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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year Ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --- THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission File No. 0-13818
POPULAR, INC.
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Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0416582
Principal Executive Offices:
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209 Munoz Rivera Avenue
Hato Rey, Puerto Rico 00918
Telephone Number: (809) 765-9800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($6.00 par value)
8.35% Non-Cumulative Monthly Income Preferred Stock,
1994 Series A (Liquidation Preference $25.00 Per Share)
Series A Participating Cumulative Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of February 26, 1999 the Corporation had 135,709,287 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates of the Corporation was $4,503,852,000 based upon the reported
closing price of $33.1875 on the NASDAQ National Market System on that date.
DOCUMENTS INCORPORATED BY REFERENCE
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(1) Portions of the Corporation's Annual Report to Shareholders for the
fiscal year ended December 31, 1998 are incorporated herein by reference in
response to Item 1 of Part I, Items 5 through 8 of Part II and Item 14 of Part
IV.
(2) Portions of the Corporation's Proxy Statement relating to the 1999
Annual Meeting of Stockholders of the Corporation are incorporated herein by
reference to Items 10 through 13 of Part III.
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TABLE OF CONTENTS
Page
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PART I
Item 1 Business ................................................ 3
Item 2 Properties .............................................. 11
Item 3 Legal Proceedings ....................................... 12
Item 4 Submission of Matters to a Vote of Security Holders ..... 12
PART II
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters .................................... 12
Item 6 Selected Financial Data .................................. 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk 14
Item 8 Financial Statements and Supplementary Data .............. 15
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................... 15
PART III
Item 10 Directors and Executive Officers of the Registrant ....... 15
Item 11 Executive Compensation ................................... 15
Item 12 Security Ownership of Certain Beneficial Owners
and Management ......................................... 16
Item 13 Certain Relationships and Related Transactions ........... 16
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .................................... 16
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PART I
POPULAR, INC.
ITEM 1. BUSINESS
Popular, Inc. (the "Corporation") is a diversified, publicly owned bank
holding company, registered under the Bank Holding Company Act of 1956, as
amended (the "BHC Act") and, accordingly, subject to the supervision and
regulation of the Board of Governors of the Federal Reserve System ("the Federal
Reserve Board"). The Corporation was incorporated in 1984 under the laws of the
Commonwealth of Puerto Rico and is the largest financial institution in Puerto
Rico, with consolidated assets of $23.2 billion, total deposits of $13.7 billion
and stockholders' equity of $1.7 billion at December 31, 1998. Based on total
assets at December 31, 1998, the Corporation was the 36th largest bank holding
company in the United States.
The Corporation's principal subsidiary, Banco Popular de Puerto Rico
("Banco Popular" or the "Bank"), was incorporated over 100 years ago in 1893 and
is Puerto Rico's largest bank with total assets of $18.5 billion, deposits of
$11.7 billion and stockholders' equity of $1.4 billion at December 31, 1998. The
Bank, accounted for 80% of the total consolidated assets of the Corporation at
December 31, 1998. A consumer-oriented bank, Banco Popular has the largest
retail franchise in Puerto Rico, operating 194 branches and 421 automated teller
machines. The Bank also has the largest trust operation in Puerto Rico. In
addition, as of December 31, 1998, it operated the largest Hispanic bank branch
network in the mainland United States with 32 branches in New York and an agency
in Chicago. As of December 31, 1998, these branches had a total of approximately
$1.6 billion in deposits. The Bank also operates seven branches in the U.S.
Virgin Islands and one branch in the British Virgin Islands. Banco Popular's
deposits are insured under the Bank Insurance Fund ("BIF") of the Federal
Deposit Insurance Corporation (the "FDIC"). Banco Popular has three
subsidiaries, Popular Leasing & Rental, Inc., Puerto Rico's largest vehicle
leasing and daily rental company, Popular Finance, Inc., a small-loan and second
mortgage company with 48 offices in Puerto Rico, and Popular Mortgage, Inc., a
mortgage loan company with eleven offices in Puerto Rico.
The Corporation has two other principal subsidiaries: Popular
Securities Incorporated, a securities broker-dealer in Puerto Rico with
brokerage, financial advisory, investment and security brokerage operations for
institutional and retail customers and Popular International Bank, Inc. ("PIB").
PIB owns all of the outstanding stock of Popular North America, Inc. ("PNA") and
ATH Costa Rica, which provides ATM switching and driving services in San Jose,
Costa Rica. In addition, PIB has an investment in 45% of the outstanding stock
of Banco Gerencial & Fiduciario S.A. (BGF), a commercial bank in the Dominican
Republic.
PIB is a wholly-owned subsidiary of the Corporation organized in 1992
under the laws of the Commonwealth of Puerto Rico that operates as an
"international banking entity" under the International Banking Center Regulatory
Act of Puerto Rico (the "IBC Act"). PIB is principally engaged in providing
managerial services to its subsidiaries.
PNA, a wholly-owned subsidiary of PIB and an indirectly wholly-owned
subsidiary of the Corporation, was organized in 1991 under the laws of the State
of Delaware. As of December 31, 1998, PNA had ten subsidiaries, all of which
were wholly-owned: Banco Popular North America, Inc., ("BPNAI"), Banco Popular,
N.A. Florida ("Banco Popular (Florida)"), Banco Popular, N.A. (Texas) ("Banco
Popular (Texas)"), Banco Popular, N.A. (California) ("Banco Popular
(California)"), Banco Popular, FSB, First State Bank of Southern California
("First State") and Bronson-Gore Bank of Prospect Heights, The Irving Bank,
Water Tower Bank (collectively, "Gore-Bronson Banks") and Popular Cash Express,
Inc. ("PCE"). PNA does not engage directly in any activities other than
providing managerial services to its subsidiaries and raising funds for those
subsidiaries. BPNAI is the holding company of Banco Popular, Illinois.
PIB, PNA and BPNAI, respectively as indirect and direct owners of Banco
Popular, Illinois, Banco Popular (Florida), Banco Popular (Texas), Banco Popular
(California), Banco Popular, FSB, First State and Gore-Bronson Banks, are
registered bank holding companies under the BHC Act.
Banco Popular, Illinois operated 19 branches in the State of Illinois.
The deposits of Banco Popular, Illinois were insured under BIF by the FDIC,
which was also its primary federal regulator. As of December 31, 1998, the
assets of Banco Popular, Illinois were $1.0 billion and its deposits were $795.7
million. In addition, Banco Popular, Illinois owned all of the outstanding stock
of Popular Leasing, USA, a non-banking subsidiary that offers small ticket
equipment leasing in seven states, with total assets of $36.8 million as of
December 31, 1998.
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As of December 31, 1998, the assets of Banco Popular (Florida) were
$214.4 million and its deposits were $133.3 million, operating ten branches in
Florida. Banco Popular (Florida) was a national bank and its deposits were
insured under BIF by the FDIC.
Banco Popular (Texas) is also a national bank. As of December 31, 1998,
the assets of Banco Popular (Texas) were $90.5 million and its deposits were
$51.2 million, with four branches operating in Houston, Texas. The deposits of
Banco Popular (Texas) were also insured under BIF by the FDIC and was subject to
supervision by the Office of the Comptroller of the Currency ("OCC").
Banco Popular (California), was a national bank and operated 14
branches in California with total assets of $221 million and deposits of $162.6
million as of December 31, 1998. The deposits of Banco Popular (California) were
also insured by the FDIC and was subject to supervision by the OCC.
Banco Popular, FSB, was a federal savings bank with total assets of
$375 million and deposits of $310 million. The deposits of Banco Popular, FSB
were insured under the Saving Association Insurance Fund ("SAIF") by the FDIC.
Banco Popular, FSB was subject to the supervision of the Office Thrift
Supervision. Banco Popular, FSB owned Equity One, Inc., a Delaware corporation
("Equity One"). Equity One is a diversified consumer finance company engaged in
the business of making personal and mortgage loans and providing dealer
financing through 128 offices in 36 states with total assets of $1.4 billion as
of December 31, 1998.
Acquisitions
On September 30, 1998, the Corporation through its wholly-owned
subsidiary PIB, acquired 45% of the outstanding stock of BGF. BGF is the fourth
largest bank in the Dominican Republic, with 26 branches throughout the
Dominican Republic, $496 million in total assets and $320 million in total
deposits as of September 30, 1998. The deposits of BGF are not insured by the
FDIC and it is subject to the supervision of the Monetary Board of the Central
Bank of the Dominican Republic.
On October 31, 1998, PNA acquired 100% of the voting shares of First
State with $194 million in assets and deposits of $157 million at October 31,
1998. First State operates five branches in California and its deposits are
insured by the FDIC. On the same day, PNA acquired 100% of the voting shares of
Gore-Bronson Bancorp, Inc., and its banks subsidiaries: Bronson-Gore Bank in
Prospect Heights, the Irving Bank and Water Tower Bank (Gore-Bronson Banks) with
assets of $281 million and deposits of $217 million at the acquisition date. The
deposits of Gore-Bronson Banks are insured by the FDIC. The Gore-Bronson Banks
specialize in asset-based lending and operates five branches in Chicago
Metropolitan Area. On December 1, 1998 Gore-Bronson Bancorp, Inc. was merged
with and into PNA.
In April 1998, PNA through its nonbank subsidiary PCE, completed the
acquisition of 15 check cashing outlets in Florida. These outlets offer services
such as check cashing, money transfers to other countries, money order sales and
processing of payments. In October 1998, PCE acquired Inglewood Quik Check, Inc.
("Inglewood") a corporation with eight check cashing locations and 28 mobile
check-cashing units in California. As of December 31, 1998, PCE and its
subsidiary Inglewood are operating 23 outlets and 28 mobile check-cashing units,
with consolidated assets of $19.4 million.
Reorganization
During 1998, the Corporation actively worked in an internal
reorganization of its direct and indirect subsidiaries that was completed on
January 1, 1999 (the "Reorganization"). In order to take advantage of recent
changes in federal laws involving branch banking across state lines, the
Corporation undertook the Reorganization to streamline its operations in the
United States and simplify the regulatory environment in which its multiple
banking subsidiaries in the United States were operating.
In general terms, the mechanics of the Reorganization were as follows:
The Corporation organized a new Puerto Rico-chartered bank that acquired all of
the assets and liabilities of Banco Popular, except those connected with the
Bank's branches in New York. As a result, the new Puerto Rico-chartered bank
became the owner of all of the assets of the Bank in Puerto Rico, the United
States Virgin Islands, the British Virgin Islands, one branch in New York and
the agency in Illinois. As was the case with the old Banco Popular, the new
Puerto Rico-chartered bank became a wholly-owned subsidiary of the Corporation.
Following the completion of the Reorganization, the new Puerto Rico-chartered
bank changed its corporate name to "Banco Popular de Puerto Rico".
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The old Banco Popular owning only the New York branches, merged with
and into Banco Popular, New York, a new New York-chartered bank, into which
Banco Popular, Illinois, Banco Popular (Florida), Banco Popular (California) and
Banco Popular, FSB were also merged. The resulting institution was named Banco
Popular, New York ("BPNY") and became a direct subsidiary of BPNAI. Also, as
part of the reorganization PNA contributed all of the issued and outstanding
shares of Banco Popular (Texas) to BPNAI. The new structure resulted in PNA as
the parent company of BPNAI and BPNAI became the holding company of BPNY, Banco
Popular (Texas), First State and Gore-Bronson Banks. Following the completion of
the reorganization, BPNY changed its corporate name to Banco Popular North
America ("BPNA"). Furthermore, BPNAI changed its corporate name to Popular
Holdings USA, Inc. ("PHUSA"). As part also of the Reorganization, on January 23,
1999, First State merged with and into BPNA and during 1999 is expected that
Gore-Bronson Banks and Banco Popular (Texas) will be merge with and into BPNA.
The Reorganization did not cause any disruption or interruption in the
delivery of services and products offered by the Corporation's banking and
non-banking subsidiaries to existing and potential customers in each of the
markets served.
Competition
The business of banking is highly competitive. In addition to
competition from other commercial banks, banks face significant competition from
nonbank financial institutions. Savings associations compete aggressively with
commercial banks for deposits and loans. Credit unions and finance companies are
significant factors in the consumer loan market. Investment firms and retailers
are significant competitors for some types of business. Banks compete for
deposits with a broad spectrum of other types of investments such as mutual
funds, debt securities of corporations, and debt securities of the federal
government, state governments and their respective agencies. The principal
methods of competition for financial services are price (interest rates paid on
deposits, interest rates charged on borrowings, and fees charged for services)
and service (convenience and quality of services rendered to customers).
Forward-Looking Statements
This report 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 the Corporation'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 I, Item 3. 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.
Recent Developments
On March 2, 1999, the Corporation acquired 9.99% of the outstanding
stock of Telecomunicaciones de Puerto Rico, Inc. ("Telpri"), the successor to
the Puerto Rico Telephone Company, from the Puerto Rican Telephone Authority, a
political subdivision of the Government of Puerto Rico (the "PRTA"), for $90.2
million. The Corporation made this investment in conjunction with the
simultaneous acquisition by GTE Telecommunications Incorporated ("GTE"),
indirectly through a wholly-owned subsidiary, of 40.01% plus one share of the
outstanding stock of Telpri that resulted in GTE's control and operation of
Telpri. After these acquisitions closed, the government of Puerto Rico retained
ownership of 43% of the outstanding stock of Telpri. The remaining 7% was
acquired by the Employee Stock Ownership Plan Trust of Telpri.
The Corporation's business is described on pages 1 through 17 of the
Business Review Section of the Annual Report to Shareholders for the year ended
December 31, 1998, which is incorporated herein by reference.
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REGULATION AND SUPERVISION
General
Each of the Corporation, PIB, PNA and PHUSA is a bank holding company
subject to supervision and regulation by the Federal Reserve Board under the BHC
Act. As a bank holding company, the Corporation's, PIB's, PNA's and PHUSA's
activities and those of their banking and non-banking subsidiaries are limited
to the business of banking and activities closely related to banking, and none
of the Corporation, PIB, PNA or PHUSA may directly or indirectly acquire the
ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company in the United States, including a
bank, without the prior approval of the Federal Reserve Board. In addition, bank
holding companies are generally prohibited under the BHC Act from engaging in
non-banking activities, subject to certain exceptions.
Banco Popular is considered a foreign bank for purposes of the
International Banking Act of 1978 (the "IBA"). Under the IBA Banco Popular is
not permitted to operate a branch or agency, that is located outside of its
"home state", except to the extent that a national bank with the same home state
is permitted to do so as described under "Interstate Banking and Legislation"
below. Puerto Rico is not considered a state for purposes of these geographic
limitations. Banco Popular has designated the state of New York as its home
state.
Banco Popular, BPNA, Gore-Bronson Banks and Banco Popular (Texas) are
subject to supervision and examination by applicable federal and state banking
agencies including, in the case of Banco Popular, the Federal Reserve Board and
the Office of the Commissioner of Financial Institutions of Puerto Rico, in the
case of BPNA, the Federal Reserve Board and the New York State Banking
Department; in the case of Gore-Bronson Banks, the FDIC and the Illinois
Commissioner of Banks and Trust Companies; and in the case of Banco Popular
(Texas), the OCC. Banco Popular, BPNA, Gore-Bronson Banks and Banco Popular
(Texas) are subject to requirements and restrictions under federal and state
law, including requirements to maintain reserves against deposits, restrictions
on the types and amounts of loans that may be granted and the interest that may
be charged thereon, and limitations on the types of other investments that may
be made and the types of services that may be offered. Various consumer laws and
regulations also affect the operations of Banco Popular, BPNA, Gore-Bronson
Banks and Banco Popular (Texas). In addition to the impact of regulations,
commercial banks are significantly affected by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit availability
in order to influence the economy.
F D I C I A
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") the federal banking regulators must take prompt corrective action in
respect of depository institutions that do not meet minimum capital
requirements. FDICIA and regulations thereunder established five capital tiers:
"well capitalized", "adequately capitalized," "undercapitalized", "significantly
under- capitalized", and "critically undercapitalized". A depository institution
is deemed well capitalized if it maintains a leverage ratio of at least 5%, a
risk-based Tier 1 capital ratio of at least 6% and a risk-based total capital
ratio of at least 10% and is not subject to any written agreement or directive
to meet a specific capital level. A depository institution is deemed adequately
capitalized if it is not well capitalized but maintains a leverage ratio of at
least 4% (or at least 3% if given the highest regulatory rating and not
experiencing or anticipating significant growth), a risk-based Tier 1 capital
ratio of at least 4% and a risk-based total capital ratio of at least 8%. A
depository institution is deemed undercapitalized if it fails to meet the
standards for adequately capitalized institutions (unless it is deemed
significantly or critically undercapitalized). An institution is deemed
significantly undercapitalized if it has a leverage ratio of less than 3%, a
risk-based Tier 1 capital ratio of less than 3% or a risk-based total capital
ratio of less than 6%. An institution is deemed critically undercapitalized if
it has tangible equity equal to 2% or less of total assets. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives a less than
satisfactory examination rating in any one of four categories.
At December 31, 1998, each of Banco Popular, BPNA, Gore-Bronson Banks,
First State and Banco Popular (Texas) was well capitalized. An institution's
capital category, as determined by applying the prompt corrective action
provisions of law, may not constitute an accurate representation of the overall
financial condition or prospects of the Corporation or its banking subsidiaries,
and should be considered in conjunction with other available information
regarding the Corporation's financial condition and results of operations.
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FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
The capital-based prompt corrective action provisions of FDICIA and
their implementing regulations apply to FDIC-insured depository institutions
such as the subsidiaries of the Corporation, PIB, PNA and PHUSA, but they are
not directly applicable to holding companies, such as the Corporation, PIB, PNA
and PHUSA which control such institutions. However, federal banking agencies
have indicated that, in regulating holding companies, they may take appropriate
action at the holding company level based on their assessment of the
effectiveness of supervisory actions imposed upon subsidiary insured depository
institutions pursuant to such provisions and regulations.
Holding Company Structure
Banco Popular, BPNA, Gore-Bronson Banks and Banco Popular (Texas) are
subject to restrictions under federal law that limit the transfer of funds among
any of them, any of the Corporation, PIB, PNA or PHUSA and any of the
Corporation's other non-banking subsidiaries, whether in the form of loans,
other extensions of credit, investments or asset purchases. Such a transfer by
any of Banco Popular, BPNA, Gore-Bronson Banks or Banco Popular (Texas), to any
of the Corporation, PIB, PNA or PHUSA or to any of the non-banking subsidiaries,
is limited in amount to 10% of the transferring institution's capital stock and
surplus and, with respect to the Corporation and any of its non-banking
subsidiaries, to an aggregate of 20% of the transferring institution's capital
stock and surplus. For these purposes, capital stock and surplus includes the
institution's total risk-based capital plus the balance of its allowance for
loan losses not included therein. Furthermore, such loans and extensions of
credit are required to be secured in specified amounts.
Under the Federal Reserve Board policy, a bank holding company such as
the Corporation, PIB, PNA or PHUSA is expected to act as a source of financial
strength to each of its subsidiary banks and to commit resources to support each
subsidiary bank. This support may be required at times when, absent such policy,
the bank holding company might not otherwise provide such support. In addition,
any capital loans by a bank holding company to any of its subsidiary depository
institutions are subordinated in right of payment to deposits and to certain
other indebtedness of such subsidiary depository institution. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary
depository institution will be assumed by the bankruptcy trustee and entitled to
a priority of payment. Banco Popular, BPNA, Gore- Bronson Banks and Banco
Popular (Texas) are currently the only depository institutions of the
Corporation, PNA and PHUSA.
Because the Corporation, PIB, PNA and PHUSA are holding companies,
their right to participate in the assets of any subsidiary upon the latter's
liquidation or reorganization will be subject to the prior claims of the
subsidiary's creditors (including depositors in the case of subsidiary
depository institutions) except to the extent that the Corporation, PIB, PNA or
PHUSA as the case may be, may itself be a creditor with recognized claims
against the subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution, the deposits of which are insured by the FDIC, can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default". "Default"
is defined generally as the appointment of a conservator or a receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. Banco Popular, BPNA, Gore-Bronson Banks and Banco Popular (Texas)
are all currently FDIC-insured depository institutions of the Corporation. In
some circumstances (depending upon the amount of the loss or anticipated
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loss suffered by the FDIC), cross-guarantee liability may result in the ultimate
failure or insolvency of one or more insured depository institutions in a
holding company structure. Any obligation or liability owed by a subsidiary
depository institution to its parent company is subordinated to the subsidiary
bank's cross-guarantee liability with respect to commonly controlled insured
depository institutions.
Dividend Restrictions
The principal regular source of cash flow for the Corporation is
dividends from Banco Popular. Various statutory provisions limit the amount of
dividends Banco Popular can pay to the Corporation without regulatory approval.
As a member bank subject to the regulation of the Federal Reserve Board, Banco
Popular must obtain the approval of the Federal Reserve Board for any dividend
if the total of all dividends declared by the member bank in any calendar year
would exceed the total of its net profits, as defined by the Federal Reserve
Board, for that year, combined with its retained net profits for the preceding
two years. In addition, a member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans that are in arrears with respect to interest by six
months or more unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a member bank is not
permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand. A member bank may, however, net the sum of its
bad debts as so defined against the balance in its allowance for loan losses
account and deduct from undivided profits only bad debts as so defined in excess
of that account. At December 31, 1998, Banco Popular could have declared a
dividend of approximately $361 million without the approval of the Federal
Reserve Board. On January 14, 1999, the Board of Directors of Banco Popular
approved a dividend of $230 million payable on January 15, 1999. The proceeds
from this dividend were used by the Corporation to repay outstanding debts at
the Holding Company level. New York law and the National Bank Act contains
similar limitation on the amount of dividends that a bank subsidiary can pay to
its holding company.
The payment of dividends by Banco Popular, BPNA, Gore-Bronson Banks and
Banco Popular (Texas) may also be affected by other regulatory requirements and
policies, such as the maintenance of adequate capital. If, in the opinion of the
applicable regulatory authority, a depository institution under its jurisdiction
is engaged in, or is about to engage in, an unsafe or unsound practice (that,
depending on the financial condition of the depository institution, could
include the payment of dividends), such authority may require, after notice and
hearing, that such depository institution cease and desist from such practice.
The Federal Reserve Board has issued a policy statement that provides that
insured banks and bank holding companies should generally pay dividends only out
of current operating earnings. In addition, all insured depository institutions
are subject to the capital-based limitations required by the FDICIA. See
"FDICIA".
See" Puerto Rico Regulation" for a description of certain restrictions
on Banco Popular's ability to pay dividends under Puerto Rico law.
FDIC Insurance Assessments
Banco Popular, BPNA, Gore-Bronson Banks and Banco Popular (Texas) are
subject to FDIC deposit insurance assessments.
Pursuant to the FDICIA, the FDIC has adopted a risk-based assessment
system, under which the assessment rate for an insured depository institution
varies according to the level of risk incurred in its activities. An
institution's risk category is based partly upon whether the institution is well
capitalized, adequately capitalized or less than adequately capitalized. Each
insured depository institution is also assigned to one of the following
"supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially
sound institutions with only a few minor weaknesses; Group "B" institutions are
institutions that demonstrate weaknesses that, if not corrected, could result in
significant deterioration; and Group "C" institutions are institutions for which
there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct the
areas of weakness.
The FDIC reduced the insurance premiums it charges on bank deposits
insured by the BIF to the statutory minimum of $2,000.00 for "well capitalized"
banks, effective January 1, 1996. On September 30, 1996, the Deposit Insurance
Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA repealed the
statutory minimum premium, and currently premiums related to deposits assessed
by both the BIF and the Savings Association Insurance Fund ("SAIF") are to be
assessed at a annual rate of between 0 cents and 27 cents per $100.00 of
deposits. DIFA also provided for a special one-time assessment imposed on
deposits insured by the SAIF to recapitalize the SAIF to bring the SAIF up to
statutorily required levels.
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DIFA also separated the Financing Corporation ("FICO") assessment to
service the interest on its bond obligations from the BIF and SAIF assessments.
The amount assessed on individual institutions by the FICO is in addition to the
amount, if any, paid for deposit insurance according to the FDIC's risk-related
assessment rate schedules. By law, the FICO rate on BIF-assessable deposits must
be one-fifth the rate on SAIF-assessable deposits until the insurance funds are
merged or until January 1, 2000 (whichever occurs first). As of December 31,
1998, the Corporation had a BIF deposit assessment base of approximately $12.8
billion.
Brokered Deposits
FDIC regulations adopted under the FDICIA govern the receipt of
brokered deposits. Under these regulations, a bank cannot accept, roll over or
renew brokered deposits (which term is defined also to include any deposit with
an interest rate more than 75 basis points above prevailing rates) unless (i) it
is well capitalized or (ii) it is adequately capitalized and receives a waiver
from the FDIC. A bank that is adequately capitalized may not pay an interest
rate on any deposits in excess of 75 basis points over certain prevailing market
rates specified by regulation. There are no such restrictions on a bank that is
well capitalized. The Corporation does not believe the brokered deposits
regulation has had or will have a material effect on the funding or liquidity of
Banco Popular, BPNA, Gore-Bronson Banks and Banco Popular (Texas).
Capital Adequacy
Information about the capital composition of the Corporation as of
December 31, 1998 and for the four previous years is presented in Table H
"Capital Adequacy Data", on page F-14 in the "Management Discussion and Analysis
of Financial Condition and Results of Operations" (MD&A) and is incorporated
herein by reference.
Under the Federal Reserve Board's risk-based capital guidelines for
bank holding companies and member banks, the minimum guidelines for the ratio of
qualifying total capital ("Total Capital") to risk-weighted assets (including
certain off-balance sheet items, such as standby letters of credit) is 8%. At
least half of the Total Capital is to be comprised of common equity, retained
earnings, minority interest in unconsolidated subsidiaries, non-cumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, less goodwill, and certain other intangible assets ("Tier 1 Capital").
The remainder may consist of a limited amount of subordinated debt, other
preferred stock, certain other instruments and a limited amount of loan and
lease loss reserves ("Tier 2 Capital").
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies and member banks. These guidelines
provide for a minimum ratio of Tier 1 Capital to total assets, less goodwill and
certain other intangible assets discussed below (the "leverage ratio") of 3% for
bank holding companies and member banks that meet certain specified criteria,
including that they have the highest regulatory rating. All other bank holding
companies and member banks will be required to maintain a leverage ratio of 4%.
The guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve Board will continue to consider a "tangible Tier 1
leverage ratio" and other indicia of capital strength in evaluating proposals
for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio
of a banking organization's Tier 1 Capital less all intangibles, to total assets
less all intangibles.
Banco Popular and BPNA are subject to the risk-based and leverage
capital requirements adopted by the Federal Reserve Board. See Consolidated
Financial Statements, Note 18 "Regulatory Capital Requirements" on page F-47 ,
for the capital ratios of the Corporation and of Banco Popular.
Gore-Bronson Banks and Banco Popular (Texas) are subject to similar
capital requirements adopted by the FDIC and OCC. Failure to meet capital
guidelines could subject a bank to a variety of enforcement remedies, including
the termination of deposit insurance by the FDIC and to certain restrictions on
its business. See "FDICIA".
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve Board approval, to acquire
banks located in states other than the holding company's home state without
regard to whether the transaction is prohibited under state law. In addition,
national and state banks with different home states are permitted to merge
across
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state lines, with approval of the appropriate federal banking agency, unless the
home state of a participating bank passed legislation prior to May 31, 1997
expressly prohibiting interstate mergers. States were allowed to "opt in" to
permit interstate branching by merger prior to June 1, 1997 and to permit de
novo interstate branching. Once a bank has established branches in a state
through an interstate merger transaction, the bank may establish and acquire
additional branches at any location in the state where any bank involved in the
interstate merger transaction could have established or acquired branches under
applicable federal or state law. A bank that has established a branch in a state
through de novo branching may establish and acquire additional branches in such
state in the same manner and to the same extent as a bank having a branch in
such state as a result of an interstate merger. If a state opts out of
interstate branching within the specified time period, no bank in any other
state may establish a branch in the state which has opted out, whether through
an acquisition or de novo. A foreign bank, like Banco Popular, may branch
interstate by merger or de novo to the same extent as domestic banks in the
foreign bank's home state, which, in the case of Banco Popular, is New York.
Various other legislation, including proposals to overhaul the bank
regulatory system, expand bank and bank holding company powers and limit the
investments that a depository institution may make with insured funds, is from
time to time introduced in Congress. The Corporation, PIB, PNA and PHUSA cannot
determine the ultimate effect that such potential legislation, if enacted, or
implementing regulations, would have upon their financial condition or results
of operations.
Puerto Rico Regulation
General
As a commercial bank organized under the laws of Puerto Rico, Banco
Popular is subject to the supervision, examination and regulation by the Office
of the Commissioner of Financial Institutions of Puerto Rico (the "Office of the
Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the
"Banking Law").
Section 27 of the Banking Law requires that at least 10% of the yearly
net income of Banco Popular be credited annually to a reserve fund. This
apportionment shall be done every year until the reserve fund shall be equal to
the total of paid-in capital on common and preferred stock. At the end of its
most recent fiscal year, Banco Popular had a fund established in compliance with
these requirements.
Section 27 of the Banking Law also provides that when the expenditures
of a bank are greater than the receipts, the excess of the former over the
latter shall be charged against the undistributed profits of the bank, and the
balance, if any, shall be charged against the reserve fund, as a reduction
thereof. If there is no reserve fund sufficient to cover such balance in whole
or in part, the outstanding amount shall be charged against the capital account
and no dividend shall be declared until said capital has been restored to its
original amount and the reserve fund to 20% of the original capital.
Section 16 of the Banking Law requires every bank to maintain a legal
reserve that, except as otherwise provided by the Office of the Commissioner,
shall not be less than 20% of its demand liabilities, excluding government
deposits (federal, state and municipal) which are secured by actual collateral.
Furthermore, if a bank is authorized to establish one or more bank branches in a
State of the United States or in a foreign country, where such branches are
subject to the reserve requirements of that state or country, the Office of the
Commissioner may exempt said branch or branches of the reserve requirements of
Section 16. However, Banco Popular has been exempted from such requirements,
with respect to deposits payable in Puerto Rico, pursuant to an order of the
Board of Governors of the Federal Reserve System dated November 24, 1982. The
reserve requirements of Section 16 apply to those deposits.
Section 17 of the Banking Law permits Banco Popular to make loans to
any one person, firm, partnership or corporation, up to an aggregate amount of
15% of the paid-in capital and reserve fund of the Bank. As of December 31,
1998, the legal lending limit for the Bank under this provision was
approximately $109 million and after the Reorganization approximately $90
million. The above limitations do not apply to loans which are secured by
collateral worth at least 25% more than the amount of the loan, up to an
aggregate maximum amount of one third of the paid-in capital of the Bank, plus
its reserve fund. If the institution is well capitalized and had been rated 1 in
the last examination performed by the Office of the Commissioner or any
regulatory agency its legal lending limit shall also include 15% of 50% of its
undivided profits. Institutions rated 2 in their last regulatory examination may
include this additional component in their legal lending limit only with the
previous authorization of the Office of the Commissioner. There are no
restrictions under Section 17 on the amount of loans that are wholly secured by
bonds, securities and other evidence of indebtedness of the Government of the
United States or Puerto Rico, or by current debt bonds, not in default, of
municipalities or instrumentalities of Puerto Rico.
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Section 14 of the Banking Law authorizes Banco Popular to conduct
certain financial and related activities directly or through subsidiaries,
including finance leasing of personal property, originating and servicing
mortgage loans and operating a small loan company. Banco Popular engages in
these activities through its wholly-owned subsidiaries, Popular Leasing &
Rental, Inc., Popular Mortgage, Inc. and Popular Finance Inc., respectively, all
of which are organized and operate in Puerto Rico.
The Finance Board, which is a part of the Office of the Commissioner,
but also includes as its members the Secretary of the Treasury, the Secretary of
Commerce, the Secretary of Consumer Affairs, the President of the Planning
Board, and the President of the Government Development Bank for Puerto Rico, has
the authority to regulate the maximum interest rates and finance charges that
may be charged on loans to individuals and unincorporated businesses in Puerto
Rico. The current regulations of the Finance Board provide that the applicable
interest rate on loans to individuals and unincorporated businesses (including
real estate development loans but excluding certain other personal and
commercial loans secured by mortgages on real estate properties) is to be
determined by free competition. The Finance Board also has authority to regulate
the maximum finance charges on retail installment sales contracts, which are
currently set at 21%, and for credit card purchases, which are currently set at
26%. There is no maximum rate set for installment sales contracts involving
motor vehicles, commercial, agricultural and industrial equipment, commercial
electric appliances and insurance premiums.
IBC Act
Under the IBC Act, without the prior approval of the Office of the
Commissioner, PIB may not amend its articles of incorporation or issue
additional shares of capital stock or other securities convertible into
additional shares of capital stock unless such shares are issued directly to the
shareholders of PIB previously identified in the application to organize the
international banking entity, in which case notification to the Office of the
Commissioner must be given within ten business days following the date of the
issue. Pursuant to the IBC Act, without the prior approval of the Office of the
Commissioner, PIB may not initiate the sale, encumbrance, assignment, merger or
other transfer of shares if by such transaction a person or persons acting in
concert could acquire direct or indirect control of 10% or more of any class of
the Company's stock. Such authorization must be requested at least 30 days prior
to the transaction.
PIB must submit to the Office of the Commissioner a report of its
condition and results of operation on a quarterly basis and its annual audited
financial statement at the close of its fiscal year. Under the IBC Act, PIB may
not deal with "domestic persons" as such term is defined in the IBC Act. Also,
it may only engage in those activities authorized in the IBC Act, the
regulations adopted thereunder and its license.
The IBC Act empowers the Office of the Commissioner to revoke or
suspend, after a hearing, the license of an international banking entity if,
among other things, it fails to comply with the IBC Act, regulations issued by
the Office of the Commissioner or the terms of its license or if the Office of
the Commissioner finds that the business of the international banking entity is
conducted in a manner not consistent with the public interest.
Employees
At December 31, 1998, the Corporation employed 10,549 persons. None of
its employees are represented by a collective bargaining group.
Segment Disclosure
Note 27 to the Financial Statements, "Segment Reporting" on page F-58
and F-59 is herein incorporated by reference.
ITEM 2. PROPERTIES
As of December 31, 1998, Banco Popular owned (and wholly or partially
occupied) approximately 71 branch premises and other facilities throughout the
Commonwealth and branch premises in New York. In addition, as of such date,
Banco Popular leased properties for branch operations in approximately 126
locations in Puerto Rico, 16 locations in New York and 7 locations in the U.S.
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Virgin Islands. The Corporation's management believes that each of its
facilities is well-maintained and suitable for its purpose. The principal
properties owned by the Corporation for banking operations and other services
are described below:
Popular Center, the San Juan metropolitan area headquarters, located at
209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story office building.
Approximately 50% of the office space is leased to outside tenants.
Cupey Center Complex, three buildings, one of three stories, and two of
two stories each, located in Cupey, Rio Piedras, Puerto Rico. The computer
center, operational and support services, and a recreational center for
employees are some of the main activities conducted at these facilities. The
facilities are fully occupied by Banco Popular's personnel.
Stop 22 - Santurce building, a twelve story structure located in
Santurce, Puerto Rico. A branch, the accounting department, the human resources
division and the auditing department are the main activities conducted at this
facility, which is fully occupied by Banco Popular personnel.
Old San Juan building, a twelve story structure located in Old San
Juan, Puerto Rico. Banco Popular occupies approximately 33% of the building for
a branch operation, a regional office, an exhibit room and other facilities. The
rest of the building is rented to outside tenants.
Mortgage Loan Center, a six story building, a four story building, and
a one story building, located at 153, 167 and 157 Ponce de Leon Avenue, Hato
Rey, Puerto Rico, respectively, are fully occupied by Popular Mortgage, Inc. and
Banco Popular's mortgage servicing departments.
New York building, a nine story structure with two underground levels
located at 7 West 51st. Street, New York City. BPNA occupies approximately 92%
of the office space is used for banking operations. The remaining space is
rented or available for rent to outside tenants.
Chicago building, a three story building located at 4000-4008 West
North Avenue, Chicago, Illinois. BPNA's full service branch, the executive
offices, the human resources division and the bank's operation department, are
the main activities conducted at this facility.
Orlando building, a two story building located at 5551 Vanguard Street,
Orlando, Florida. Credit cards operations, finance and accounting department and
the BPNA's operation services are the main activities conducted at this
facility.
Houston building, a one story building located at 1615 Little York
Road, Houston, Texas. BPNA's full service branch and the administrative offices
are located at this facility.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various lawsuits
arising in the ordinary course of business. Management believes, based on the
opinion of legal counsel, that the aggregate liabilities, if any, arising from
such actions would not have a material adverse effect on the financial position
of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Corporation's common stock (the "Common Stock") is traded on the
National Association of Securities Dealers Automated Quotation (NASDAQ) National
Market System under the symbol BPOP. Information concerning the range of high
and low sales prices for
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the Corporation's common shares for each quarterly period during 1998 and the
previous four years, as well as cash dividends declared is contained under Table
I, "Common Stock Performance", on page F-15 and under the caption "Stockholders'
Equity" on page F-14 in the MD&A, and is incorporated herein by reference.
Information concerning legal or regulatory restrictions on the payment
of dividends by the Corporation and Banco Popular is contained under the caption
"Regulation and Supervision" in Item 1 herein.
As of February 26, 1999, the Corporation had 10,454 stockholders of
record of its Common Stock, not including beneficial owners whose shares are
held in record names of brokers or other nominees. The last sales price for the
Corporation's Common Stock on such date, as quoted on the NASDAQ, was $33.1875
per share.
The Corporation currently has outstanding $125 million subordinated
notes due December 15, 2005 with interest payable semi-annually at 6.75%. These
notes are unsecured subordinated obligations which are subordinated in right of
payment in full to all present and future senior indebtedness of the
Corporation. These notes do not provide for any sinking fund.
On February 5, 1997, BanPonce Trust I, a statutory business trust
created under the laws of the State of Delaware that is wholly-owned by PNA and
indirectly wholly-owned by the Corporation, sold to institutional investors
$150,000,000 of its 8.32% Capital Securities Series A (liquidation amount $1,000
per Capital Security) through certain underwriters. The proceeds of the
issuance, together with the proceeds of the purchase by PNA of $4,640,000 of its
8.327% common securities (liquidation amount $1,000 per common security) were
used to purchase $154,640,000 aggregate principal amount of PNA 8.327% Junior
Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated
Debentures"). These capital securities qualify as Tier I capital, are fully and
unconditionally guaranteed by the Corporation, and are presented in the
Consolidated Statements of Condition as "Guaranteed Preferred Beneficial
Interest in Popular North America's Subordinated Debentures." The obligations of
PNA under the Junior Subordinated Debentures and its guarantees of the
obligations of BanPonce Trust I are fully and unconditionally guaranteed by the
Corporation. The assets of BanPonce Trust I consisted of $154, 640,000 of Junior
Subordinated Debentures and a related accrued interest receivable of $4,292,000.
The Junior Subordinated Debentures mature on February 1, 2027; however, under
certain circumstances, the maturity of the Junior Subordinated Debentures (which
shortening would result in a mandatory redemption of the Capital Securities) may
be shortened.
The Puerto Rico Internal Revenue Code of 1994, as amended, generally
imposes a withholding tax on the amount of any dividends paid by corporations to
individuals, whether residents of Puerto Rico or not, trusts, estates and
special partnerships at a special 10% withholding tax rate. If the recipient is
a foreign corporation or partnership not engaged in trade or business within
Puerto Rico the withholding tax is also 10%.
Prior to the first dividend distribution for the taxable year,
individuals who are residents of Puerto Rico may elect to be taxed on the
dividends at the regular rates, in which case the special 10% tax will not be
withheld from such year's distributions.
United States citizens who are non-residents of Puerto Rico will not be
subject to Puerto Rico tax on dividends if said individual's gross income from
sources within Puerto Rico during the taxable year does not exceed $1,300 if
single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury
Department "Withholding Tax Exemption Certificate for the Purpose of Section
1147", is filed with the withholding agent.
U.S. income tax law permits a credit against U.S. income tax liability,
subject to certain limitations, for certain foreign income taxes paid or deemed
paid with respect to such dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears in Table C, "Selected
Financial Data" on pages F-4 and F-5 and the text under the caption "Earnings
Analysis", on page F-6 in the MD & A, and is incorporated herein by reference.
The Corporation's ratio of earnings to fixed charges on a consolidated
basis for each of the last five years is as follows:
Year ended December 31,
Ratio of Earnings to Fixed Charges: -----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Excluding Interest on Deposits 1.8 1.8 2.0 2.0 2.6
Including Interest on Deposits 1.4 1.4 1.4 1.4 1.5
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends:
Excluding Interest on Deposits 1.8 1.8 2.0 2.0 2.5
Including Interest on Deposits 1.4 1.4 1.4 1.4 1.5
For purposes of computing these consolidated ratios, earnings represent
income before income taxes, plus fixed charges. Fixed charges represent all
interest expense (ratios are presented both excluding and including interest on
deposits), the portion of net rental expense which is deemed representative of
the interest factor and the amortization of debt issuance expense.
The Corporation's long-term senior debt and preferred stock on a
consolidated basis for each of the last five years ended December 31, is as
follows:
Year ended December 31,
-----------------------
(In thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Long-term obligations $1,582,160 $1,678,696 $1,111,713 $885,428 $489,524
Non-Cumulative preferred
stock of the Corporation 100,000 100,000 100,000 100,000 100,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item appears on page F-2 through F-28
under the caption "MD&A", and is incorporated herein by reference.
Table K, "Maturity Distribution of Earning Assets", on page F-18 in the
MD&A, has been prepared on the basis of expected maturities. The Corporation
does not have a policy with respect to rolling over maturing loans, but rolls
over loans only on a case-by-case basis after review of such loans in accordance
with the Corporation's lending criteria.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the market risk of the Corporation's
Investments, appears on page F-16 through F-18 under the caption "MD&A", and is
incorporated herein by reference.
The Corporation uses different techniques to measure its exposure to
future changes in interest rates or interest rate risk ("IRR"). The Corporation
uses simulation analysis and static gap estimates for measuring short-term IRR.
Duration analysis is used to quantify the level of long-term IRR assumed, and
focuses on the estimated economic value of portfolio equity, also referred to as
market value of portfolio equity ("MVPE") of the Corporation; i.e., the
difference between the estimated market value of financial assets less the
estimated value of financial liabilities.
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Static gap analysis measures the value of asset maturing or repricing
within a particular time period, and the amount of liabilities maturing or
repricing in the same period. The repricing volumes typically include
adjustments for anticipated future asset prepayments and for differences in
sensitivity to market rates. The volume of net assets or liabilities repricing
during future periods is used as one short-term indicator of IRR.
Simulation analysis is another measurement used by the Corporation for
short-term IRR and it addresses some of the deficiencies of gap analysis. It
involves estimating the effect on net interest income ("NII") of one or more
future interest rate scenarios as applied to the repricing of the Corporation's
current assets and liabilities and the assumption of new balances. The
simulation analyses are performed using a computer-based earnings simulation
model and are based on various interest rate scenarios.
Longer-term IRR is measured using duration analysis, in particular the
duration of MVPE. It expresses in general terms, the sensitivity of the MVPE to
changes in interest rates. The estimated MVPE is obtained from the market values
of the cash flows from the Corporation's financial assets and liabilities, which
are primarily payments of interest and repayments of principal. In turn, the
duration of the MVPE in derived from the estimated duration of the Corporation's
assets and liabilities. The sensitivity of the MVPE thus incorporates all future
cash flows from NII, whereas other measures of IRR focus primarily on short-term
net interest income.
Duration measures the "average length" of a financial asset. In
particular it equals the weighted average maturity of all the cash flows of a
security, loan, deposit, etc., where the weights are equal to the present value
of each cash flow. The present value of a cash flow occurring in the future, is
its estimated market value as of a certain date. The sensitivity of the market
value of an asset or liability to changes in interest rates is primarily a
function of its duration. In general terms, the longer the duration of an asset
or liability is, the greater is the sensitivity of its market value to interest
rate changes. Since duration measures the "length" of a financial asset, it is
usually expressed in terms of years or months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages F-29 through
F-65, and on page F-28 under the caption "Statistical Summary - Quarterly
Financial Data", in the MD&A and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the captions "Shares Beneficially Owned
by Directors, Nominees and Executive Officers of the Corporation", "Beneficial
Ownership Reporting Compliance" and "Board of Directors and Committees"
including the "Nominees for Election as Directors", "Executive Officers",
"Family Relationships" and "Other Relationships, Transactions and Events" of the
Corporation's definitive proxy statement filed with the Securities and Exchange
Commission on or about March 23, 1999 (the "Proxy Statement"), is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation Program", and
under the caption "Popular, Inc. Performance Graph" of the Proxy Statement, is
incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Principal Stockholders" and under
"Shares Beneficially Owned by Directors, Nominees and Executive Officers of the
Corporation" of the Proxy Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Family Relationships" and "Other
Relationships, Transactions and Events" of the Proxy Statement, is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following financial statements and reports included on pages F-29
thru F-65 of the financial review section of the Corporation's Annual
Report to Shareholders, have been incorporated herein by reference:
(1) Financial Statements:
Report of Independent Accountants
Consolidated Statements of Condition as of December 31, 1998
and 1997
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1998
Consolidated Statements of Changes in Stockholders' Equity for
each of the years in the three-year period ended December
31, 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules: No schedules are presented
because the information is not applicable or is included in
the Consolidated Financial Statements described in A.1 above
or in the notes thereto.
(3) Exhibits
The exhibits listed on the Exhibits Index on page 19 of this
report are filed herewith or are incorporated herein by
reference.
B. The Corporation filed one report on Form 8-K during the quarter ended
December 31, 1998.
Dated: October 7, 1998
Items reported: Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POPULAR, INC.
-------------
(Registrant)
By: S\RICHARD L. CARRION
--------------------
Richard L. Carrion
Chairman of the Board, President
and Chief Executive Officer
Dated: 02-11-99 (Principal Executive Officer)
----------
By: S\JORGE A. JUNQUERA
-------------------
Jorge A. Junquera
Senior Executive Vice President
Dated: 02-11-99 (Principal Financial Officer)
----------
By: S\AMILCAR L. JORDAN
-------------------
Amilcar L. Jordan
Senior Vice President
Dated: 02-11-99 (Principal Accounting Officer)
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
S\RICHARD L. CARRION Chairman of the Board,
- ----------------------------- President and Chief
Richard L. Carrion Executive Officer 02-11-99
S\ALFONSO F. BALLESTER Vice Chairman of
- ----------------------------- the Board 02-11-99
Alfonso F. Ballester
S\ANTONIO LUIS FERRE Vice Chairman of
- ----------------------------- the Board 02-11-99
Antonio Luis Ferre
S\JUAN J. BERMUDEZ
- ----------------------------- Director 02-11-99
Juan J. Bermudez
S\FRANCISCO J. CARRERAS
- ----------------------------- Director 02-11-99
Francisco J. Carreras
S\DAVID H. CHAFEY, JR.
- ----------------------------- Director 02-11-99
David H. Chafey, Jr.
S\LUIS E. DUBON, JR.
- ----------------------------- Director 02-11-99
Luis E. Dubon, Jr.
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S\HECTOR R. GONZALEZ
- ----------------------------- Director 02-11-99
Hector R. Gonzalez
S\JORGE A. JUNQUERA
- ----------------------------- Director 02-11-99
Jorge A. Junquera
- ----------------------------- Director
Manuel Morales, Jr.
S\ALBERTO M. PARACCHINI
- ----------------------------- Director 02-11-99
Alberto M. Paracchini
S\FRANCISCO M. REXACH, JR.
- ----------------------------- Director 02-11-99
Francisco M. Rexach, Jr.
S\J. ADALBERTO ROIG, JR.
- ----------------------------- Director 02-11-99
J. Adalberto Roig, Jr.
- ----------------------------- Director
Felix J. Serralles, Jr.
- ----------------------------- Director
Julio E. Vizcarrondo, Jr.
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EXHIBIT INDEX
Exhibit No. Description Footnote
- -----------------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Popular, Inc. (1)
3.2 By laws of Popular, Inc.
4.1 Form of certificate for common stock.
4.3 Rights Agreement. (2)
4.4 Indenture dated as of October 1, 1991, as supplemented by the First
Supplemental Indenture thereto, dated February 28, 1995 and by the
Second Supplemental Indenture thereto, dated as of May 8, 1997, each
among Popular North America, Inc., Popular, Inc,. as Guarantor, and
The First National Bank of Chicago, as Trustee. (3)
4.7 Form of Certificate of 8.35% non-cumulative monthly Income Preferred
Stock, 1994 Series A (Liquidation Preference $25.00 per share). (4)
4.9 Subordinated Indenture dated as of November 30, 1995,
between Popular, Inc. and First National Bank of Chicago, as
trustee. (5)
4.10 Form of Subordinated Note of Popular, Inc. (6)
4.11 Indenture dated as of February 15, 1995, as supplemented by the First
Supplemental Indenture thereto, dated as of May 8, 1997, between
Popular, Inc. and First National Bank of Chicago, as Trustee. (7)
4.14 Form of Fixed Rate Medium-Term Note of Popular, Inc. (8)
4.15 Form of Floating Rate Medium-Term Note of Popular, Inc. (8a)
4.16 Form of Fixed Rate Medium-Term Note, Series D, of Popular North
America, Inc., endorsed with the guarantee of Popular, Inc. (8b)
4.17 Form of Floating Rate Medium-Term Note, Series D, of Popular North
America, Inc., endorsed with the guarantee of Popular, Inc. (8c)
10.8 Annual Management Incentive Compensation Plan for certain Division
Supervisors approved in January, 1987.
10.8.1 Popular, Inc. Senior Executive Long-Term Incentive Plan dated
October 6, 1994. (9)
10.8.2 Amendment to Popular, Inc. Senior Executive Long-Term Incentive Plan
dated April 23, 1998.
10.9 Stock Deferment Plan for outside directors effective on August 15,
1996. (10)
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10.12.2 Credit Agreement dated as of October 29, 1998 among Popular, Inc.
and Popular North America, Inc., and the lenders named therein. For
an aggregate principal amount of $320,000,000. The Chase Manhattan
Bank as Administrative agent and Chase Securities, Inc. as advisor,
as manager and book manager.
12.0 Computation of Ratio of Earnings to Fixed Charges
13.1 Registrants Annual Report to Shareholders for the year ended December
31, 1998
21.1 Schedule of Subsidiaries
23.1 Consent of Independent Auditors
27.0 Financial Data Schedule (for SEC use only)
99.1 Registrant's Proxy Statement for the April 27, 1999 Annual Meeting of
Stockholders
Popular, Inc. hereby agrees to furnish upon request to the Commission a copy of
each instrument defining the rights of holders of senior and subordinated debt
of Popular, Inc. or of any of its consolidated subsidiaries.
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(1) Incorporated by reference to Exhibit 3.1 of the 1997 Form 10-K.
(2) Incorporated by reference to Exhibit 1 of Registration Statement on
Form 8-A, filed on August 28, 1998.
(3) Incorporated by reference to Exhibit 4 (f) of Registration Statement
No. 333-26941.
(4) Incorporated by reference to Exhibit 4.7 of the 1994 Form 10-k.
(5) Incorporated by reference to Exhibit 4(e) of Registration Statement No.
333-26941
(6) Incorporated by reference to Exhibit 4(p) on Form 8-K filed on December
13, 1995.
(7) Incorporated by reference to Exhibit 4(d) of Registration Statement No.
333-26941.
(8) Incorporated by reference to Exhibit 4(1) of Form 8-K filed on June 11,
1997.
(8a) Incorporated by reference to Exhibit 4(m) of Form 8-K filed on June 11,
1997.
(8b) Incorporated by reference to Exhibit 4(n) of Form 8-K on June 11, 1997.
(8c) Incorporated by reference to Exhibit 4(o) of Form 8-K filed on June 11,
1997.
(9) Incorporated by reference to Exhibit 10.8.1 of the 1994 Form 10-K.
(10) Incorporated by reference to Exhibit 10.9 of the 1996 Form 10-K.
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