
Money market investments:
Federal funds sold and securities
and mortgages purchased under agreements to resell ..... $ 31,886 $ 45,697 $ 22,823
Time deposits with other banks ........................... 1,799 776 165
Other .................................................... 238 224 89
------------------------------------
$ 33,923 $ 46,697 $ 23,077
====================================
Investment securities:
U.S. Treasury securities ................................. $ 213,153 $ 189,300 $ 167,657
Obligations of other
U.S. Government agencies and corporations ............. 82,205 43,157 35,697
Obligations of Puerto Rico,
States and political subdivisions ..................... 8,755 10,902 12,948
Collateralized mortgage obligations ...................... 37,786 26,265 26,435
Mortgage-backed securities ............................... 10,667 6,456 10,892
Other .................................................... 6,170 4,530 6,312
------------------------------------
$ 358,736 $ 280,610 $ 259,941
====================================
Interest income on investment securities for the year ended December 31,
1997, includes tax exempt interest of $290,638,000 (1996 - $229,958,000; 1995 -
$202,209,000). Exempt interest relates mostly to obligations of the United
States and Puerto Rico governments.
NOTE 21 - EMPLOYEE BENEFITS:
Pension plan:
All regular employees of BPPR are covered by a non-contributory defined
benefit pension plan. Pension benefits begin to vest after five years of service
and are based on age, years of credited service and final average compensation,
as defined. At December 31, 1997, plan assets consisted primarily of U.S.
Government obligations, high grade corporate bonds and listed stocks, including
2,836,430 shares (1996 - 2,836,430) of the Corporation with a market value of
approximately $140,403,000 (1996 - $95,730,000). Dividends paid on shares of the
Corporation held by the plan during 1997 amounted to $2,156,000 (1996 -
$1,957,000).
The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements at December 31:
1997 1996
---------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits ......................................... $(204,046) $(172,272)
Non-vested benefits ..................................... (42,545) (38,117)
---------------------
Accumulated benefit obligation ............................. (246,591) (210,389)
Effect of projected future compensation levels ............. (44,467) (32,773)
---------------------
Projected benefit obligation ............................... (291,058) (243,162)
Plan assets at fair market value ........................... 368,399 293,362
---------------------
Plan assets in excess of projected
benefit obligation ...................................... 77,341 50,200
Unrecognized net gain from past
experience different from that assumed
and effect of changes in assumptions .................... (57,833) (27,101)
Unrecognized prior service cost ............................ (2,374) (2,620)
Unrecognized initial net assets ............................ (18,086) (20,547)
---------------------
Accrued pension cost ....................................... $ (952) $ (68)
=====================
F-62
83
Net pension cost for the year ended December 31, included the following
components:
1997 1996 1995
------------------------------------
(In thousands)
Service costs - benefits earned during the period ... $ 10,847 $ 9,860 $ 6,791
Interest cost on projected benefit obligation ...... 18,657 16,645 14,798
Actual return on plan assets ........................ (87,267) (68,965) (48,665)
Net amortization and deferral ....................... 58,647 46,273 29,257
------------------------------------
Net pension costs ............................... 884 3,813 2,181
Cost of early retirement window ..................... 3,851
------------------------------------
Total pension cost .............................. $ 884 $ 3,813 $ 6,032
====================================
At December 31, 1997, the discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.00% (1996 - 7.50%; 1995
- - 7.25%). Rates of future compensation levels reflected a 4% inflation
assumption plus a merit component ranging from 0.5% to 4.5% for 1997, 1996 and
1995. The expected long-term rate of return on assets used in the computation
was 9% for 1997, 1996 and 1995.
In 1995, BPPR implemented a voluntary early retirement plan ("window") for
employees meeting certain eligibility requirements. The plan was available from
January 1, 1995 until May 1, 1995, and had a total cost of $4,539,000, including
pension and postretirement benefit costs.
Retirement and savings plan:
The Corporation also provides contributory retirement and savings plans
pursuant to sections 1165(e) of the Puerto Rico Internal Revenue Code and
section 401(k) of the Internal U.S. Revenue Code, as applicable, for
substantially all the employees of Popular Securities, Equity One, Banco Popular
FSB, Banco Popular N.A. (California), Banco Popular Illinois, Popular Finance,
Popular Leasing and Popular Mortgage. Employer contributions are determined
based on specific provisions of each plan. The cost of providing this benefit in
1997 was $2,811,000 (1996 - $2,163,000; 1995 - $1,247,000).
The Corporation also has a contributory savings plan available to employees
of BPPR. Employees are fully vested in the employer's contribution after seven
years of service. All contributions are invested in shares of the Corporation.
Total savings plan expense was $999,000 in 1997 (1996 - $863,000; 1995 -
$621,000). The savings plan held 553,293 (1996 - 368,117; 1995 - 140,970) shares
of common stock of the Corporation with a market value of approximately
$27,388,000 at December 31, 1997 (1996 - $12,424,000; 1995 - $2,731,000).
Postretirement health care benefits:
In addition to providing pension benefits, BPPR provides certain health
care benefits for retired employees. Substantially all of the employees of BPPR
who are eligible to retire under the pension plan, and provided they reach
retirement age while working for BPPR, may become eligible for these benefits.
The actual disbursement for providing these benefits during 1997 amounted to
approximately $2,703,000 (1996 - $2,556,000; 1995 - $2,152,000).
The components of net postretirement benefit cost for the year ended
December 31, were as follows:
1997 1996 1995
------------------------------------
(In thousands)
Service cost-benefits attributable to service
during the period ............................... $ 3,852 $ 3,584 $ 2,658
Interest cost on accumulated postretirement
benefit obligation ............................. 5,556 5,719 5,435
Net amortization and deferral ....................... 435 1,230 597
------------------------------------
Net postretirement benefit cost ................. 9,843 10,533 8,690
Cost of early retirement window ..................... 688
Total postretirement benefit cost ............... $ 9,843 $ 10,533 $ 9,378
====================================
F-63
84
The status of the Corporation's unfunded postretirement benefit plan at
December 31, was as follows:
1997 1996
---------------------
(In thousands)
Actuarial present value of expected
postretirement benefit obligation:
Retirees ................................................... $(27,225) $(26,929)
Fully eligible active plan participants .................... (14,318) (12,569)
Other active plan participants ............................. (46,433) (44,470)
---------------------
Accumulated postretirement benefit obligation .............. (87,976) (83,968)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions .................................. 12,284 14,981
Unrecognized prior service cost ............................ 4,941 5,376
---------------------
Accrued postretirement benefit cost ........................ $(70,751) $(63,611)
=====================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1997 was 7.00% (1996 - 7.50%).
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation at December 31, 1996 was 10%, gradually
decreasing to 5% by the year 2001 and remaining at that level thereafter. A
one-percentage point increase in the health care cost trend rate would increase
the accumulated postretirement benefit obligation as of December 31, 1997, by
$14,200,000 and the sum of the service and interest cost in 1997 by $1,782,000.
Profit sharing plan:
BPPR also has a profit sharing plan covering substantially all regular
employees. Annual contributions are determined based on the bank's profitability
ratios, as defined in the plan, and are deposited in trust. Profit sharing
expense for the year, including the cash portion paid annually to employees
which represented 40% of the expense for 1997, 1996 and 1995, amounted to
$25,954,000 (1996 - $22,859,000; 1995 - $19,577,000).
Long-term incentive plan:
BPPR has a long-term incentive plan for its senior management. Under this
plan, each January 1st the Board of Directors awards senior management a
specified number of shares of common stock of the Corporation contingent upon
reaching some pre-defined performance measures over periods of three years. The
dividends attributable to these shares are also part of the award. The final
number of shares awarded is subject to a factor based on the level of
attainment. BPPR applied APB Opinion 25 and related Interpretations in
accounting for the plans in 1995. Accordingly, compensation expense was
recognized based on the prevailing stock price until measurement date. The
measurement date is the date when the ultimate number of shares to be granted is
known.
Under the provisions of SFAS 123, effective in 1996, compensation cost is
determined based on the fair value of the stock at the grant date. The
compensation expense related to each award is recognized when probable, based on
the best estimate of the outcome of the performance condition, on a straight
line basis over the vesting period.
The compensation cost recognized for the performance-based plan was
$1,493,000 in 1997 (1996 - $837,000; 1995 - $284,000).
Puerto Rico benefit restoration plan:
BPPR also has a non-qualified unfunded supplementary pension and profit
sharing plan for those employees whose compensation exceeds the limits
established by ERISA.
F-64
85
The following table sets forth the amounts recognized in the consolidated
financial statements at December 31, for the benefit restoration plan:
1997 1996
-----------------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits ......................................... $ (490) $ (324)
-----------------------------
Accumulated benefit obligation .......................... (490) (324)
Effect of projected future compensation levels ............ (3,399) (1,849)
-----------------------------
Projected benefit obligation ............................ (3,889) (2,173)
Unrecognized net loss from past
experience different from that assumed
and effect of changes in assumptions .................... 1,847 847
Unrecognized prior service cost ........................... 571 624
-----------------------------
Accrued supplementary pension cost ........................ $ (1,471) $ (702)
=============================
Net supplementary pension cost for the year ended December 31, included the
following components:
1997 1996 1995
--------------------------
(In thousands)
Service costs - benefits earned
during the period .............................. $ 360 $ 172 $ 109
Interest cost on projected benefit
obligation ..................................... 226 94 69
Net amortization and deferral .................... 183 64 53
--------------------------
Net supplementary pension cost ................... $ 769 $ 330 $ 231
==========================
NOTE 22 - RENTAL EXPENSE AND COMMITMENTS:
At December 31, 1997, the Corporation was obligated under a number of
non-cancelable leases for land, buildings, and equipment which require rentals
(net of related sublease rentals) as follows:
Minimum Sublease
Year payments rentals Net
-----------------------------------------------------------
(In thousands)
1998 .......... $ 17,022 $ 549 $ 16,473
1999 .......... 15,086 256 14,830
2000 .......... 13,387 180 13,207
2001 .......... 10,943 150 10,793
2002 .......... 8,375 93 8,282
Later years ... 61,216 4 61,212
-----------------------------------------------------------
$ 126,029 $ 1,232 $ 124,797
===========================================================
Total rental expense for the year ended December 31, 1997, was $23,336,000
(1996 - $21,196,000; 1995 - $18,037,000).
F-65
86
NOTE 23 - INCOME TAX:
The components of income tax expense for the years ended December 31, are
summarized below. Included in these amounts are income taxes of $747,000 in 1997
(1996 - $1,480,000; 1995 - $1,981,000), related to gains on securities
transactions.
1997 1996 1995
----------------------------------------
(In thousands)
Current income tax expense:
Puerto Rico ................................. $ 83,120 $ 81,488 $ 58,067
Federal and States .......................... 16,058 15,777 9,624
----------------------------------------
Subtotal ................................. 99,178 97,265 67,691
----------------------------------------
Deferred income tax expense (benefit):
Puerto Rico ................................. (19,851) (23,589) (9,501)
Federal and States .......................... (4,866) (2,799) 1,006
Adjustment for enacted changes
in income tax laws ........................ 573
----------------------------------------
Subtotal ................................. (24,717) (26,388) (7,922)
----------------------------------------
Total income tax expense ................. $ 74,461 $ 70,877 $ 59,769
========================================
The reasons for the difference between the income tax expense applicable to
income before provision for income taxes and the amount computed by applying the
statutory rate in Puerto Rico, were as follows:
1997 1996 1995
----------------------------------------------------------------
% of % of %of
pre-tax pre-tax pre-tax
Amount Income Amount Income Amount Income
----------------------------------------------------------------
(Dollars in thousands)
Computed income tax at
statutory rate................... $ 110,770 39% $ 99,851 39% $ 86,574 42%
Benefits of net tax exempt
interest income.................. (37,860) (13) (29,118) (11) (24,604) (12)
Federal and States taxes and 1,551 144 (2,201) (1)
other............................ ----------------------------------------------------------------
Income tax expense................ $ 74,461 26% $ 70,877 28% $ 59,769 29%
================================================================
In October 1994, a Tax Reform Act was enacted in Puerto Rico. In general
terms, the Tax Reform was effective for taxable years beginning after June 30,
1995. Among its provisions, the Act reduced the maximum tax rate for
corporations from 42% to 39%. The deferred taxes of the Corporation were
adjusted accordingly in 1995, to reflect this tax rate reduction on those
temporary differences and tax attributes that were expected to reverse or settle
on or after January 1, 1996. The Act also repealed the reserve method of
determining losses on loans and requires taxpayers to use the direct charge-off
method and recapture the reserve balance at December 31, 1995 into income for
tax purposes over a four-year period. As a result of this change, the
Corporation is required to pay $15,247,000 in both, 1998 and 1999. In 1996 and
1997, the Corporation paid $14,763,000 and $14,994,000, respectively, related to
the aforementioned recapture (the increase since 1997 results from the
acquisition of RCB on June 30, 1997). A deferred tax asset is recorded to
recognize the difference between the tax and accounting bases of the allowance
for loan losses.
F-66
87
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities at December 31, were as
follows:
1997 1996
----------------------------
(In thousands)
Deferred tax assets:
Alternative minimum tax credits available for
carryforward and other credits .......................... $ 22,353 $ 24,303
Net operating loss carryforward available .................... 1,340 292
Postretirement benefit obligation
(other than pensions) ...................................... 28,069 24,966
Allowance for loan losses .................................... 50,203 18,670
Other temporary differences .................................. 16,398 22,339
----------------------------
Total gross deferred tax assets ........................... 118,363 90,570
----------------------------
Deferred tax liabilities:
Differences between the assigned values and the
tax bases of assets and liabilities recognized
in purchase business combinations ....................... 11,893 16,025
Unrealized gain on securities available-for-sale ............. 11,180 1,490
Other temporary differences .................................. 11,819 8,325
----------------------------
Total gross deferred tax liabilities ...................... 34,892 25,840
----------------------------
Valuation allowance .......................................... 205 577
----------------------------
Net deferred tax asset .................................... $ 83,266 $ 64,153
============================
At December 31, 1997, the Corporation had $22,353,000 in credits expiring
in annual installments through year 2014 that will reduce the regular income tax
liability in future years. During 1997, the Corporation used alternative minimum
tax (AMT) credits totaling $1,432,000 (1996 - $1,720,000) to reduce its regular
tax liability. The Corporation had, at the end of 1997, $3,391,000 in net
operating losses (NOL) available to carry over to offset taxable income in
future years. These NOLs are available to carryforward until year 2004. During
1997, the Corporation used NOL carryforwards amounting to $748,000 to reduce its
regular taxable income. Other temporary differences included as deferred assets
are mainly related to the deferral of loan origination costs and commissions.
A valuation allowance of $205,000 (1996 - $577,000) is reflected in 1997,
related to deferred tax assets arising from NOL carryforwards and temporary
differences for which the Corporation could not determine the likelihood of its
realizability. Based on the information available, the Corporation expects to
fully realize all other items comprising the net deferred tax as of December 31,
1997.
Under the Puerto Rico Internal Revenue Code, the Corporation and its
subsidiaries are treated as separate taxable entities and are not entitled to
file consolidated tax returns. Until December 31, 1995, dividends received by
the Corporation from its subsidiaries (net of an 85% dividend received deduction
allowed by the former Puerto Rico Income Tax Law) were subject to Puerto Rico
income tax at the normal corporate tax rates. Technical amendments to the Puerto
Rico Internal Revenue Code increased the dividend received deduction to 100%, on
dividends received from "controlled" subsidiaries, effective on January 1, 1996.
In previous years, the Corporation did not recognize a deferred tax liability on
the unremitted earnings of domestic subsidiaries since the Puerto Rico Income
Tax Law provided certain alternatives to remit those earnings to the Corporation
on a tax-free basis.
The Corporation has never received any dividend payments from its U.S.
subsidiaries. Any such dividend paid from a U.S. subsidiary to the Corporation
would be subject to a 30% withholding tax based on the provisions of the U.S.
Internal Revenue Code. The Corporation has not recorded any deferred tax
liability on the unremitted earnings of its U.S. subsidiaries, based on the
provisions of SFAS 109, which states that no recognition of a deferred tax
liability is warranted for foreign subsidiaries if the indefinite reversal
criteria applies. The Corporation believes that the likelihood of receiving
dividend payments from any of its U.S. subsidiaries is remote, based on the
significant expansions it is undertaking in the U.S. mainland.
F-67
88
The Corporation's subsidiaries in the United States file a consolidated
federal income tax return. The Corporation's federal income tax provision for
1997 was $9,583,000 (1996 - $12,281,000; 1995 - $9,265,000). The intercompany
settlements of taxes paid is based on tax sharing agreements which generally
allocates taxes to each entity based on a separate return basis.
NOTE 24 - OFF-BALANCE SHEET LENDING ACTIVITIES AND CONCENTRATION OF CREDIT RISK:
Off-balance sheet risk:
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financial needs of its
customers and to manage its own risk arising from movements in interest rates.
These financial instruments include loan commitments, letters of credit, standby
letters of credit, futures contracts, options on futures contracts, interest
rate swaps and caps and foreign exchange contracts. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statement of condition. The contract or
notional amount of these instruments, which are not included in the statement of
condition, are an indicator of the Corporation's activities in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial guarantees written is represented by the
contractual notional amounts of those instruments. The Corporation uses the same
credit policies in making these commitments and conditional obligations as it
does for those reflected on the statement of condition.
Financial instruments with off-balance sheet risk at December 31, whose
contract amounts represent potential credit risk were as follows:
1997 1996
-------------------------------
(In thousands)
Commitments to extend credit:
Credit card lines....................................... $ 964,484 $ 915,589
Commercial lines of credit.............................. 1,668,221 1,374,670
Other unused commitments................................ 33,418 48,693
Commercial letters of credit.............................. 16,352 21,921
Standby letters of credit................................. 56,244 115,681
Commitments to purchase mortgage loans ................... 25,000 2,203
Commitments to extend credit:
Contractual commitments to extend credit are legally binding agreements to
lend money to customers at predetermined interest rates for a specified period
of time. To extend credit the Corporation evaluates each customer's
creditworthiness. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include cash, accounts receivable, inventory, property, plant and
equipment and investment securities, among others. The Corporation's exposure to
credit loss in the event of nonperformance by the customer is represented by the
contractual amount of the commitment to extend credit. Since many of the loan
commitments may expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements.
Letters of credit:
There are two principal types of letters of credit: commercial and standby
letters of credit. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
In most instances, cash items are held by the Corporation to collateralize these
instruments.
In general, commercial letters of credit are short-term instruments used to
finance a commercial contract for the shipment of goods from a seller to a
buyer. This type of letter of credit ensures prompt payment to the seller in
accordance with the terms of the contract. Although the commercial letter of
credit is contingent upon the satisfaction of specified conditions, it
represents a credit exposure if the buyer defaults on the underlying
transaction.
Standby letters of credit are also issued by the Corporation to disburse
funds to a third party beneficiary if the Corporation's customer fails to
perform under the terms of an agreement with the beneficiary. These letters of
credit are used by the customer as a credit enhancement and typically expire
without being drawn upon.
F-68
89
Other commitments:
The Corporation entered into a commitment to purchase $25,000,000 of
mortgage loans from another institution with the option of purchasing additional
loans up to $150,000,000. The commitment expires on June 30, 1999. The purchased
mortgage loans will continue to be serviced by the originating institution. As
of December 31, 1997, no loans have been purchased under this agreement.
Geographic concentration:
A geographic concentration exists within the Corporation's loan portfolio
since most of its business activity is with customers located in Puerto Rico. As
of December 31, 1997, the Corporation had no significant concentrations of
credit risk and no significant exposure to highly leveraged transactions in its
loan portfolio.
The asset composition of the Corporation by geographical area at December
31, was as follows:
1997 1996
(Dollars in thousands)
-----------------------------------------------------
Puerto Rico $14,189,332 73.5% $ 12,386,136 73.9%
United States 4,616,196 23.9 3,756,526 22.4
U.S. and British Virgin
Islands and Latin America 494,979 2.6 621,441 3.7
-----------------------------------------------------
$19,300,507 100.0% $16,764,103 100.0%
=====================================================
Included in total assets of Puerto Rico are investments in obligations of
the U.S. Treasury and U.S. Government agencies amounting to $3.8 billion and
$2.9 billion in 1997 and 1996, respectively.
NOTE 25 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The information about the estimated fair values of financial instruments
required by generally accepted accounting principles is presented hereunder
including some items not recognized in the statement of condition.
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that creates a contractual obligation or
right to deliver to or receive cash or another financial instrument from a
second entity on potentially favorable terms with the first entity. All
nonfinancial instruments and certain other specific items are excluded from the
fair value disclosure requirements.
For those financial instruments with no quoted market prices available,
fair values have been estimated using present value or other valuation
techniques. These techniques are inherently subjective and are significantly
affected by the assumptions used, including the discount rates, estimates of
future cash flows and prepayment assumptions. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument.
The fair values reflected herein have been determined based on the
prevailing interest rate environment as of December 31, 1997 and 1996,
respectively. In different interest rate environments, fair value results can
differ significantly, especially for certain fixed rate financial instruments
and non-accrual assets. In addition, the fair values presented do not attempt to
estimate the value of the Corporation's fee generating businesses and
anticipated future business activities, that is, they do not represent the
Corporation's value as a going concern. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Corporation.
The estimated fair values of the Corporation's financial instruments, their
carrying value and the methodologies used to estimate fair values are presented
below.
Short-term financial instruments:
Short-term financial instruments, both assets and liabilities, have been
valued at their carrying amounts as reflected in the Corporation's Consolidated
Statements of Condition. For these financial instruments, the carrying value may
approximate fair value because of the relatively short period of time between
the origination of the instruments and their expected realization.
F-69
90
Included in this category are: cash and due from banks, federal funds sold and
securities and mortgages purchased under agreements to resell, time deposits
with other banks, bankers' acceptances, customers' liabilities on acceptances,
accrued interest receivable, securities sold under agreements to repurchase,
acceptances outstanding and accrued interest payable.
Investment and trading securities:
Investment and trading securities are financial instruments which trade
regularly on secondary markets. The estimated fair value of these securities was
determined using either market prices or dealer quotes, where available, or
quoted market prices of financial instruments with similar characteristics. The
fair value of investment securities available-for-sale and trading securities
equals their carrying value since they are marked-to-market for accounting
purposes. These instruments are detailed in the Statements of Condition and in
notes 3, 4 and 26.
Loans held-for-sale:
Estimated fair value of loans held-for-sale as of December 31, 1997, was
$265,421,000 (1996 - $257,183,000) based on secondary market prices.
Loans:
Estimated fair values have been determined for groups of loans with similar
financial characteristics. Loans were segregated by type such as commercial,
construction, residential mortgage, consumer and credit cards. Each loan
category was further segmented based on collateral, interest repricing and
accrual vs. non-accrual status. For variable rate loans with frequent repricing
terms and no significant change in credit risk, fair values were based on
carrying values.
Commercial loans with fixed rates were segregated into commercial real
estate, cash collateral and other. Consumer loans were segregated by type such
as personal, auto, boat, student, credit cards, reserve lines and home equity
loans. Personal loans were further subdivided in mortgage-guaranteed, cash
collateral and unsecured. The fair values of fixed-rate commercial, construction
and consumer loans were estimated by discounting scheduled cash flows using
prevailing market rates for those loans. For non-accruing loans, the estimated
fair values were based on the discounted value of estimated cash flows. For
these loans, principal-only cash flows were adjusted to reflect projected
charge-offs. Interest cash flows were determined based on historical collection
experience. Residential mortgage loans were valued using quoted market prices,
where available, and market prices of traded loans with similar credit ratings,
interest rates and maturity dates adjusted for estimated prepayments. Generally
accepted accounting principles do not require, nor the Corporation has
performed, a fair valuation of its lease financing portfolio. Therefore, for
presentation purposes only, leases are shown below with fair value equal to its
carrying value.
1997 1996
-------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
-------------------------------------------------------------
(In thousands)
Commercial ............................ $ 4,637,409 $ 4,646,199 $3,822,096 $3,821,956
Construction .......................... 250,111 248,953 200,083 200,576
Lease financing ....................... 581,927 581,927 516,001 516,001
Mortgage .............................. 2,568,693 2,614,296 2,381,332 2,399,493
Consumer (including credit cards) ..... 3,073,264 3,013,351 2,604,387 2,656,156
Less: Allowance for loan losses ...... 211,651 185,574
-------------------------------------------------------------
$10,899,753 $11,104,726 $9,338,325 $9,594,182
=============================================================
Deposits:
As specified by SFAS 107, "Disclosures about Fair Value of Financial
Instruments," the fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, NOW and money market accounts,
which at December 31, 1997 and 1996, comprised 64% and 62%, respectively, of the
Corporation's total deposits, is equal to the amount payable on demand as of the
respective dates. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates offered at December 31, 1997 and 1996, respectively, for deposits with
similar remaining maturities.
F-70
91
1997 1996
-------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
-------------------------------------------------------------
(In thousands)
Non-interest bearing deposits ......... $ 2,546,836 $ 2,546,836 $ 2,330,704 $ 2,330,704
Savings accounts ...................... 3,584,963 3,584,963 3,201,367 3,201,367
NOW and money market
accounts ............................ 1,357,519 1,357,519 1,173,496 1,173,496
Certificates of deposit ............... 4,260,268 4,310,289 4,057,708 4,060,727
-------------------------------------------------------------
$11,749,586 $11,799,607 $10,763,275 $10,766,294
=============================================================
Borrowings and long-term debt:
Borrowings and long-term debt, which include other short-term borrowings,
notes payable, senior debentures, subordinated notes and capital securities,
were valued using quoted market rates for similar instruments at December 31,
1997 and 1996, respectively. Included within other short-term borrowings at
December 31, 1997, were $183,999,000 (1996 - $290,091,000) in commercial paper
issued by the Corporation which has been valued at its carrying amount because
of the relatively short period of time between its origination and maturity.
1997 1996
-------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
-------------------------------------------------------------
(In thousands)
Other short-term borrowings ........... $ 1,287,435 $ 1,287,306 $1,404,006 $1,404,744
Notes payable ......................... 1,403,696 1,413,748 986,713 989,970
Senior debentures ..................... 30,000 30,000
Subordinated notes .................... 125,000 126,132 125,000 116,699
Capital securities .................... 150,000 158,481
Commitments to extend credit and standby letters of credit:
Commitments to extend credit were fair valued using the fees currently
charged to enter into similar agreements. For those commitments where a future
stream of fees is charged, the fair value was estimated by discounting the
projected cash flows of fees on commitments which are expected to be disbursed,
based on historical experience. The fair value of letters of credit is based on
fees currently charged on similar agreements. At December 31, 1997, the
Corporation had $2,666,123,000 and $72,596,000 in commitments to extend credit
and letters of credit, respectively (1996 - $2,338,952,000 and $137,602,000).
The estimated fair value of these financial instruments with no carrying value
was $8,577,000 (1996 - $9,137,000).
NOTE 26 - RISK MANAGEMENT AND TRADING ACTIVITIES
The Corporation's exposure to market risk relates to changes in interest
rates or in the fair value of the underlying financial instruments and, to a
limited extent, to fluctuations in foreign currency exchange rates. The
operations are subject to the risk of interest rate fluctuations to the extent
that interest-earning assets and interest-bearing liabilities mature or reprice
at different times or in differing amounts.
Risk management activities are aimed at optimizing net interest income,
consistent with the Corporation's business strategies. Among the various methods
used by the Corporation to measure the risks generated by assets and liabilities
are beta-adjusted gap analysis, simulations and duration analysis.
In managing its market risk the Corporation enters, to a limited extent,
into certain derivative instruments that expose it to credit risk, which
represent the risk that the counterparties might default on their obligations.
To manage the level of credit risk the Corporation deals with counterparties of
good credit standing, enters into master netting agreements whenever possible
and, when appropriate, obtains collateral. Concentrations of credit risk which
arise through the Corporation's trading and nontrading activities are presented
in Note 24.
The following table indicates the types of derivative financial instruments
the Corporation held at December 31. The credit exposure is represented by the
fair value of the instruments with a positive market value. The table should be
read in conjunction with the descriptions of these products and the
Corporation's objectives for holding them which immediately follows.
F-71
92
1997 1996
------------------------------------------------------------------------------
Notional Average for the Fair Notional Average for the Fair
amount year value amount year value
------------------------------------------------------------------------------
(In thousands)
Interest rate swaps:
Pay floating/receive fixed ....... $ 15,000 $ 20,181 $ 108 $ 25,000 $ 21,250 $ 98
Pay fixed/receive floating ....... 215,000 167,180 (1,678) 115,000 115,000 (13)
Interest rate swaptions ........... 32,271 29,360 23,277 22,149 14,683 1,233
Interest rate futures ............. 28,357
Interest rate options ............. 60,917 238,830 533
Interest rate caps ................ 3,413 1,351 41
Interest rate floors .............. 3,413 1,351 (46)
Foreign exchange contracts ........ 1,234 1,047 178 748
Interest rate swaps:
Interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal. Net interest settlements on interest rate swaps are
recorded as an adjustment to interest income or interest expense of the hedged
item.
1997 1996
-----------------------
(Dollars in thousands)
Activity of interest rate swaps hedges for the year:
Beginning balance ................................. $ 140,000 $ 125,000
New swaps ......................................... 170,000 15,000
Matured swaps ..................................... (80,000)
-----------------------
Ending balance .................................... $ 230,000 $ 140,000
=======================
Pay floating/receive fixed:
Weighted average receive rate at December 31 ...... 6.42% 6.54%
Weighted average pay rate at December 31 .......... 5.94 5.81
Pay fixed/receive floating:
Weighted average receive rate at December 31 ...... 5.88% 5.82%
Weighted average pay rate at December 31 .......... 6.24 6.31
The agreements were entered into to change the Corporation's interest rate
exposure and they end at the time the related obligation matures. The variable
rates are based on the three-month and six-month LIBOR rates. Non-performance by
any of the counterparties on this agreement will expose the Corporation to an
interest rate risk which management deems to be immaterial.
Interest rate swaptions:
The Corporation enters into "swaption" derivative securities, which combine
the characteristics of interest rate swaps and options, for hedging purposes.
BPPR issues certificates of deposit with returns linked to the Standard and
Poor's 500 index (the index). In order to hedge the cost of these certificates,
positions in swaptions are assumed. These swaptions earn a return to the
Corporation equal to the appreciation in the index throughout the life of the
certificate of deposit issued. In exchange, the Corporation pays the
counterparty a fixed rate of interest.
Interest rate futures:
Financial futures contracts are agreements to buy or sell a notional amount
of a financial instrument at a given time in the future. Options on futures
contracts confer the right from seller to buyer to take a future position at a
stated price. Risks arise from the possible inability of counterparties to meet
the terms of their contracts and from movements in securities values and
interest rates.
F-72
93
Interest rate options and caps:
Interest rate options are contracts that grant the purchaser, for a premium
payment, the right to either purchase from or sell to the writer of the option a
financial instrument at a specified price within a specified period of time or
on a specified date. Interest rate caps and floors are option-like contracts
that require the writer to pay the purchaser at specified future dates the
amount, if any, by which a specified market interest rate exceeds the fixed cap
rate or falls below the fixed floor rate, applied to a notional principal
amount. The option writer receives a premium for bearing the risk of unfavorable
interest rate changes.
Foreign exchange contracts:
To satisfy the needs of its customers, from time to time, the Corporation
enters into foreign exchange contracts in the spot or futures market. Spot
contracts require the exchange of two currencies at an agreed rate to occur
within two business days of the contract date. Forward and futures contracts to
purchase or sell currencies at a future date settle over periods of up to one
year, in general. Futures and forward contracts are recorded at market value.
Securities sold not yet purchased:
The Corporation enters in securities sold not yet purchased transactions
for hedging strategies and for trading purposes. Various assets and liabilities,
such as investment securities financed by borrowings, are usually hedged to
lock-in spreads and reduce the risk of losses in value due to interest rate
fluctuations. At December 31, 1996, securities sold short amounting to
$59,315,000 were used to hedge $59,819,000 of auto loans held-for-sale. The
securities sold short are recorded as other short-term borrowings on the
statement of condition at market. Gains and losses are deferred until gains or
losses on the related hedged item are recognized. At December 31, 1996, the
Corporation had deferred gains and losses of $195,000 and $41,000, respectively,
related to these activities.
Open positions on securities sold short for trading purposes are usually
closed at each month-end. The volume of such transactions is not significant, as
further discussed below.
Trading activities:
The Corporation maintains limited trading positions in certain financial
instruments and nonfinancial contracts including, to a limited extent,
derivatives. Most of the Corporation's trading activities are limited to the
purchase of debt securities for the purpose of selling them in the near term and
positioning securities for resale to retail customers. Trading activities of the
Corporation are subject to strict guidelines approved by the Board of Directors
and included in the investment policy.
In anticipation of customer demand, the Corporation carries an inventory of
capital market instruments and maintains market liquidity by quoting bid and
offer prices to and trading with other market makers. Positions are also taken
in interest rate sensitive instruments, based on expectations of future market
conditions. These activities constitute the proprietary trading business and are
held by the Corporation to provide customers with financial products at
competitive prices. As trading strategies depend on both market-making and
proprietary positions, given the relationship between instruments and markets,
those activities are managed in concert in order to maximize net trading
revenue.
All trading instruments are subject to market risk, the risk that future
changes in market conditions may make an instrument less valuable or more
onerous. Fluctuations in market prices, interest rates or exchange rates change
the market value of the instruments. As the instruments are recognized at market
value, these changes directly affect reported income. Exposure to market risk is
managed, in accordance with risk limits set by senior management, by buying or
selling instruments or entering into offsetting positions.
The Corporation held no futures or options contracts written for trading
purposes at December 31, 1997. For 1996, the contract amounts of futures and
options written for trading purposes were $3,210,000 and $6,079,000,
respectively. The following table indicates the fair value and net gains
(losses) of derivatives financial instruments held for trading purposes.
F-73
94
Fair Value
----------------------------------------------------------------------
At December 31, 1997 Average for the period Net gains
Assets Liabilities Assets Liabilities (losses)
----------------------------------------------------------------------
(In thousands)
Futures contracts...... $0 $0 $0 $1 $(23)
Options................ 0 0 0 11 (41)
Fair Value
----------------------------------------------------------------------
At December 31, 1996 Average for the period Net gains
Assets Liabilities Assets Liabilities (losses)
----------------------------------------------------------------------
(In thousands)
Futures contracts...... $0 $135 $140 $34 $(274)
Options................ 0 73 0 48 121
The Corporation's credit exposure from off-balance sheet derivative
financial instruments held or issued for trading purposes is represented by the
fair value of the instruments with a positive fair value at that date.
NOTE 27 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS:
During the year ended December 31, 1997, the Corporation paid interest and
income taxes amounting to $703,553,000 and $88,752,000, respectively (1996 -
$579,733,000 and $76,324,000; 1995 - $515,960,000 and $42,383,000). In addition,
loans transferred to other real estate and other property for the year ended
December 31, 1997, amounted to $22,727,000 and $7,606,000, respectively (1996 -
$3,333,000 and $5,640,000).
NOTE 28 - CONTINGENT LIABILITIES:
The Corporation is a defendant in a number of legal proceedings arising in
the normal course of business. Management believes, based on the opinion of
legal counsel, that the final disposition of these matters will not have a
material adverse effect on the Corporation's financial position or results of
operations.
NOTE 29 - POPULAR, INC. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION:
The following condensed financial information presents the financial
position of the Holding Company only as of December 31, 1997 and 1996 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997.
F-74
95
STATEMENTS OF CONDITION
December 31,
---------------------------
1997 1996
---------------------------
(In thousands)
ASSETS
Cash .................................................................... $ 378 $ 191
Money market investments ................................................ 55,024
Investment securities available-for-sale, at market value ............... 88,371 69,486
Investment in BPPR, at equity ........................................... 1,255,880 1,009,648
Investment in Banco Popular, Illinois, at equity ........................ 128,089 39,820
Investment in Banco Popular, FSB, at equity ............................. 148,038 130,577
Investment in Banco Popular, N.A. (California), at equity ............... 14,187 12,566
Investment in other subsidaries, at equity .............................. 26,933 47,365
Advances to subsidiaries ................................................ 691,706 634,257
Premises and equipment .................................................. 39,176
Other assets ............................................................ 3,683 3,348
---------------------------
Total assets .......................................................... $ 2,357,265 $ 2,041,458
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold under agreements to repurchase .......................... $ 51,775 $ 52,084
Commercial paper ........................................................ 98,099 164,379
Other short-term borrowings ............................................. 21,700 65,000
Notes payable ........................................................... 535,263 320,539
Senior debentures ....................................................... 30,000
Accrued expenses and other liabilities .................................. 22,336 21,924
Subordinated notes ...................................................... 125,000 125,000
Stockholders' equity .................................................... 1,503,092 1,262,532
---------------------------
Total liabilities and stockholders' equity ............................ $ 2,357,265 $ 2,041,458
===========================
STATEMENTS OF INCOME
Year ended December 31,
----------------------------------------
1997 1996 1995
----------------------------------------
(In thousands)
Income:
Dividends from subsidiaries ........................................ $ 53,000 $ 42,608 $ 76,600
Interest on money market and investment securities ................. 5,355 4,828 3,897
Other operating income ............................................. 496 2,394 1,347
Interest on advances to subsidiaries ............................... 45,434 42,047 26,258
----------------------------------------
Total income ...................................................... 104,285 91,877 108,102
----------------------------------------
Expenses:
Interest expense ................................................... 53,182 42,761 25,824
Operating expenses ................................................. 1,494 1,698 671
----------------------------------------
Total expenses .................................................... 54,676 44,459 26,495
----------------------------------------
Income before income taxes and equity in undistributed
earnings of subsidiaries ........................................... 49,609 47,418 81,607
Income taxes ......................................................... (1,573) 1,109 6,787
----------------------------------------
Income before equity in undistributed earnings of subsidiaries ....... 51,182 46,309 74,820
Equity in undistributed earnings of subsidiaries ..................... 158,383 138,841 71,541
----------------------------------------
Net income ........................................................ $ 209,565 $ 185,150 $ 146,361
========================================
F-75
96
STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------
1997 1996 1995
----------------------------------------
(In thousands)
Cash flows from operating activities:
Net income ......................................................... $ 209,565 $ 185,150 $ 146,361
----------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries ................ (158,383) (138,841) (71,541)
Dividend in kind received from a subsidiary ..................... (41,600)
Depreciation of premises and equipment .......................... 1,345 1,621 829
Loss on disposition of premises and equipment ................... 3,295
Gain on sale of investment securities available-for-sale ........ (824)
Amortization of premiums and accretion of discounts on
investments .................................................... 20 22 23
Net increase in other assets .................................... (335) (914) (1,163)
Net decrease in current taxes ................................... (86) (3,182)
Net decrease in interest payable ................................ (4,199)
Net (decrease) increase in other liabilities .................... (2,190) 4,554 5,363
-----------------------------------------
Total adjustments ........................................... (161,357) (136,740) (108,089)
-----------------------------------------
Net cash provided by operating activities ................... 48,208 48,410 38,272
-----------------------------------------
Cash flows from investing activities:
Net decrease (increase) in money market investments ............... 55,024 (47,564) 581
Purchases of investment securities available-for-sale .............. (5,560) (1,538) (14,178)
Maturities of investment securities available-for-sale ............. 682 883
Sales of investment securities available-for-sale .................. 2,365
Capital contribution to subsidiaries ............................... (58,500) (30,000) (16,130)
Distribution from subsidiary ....................................... 392
Advances to subsidiaries ........................................... (57,449) (100,940) (374,047)
Acquisition of premises and equipment .............................. (15) (3) (22)
Proceeds from sale of premises and equipment ....................... 34,551
-----------------------------------------
Net cash used in investing activities ....................... (28,902) (178,770) (403,796)
-----------------------------------------
Cash flows from financing activities:
Net (decrease) increase in securities sold under
agreements to repurchase .......................................... (309) (191) 42,425
Net (decrease) increase in commercial paper ........................ (66,280) (10,349) 41,934
Net (decrease) increase in other short-term borrowings ............. (43,300) 30,600 34,400
Net increase in notes payable ...................................... 214,724 158,039 162,500
Payment of senior debentures ....................................... (30,000)
Cash dividends paid ................................................ (59,037) (51,896) (44,521)
Proceeds from issuance of subordinated notes ....................... 125,000
Proceeds from issuance of common stock ............................. 4,642 4,135 3,500
Treasury stock acquired, at cost ................................... (39,559)
-----------------------------------------
Net cash (used) provided by financing activities ............ (19,119) 130,338 365,238
-----------------------------------------
Net increase (decrease) in cash .................................... 187 (22) (286)
Cash at beginning of period ........................................ 191 213 499
-----------------------------------------
Cash at end of period .............................................. $ 378 $ 191 $ 213
=========================================
The principal source of income for the Holding Company consists of
dividends from BPPR. As a member subject to the regulations of the Federal
Reserve Board, BPPR must obtain the approval of the Federal Reserve Board for
any dividend if the total of all dividends declared by it in any calendar year
would exceed the total of its net profits for that year, as defined by the
Federal Reserve Board, combined with its retained net profits for the preceding
two years. The payment of dividends by BPPR may also be affected by other
regulatory requirements and policies, such as the maintenance of certain minimum
capital levels.
F-76
97
NOTE 30 - POPULAR INTERNATIONAL BANK, INC. (A SUBSIDIARY OF POPULAR, INC.)
FINANCIAL INFORMATION:
The following summarized financial information presents the consolidated
financial position of Popular International Bank, Inc. and its subsidiaries as
of November 30, 1997 and 1996, and the results of their operations, cash flows
and changes in stockholder's equity for each of the three years in the period
ended November 30, 1997. Popular International Bank, Inc., is the holding
company of Popular North America, Inc., including Banco Popular North America
and its wholly-owned subsidiary Banco Popular, Illinois, Banco Popular, N.A.
(Texas), Banco Popular, N.A. (California), Banco Popular, N.A. (Florida) and
Banco Popular, FSB (second-tier subsidiaries) and its wholly-owned subsidiary
Equity One, Inc.
STATEMENTS OF CONDITION
November 30,
---------------------------
1997 1996
---------------------------
(In thousands)
ASSETS
Cash .................................................................. $ 70,315 $ 31,171
Money market investments .............................................. 36,126 49,184
Investment securities available-for-sale, at market value ............. 323,152 205,249
Investment securities held-to-maturity, at cost ....................... 18,054 12,232
Loans held-for-sale ................................................... 50,886 48,068
Loans ................................................................. 2,127,817 1,545,262
Less: Unearned income ........................................... 55,295 47,420
Allowance for loan losses ............................. 30,907 22,920
---------------------------
2,041,615 1,474,922
---------------------------
Other assets .......................................................... 93,120 50,672
Intangible assets ..................................................... 82,726 31,232
---------------------------
Total assets .................................................... $ 2,715,994 $ 1,902,730
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Non-interest bearing ............................................... $ 211,396 $ 94,297
Interest bearing ................................................... 1,003,792 593,195
---------------------------
1,215,188 687,492
---------------------------
Federal funds purchased and securities sold under agreements
to repurchase ........................................................ 24,288 5,075
Other short-term borrowings, consisting of $269,732 in term notes
(1996 - $375,625), and a revolving credit facility with an
affiliate of $10,000 (1996 - $35,000) ................................ 279,732 410,625
Notes payable (Note 12) ............................................... 704,507 579,277
Other liabilities ..................................................... 52,473 38,722
Preferred beneficial interests in Popular North America's junior
subordinated deferrable interest debentures guaranteed by
the Corporation .................................................... 150,000
Stockholder's equity .................................................. 289,806 181,539
---------------------------
Total liabilities and stockholder's equity ..................... $ 2,715,994 $ 1,902,730
===========================
F-77
98
STATEMENTS OF INCOME
Year ended November 30,
----------------------------------------
1997 1996 1995
----------------------------------------
(In thousands)
Interest and fees:
Loans .............................................................. $ 192,202 $ 136,824 $ 101,442
Money market and investment securities ............................. 24,658 16,188 18,948
----------------------------------------
216,860 153,012 120,390
----------------------------------------
Interest expense:
Deposits ........................................................... 35,972 24,000 21,225
Short-term borrowings .............................................. 23,092 22,572 6,595
Long-term borrowings ............................................... 55,603 35,265 39,847
----------------------------------------
114,667 81,837 67,667
----------------------------------------
Net interest income .................................................. 102,193 71,175 52,723
Provision for loan losses ............................................ 17,041 14,299 8,651
----------------------------------------
Net interest income after provision for loan losses .................. 85,152 56,876 44,072
Service charges on deposit accounts .................................. 5,588 2,735 1,844
Other service fees ................................................... 8,159 4,663 3,813
Gain on sale of securities ........................................... 339 7,026 6,239
Other operating income ............................................... 11,817 5,342 6,738
----------------------------------------
111,055 76,642 62,706
----------------------------------------
Operating expenses ................................................... 85,031 46,509 35,782
----------------------------------------
Income before income tax ............................................. 26,024 30,133 26,924
Income tax ........................................................... 11,192 12,978 10,629
----------------------------------------
Net income ........................................................... $ 14,832 $ 17,155 $ 16,295
========================================
F-78
99
STATEMENTS OF CASH FLOWS
Year ended November 30,
--------------------------------------
1997 1996 1995
--------------------------------------
(In thousands)
--------------------------------------
Cash flows from operating activities:
Net income ................................................................... $ 14,832 $ 17,155 $ 16,295
--------------------------------------
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of premises and equipment ..................... 3,136 1,833 1,136
Provision for loan losses ................................................... 17,041 14,299 8,651
Amortization of intangibles ................................................. 5,850 3,460 3,321
Amortization of deferred loan fees and costs ................................ (1,529) (1,922) 6,467
Amortization of premiums and accretion of discounts on
investments ............................................................... 1,271 267 446
Increase in loans held-for-sale ............................................. (2,817) (24,513)
Gain on sale of investment securities available-for-sale .................... (339) (7,026) (6,239)
Gain on disposition of premises and equipment ............................... (655)
Gain on sale of loans ....................................................... (10,133) (8,049) (6,676)
Net increase in interest receivable ......................................... (5,395) (1,286) (5,375)
Net increase in other assets ................................................ (5,312) (1,915) (5,046)
Net increase in interest payable ............................................ 5,008
Net decrease in current and deferred taxes .................................. (3,556) (1,942)
Net (decrease) increase in other liabilities ................................ (1,884) 5,392 7,509
--------------------------------------
Total adjustments ..................................................... 686 (21,402) 4,194
--------------------------------------
Net cash provided (used) by operating activities ...................... 15,518 (4,247) 20,489
--------------------------------------
Cash flows from investing activities:
Net decrease (increase) in money market investments .......................... 24,058 (15,676) 3,489
Purchases of investment securities held-to-maturity .......................... (270) (6,214)
Purchases of investment securities available-for-sale ........................ (526,337) (71,955) (358,811)
Maturities of investment securities held-to-maturity ......................... 2,750
Sale of investment securities available-for-sale ............................. 506,365 61,205 183,091
Maturities of investment securities available-for-sale ....................... 70,092 98,011 50,000
Net disbursements on loans ................................................... (539,951) (574,754) (357,540)
Proceeds from sale of loans .................................................. 294,001 285,771 70,155
Acquisition of loan portfolios ............................................... (10,853) (18,059)
Assets acquired, net of cash ................................................. (36,734) (2,656)
Acquisition of premises and equipment ........................................ (17,974) (4,794) (4,941)
Proceeds from sales of premises and equipment ................................ 5,857
--------------------------------------
Net cash used in investing activities ................................. (228,996) (231,062) (432,616)
--------------------------------------
Cash flows from financing activities:
Net increase in deposits ..................................................... 56,092 42,735 43,211
Net deposits acquired ........................................................ 163,504
Net (decrease) increase in federal funds purchased and securities
sold under agreements to repurchase ......................................... (169) 1,040 (8,965)
Net (decrease) increase in other short-term borrowings ....................... (130,893) 222,514 (24,870)
Proceeds from issuance of notes payable ...................................... 964,931 30,024 234,215
Payments of notes payable .................................................... (845,840) (84,885)
Proceed from issuance of Capital Securities .................................. 150,000
Proceeds from issuance of common stock ....................................... 462 150
Capital contribution from Parent company ..................................... 58,039 29,850
--------------------------------------
Net cash provided by financing activities ............................. 252,622 241,428 407,095
--------------------------------------
Net increase (decrease) in cash and due from banks ............................. 39,144 6,119 (5,032)
Cash and due from banks at beginning of year ................................... 31,171 25,052 30,084
--------------------------------------
Cash and due from banks at end of year ......................................... $ 70,315 $ 31,171 $ 25,052
======================================
F-79
100
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
Year ended November 30,
--------------------------------------
1997 1996 1995
--------------------------------------
(In thousands)
Preferred Stock:
Par value $25; authorized 25,000,000 shares, none issued
Common Stock:
Par value $5; authorized 1,000,000 shares, 792,300 shares
issued and outstanding (1996 - 700,000; 1995 - 670,000)
Balance at beginning of the period ........................................... $ 3,500 $ 3,350 $ 3,350
Issuance of common stock ..................................................... 462 150
--------------------------------------
Balance at end of the period ................................................. 3,962 3,500 3,350
--------------------------------------
Additional paid-in capital:
Balance at beginning of the period ........................................... 132,964 103,114 103,114
Capital contribution from Parent company ..................................... 91,900 29,850
--------------------------------------
Balance at end of the period ................................................. 224,864 132,964 103,114
--------------------------------------
Retained earnings:
Balance at beginning of the period ........................................... 44,389 27,234 10,939
Net income ................................................................... 14,832 17,155 16,295
--------------------------------------
Balance at end of the period ................................................. 59,221 44,389 27,234
--------------------------------------
Unrealized holding gains (losses) on investment securities available-for-sale,
net of deferred taxes:
Balance at beginning of the period ........................................... 686 5,437 (2,473)
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes ................................... 1,073 (4,751) 7,910
--------------------------------------
Balance at end of period ..................................................... 1,759 686 5,437
--------------------------------------
Total stockholder's equity .................................................. $ 289,806 $ 181,539 $ 139,135
======================================
NOTE 31 - POPULAR NORTH AMERICA, INC. (A SECOND - TIER SUBSIDIARY OF POPULAR,
INC.) FINANCIAL INFORMATION:
The following summarized financial information presents the consolidated
financial position of Popular North America, Inc. and its subsidiaries, Banco
Popular North America and its wholly-owned subsidiary Banco Popular, Illinois,
Banco Popular, N.A. (Florida), Banco Popular, FSB, including its wholly-owned
subsidiary Equity One, Inc., Banco Popular N.A. (California) and Banco Popular
N.A. (Texas) (second tier subsidiaries) as of November 30, 1997 and 1996, and
the results of their operations, cash flows and changes in stockholder's equity
for each of the three years in the period ended November 30, 1997.
F-80
101
STATEMENTS OF CONDITION
November 30,
---------------------------
1997 1996
---------------------------
(In thousands)
ASSETS
Cash and due from banks ............................................... $ 70,207 $ 29,936
Money market investments .............................................. 33,709 46,399
Investment securities available-for-sale, at market value ............. 323,090 205,181
Investment securities held-to-maturity, at cost ....................... 18,054 12,232
Loans held-for-sale ................................................... 50,886 48,068
Loans ................................................................. 2,127,817 1,545,262
Less: Unearned income ................................................ 55,295 47,420
Allowance for loan losses ...................................... 30,907 22,920
---------------------------
2,041,615 1,474,922
---------------------------
Other assets .......................................................... 90,304 50,525
Intangible assets ..................................................... 82,725 31,232
---------------------------
Total assets .................................................... $ 2,710,590 $ 1,898,495
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits:
Non-interest bearing ................................................. $ 211,396 $ 94,297
Interest bearing ..................................................... 1,003,792 593,195
---------------------------
1,215,188 687,492
---------------------------
Federal funds purchased and securities sold under agreements
to repurchase ........................................................ 24,288 5,075
Other short-term borrowings, consisting of $269,732 term notes
(1996 - $375,625) and a revolving credit facility with an
affiliate of $10,000 (1996 - $35,000) ............................... 279,732 410,625
Notes payable (Note 12) ............................................... 704,507 579,277
Other liabilities ..................................................... 52,190 38,699
Preferred beneficial interests in Popular North America's
junior subordinated deferrable interest debentures
guaranteed by the Corporation ...................................... 150,000
Stockholder's equity .................................................. 284,685 177,327
---------------------------
Total liabilities and stockholder's equity ...................... $ 2,710,590 $ 1,898,495
===========================
F-81
102
STATEMENTS OF INCOME
Year ended November 30,
--------------------------------------
1997 1996 1995
--------------------------------------
(In thousands)
Interest and fees:
Loans ........................................................................ $ 192,202 $ 136,824 $ 101,442
Money market and investment securities ....................................... 23,089 16,107 18,888
--------------------------------------
215,291 152,931 120,330
--------------------------------------
Interest expense:
Deposits ..................................................................... 35,972 24,000 21,225
Short-term borrowings ........................................................ 23,091 22,572 6,595
Long-term borrowings ......................................................... 55,602 35,265 39,847
--------------------------------------
114,665 81,837 67,667
--------------------------------------
Net interest income ............................................................ 100,626 71,094 52,663
Provision for loan losses ...................................................... 17,041 14,299 8,651
--------------------------------------
Net interest income after provision for loan losses ............................ 83,585 56,795 44,012
Service charges on deposit accounts ............................................ 5,588 2,735 1,844
Other service fees ............................................................. 8,149 4,663 3,813
Gain on sale of securities ..................................................... 308 7,026 6,239
Other operating income ......................................................... 11,926 5,457 6,738
--------------------------------------
109,556 76,676 62,646
--------------------------------------
Operating expenses ............................................................. 84,512 46,600 35,778
--------------------------------------
Income before tax .............................................................. 25,044 30,076 26,868
Income tax ..................................................................... 11,192 12,978 10,629
--------------------------------------
Net income ..................................................................... $ 13,852 $ 17,098 $ 16,239
======================================
F-82
103
STATEMENTS OF CASH FLOWS
Year ended November 30,
--------------------------------------
1997 1996 1995
--------------------------------------
(In thousands)
Cash flows from operating activities:
Net income ................................................................... $ 13,852 $ 17,098 $ 16,239
--------------------------------------
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of premises and equipment ..................... 3,092 1,833 1,136
Provision for loan losses ................................................... 17,041 14,299 8,651
Amortization of intangibles ................................................. 5,850 3,460 3,321
Amortization of deferred loan fees and costs ................................ (1,529) (1,922) 6,467
Amortization of premiums and accretion of discounts on
investments .............................................................. 1,271 267 446
Increase in loans held-for-sale ............................................. (2,817) (24,513)
Gain on sale of investment securities available-for-sale .................... (309) (7,026) (6,239)
Gain on disposition of premises and equipment ............................... (655)
Gain on sale of loans ....................................................... (10,133) (8,049) (6,676)
Net increase in interest receivable ......................................... (5,395) (1,286) (5,368)
Net increase in other assets ................................................ (5,137) (1,884) (4,940)
Net increase in interest payable ............................................ 5,001
Net increase in current and deferred taxes .................................. (3,556) (1,942)
Net increase in other liabilities ........................................... (788) 5,392 7,483
--------------------------------------
Total adjustments ....................................................... 1,936 (21,371) 4,281
--------------------------------------
Net cash provided (used) by operating activities ........................ 15,788 (4,273) 20,520
--------------------------------------
Cash flows from investing activities:
Net decrease (increase) in money market investments .......................... 23,438 (13,912) 3,476
Purchases of investment securities held-to-maturity .......................... (270) (6,214)
Maturities of investment securities held-to-maturity ......................... 2,750
Purchases of investment securities available-for-sale ........................ (526,272) (71,888) (358,811)
Sale of investment securities available-for-sale ............................. 506,255 61,205 183,091
Maturities of investment securities available-for-sale ....................... 70,092 98,011 50,000
Net disbursements on loans ................................................... (539,951) (574,754) (357,540)
Proceeds from sale of loans .................................................. 294,001 285,771 70,155
Acquisition of loan portfolios ............................................... (10,853) (18,059)
Assets acquired, net of cash ................................................. (36,734) (2,656)
Acquisition of premises and equipment ........................................ (16,542) (4,794) (4,941)
Proceeds from sale of premises and equipment ................................. 5,695
--------------------------------------
Net cash used in investing activities ................................... (228,391) (229,231) (432,629)
--------------------------------------
Cash flows from financing activities:
Net increase in deposits ..................................................... 56,344 42,735 43,211
Net deposits acquired ........................................................ 163,504
Net (decrease) increase in federal funds purchased and securities
sold under agreements to repurchase ......................................... (169) 1,040 (8,965)
Net (decrease) increase in other short-term borrowings ....................... (130,892) 222,514 (24,870)
Proceeds from issuance of notes payable ...................................... 964,931 30,024 234,215
Payments of note payable ..................................................... (845,840) (84,885)
Proceeds from issuance of Capital Securities ................................. 150,000
Capital contribution from Parent company ..................................... 58,500 27,000
--------------------------------------
Net cash provided by financing activities ............................... 252,874 238,428 407,095
--------------------------------------
Net increase (decrease) in cash and due from banks ............................. 40,271 4,924 (5,014)
Cash and due from banks at beginning of period ................................. 29,936 25,012 30,026
--------------------------------------
Cash and due from banks at end of period ....................................... $ 70,207 $ 29,936 $ 25,012
======================================
F-83
104
STATEMENTS OF CHANGES IN
STOCKHOLDER'S EQUITY
Year ended November 30,
--------------------------------------
1997 1996 1995
--------------------------------------
(In thousands)
Preferred Stock:
Par value $0.10; authorized 10,000,000 shares, none issued
Common Stock:
Par value $1; authorized 10,000 shares, 2,000 shares issued
and outstanding
Balance at beginning and end of the period ................................... $ 2 $ 2 $ 2
--------------------------------------
Additional paid-in capital:
Balance at beginning of the period ........................................... 132,163 105,163 105,163
Capital contribution from parent company ..................................... 92,440 27,000
--------------------------------------
Balance at end of the period ................................................. 224,603 132,163 105,163
--------------------------------------
Retained earnings:
Balance at beginning of the period ........................................... 44,477 27,379 11,140
Net income ................................................................... 13,852 17,098 16,239
--------------------------------------
Balance at end of the period ................................................ 58,329 44,477 27,379
--------------------------------------
Unrealized holding gains (losses) on investment securities available-for-sale,
net of deferred taxes:
Balance at beginning of the period ........................................... 685 5,437 (2,473)
Net change in the fair value of investment securities
available-for-sale, net of deferred taxes ................................... 1,066 (4,752) 7,910
--------------------------------------
Balance at end of period ..................................................... 1,751 685 5,437
--------------------------------------
Total stockholder's equity .............................................. $ 284,685 $ 177,327 $ 137,981
--------------------------------------
F-84