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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10 - Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998 Commission file number 0 - 13818
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POPULAR, INC.
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(Exact name of registrant as specified in its charter)
Puerto Rico 66-041-6582
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(State of incorporation) (I.R.S. Employer
Identification No.)
Popular Center Building
209 Munoz Rivera Avenue, Hato Rey
San Juan, Puerto Rico 00918
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(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (787) 765-9800
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Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report) Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock $6.00 Par value 67,748,893
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(Title of Class) (Shares Outstanding as of May 13, 1998)
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POPULAR, INC.
INDEX
Part I - Financial Information Page
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Item 1. Financial Statements
Unaudited consolidated statements of condition - March 31,
1998, December 31, 1997 and March 31, 1997. 3
Unaudited consolidated statements of income - Quarter ended
March 31, 1998 and 1997. 4
Unaudited consolidated statements of comprehensive income -
Quarter ended March 31, 1998 and 1997. 5
Unaudited consolidated statements of cash flows - Quarter ended
March 31, 1998 and 1997. 6
Notes to unaudited consolidated financial statements. 7-17
Item 2. Management's discussion and analysis of financial condition
and results of operations. 18-30
Part II - Other Information
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Item 1. Legal proceedings 30
Item 2. Changes in securities and use of proceeds - None N/A
Item 3. Defaults upon senior securities - None N/A
Item 4. Submission of matters to a vote of security holders - None N/A
Item 5. Other information 31
Item 6. Exhibits and reports on Form 8-K 31
--- Signature 32
FORWARD LOOKING INFORMATION. This Quarterly Report on Form 10-Q contains
certain forward looking statements with respect to the adequacy of the
allowance for loan losses and the effect of legal proceedings on Popular,
Inc.'s financial condition and results of operations. These forward looking
statements involve certain risks, uncertainties, estimates and assumptions by
management.
Various factors could cause actual results to differ from those
contemplated by such forward looking statements. With respect to the adequacy of
the allowance for loan losses, these factors include the rate of growth in the
economy, the relative strength and weakness in the consumer and commercial
credit sectors and in the real estate markets and the performance of the stock
and bond markets. Moreover, the outcome of litigation, as discussed in "Part II,
Item I. Legal Proceedings." is inherently uncertain and depends on judicial
interpretations of law and the findings of judges and juries.
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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
MARCH 31, December 31, March 31,
(In thousands) 1998 1997 1997
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ASSETS
Cash and due from banks $ 517,003 $ 463,151 $ 447,113
- ------------------------------------------------------------------------------------------------------------------------
Money market investments:
Federal funds sold and securities and
mortgages purchased under agreements to resell 587,579 802,803 728,381
Time deposits with other banks 46,182 9,013 59,831
Banker's acceptances 696 2,274 1,975
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634,457 814,090 790,187
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Investment securities available-for-sale, at market value 5,906,739 5,239,005 3,963,115
Investment securities held-to-maturity, at cost 416,773 408,993 1,430,700
Trading account securities, at market value 247,735 222,303 263,478
Loans held-for-sale 307,382 265,204 249,317
Loans 11,582,940 11,457,675 9,972,694
Less - Unearned income 347,153 346,272 332,757
Allowance for loan losses 217,708 211,651 191,360
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11,018,079 10,899,752 9,448,577
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Premises and equipment 377,189 364,892 372,957
Other real estate 17,285 18,012 6,615
Customers' liabilities on acceptances 1,397 1,801 1,870
Accrued income receivable 132,092 118,677 108,320
Other assets 213,948 252,040 191,912
Intangible assets 228,141 232,587 127,297
- ------------------------------------------------------------------------------------------------------------------------
$20,018,220 $19,300,507 $17,401,458
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,492,547 $ 2,546,836 $ 2,213,435
Interest bearing 9,513,253 9,202,750 8,251,718
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12,005,800 11,749,586 10,465,153
Federal funds purchased and securities sold under
agreements to repurchase 2,959,925 2,723,329 2,344,411
Other short-term borrowings 1,567,346 1,287,435 1,535,911
Notes payable 1,304,268 1,403,696 1,153,472
Senior debentures
Acceptances outstanding 1,397 1,801 1,870
Other liabilities 358,246 356,568 338,126
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18,196,982 17,522,415 15,838,943
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Subordinated notes 125,000 125,000 125,000
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Preferred beneficial interests in Popular North America's
junior subordinated deferrable interest debentures guaranteed
by the Corporation 150,000 150,000 150,000
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Stockholders' equity :
Preferred stock 100,000 100,000 100,000
Common stock 412,238 412,029 396,731
Surplus 603,445 602,023 497,462
Retained earnings 433,062 395,253 303,268
Treasury stock-at cost (39,559) (39,559)
Accumulated other comprehensive income-unrealized gains (losses)
on securities available-for-sale, net of deferred taxes 37,052 33,346 (9,946)
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1,546,238 1,503,092 1,287,515
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$20,018,220 $19,300,507 $17,401,458
========================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarter ended
March 31,
(Dollars in thousands, except per share amounts) 1998 1997
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INTEREST INCOME:
Loans $293,217 $246,353
Money market investments 8,827 8,867
Investment securities 90,259 75,111
Trading account securities 4,065 3,934
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396,368 334,265
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INTEREST EXPENSE:
Deposits 97,330 86,195
Short-term borrowings 56,248 47,362
Long-term debt 30,086 20,064
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183,664 153,621
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Net interest income 212,704 180,644
Provision for loan losses 33,565 23,687
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Net interest income after provision
for loan losses 179,139 156,957
Service charges on deposit accounts 25,338 21,819
Other service fees 26,173 22,169
Gain (loss) on sale of securities 867 (1,660)
Trading account profit 669 433
Other operating income 14,904 11,494
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247,090 211,212
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OPERATING EXPENSES:
Personnel costs:
Salaries 59,293 48,345
Profit sharing 5,683 6,440
Pension and other benefits 18,418 16,700
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83,394 71,485
Net occupancy expense 11,561 9,002
Equipment expenses 18,028 14,851
Other taxes 7,968 6,445
Professional fees 12,878 9,903
Communications 8,824 7,581
Business promotion 8,216 5,957
Printing and supplies 4,003 3,644
Other operating expenses 10,724 8,819
Amortization of intangibles 6,784 4,438
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172,380 142,125
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Income before taxes 74,710 69,087
Income tax 19,915 19,548
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NET INCOME $ 54,795 $ 49,539
====================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 52,708 $ 47,452
====================================================================================================
EARNINGS PER COMMON SHARE $ 0.78 $ 0.72
====================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POPULAR, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Quarters ended
March 31,
(In thousands) 1998 1997
- -----------------------------------------------------------------------
Net Income $54,795 $ 49,539
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Other comprehensive income net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period 4,311 (12,655)
Less: reclassification adjustment
for gains (losses) included in net income 605 (1,009)
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Total other comprehensive income (loss) $ 3,706 $(11,646)
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Comprehensive income $58,501 $ 37,893
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The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the quarter ended
March 31,
(In thousands) 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 54,795 $ 49,539
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Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of premises and equipment 14,205 12,639
Provision for loan losses 33,565 23,687
Amortization of intangibles 6,784 4,438
(Gain) loss on sale of investment securities available-for-sale (867) 1,660
Loss on disposition of premises and equipment 21 160
Gain on sale of loans (4,974) (4,388)
Amortization of premiums and accretion of discounts on investments 712 596
(Increase) decrease in loans held-for-sale (42,178) 5,812
Amortization of deferred loan fees and costs (196) (1,101)
Net (increase) decrease in trading securities (25,433) 28,671
Net increase in interest receivable (13,416) (12,833)
Net decrease in other assets 70,051 212,087
Net increase (decrease) in interest payable 40 (8,323)
Net increase in current and deferred taxes 12,233 10,317
Net increase in postretirement benefit obligation 2,161 1,473
Net (decrease) increase in other liabilities (35,092) 6,469
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Total adjustments 17,616 281,364
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Net cash provided by operating activities 72,411 330,903
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments 179,633 10,090
Purchases of investment securities held-to-maturity (1,081,608) (7,028,117)
Maturities of investment securities held-to-maturity 373,475 6,851,253
Purchases of investment securities available-for-sale (4,835,174) (2,056,260)
Maturities of investment securities available-for-sale 4,608,579 78,604
Sales of investment securities available-for-sale 264,482 1,356,192
Net disbursements on loans (307,687 (253,082)
Proceeds from sale of loans 155,680 121,723
Acquisition of loan portfolios (4,628) (4,082)
Acquisition of premises and equipment (35,396) (35,520)
Proceeds from sale of premises and equipment 9,431 6,461
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Net cash used in investing activities (673,213) (952,738)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 216,625 (298,121)
Net deposits acquired 36,297
Net increase in federal funds purchased and
securities sold under agreements to repurchase 236,596 468,945
Net increase in other short-term borrowings 279,911 131,906
Proceeds from issuance of notes payable 301,450 166,759
Payments of notes payable (400,877)
Payment of senior debentures (30,000)
Proceeds from issuance of Series A Capital Securities 150,000
Dividends paid (16,978) (13,989)
Proceeds from issuance of common stock 1,630 1,080
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Net cash provided by financing activities 654,654 576,580
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Net increase (decrease) in cash and due from banks 53,852 (45,255)
Cash and due from banks at beginning of period 463,151 492,368
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Cash and due from banks at end of period $ 517,003 $ 447,113
=============================================================================================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share information)
NOTE 1- CONSOLIDATION
The consolidated financial statements of Popular, Inc. include the balance
sheet of the Corporation and its wholly-owned subsidiaries, Popular Securities
Incorporated; Popular International Bank, Inc. and its wholly-owned
subsidiaries ATH Costa Rica, and Popular North America, Inc. including Banco
Popular, FSB, Banco Popular, Illinois, Banco Popular National Association
(California), Banco Popular, N.A. (Florida), Banco Popular, N.A. (Texas),
(second tier subsidiaries), Popular Leasing, USA and Equity One, Inc.; Banco
Popular de Puerto Rico and its wholly-owned subsidiaries, Popular Leasing and
Rental, Inc., Popular Finance, Inc. and Popular Home Mortgage, Inc.; and
Metropolitana de Prestamos, Inc., as of March 31, 1998, December 31, 1997 and
March 31, 1997 and their related statements of income, comprehensive income and
cash flows as of March 31, 1998 and 1997.These statements are, in the opinion
of management, a fair statement of the results of the periods presented. These
results are unaudited, but include all necessary adjustments, of a normal
recurring nature, for a fair presentation of such results. Certain
reclassifications have been made to the prior year consolidated financial
statements to conform to the 1998 presentation.
NOTE 2- ACCOUNTING CHANGES
Effective March 31, 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) 129, "Disclosure of Information about Capital
Structure". This statement establishes standards for disclosing information
about an entity's capital structure. However, it contains no change in
disclosure requirements for entities that were previously subject to the
requirements of Opinions 10 and 15 and SFAS 47.
Effective 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. At March 31,
1998, the Corporation did not have any dilutive potential common shares.
Effective January 1, 1997, the Corporation adopted SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
which supersedes SFAS 122 "Accounting for Mortgage Servicing Rights". This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. Those
standards are based on a consistent application of a financial component
approach that focuses on the legal and physical control over the component.
Under this
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approach, following a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
and derecognizes financial assets for which control has been surrendered and
financial liabilities that have been extinguished. However, the FASB issued
SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement 125", that delays until January 1, 1998, the effective date of those
provisions of the statement that deal with securities lending, repurchase
agreements and similar transactions. The adoption of this pronouncement did not
have a financial impact on the consolidated financial statements of the
Corporation for the three months period ended March 31, 1998.
In addition, this statement requires that mortgage banking enterprises
recognize as separate assets the rights to service mortgage loans for others,
whether those servicing rights are originated or purchased. Also, it requires
mortgage banking enterprises to assess capitalized mortgage servicing rights
for impairment based on the fair value of those rights. The total cost of
mortgage loans to be sold with servicing rights retained is allocated to the
mortgage servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values. These mortgage servicing rights are
amortized in proportion to and over the periods of estimated net servicing
income.
To estimate the fair value of mortgage servicing rights the Corporation
considers prices for similar assets and the present value of expected future
cash flows associated with the servicing rights calculated using assumptions
that market participants would use in estimating future servicing income and
expense. For purposes of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Corporation stratifies such rights based on
predominant risk characteristics of underlying loans, such as loan type, rate
and term. The amount of impairment recognized if any, is the amount by which
the capitalized mortgage servicing rights per stratum exceeds its estimated
fair value. Impairment is recognized through a valuation allowance. As of March
31, 1998, the carrying value, estimated fair value and valuation allowance of
capitalized mortgage servicing rights were $29,341, $33,983 and $13,
respectively (1997 - $26,367, $35,221 y $31).
In June 1997, the Financial Accounting Standard Board issued SFAS 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. Comprehensive income has been defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances, except those resulting from investments by owners and
distributions to owners. This pronouncement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The pronouncement does
not require a specific format for the financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. This statement is effective for fiscal
years beginning after December 15, 1997 and reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Corporation adopted this statement effective January 1, 1998.
Also in June 1997, the Financial Accounting Standard Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information". This
statement establishes standards for the way that public business enterprises
report information about operating
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segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders since the second year of application. 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.
In February 1998, the Financial Accounting Standard Board issued SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement supersedes the disclosure requirements in FASB statements No. 87,
Employers' Accounting for Pensions, No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. This statement revises employers' disclosures
about pension and postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values on plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
statement suggests combined formats for presentation of pension and other
postretirement benefits disclosures. This statement is effective for fiscal
year beginning after December 15, 1997, and requires comparative information
for earlier years. Restatement of disclosures for earlier periods provided for
comparative purposes is required unless the information is not readily
available, in which case the notes to the financial statements should include
all available information and a description of the information not available.
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NOTE 3 - INVESTMENT SECURITIES
The average maturities as of March 31, 1998, and market value for the following
investment securities are:
Investments securities available-for-sale:
March 31,
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1998 1997
Amortized Market Amortized Market
Cost Value Cost Value
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U.S. Treasury (average maturity of
1 year and 10 months) $3,479,951 $3,498,379 $2,669,908 $2,663,911
Obligations of other U.S. Government
agencies and corporations (average
maturity of 3 years and 10 months) 1,050,998 1,051,667 312,604 308,669
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 8 years and 5 months) 58,970 59,793 39,305 39,118
Collateralized mortgage obligations (average
maturity of 1 year and 5 months) 831,877 831,826 486,786 485,339
Mortgage-backed securities (average
maturity of 24 years) 396,850 403,844 426,975 425,964
Equity securities (without contractual
maturity) 34,360 57,362 20,238 20,753
Others (average maturity of 11 years) 3,839 3,868 19,362 19,361
$5,856,845 $5,906,739 $3,975,178 $3,963,115
========================================================
Investment securities held-to-maturity:
March 31
--------
1998 1997
Amortized Market Amortized Market
Cost Value Cost Value
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U.S. Treasury $ 370,721 $ 370,323
Obligations of other U.S. Government
agencies and corporations (average
maturity of 1 month) $125,129 $ 125,130 739,617 739,064
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 3 years and 5 months) 94,011 94,977 59,725 60,761
Collateralized mortgage obligations (average
maturity of 1 year and 10 months) 52,879 52,981 130,117 129,583
Mortgage-backed securities (average
maturity of 3 years and 5 months) 43,588 44,595 53,159 52,646
Equity securities (without contractual
maturity) 76,264 76,264 64,620 64,620
Others (average maturity of 7 years
and 11 months) 24,902 24,895 12,741 12,706
------------------------------------------------------
$416,773 $418,842 $1,430,700 $1,429,703
======================================================
NOTE 4- PLEDGED ASSETS
Securities and insured mortgage loans of the Corporation of $4,329,480 (1997 -
$3,709,321) are pledged to secure public and trust deposits and securities and
mortgages sold under repurchase agreements.
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NOTE 5- COMMITMENTS
In the normal course of business there are letters of credit outstanding and
stand-by letters of credit which at March 31, 1998, amounted to $13,843 and
$53,252. There are also outstanding other commitments and contingent
liabilities, such as guarantees and commitments to extend credit, which are not
reflected in the accompanying financial statements. No losses are anticipated
as a result of these transactions.
NOTE 6- SUBORDINATED NOTES
Subordinated notes of $125,000 as of March 31, 1998 and 1997 consisted of notes
issued by the Corporation on December 12, 1995, maturing on December 15, 2005,
with interest payable semi-annually at 6.75%.
NOTE 7- STOCKHOLDERS' EQUITY
Authorized common stock is 180,000,000 shares with a par value of $6 per share
of which 67,717,548 were issued and outstanding at March 31, 1998. On May 8,
1997, the Board of Directors authorized the repurchase of up to 3 million
shares of the outstanding common stock of the Corporation. As of March 31,
1998, 988,800 common shares were purchased at a cost of $39.6 million.
Authorized preferred stock is 10,000,000 shares without par value of which
4,000,000, non-cumulative with a dividend rate of 8.35% and a liquidation
preference value of $25 per share, were issued and outstanding at March 31,
1998.
Popular International Bank, Inc. (PIB) and Popular North America, Inc.'s (PNA)
bank subsidiaries (Banco Popular, Illinois, Banco Popular National Association
(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 PIB and PNA to make dividend and
asset distributions to the Corporation, nor on the ability of PNA's
subsidiaries, except for Banco Popular FSB, to make distributions to PNA. In
connection with the acquisition by Banco Popular, FSB from the Resolution Trust
Company (RTC) of four New Jersey branches of the former Carteret Federal
Savings Bank, the RTC provided to Banco Popular, FSB interim financial
assistance in the form of a loan in the amount of $19.5 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 payments in full of such
promissory note.
NOTE 8- EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are calculated based on net income applicable
to common stockholders which amounted to $52,708 for the first quarter of 1998
(1997 - $47,452), after deducting the dividends on preferred stock. EPS are
based on 67,717,548 and
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66,121,855 average shares outstanding for the first quarter of 1998 and 1997,
respectively.
NOTE 9- SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the quarter ended March 31, 1998, the Corporation paid interest and
income taxes amounting to $181,828 and $2,613, respectively (1997 - $160,892
and $4,732). In addition, the loans receivable transferred to other real estate
and other property for the quarter ended March 31, 1998, amounted to $1,790 and
$8,131, respectively (1997 - $1,524 and $5,468). The Corporation's
stockholders' equity at March 31, 1998, includes $37,053 in unrealized holding
gains on securities available-for-sale, net of deferred taxes, as compared with
$9,946 in unrealized losses as of March 31, 1997.
NOTE 10- POPULAR INTERNATIONAL BANK, INC. (A WHOLLY-OWNED SUBSIDIARY OF
POPULAR, INC.) FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular International Bank, Inc. (PIB) and
its wholly-owned subsidiaries, ATH Costa Rica, and Popular North America, inc,
including Banco Popular North America, Banco Popular, FSB, Banco Popular
National Association (California), Banco Popular, N.A. (Florida), Banco
Popular, N.A. (Texas) (second-tier subsidiaries) and Equity One, Inc. as of
February 28, 1998 and 1997, and the results of their operations for the
quarters then ended.
Popular, Inc. has not presented separate financial statements and any other
disclosures concerning Popular International Bank, Inc., other than the
following summarized financial information, because management has determined
that such information is not material to holders of debt securities issued by
PIB which is guaranteed by the Corporation.
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POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
February 28,
------------
1998 1997
---- ----
Assets:
Cash $ 72,107 $ 32,722
Money market investments 112,795 139,745
Investment securities 296,203 159,899
Loans 2,290,156 1,677,408
Less: Unearned income 56,763 47,919
Allowance for loan losses 32,236 24,212
---------- ----------
2,201,157 1,605,277
Other assets 116,252 52,847
Intangibles assets 83,399 30,325
---------- ----------
Total assets $2,881,913 $2,020,815
========== ==========
Liabilities and Stockholder's Equity:
Deposits $1,277,279 $ 680,377
Short-term borrowings 379,737 286,458
Notes payable 740,573 629,175
Other liabilities 40,355 34,666
Preferred beneficial interests in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 150,000
Stockholder's equity 293,969 240,139
---------- ----------
Total liabilities and stockholder's equity $2,881,913 $2,020,815
========== ==========
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POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Quarter ended
February 28,
--------------
1998 1997
---- ----
Income:
Interest and fees $61,845 $45,877
Other income 10,211 2,794
------- -------
Total income 72,056 48,671
------- -------
Expenses:
Interest expense 32,562 23,850
Provision for loan losses 4,834 3,685
Operating expenses 29,307 13,735
------- -------
Total expenses 66,703 41,270
------- -------
Income before income tax 5,353 7,401
Income tax 1,760 3,294
------- -------
Net income $ 3,593 $ 4,107
======= =======
15
15
NOTE 11- POPULAR NORTH AMERICA, INC. (A SECOND-TIER SUBSIDIARY OF POPULAR,
INC.) FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular North America, Inc. and its
wholly-owned subsidiaries, Banco Popular North America, Banco Popular, FSB,
Banco Popular National Association (California), Banco Popular, N.A. (Florida),
Banco Popular, N.A. (Texas) and Equity One, Inc. (second tier subsidiary) as of
February 28, 1998 and 1997, and the results of their operations for the
quarters then ended.
Popular, Inc. has not presented separate financial statements and any other
disclosures concerning Popular North America, Inc., other than the following
summarized financial information, because management has determined that such
information is not material to holders of debt securities issued by PNA which
is guaranteed by the Corporation.
16
16
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
February 28,
------------
1998 1997
---- ----
Assets:
Cash $ 71,796 $ 32,606
Money market investments 110,924 82,747
Investment securities 295,992 159,801
Loans 2,290,156 1,677,408
Less: Unearned income 56,763 47,919
Allowance for loan losses 32,236 24,212
---------- ----------
2,201,157 1,605,277
Other assets 93,356 50,087
Intangibles assets 83,399 30,325
---------- ----------
Total assets $2,856,624 $1,960,843
========== ==========
Liabilities and Stockholder's Equity:
Deposits $1,277,279 $ 680,377
Short-term borrowings 359,537 286,458
Notes payable 740,573 629,175
Other liabilities 40,056 34,562
Preferred beneficial interests in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 150,000
Stockholder's equity 289,179 180,271
---------- ----------
Total liabilities and stockholder's equity $2,856,624 $1,960,843
========== ==========
17
17
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Quarter ended
February 28,
-------------
1998 1997
---- ----
Income:
Interest and fees $ 61,584 $ 45,128
Other income 10,400 2,796
---------- ----------
Total income 71,984 47,924
---------- ----------
Expenses:
Interest expense 32,339 23,850
Provision for loan losses 4,834 3,685
Operating expenses 29,121 13,626
---------- ----------
Total expenses 66,294 41,161
---------- ----------
Income before income tax 5,690 6,763
Income tax 1,760 3,294
---------- ----------
Net income $ 3,930 $ 3,469
========== ==========
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18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial review contains the analysis of the consolidated financial
position and financial performance of Popular, Inc. and its subsidiaries (the
Corporation). The Corporation is a regional diversified bank holding company
engaged in the following businesses through its subsidiaries.
- Commercial Banking/Savings and Loans - Banco Popular de Puerto
Rico (BPPR), Banco Popular, Illinois, Banco Popular, FSB and Banco
Popular National Association (California). The Corporation made
several acquisitions since March 31, 1997, to expand its banking
franchise, both in the United States and Puerto Rico, as follows:
- Seminole National Bank in Florida, acquired on April 30,
1997, now operating as Banco Popular, N.A. (Florida)
- National Bancorp, Inc. and CBC Bancorp, Ltd., which were
subsequently consolidated with Banco Popular, Illinois,
acquired on May 31,1997
- The former Roig Commercial Bank (RCB), mostly operating in
the eastern part of Puerto Rico, was merged into BPPR on
June 30, 1997
- Houston Bancorporation, subsequently renamed as Banco
Popular, N.A. (Texas), acquired on December 1, 1997
- Lease Financing - Popular Leasing and Rental, Inc. and Popular
Leasing, U.S.A.
- Mortgage Banking/Consumer Finance - Popular Mortgage, Inc. d/b/a
Popular Home Mortgage, Equity One, Inc. and Popular Finance, Inc.
- Investment Banking - Popular Securities Incorporated (Popular
Securities)
- ATM Processing Services - ATH Costa Rica
NET INCOME
Net income for the first quarter of 1998 was $54.8 million, compared with $49.5
million reported for the same period in 1997, and $55.3 million reported during
the last quarter of 1997. Earnings per common share (EPS) for the quarter were
$0.78, based on 67,717,548 average shares outstanding, compared with EPS of
$0.72 for the first quarter of 1997, based on 66,121,855 average shares
outstanding, and EPS of $0.78 for the fourth quarter of 1997, based on
67,682,704 average shares outstanding. Return on assets (ROA) and return on
common equity (ROE) for the quarter ended March 31, 1998, were 1.14% and
15.36%, respectively, compared with 1.19% and 16.32% reported during the same
period in 1997, and 1.11% and 15.56% for the last quarter of 1997.
The rise in the Corporation's net income for the first quarter of 1998, when
compared with the same period a year ago, was driven by an increase of $32.1
million in net interest income and $13.7 million in other revenues, partially
offset by a rise of $30.6 million in operating expenses
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19
and an increase of $9.9 million in the provision for loan losses. Table A
presents a detail of the components of net income as a percentage of average
assets for the first quarter of 1998 and 1997.
TABLE A
COMPONENTS OF NET INCOME AS A PERCENTAGE OF AVERAGE TOTAL ASSETS
First Quarter
- ----------------------------------------------------------------------------
1998 1997
------------------------
Net interest income 4.43% 4.34%
Provision for loan losses (0.70) (0.56)
Securities and trading gains 0.03 (0.03)
Other income 1.38 1.33
----- -----
5.14 5.08
Operating expenses (3.59) (3.42)
----- -----
Income before tax 1.55 1.66
Provision for income tax (0.41) (0.47)
----- -----
Net income 1.14% 1.19%
===== =====
NET INTEREST INCOME
Net interest income for the first quarter of 1998, reached $212.7 million
compared with $180.6 million reported for the same quarter in 1997. On a
taxable equivalent basis, net interest income increased to $228.1 million from
$193.4 million in the same quarter of 1997 and $225.7 million in the last
quarter of 1997. The rise from the first quarter of 1997, resulted from
increases of $33.7 million due to a higher volume of earning assets and $1.0
million due to a higher net interest yield, on a taxable equivalent basis. For
analytical purposes, the interest earned on tax-exempt assets is adjusted to a
taxable equivalent basis assuming the applicable statutory income tax rates.
Table B summarizes the changes in the composition of average earning assets and
interest bearing liabilities and their respective yields and costs, on a
taxable equivalent basis, for the first quarter of 1998 and 1997.
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20
TABLE B
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS
(Dollars in millions) FIRST QUARTER
- -----------------------------------------------------------------------------------------------------------------
Average Levels Average Yields
------------------------------------------------------------------------
1998 1997 Variance 1998 1997 Variance
------------------------------------------------------------------------
Money market investments $ 700 $ 690 $ 10 5.11% 5.21% (0.10%)
Investment securities 5,914 5,102 812 7.08 6.80 0.28
Trading account securities 260 285 (25) 6.82 6.32 0.50
-------- -------- ------- ----- ------ -----
6,874 6,077 797 6.87 6.59 0.28
-------- -------- ------- ----- ------ -----
Loans:
Commercial 4,939 3,993 946 9.37 9.09 0.28
Leasing 589 524 65 13.10 13.07 0.03
Mortgage 2,871 2,584 287 8.72 8.40 0.32
Consumer 3,068 2,677 391 12.99 13.08 (0.09)
-------- -------- ------- ----- ------ -----
11,467 9,778 1,689 10.36 10.22 0.14
-------- -------- ------- ----- ------ -----
TOTAL EARNING ASSETS $ 18,341 $ 15,855 $ 2,486 9.06% 8.83% 0.23%
======== ======== ======= ===== ====== =====
Interest bearing deposits:
NOW and money market $ 1,379 $ 1,179 $ 200 3.35% 3.35% 0.00%
Savings 3,641 3,197 444 3.08 3.06 0.02
Time deposits 4,291 3,924 367 5.51 5.41 0.10
-------- -------- ------- ----- ------ -----
9,311 8,300 1,011 4.24 4.21 0.03
Short-term borrowings 4,090 3,564 526 5.58 5.39 0.19
Medium and long-term debt 1,631 1,283 348 7.46 6.33 1.13
-------- -------- ------- ----- ------ -----
TOTAL INTEREST BEARING
LIABILITIES 15,032 13,147 1,885 4.95 4.74 0.21
Demand deposits 2,494 2,176 318
Net non-interest bearing funds 815 532 283
-------- -------- -------
$ 18,341 $ 15,855 $ 2,486 4.06% 3.93% 0.13%
======== ======== ======= ===== ====== ====
NET INTEREST MARGIN 5.00% 4.90% 0.10%
NET INTEREST SPREAD 4.11% 4.09% 0.02%
Average earning assets increased 15.7% principally due to a rise of $1.7
billion in average loans, particularly commercial loans, and an increase of
$812 million in the average balance of investment securities. The acquisition
of RCB, CBC Bancorp, Ltd, National Bancorp, Inc.,Banco Popular N.A., (Florida)
and Banco Popular N.A., (Texas) contributed $680 million in loans at their
respective acquisition dates. Also, the leadership position of Popular, Inc. in
Puerto Rico contributed to develop a sustained growth in its loan portfolio,
particularly in the commercial sector.
Investment securities increased 15.9%, mainly attributed to the increase of
$474 million in U.S. Treasury securities and collateralized mortgage
obligations and $250 million in mortgage-backed securities, both at BPPR.
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21
The average yield on earning assets, on a taxable equivalent basis, rose 23
basis points for the first quarter of 1998, as compared with the same period in
1997. The rise is principally attributed to increases of 28 basis points on the
yield on investment securities and 14 basis points on the yield on loans. This
increase relates to the higher interest rate scenario that prevailed during the
first quarter of 1998, as compared with the first quarter of 1997. The increase
in the average yield on loans, on a taxable equivalent basis, as can be seen in
Table B, was mostly reflected in the commercial and mortgage loan portfolios of
the Corporation. The yield on commercial loans has benefitted somehow from the
elimination of Section 936 of the U.S. Internal Revenue Code in 1996. Some
loans that were previously priced using a 936 market rate as factor, have
changed its pricing to a higher base in accordance with the conventional funds
market, thus improving the yield on the commercial loan portfolio. The increase
in the yield of mortgage loans is attributed primarily to the portfolios
located in the U.S. markets. On the other hand, the yield on the consumer loan
portfolio decreased, as a result of the strong market competition to obtain
retail customer relationships.
Average interest bearing liabilities of the Corporation increased by $1.9
billion for the first three months of 1998, as compared with the same period in
1997. Most of this increase was reflected in the average balance of interest
bearing deposits, contributing 54% of the increase. Short-term borrowings
accounted for 28% of the increase and medium and long-term debt accounted for
the remaining 18% of the increase. The acquisition of the banking operations
consolidated into Banco Popular, Illinois, contributed $328 million in interest
bearing deposits, while RCB added $584 million at their respective acquisition
dates. In addition, Banco Popular, N.A. (Florida) and Banco Popular, N.A.
(Texas), had $99 million in average interest bearing deposits for the
three-month period ended March 31, 1998. Average demand deposits, also
reflected a significant increase of 14.6%, as compared with the first quarter
of 1997, mainly due to the aforementioned acquisitions.
The increase in the average balance of short-term borrowings was mostly
reflected at BPPR, mainly due to arbitrage opportunities undertaken during the
second half of 1997 and the first quarter of 1998. The increase in average
medium and long-term debt was mostly used to finance the growth and expansion
of the Corporation.
The increase of 21 basis points in the total cost of interest bearing
liabilities for the first three months of 1998, as compared with the same
period of 1997, was due to the increase of 113 basis points in the cost of
medium and long-term borrowings and 19 basis points in the cost of short-term
borrowings. These increases in rates relate to the debt issued during a higher
interest rate environment and debt with floating rates resetting semiannually
or quarterly. The cost of interest bearing deposits reflected an increase of
only three basis points, mainly due to the higher cost of time deposits.
The increase in the average yield on earning assets, partially offset by the
increase in the average cost of interest bearing liabilities, combined with a
higher proportion of average loans in relation to total earning assets, allowed
the Corporation to improve its net interest margin, on a taxable equivalent
basis by ten basis points, from 4.90% reported during the first quarter of
1997, to 5.00% during the first quarter of 1998. Also, the higher proportion of
non interest-bearing liabilities, such as demand deposits and other funding
sources, to average earning assets contributed to the increase in the net
interest margin. During the last quarter of 1997, the net interest yield, on a
taxable equivalent basis, was 4.81%.
22
22
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 interest income
is affected primarily by interest rate volatility and its impact on the
repricing of assets and liabilities. The Corporation maintains a formal asset
and liability management process to quantify, monitor and control interest rate
risk and to assist management in maintaining stability in the net interest
margin under varying interest rate environments.
The Corporation uses various techniques to assess the degree of interest rate
risk, including 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. An
interest rate sensitivity analysis, performed at the corporate level, is the
primary tool used in expressing the potential loss in future earnings resulting
from selected hypothetical changes in interest rates.
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. 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.
Based on the results of the sensitivity analysis as of March 31, 1998, the
increase in net interest income on a hypothetical rising rate scenario for the
next twelve months is $4.8 million and the decrease for the same period
utilizing a hypothetical declining rate scenario is $2.9 million. Both
hypothetical rate scenarios consider a gradual change of 50 basis points during
the twelve-month period. This level of interest rate risk is well within the
Corporation's policy guidelines.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses for the first quarter of 1998, totaled $33.6
million or a $9.9 million increase from $23.7 million reported for the same
quarter of 1997. During the fourth quarter of 1997, the provision was $31.7
million. As seen in Table C, net charge-offs for the quarter ended March 31,
1998, reached $27.5 million or 0.96% of average loans, compared with $17.9
million or 0.73% for the same quarter in 1997, and $25.5 million or 0.91% for
the quarter ended December 31, 1997.
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23
TABLE C
- -------------------------------------------------------------------------------------------------------------
Quarter Provision for Net Allowance for
Ended Loan Losses Charge-Offs Loan Losses
- -------------------------------------------------------------------------------------------------------------
(In millions)
March 31, 1998 $33.6 $27.5 $218
December 31, 1997 31.7 25.5 212
September 30, 1997 29.8 31.5 205
June 30, 1997 25.4 22.9 207
March 31, 1997 23.7 17.9 191
The increase of $9.6 million in net charge-offs was mostly reflected in the
consumer loan portfolio, which increased $10.1 million. Consumer loans net
charge-offs totaled $18.7 million or 2.43% of average consumer loans for the
quarter ended March 31, 1998, compared with $8.6 million or 1.28%,
respectively, for the same quarter last year. Lease financing net credit losses
amounted to $2.4 million or 1.66% of the average lease financing portfolio for
the three-month period ended March 31, 1998, compared with $1.1 million or
0.88%, respectively, for the same period last year. The rise in net credit
losses in the consumer category was the result of the increased level of
personal bankruptcies, both in Puerto Rico and the U.S. Conversely, commercial,
construction and mortgage loans net charge-offs decreased $1.4 million, $0.2
million and $0.1 million, respectively, when compared with the first quarter of
1997. The decrease in net charge-offs in the commercial loan portfolio resulted
principally from the write-off during the first quarter of 1997, of two
commercial relationships of over $1.0 million each.
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24
TABLE D
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
First Quarter
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------
Balance at beginning of period $211,651 $185,574
Provision for loan losses 33,565 23,687
----------------------------
245,216 209,261
----------------------------
Losses charged to the allowance:
Commercial 9,991 11,200
Construction 125 300
Lease financing 6,185 6,283
Mortgage 492 529
Consumer 22,480 12,001
----------------------------
39,273 30,313
----------------------------
Recoveries:
Commercial 4,040 3,823
Construction 40 1
Lease financing 3,746 5,129
Mortgage 119 36
Consumer 3,820 3,423
----------------------------
11,765 12,412
----------------------------
Net loans charged-off 27,508 17,901
----------------------------
Balance at end of period $217,708 $191,360
============================
Ratios:
Allowance for losses to loans 1.89% 1.94%
Allowance to non-performing assets 102.04 109.99
Allowance to non-performing loans 111.03 116.63
Non-performing assets to loans 1.85 1.76
Non-performing assets to total assets 1.07 1.00
Net charge-offs to average loans 0.96 0.73
Provision to net charge-offs 1.22X 1.32x
Net charge-offs earnings coverage 3.94 5.18
As shown in Table D, the allowance for loan losses at March 31, 1998, amounted
to $218 million representing 1.89% of loans, compared with $191 million or
1.94% at the same date last year. At December 31, 1997, the allowance for loan
losses was $212 million or 1.86% of loans. Management considers that the
allowance for loan losses is adequate to absorb potential write-offs in the
loan portfolio, based on the process established to assess its adequacy. This
process incorporates portfolio risk characteristics, results of periodic credit
reviews, prior loss experience, current and anticipated economic conditions and
loan impairment measurements.
The Corporation has defined impaired loans as all loans with interest and/or
principal past due 90 days or more and other specific loans for which, based on
current information and events, it is probable that the debtor will be unable
to pay all amounts due according to the contractual terms of the loan
agreement. Loan impairment is measured based on the present value of expected
cash flows discounted at the loan's effective rate, on the observable market
price or, on the fair value of the collateral if the loan is collateral
dependent. Large groups of smaller balance homogenous loans are collectively
evaluated for impairment based on past experience. All other loans are
evaluated on a loan-by-loan basis. Impaired loans for which the discounted cash
flows, collateral
25
25
value or market price equals or exceeds its carrying value do not require an
allowance. At March 31, 1998, the Corporation had $121 million in loans
considered impaired of which $83 million had a related allowance for possible
loan losses of $22 million. As of the same date last year, loans considered
impaired amounted to $99 million of which $65 million had a related allowance
for loan losses of $18 million. Average impaired loans during the first quarter
of 1998 and 1997 were $121 million and $97 million, respectively. The
Corporation recognized interest income on impaired loans of $1.2 million and
$1.0 million, for the quarters ended March 31, 1998 and 1997, respectively.
CREDIT QUALITY
Non-performing assets (NPA) consist of past-due loans on which no interest
income is being accrued, renegotiated loans and other real estate. The
Corporation reports its non-performing assets on a more conservative basis than
most U.S. banks. The standard industry practice is to place non-performing
commercial loans on non-accrual status when payments of principal or interest
are delinquent 90 days. However, the Corporation's policy is to place
commercial loans on non-accrual status when payments of principal or interest
are delinquent 60 days. Lease financing, conventional mortgage and closed-end
consumer loans are placed on non-accrual status when payments are delinquent 90
days. Closed-end consumer loans are charged-off against the allowance when
delinquent 120 days. Open-end (revolving credit) consumer loans are charged-off
when payments are delinquent 180 days. Certain loans which would be treated as
non-accrual loans pursuant to the foregoing policy, are treated as accruing
loans if they are considered well secured and in the process of collection.
Under the standard industry practice, closed-end consumer loans are charged-off
when delinquent 120 days, but these consumer loans are not customarily placed
on non-accrual status prior to being charged-off.
As shown in Table E, NPA as of March 31, 1998 amounted to $213 million or 1.85%
of loans, compared with $174 million or 1.76% at March 31, 1997. NPA were $212
million or 1.87% of loans at December 31, 1997.
TABLE E
- -------------------------------------------------------------------------------------------
NPA Allowance
as a % as a %
Date NPA of Loans of NPA
- -------------------------------------------------------------------------------------------
(Dollars in millions)
March 31, 1998 $213 1.85% 102.0%
December 31, 1997 212 1.87 99.6
September 30, 1997 213 1.90 96.4
June 30, 1997 211 1.94 97.9
March 31, 1997 174 1.76 110.0
Non-performing loans totaled $196 million as of March 31, 1998, compared with
$164 million at the end of the same quarter of 1997 and $194 million as of
December 31, 1997. Non-performing mortgage loans increased $5.7 million as
compared with March 31, 1997, mainly at Equity One, Inc. At March 31, 1998,
non-performing mortgage loans at Equity One amounted to $27.3 million, an
increase of $5.0 million from the $22.3 million reported as of the same date
last year. The
26
26
increase relates to the higher volume of personal bankruptcies in the mainland
and the growth in the mortgage loan portfolio of that subsidiary.
Non-performing consumer and commercial loans increased $11.8 million and $14.2
million, respectively, over their respective amounts as of March 31, 1997. The
increase in the non-performing consumer portfolio is also related to the higher
volume of personal bankruptcies, which caused an increase in delinquency
levels, and the higher loan volume. Furthermore, the increase in the
non-performing commercial portfolio was influenced by the higher loan volume,
coupled with the implementation of the Corporation's more conservative
non-accrual policy on the operations acquired. Non-performing lease financings
increased $0.3 million when compared to the same quarter of 1997. Other real
estate owned also showed an increase of $10.7 million particularly in Equity
One, Inc.
Assuming standard industry practice of placing commercial loans on non-accrual
status when payments of principal or interest are 90 days or more past due and
excluding the closed-end consumer loans from non-accruing loans, non-performing
assets as of March 31, 1998, amounted to $160 million or 1.39% of loans, and
the allowance for loan losses would be 135.9% of non-performing assets. At
March 31, 1997 and December 31, 1997, adjusted non-performing assets were $124
million and $167 million, respectively, or 1.25% and 1.47% of loans.
Accruing loans that are contractually past-due 90 days or more as to principal
or interest as of March 31, 1998, amounted to $22.4 million compared with $11.4
million at March 31, 1997, and $20.8 million at December 31, 1997.
OTHER OPERATING INCOME
Other operating income, excluding securities and trading gains, amounted to
$66.4 million for the first quarter of 1998, compared with $55.5 million for
the same quarter in 1997, an increase of $10.9 million or 19.7%. As Table F
shows, this rise was driven by increases of $4.0 million in other service fees,
$3.5 million in service charges on deposit accounts, and $3.4 million in other
operating income.
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27
TABLE F
OTHER OPERATING INCOME
First Quarter
- -----------------------------------------------------------------------------------------------------
1998 1997 Change
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service charges on deposit
accounts $25,338 $21,819 $3,519
---------------------------------------
Other service fees:
Credit card fees and discounts 8,067 6,580 1,487
Credit life insurance fees 2,066 2,401 (335)
Debit card fees 4,112 3,437 675
Sale and administration of
investment products 2,778 1,658 1,120
Mortgage servicing fees, net of
amortization 2,392 2,248 144
Trust fees 2,000 1,613 387
Other fees 4,758 4,232 526
---------------------------------------
Subtotal 26,173 22,169 4,004
Other income 14,904 11,494 3,410
---------------------------------------
Total $66,415 $55,482 $10,933
=======================================
The growth in service charges on deposit accounts reflects increases in
transaction volumes and account activity mainly driven by the acquisitions made
after March 31, 1997. The increase in other service fees was mainly due to
higher credit card fees and discounts, increased fees from the sale and
administration of investment products, and an increase in debit card fees. The
credit card fees and discounts increased $1.5 million as a result of the rise
of 29.3% in credit card net sales and a growth of 24.1% in the number of credit
card active accounts. The fees related to the sale and administration of
investment products rose $1.1 million helped by the performance of a new retail
division created in May 1997 by Popular Securities, the Corporation's
broker/dealer subsidiary. Debit card fees increased $0.7 million related to the
sustained growth in the number of debit cards and the sustained growth in the
number of point-of-sale (POS) terminals and volume of transactions. The volume
of transactions at POS terminals increased from a monthly average of
approximately 2.5 million in March 1997 to 3.6 million a year later.
The increase in other operating income, from $11.5 million for the first
quarter of 1997 to $14.9 million for the same period in 1998, mainly resulted
from a non-recurring income as the Corporation recovered $1.7 million of its
investment in common stock of Citizens Bank of Jamaica, written down during the
first quarter of 1997.
During the first three months of 1998, the Corporation realized a net gain on
sale of securities and trading account profits amounting to $0.9 million and
$0.7 million, respectively, compared with a net loss of $1.7 million on the
sale of securities and a trading account profit of $0.4 million for the first
three months of 1997.
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28
OPERATING EXPENSES
Operating expenses for the first quarter of 1998, were $172.4 million compared
with $142.1 million for the same quarter in 1997, an increase of $30.3 million,
principally reflecting higher personnel costs, professional fees, net occupancy
expenses, business promotion and amortization of intangibles.
Personnel costs, the largest category of operating expenses, totaled $83.4
million for the first three months of 1998, compared with $71.5 million for the
same period in 1997, an increase of $11.9 million or 16.7%. Salaries accounted
for the largest portion of the increase in personnel costs rising $10.9 million
or 22.6% to $59.3 million, compared with $48.4 million in 1997. The
acquisitions made after March 31, 1997, accounted for more than $5.0 million of
the increase in salary expense. Full-time equivalent employees (FTE) amounted
to 8,955 at the end of this quarter, up 970 from 7,985 FTEs at March 31, 1997.
Pension and other benefits rose $1.7 million, reflecting the impact in payroll
taxes of the increase in salaries and higher health insurance expenses.
Partially offsetting these increases was a reduction of $0.8 million in the
profit sharing expense. This reduction is a result of a change to the profit
sharing plan at BPPR, in order to encourage stronger profitability ratios.
Other operating expenses, excluding personnel costs, increased $18.4 million,
reaching $89.0 million for the first quarter of 1998, compared with $70.6
million for the same period in 1997. The increase in other operating expenses
was reflected in most expense categories, mainly as a result of the
Corporation's continued growth and acquisitions. Equipment expenses grew $3.2
million mostly due to the investment needed to support the growth of the
Corporation's business activity and geographical expansion, including costs
related to the expansion of the electronic payment system and new technology.
During the first quarter of 1998, the Corporation increased its automated
teller machine (ATM) network by 104 and 4,978 additional POS terminals were
connected in order to expand its electronic delivery capabilities. Professional
fees increased $3.0 million, including expenses related to business expansion
in the U.S. and costs incurred in relation to the Corporation's action plan to
address the Year 2000 Issue. Net occupancy expenses increased $2.6 million
mostly as a result of the Corporation's growth and expansion and the sale,
during the fourth quarter of 1997, of an income-producing property. Business
promotion rose $2.3 million as part of the institutional campaign launched in
the continental U.S. to emphasize Banco Popular's image as a Hispanic bank and
the promotional efforts related to the credit card program in the U.S. The
amortization of intangibles also reflected an increase of $2.3 million related
to the premium paid on the operations acquired after March 31, 1997.
Income tax expense rose $0.4 million from $19.5 million in the first quarter of
1997, to $19.9 million in the same quarter this year, reflecting the growth in
pre-tax earnings. However, the effective tax rate for the first quarter of
1998, decreased to 26.7% from 28.3% for the same period in 1997, primarily as a
result of a higher volume of tax-exempt assets.
BALANCE SHEET COMMENTS
At the end of the first quarter of 1998, the Corporation's total assets reached
$20.0 billion or $2.6 billion over the amount reported as of the same date a
year earlier. The growth in total assets was driven by the acquisitions
performed in Puerto Rico, Illinois, Florida and Texas, all performed after
March 31, 1997. These acquisitions contributed $1.4 billion in total assets at
their respective acquisition dates. Total assets at December 31, 1997, were
$19.3 billion. The
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Corporation's earning assets amounted to $18.7 billion at March 31, 1998,
compared with $16.3 billion and $18.1 billion at March 31, 1997 and December
31, 1997, respectively.
Money market investments decreased $156 million to $634 million at March 31,
1998, from the same date a year earlier. Investment securities amounted to $6.3
billion at the end of the first quarter of 1998, compared with $5.4 billion at
the same date last year. Investment securities included $5.9 billion and $4.0
billion in investment securities available-for-sale, at March 31, 1998 and
1997, respectively. The increase in investment securities during the
twelve-month period mostly resulted from arbitrage opportunities undertaken by
BPPR. The trading portfolio amounted to $248 million and $263 million at March
31, 1998 and 1997, respectively.
Total loans at March 31, 1998, reached $11.5 billion, an increase of $1.6
billion or 16.7% over $9.9 billion reported a year earlier. Total loans at
December 31, 1997, were $11.4 billion. The commercial loan portfolio reflected
the largest growth since March 31, 1997, with an increase of $947 million. The
growth mostly resulted from the continued marketing efforts directed to the
retail and middle market. Also, the aforementioned acquisitions contributed
$187 million to the commercial portfolio at their acquisition dates.
The consumer and mortgage loan portfolios also reflected significant growth
when compared with their balances at March 31, 1997, increasing $394 million
and $253 million, respectively. The operations acquired were responsible for
approximately $187 million of the increase in the consumer loan portfolio.
Also, business expansion, both in Puerto Rico and the U.S. mainland, and sound
marketing efforts contributed to the growth in the consumer and mortgage loan
portfolios. The increase in the mortgage loan portfolio was achieved in spite
of sales of $561 million of mortgage loans since the end of the first quarter
of 1997. The leasing portfolio also reflected growth from March 31, 1997, with
an increase of $60 million.
As a result of the premiums paid on the acquisitions performed after March 31,
1997, the Corporation's intangible assets increased to $228 million at March
31, 1998, from $127 million at the same date last year. The acquisition of RCB
accounted for $64 million in intangible assets at acquisition date, while the
operations acquired in the U.S. resulted in $40 million in intangible assets.
On the liability side, total deposits reached $12.0 billion at March 31, 1998,
or $1.5 billion higher than the amount reported at the same date last year. The
increase was impacted by the acquisitions performed after March 31, 1997, which
contributed $1.1 billion in total deposits at their respective acquisition
dates. At the end of the first quarter of 1998, the Corporation had deposits of
$8.6 billion in Puerto Rico, $2.9 billion in the United States and $509 million
in the British and U.S. Virgin Islands. Total deposits at December 31, 1997
amounted to $11.7 billion.
Borrowed funds, including subordinated notes and capital securities, increased
to $6.1 billion at March 31, 1998, compared with $5.3 billion at the same date
a year earlier. The rise was mostly reflected in federal funds purchased and
securities sold under agreements to repurchase, which increased $616 million.
The increase in borrowed funds was used to finance loan growth and arbitrage
activities.
The Corporation's stockholders' equity reached $1.55 billion at March 31, 1998,
compared with $1.29 billion at the same date last year and $1.50 billion at
December 31, 1997. The increase from the end of the first quarter of 1997, was
mostly the result of 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 the acquisitions resulted in $96 million of additional capital. On
May 8, 1997, the Board of Directors approved a stock repurchase program of up
to three million shares of the outstanding
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common stock of the Corporation. Although the Corporation did not repurchase
any shares of its common stock during the quarter ended March 31, 1998, a total
of 988,800 shares with a total cost of $39.6 million, were repurchased during
1997. A positive variance of $47.0 million in the unrealized gains (losses) on
securities available-for-sale, also contributed to the increase in
stockholders' equity as of March 31, 1998.
The dividend payout ratio to common stockholders for the quarter ended March
31, 1998, was 28.25%, compared with 25.07% for the same quarter last year and
25.19% for the year ended December 31, 1997. The increase in the ratio from the
first quarter of 1997, resulted from an increase of 22.2%, from $0.18 to $0.22
per common share, in the Corporation's quarterly dividend, effective with the
dividend paid on October 1, 1997.
The market value of the Corporation's common stock at March 31, 1998, was
$58.69 per share, compared with $35.50 at March 31, 1997, and $49.50 at
December 31, 1997. The Corporation's market capitalization at March 31, 1998,
was $4.0 billion compared with $2.3 billion at March 31, 1997, and $3.4 billion
at December 31, 1997. Book value per common share increased to $21.36 at March
31, 1998, from $17.96 at the same date last year.
The Corporation continues to enjoy strong capital ratios, with a Tier I, total
capital and leverage ratios of 12.17%, 14.54% and 7.11%, respectively, at March
31, 1998. At the same date last year, these same ratios were 13.35%, 15.90% and
7.71%, respectively.
Popular International Bank, Inc. (PIB) and Popular North America, Inc.'s (PNA)
bank subsidiaries (Banco Popular, Illinois, Banco Popular National Association
(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 PIB and PNA to make dividend and
asset distributions to the Corporation, nor on the ability of PNA's
subsidiaries, except for Banco Popular, FSB, to make distributions to PNA. In
connection with the acquisition by Banco Popular, FSB from the Resolution Trust
Company (RTC) of four New Jersey branches of the former Carteret Federal
Savings Bank, the RTC provided to Banco Popular, FSB interim financial
assistance in the form of a loan in the amount of $19.5 million, which matures
on January 20, 2000, but which is prepayable any time before then. Pursuant to
the terms of such financing, Banco Popular, FSB may not, among other things,
declare or pay any dividends on its outstanding capital stock (unless such
dividends are used exclusively for payment of principal of or interest on such
RTC loan) or make any distribution of its assets until payment in full of such
promissory note. As of March 31, 1998 the undistributed earnings of Banco
Popular, FSB totaled $53 million.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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ITEM 5. OTHER INFORMATION
On April 23, 1998, the Board of Directors approved a 2-for-1 stock split,
effective July 1,1998, to be effected in the form of a dividend for
shareholders of record as of June 12, 1998. The split will bring the total
outstanding common shares of the Corporation to 135,497,786.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Description Exhibit Reference
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19 Quarterly Report to shareholders for the Exhibit "A"
quarter ended March 31, 1998
27 Financial Data Schedule Exhibit "B"
b) One report on Form 8-K was filed for the quarter ended March 31, 1998:
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Dated: January 9, 1998
Items reported: Item 5 - Other Events
Item 7 - Financial Statements, Pro-Forma,
Financial Information and Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
POPULAR, INC.
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(Registrant)
Date: May 13, 1998 By: S/ Jorge A. Junquera
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Jorge A. Junquera
Senior Executive Vice President
Date: May 13, 1998 By: S/ Amilcar L. Jordan
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Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller