1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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 135,637,327
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(Title of Class) (Shares Outstanding as of November 13, 1998)
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POPULAR, INC.
INDEX
Part I - Financial Information Page
Item 1. Financial Statements
Unaudited consolidated statements of condition - September 30,
1998, December 31, 1997 and September 30, 1997. 3
Unaudited consolidated statements of income - Quarters and nine
months ended September 30, 1998 and 1997. 4
Unaudited consolidated statements of comprehensive income -
Quarters and nine months ended September 30, 1998 and 1997. 5
Unaudited consolidated statements of cash flows - Nine months
ended September 30, 1998 and 1997. 6
Notes to unaudited consolidated financial statements. 7-15
Item 2. Management's discussion and analysis of financial condition
and results of operations. 16-34
Item 3. Quantitative and qualitative disclosures about market risk. 22-23
Part II - Other Information
Item 1. Legal proceedings N/A
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 34
Item 6. Exhibits and reports on Form 8-K 35
--- Signature 35
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, the Corporation's market risk, the effect of legal proceedings
on Popular, Inc.'s financial condition and results of operations and the Year
2000 issue. 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 and market risk, these factors include, among
others, 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, the
performance of the stock and bond markets , the magnitude of interest rate
changes and the potential effects of the Year 2000 issue. 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. The information regarding Year 2000 compliance is
based on management's current assessment. However, this is an ongoing process
involving continual evaluation, and unanticipated problems could develop that
could cause compliance to be more difficult or costly than currently
anticipated.
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POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
SEPTEMBER 30, December 31, September 30,
(In thousands) 1998 1997 1997
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ASSETS
Cash and due from banks $ 543,565 $ 463,151 $ 530,915
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Money market investments:
Federal funds sold and securities and
mortgages purchased under agreements to resell 720,511 802,803 467,285
Time deposits with other banks 102,525 9,013 5,256
Banker's acceptances 360 2,274 2,871
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823,396 814,090 475,412
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Investment securities available-for-sale, at market value 6,223,460 5,239,005 5,869,770
Investment securities held-to-maturity, at cost 258,032 408,993 829,105
Trading account securities, at market value 253,129 222,303 224,734
Loans held-for-sale 495,241 265,204 238,991
Loans 12,217,822 11,457,675 11,287,080
Less - Unearned income 350,536 346,272 344,010
Allowance for loan losses 245,382 211,651 205,077
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11,621,904 10,899,752 10,737,993
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Premises and equipment 408,919 364,892 390,905
Other real estate 25,743 18,012 12,014
Customers' liabilities on acceptances 16,288 1,801 3,005
Accrued income receivable 141,184 118,677 144,769
Other assets 242,472 252,040 212,070
Intangible assets 220,260 232,587 227,102
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$ 21,273,593 $ 19,300,507 $ 19,896,785
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,665,500 $ 2,546,836 $ 2,293,394
Interest bearing 9,882,250 9,202,750 8,920,773
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12,547,750 11,749,586 11,214,167
Federal funds purchased and securities sold under
agreements to repurchase 3,469,382 2,723,329 3,897,110
Other short-term borrowings 1,504,316 1,287,435 1,294,693
Notes payable 1,341,530 1,403,696 1,435,763
Acceptances outstanding 16,288 1,801 3,005
Other liabilities 391,827 356,569 327,267
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19,271,093 17,522,416 18,172,005
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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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Minority interest in consolidated subsidiary 30,609
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Stockholders' equity :
Preferred stock 100,000 100,000 100,000
Common stock 825,200 412,029 411,870
Surplus 194,033 602,023 580,806
Retained earnings 510,046 395,253 376,908
Treasury stock-at cost (39,560) (39,560) (39,560)
Accumulated other comprehensive income-unrealized gains
on securities available-for-sale, net of deferred taxes 107,172 33,346 19,756
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1,696,891 1,503,091 1,449,780
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$ 21,273,593 $ 19,300,507 $ 19,896,785
===================================================================================================================================
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 Nine months ended
September 30, September 30,
(Dollars in thousands, except per share information) 1998 1997 1998 1997
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INTEREST INCOME:
Loans $302,403 $ 283,139 $ 892,096 $ 790,296
Money market investments 9,566 8,237 27,585 25,619
Investment securities 93,977 97,522 277,413 257,279
Trading account securities 4,875 4,516 12,960 13,490
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410,821 393,414 1,210,054 1,086,684
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INTEREST EXPENSE:
Deposits 101,239 95,594 300,346 268,881
Short-term borrowings 66,611 66,117 181,189 169,888
Long-term debt 27,930 28,698 86,382 73,660
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195,780 190,409 567,917 512,429
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Net interest income 215,041 203,005 642,137 574,255
Provision for loan losses 34,667 29,849 101,756 78,949
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Net interest income after provision
for loan losses 180,374 173,156 540,381 495,306
Service charges on deposit accounts 26,344 24,378 77,176 68,411
Other service fees 28,557 25,252 83,548 72,206
Gain on sale of securities 4,553 519 8,469 145
Trading account profit 506 959 2,486 2,209
Other operating income 14,261 15,201 43,379 33,820
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254,595 239,465 755,439 672,097
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OPERATING EXPENSES:
Personnel costs:
Salaries 61,267 55,566 180,183 154,255
Profit sharing 5,618 6,164 17,565 19,392
Pension and other benefits 17,433 17,806 52,621 51,813
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84,318 79,536 250,369 225,460
Net occupancy expense 12,260 10,362 35,558 28,107
Equipment expenses 18,533 16,976 55,042 48,604
Other taxes 8,035 8,215 23,902 21,971
Professional fees 14,218 11,900 40,912 32,726
Communications 9,444 8,743 27,462 24,074
Business promotion 9,751 9,831 26,884 23,768
Printing and supplies 4,490 3,984 12,908 10,755
Other operating expenses 10,679 10,984 32,483 29,958
Amortization of intangibles 6,890 6,810 20,523 16,089
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178,618 167,341 526,043 461,512
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Income before taxes 75,977 72,124 229,396 210,585
Income tax 18,397 18,511 59,560 56,342
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NET INCOME $ 57,580 $ 53,613 $ 169,836 $ 154,243
=================================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 55,493 $ 51,526 $ 163,574 $ 147,981
=================================================================================================================================
EARNINGS PER COMMON SHARE $ 0.41 $ 0.38 $ 1.21 $ 1.11
=================================================================================================================================
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)
Quarter ended Nine months ended
September 30, September 30,
In thousands) 1998 1997 1998 1997
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Net Income $ 57,580 $53,613 $169,836 $154,243
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Other comprehensive income net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period 69,172 13,791 80,732 18,333
Less: reclassification adjustment
for gains (losses) included in net
income 4,313 340 6,906 276
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Total other comprehensive income $ 64,859 $13,451 $ 73,826 $ 18,057
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Comprehensive income $122,439 $67,064 $243,662 $172,300
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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)
Nine months ended
September 30,
(In thousands) 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 169,836 $ 154,243
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Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of premises and equipment 46,020 40,073
Provision for loan losses 101,756 78,949
Amortization of intangibles 20,523 16,089
Gain on sale of investment securities available-for-sale (8,469) (145)
Loss on disposition of premises and equipment 46 88
Gain on sale of loans (17,572) (8,525)
Amortization of premiums and accretion of discounts
on investments 2,057 1,033
(Increase) decrease in loans held-for-sale (230,038) 16,138
Amortization of deferred loan fees and costs (284) (2,514)
Net (increase) decrease in trading securities (30,826) 67,436
Net increase in interest receivable (20,803) (42,295)
Net decrease in other assets 49,343 216,544
Net (decrease) increase in interest payable (2,150) 7,861
Net increase (decrease) in current and deferred taxes 16,363 (38,100)
Net increase in postretirement benefit obligation 6,547 6,229
Net decrease in other liabilities (18,998) (5,591)
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Total adjustments (86,485) 353,270
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Net cash provided by operating activities 83,351 507,513
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments 68,899 347,559
Purchases of investment securities held-to-maturity (10,081,965) (48,463,368)
Maturities of investment securities held-to-maturity 10,236,353 48,887,010
Purchases of investment securities available-for-sale (4,243,287) (6,922,799)
Maturities of investment securities available-for-sale 2,471,881 2,346,508
Sales of investment securities available-for-sale 893,441 2,646,105
Net disbursements on loans (1,122,887) (1,111,679)
Proceeds from sale of loans 596,617 280,659
Acquisition of loan portfolios (43,630) (23,131)
Assets acquired, net of cash (4,094) (78,163)
Cash received in acquisition 51,238
Acquisition of premises and equipment (74,473) (90,516)
Proceeds from sale of premises and equipment 15,297 27,570
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Net cash used in investing activities (1,236,610) (2,154,245)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 439,009 (563,025)
Net deposits acquired 36,297
Net increase in federal funds purchased and
securities sold under agreements to repurchase 746,053 1,964,387
Net increase (decrease) in other short-term borrowings 162,064 (109,313)
Proceeds from issuance of notes payable 7,139 678,598
Payments of notes payable (111,114) (327,009)
Payment of senior debentures (30,000)
Proceeds from issuance of Series A Capital Securities 150,000
Dividends paid (50,955) (42,065)
Proceeds from issuance of common stock 5,180 3,266
Treasury stock, acquired (39,560)
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Net cash provided by financing activities 1,233,673 1,685,279
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Net increase in cash and due from banks 80,414 38,547
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 $ 543,565 $ 530,915
==========================================================================================
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 subsidiaries ATH Costa
Rica, Banco Gerencial & Fiduciario Dominicano, S.A. and Popular North America,
Inc., including Banco Popular, FSB and its wholly-owned subsidiary Equity One,
Inc., Banco Popular, Illinois and its wholly-owned subsidiary Popular Leasing
USA, Banco Popular National Association (California), Banco Popular National
Association (Florida), Banco Popular National Association (Texas) and Popular
Cash Express, Inc.; Banco Popular de Puerto Rico and its wholly-owned
subsidiaries, Popular Leasing and Rental, Inc., Popular Finance, Inc. and
Popular Mortgage, Inc.; and Metropolitana de Prestamos, Inc., as of September
30, 1998, December 31, 1997 and September 30, 1997 and their related statements
of income, comprehensive income and cash flows for the nine-month periods then
ended. These statements are, in the opinion of management, a fair statement of
the results of the periods presented. These results are unaudited, but include
all necessary adjustments, of a normal recurring nature, for a fair presentation
of such results. Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the 1998 presentation.
On September 30, 1998, the Corporation acquired 45% in newly issued stock of
Banco Gerencial & Fiduciario (BGF), a commercial bank operating in the Dominican
Republic. Based on the provisions of the stock purchase agreement, BGF is being
presented as a consolidated subsidiary of the Corporation.
NOTE 2 - ACCOUNTING CHANGES
Effective January 1, 1998 the Corporation adopted 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 requires the reclassification of financial statements
for earlier periods presented for comparative purposes.
In June 1997, the Financial Accounting Standard Board (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 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
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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. Adoption in interim financial statements is not required
until the year after initial adoption, however, comparative prior period
information is required.
In February 1998, the FASB 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.
On June 16, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of condition and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge of
the exposure to changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment (fair value hedge), a hedge of the exposure to
variable cash flows of a forecasted transaction (cash flow hedge), or a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. In general, the gain or loss in a fair value
hedge is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. For a cash flow hedge, gains or losses are reported in other
comprehensive income and subsequently reclassified into earnings. For
derivatives designated as a hedge of the foreign currency exposure, the gain or
loss is reported in other comprehensive income as part of the cumulative
translation adjustment. This statement is effective for all quarters of fiscal
years beginning after June 15, 1999. Initial application of this Statement
should be as of the beginning of an entity's fiscal quarter; on that date,
hedging relationships must be designated anew and documented pursuant to the
provisions of this Statement. Earlier application of all the provisions of this
Statement is encouraged, but it is permitted as of the beginning of any fiscal
quarter that begins after issuance of the Statement. This Statement should not
be applied retroactively to financial statements of prior periods. Management
understands that the adoption of this Statement will not have a material effect
on the consolidated financial statements of the Corporation.
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NOTE 3 - INVESTMENT SECURITIES
The average maturities as of September 30, 1998, and market value for the
following investment securities are:
Investments securities available-for-sale:
September 30,
------------
1998 1997
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Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------------------
U.S. Treasury (average maturity of 1 year
and 7 months) $3,116,113 $3,180,266 $4,027,623 $4,043,382
Obligations of other U.S. Government
agencies and corporations (average
maturity of 7 years and 2 months) 1,704,220 1,743,857 956,146 966,676
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 9 years and 5 months) 54,227 56,593 47,377 47,890
Collateralized mortgage obligations (average
maturity of 1 year and 6 months) 798,904 802,746 720,600 720,880
Mortgage-backed securities (average
maturity of 21 years and 5 months) 367,484 376,165 60,658 60,167
Equity securities (without contractual
maturity) 28,697 52,051 18,150 18,154
Others (average maturity of 9 years and
10 months) 11,761 11,782 12,602 12,621
----------------------------------------------------------------
$6,081,406 $6,223,460 $5,843,156 $5,869,770
================================================================
Investment securities held-to-maturity:
September 30,
1998 1997
------ ------
Amortized Market Amortized Market
Cost Value Cost Value
------------------------------------------------------------------
U.S. Treasury Obligations $ 250,122 $ 250,160
Obligations of other U.S. Government
agencies and corporations (average maturity
of 6 months) $ 4,881 $ 4,881 289,704 289,500
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 4 years and 1 month) 69,218 70,714 74,160 75,548
Collateralized mortgage obligations (average
maturity of 1 year and 8 months) 35,171 35,343 77,032 76,982
Mortgage-backed securities (average
maturity of 3 years) 36,182 37,551 48,827 49,695
Equity securities (without contractual
maturity) 77,730 77,730 70,360 70,360
Others (average maturity of 6 years
and 2 months) 34,850 34,865 18,900 18,870
-----------------------------------------------------------------
$ 258,032 $ 261,084 $ 829,105 $ 831,115
=================================================================
NOTE 4 - PLEDGED ASSETS
Securities and insured mortgage loans of the Corporation of $4,833,416 (1997 -
$4,952,973) are pledged to secure public and trust deposits and securities and
mortgages sold under repurchase agreements.
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NOTE 5 - COMMITMENTS
In the normal course of business there are letters of credit outstanding and
stand-by letters of credit which at September 30, 1998, amounted to $38,370 and
$59,423. There are also outstanding other commitments and contingent
liabilities, such as guarantees and commitments to extend credit, which are not
reflected in the accompanying financial statements. No losses are anticipated as
a result of these transactions.
NOTE 6 - SUBORDINATED NOTES
Subordinated notes of $125,000 as of September 30, 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 135,555,652 were issued and outstanding at September 30, 1998, after
adjusting for the stock split described below. On April 23, 1998, the
Corporation's Board of Directors authorized a two-for-one common stock split
effected in the form of a dividend, effective July 1, 1998. As a result of the
split 68,737,693 shares were issued, and $412 million were transferred from
surplus to common stock. All references in the financial statements to the
numbers of common shares and per share amounts have been restated to reflect the
stock split. On May 8, 1997, the Board of Directors approved a stock repurchase
program of up to three million shares of outstanding common stock of the
Corporation. A total of 1,977,600 shares, after restating for the stock split,
with a cost of $39.6 million were repurchased during 1997, no additional shares
were repurchased during the nine month period ended September 30, 1998.
Authorized preferred stock is 10,000,000 shares without par value of which
4,000,000, non-cumulative with a dividend rate of 8.35% and a liquidation
preference value of $25 per share, were issued and outstanding at September 30,
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 National Association (Florida); Banco Popular,
National Association (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.
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NOTE 8 - EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are calculated based on net income applicable to
common stockholders which amounted to $55,493 for the third quarter of 1998
(1997 - $51,526) and $163,574 for the nine months ended September 30, 1998 (1997
- - $147,981), after deducting the dividends on preferred stock. EPS are based on
135,555,652 average shares outstanding for the third quarter of 1998 (1997 -
135,732,567) and 135,496,620 average shares outstanding for the first nine
months of 1998 (1997 - 135,589,283), after restating for the stock split.
NOTE 9 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the nine month period ended September 30, 1998, the Corporation paid
interest and income taxes amounting to $575,885 and $80,810 respectively (1997 -
$469,020 and $76,077). In addition, the loans receivable transferred to other
real estate and other property for the nine-month period ended September 30,
1998, amounted to $6,208 and $20,449, respectively (1997 - $4,699 and $18,022).
The Corporation's stockholders' equity at September 30, 1998, includes $107,172
in unrealized holding gains on securities available-for-sale, net of deferred
taxes, as compared with $19,756 as of September 30, 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 subsidiaries, ATH Costa Rica, Banco Gerencial & Fiduciario Dominicano, S.A.
and Popular North America, Inc, including Banco Popular, FSB and its
wholly-owned subsidiary Equity One, Inc., Banco Popular, Illinois and its
wholly-owned subsidiary Popular Leasing, USA, Banco Popular National Association
(California), Banco Popular National Association (Florida), Banco Popular
National Association (Texas) and Popular Cash Express, Inc. as of August 31,
1998 and 1997, and the results of their operations for the quarters and the
nine-month periods then ended.
Popular, Inc. has not presented separate financial statements and any other
disclosures concerning Popular International Bank, Inc., other than the
following summarized financial information, because management has determined
that such information is not material to holders of debt securities issued by
PIB which is guaranteed by the Corporation.
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POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
August 31,
1998 1997
---------- ----------
Assets:
Cash $ 188,864 $ 62,360
Money market investments 160,432 67,411
Investment securities 257,265 426,065
Loans 2,807,944 2,048,109
Less: Unearned income 67,698 52,997
Allowance for loan losses 48,799 30,413
---------- ----------
2,691,447 1,964,699
Other assets 177,235 90,179
Intangible assets 84,441 73,934
---------- ----------
Total assets $3,559,684 $2,684,648
========== ==========
Liabilities and Stockholder's Equity:
Deposits $1,633,144 $1,129,594
Short-term borrowings 648,427 389,140
Notes payable 707,454 688,911
Other liabilities 63,890 40,191
Preferred beneficial interests in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 150,000
Minority interest in consolidated subsidiary 30,609 -0-
Stockholder's equity 326,160 286,812
---------- ----------
Total liabilities and stockholder's equity $3,559,684 $2,684,648
========== ==========
13
13
POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Quarter ended For the nine months ended
August 31, August 31,
-------------------- -------------------------
1998 1997 1998 1997
------- ------- -------- --------
Income:
Interest and fees $65,629 $59,435 $191,353 $157,329
Other income 11,827 10,918 34,759 18,409
------- ------- -------- --------
Total income 77,456 70,353 226,112 175,738
------- ------- -------- --------
Expenses:
Interest expense 34,706 32,080 100,588 83,241
Provision for loan losses 5,608 4,395 15,765 12,502
Operating expenses 34,916 25,087 96,848 58,022
------- ------- -------- --------
Total expenses 75,230 61,562 213,201 153,765
------- ------- -------- --------
Income before income tax 2,226 8,791 12,911 21,973
Income tax 1,553 3,587 6,016 9,264
------- ------- -------- --------
Net income $ 673 $ 5,204 $ 6,895 $ 12,709
======= ======= ======== ========
14
14
NOTE 11 - POPULAR NORTH AMERICA, INC. (A SECOND-TIER SUBSIDIARY OF POPULAR,
INC.) FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular North America, Inc. (PNA) and its
wholly-owned subsidiaries, Banco Popular, FSB and its wholly-owned subsidiary
Equity One, Inc.; Banco Popular, Illinois and its wholly-owned subsidiary
Popular Leasing USA; Banco Popular National Association (California); Banco
Popular National Association (Florida); Banco Popular National Association
(Texas);and Popular Cash Express, Inc. as of August 31, 1998 and 1997, and the
results of their operations for the quarters and the nine-month periods then
ended.
Popular, Inc. has not presented separate financial statements and any other
disclosures concerning Popular North America, Inc., other than the following
summarized financial information, because management has determined that such
information is not material to holders of debt securities issued by PNA which is
guaranteed by the Corporation.
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
August 31,
--------------------------
1998 1997
---------- ----------
Assets:
Cash $ 107,514 $ 62,329
Money market investments 80,300 64,661
Investment securities 249,511 426,015
Loans 2,530,872 2,048,109
Less: Unearned income 67,698 52,997
Allowance for loan losses 34,467 30,413
---------- ----------
2,428,707 1,964,699
Other assets 104,580 87,441
Intangibles assets 83,677 73,934
---------- ----------
Total assets $3,054,289 $2,679,079
========== ==========
Liabilities and Stockholder's Equity:
Deposits $1,313,553 $1,129,594
Short-term borrowings 577,889 389,140
Notes payable 676,366 688,911
Other liabilities 44,342 39,793
Preferred beneficial interests in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 150,000
Stockholder's equity 292,139 281,641
---------- ----------
Total liabilities and stockholder's equity $3,054,289 $2,679,079
========== ==========
15
15
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Quarter ended For the nine months ended
August 31, August 31,
-------------------- -------------------------
1998 1997 1998 1997
------- ------- ---------- ----------
Income:
Interest and fees $65,595 $60,273 $191,010 $155,796
Other income 11,721 11,133 34,820 18,462
------- ------- -------- --------
Total income 77,316 71,406 225,830 174,258
------- ------- -------- --------
Expenses:
Interest expense 34,634 32,395 100,219 83,239
Provision for loan losses 5,608 4,400 15,765 12,502
Operating expenses 34,658 25,479 96,189 57,582
------- ------- -------- --------
Total expenses 74,900 62,274 212,173 153,323
------- ------- -------- --------
Income before income tax 2,416 9,132 13,657 20,935
Income tax 1,553 3,672 6,016 9,264
------- ------- -------- --------
Net income $ 863 $ 5,460 $ 7,641 $ 11,671
======= ======= ======== ========
16
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
TABLE A
FINANCIAL HIGHLIGHTS
AT SEPTEMBER 30, AVERAGE FOR THE NINE MONTHS
BALANCE SHEET HIGHLIGHTS 1998 1997 Change 1998 1997 Change
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Money market investments $ 823,396 $ 475,412 $ 347,984 $ 747,358 $ 644,595 $ 102,763
Investment and trading securities 6,734,621 6,923,609 (188,988) 6,359,326 6,001,053 358,273
Loans 12,362,527 11,182,061 1,180,466 11,671,654 10,329,862 1,341,792
Total assets 21,273,593 19,896,785 1,376,808 19,924,608 17,972,201 1,952,407
Deposits 12,547,778 11,214,167 1,333,611 12,028,881 10,808,220 1,220,661
Borrowings 6,590,229 6,902,566 (312,337) 5,892,423 5,640,541 251,882
Stockholders' equity 1,696,891 1,449,780 247,111 1,533,104 1,341,984 191,120
THIRD QUARTER NINE MONTHS
OPERATING HIGHLIGHTS 1998 1997 Change 1998 1997 Change
(In thousands, except per share information)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 215,041 $ 203,005 $ 12,036 $ 642,137 $ 574,255 $ 67,882
Provision for loan losses 34,667 29,849 4,818 101,756 78,949 22,807
Fees and other income 74,221 66,309 7,912 215,058 176,791 38,267
Other expenses 197,015 185,852 11,163 585,603 517,854 67,749
Net income $ 57,580 $ 53,613 $ 3,967 $ 169,836 $ 154,243 $ 15,593
Net income applicable to common
stock $ 55,493 $ 51,526 $ 3,967 $ 163,574 $ 147,981 $ 15,593
Earnings per common share 0.41 0.38 0.03 1.21 1.11 0.10
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED STATISTICAL THIRD QUARTER NINE MONTHS
INFORMATION 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA - Market price
High $36.75 $27.94 $36.75 $27.94
Low 28.00 20.57 23.03 16.53
End 28.38 26.50 28.38 26.50
Book value at period ended 11.80 9.98 11.80 9.98
Dividends declared 0.14 0.11 0.36 0.29
Dividend payout ratio 26.86% 23.30% 27.32% 24.19%
Price/earnings ratio 17.74x 18.21x 17.74X 18.21x
- ------------------------------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS - Return on assets 1.12% 1.10% 1.14% 1.15%
Return on common equity 14.94 15.46 15.26 15.93
Net interest spread (taxable equivalent) 3.89 4.02 4.03 4.06
Net interest yield (taxable equivalent) 4.77 4.72 4.92 4.85
Effective tax rate 24.21 25.67 25.96 26.75
Overhead ratio 48.55 49.77 48.43 49.58
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION RATIOS - Equity to assets 7.73% 7.35% 7.69% 7.47%
Tangible equity to assets 6.72 6.23 6.64 6.60
Equity to loans 13.19 12.89 13.14 12.99
Internal capital generation 9.28 10.31 9.98 10.85
Tier I capital to risk - adjusted assets 12.05 12.06 12.05 12.06
Total capital to risk - adjusted assets 14.42 14.47 14.42 14.47
Leverage ratio 7.37 6.88 7.37 6.88
- ------------------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY RATIOS - Allowance for losses to loans 1.98% 1.83% 1.98% 1.83%
Allowance to non-performing assets 87.17 96.38 87.17 96.38
Allowance to non-performing loans 95.94 102.15 95.94 102.15
Non-performing assets to loans 2.28 1.90 2.28 1.90
Non-performing assets to total assets 1.32 1.07 1.32 1.07
Net charge-offs to average loans 0.93 1.14 0.94 0.93
Provision to net charge-offs 1.25x 0.95x 1.24x 1.09x
Net charge-offs earnings coverage 4.00 3.24 4.02 4.01
NOTE: All common stock data has been adjusted to reflect the stock split
effected in the form of a dividend on July 1,1998.
17
17
FINANCIAL REVIEW
This financial review contains the analysis of the consolidated financial
position and financial performance of Popular, Inc. and its subsidiaries (the
Corporation). The Corporation is a regional diversified bank holding company
engaged in the following businesses through its subsidiaries:
o Commercial Banking/Savings and Loans - Banco Popular de Puerto
Rico (BPPR), Banco Popular, Illinois, Banco Popular, FSB,
Banco Popular National Association (California), Banco Popular
National Association, (Florida), Banco Popular National
Association (Texas). On September 30, 1998, the Corporation
acquired 45% in newly issued stock of Banco Gerencial &
Fiduciario Dominicano, S.A. (BGF) operating 22 branches in the
Dominican Republic with total assets of $496 million and
deposits of $320 million.
o Lease Financing - Popular Leasing and Rental, Inc. and Popular
Leasing, USA.
o Mortgage Banking/Consumer Finance - Popular Mortgage, Inc.,
Equity One, Inc. and Popular Finance, Inc.
o Investment Banking - Popular Securities Incorporated (Popular
Securities)
o ATM Processing Services - ATH Costa Rica
o Check cashing - Popular Cash Express
NET INCOME
Net income for the third quarter of 1998 was $57.6 million, compared with $53.6
million reported for the same period in 1997 and $57.5 million reported during
the second quarter of 1998. Earnings per common share (EPS), after adjusting for
the stock split in the form of a dividend of one share for each share
outstanding effective July 1, 1998, were $0.41 based on 135,555,652 average
shares outstanding, compared with EPS of $0.38 for the third quarter of 1997
based on 135,732,567 average shares outstanding and EPS of $0.41 for the second
quarter of 1998 based on 135,497,786 average shares outstanding. Return on
assets (ROA) and return on common equity (ROE) for the quarter ended September
30, 1998, were 1.12% and 14.94%, respectively, compared with 1.10% and 15.46%
reported during the same period in 1997, and 1.16% and 15.50% for the second
quarter of 1998.
For the first nine months, the Corporation reported net earnings of $169.8
million compared with $154.2 million for the same period in 1997. ROA and ROE
for the nine months ended September 30, 1998 were 1.14% and 15.26%,
respectively. These ratios were 1.15% and 15.93% for the same period in 1997.
On April 23, 1998, the Board of Directors authorized a two-for-one common stock
split in the form of a dividend, bringing total outstanding shares to
135,497,786. The new shares were distributed on July 1, 1998 to shareholders of
record as of June 12, 1998. As mentioned above, all per share data included
herein has been adjusted to reflect the stock split.
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18
The Corporation's results of operations for the quarter ended September 30, 1998
reflected increases of $12.0 million in net interest income and $4.3 million in
other revenues when compared with the same quarter in 1997. These improvements
were partially offset by an increase of $11.3 million in operating expenses and
$4.8 million in the provision for loan losses.
NET INTEREST INCOME
Net interest income for the third quarter of 1998, amounted to $215.0 million,
an increase of 5.9% over the same period in 1997. On a taxable equivalent basis,
net interest income increased to $233.4 million from $218.7 million reported for
the third quarter of 1997.
The increase of $14.7 million in net interest income on a taxable equivalent
basis was driven by a $18.7 million increase attributable to a higher volume of
earning assets partially offset by a decrease of $4.0 million due to rates,
particularly in the mortgage and consumer loan portfolios, and by higher rates
on some interest bearing liabilities.The latter was partially offset by a higher
volume of non-interest bearing funds, such as demand deposits and capital, used
to finance earning assets.
For analytical purposes, the interest earned on tax-exempt assets is adjusted to
a taxable equivalent basis assuming the applicable statutory income tax rates.
Table B summarizes the changes in the composition of average earning assets and
interest bearing liabilities, and their respective interest income and expenses
and yields and costs, on a taxable equivalent basis, for the third quarter of
1998, as compared with the same quarter in 1997.
19
19
TABLE B
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS
QUARTER ENDED ON SEPTEMBER 30,
Variance
Average Volume Average Yields Interest Attributable to
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 Variance 1998 1997 Variance 1998 1997 Variance Rate Volume
- ---------------------------------------------------------------------------------------------------------------------------------
($ in millions) ($ in thousands)
$ 777 $ 609 $ 168 4.89% 5.38% (0.49%) Money market investments $ 9,567 $ 8,237 $ 1,330 $(1,280) $ 2,610
6,199 6,386 (187) 7.39 6.91 0.48 Investment securities 110,467 110,938 (471) 1,906 (2,377)
310 286 24 6.52 6.76 (0.24) Trading 5,098 4,876 222 (179) 401
- ------- ------- -------- ----- ----- ------ -------- -------- ------- ------- -------
7,286 7,281 5 6.59 6.67 (0.08) 125,132 124,051 1,081 447 634
- ------- ------- -------- ----- ----- ------ -------- -------- ------- ------- -------
Loans:
5,151 4,692 459 9.24 9.21 0.03 Commercial 119,972 108,961 11,011 320 10,691
635 560 75 13.17 13.09 0.08 Leasing 20,911 18,336 2,575 119 2,456
3,035 2,783 252 8.48 8.57 (0.09) Mortgage 64,322 59,618 4,704 (649) 5,353
3,107 2,999 108 12.73 13.02 (0.29) Consumer 98,880 98,179 701 (4,554) 5,255
- ------- ------- -------- ----- ----- ----- -------- -------- ------- ------- -------
11,928 11,034 894 10.16 10.29 (0.13) 304,085 285,094 18,991 (4,764) 23,755
- ------- ------- -------- ----- ----- ----- -------- -------- ------- ------- -------
$19,214 $18,315 $ 899 8.81% 8.85% (0.04%) TOTAL EARNING ASSETS $429,217 $409,145 $20,072 $(4,317) $24,389
======= ======= ======== ===== ===== ===== ======== ======== ======= ======= =======
Interest bearing deposits:
$ 1,431 $ 1,322 $ 109 3.38% 3.43% (0.05%) NOW and money market $ 12,188 $ 11,424 $ 764 $ (155) $ 919
3,706 3,558 148 3.09 3.07 0.02 Savings 28,890 27,577 1,313 (53) 1,366
4,444 4,107 337 5.37 5.47 (0.10) Time deposits 60,161 56,593 3,568 (1,708) 5,276
- ------- ------- -------- ----- ----- ----- -------- -------- ------- ------- -------
9,581 8,987 594 4.19 4.22 (0.03) 101,239 95,594 5,645 (1,916) 7,561
- ------- ------- -------- ----- ----- ----- -------- -------- ------- ------- -------
4,729 4,555 174 5.59 5.76 (0.17) Short-term borrowings 66,611 66,117 494 (1,865) 2,359
1,636 1,915 (279) 6.78 5.96 0.82 Medium and long-term debt 27,931 28,698 (767) 3,481 (4,248)
- ------- ------- -------- ----- ----- ----- -------- -------- ------- ------- -------
TOTAL INTEREST BEARING
15,946 15,457 489 4.87 4.89 (0.02) LIABILITIES 195,781 190,409 5,372 (300) 5,672
2,501 2,332 169 Demand deposits
767 526 241 Other sources of funds
- ------- ------- -------- ----- ----- ----- -------- -------- ------- ------- -------
$19,214 $18,315 $ 899 4.04% 4.13% (0.09%) $233,436 $218,736 $14,700 $(4,017) $18,717
======= ======= ======== ===== ===== ===== ======== ======== ======= ======= =======
Taxable equivalent
adjustment 18,395 15,731 2,664
-------- -------- -------
Net interest income
per books $215,041 $203,005 $12,036
======== ======== =======
4.77% 4.72% 0.05% NET INTEREST MARGIN
3.94% 3.96% (0.02%) NET INTEREST SPREAD
The increase of $899 million in average earning assets was primarily related to
the increase in loans which accounted for $894 million of the total increase.
The commercial and mortgage portfolios reflected the major rises, increasing
$459 million and $252 million, respectively, due to the sustained growth in the
Corporation's loan portfolio, principally at BPPR, Equity One and Banco Popular,
FSB.
Investment securities decreased by $187 million to $6.2 billion when compared to
the third quarter of 1997. The decrease relates primarily to a lower interest
rate scenario that provided less attractive investment alternatives and to the
aforementioned loan growth.
The average yield on earning assets, on a taxable equivalent basis, was 8.81%,
four basis points lower than the 8.85% reported in the third quarter of 1997.
This decrease relates primarily to a lower yield on loans which decreased from
10.29% reported in the third quarter of 1997, to 10.16% in the same period of
1998.
20
20
The increase in average interest bearing liabilities for the quarter ended on
September 30, 1998, as compared with the same quarter of 1997, was mainly
reflected in average interest bearing deposits, primarily at BPPR.
The average cost of interest bearing liabilities increased by nine basis points
when compared with the third quarter of 1997. The increase is mainly driven by a
higher rate on medium and longer term debt related to debt issued during a
higher interest rate environment and floating rate instruments resetting
semiannually or quarterly.
In spite of the decrease in the yield on earning assets and the increase in the
average cost of interest bearing liabilities, the higher proportion of loans,
which carry a relatively higher yield, and a significantly higher amount of
non-interest bearing sources, allowed the Corporation to improve its net
interest margin, on a taxable equivalent basis, from 4.72% reported for the
third quarter of 1997 to 4.77% reported for the same quarter of 1998. During the
second quarter of 1998, the net interest yield, on a taxable equivalent basis,
was 4.93%.
For the nine-month period ended September 30, 1998, net interest income, on a
taxable equivalent basis, increased $75.5 million, compared with the same period
of 1997. The increase in the average volume of earning assets, partially offset
by an increase in the average volume of interest bearing liabilities caused a
positive variance of $78.7 million, which was offset by a negative variance of
$3.2 million due to changes in rates and in the mix of the portfolios.
21
21
TABLE C
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS
YEAR-TO-DATE AS OF SEPTEMBER 30,
Variance
Average Volume Average Yields Interest Attributable to
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 Variance 1998 1997 Variance 1998 1997 Variance Rate Volume
- -----------------------------------------------------------------------------------------------------------------------------------
($ in millions) ($ in thousands)
Money market
$ 747 $ 644 $ 103 4.94% 5.32% (0.38)% investments $ 27,585 $ 25,619 $ 1,966 $ (2,428) $ 4,394
6,081 5,703 378 7.07 6.87 0.19 Investment securities 321,922 293,613 28,309 8,131 20,178
278 299 (21) 6.69 6.59 0.10 Trading 13,917 14,725 (808) 234 (1,042)
- ------- ------- ------ ------ ----- ----- ---------- ---------- -------- -------- --------
7,106 6,646 460 6.83 6.71 0.12 363,424 333,957 29,467 5,937 23,530
- ------- ------- ------ ------ ----- ----- ---------- ---------- -------- -------- --------
Loans:
5,043 4,286 757 9.27 9.21 0.06 Commercial 349,622 295,248 54,374 1,913 52,461
628 542 86 13.12 13.12 0.00 Leasing 60,321 53,360 6,961 (1,296) 8,257
2,937 2,694 243 8.62 8.47 0.15 Mortgage 189,756 171,069 18,687 3,077 15,610
3,064 2,808 256 12.96 13.07 (0.11) Consumer 297,547 276,060 21,487 (7,821) 29,308
- ------- ------ ------ ------ ----- ----- ---------- ---------- -------- -------- --------
11,672 10,330 1,342 10.26 10.29 (0.03) 897,246 795,737 101,509 (4,127) 105,636
- ------- ------- ------ ------ ----- ----- ---------- ---------- -------- -------- --------
$18,778 $16,976 $1,802 8.96% 8.89% 0.07% TOTAL EARNING ASSETS $1,260,670 $1,129,694 $130,976 $ 1,810 $129,166
======= ======= ====== ====== ===== ===== ========== ========== ======== ======== =========
Interest bearing deposits:
$ 1,425 $1,245 $ 180 3.37% 3.37% 0.00 % NOW and money market $ 35,907 $ 31,348 $ 4,559 $ (15) $ 4,574
3,843 3,348 495 3.09 3.07 0.02 Savings 85,378 76,811 8,567 122 8,445
4,231 3,953 278 5.47 5.44 0.03 Time deposits 179,061 160,722 18,339 (2,489) 20,828
- ------- ------- ------ ------ ----- ---- ---------- ---------- -------- -------- --------
9,499 8,546 953 4.23 4.21 0.02 300,346 268,881 31,465 (2,382) 33,847
- ------- ------- ------ ------ ----- ---- ---------- ---------- -------- -------- --------
4,378 4,023 355 5.53 5.65 (0.12) Short-term borrowings 181,189 169,888 11,301 (2,579) 13,880
1,665 1,620 45 6.93 6.08 0.85 Medium and long-term
- ------- ------- ------ ------ ----- ----- debt 86,382 73,660 12,722 9,979 2,743
---------- ---------- -------- -------- --------
TOTAL INTEREST BEARING
15,542 14,189 1,353 4.89 4.83 0.06 LIABILITIES 567,917 512,429 55,488 5,018 50,470
2,529 2,262 267 Demand deposits
707 525 182 Other sources of funds
- ------- ------- ------ ------ ----- ----- --------- ---------- -------- -------- --------
$18,778 $16,976 $1,802 4.04% 4.04% 0.00 % 692,753 $ 617,265 $ 75,488 $ (3,208) $ 78,696
======= ======= ====== ====== ===== ===== ======== ========
Taxable equivalent
adjustment 50,616 43,010 7,606
---------- ---------- --------
Net interest income
per books $ 642,137 $ 574,255 $ 67,882
========== ========== ========
4.92% 4.85% 0.07 % NET INTEREST MARGIN
4.07% 4.06% 0.01 % NET INTEREST SPREAD
As shown in Table C, average earning assets for the nine months period ended
September 30, 1998, increased by $1.8 billion when compared with the same
period of 1997. Average loans increased $1.3 billion or 74% of the total
increase. All loan portfolios reflected increases, however, the commercial
portfolio was the principal contributor to the increase in average loans due to
the sustained growth of the Corporation's loans portfolio in Puerto Rico and in
the U.S. The increase in investment securities was mainly attained at BPPR and
was comprised principally of US Agency securities and collateralized mortgage
obligations.
The increase of seven basis points in the average yield on earning assets, on a
taxable equivalent basis, was mainly caused by a higher rate in investment
securities and a higher proportion of loans, partially offset by a lower yield
in the loan portfolio of three basis points, from 10.29% in the first nine
months of 1997 to 10.26% in the same period of 1998.
22
22
Interest bearing liabilities increased $1.4 billion of which $953 million were
reflected in average interest bearing deposits, when compared to the nine-month
period ended September 30, 1997. All deposit categories showed increases,
reflecting the growth of the Corporation in both Puerto Rico and in the United
States. Average short-term borrowings increased by $355 million, averaging $4.4
billion at September 30, 1998 compared with $4.0 billion at the same date in
1997, mostly due to higher arbitrage activities as compared with the first nine
months of 1997.
The rise in the yield on earning assets, on a taxable equivalent basis, and the
change in the mix of the portfolios, partially offset by the increase in the
cost of interest bearing liabilities resulted in the increase in net interest
margin, on a taxable equivalent basis, of seven basis points for the nine month
period ended September 30, 1998, from 4.85% reported for the same period of
1997.
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, simulation 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 corporation 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 may occur in the future.
Based on the results of the sensitivity analysis as of September 30, 1998, the
increase in net interest income on a hypothetical rising rate scenario for the
next twelve months was $15.8 million and the decrease for the same period
utilizing a hypothetical declining rate scenario was $8.3 million. Both
hypothetical rate scenarios consider a gradual change of 150 basis points during
the twelve-month period. This level of interest rate risk is well within the
Corporation's policy guidelines.
In the course of its business, the Corporation occasionally enters into foreign
exchange transactions. These transactions are executed as an intermediary
primarily for its commercial and retail clients, and any foreign exchange
positions assumed by the Corporation as a result are offset in the currency
markets. Management therefore believes that the market risk assumed by the
Corporation in its
23
23
foreign currency transactions is immaterial.
The Corporation is the owner of 45% of the common shares of BGF, by virtue of
which it is BGF's largest shareholder. BGF is the Dominican Republic's fourth
largest banking institution, and its primary business is offering retail and
commercial banking services. Most of BGF's business is conducted in Dominican
pesos ("DR$"). Local (DR) regulations limit the ability of BGF to assume
unhedged foreign currency positions. The value of Corporation's investment in
BGF may be affected prospectively by fluctuations in future exchange rates
between the DR$ and US$. However, management does not expect future fluctuations
between these two currencies to affect materially the value of the Corporation
investment in BGF.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses totaled $34.7 million for the third quarter of
1998, an increase of 16.1% when compared with $29.8 million for the same quarter
of 1997. For the second quarter of 1998 the provision was $33.5 million. For the
nine-month period ended September 30, 1998, the provision for loan losses
increased 28.9%, from $78.9 million for the same period of 1997. The growth in
the loan portfolio coupled with the increase in non-performing assets were the
major reasons for increase in the provision. Net charge-offs for the quarter
ended September 30, 1998, reached $27.7 million or 0.93% of average loans,
compared with $31.5 million or 1.14% reported for the same quarter in 1997, and
$27.2 million or 0.94% for the quarter ended on June 30, 1998. Table D presents
other related information for the quarter ended September 30, 1998 and 1997 and
for the first nine months of 1998 and 1997.
Consumer loans net charge-offs totaled $17.6 million or 2.26% of average
consumer loans in the third quarter of 1998, compared with $20.0 million or
2.65% in the second quarter of 1998 and $14.3 million or 1.90% in the third
quarter of 1997. The increase in consumer loans net charge-offs as compared with
the third quarter of 1997, is mostly related to higher levels of bankruptcies in
the U.S. mainland and in Puerto Rico. However, the Corporation continuous
collection efforts helped to offset the increase in consumer loans net
charge-offs as reflected in the reduction of $2.4 million when compared with the
second quarter of 1998. On the other hand, commercial loans net charge-offs
decreased $6.2 million for the quarter ended September 30, 1998, when compared
with the same quarter in 1997. This decrease was principally due to a higher
amount of recoveries of $1.7 million or 45%, together with the Corporation
conservative charge-off policy applied to loans acquired during the end of the
second quarter of last year.
For the nine-month period ended September 30, 1998, net charge-offs amounted to
$82.4 million or 0.94% of average loans, compared with $72.3 million or 0.93% of
average loans recorded a year ago. The increase in net credit losses was mostly
related to the consumer loan portfolio, that reflected a rise of $21.6 million,
compared to the nine-month period ended September 30, 1997. Conversely,
commercial loans net charge-offs decreased $10.9 million for the nine-month
period ended September 30, 1998, when compared with the same period in 1997.
At September 30, 1998, the allowance for loan losses was $245.4 million,
representing 1.98% of loans, as compared with $205 million or 1.83% one year
earlier, and $224 million or 1.91% at June 30, 1998. Included in the allowance
for loan losses as of September 30, 1998 are $14.3 million of BGF. Management
considers that the allowance for loan losses is adequate to absorb potential
write-offs of 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 measurement.
Although the effect of hurricane Georges on the Corporation's Puerto Rico loan
portfolio is difficult to predict at this time, management considers that it
will not have a material impact on the Corporation's financial results. Also,
management believes that the provision recorded this quarter is adequate to
cover for future losses and keeps closely monitoring the performance of the
loan portfolios on the island.
24
24
Table D presents the movement in the allowance for loan losses and shows
selected loan loss statistics for the three and nine-month periods ended
September 30, 1998.
TABLE D
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
Third Quarter First Nine Months
(Dollars in thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 224,045 $206,719 $ 211,651 $185,574
Allowances purchased 14,332 14,332 12,832
Provision for loan losses 34,667 29,849 101,756 78,949
----------------------------------------------------------------------
273,044 236,568 327,739 277,355
----------------------------------------------------------------------
Losses charged to the allowance:
Commercial 13,183 17,726 32,732 41,368
Construction 300 190 600
Lease financing 5,052 5,498 16,191 17,615
Mortgage 709 848 1,990 1,854
Consumer 22,115 18,141 69,634 45,759
----------------------------------------------------------------------
41,059 42,513 120,737 107,196
----------------------------------------------------------------------
Recoveries:
Commercial 5,469 3,767 13,370 11,139
Construction 208 31 249 112
Lease financing 3,122 3,190 11,113 12,249
Mortgage 50 171 224 277
Consumer 4,548 3,863 13,424 11,141
----------------------------------------------------------------------
13,397 11,022 38,380 34,918
----------------------------------------------------------------------
Net loans charged-off (recovered):
Commercial 7,714 13,959 19,362 30,229
Construction (208) 269 (59) 488
Lease financing 1,930 2,308 5,078 5,366
Mortgage 659 677 1,766 1,577
Consumer 17,567 14,278 56,210 34,618
----------------------------------------------------------------------
27,662 31,491 82,357 72,278
----------------------------------------------------------------------
Balance at end of period $ 245,382 $205,077 $ 245,382 $205,077
======================================================================
Ratios:
Allowance for losses to loans 1.98% 1.83% 1.98% 1.83%
Allowance to non-performing assets 87.17 96.38 87.17 96.38
Allowance to non-performing loans 95.94 102.15 95.94 102.15
Non-performing assets to loans 2.28 1.90 2.28 1.90
Non-performing assets to total assets 1.32 1.07 1.32 1.07
Net charge-offs to average loans 0.93 1.14 0.94 0.93
Provision to net charge-offs 1.25x 0.95x 1.24x 1.09x
Net charge-offs earnings coverage 4.00 3.24 4.02 4.01
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 value or market price equals or exceeds its carrying value do not
require an allowance.
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25
The following table shows the Corporation's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 (as
amended by SFAS No. 118) at September 30, 1998 and September 30, 1997.
SEPTEMBER 30, 1998 September 30, 1997
--------------------------- -------------------------
RECORDED VALUATION Recorded Valuation
INVESTMENT ALLOWANCE Investment Allowance
---------- --------- --------- ---------
(In millions)
Impaired loans:
Valuation allowance required $ 114 $ 30 $ 85 $ 19
No valuation allowance required 39 36
---------- --------- --------- ---------
Total impaired loans $ 153 $ 30 $ 121 $ 19
========== ========= ========= =========
Average impaired loans during the third quarter of 1998 and 1997 were $138
million and $124 million, respectively. The Corporation recognized interest
income on impaired loans of $1.7 million, and $2.1 million, respectively, for
the quarters ended September 30, 1998 and 1997.
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 NPA on a more conservative basis than most U.S. banks. The
standard industry practice is to place non-performing commercial loans on
non-accrual status when payments of principal or interest are delinquent 90
days. However, the Corporation's policy is to place commercial loans on
non-accrual status when payments of principal or interest are delinquent 60
days. Lease financing, conventional mortgage and closed-end consumer loans are
placed on non-accrual status when payments are delinquent 90 days. Closed-end
consumer loans are charged-off against the allowance when delinquent 120 days.
Open-end (revolving credit) consumer loans are charged-off when payments are
delinquent 180 days. Certain loans which would be treated as non-accrual loans
pursuant to the foregoing policy, are treated as accruing loans if they are
considered well-secured and in the process of collection. Under the standard
industry practice, closed-end consumer loans are charged-off when delinquent 120
days, but these consumer loans are not customarily placed on non-accrual status
prior to being charged-off.
Table E shows information on non-performing assets as of September 30, 1998,
December 31, 1997 and September 30, 1997. NPA were $224.5 million or 1.91% of
loans at June 30, 1998.
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TABLE E
NON-PERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial, construction, industrial
and agricultural $149,504 $108,590 $119,069
Lease financing 3,185 1,569 1,538
Mortgage 60,248 53,449 55,635
Consumer 42,828 30,840 24,519
Other real estate 25,743 18,012 12,014
----------------------------------------------------------------------
Total $281,508 $212,460 $212,775
======================================================================
Accruing loans past-due
90 days or more $ 24,427 $ 20,843 $ 16,372
======================================================================
Non-performing assets to loans 2.28% 1.87% 1.90%
Non-performing assets to assets 1.32 1.10 1.07
Non-performing loans totaled $256 million as of September 30, 1998, compared
with $201 million at the same date last year and $204 million as of June 30,
1998 and include $31MM in loans of BGF. All loans categories reflected increases
as compared with September 30, 1997. The non-performing commercial, including
construction, and consumer loans increased $30.4 million and $18.3 million,
respectively, while the mortgage and lease financing non-performing loans
increased $4.6 million and $1.6 million, respectively. The increase in
non-performing commercial loans was mainly attributed to the inclusion of $25.2
million in non-performing commercial loans of BGF. Non-performing consumer loans
also includes $5.7 million in loans from BGF. Aside from the loans of BGF, most
of the rise in consumer was related to an increased level of personal
bankruptcies in P.R. and the U.S. mainland. Bankruptcy filings in U.S. federal
courts, including Puerto Rico, rose 8.5 percent in the 12-month period ending
June 30, 1998. In addition, the other real estate category increased $13.7
million principally at Equity One which increased $6.9 million, followed by BPPR
with an increase of $4.3 million.
Assuming standard industry practice of placing commercial loans on non-accrual
status when payments of principal or interest are past due 90 days or more and
excluding the closed-end consumer loans from non-accruing loans, non-performing
assets as of September 30, 1998, amounted to $210 million or 1.70% of loans, and
the allowance for loan losses would be 116.7% of non-performing assets. At
September 30, 1997 and June 30, 1998, adjusted non-performing assets were $165
million and $166 million, respectively, or 1.47% and 1.41% of loans.
OTHER OPERATING INCOME
Other operating income, excluding securities and trading gains, amounted to
$69.1 million for the three-month period ended September 30, 1998, compared with
$64.8 million for the same quarter in 1997, an increase of $4.3 million or 6.7%.
This rise in other income was principally driven by an increase of $3.3 million
in other service fees and $2.0 million in service charges on deposit accounts.
For the first nine-months, total other operating income grew 17.0% to $204.1
million in 1998 from $174.4 million in 1997.
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27
Other service fees rose to $28.6 million for the third quarter of 1998, from
$25.3 million for the same quarter in 1997. The increase in other service fees
was principally attained in credit card fees and discounts which rose $1.1
million, as credit card net sales rose 22.5% and the number of credit card
active accounts grew 24.5%. Check cashing fees which are included in other fees,
increased $0.6 million as a result of the fees collected by the new subsidiary,
Popular Cash Express, which started operations at the end of the second quarter
of 1998. Also, trust fees rose $0.5 million mostly in pension plan fees due to
higher number of Keogh and 401K accounts. In addition, debit card fees rose $0.4
million as a result of the sustained growth in the volume of transactions at
point-of-sale (POS) terminals. The volume of transactions at POS terminals
increased from a monthly average of 2.9 million in September 1997 to 4.9 million
a year later.
TABLE F
OTHER OPERATING INCOME
Third Quarter First Nine Months
- -------------------------------------------------------------------------------------------------------
1998 1997 Change 1998 1997 Change
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service charges on deposit
accounts $26,344 $24,378 $ 1,966 $ 77,176 $ 68,411 $ 8,765
Other service fees:
Credit card fees and discounts 8,565 7,449 1,116 25,374 21,232 4,142
Credit life insurance fees 2,162 2,418 (256) 6,412 7,440 (1,028)
Debit card fees 4,441 4,036 405 13,139 11,269 1,870
Sale and administration of
investment products 2,891 2,629 262 8,877 6,699 2,178
Mortgage servicing fees, net of
amortization 2,157 2,443 (286) 6,836 7,147 (311)
Trust fees 2,471 1,950 521 6,708 5,137 1,571
Other fees 5,870 4,327 1,543 16,202 13,282 2,920
------------------------------------------------------------------
Subtotal 28,557 25,252 3,305 83,548 72,206 11,342
Other income 14,261 15,201 (940) 43,379 33,820 9,559
------------------------------------------------------------------
Total $69,162 $64,831 $ 4,331 $204,103 $174,437 $ 29,666
==================================================================
Service charges on deposit accounts totaled $26.3 million for the quarter ended
September 30, 1998, compared with $24.4 million for the same quarter of 1997.
This increase resulted from a higher volume of deposits and increases in fees
collected on commercial deposits with account analysis. For the nine-month
period ended September 30, 1998, service charges on deposit accounts amounted to
$77.2 million or $8.8 million higher than $68.4 million reported for the same
period in 1997.
Other income had a decrease of $0.9 million as compared with the third quarter
of 1997, as a result of a loan securitization of $103 million in 1997 at Equity
One, which resulted in a pretax gain of $3.4 million.
For the third quarter of 1998, the Corporation recognized a net gain of $4.6
million in the sale of securities and a net trading account profit of $0.5
million compared with profits of $0.5 million and $1.0 million, respectively,
for the same quarter last year. The gain on sale of securities for the third
quarter of 1998 mostly resulted from the sale of equity securities by the
Corporation's holding company, which produced a gain of $4.4 million.
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28
The reduction in non-interest revenues due to the effects of Hurricane Georges
in Puerto Rico was not significant. Fees such as merchant discounts, debit card
fees and other fees showed decreases in September due to business interruption
and the lack of electricity in several towns of the Island.
OPERATING EXPENSES
Operating expenses for the third quarter of 1998 were $178.6 million compared
with $167.3 million for the same quarter in 1997, an increase of $11.3 million
principally reflecting higher personnel costs, professional fees, net occupancy
and equipment expenses. For the first nine months of 1998, operating expenses
rose to $526.0 million from $461.5 million for the same period in 1997.
The largest category of operating expenses, personnel costs, totaled $84.3
million for the third quarter of 1998, increasing $4.8 million from $79.5
million for the same period of 1997. Salaries accounted for a significant
portion of this increase rising $5.7 million or 10.3%. This rise resulted from
increased employment levels due to the Corporation's continued growth and
expansion and annual merit increases. Full time equivalent employees (FTE) were
9,305 at September 30, 1998, up 609 from 8,696 FTEs as of the same date a year
earlier.
Other operating expenses, excluding personnel costs, increased $6.5 million,
reaching $94.3 million for the third quarter of 1998, compared with $87.8
million for the same period in 1997. The increase in other operating expenses
was mostly reflected in professional fees which grew $2.3 million, reflecting
expenditures associated with system developments and technical support.
Equipment and net occupancy expenses increased a combined $3.5 million mostly as
a result of the costs related to the expansion of the electronic payment system,
and the network of automated teller machines and POS terminals, and also to the
business expansion in the US mainland. During the three-month period ended
September 30, 1998, a total of 2,919 new POS terminals were installed bringing
the current total to 18,215 terminals. The Corporation also increased its
automated teller machines (ATM) network by 561 machines when compared with 442
at the same date last year.
Income tax expense for the quarter ended September 30, 1998 amounted to $18.4
million, a decrease of $0.1 million as compared with $18.5 million recorded for
the same quarter of 1997. The decrease in income tax resulted from a higher
volume of tax exempt income. The effective tax rate for the third quarter of
1998 decreased to 24.2% from 25.7% for the same period in 1997. For the
nine-month period ended September 30, 1998 and 1997, income tax expense amounted
to $59.6 million and $56.3 million, respectively.
YEAR 2000
STATE OF READINESS
The Corporation, following the guidelines established by regulators and under
the direction of the Year 2000 Office, has been actively engaged in modifying,
converting, and testing its computer systems and date-sensitive operating
equipment. It is also working with customers and business partners to ascertain
their progress toward Year 2000 compliance. Internal auditors of the Corporation
are verifying and validating the work done in this important project, which has
been classified as the top priority of the Corporation during 1998 and 1999.
A four phase action plan is being used to drive the activities related with the
information technology components (in-house processed core applications; data
processing center computers, software and equipment; networks and communication
backbones; decentralized managed applications; and personal computers with
their corresponding software) and date-sensitive operating equipment as
explained below:
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29
Assessment - identification of the components that may be impacted
by the arrival of the new millennium. Determination of resources
needed, time frame and sequencing of the Year 2000 efforts,
Remediation - modification, conversion, replacement or elimination
of components not Year 2000 ready,
Validation - testing and verification of the components by
simulating data conditions for the Year 2000,
Implementation - installation of renovated components into
production.
INFORMATION TECHNOLOGY
As of September 30, 1998 the information technology action plan was 64%
completed, slightly ahead of the 61% projection. The following is a summarized
report of actual results by phase and what is expected to be achieved during the
next five quarters.
INFORMATION TECHNOLOGY SYSTEMS
ACTUAL
9/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
ASSESSMENT 96% 96% 100% -- -- -- --
REMEDIATION 78% 79% 95% 100% -- -- --
VALIDATION 54% 52% 82% 94% 100% -- --
IMPLEMENTATION 41% 24% 64% 73% 87% 99% 100%
The above expected completion dates are based on assumptions of future events
considering the continued availability of resources and the completion of work
by third parties. Even though the Corporation feels that its current state of
readiness is adequate there is no guarantee that these estimates will be
achieved.
The Corporation has already tested the operating system and system products of
its mainframe computer and is in the process of testing applications in the Year
2000 laboratory. The principal core application, which handles the demand
deposits and savings accounts of customers, has also been remediated and tested,
as well as other mission critical applications.
NON-INFORMATION TECHNOLOGY
The action plan of date-sensitive operating equipment was 98% completed as of
September 30, 1998. The most recent projection is to have all items Year 2000
ready and implemented by December 31, 1998.
Significant third parties with which the Corporation interfaces with regard to
the Year 2000 problem include customers and business partners (counterparts,
technology vendors, service providers, payment and clearing systems, utilities,
etc.). Unreadiness by these third parties would expose the Corporation to a
potential loss, through impairment of business processes and activities.
The Corporation is actively assessing and already monitoring the progress of
customers in their efforts
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30
to become Year 2000 compliant and the possible effects of their inability to
become Year 2000 compliant. A formal risk assessment of customers has been
incorporated into the underwriting, scheduled review and credit rating process.
The Corporation is also assessing, monitoring and testing the progress of its
business partners and counterparts to determine whether they will be able to
successfully interact with the Corporation in the Year 2000.
For our operations in the USA mainland, which are highly dependable on a
processing service bureau, several steps have been undertaken to reduce the
exposure. Officers of the Corporation have an active participation in the
business partner's client advisory board, which has contracted an external
entity to conduct independent quarterly reviews of the Year 2000 action plan.
Their progress is being monitored through the review of monthly reports and the
detailed test plans that they will use to accomplish the validation phase.
Contingency plans are being defined for each business unit in the event that
vendors are not able to become Year 2000 compliant by June 30, 1999.
CONTINGENCY PLANS AND BUSINESS CONTINUITY
Even after thorough testing plans are executed, there is a possibility that
problems may arise in relation to all the changes made to systems and equipment
to ascertain they are ready for the Year 2000. Based on the current status of
the Year 2000 action plans, the Corporation's most reasonably likely worst case
scenario is that an unforeseen hardware or system failure might impair the
execution of one or more critical business processes during a limited period of
time. Business resumption plans are based on the assumption that the Corporation
will correct any hardware or software systems failure within five working days.
The Corporation's strategy is to focus on the assessment, remediation,
validation, and implementation phases of its Year 2000 action plans so as to
limit errors, and therefore the need to implement business resumption plans.
Nevertheless, the Corporation has established company wide business recovery
plans to support critical business processes in case of an unforeseen hardware
or software failure in the Year 2000. These business resumption plans include,
among other things, a business impact analysis, prioritization of business
processes, specific recovery strategies and alternative manual procedures for
critical business processes. Business resumption plans are scheduled for testing
during the fourth quarter of 1998 and the second quarter of 1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Corporation expects that the principal costs of the Year 2000 project are
those associated with the remediation and validation phases. The major portion,
however, will be met from the existing resources through the deferral of
technology projects, with the remainder representing incremental costs.
The information technology group was reinforced with 55 additional programmers
and other skilled technical personnel to ascertain the availability of the
necessary resources. Other relevant incremental costs are the costs to contract
external consultants to manage the remediation and validation of certain
specific items and scheduled upgrades that were accelerated due to the Year 2000
issue. The Corporation is funding the project through operating cash flows and
does not anticipate that the related incremental costs nor the impact of the
technology development initiatives being deferred will be material to the
financial condition and results of operations of any single year.
Management estimates the total incremental costs of achieving Year 2000
compliance to be approximately $11.3 million over the two year period ending in
December 31, 1999. Approximately $3.7 million has been expended to date, of
which $2.1 million are related with consultants contracted, $1.2 million with
additional technical employees hired, $0.2 million with new hardware and
software acquired and $0.2 million with costs to contact customers, retain
technical employees and other costs
31
31
of the Year 2000 project. The remaining estimated incremental costs for 1998
are $2.6 million.
Year 2000 costs are based on management's best estimates, which were derived
utilizing numerous assumptions of future events and other factors. However,
there can be no guarantee that these estimates will be achieved and actual costs
could differ materially from those projected.
BALANCE SHEET COMMENTS
At September 30, 1998, the Corporation's total assets reached $21.3 billion from
$19.3 billion reported at December 31, 1997 an increase of $2.0 billion or
10.22%. This rise included $496 million related to the acquisition of BGF, and
the Corporation continuous business expansion. Total assets at September 30,
1997, were $19.9 billion. Earning assets increased $1.8 billion, reaching $19.9
billion as of September 30, 1998, from $18.1 billion as of December 31, 1997 and
$18.6 billion at September 30, 1997.
TABLE G
LOANS ENDING BALANCES
SEPTEMBER 30, December 31, September 30,
1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial, industrial and agricultural $ 5,273,229 $ 4,637,409 $ 4,492,160
Construction 235,299 250,111 255,594
Lease financing 638,824 581,927 566,640
Mortgage * 3,084,325 2,833,896 2,823,022
Consumer 3,130,850 3,073,264 3,044,645
-----------------------------------------------------------------------
Total $12,362,527 $11,376,607 $11,182,061
=======================================================================
* Includes loans held-for-sale
The investment portfolio totaled $6.5 billion as of September 30, 1998 an
increase of $833 million from $5.6 billion as of December 31, 1997. Investment
securities as of September 30, 1997 amounted to $6.7 billion. The increase in
investment securities as compared with December 31, 1997, resulted mostly from
arbitrage opportunities undertaken by BPPR.
As shown on Table G, the loan portfolio increased $986 million as compared with
December 31, 1997, of which $621 million were in commercial and construction
loans and $250 million in mortgage loans. The growth in the commercial loan
portfolio resulted principally from the continued marketing efforts directed to
the retail and middle market and the expansion in the United States and the
Caribbean. BGF accounted for $209 million of the increase in the commercial
loans.
BPPR, Equity One and Banco Popular, FSB accounted for 82% or $206 million of the
total increase in the mortgage loans portfolio as compared with December 31,
1997. The acquisition of BGF also contributed $66 million in consumer loans.
Total deposits at September 30, 1998, were $12.5 billion or $798 million over
the $11.7 billion at December 31, 1997. The acquisition of BGF contributed $320
million in total deposits. Savings accounts and time deposits continued their
growth, increasing $233 million and $452 million, respectively, as compared
with December 31,1997. At September 30, 1997, total deposits amounted
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32
to $11.2 billion. Total deposits in Puerto Rico, the Corporation's principal
place of business, increased to $8.8 billion at September 30, 1998, from $8.6
billion at December 31, 1997 and $8.1 billion at September 30, 1997.
Table H presents the distribution of assets, loans and deposits by geographical
area.
TABLE H
DISTRIBUTION BY GEOGRAPHICAL AREA
(Dollars in millions)
SEPTEMBER 30, 1998 December 31, 1997 September 30, 1997
$ % $ % $ %
--------------------------------------------------------------------
ASSETS
Puerto Rico $15,259 71.73% $14,190 73.52% $14,830 74.54%
United States 5,006 23.53 4,616 23.92 4,573 22.98
U.S. and British Virgin
Islands and Latin America 1,009 4.74 495 2.56 494 2.48
------- ------ ------- ------ ------- ------
$21,274 100.00% $19,301 100.00% $19,897 100.00%
------- ------ ------- ------ ------- ------
LOANS
Puerto Rico $ 7,605 61.51% $ 7,282 64.01% $ 7,230 64.66%
United States 4,120 33.33 3,727 32.76 3,577 31.99
U.S. and British Virgin
Islands and Latin America 638 5.16 368 3.23 375 3.35
------- ------ ------- ------ ------- ------
$12,363 100.00% $11,377 100.00% $11,182 100.00%
------- ------ ------- ------ ------- ------
DEPOSITS
Puerto Rico $ 8,797 70.11% $ 8,581 73.03% $ 8,126 72.46%
United States 2,939 23.42 2,715 23.11 2,623 23.39
U.S. and British Virgin
Islands and Latin America 812 6.47 454 3.86 465 4.15
------- ------ ------- ------ ------- ------
$12,548 100.00% $11,750 100.00% $11,214 100.00%
------- ------ ------- ------ ------- ------
Borrowed funds, including subordinated notes and capital securities, amounted to
$6.6 billion at September 30, 1998, compared with $5.7 billion and $6.9 billion
at December 31, 1997 and September 30, 1997, respectively.
As part of the investment in BGF the Corporation recognized a minority interest
of $30.6 million, which represents the beneficial interest of the minority
investors of BGF.
The Corporation's stockholder's equity at September 30, 1998 reached $1.70
billion compared with $1.50 billion at December 31, 1997. This increase of
$193.8 million was mostly due to earnings retention and to the unrealized
holding gains on securities available-for-sale, which rose $73.8 million as
compared with year-end 1997. Also, the Corporation's Dividend Reinvestment Plan
contributed $5.2 million in additional capital since December 31, 1997.
Stockholders' equity at September 30, 1997 amounted to $1.45 billion.
The dividend payout ratio to common stockholders for the quarter ended
September 30, 1998, was 26.86% compared with 23.30% for the same quarter last
year. For the nine-month periods ended
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September 30, 1998 and 1997, these ratios were 27.32% and 24.19%, respectively.
The increase in the ratio resulted from an increase of 22.2%, from $0.09 to
$0.11 per common share (after restating for the stock split), in the
Corporation's quarterly dividend, effective with the dividend paid on October
1, 1997.
On August 13, 1998, the Board of Directors of Popular, Inc. declared a cash
dividend of $0.14 per common share payable on October 1, 1998, to shareholders
of record as of September 11, 1998, representing a 27.3% increase over the $0.11
per share paid in previous quarterly dividends.
Under the regulatory framework for prompt corrective action, banks and bank
holding companies which meet or exceed a Tier I ratio of 6%, a total capital
ratio of 10% and a leverage ratio of 5% are considered well-capitalized. As
shown on Table I, 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.
The market value of the Corporation's common stock at September 30, 1998, was
$28.38, compared with $24.75 at December 31, 1997 and $26.50 at September 30,
1997, after restating for the stock dividend. Market capitalization at September
30, 1998, was $3.8 billion compared with $3.4 billion as of December 31, 1997
and $3.6 billion at September 30, 1997.
TABLE I
CAPITAL ADEQUACY DATA
- --------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
1998 1997 1997
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(Dollars in thousands)
Risk-based capital
Tier I capital $ 1,476,823 $ 1,335,391 $ 1,312,893
Supplementary (Tier II) capital 289,818 263,115 261,922
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Total capital $ 1,766,641 $ 1,598,506 $ 1,574,815
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Risk-weighted assets
Balance sheet items $11,986,235 $10,687,847 $10,556,045
Off-balance sheet items 267,437 287,822 329,517
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Total risk-weighted assets $12,253,672 $10,975,669 $10,885,562
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Ratios:
Tier I capital (minimum required - 4.00%) 12.05% 12.17% 12.06%
Total capital (minimum required - 8.00%) 14.42 14.56 14.47
Leverage ratio (minimum required - 3.00%) 7.37 6.86 6.88
Popular International Bank, Inc. (PIB) and Popular North America, Inc.'s (PNA)
bank subsidiaries (Banco Popular, Illinois, Banco Popular National Association
(California), Banco Popular National Association (Florida), Banco Popular,
National Association (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
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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 September 30, 1998 the undistributed earnings of Banco Popular, FSB
totaled $62 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.
ITEM 5. OTHER INFORMATION
Focusing on the objective of becoming the number one bank for the Hispanics in
the United States, the Corporation continues its plan of corporate
reorganization for its U.S. banking subsidiaries. The objective of this
reorganization is to consolidate its banking operations in Florida, California,
New York, New Jersey, and Illinois into one banking entity incorporated in New
York. This new structure will facilitate the communication and geographic
expansion while at the same time reduce costs, provide more flexibility and
efficiency to the Corporation.
On September 21, 1998, Hurricane Georges struck the island of Puerto Rico, the
Corporation's principal place of business. Economists estimate infrastructure
and personal property losses to be about $3.8 billion, whereas the loss of
production due to the lack of electricity, water and communications could reach
$3.1 billion. In 1994, Banco Popular de Puerto Rico established a bankwide
Disaster Recovery Plan that proved its effectiveness with Georges.
Notwithstanding the impact this hurricane had on Puerto Rico, 86% of the branch
network was fully operational seven days after the hurricane, and the operations
of both the ATH network and the bank's electronic data center were never
interrupted.
On October 31, 1998 the Corporation acquired First State Bank of Southern
California, with $194 million in assets and $157 million in deposits and
operating five branches located in Santa Fe Springs, Paramount, Lynwood and Los
Angeles. Also, at the same date the Corporation acquired Gore-Bronson Bancorp
and its subsidiaries Bronson-Gore Bank, Irving Bank, and Water Tower Bank with
assets of $281 million and deposits of $217 million. This corporation
specializes in asset-based lending and operates five branches in the Greater
Chicago Metropolitan Area.
In addition, on October 31, 1998 Popular Cash Express acquired Inglewood Quick
Check, Inc., a corporation that handles eight check-cashing locations and 27
mobile check-cashing operations in California.
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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 September 30, 1998
27 Financial Data Schedule for SEC use only Exhibit "B"
b) Two reports on Form 8-K were filed for the quarter ended September 30, 1998:
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Dated: July 9, 1998 and August 13, 1998
Items reported: Item 5 - Other Events
Item 7 - Financial Statements, Pro-Forma, Financial Information
and Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
POPULAR, INC.
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(Registrant)
Date: November 13, 1998 By: S/ Jorge A. Junquera
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Jorge A. Junquera
Senior Executive Vice President
Date: November 13, 1998 By: S/ Amilcar L. Jordan
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Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller