<PAGE> 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, 1996 Commission file number 0 - 13818
------------------ ---------
BANPONCE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-041-6582
- ------------------------ -----------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
Popular Center Building
209 Munoz Rivera avenue, Hato Rey
San Juan, Puerto Rico 00918
----------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (787) 765-9800
--------------
Not Applicable
- --------------------------------------------------------------------------------
(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
----- -----
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 66,088,506
---------------------------- --------------------------------------------
(Title of Class) (Shares Outstanding as of November 13, 1996)
<PAGE> 2
2
BANPONCE CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
<S> <C>
Item 1. Financial Statements
Unaudited consolidated statements of condition
September 30, 1996 and December 31, 1995. 3
Unaudited consolidated statements of income - Three
and Nine months ended September 30, 1996 and 1995. 4
Unaudited consolidated statements of cash
flows - Nine months ended September 30, 1996 and 1995. 5
Notes to unaudited consolidated financial
statements. 6-13
Item 2. Management's discussion and analysis of
financial condition and results of operation. 14-24
Part II - Other Information
Item 1. Legal proceedings - None N/A
Item 2. Changes in securities - 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 - None N/A
Item 6. Exhibits and reports on Form 8-K 25
--- Signature 25
</TABLE>
<PAGE> 3
3
BANPONCE CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 488,151 $ 458,173
- -------------------------------------------------------------------------------------------------------------
Money market investments:
Federal funds sold and securities and
mortgages purchased under agreements to resell 1,152,352 796,417
Time deposits with other banks 5,348 100
Banker's acceptances 1,954 2,202
- -------------------------------------------------------------------------------------------------------------
1,159,654 798,719
- -------------------------------------------------------------------------------------------------------------
Investment securities held to maturity, at cost 1,712,154 1,651,344
Investment securities available-for-sale,
at market value 2,832,553 3,209,974
Trading account securities, at market value 372,354 330,674
Loans held-for-sale 176,937 112,806
Loans 9,743,305 8,883,963
Less - Unearned income 330,954 319,285
Allowance for loan losses 182,372 168,393
- -------------------------------------------------------------------------------------------------------------
9,229,979 8,396,285
- -------------------------------------------------------------------------------------------------------------
Premises and equipment 345,992 325,203
Other real estate 4,540 7,807
Customer's liabilities on acceptances 2,053 2,208
Accrued income receivable 120,220 113,539
Other assets 177,307 125,742
Intangible assets 133,684 142,977
- -------------------------------------------------------------------------------------------------------------
$16,755,578 $15,675,451
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,082,455 $ 2,021,658
Interest bearing 8,506,526 7,855,004
- -------------------------------------------------------------------------------------------------------------
10,588,981 9,876,662
- -------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold
under agreements to repurchase 2,787,186 3,000,878
Other short-term borrowings 848,071 454,707
Notes payable 861,933 730,428
Senior debentures 30,000 30,000
Acceptances outstanding 2,053 2,208
Other liabilities 292,249 263,871
- -------------------------------------------------------------------------------------------------------------
15,410,473 14,358,754
- -------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000 175,000
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity :
Preferred stock 100,000 100,000
Common stock 396,292 197,692
Surplus 479,792 427,282
Retained earnings 250,022 350,480
Unrealized losses (gains) on securities available-for-sale, net of
deferred taxes (6,001) 16,243
Capital reserves 50,000
- -------------------------------------------------------------------------------------------------------------
1,220,105 1,141,697
- -------------------------------------------------------------------------------------------------------------
$16,755,578 $15,675,451
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements
<PAGE> 4
4
BANPONCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended For the nine months ended
September 30, September 30,
(Dollars in thousands, except per share amounts) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans $235,995 $208,175 $679,269 $599,254
Money market investments 14,566 8,885 34,121 13,467
Investment securities 71,259 67,637 211,646 189,772
Trading account securities 5,277 3,762 14,963 5,002
- ----------------------------------------------------------------------------------------------------------------------------------
327,097 288,459 939,999 807,495
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 89,851 83,886 259,540 245,536
Short-term borrowings 53,190 43,325 137,745 97,945
Long-term debt 11,820 12,833 39,810 35,952
- ----------------------------------------------------------------------------------------------------------------------------------
154,861 140,044 437,095 379,433
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 172,236 148,415 502,904 428,062
Provision for loan losses 22,436 18,987 65,381 43,331
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 149,800 129,428 437,523 384,731
Service charges on deposit accounts 21,390 19,976 63,855 57,618
Other service fees 19,035 16,456 55,823 45,832
Gain (loss) on sale of securities 4,911 1,950 5,620 2,062
Trading account profit (loss) (216) 293 (661) 593
Other operating income 6,279 8,156 28,069 18,651
- ----------------------------------------------------------------------------------------------------------------------------------
201,199 176,259 590,229 509,487
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 46,672 44,626 137,536 128,837
Profit sharing 5,789 4,435 17,544 14,268
Pension and other benefits 15,632 13,302 48,267 43,985
- ----------------------------------------------------------------------------------------------------------------------------------
68,093 62,363 203,347 187,090
Net occupancy expense 8,700 8,236 26,614 24,258
Equipment expenses 12,037 10,274 35,617 29,610
Other taxes 5,816 5,241 17,245 15,966
Professional fees 11,659 8,847 32,568 25,619
Communications 6,748 5,731 19,561 17,023
Business promotion 6,357 4,270 17,776 12,232
Printing and supplies 2,928 3,047 8,871 8,345
Other operating expenses 8,663 6,470 22,861 27,335
Amortization of intangibles 4,452 5,117 13,536 15,157
- ----------------------------------------------------------------------------------------------------------------------------------
135,453 119,596 397,996 362,635
Income before taxes 65,746 56,663 192,233 146,852
Income taxes 19,473 18,356 54,763 40,743
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 46,273 $ 38,307 $137,470 $106,109
==================================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 44,186 $ 36,220 $131,208 $ 99,847
==================================================================================================================================
EARNINGS PER COMMON SHARE: $ 0.67 $ 0.55 $ 1.99 $ 1.52
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
<PAGE> 5
5
BANPONCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 137,470 $ 106,109
- ------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of premises and equipment 36,033 32,283
Provision for loan losses 65,381 43,331
Amortization of intangibles 13,536 15,157
Gain on sale of investment securities available-for-sale (5,620) (2,062)
Loss on disposition of premises and equipment 34 125
Amortization of premiums and accretion of discounts on investments 7,191 (2,479)
Increase in loans held-for-sale (64,131) (5,689)
Amortization of deferred loan fees and costs (2,283) 432
Net increase in postretirement benefit obligation 6,812 5,770
Net increase in trading securities (41,681) (48,659)
Net increase in interest receivable (6,068) (35,380)
Net increase in other assets (28,900) (11,989)
Net increase in interest payable 8,780 384
Net decrease in current and deferred taxes (20,937) (5,401)
Net increase in other liabilities 15,487 6,924
- ------------------------------------------------------------------------------------------------------------------------------
Total adjustments (16,366) (7,253)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 121,104 98,856
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase)decrease in money market investments (348,268) 127,792
Purchases of investment securities held-to-maturity (17,836,268) (11,030,926)
Maturities of investment securities held-to-maturity 17,772,265 10,985,704
Purchases of investment securities available-for-sale (4,102,815) (818,398)
Maturities of investment securities available-for-sale 1,933,938 78,867
Sales of investment securities available-for-sale 2,542,954 234,056
Net disbursements on loans (1,130,766) (861,871)
Proceeds from sale of loans 300,128 88,876
Acquisition of loan portfolios (37,603) (46,575)
Assets acquired, net of cash (7,164) (29,189)
Acquisition of premises and equipment (56,529) (44,047)
Proceeds from sale of premises and equipment 3,026 8,893
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (967,102) (1,306,818)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 649,614 532,568
Net deposits acquired 163,577
Net (decrease) increase in federal funds purchased and
securities sold under agreements to repurchase (213,692) (413,269)
Net increase (decrease) in other short-term borrowings 393,363 (177,298)
Proceeds from issuance of notes payable 546,712 327,153
Payments of notes payable (415,207) (87,508)
Payments of subordinated notes (50,000)
Dividends paid (37,920) (32,557)
Proceeds from issuance of common stock 3,106 2,528
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 875,976 1,141,732
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 29,978 (66,230)
Cash and due from banks at beginning of period 458,173 442,316
- ------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 488,151 $ 376,086
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
<PAGE> 6
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share information)
NOTE 1- CONSOLIDATION
The consolidated financial statements of BanPonce Corporation include the
balance sheet of the Corporation and its wholly-owned subsidiaries, Vehicle
Equipment Leasing Company, Inc. (Velco); BP Capital Markets, Inc.; Popular
International Bank, Inc. and its wholly-owned subsidiary BanPonce Financial
Corp., including Banco Popular, FSB, Pioneer Bancorp, Inc., CombanCorp
(acquired on September 30, 1996) (second tier subsidiaries) and Equity One,
Inc.; and Banco Popular de Puerto Rico and its wholly-owned subsidiaries,
Popular Leasing and Rental, Inc., Popular Consumer Services, Inc. and Popular
Mortgage, Inc., as of September 30, 1996 and December 31, 1995, and their
related statements of income and cash flows for the nine-months ended September
30, 1996 and 1995. 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 1996
presentation.
NOTE 2- ACCOUNTING CHANGES
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity as well as assets held for disposition be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. For the quarter and nine-month period ended
September 30,1996, the Corporation recognized a loss of $700, based on the
requirements of this pronouncement.
Effective January 1, 1996, the Corporation adopted SFAS 122, "Accounting for
Mortgage Servicing Rights." This statement requires that mortgage banking
enterprises recognize as separate assets the rights to service mortgage loans
for others, whether those servicing rights are originated or purchased. Also,
it requires mortgage banking enterprises to assess capitalized mortgage
servicing rights for impairment based on the fair value of those rights.
Pursuant to the provisions of SFAS 122, the total cost of mortgage loans to be
sold with servicing rights retained is allocated to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. These mortgage servicing rights are amortized in
proportion to and over the periods of estimated net servicing income.
To estimate the fair value of mortgage servicing rights the Corporation
considers prices for similar assets and the present value of expected future
cash flows associated with the servicing rights calculated using assumptions
that market participants would use in estimating future servicing income and
expense. For purposes of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Corporation stratifies such rights based on
predominant risk characteristics of underlying loans, such as loan type, rate
and term. The amount of impairment recognized if any, is the amount by which
the capitalized mortgage servicing rights per stratum exceeds its estimated
fair value. Impairment is recognized through a valuation allowance. As of
September 30, 1996, the carrying value, estimated fair value and valuation
allowance of capitalized mortgage servicing rights were $24,193, $30,864 and
$64, respectively. For the quarter and nine-
<PAGE> 7
7
period ended September 30, 1996, the Corporation realized additional income of
$1,366 and $2,976, respectively, as a result of the adoption of this
pronouncement.
Effective January 1, 1996, the Corporation adopted SFAS 123 "Accounting for
Stock-Based Compensation." This statement establishes a fair value-based method
of accounting for stock-based employee compensation plans. It encourages
entities to adopt this method in lieu of the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", for all arrangements under which
employees receive shares of stock or other equity instruments of the employer
or the employer incurs liabilities to employees in amounts based on the price
of its stock. Banco Popular provides a stock-based compensation plan for its
senior management. It is a three-year incentive plan under which shares of
stock of the Corporation are granted if long-term corporate performance and
objectives are met. For the quarter and nine-month period ended September 30,
1996, the Corporation recognized $401 and $615, respectively, related to this
plan.
Effective January 1, 1995, the Corporation adopted SFAS 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." These
statements address the accounting by creditors for impairment of certain loans
and require that impaired loans as defined, be measured based on the present
value of expected future cash flows discounted at the loan's effective rate, at
the loan's observable market price or, on the fair value of the collateral if
the loan is collateral dependent. As of September 30, 1996, the recorded
investment in loans that are considered to be impaired under SFAS 114 was
$89,153 (1995 - $98,175), of which $53,632 (1995 - $46,439) had a related
allowance for possible loan losses of $14,576 (1995 - $16,600). Average
impaired loans during the quarter and the first nine months of 1996 were
$89,239 and $86,141, respectively (1995 - $93,716 and $91,608). The Corporation
recognized interest income on impaired loans of $1,147, and $2,735,
respectively, for the quarter and nine-month period ended September 30, 1996
(1995 - $927 and $2,325).
In June 1996, the Financial Accounting Standard Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of financial components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. The pronouncement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities ocurring after December
31, 1996, and is to be applied prospectively. The Corporation has not yet
determined the impact of this statement.
<PAGE> 8
8
NOTE 3 - INVESTMENT SECURITIES
The average maturities as of September 30, 1996, and market value for the
following investment securities are :
Investment securities held-to-maturity:
<TABLE>
<CAPTION>
September 30,
1996 1995
Amortized Amortized
Cost Market Value Cost Market Value
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury (average maturity of
7 months) $ 922,075 $ 922,621 $2,144,326 $2,151,139
Obligations of other U.S. Government
agencies and corporations (average
maturity of 4 months) 280,376 279,433 214,280 212,445
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 2 years and 6 months) 188,138 189,687 197,694 201,988
Collateralized mortgage obligations (average
maturity of 1 year and 5 months) 195,276 194,259 370,599 366,165
Mortgage-backed securities (average
maturity of 4 years and 5 months) 54,837 53,989 124,280 123,474
Equity securities (without contractual
maturity) 58,773 58,773 43,558 43,558
Others (average maturity of 4 years
and 8 months) 12,679 12,645 12,515 12,550
-----------------------------------------------------------------------------
$1,712,154 $1,711,407 $3,107,252 $3,111,319
============================================================================
</TABLE>
Investment securities available-for-sale:
<TABLE>
<CAPTION>
September 30,
1996 1995
Amortized Amortized
Cost Market Value Cost Market Value
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury (average maturity
of 1 year and 2 months) $2,033,960 $2,033,102 $ 904,314 $ 905,457
Obligations of other U.S. Government
agencies and corporations (average
maturity of 1 year and 11 months) 158,782 158,120 145,079 145,735
Obligations of Puerto Rico, States and
political subdivisions (average maturity
of 2 years and 8 months) 24,107 24,059 30,518 30,574
Collateralized mortgage obligations (average
maturity of 3 years) 296,727 295,953 64,980 64,850
Mortgage-backed securities (average
maturity of 18 years and 3 months) 295,457 290,990 183,656 183,268
Equity securities (without contractual
maturity) 11,512 11,439 3,984 3,984
Others (average maturity of 13 years
and 1 month) 19,050 18,890 35,786 43,324
-----------------------------------------------------------------------------
$2,839,595 $2,832,553 $1,368,317 $1,377,192
=============================================================================
</TABLE>
NOTE 4- PLEDGED ASSETS
Securities and insured mortgage loans of the Corporation of $3,007,804 (1995 -
$2,496,446) are pledged to secure public and trust deposits and securities and
mortgages sold under repurchase agreements.
<PAGE> 9
9
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, 1996, amounted to $13,366 and
$119,143. There are also outstanding other commitments and contingent
liabilities, such as guarantees and commitments to extend credit, which are not
reflected in the accompanying unaudited financial statements. No losses are
anticipated as a result of these transactions.
NOTE 6- SUBORDINATED NOTES
Subordinated notes consist of the following:
<TABLE>
<CAPTION>
September 30,
1996 1995
--------------------------------
<S> <C> <C>
Subordinated notes issued by the Corporation on
December 12, 1995, maturing on December 15,
2005, with interest payable semi-annually at 6.75% $ 125,000
--------------------------------
Subordinated notes issued by Banco Popular on March
29, 1989, which matured on June 15, 1996, with
interest payable quarterly and consisting of:
8.875% Fixed Rate Notes series A $15,000
8.6875% Fixed Rate Notes series B 15,000
Floating Rate Notes series A with interest
payable at 88% of LIBID rate 19,000
Floating Rate Notes series B with interest
payable at 86% of LIBID rate 1,000
--------------------------------
50,000
--------------------------------
$ 125,000 $50,000
================================
</TABLE>
NOTE 7- STOCKHOLDERS' EQUITY
Authorized common stock is 90,000,000 shares with a par value of $6 per share
of which 66,048,673 are issued and outstanding at September 30, 1996. On April
26,1996, the Corporation's Board of Directors authorized a stock split of one
share for each share outstanding effected in the form of a dividend on
July 1, 1996. As a result of the split, 33,000,590 shares were issued ,and
$198,004 were transferred from retained earnings 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. 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, are issued and outstanding at September 30, 1996.
NOTE 8- EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are calculated based on net income applicable
to common stockholders which amounted to $44,186 for the third quarter of 1996
(1995 -$36,220) and $131,208 for the nine months ended September 30, 1996 (1995
- - $99,847), after deducting the dividends on preferred stock. EPS are based on
66,048,673 average shares outstanding for the third quarter of 1996 (1995 -
65,844,636) and 66,000,086 average shares outstanding for the first nine months
of 1996 (1995 - 65,789,014), after restating for the stock split.
<PAGE> 10
10
NOTE 9 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the nine-month period ended September 30, 1996, the Corporation paid
interest and income taxes amounting to $427,946 and $70,047, respectively (1995
- - $382,692 and $36,741). In addition, the loans receivable transferred to other
real estate and other property for the nine-month period ended September 30,
1996, amounted to $2,089 and $3,849, respectively (1995 - $5,072, and $2,669).
The Corporation's stockholders' equity at September 30, 1996, includes $6,001,
net of deferred taxes, in unrealized holding losses on securities
available-for-sale, as compared with unrealized holding gains of $5,845 at
September 30, 1995.
NOTE 10- POPULAR INTERNATIONAL BANK, INC. (A WHOLLY-OWNED SUBSIDIARY OF
BANPONCE CORPORATION) FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular International Bank, Inc. and its
wholly-owned subsidiary BanPonce Financial Corp, including its wholly owned
subsidiaries: Pioneer Bancorp, Inc., Banco Popular, FSB, and Combancorp
(second-tier subsidiaries) and Equity One, Inc. as of September 30, 1996 and
1995, and the results of their operations for the nine-month periods then
ended. Combancorp was acquired on September 30, 1996.
POPULAR INTERNATIONAL BANK, INC.
STATEMENT OF CONDITION
(In thousands)
<TABLE>
<CAPTION>
September 30,
-------------
1996 1995
---- ----
Assets:
<S> <C> <C>
Cash $ 23,143 $ 24,248
Money market investments 44,513 28,468
Investment securities 203,375 265,793
---------- ----------
Loans 1,419,727 1,109,580
Less: Unearned income 46,008 41,448
Allowance for loan losses 20,126 15,492
---------- ----------
1,353,593 1,052,640
Other assets, consisting principally of
intangible assets, including goodwill, net
of amortization 74,731 62,763
---------- ----------
Total assets $1,699,355 $1,433,912
========== ==========
Liabilities and Stockholder's Equity:
Deposits $ 632,657 $ 527,616
Short-term borrowings 340,384 149,934
Notes payable 519,224 589,111
Other liabilities 31,993 33,210
Stockholder's equity 175,097 134,041
---------- ----------
Total liabilities and stockholder's equity $1,699,355 $1,433,912
========== ==========
</TABLE>
<PAGE> 11
11
POPULAR INTERNATIONAL BANK, INC.
STATEMENT OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Quarter ended For the nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Income:
<S> <C> <C> <C> <C>
Interest and fees $37,968 $31,700 $110,235 $87,153
Other service fees 6,850 6,202 17,387 11,958
------- ------- -------- -------
Total income 44,818 37,902 127,622 99,111
------- ------- -------- -------
Expenses:
Interest expense 20,196 17,805 59,723 49,147
Provision for loan losses 3,276 2,347 10,288 5,801
Operating expenses 12,198 9,095 33,176 26,254
------- ------- -------- -------
Total expenses 35,670 29,247 103,187 81,202
------- ------- -------- -------
Income before income tax 9,148 8,655 24,435 17,909
Income tax 3,987 3,370 9,994 7,168
------- ------- -------- -------
Net income $ 5,161 $ 5,285 $ 14,441 $10,741
======= ======= ======== =======
</TABLE>
<PAGE> 12
12
NOTE 11 - BANPONCE FINANCIAL CORP (A SECOND TIER SUBSIDIARY OF BANPONCE
CORPORATION) FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of BanPonce Financial Corp and its wholly-owned
subsidiaries Pioneer Bancorp Inc.,Banco Popular, FSB, Combancorp and Equity
One, Inc. (second tier susidiary) as of September 30, 1996, and 1995 and the
results of their operations for the nine-month periods then ended. Combancorp
was acquired on September 30, 1996.
BANPONCE FINANCIAL CORP
STATEMENT OF CONDITION
(In thousands)
<TABLE>
<CAPTION>
September 30,
-------------
1996 1995
---- ----
Assets:
<S> <C> <C>
Cash $ 23,114 $ 24,201
Money market investments 43,511 27,496
Investment securities 203,375 265,793
---------- ----------
Loans 1,419,727 1,109,580
Less: Unearned income 46,008 41,448
Allowance for loan losses 20,126 15,492
---------- ----------
1,353,593 1,052,640
Other assets, consisting principally of
intangible assets, including goodwill, net
of amortization 74,554 62,648
---------- ----------
Total assets $1,698,147 $1,432,778
========== ==========
Liabilities and Stockholder's Equity:
Deposits $ 632,657 $ 527,616
Short-term borrowings 340,384 149,934
Notes payable 519,224 589,111
Other liabilities 31,974 33,190
Stockholder's equity 173,908 132,927
---------- ----------
Total liabilities and stockholder's equity $1,698,147 $1,432,778
========== ==========
</TABLE>
<PAGE> 13
13
BANPONCE FINANCIAL CORP
STATEMENT OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Quarter ended For the nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Income:
<S> <C> <C> <C> <C>
Interest and fees $37,951 $31,684 $110,185 $87,108
Other service fees 6,934 6,202 17,471 11,958
------- ------- -------- -------
Total income 44,885 37,886 127,656 99,066
------- ------- -------- -------
Expenses:
Interest expense 20,196 17,805 59,723 49,147
Provision for loan losses 3,276 2,347 10,288 5,801
Operating expenses 12,221 9,116 33,245 26,225
------- ------- -------- -------
Total expenses 35,693 29,268 103,256 81,173
------- ------- -------- -------
Income before income tax 9,192 8,618 24,400 17,893
Income tax 3,987 3,370 9,994 7,168
------- ------- -------- -------
Net income $ 5,205 $ 5,248 $ 14,406 $10,725
======= ======= ======== =======
</TABLE>
<PAGE> 14
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial discussion contains an analysis of the consolidated financial
position and financial performance of BanPonce Corporation and its wholly-owned
subsidiaries (the Corporation) and should be read in conjunction with the
consolidated financial statements, notes and tables included elsewhere in this
report. The Corporation offers a wide range of products and services through
its subsidiaries and is engaged in the following businesses:
- Commercial Banking/Savings and Loans - Banco Popular de Puerto Rico (Banco
Popular), Pioneer Bank, Inc., Banco Popular, FSB and Commerce National
Bank. The latter was acquired on September 30, 1996.
- Lease Financing - Popular Leasing and Rental, Inc., and Vehicle Equipment
Leasing Company, Inc. (VELCO)
- Mortgage Banking/Consumer Finance - Popular Mortgage, Inc. (d/b/a Puerto
Rico Home Mortgage), Equity One, Inc. (Equity One) and Popular Consumer
Services, Inc. (d/b/a Best Finance)
- Investment Banking - BP Capital Markets, Inc. (BP Capital)
NET INCOME
The Corporation reported net earnings of $46.3 million for the third quarter of
1996, compared with $38.3 million realized in the same period of 1995, and
$46.1 million reported during the second quarter of 1996. Earnings per common
share (EPS) for the quarter were $0.67, based on 66,048,673 average shares
outstanding, compared with EPS of $0.55 for the third quarter of 1995, based
on 65,844,636 average shares outstanding and EPS of $0.67 for the second
quarter of 1996, based on 66,001,180 average shares outstanding, after
adjusting for the stock split in the form of a dividend of one share for each
share outstanding effective July 1, 1996. Return on assets (ROA) and return on
common equity (ROE) for the quarter ended September 30, 1996, were 1.10% and
15.94%, respectively, compared with 1.03% and 14.55% reported during the third
quarter of 1995 and 1.16% and 16.56%, respectively, for the second quarter of
1996.
The increase of $8 million in quarterly earnings is derived mainly from
the improvement of $23.8 million realized in net interest income and higher
non-interest revenues by $4.6 million, partially offset by increases of $15.9
million in operating expenses, $3.4 million in the provision for loan losses,
and $1.1 million in income tax expense.
For the nine-month period ended September 30, 1996, the Corporation
reported net earnings of $137.5 million, increasing almost 30% when compared
with the $106.1 million in net earnings attained during the first nine months
of 1995. EPS for both periods were $1.99 and $1.52, respectively, based on
66,000,086 average shares outstanding for the first nine months of 1996 and
65,789,014 for the same period in 1995. ROA and ROE for the nine-month period
ended September 30, 1996, were 1.14% and 16.29%, respectively, compared with
1.03% and 14.00%, respectively, in the same period of 1995.
<PAGE> 15
15
NET INTEREST INCOME
Net interest income for the quarter ended September 30, 1996, reached $172.2
million compared with $148.4 million reported for the same quarter in 1995. On
a taxable equivalent basis, net interest income increased to $184.1 million
from $159.9 million in the third quarter of 1995 and $180.5 million in the
second quarter of 1996. This rise resulted from a $16.9 million increase due to
a higher volume of earning assets and a $7.3 million increase due to a higher
net interest yield, on a taxable equivalent basis. For analytical purposes, the
interest earned on tax-exempt assets is adjusted to a taxable equivalent basis
assuming the applicable statutory income tax rates. The highest marginal tax
rate in Puerto Rico, the Corporation's principal place of business, was reduced
from 42% in 1995 to 39% in 1996.
Average earning assets reached $15.8 billion for the quarter ended
September 30, 1996, compared with $13.8 billion for the same quarter of 1995.
Loans contributed with 52% of the growth in earning assets, while the remaining
48% of the increase was attained in money market investments, investment and
trading account securities.
Average money market investments reached $1.1 billion for the third
quarter of 1996, compared with $601 million for the same period of 1995. The
increase of $484 million was mainly accomplished at BP Capital, contributing
$454 million to the total increase. The yield on money market investments
decreased from 5.87% to 5.34%, from the third quarter of 1995 to the third
quarter of 1996, due primarily to a decrease in the general level of short-term
interest rates during that time period, as a result of a stimulative monetary
policy implemented by the Federal Reserve.
Average investment securities reached $4.9 billion compared with $4.6
billion in the same quarter of 1995. The increase arose principally from
increased activity at Banco Popular during the quarter. Anticipating a
substantial reduction in the volume of 936 funds, Banco Popular, started
raising conventional funds from U.S. banks and other institutional lenders in
order to strengthen and enhance its access to financing in the capital markets,
investing the proceeds in U.S. Agency Discount Notes. This arbitrage activity
may decrease during the fourth quarter of the year when conventional funds are
expected to replace a portion of the 936 funds expected to be withdrawn. The
average yield of the Corporation's investment portfolio, including both
available-for-sale and held-to-maturity investments, decreased 12 basis points
to 6.59% during the three-month period ended September 30, 1996, from 6.71%
during the same period of 1995. The latter is the result of the run-off of
higher yielding securities in a decreasing interest rate scenario and the lower
yield of U. S. Agency Discount Notes as the Federal Reserve decreased interest
rates in late 1995 and early 1996.
The average balance of trading account securities for the three-month
period ended September 30, 1996, totaled $375 million compared with $248
million reported for the same quarter last year. Puerto Rico Home Mortgage and
BP Capital are the main contributors to this rise, with increases of $96.2
million and $33.7 million, respectively.
The Corporation had a significant growth in total average loans for the
quarter with an increase of $1.0 billion or 12.3%, compared with the average
balance of $8.4 billion in the third quarter of 1995. The increases in the
commercial loan portfolio, including construction loans, of $476 million and
in the mortgage loan portfolio of $265 million accounted for 72% of the total
increase. These increases occurred mainly in Banco Popular and Equity One,
respectively. The average yield on loans, on a taxable equivalent basis, rose 8
basis points from 10.01% to 10.09% in 1996. The loan category that was
responsible for most of the yield improvement was personal loans which had an
average yield for the quarter of 11.57%, compared with 10.84% in the third
quarter of 1995. Other categories, such as
<PAGE> 16
16
financing leases and credit cards, also showed higher yields during the
quarter, while the yield on commercial loans, including construction, remained
flat and the yield on mortgages decreased 4 basis points.
As a result of the increase in the proportion of lower yielding assets,
partially offset by the higher yield on loans, the average yield on earning
assets, on a taxable equivalent basis, decreased 9 basis points from 8.66%
for the third quarter of 1995 to 8.57% during the third quarter of 1996.
Average interest bearing liabilities of the Corporation were $13.3
billion for the three-month period ended September 30, 1996, compared with
$11.6 billion for the same period of 1995. Average interest bearing deposits
increased $724 million, mostly in certificates of deposits, including other
time deposits and in savings accounts, which rose $468 million and $203
million, respectively, for the third quarter of 1996. Average demand deposits
grew by $210 million from $1.8 billion to $2.0 billion.
Average costs of interest bearing deposits for the quarters ended
September 30, 1996 and 1995 were 4.18% and 4.25%, respectively. The decrease of
7 basis points was principally the result of a decrease in the average cost of
certificates of deposit, including other time deposits for the third quarter of
1996, of 23 basis points from 5.45% to 5.22%. The average cost of NOW and money
market deposits also decreased 13 basis points, to 3.31% in the third quarter
of 1996. The average cost of savings accounts increased to 3.05%, from 2.98%
reported during the third quarter of 1995.
Average short-term borrowings increased $834 million to $3.9 billion
during the third quarter of 1996, compared with $3.1 billion reported during
the same period of 1995. The increase was mainly realized at BP Capital with a
$473 million increase in average balance, mostly related to its arbitrage
activities. The average cost of short-term borrowings for the quarter ended
September 30, 1996, decreased by 16 basis points, from 5.42% to 5.26% in 1996.
The decline in both, the average cost of interest bearing deposits and
borrowings, resulted in a decrease in the total cost of interest bearing
liabilities of 17 basis points, from 4.76% to 4.59% for the third quarter of
1995 and 1996, respectively. The cost of funding earning assets was 3.87% for
the quarter ended September 30, 1996, compared with 4.00% for the same quarter
a year before.
The net interest yield, on a taxable equivalent basis, for the third
quarter of 1996, was 4.70% compared with 4.66% for the same quarter in 1995 and
4.85% in the second quarter of 1996. The increase in the net interest yield
mostly resulted from the decline in funding costs, particularly certificates of
deposit and borrowings.
Table A below contains a summary of the results of the Corporation's net
interest yield, on a taxable equivalent basis, for the nine-month periods ended
September 30, 1996 and 1995. The rise of $79.5 million in net interest income
results from a $56.5 million increase due to a higher volume of average earning
assets and a $23.0 million effect due to higher net interest yield, on a
taxable equivalent basis.
<PAGE> 17
17
TABLE A
<TABLE>
<CAPTION>
NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
(Dollars in millions) First Nine Months
- -----------------------------------------------------------------------------
1996 Average 1995 Average
---------------------------------------------------
Balance Rate Balance Rate
---------------------------------------------------
<S> <C> <C> <C> <C>
Earning assets $15,142 8.61% $12,896 8.69%
======= =======
Financed by:
Interest $12,655 4.57% $10,679 4.72%
bearing funds
Non interest
bearing funds 2,487 2,217
------- -------
TOTAL $15,142 3.82% $12,896 3.91%
======= =======
Net interest income
per books $ 502.9 $ 428.1
Taxable equivalent
adjustment 36.3 31.6
------- -------
Net interest income on a
taxable equivalent basis $ 539.2 $ 459.7
======= =======
Spread 4.04% 3.97%
Net interest yield 4.79% 4.78%
</TABLE>
For the last 20 years Section 936 of the U.S. Internal Revenue Code (the
Code) has granted U.S. corporations operating in Puerto Rico (936 corporations)
a tax credit against its federal tax liability for the net revenues derived
from both qualifying active business and certain passive investments held in
Puerto Rico banks, known as Qualified Possession Source Investment Income
(QPSII). This favorable tax environment created a local funds market with an
average cost usually below the U.S. market or the Eurodollar market. Financial
institutions and other eligible borrowers in Puerto Rico have benefited from
that low cost, although having to comply with certain investment requirements
imposed by local regulations. In August, the U.S. Congress approved legislation
that increased the federal minimum wage and repealed Section 936 of the Code.
The bill approved repealed QPSII effective July 1, 1996, for taxable years
beginning after December 31, 1995, while the income and wage credits will be
phased out in 10 years. As a result, the Corporation anticipates a substantial
reduction in the volume of 936 funds during the fourth quarter of 1996 and its
substitution with conventional, more expensive funds. This may have the effect
of increasing the cost of funds, therefore reducing the net interest income
projected for the fourth quarter of 1996. The expected increase in the cost of
funds should be partially offset by several mitigating factors which include a
higher rate charged on commercial loans, whose price was previously indexed to
a 936 market rate, and a lower level of investments required by local
regulations to all recipients of 936 funds which earn a return substantially
below market rates. In addition, some 936 corporations may choose not to
withdraw a portion of their funds from financial institutions and rather invest
those funds at a longer term to reduce the tollgate taxes applicable upon
repatriating those funds. If this is the case, the cost of those funds should
remain below that of the U.S. or Eurodollar market. At September 30, 1996, the
Corporation had $3.2 billion in 936 funds, representing 20.6% of its
liabilities.
<PAGE> 18
18
PROVISION AND ALLOWANCE FOR LOAN LOSSES
As shown in Table B, the provision for loan losses for the third quarter of
1996 was $22.4 million or $3.4 million higher than the provision of $19.0
million recorded for the same quarter of 1995. For the second quarter of 1996
the provision was $21.7 million. Net charge-offs for the quarter ended
September 30, 1996, reached $18.8 million or 0.80% of average loans, compared
with $13.3 million or 0.64% reported for the same quarter in 1995, and $18.1
million or 0.80% for the quarter ended on June 30,1996.
TABLE B
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Quarter Provision for Net Allowance for
Ended Loan Losses Charge Offs Loan Losses
- ---------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
September 30, 1996 $22.4 $18.8 $182
June 30, 1996 21.7 18.1 178
March 31, 1996 21.3 14.9 175
December 31, 1995 21.2 17.3 168
September 30, 1995 19.0 13.3 164
</TABLE>
Consumer loans and lease financing net charge-offs increased $3.4 million
and $2.1 million, respectively. Consumer loans net charge-offs totaled $7.7
million or 1.24% of average consumer loans for the quarter ended September 30,
1996, while lease financing net losses amounted to $3.1 million or 2.44%. For
the same quarter last year, consumer loans and lease financing charge-offs
represented 0.79% and 0.81%, respectively, of their average portfolio.
TABLE C
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
<TABLE>
<CAPTION>
Third Quarter First Nine Months
(Dollars in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $178,330 $158,734 $168,393 $153,798
Allowance purchased 402 402
Provision for loan losses 22,436 18,987 65,381 43,331
-------------------------------------------------------------------
201,168 177,721 234,176 197,129
-------------------------------------------------------------------
Losses charged to the allowance
Commercial 8,814 9,226 27,214 22,161
Construction 510 508 1,703 2,008
Lease financing 6,166 1,316 14,360 4,120
Mortgage 549 468 1,605 1,130
Consumer 11,159 9,285 31,340 24,045
-------------------------------------------------------------------
27,198 20,803 76,222 53,464
-------------------------------------------------------------------
Recoveries
Commercial 1,798 2,229 7,702 5,502
Construction 108 130 286
Lease financing 3,029 315 5,938 1,888
Mortgage 37 56 230 183
Consumer 3,430 4,912 10,418 12,906
-------------------------------------------------------------------
8,402 7,512 24,418 20,765
-------------------------------------------------------------------
Net loans charged-off 18,796 13,291 51,804 32,699
-------------------------------------------------------------------
Balance at end of period $182,372 $164,430 $182,372 $164,430
===================================================================
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
Third Quarter First Nine Months
1996 1995 1996 1995
Ratios: --------------------------- --------------------------
<S> <C> <C> <C> <C>
Allowance for losses to loans 1.90% 1.94% 1.90% 1.94%
Allowance to non-performing assets 118.89 105.46 118.89 105.46
Allowance to non-performing loans 124.71 114.52 124.71 114.52
Non-performing assets to loans 1.60 1.84 1.60 1.84
Non-performing assets to total assets 0.92 1.04 0.92 1.04
Net charge-offs to average loans 0.80 0.64 0.76 0.54
Provision to net charge-offs 1.19x 1.43x 1.26x 1.33x
Net charge-offs earnings coverage 4.69 5.69 4.97 5.82
</TABLE>
Within the consumer category, credit cards experienced an increase of
approximately $2.9 million in credit losses during the third quarter of 1996,
mostly in the portfolio that the Corporation maintains in the U.S. mainland.
Credit cards net charge-offs represented 2.55% of the average credit card
portfolio for the third quarter of 1996, compared with 2.58% for the same
period of 1995. Economic factors such as the increase in personal bankruptcies
in 1996 and a rising trend in consumer debt as a percentage of disposable
personal income, contributed to the higher level of net credit losses in the
consumer loan portfolio.
Mortgage loans net charge-offs grew by $0.1 million during the third
quarter, whereas the construction loan portfolio experienced net charge-offs of
$0.4 million, for a $0.1 million improvement compared with the third quarter of
1995. Total commercial loans net charge-offs were $7.0 million in both the
third quarter of 1996 and 1995. Nevertheless, as a percentage of average loans
net charge-offs of commercial loans, including construction, decreased to 0.79%
this quarter from 0.92% in the third quarter of 1995.
For the nine-month period ended September 30, 1996, the provision for loan
losses increased $22.1 million to $65.4 million, from $43.3 million for the
same period in 1995. The growth of $1.1 billion in the loan portfolio since
September 30, 1995, and higher net charge-offs by $19.1 million for the
nine-month period were responsible for the increase in the provision. The
increase in net charge-offs was mostly experienced in consumer loans and lease
financing with rises of $9.8 million and $6.2 million, respectively. Commercial
and mortgage loans net credit losses also exceeded the amount of last year by
$2.9 million and $0.4 million, respectively, while construction loans net
charge-offs decreased by $0.2 million.
At September 30, 1996, the allowance for loan losses reached $182 million,
representing 1.90% of loans, compared with $164 million or 1.94% a year before.
Management considers that the allowance for loan losses is adequate to absorb
the potential write-offs in the loan portfolio based on the methodology
established for its evaluation, which includes portfolio risk characteristics,
prior loss experience, results of periodic credit reviews, current and
anticipated economic conditions and loan impairment measurement. Although the
allowance for loan losses as a percentage of loans decreased slightly, the
allowance to non-performing loans improved to 124.7% at September 30, 1996,
from the ratio of 114.5% at the same date of 1995.
The Corporation had $89 million in loans considered impaired at September
30, 1996, of which $54 million had a related allowance for possible loan losses
of $15 million. As of the same date last year, loans considered impaired
amounted to $98 million of which $46 million had a related allowance for loan
losses of $17 million.
CREDIT QUALITY
Non-performing assets (NPA) consist of past due loans on which no interest
income is being accrued, renegotiated loans and other real estate. The
Corporation reports its non-performing assets on a more conservative basis than
most U.S. banks. The standard industry practice is to place non-performing
commercial loans on non-accrual status when payments of principal or interest
are delinquent 90 days.
<PAGE> 20
20
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 that 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.
NPA as of September 30, 1996, amounted to $153 million or 1.60% of loans,
compared with $156 million or 1.84% at September 30, 1995. NPA were $152
million or 1.64% of loans at June 30, 1996. Despite the increase in loans in
most categories, there was a modest reduction in NPA compared with September
30, 1995, which helped to improve the ratios of NPA to total loans and the
allowance for loan losses to NPA, as shown in Table D.
TABLE D
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NPA Allowance
as a % as a %
Date NPA of Loans of NPA
- -------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
September 30, 1996 $153 1.60% 118.9%
June 30, 1996 152 1.64 117.0
March 31, 1996 151 1.70 116.0
December 31, 1995 155 1.79 108.6
September 30, 1995 156 1.84 105.5
</TABLE>
Non-performing loans totaled $146 million as of September 30, 1996,
compared with $144 million at the end of the third quarter of 1995 and $146
million as of June 30, 1996. Non-performing mortgage loans increased $13.2
million as compared with September 30, 1995, mainly in Equity One. As of
September 30, 1995, non-performing mortgage loans at Equity One amounted to
$3.4 million, compared with $14.3 million as of the same date this year. Most
of the increase relates to the significant increase in personal bankruptcies in
the U.S. mainland and the growth in the mortgage loan portfolio of that
subsidiary. Non-performing consumer loans increased $1.7 million. The increases
in non-performing mortgage and consumer loans were partially offset by
reductions in non-performing commercial, including construction loans and lease
financing, which decreased $7.4 million and $4.9 million, respectively. Also,
renegotiated loans decreased $0.2 million as compared with September 30, 1995.
Management efforts to successfully dispose of other real estate owned reduced
this non-performing asset by $4.9 million, particularly at Banco Popular and
Pioneer.
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, 1996, amounted to $114 million or
1.19% of loans, and the allowance for loan losses would be 159.9% of
non-performing assets. At September 30, 1995, and June 30, 1996, adjusted
non-performing assets were $124 million and $113 million, respectively, or
1.46% and 1.21% of loans.
Accruing loans that are contractually past due 90 days or more as to
principal or interest as of September 30, 1996, amounted to $12.2 million
compared with $16.0 million at September 30, 1995, and $13.2 million at June
30, 1996.
<PAGE> 21
21
OTHER OPERATING INCOME
Total other operating income, including securities and trading gains, increased
$4.6 million or 9.8% to $51.4 million for the third quarter of 1996, from $46.8
million reported for the same period in 1995. This increase resulted from
growth in service charges on deposit accounts, other service fees and higher
gains on sale of securities, partially compensated by reductions in trading
account profits and other operating income. For the first nine months, total
other operating income grew 22.4% to $152.7 million in 1996 from $124.8 million
in 1995.
Service charges on deposit accounts provided approximately 42% of other
operating income, increasing to $21.4 million for the third quarter of 1996,
from $20.0 million reported for the same period in 1995. The rise of $1.4
million or 7.1% is mainly attributed to a broader variety of services offered
to commercial accounts at Banco Popular, together with revisions made to their
fee structure. In addition, service charges on savings accounts showed an
increase as a result of a higher volume. For the nine-month period ended
September 30, 1996, service charges on deposit accounts totaled $63.8 million,
increasing $6.2 million from the $57.6 million reported for the same period a
year earlier.
Other service fees rose $2.6 million to $19.0 million for the third
quarter of 1996, from $16.4 million for the same quarter in 1995. This rise
was led by an increase of $1.3 million in debit card revenues resulting from a
higher volume of services provided by Banco Popular, including fees from the
rent of point-of-sale (POS) terminals, merchant transaction fees and ATM
interchange income. Credit card fees at Banco Popular increased $0.7 million,
reflecting the positive effect of promotional activities and merchant fee
volume, as well as an increase in volume of transactions. For the nine-month
period ended September 30, 1996, other service fees reached $55.8 million or
21.8% higher than the $45.8 million obtained a year earlier.
On the other hand, other operating income decreased $1.9 million to $6.3
million for the third quarter of 1996, from $8.2 million for the third quarter
of 1995. Both Banco Popular and BanPonce Financial recognized write-downs of
impaired assets during this quarter, which amounted to $1.9 million. Moreover,
the Corporation reflected a decrease in the gain on sale of mortgage loans due
to changes in market conditions. Partially offsetting this reduction was an
increase in income related to the daily rental operation of the Corporation's
leasing subsidiaries. Other operating income increased 50.5% for the nine-month
period ended September 30, 1996, reaching $28.1 million compared with $18.7
million for the same period last year.
Gains on sale of investment securities available-for-sale for the third
quarter of 1996 amounted to $4.9 million, principally due to the sale of $6.4
million in equity securities by BanPonce Financial. During the same quarter a
year earlier, BanPonce Financial sold $3.4 million in investment securities
that resulted in a gain of $2.9 million. Trading activities resulted in a net
loss of $0.2 million for the quarter ended September 30, 1996, compared with a
net profit of $0.3 million in the third quarter of 1995.
OPERATING EXPENSES
Operating expenses for the third quarter of 1996 were $135.5 million compared
with $119.6 million for the same quarter in 1995, an increase of $15.9 million
or 13.3%. For the first nine months of 1996, operating expenses rose to $398.0
million from $362.6 million for the same period in 1995.
Personnel costs amounted to $68.1 million for the third quarter of 1996,
increasing $5.7 million from $62.4 million for the same period of 1995.
Salaries accounted for a significant portion of this increase, rising $2.1
million or 4.6%, reaching $46.7 million for the quarter ended September 30,
1996, compared with $44.6 million for the same period in 1995, primarily due to
higher salary levels and incentive pay to
<PAGE> 22
22
compensate sales efforts and emphasize the fulfillment of objectives. Full-time
equivalent employees were 7,795 at September 30, 1996, up 142 from 7,653 as of
the same date a year earlier. Pension costs and other fringe benefits increased
$2.3 million to $15.6 million for the third quarter of 1996, reflecting an
increase in medical plan costs and in pension and postretirement benefits
expenses. Moreover, the profit sharing expense rose to $5.8 million for the
third quarter of 1996, from $4.4 million for the same period in 1995, as a
result of higher eligible salaries and stronger profitability ratios at Banco
Popular. Personnel costs for the nine-month period ended September 30, 1996,
grew $16.2 million or 8.7% to $203.3 million, from $187.1 million recorded for
the same period a year earlier.
Other operating expenses, excluding personnel cost, increased $10.2
million, reaching $67.4 million for the quarter ended September 30, 1996,
compared with $57.2 million for the same quarter in 1995. Professional fees
rose $2.8 million, principally at Banco Popular, reflecting expenditures for
purchased software associated with systems enhancements and for consulting
services related to the Corporation's strategic initiatives. Business promotion
expense rose $2.1 million as part of the ongoing campaign to promote the use of
electronic services at Banco Popular. In addition, during this quarter Banco
Popular invested in expanding the market penetration of new commercial and
retail products and services, by sponsoring events such as the transmission in
Puerto Rico of the Olympic Games and others.
Also, communications and equipment expenses increased $2.8 million,
mostly as a result of the expansion of the electronic payment system, an
upgrade to Banco Popular's communication system and the growth in the network
of POS terminals. During the three-month period ended September 30, 1996, a
total of 1,016 new POS terminals were installed bringing the current total to
9,998 terminals. In addition, in this quarter Banco Popular, FSB, the
Corporation's savings and loans subsidiary, recorded $1.2 million in other
operating expenses as a result of the one-time assessment to capitalize the
Savings Association Insurance Fund (SAIF) approved on September 30, 1996. The
new bill provides that, effective January 1, 1997, the assessment base for
payments of the interest on obligations issued by the Financing Corporation
(FICO) for the resolution of failed thrifts will be expanded to include all
FDIC-insured institutions. For the nine-month period ended September 30, 1996,
other operating expenses of the Corporation reached $194.6 million, compared
with $175.5 million reported for the same period in 1995.
Income tax expense for the quarter ended September 30, 1996, amounted to
$19.5 million, an increase of $1.1 million over the $18.4 million recorded for
the same quarter of 1995. The increase in income tax results basically from a
higher pre-tax income. For the nine-month period ended September 30, 1996,
income tax expense reached $54.8 million, compared with $40.7 million reported
for the same period in 1995. The effective tax rates for the third quarter of
1996 and the first nine months of 1996 were 29.6% and 28.5%, respectively,
compared with 32.4% and 27.7% for the same periods in 1995.
BALANCE SHEET COMMETS
The Corporation maintained its growing trend during the quarter just ended. At
September 30, 1996, the Corporation's total assets reached $16.8 billion, an
increase of 12.2% when compared with $14.9 billion at September 30, 1995. Total
assets at December 31, 1995, were $15.7 billion. Average assets for the first
nine months of 1996 were $16.1 billion compared with $13.8 billion for the same
period in 1995, an increase of 17.1%. Average assets for the year ended
December 31, 1995, were $14.1 billion.
Earning assets at September 30, 1996, increased to $15.7 billion from
$14.0 billion at September 30, 1995, and $14.7 billion at December 31, 1995.
Total loans accounted for $1.1 billion of that growth, reaching $9.6 billion at
September 30, 1996, or 13.0% higher than the $8.5 billion a year ago. Most loan
categories experienced growth. Commercial, including construction loans,
increased $482 million or 14.4%, from $3.3 billion at September 30, 1995, to
$3.8 billion at September 30, 1996. Mortgage loans rose $318 million or 13.4%,
from $2.4 billion at September 30, 1995. The increase was mostly
<PAGE> 23
23
experienced in Equity One, which rose $123 million and in Banco Popular with an
increase of $130 million. Consumer loans increased $282 million or 12.4% and
the lease financing portfolio rose $21 million or 4.2% as compared with
September 30, 1995. Total loans at December 31, 1995, amounted to $8.7 billion.
Money market investments amounted to $1.2 billion at September 30, 1996,
compared with $715 million as of the same date in 1995. BP Capital, which was
responsible for $398 million of the increase, had $1.1 billion in money market
investments at the end of the third quarter of 1996. Investment securities
totaled $4.5 billion as of both September 30, 1996 and 1995. These figures
include $2.8 billion in investment securities available-for-sale as of
September 30, 1996, and $1.4 billion as of September 30, 1995. The shift to the
available-for-sale portfolio mostly resulted from the reclassification of $1.3
billion from securities held-to-maturity at the end of 1995. In November 1995,
the Financial Accounting Standards Board (FASB) issued a Special Report, "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities". In conjunction with the issuance of this
Special Report the FASB provided for a one-time "window" to reclassify
securities from the held-to-maturity portfolio to the available-for-sale or
trading portfolios before January 1, 1996, without calling into question the
intent to hold other debt securities to maturity in the future. Trading account
securities amounted to $372 million at September 30, 1996, an increase of $91
million, mainly attained by BP Capital and Puerto Rico Home Mortgage.
On the liability side, total deposits reached $10.6 billion at September
30, 1996, or $861 million higher than the September 30, 1995 figure.
Non-interest bearing deposits amounted to $2.1 billion at September 30, 1996,
while interest bearing deposits reached $8.5 billion. These figures compare
with $1.8 billion and $7.9 billion, respectively, at the end of the third
quarter of 1995. A significant portion of the increase was realized at Banco
Popular, whose interest bearing deposits increased $538 million, particularly
in certificates of deposit, and its non-interest bearing deposits increased
$230 million. At September 30, 1996, 79.4% of the Corporation's total deposits
were in Puerto Rico and the Virgin Islands, and the remaining 20.6% were U.S.
deposits. Total 936 deposits at September 30, 1996, amounted to $1.0 billion.
Total deposits at December 31, 1995 were $9.9 billion.
Federal funds purchased and securities sold under agreements to
repurchase, notes payable and other short-term borrowings increased $721
million, from $3.8 billion at September 30, 1995, to $4.5 billion at September
30, 1996. This rise is mainly due to an increase of $423 million in other
short-term borrowings, mainly in Banco Popular and BanPonce Financial, and a
higher volume of securities sold under agreements to repurchase at BP Capital.
In addition, in September 1996 Banco Popular issued $150 million in promissory
notes.
Subordinated notes increased to $125 million at September 30, 1996, from
$50 million outstanding a year ago. On December 12, 1995, the Corporation
issued $125 million in subordinated notes carrying an interest rate of 6.75%
and maturing on December 15, 2005. The proceeds obtained from this issuance
were utilized to finance the growth and expansion of the Corporation's
subsidiaries. The $50 million subordinated notes outstanding at September 30,
1995, matured on June 15, 1996.
The Corporation's stockholders' equity at September 30, 1996, amounted to
$1.22 billion, compared with $1.10 billion at September 30, 1995. The increase
is mainly due to earnings retention. Also, the additional shares issued under
the Dividend Reinvestment Plan contributed $4.1 million in additional capital
since September 30, 1995. On April 26, 1996, the Board of Directors authorized
a two-for-one common stock split effected in the form of a dividend, which
doubled the total outstanding shares at the time. The new shares were issued on
July 1, 1996, to shareholders of record as of June 14, 1996, and $198 million
were transferred from retained earnings to common stock as a result of the
split. All per share data included herein has been adjusted to reflect the
stock split. Stockholders' equity at September
<PAGE> 24
24
30, 1996, includes $6.0 million, net of deferred taxes, in unrealized holding
losses on securities available-for-sale, compared with $5.8 million in
unrealized gains on securities available-for-sale at September 30, 1995.
Stockholders' equity at December 31, 1995, amounted to $1.14 billion.
The market value of the Corporation's common stock at September 30, 1996,
increased 39% to $27.00 per share, from $19.38 at the same date last year and
$22.50 at June 30, 1996. The Corporation's total market capitalization at
September 30, 1996, was $1.78 billion. Book value per common share increased to
$16.96 as of September 30, 1996, compared with $15.22 as of the same date last
year. The dividend payout ratio to common stockholders for the quarter ended
September 30, 1996, was 26.89% compared with 27.25% for the same quarter last
year.
The market value of the Corporation's preferred stock at September 30,
1996, was $26.50 per share compared with $26.75 at September 30, 1995, and
$26.50 at June 30, 1996.
Capital ratios continue well over regulatory requirements. The Corporation
ended the third quarter of 1996 with Tier I, total capital and leverage ratios
of 11.62%, 14.21% and 6.54%, respectively, compared with 11.57%, 12.83%
and 6.70% at September 30, 1995.
<PAGE> 25
25
Part II - Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
a) Exhibit No. Description Exhibit Reference
-------------- ------------------- ---------
<S> <C> <C>
19 Quarterly Report to shareholders for the Exhibit "A"
period ended September 30, 1996
27 Financial Data Schedule (For Sec use only) Exhibit"B"
<CAPTION>
b) Two reports on Form 8-K were filed for the quarter ended September 30,
1996:
<S> <C>
Dated: July 9, 1996 and August 30, 1996
Items reported: Item 5 - Other Events
Item 7 - Financial Statements, Pro-Forma,
Financial Information and Exhibits
</TABLE>
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.
BANPONCE CORPORATION
--------------------
(Registrant)
Date: 11/13/96 By: /s/ Jorge A. Junquera
-------- ---------------------------------------
Jorge A. Junquera
Senior Executive Vice President
Date: 11/13/96 By: /s/ Amilcar L. Jordan
-------- ---------------------------------------
Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller
<PAGE> 26
EXHIBIT A
QUARTERLY REPORT / SEPTEMBER 30, 1996
[GRAPH]
<PAGE> 27
TO OUR STOCKHOLDERS
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The financial results of BanPonce Corporation (the Corporation) remained strong
during the third quarter of 1996. The Corporation earned $46.3 million in the
third quarter of 1996, compared with $38.3 million for the third quarter of
1995, an increase of $8.0 million or 20.8%. Among the financial highlights for
this quarter, compared with the third quarter of 1995, net interest income rose
$23.8 million and other operating income rose $4.6 million, partially offset by
increases in the provision for loan losses of $3.4 million and in operating
expenses of $15.9 million.
Earnings per common share (EPS) for the quarter were $0.67, based on
66,048,673 average shares outstanding, compared with $0.55, based on 65,844,636
average shares outstanding for the quarter ended September 30, 1995, after
adjusting for the stock split in the form of a dividend of one share for each
share outstanding effective on July 1, 1996. Profitability improved with return
on assets (ROA) and return on common equity (ROE) increasing to 1.10% and
15.94%, respectively, for the third quarter of 1996, from 1.03% and 14.55% for
the same period a year earlier.
For the first nine months of 1996, net income was $137.5 million or $1.99 per
common share, up 29.6% from the $106.1 million or $1.52 per common share for the
first nine months of 1995. For the first nine months of this year, ROA was 1.14%
and ROE was 16.29%, compared with 1.03% and 14.00% for the same period in 1995.
Solid growth of $2.0 billion in the average volume of earning assets and a
higher net interest yield combined to produce a $23.8 million or 16.1% increase
in net interest income. Money market investments and investment securities
roughly contributed $829 million to the growth in average earning assets, while
loans contributed $1.0 billion.
The provision for loan losses increased to $22.4 million for the third
quarter of 1996, from $19.0 million for the same period a year earlier. Net
charge-offs for the third quarter were $18.8 million or 0.80% of average loans,
compared with $13.3 million or 0.64% of average loans reported for the same
quarter last year. For the first nine months of 1996, net charge-offs amounted
to $51.8 million or 0.76% of average loans, compared with $32.7 million or 0.54%
for the same period a year earlier.
Non-performing assets (NPA) at September 30, 1996, amounted to $153 million
compared with $156 million a year earlier and $152 million at June 30, 1996. As
a percentage of loans, non-performing assets represented 1.60%, 1.84% and 1.64%,
respectively, as of those same dates. The Corporation's non-accrual policy is
more conservative than the standard industry practice, as further explained in
the financial review section. When adjusted to conform to standard industry
practice, NPA were $114 million or 1.19% of total loans as of September 30,
1996, compared with $124 million or 1.46% as of the same date last year. The
allowance for loan losses at September 30, 1996, amounted to $182 million,
representing 1.90% of loans, compared with $164 million or 1.94% at the same
date in 1995.
Other operating revenues grew $4.6 million or 9.8%, from $46.8 million for
the third quarter of 1995 to $51.4 million for the same period in 1996.
Strategic initiatives aimed at transforming the payment system continue showing
benefits as the increase in other operating income is led by a growth of $1.3
million in debit card revenues. These revenues include fees from the rent of
point-of-sale terminals, merchant transaction fees and ATM interchange income.
Also, service charges on deposit accounts increased $1.4 million reflecting a
higher activity in commercial accounts and a higher volume of deposits.
Operating expenses for the three-month period ended September 30, 1996,
totaled $135.5 million compared with $119.6 million for the same quarter a year
earlier. Factors such as merit increases, expenses related to the implementation
of technological advances and strategic initiatives, the expansion of the
Corporation's business activities and the development of new products and
services resulted in higher operating expenses. Also, during this quarter Banco
Popular, FSB recorded a one-time assessment of $1.2 million in order to
capitalize the Savings Association Insurance Fund (SAIF).
The Corporation's total assets at September 30, 1996, were $16.8 billion
compared with $14.9 billion at the same date in 1995 and $16.4 billion as of
June 30, 1996. Total loans reached $9.6 billion while total deposits were $10.6
billion. The Corporation's capital increased to $1.2 billion at September
1
<PAGE> 28
30, 1996, compared with $1.1 billion a year earlier. Book value per common share
increased to $16.96 as of September 30, 1996, from $15.22 as of the same date
last year after adjusting to reflect the stock dividend.
At September 30, 1996, the market value of the Corporation's common stock was
$27.00. Based on 66,048,673 common shares outstanding, the Corporation had a
total market capitalization of $1.8 billion at September 30, 1996. The
Corporation enjoys strong risk-weighted capital ratios with a Tier I ratio of
11.62%, a total capital ratio of 14.21 % and a leverage ratio of 6.54%.
Please refer to the financial review section of this quarterly report for a
more detailed discussion of the Corporation's financial performance and results
of operations.
- -------------------------------------------------------------------------------
On September 30, 1996, BanPonce completed the acquisition of CombanCorp,
continuing the strategic initiative to diversify its geographic presence as well
as to broaden its business franchise. CombanCorp is the parent company of
Commerce National Bank which operates three branches in California located in
City of Commerce, Montebello and Downey, with $75 million in assets and $63
million in deposits.
Also, in September 26, 1996, the Corporation signed a letter of intent to
acquire CBC Bancorp, the parent company of Capitol Bank & Trust and Capitol Bank
of Westmont. CBC Bancorp, with assets of $315 million and deposits of $280
million at June 30, 1996, operates three branches in Chicago and Westmont,
Illinois through its banking subsidiaries.
Meanwhile, the Corporation continues expanding as Equity One opened four new
branches during this quarter for a total of 99 branches in 27 states. Banco
Popular also opened another in-store branch to continue providing banking
services at our customers' convenience.
- -------------------------------------------------------------------------------
In September 1996, President Clinton signed into law, as part of the Omnibus
Budget Reconciliation Act, the "Deposit Insurance Funds Act of 1996" (the Act).
The Act provides for the capitalization of the Savings Association Insurance
Fund (SAIF) to its designated reserve level ratio of 1.25% of insured deposits
in thrift institutions. In doing so, the Act gives the FDIC the legal authority
to impose a special one-time assessment on all SAIF insured institutions. As
mentioned above, during this quarter Banco Popular, FSB, recognized $1.2 million
in other operating expenses related to this one-time assessment. The Act also
provides that the assessment base for the payment of interest on obligations
issued by the Financing Corporation (FICO) for the resolution of failed thrifts
will be expanded to include all FDIC insured depository institutions. Excluding
the effect of this one-time assessment, this legislation will result in a higher
deposit insurance expense for the Corporation during 1997.
- -------------------------------------------------------------------------------
As previously discussed, in August the U.S. Congress approved legislation to
increase the federal minimum wage which included the amendment to Section 936 of
the U.S. Internal Revenue Code. Prior to this amendment, Section 936 provided
U.S. companies (936 corporations) operating on the island with a tax credit
against its federal tax liability on income derived from business operations and
investment income in Puerto Rico. The bill approved repealed the Qualified
Possession Source Investment Income ("QPSII") effective July 1, 1996, for
taxable years beginning after December 31, 1995, while the income and the wage
credits will be phased out in 10 years. The Corporation anticipates a
substantial reduction in the volume of 936 funds and a slight increase in the
cost of funds as most of these funds will be replaced with more expensive funds.
- -------------------------------------------------------------------------------
The Corporation is in the process of completing the final steps to establish
ATH-Costa Rica, the first automated teller machine (ATM) network in Costa Rica.
The combined efforts of Banco Popular de Puerto Rico, with its shared network
ATH (A Toda Hora) and fifteen local banking institutions, will add 70 machines
to the 80 ATMs currently operating, while providing its customers with access to
ATMs in Puerto Rico and the United States, and vice-versa.
/s/ Richard L. Carrion
--------------------------------
Richard L. Carrion
Chairman, President and
Chief Executive Officer
2
<PAGE> 29
FINANCIAL REVIEW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS At September 30, Average for the nine months
(In thousands) 1996 1995 Change 1996 1995 Change
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money market investment $1,159,654 $ 715,224 $ 444,430 $ 867,609 $ 305,907 $ 561,702
Investment and trading securities 4,917,061 4,765,803 151,258 5,217,378 4,483,910 733,468
Loans 9,589,288 8,486,900 1,102,388 9,057,462 8,106,514 950,948
All other assets 1,089,575 966,668 122,907 973,787 863,074 110,713
Total assets 16,755,578 14,934,595 1,820,983 16,116,236 13,759,405 2,356,831
Non-interest bearing liabilities 2,376,757 2,086,677 290,080 2,285,168 2,026,525 258,643
Interest bearing liabilities 13,158,716 11,745,871 1,412,845 12,655,292 10,679,496 1,975,796
Stockholders' equity 1,220,105 1,102,047 118,058 1,175,776 1,053,384 122,392
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING HIGHLIGHTS
(In Thousands, except Third Quarter Nine Months
per share information) 1996 1995 Change 1996 1995 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $172,236 $148,415 $23,821 $502,904 $428,062 $74,842
Provision for loan losses 22,436 18,987 3,449 65,381 43,331 22,050
Fees and other income 51,399 46,831 4,568 152,706 124,756 27,950
Other expenses 154,926 137,952 16,974 452,759 403,378 49,381
Net income $ 46,273 $ 38,307 $ 7,966 $137,470 $106,109 $31,361
Net income applicable to common
stock $ 44,186 $ 36,220 $ 7,966 $131,208 $ 99,847 $31,361
Earnings per common share 0.67 0.55 0.12 1.99 1.52 0.47
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED STATISTICAL Third Quarter Nine Months
INFORMATION 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS - Return on assets 1.10% 1.03% 1.14% 1.03%
Return on earning assets 1.17 1.10 1.21 1.10
Return on common equity 15.94 14.55 16.29 14.00
Net interest spread (taxable equivalent 3.98 3.90 4.04 3.97
Net interest yield (taxable equivalent) 4.70 4.66 4.79 4.78
Effective tax rate 29.62 32.39 28.49 27.74
Overhead ratio 48.80 49.03 48.77 55.57
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION RATIOS - Equity to assets 7.16% 7.39% 7.30% 7.66%
Tangible equity to assets 6.42 6.42 6.50 6.64
Equity to loans 12.81 13.00 12.98 12.99
Internal capital generation 10.75 9.69 11.06 9.10
Tier I capital to risk-adjusted assets 11.62 11.57 11.62 11.57
Total capital to risk-adjusted assets 14.21 12.83 14.21 12.83
Leverage ratio 6.54 6.70 6.54 6.70
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA - Market price
High $ 27.75 $ 19.50 $ 27.75 $ 19.50
Low 22.63 17.75 19.38 14.07
End 27.00 19.38 27.00 19.38
Book value at period end 16.96 15.22 16.96 15.22
Dividends declared 0.18 0.15 0.51 0.42
Dividend payout ratio 26.89% 27.25% 24.13% 26.33%
Price/earnings ratio 10.51X 9.76x 10.51X 9.76x
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA - Common shares outstanding 66,048,673 65,844,636
Full-time equivalent employees 7,795 7,653
Branches (banking operations) 222 214
Automated teller machines 367 327
Stockholders 5,520 5,375
</TABLE>
Note: All common stock data has been adjusted to reflect the stock split
effected in the form of a dividend on July 1, 1996.
3
<PAGE> 30
FINANCIAL REVIEW
- -------------------------------------------------------------------------------
This financial discussion contains an analysis of the consolidated financial
position and financial performance of BanPonce Corporation and its wholly-owned
subsidiaries (the Corporation) and should be read in conjunction with the
consolidated financial statements, notes and tables included elsewhere in this
report. The Corporation offers a wide range of products and services through its
subsidiaries and is engaged in the following businesses:
- Commercial Banking/Savings and Loans - Banco Popular de Puerto Rico
(Banco Popular), Pioneer Bank, Inc., Banco Popular, FSB and Commerce
National Bank. The latter was acquired on September 30, 1996.
- Lease Financing - Popular Leasing and Rental, Inc., and Vehicle
Equipment Leasing Company, Inc. (VELCO)
- Mortgage Banking/Consumer Finance - Popular Mortgage, Inc. (d/b/a
Puerto Rico Home Mortgage), Equity One, Inc. (Equity One) and Popular
Consumer Services, Inc. (d/b/a Best Finance)
- Investment Banking - BP Capital Markets, Inc. (BP Capital)
NET INCOME
The Corporation reported net earnings of $46.3 million for the third quarter of
1996, compared with $38.3 million realized in the same period of 1995, and $46.1
million reported during the second quarter of 1996. Earnings per common share
(EPS) for the quarter were $0.67, based on 66,048,673 average shares
outstanding, compared with EPS of $0.55 for the third quarter of 1995, based on
65,844,636 average shares outstanding and EPS of $0.67 for the second quarter of
1996, based on 66,001,180 average shares outstanding, after adjusting for the
stock split in the form of a dividend of one share for each share outstanding
effective July 1, 1996. Return on assets (ROA) and return on common equity (ROE)
for the quarter ended September 30, 1996, were 1.10% and 15.94%, respectively,
compared with 1.03% and 14.55% reported during the third quarter of 1995 and
1.16% and 16.56%, respectively, for the second quarter of 1996.
The increase of $8 million in quarterly earnings is derived mainly from the
improvement of $23.8 million realized in net interest income and higher
non-interest revenues by $4.6 million, partially offset by increases of $15.9
million in operating expenses, $3.4 million in the provision for loan losses,
and $1.1 million in income tax expense.
For the nine-month period ended September 30, 1996, the Corporation reported
net earnings of $137.5 million, increasing almost 30% when compared with the
$106.1 million in net earnings attained during the first nine months of 1995.
EPS for both periods were $1.99 and $1.52, respectively, based on 66,000,086
average shares outstanding for the first nine months of 1996 and 65,789,014 for
the same period in 1995. ROA and ROE for the nine-month period ended September
30, 1996, were 1.14% and 16.29%, respectively, compared with 1.03% and 14.00%,
respectively, in the same period of 1995.
NET INTEREST INCOME
Net interest income for the quarter ended September 30, 1996, reached $172.2
million compared with $148.4 million reported for the same quarter in 1995. On a
taxable equivalent basis, net interest income increased to $184.1 million from
$159.9 million in the third quarter of 1995 and $180.5 million in the second
quarter of 1996. This rise resulted from a $16.9 million increase due to a
higher volume of earning assets and a $7.3 million increase due to a higher net
interest yield, on a taxable equivalent basis. For analytical purposes, the
interest earned on tax-exempt assets is adjusted to a taxable equivalent basis
assuming the applicable statutory income tax rates. The highest marginal tax
rate in Puerto Rico, the Corporation's principal place of business, was reduced
from 42% in 1995 to 39% in 1996.
Average earning assets reached $15.8 billion for the quarter ended September
30, 1996, compared with $13.8 billion for the same quarter of 1995. Loans
contributed with 52% of the growth in earning assets, while the remaining 48% of
the increase was attained in money market investments, investment and trading
account securities.
Average money market investments reached $1.1 billion for the third quarter
of 1996, compared with $601 million for the same period of 1995. The increase of
$484 million was mainly accomplished at BP Capital, contributing $454 million to
the total increase. The yield on money market investments decreased from 5.87%
to 5.34%, from the third quarter of 1995 to the third quarter of 1996, due
primarily to a decrease in the general level of short-term interest rates during
that time period, as a result of a stimulative monetary policy implemented by
the Federal Reserve.
4
<PAGE> 31
- -------------------------------------------------------------------------------
Average investment securities reached $4.9 billion compared with $4.6 billion in
the same quarter of 1995. The increase arose principally from increased activity
at Banco Popular during the quarter. Anticipating a substantial reduction in the
volume of 936 funds, Banco Popular, started raising conventional funds from U.S.
banks and other institutional lenders in order to strengthen and enhance its
access to financing in the capital markets, investing the proceeds in U.S.
Agency Discount Notes. This arbitrage activity may decrease during the fourth
quarter of the year when conventional funds are expected to replace a portion of
the 936 funds expected to be withdrawn. The average yield of the Corporation's
investment portfolio, including both available-for-sale and held-to-maturity
investments, decreased 12 basis points to 6.59% during the three-month period
ended September 30, 1996, from 6.71% during the same period of 1995. The latter
is the result of the run-off of higher yielding securities in a decreasing
interest rate scenario and the lower yield of U. S. Agency Discount Notes as the
Federal Reserve decreased interest rates in late 1995 and early 1996.
The average balance of trading account securities for the three-month period
ended September 30, 1996, totaled $375 million compared with $248 million
reported for the same quarter last year. Puerto Rico Home Mortgage and BP
Capital are the main contributors to this rise, with increases of $96.2 million
and $33.7 million, respectively.
The Corporation had a significant growth in total average loans for the
quarter with an increase of $1.0 billion or 12.3%, compared with the average
balance of $8.4 billion in the third quarter of 1995. The increases in the
commercial loan portfolio, including construction loans, of $476 million and in
the mortgage loan portfolio of $265 million accounted for 72% of the total
increase. These increases occurred mainly in Banco Popular and Equity One,
respectively. The average yield on loans, on a taxable equivalent basis, rose 8
basis points from 10.01% to 10.09% in 1996. The loan category that was
responsible for most of the yield improvement was personal loans which had an
average yield for the quarter of 11.57%, compared with 10.84% in the third
quarter of 1995. Other categories, such as financing leases and credit cards,
also showed higher yields during the quarter, while the yield on commercial
loans, including construction, remained flat and the yield on mortgages
decreased 4 basis points.
As a result of the increase in the proportion of lower yielding assets,
partially offset by the higher yield on loans, the average yield on earning
assets, on a taxable equivalent basis, decreased 9 basis points from 8.66% for
the third quarter of 1995 to 8.57% during the third quarter of 1996.
Average interest bearing liabilities of the Corporation were $13.3 billion
for the three-month period ended September 30, 1996, compared with $11.6 billion
for the same period of 1995. Average interest bearing deposits increased $724
million, mostly in certificates of deposits, including other time deposits and
in savings accounts, which rose $468 million and $203 million, respectively, for
the third quarter of 1996. Average demand deposits grew by $210 million from
$1.8 billion to $2.0 billion.
Average costs of interest bearing deposits for the quarters ended September
30, 1996 and 1995 were 4.18% and 4.25%, respectively. The decrease of 7 basis
points was principally the result of a decrease in the average cost of
certificates of deposit, including other time deposits for the third quarter of
1996, of 23 basis points from 5.45% to 5.22%. The average cost of NOW and money
market deposits also decreased 13 basis points, to 3.31% in the third quarter of
1996. The average cost of savings accounts increased to 3.05%, from 2.98%
reported during the third quarter of 1995.
Average short-term borrowings increased $834 million to $3.9 billion during
the third quarter of 1996, compared with $3.1 billion reported during the same
period of 1995. The increase was mainly realized at BP Capital with a $473
million increase in average balance, mostly related to its arbitrage activities.
The average cost of short-term borrowings for the quarter ended September 30,
1996, decreased by 16 basis points, from 5.42% to 5.26% in 1996.
The decline in both, the average cost of interest bearing deposits and
borrowings, resulted in a decrease in the total cost of interest bearing
liabilities of 17 basis points, from 4.76% to 4.59% for the third quarter of
1995 and 1996, respectively. The cost of funding earning assets was 3.87% for
the quarter ended September 30, 1996, compared with 4.00% for the same quarter a
year before.
The net interest yield, on a taxable equivalent basis, for the third quarter
of 1996, was 4.70% compared with 4.66% for the same quarter in 1995 and 4.85% in
the second quarter of 1996. The increase in the net interest yield mostly
resulted from the decline in funding costs, particularly certificates of deposit
and borrowings.
5
<PAGE> 32
- -------------------------------------------------------------------------------
Table A below contains a summary of the results of the Corporation's net
interest yield, on a taxable equivalent basis, for the nine-month periods ended
September 30, 1996 and 1995. The rise of $79.5 million in net interest income
results from a $56.5 million increase due to a higher volume of average earning
assets and a $23.0 million effect due to higher net interest yield, on a taxable
equivalent basis.
TABLE A
<TABLE>
<CAPTION>
NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
- --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FIRST NINE MONTHS
- --------------------------------------------------------------------------------
1996 AVERAGE 1995 AVERAGE
-------------------------------------------
BALANCE RATE BALANCE RATE
-------------------------------------------
<S> <C> <C> <C> <C>
Earning assets $15,142 8.61% $12,896 8.69%
======= =======
Financed by:
Interest
bearing funds $12,655 4.57% $10,679 4.72%
Non-interest
bearing funds 2,487 2,217
------- -------
Total $15,142 3.82% $12,896 3.91%
======= =======
Net interest income
per books $ 502.9 $ 428.1
Taxable equivalent
adjustment 36.3 31.6
------- -------
Net interest income
on a taxable equivalent
basis $ 539.2 $ 459.7
======= =======
Spread 4.04% 3.97%
Net interest yield 4.79% 4.78%
</TABLE>
For the last 20 years Section 936 of the U.S. Internal Revenue Code (the
Code) has granted U.S. corporations operating in Puerto Rico (936 corporations)
a tax credit against its federal tax liability for the net revenues derived from
both qualifying active business and certain passive investments held in Puerto
Rico banks, known as Qualified Possession Source Investment Income (QPSII). This
favorable tax environment created a local funds market with an average cost
usually below the U.S. market or the Eurodollar market. Financial institutions
and other eligible borrowers in Puerto Rico have benefited from that low cost,
although having to comply with certain investment requirements imposed by local
regulations. In August, the U.S. Congress approved legislation that increased
the federal minimum wage and repealed Section 936 of the Code. The bill approved
repealed QPSII effective July 1, 1996, for taxable years beginning after
December 31, 1995, while the income and wage credits will be phased out in 10
years. As a result, the Corporation anticipates a substantial reduction in the
volume of 936 funds during the fourth quarter of 1996 and its substitution with
conventional, more expensive funds. This may have the effect of increasing the
cost of funds, therefore reducing the net interest income projected for the
fourth quarter of 1996. The expected increase in the cost of funds should be
partially offset by several mitigating factors which include a higher rate
charged on commercial loans, whose price was previously indexed to a 936 market
rate, and a lower level of investments required by local regulations to all
recipients of 936 funds which earn a return substantially below market rates. In
addition, some 936 corporations may choose not to withdraw a portion of their
funds from financial institutions and rather invest those funds at a longer term
to reduce the tollgate taxes applicable upon repatriating those funds. If this
is the case, the cost of those funds should remain below that of the U.S. or
Eurodollar mrket. At September 30, 1996, the Corporation had $3.2 billion in 936
funds, representing 20.6% of its liabilities.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
As shown in Table B, the provision for loan losses for the third quarter of 1996
was $22.4 million or $3.4 million higher than the provision of $19.0 million
recorded for the same quarter of 1995. For the second quarter of 1996 the
provision was $21.7 million. Net charge-offs for the quarter ended September 30,
1996, reached $18.8 million or 0.80% of average loans, compared with $13.3
million or 0.64% reported for the same quarter in 1995, and $18.1 million or
0.80% for the quarter ended on June 30,1996.
TABLE B
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Quarter Provision for Net Allowance for
Ended Loan Losses Charge-offs Loan Losses
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
September 30, 1996 $22.4 $18.8 $182
June 30, 1996 21.7 18.1 178
March 31, 1996 21.3 14.9 175
December 31, 1995 21.2 17.3 168
September 30, 1995 19.0 13.3 164
</TABLE>
Consumer loans and lease financing net charge-offs increased $3.4 million and
$2.1 million, respectively. Consumer loans net charge-offs totaled $7.7 million
or 1.24% of average consumer loans for the quarter ended September 30, 1996,
while lease financing net losses amounted to $3.1 million or 2.44%. For the same
quarter last year, consumer loans and lease financing charge-offs represented
0.79% and 0.81%, respectively, of their average portfolio.
6
<PAGE> 33
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TABLE C
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
Third Quarter First Nine Months
(Dollars in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period.................................... $178,330 $158,734 $168,393 $153,798
Allowance purchased............................................... 402 402
Provision for loan losses......................................... 22,436 18,987 65,381 43,331
-----------------------------------------------
201,168 177,721 234,176 197,129
-----------------------------------------------
Losses charged to the allowance
Commercial....................................................... 8,814 9,226 27,214 22,161
Construction..................................................... 510 508 1,703 2,008
Lease financing.................................................. 6,166 1,316 14,360 4,120
Mortgage......................................................... 549 468 1,605 1,130
Consumer......................................................... 11,159 9,285 31,340 24,045
----------------------------------------------
27,198 20,803 76,222 53,464
----------------------------------------------
Recoveries
Commercial....................................................... 1,798 2,229 7,702 5,502
Construction..................................................... 108 130 286
Lease financing.................................................. 3,029 315 5,938 1,888
Mortgage......................................................... 37 56 230 183
Consumer......................................................... 3,430 4,912 10,418 12,906
----------------------------------------------
8,402 7,512 24,418 20,765
----------------------------------------------
Net loans charged-off............................................. 18,796 13,291 51,804 32,699
----------------------------------------------
Balance at end of period.......................................... $182,372 $164,430 $182,372 $164,430
==============================================
Ratios:
Allowance for losses to loans.................................... 1.90% 1.94% 1.90% 1.94%
Allowance to non-performing assets............................... 118.89 105.46 118.89 105.46
Allowance to non-performing loans................................ 124.71 114.52 124.71 114.52
Non-performing assets to loans................................... 1.60 1.84 1.60 1.84
Non-performing assets to total assets............................ 0.92 1.04 0.92 1.04
Net charge-offs to average loans................................. 0.80 0.64 0.76 0.54
Provision to net charge-offs..................................... 1.19X 1.43x 1.26X 1.33x
Net charge-offs earnings coverage................................ 4.69 5.69 4.97 5.82
</TABLE>
Within the consumer category, credit cards experienced an increase of
approximately $2.9 million in credit losses during the third quarter of 1996,
mostly in the portfolio that the Corporation maintains in the U.S. mainland.
Credit cards net charge-offs represented 2.55% of the average credit card
portfolio for the third quarter of 1996, compared with 2.58% for the same period
of 1995. Economic factors such as the increase in personal bankruptcies in 1996
and a rising trend in consumer debt as a percentage of disposable personal
income, contributed to the higher level of net credit losses in the consumer
loan portfolio.
Mortgage loans net charge-offs grew by $0.1 million during the third quarter,
whereas the construction loan portfolio experienced net charge-offs of $0.4
million, for a $0.1 million improvement compared with the third quarter of 1995.
Total commercial loans net charge-offs were $7.0 million in both the third
quarter of 1996 and 1995. Nevertheless, as a percentage of average loans net
charge-offs of commercial loans, including construction, decreased to 0.79% this
quarter from 0.92% in the third quarter of 1995.
For the nine-month period ended September 30, 1996, the provision for loan
losses increased $22.1 million to $65.4 million, from $43.3 million for the same
period in 1995. The growth of $1.1 billion in the loan portfolio since September
30, 1995, and higher net charge-offs by $19.1 million for the nine-month period
were responsible for the increase in the provision. The increase in net
charge-offs was mostly experienced in consumer loans and lease financing with
rises of $9.8 million and $6.2 million, respectively. Commercial and mortgage
loans net credit losses also exceeded the amount of last year by $2.9 million
and $0.4 million, respectively, while construction loans net charge-offs
decreased by $0.2 million.
7
<PAGE> 34
- -------------------------------------------------------------------------------
At September 30, 1996, the allowance for loan losses reached $182 million,
representing 1.90% of loans, compared with $164 million or 1.94% a year before.
Management considers that the allowance for loan losses is adequate to absorb
the potential write-offs in the loan portfolio based on the methodology
established for its evaluation, which includes portfolio risk characteristics,
prior loss experience, results of periodic credit reviews, current and
anticipated economic conditions and loan impairment measurement. Although the
allowance for loan losses as a percentage of loans decreased slightly, the
allowance to non-performing loans improved to 124.7% at September 30, 1996, from
the ratio of 114.5% at the same date of 1995.
The Corporation had $89 million in loans considered impaired at September
30, 1996, of which $54 million had a related allowance for possible loan losses
of $15 million. As of the same date last year, loans considered impaired
amounted to $98 million of which $46 million had a related allowance for loan
losses of $17 million.
CREDIT QUALITY
Non-performing assets (NPA) consist of past due loans on which no interest
income is being accrued, renegotiated loans and other real estate. The
Corporation reports its non-performing assets on a more conservative basis than
most U.S. banks. The standard industry practice is to place non-performing
commercial loans on non-accrual status when payments of principal or interest
are delinquent 90 days. However, the Corporation's policy is to place commercial
loans on non-accrual status when payments of principal or interest are
delinquent 60 days. Lease financing, conventional mortgage and closed-end
consumer loans are placed on non-accrual status when payments are delinquent 90
days. Closed-end consumer loans are charged-off against the allowance when
delinquent 120 days. Open-end (revolving credit) consumer loans are charged-off
when payments are delinquent 180 days. Certain loans that 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.
NPA as of September 30, 1996, amounted to $153 million or 1.60% of loans,
compared with $156 million or 1.84% at September 30, 1995. NPA were $152 million
or 1.64% of loans at June 30, 1996. Despite the increase in loans in most
categories, there was a modest reduction in NPA compared with September 30,
1995, which helped to improve the ratios of NPA to total loans and the allowance
for loan losses to NPA, as shown in Table D.
TABLE D
- -----------------------------------------------------
<TABLE>
<CAPTION>
NPA Allowance
as a % as a %
Date NPA of Loans of NPA
- -----------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
September 30, 1996 $153 1.60% 118.9%
June 30, 1996 152 1.64 117.0
March 31, 1996 151 1.70 116.0
December 31, 1995 155 1.79 108.6
September 30, 1995 156 1.84 105.5
</TABLE>
Non-performing loans totaled $146 million as of September 30, 1996, compared
with $144 million at the end of the third quarter of 1995 and $146 million as of
June 30, 1996. Non-performing mortgage loans increased $13.2 million as compared
with September 30, 1995, mainly in Equity One. As of September 30, 1995,
non-performing mortgage loans at Equity One amounted to $3.4 million, compared
with $14.3 million as of the same date this year. Most of the increase relates
to the significant increase in personal bankruptcies in the U.S. mainland and
the growth in the mortgage loan portfolio of that subsidiary. Non-performing
consumer loans increased $1.7 million. The increases in non-performing mortgage
and consumer loans were partially offset by reductions in non-performing
commercial, including construction loans and lease financing, which decreased
$7.4 million and $4.9 million, respectively. Also, renegotiated loans decreased
$0.2 million as compared with September 30, 1995. Management efforts to
successfully dispose of other real estate owned reduced this non-performing
asset by $4.9 million, particularly at Banco Popular and Pioneer.
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, 1996, amounted to $114 million or
1.19% of loans, and the allowance for loan losses would be 159.9% of
non-performing assets. At September 30, 1995, and June 30, 1996, adjusted
non-performing assets were $124 million and $113 million, respectively, or 1.46%
and 1.21% of loans.
8
<PAGE> 35
- --------------------------------------------------------------------------------
Accruing loans that are contractually past due 90 days or more as to
principal or interest as of September 30, 1996, amounted to $12.2 million
compared with $16.0 million at September 30, 1995, and $13.2 million at June 30,
1996.
OTHER OPERATING INCOME
Total other operating income, including securities and trading gains, increased
$4.6 million or 9.8% to $51.4 million for the third quarter of 1996, from $46.8
million reported for the same period in 1995. This increase resulted from growth
in service charges on deposit accounts, other service fees and higher gains on
sale of securities, partially compensated by reductions in trading account
profits and other operating income. For the first nine months, total other
operating income grew 22.4% to $152.7 million in 1996 from $124.8 million in
1995.
Service charges on deposit accounts provided approximately 42% of other
operating income, increasing to $21.4 million for the third quarter of 1996,
from $20.0 million reported for the same period in 1995. The rise of $1.4
million or 7.1% is mainly attributed to a broader variety of services offered to
commercial accounts at Banco Popular, together with revisions made to their fee
structure. In addition, service charges on savings accounts showed an increase
as a result of a higher volume. For the nine-month period ended September 30,
1996, service charges on deposit accounts totaled $63.8 million, increasing $6.2
million from the $57.6 million reported for the same period a year earlier.
Other service fees rose $2.6 million to $19.0 million for the third quarter
of 1996, from $16.4 million for the same quarter in 1995. This rise was led by
an increase of $1.3 million in debit card revenues resulting from a higher
volume of services provided by Banco Popular, including fees from the rent of
point-of-sale (POS) terminals, merchant transaction fees and ATM interchange
income. Credit card fees at Banco Popular increased $0.7 million, reflecting the
positive effect of promotional activities and merchant fee volume, as well as an
increase in volume of transactions. For the nine-month period ended September
30, 1996, other service fees reached $55.8 million or 21.8% higher than the
$45.8 million obtained a year earlier.
On the other hand, other operating income decreased $1.9 million to $6.3
million for the third quarter of 1996, from $8.2 million for the third quarter
of 1995. Both Banco Popular and BanPonce Financial recognized write-downs of
impaired assets during this quarter, which amounted to $1.9 million. Moreover,
the Corporation reflected a decrease in the gain on sale of mortgage loans due
to changes in market conditions. Partially offsetting this reduction was an
increase in income related to the daily rental operation of the Corporation's
leasing subsidiaries. Other operating income increased 50.5% for the nine-month
period ended September 30, 1996, reaching $28.1 million compared with $18.7
million for the same period last year.
Gains on sale of investment securities available-for-sale for the third
quarter of 1996 amounted to $4.9 million, principally due to the sale of $6.4
million in equity securities by BanPonce Financial. During the same quarter a
year earlier, BanPonce Financial sold $3.4 million in investment securities that
resulted in a gain of $2.9 million. Trading activities resulted in a net loss of
$0.2 million for the quarter ended September 30, 1996, compared with a net
profit of $0.3 million in the third quarter of 1995.
OPERATING EXPENSES
Operating expenses for the third quarter of 1996 were $135.5 million compared
with $119.6 million for the same quarter in 1995, an increase of $15.9 million
or 13.3%. For the first nine months of 1996, operating expenses rose to $398.0
million from $362.6 million for the same period in 1995.
Personnel costs amounted to $68.1 million for the third quarter of 1996,
increasing $5.7 million from $62.4 million for the same period of 1995. Salaries
accounted for a significant portion of this increase, rising $2.1 million or
4.6%, reaching $46.7 million for the quarter ended September 30, 1996, compared
with $44.6 million for the same period in 1995, primarily due to higher salary
levels and incentive pay to compensate sales efforts and emphasize the
fulfillment of objectives. Full-time equivalent employees were 7,795 at
September 30, 1996, up 142 from 7,653 as of the same date a year earlier.
Pension costs and other fringe benefits increased $2.3 million to $15.6 million
for the third quarter of 1996, reflecting an increase in medical plan costs and
in pension and postretirement benefits expenses. Moreover, the profit sharing
expense rose to $5.8 million for the third quarter of 1996, from $4.4 million
for the same period in 1995, as a result of higher eligible salaries and
stronger profitability ratios at Banco Popular. Personnel costs for the
nine-month period ended September 30, 1996, grew $16.2 million or 8.7% to $203.3
million, from $187.1 million recorded for the same period a year earlier.
Other operating expenses, excluding personnel cost, increased $10.2 million,
reaching $67.4 million for the
9
<PAGE> 36
- -------------------------------------------------------------------------------
quarter ended September 30, 1996, compared with $57.2 million for the same
quarter in 1995. Professional fees rose $2.8 million, principally at Banco
Popular, reflecting expenditures for purchased software associated with systems
enhancements and for consulting services related to the Corporation's strategic
initiatives. Business promotion expense rose $2.1 million as part of the ongoing
campaign to promote the use of electronic services at Banco Popular. In
addition, during this quarter Banco Popular invested in expanding the market
penetration of new commercial and retail products and services, by sponsoring
events such as the transmission in Puerto Rico of the Olympic Games and others.
Also, communications and equipment expenses increased $2.8 million, mostly as
a result of the expansion of the electronic payment system, an upgrade to Banco
Popular's communication system and the growth in the network of POS terminals.
During the three-month period ended September 30, 1996, a total of 1,016 new POS
terminals were installed bringing the current total to 9,998 terminals. In
addition, in this quarter Banco Popular, FSB, the Corporation's savings and
loans subsidiary, recorded $1.2 million in other operating expenses as a result
of the one-time assessment to capitalize the Savings Association Insurance Fund
(SAIF) approved on September 30, 1996. The new bill provides that, effective
January 1, 1997, the assessment base for payments of the interest on obligations
issued by the Financing Corporation (FICO) for the resolution of failed thrifts
will be expanded to include all FDIC-insured institutions. For the nine-month
period ended September 30, 1996, other operating expenses of the Corporation
reached $194.6 million, compared with $175.5 million reported for the same
period in 1995.
Income tax expense for the quarter ended September 30, 1996, amounted to
$19.5 million, an increase of $1.1 million over the $18.4 million recorded for
the same quarter of 1995. The increase in income tax results basically from a
higher pre-tax income. For the nine-month period ended September 30, 1996,
income tax expense reached $54.8 million, compared with $40.7 million reported
for the same period in 1995. The effective tax rates for the third quarter of
1996 and the first nine months of 1996 were 29.6% and 28.5%, respectively,
compared with 32.4% and 27.7% for the same periods in 1995.
BALANCE SHEET COMMETS
The Corporation maintained its growing trend during the quarter just ended. At
September 30, 1996, the Corporation's total assets reached $16.8 billion, an
increase of 12.2% when compared with $14.9 billion at September 30, 1995. Total
assets at December 31, 1995, were $15.7 billion. Average assets for the first
nine months of 1996 were $16.1 billion compared with $13.8 billion for the same
period in 1995, an increase of 17.1%. Average assets for the year ended December
31, 1995, were $14.1 billion.
Earning assets at September 30, 1996, increased to $15.7 billion from $14.0
billion at September 30, 1995, and $14.7 billion at December 31, 1995. Total
loans accounted for $1.1 billion of that growth, reaching $9.6 billion at
September 30, 1996, or 13.0% higher than the $8.5 billion a year ago. Most loan
categories experienced growth. Commercial, including construction loans,
increased $482 million or 14.4%, from $3.3 billion at September 30, 1995, to
$3.8 billion at September 30, 1996. Mortgage loans rose $318 million or 13.4%,
from $2.4 billion at September 30, 1995. The increase was mostly experienced in
Equity One, which rose $123 million and in Banco Popular with an increase of
$130 million. Consumer loans increased $282 million or 12.4% and the lease
financing portfolio rose $21 million or 4.2% as compared with September 30,
1995. Total loans at December 31, 1995, amounted to $8.7 billion.
Money market investments amounted to $1.2 billion at September 30, 1996,
compared with $715 million as of the same date in 1995. BP Capital, which was
responsible for $398 million of the increase, had $1.1 billion in money market
investments at the end of the third quarter of 1996. Investment securities
totaled $4.5 billion as of both September 30, 1996 and 1995. These figures
include $2.8 billion in investment securities available-for-sale as of September
30, 1996, and $1.4 billion as of September 30, 1995. The shift to the
available-for-sale portfolio mostly resulted from the reclassification of $1.3
billion from securities held-to-maturity at the end of 1995. In November 1995,
the Financial Accounting Standards Board (FASB) issued a Special Report, "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities". In conjunction with the issuance of this Special
Report the FASB provided for a one-time "window" to reclassify securities from
the held-to-maturity portfolio to the available-for-sale or trading portfolios
before January 1, 1996, without calling into question the intent to hold other
debt securities to maturity in the future. Trading account securities amounted
to $372 million at September 30, 1996, an increase of $91 million, mainly
attained by BP Capital and Puerto Rico Home Mortgage.
On the liability side, total deposits reached $10.6 billion at September 30,
1996, or $861 million higher
10
<PAGE> 37
- -------------------------------------------------------------------------------
than the September 30, 1995 figure. Non-interest bearing deposits amounted to
$2.1 billion at September 30, 1996, while interest bearing deposits reached $8.5
billion. These figures compare with $1.8 billion and $7.9 billion, respectively,
at the end of the third quarter of 1995. A significant portion of the increase
was realized at Banco Popular, whose interest bearing deposits increased $538
million, particularly in certificates of deposit, and its non-interest bearing
deposits increased $230 million. At September 30, 1996, 79.4% of the
Corporation's total deposits were in Puerto Rico and the Virgin Islands, and the
remaining 20.6% were U.S. deposits. Total 936 deposits at September 30, 1996,
amounted to $1.0 billion. Total deposits at December 31, 1995 were $9.9 billion.
Federal funds purchased and securities sold under agreements to repurchase,
notes payable and other short-term borrowings increased $721 million, from $3.8
billion at September 30, 1995, to $4.5 billion at September 30, 1996. This rise
is mainly due to an increase of $423 million in other short-term borrowings,
mainly in Banco Popular and BanPonce Financial, and a higher volume of
securities sold under agreements to repurchase at BP Capital. In addition, in
September 1996 Banco Popular issued $150 million in promissory notes.
Subordinated notes increased to $125 million at September 30, 1996, from $50
million outstanding a year ago. On December 12, 1995, the Corporation issued
$125 million in subordinated notes carrying an interest rate of 6.75% and
maturing on December 15, 2005. The proceeds obtained from this issuance were
utilized to finance the growth and expansion of the Corporation's subsidiaries.
The $50 million subordinated notes outstanding at September 30, 1995, matured on
June 15, 1996.
The Corporation's stockholders' equity at September 30, 1996, amounted to
$1.22 billion, compared with $1.10 billion at September 30, 1995. The increase
is mainly due to earnings retention. Also, the additional shares issued under
the Dividend Reinvestment Plan contributed $4.1 million in additional capital
since September 30, 1995. On April 26, 1996, the Board of Directors authorized a
two-for-one common stock split effected in the form of a dividend, which doubled
the total outstanding shares at the time. The new shares were issued on July 1,
1996, to shareholders of record as of June 14, 1996, and $198 million were
transferred from retained earnings to common stock as a result of the split. All
per share data included herein has been adjusted to reflect the stock split.
Stockholders' equity at September 30, 1996, includes $6.0 million, net of
deferred taxes, in unrealized holding losses on securities available-for-sale,
compared with $5.8 million in unrealized gains on securities available-for-sale
at September 30, 1995. Stockholders' equity at December 31, 1995, amounted to
$1.14 billion.
The market value of the Corporation's common stock at September 30, 1996,
increased 39% to $27.00 per share, from $19.38 at the same date last year and
$22.50 at June 30, 1996. The Corporation's total market capitalization at
September 30, 1996, was $1.78 billion. Book value per common share increased to
$16.96 as of September 30, 1996, compared with $15.22 as of the same date last
year. The dividend payout ratio to common stockholders for the quarter ended
September 30, 1996, was 26.89% compared with 27.25% for the same quarter last
year.
The market value of the Corporation's preferred stock at September 30, 1996,
was $26.50 per share compared with $26.75 at September 30, 1995, and $26.50 at
June 30, 1996.
Capital ratios continue well over regulatory requirements. The Corporation
ended the third quarter of 1996 with Tier I, total capital and leverage ratios
of 11.62%, 14.21% and 6.54%, respectively, compared with 11.57%, 12.83% and
6.70% at September 30, 1995.
11
<PAGE> 38
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION
- ------------------------------------------------------------------------------------------------------
September 30
(In Thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks............................................... $ 488,151 $ 376,086
----------------------------
Money market investments:
Federal funds sold and securities and mortgages
purchased under agreements to resell................................ 1,152,352 714,085
Time deposits with other banks....................................... 5,348 100
Bankers' acceptances................................................. 1,954 1,039
----------------------------
1,159,654 715,224
----------------------------
Investment securities held-to-maturity,
at cost............................................................. 1,712,154 3,107,252
Investment securities available-for-sale, at market value............ 2,832,553 1,377,192
Trading account securities, at market value.......................... 372,354 281,359
Loans held-for-sale.................................................. 176,937 37,146
Loans................................................................ 9,743,305 8,764,741
Less--Unearned income.............................................. 330,954 314,987
Allowance for loan losses ................................... 182,372 164,430
----------------------------
9,229,979 8,285,324
----------------------------
Premises and equipment............................................... 345,992 328,118
Other real estate.................................................... 4,540 9,494
Customers' liabilities on acceptances................................ 2,053 1,592
Accrued income receivable............................................ 120,220 124,541
Other assets......................................................... 177,307 142,519
Intangible assets ................................................... 133,684 148,748
----------------------------
$16,755,578 $ 14,934,595
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing............................................. $ 2,082,455 $ 1,838,618
Interest bearing................................................. 8,506,526 7,889,766
----------------------------
10,588,981 9,728,384
Federal funds purchased and securities sold
under agreements to repurchase .................................. 2,787,186 2,642,766
Other short-term borrowings....................................... 848,071 418,936
Notes payable .................................................... 861,933 714,403
Senior debentures................................................. 30,000 30,000
Acceptances outstanding........................................... 2,053 1,592
Other liabilities................................................. 292,249 246,467
----------------------------
15,410,473 13,782,548
----------------------------
Subordinated notes ............................................... 125,000 50,000
----------------------------
Stockholders' equity:
Preferred stock .................................................. 100,000 100,000
Common stock...................................................... 396,292 197,534
Surplus .......................................................... 479,792 411,468
Retained earnings................................................. 250,022 344,343
Unrealized gains (losses) on securities available-for-sale, net
of deferred taxes ............................................... (6,001) 5,845
Capital reserves ................................................. 42,857
----------------------------
1,220,105 1,102,047
----------------------------
$16,755,578 $ 14,934,595
============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 39
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Quarter ended For the nine months ended
September 30, September 30,
(Dollars in thousands, except per share information) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans................................................... $235,995 $208,175 $679,269 $599,254
Money market investments ............................... 14,566 8,885 34,121 13,467
Investment securities................................... 71,259 67,637 211,646 189,772
Trading account securities ............................. 5,277 3,762 14,963 5,002
-----------------------------------------------
327,097 288,459 939,999 807,495
-----------------------------------------------
INTEREST EXPENSE:
Deposits ............................................... 89,851 83,886 259,540 245,536
Short-term borrowings .................................. 53,190 43,325 137,745 97,945
Long-term debt ......................................... 11,820 12,833 39,810 35,952
-----------------------------------------------
154,861 140,044 437,095 379,433
-----------------------------------------------
Net interest income..................................... 172,236 148,415 502,904 428,062
Provision for loan losses............................... 22,436 18,987 65,381 43,331
-----------------------------------------------
Net interest income after provision for loan losses..... 149,800 129,428 437,523 384,731
Service charges on deposit accounts..................... 21,390 19,976 63,855 57,618
Other service fees ..................................... 19,035 16,456 55,823 45,832
Gain on sale of securities.............................. 4,911 1,950 5,620 2,062
Trading account profit (loss) .......................... (216) 293 (661) 593
Other operating income.................................. 6,279 8,156 28,069 18,651
-----------------------------------------------
201,199 176,259 590,229 509,487
-----------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries............................................... 46,672 44,626 137,536 128,837
Profit sharing......................................... 5,789 4,435 17,544 14,268
Pension and other benefits ............................ 15,632 13,302 48,267 43,985
-----------------------------------------------
68,093 62,363 203,347 187,090
Net occupancy expense................................... 8,700 8,236 26,614 24,258
Equipment expenses ..................................... 12,037 10,274 35,617 29,610
Other taxes............................................. 5,816 5,241 17,245 15,966
Professional fees....................................... 11,659 8,847 32,568 25,619
Communications ......................................... 6,748 5,731 19,561 17,023
Business promotion...................................... 6,357 4,270 17,776 12,232
Printing and supplies .................................. 2,928 3,047 8,871 8,345
Other operating expenses................................ 8,663 6,470 22,861 27,335
Amortization of intangibles............................. 4,452 5,117 13,536 15,157
-----------------------------------------------
135,453 119,596 397,996 362,635
-----------------------------------------------
Income before taxes..................................... 65,746 56,663 192,233 146,852
Income taxes............................................ 19,473 18,356 54,763 40,743
-----------------------------------------------
NET INCOME.............................................. $ 46,273 $ 38,307 $137,470 $106,109
===============================================
NET INCOME APPLICABLE TO COMMON STOCK................... $ 44,186 $ 36,220 $131,208 $ 99,847
===============================================
EARNINGS PER COMMON SHARE .............................. $ 0.67 $ 0.55 $ 1.99 $ 1.52
===============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 40
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
For the nine months ended
September 30,
(In thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 137,470 $ 106,109
--------------------------------
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of premises and equipment......... 36,033 32,283
Provision for loan losses ...................................... 65,381 43,331
Amortization of intangibles..................................... 13,536 15,157
Gain on sale of investment securities available-for-sale........ (5,620) (2,062)
Loss on disposition of premises and equipment................... 34 125
Amortization of premiums and accretion of discounts
on investments ................................................ 7,191 (2,479)
Increase in loans held-for-sale ................................ (64,131) (5,689)
Amortization of deferred loan fees and costs.................... (2,283) 432
Net increase in postretirement benefit obligation............... 6,812 5,770
Net increase in trading securities.............................. (41,681) (48,659)
Net increase in interest receivable............................. (6,068) (35,380)
Net increase in other assets.................................... (28,900) (11,989)
Net increase in interest payable................................ 8,780 384
Net decrease in current and deferred taxes ..................... (20,937) (5,401)
Net increase in other liabilities............................... 15,487 6,924
--------------------------------
Total adjustments .............................................. (16,366) (7,253)
--------------------------------
Net cash provided by operating activities........................ 121,104 98,856
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in money market investments............. (348,268) 127,792
Purchases of investment securities held-to-maturity............. (17,836,268) (11,030,926)
Maturities of investment securities held-to-maturity............ 17,772,265 10,985,704
Purchases of investment securities available-for-sale........... (4,102,815) (818,398)
Maturities of investment securities available-for-sale.......... 1,933,938 78,867
Sales of investment securities available-for-sale............... 2,542,954 234,056
Net disbursements on loans...................................... (1,130,766) (861,871)
Proceeds from sale of loans..................................... 300,128 88,876
Acquisition of loan portfolios.................................. (37,603) (46,575)
Assets acquired, net of cash.................................... (7,164) (29,189)
Acquisition of premises and equipment .......................... (56,529) (44,047)
Proceeds from sale of premises and equipment.................... 3,026 8,893
--------------------------------
Net cash used in investing activities............................ (967,102) (1,306,818)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits........................................ 649,614 532,568
Net deposits acquired........................................... 163,577
Net (decrease) increase in federal funds purchased and
securities sold under agreements to repurchase................. (213,692) 413,269
Net increase (decrease) in other short-term borrowings.......... 393,363 (177,298)
Proceeds from issuance of notes payable ........................ 546,712 327,153
Payments of notes payable....................................... (415,207) (87,508)
Payments of subordinated notes.................................. (50,000)
Dividends paid.................................................. (37,920) (32,557)
Proceeds from issuance of common stock.......................... 3,106 2,528
--------------------------------
Net cash provided by financing activities........................ 875,976 1,141,732
--------------------------------
Net increase (decrease) in cash and due from banks............... 29,978 (66,230)
Cash and due from banks at beginning of period................... 458,173 442,316
--------------------------------
Cash and due from banks at end of period ........................ $ 488,151 $ 376,086
================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share information)
NOTE 1 - CONSOLIDATION
The consolidated financial statements of BanPonce Corporation include the
balance sheet of the Corporation and its wholly-owned subsidiaries, Vehicle
Equipment Leasing Company, Inc. (Velco); BP Capital Markets, Inc.; Popular
International Bank, Inc. and its wholly-owned subsidiary BanPonce Financial
Corp., including Banco Popular, FSB, Pioneer Bancorp, Inc., CombanCorp (second
tier subsidiaries) and Equity One, Inc.; and Banco Popular de Puerto Rico and
its wholly-owned subsidiaries, Popular Leasing and Rental, Inc., Popular
Consumer Services, Inc. and Popular Mortgage, Inc., as of September 30, 1996 and
1995, and their related statements of income and cash flows for the nine-month
periods then ended. These statements are, in the opinion of management, a fair
statement of the results of the periods presented. These results are unaudited,
but include all necessary adjustments, of a normal recurring nature, for a fair
presentation of such results. Certain reclassifications have been made to the
prior year consolidated financial statements to conform to the 1996
presentation.
NOTE 2 - ACCOUNTING CHANGES
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity as well as assets held for disposition be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For the quarter and nine-month period ended
September 30,1996, the Corporation recognized a loss of $700, based on the
requirements of this pronouncement.
Effective January 1, 1996, the Corporation adopted SFAS 122, "Accounting for
Mortgage Servicing Rights." This statement requires that mortgage banking
enterprises recognize as separate assets the rights to service mortgage loans
for others, whether those servicing rights are originated or purchased. Also, it
requires mortgage banking enterprises to assess capitalized mortgage servicing
rights for impairment based on the fair value of those rights. Pursuant to the
provisions of SFAS 122, the total cost of mortgage loans to be sold with
servicing rights retained is allocated to the mortgage servicing rights and the
loans (without the mortgage servicing rights) based on their relative fair
values. These mortgage servicing rights are amortized in proportion to and over
the periods of estimated net servicing income.
To estimate the fair value of mortgage servicing rights the Corporation
considers prices for similar assets and the present value of expected future
cash flows associated with the servicing rights calculated using assumptions
that market participants would use in estimating future servicing income and
expense. For purposes of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Corporation stratifies such rights based on
predominant risk characteristics of underlying loans, such as loan type, rate
and term. The amount of impairment recognized if any, is the amount by which the
capitalized mortgage servicing rights per stratum exceeds its estimated fair
value. Impairment is recognized through a valuation allowance. As of September
30, 1996, the carrying value, estimated fair value and valuation allowance of
capitalized mortgage servicing rights were $24,193, $30,864 and $64,
respectively. For the quarter and nine-month period ended September 30, 1996,
the Corporation realized additional income of $1,366 and $2,976, respectively,
as a result of the adoption of this pronouncement.
Effective January 1, 1996, the Corporation adopted SFAS 123 "Accounting for
Stock-Based Compensation." This statement establishes a fair value-based method
of accounting for stock-based employee compensation plans. It encourages
entities to adopt this method in lieu of the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", for all arrangements under which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
its stock.
15
<PAGE> 42
- --------------------------------------------------------------------------------
Banco Popular provides a stock-based compensation plan for its senior
management. It is a three-year incentive plan under which shares of stock of the
Corporation are granted if long-term corporate performance and objectives are
met. For the quarter and nine-month period ended September 30, 1996, the
Corporation recognized $401 and $615, respectively, related to this plan.
Effective January 1, 1995, the Corporation adopted SFAS 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." These
statements address the accounting by creditors for impairment of certain loans
and require that impaired loans as defined, be measured based on the present
value of expected future cash flows discounted at the loan's effective rate, at
the loan's observable market price or, on the fair value of the collateral if
the loan is collateral dependent. As of September 30, 1996, the recorded
investment in loans that are considered to be impaired under SFAS 114 was
$89,153 (1995 - $98,175), of which $53,632 (1995 - $46,439) had a related
allowance for possible loan losses of $14,576 (1995 - $16,600). Average impaired
loans during the quarter and the first nine months of 1996 were $89,239 and
$86,141, respectively (1995 - $93,716 and $91,608). The Corporation recognized
interest income on impaired loans of $1,147, and $2,735, respectively, for the
quarter and nine-month period ended September 30, 1996 (1995 - $927 and $2,325).
In June 1996, the Financial Accounting Standard Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of financial components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
The pronouncement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities ocurring after December 31, 1996, and is to be
applied prospectively. The Corporation has not yet determined the impact of this
statement.
NOTE 3 - INVESTMENT SECURITIES
The average maturities as of September 30, 1996, and market value for the
following investment securities are:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Investments securities held-to-maturity:
September 30,
1996 1995
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury (average
maturity of 7 months) $ 922,075 $ 922,621 $2,144,326 $2,151,139
Obligations of other U.S. Government
agencies and corporations
(average maturity of 4 months) 280,376 279,433 214,280 212,445
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 2 years and 6 months) 188,138 189,687 197,694 201,988
Collateralized mortgage obligations
(average maturity of 1 year and 5 months) 195,276 194,259 370,599 366,165
Mortgage-backed securities (average
maturity of 4 years and 5 months) 54,837 53,989 124,280 123,474
Equity securities (without contractual
maturity) 58,773 58,773
Others (average maturity of 4 years
and 8 months) 12,679 12,645 56,073 56,108
------------------------------------------------------
$1,712,154 $1,711,407 $3,107,252 $3,111,319
======================================================
</TABLE>
16
<PAGE> 43
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Investments securities available-for-sale:
September 30,
1996 1995
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury (average maturity
of 1 year and 2 months) $2,033,960 $2,033,102 $ 904,314 $ 905,457
Obligations of other U.S. Government
agencies and corporations (average
maturity of 1 year and 11 months) 158,782 158,120 145,079 145,735
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 2 years and 8 months) 24,107 24,059 30,518 30,574
Collateralized mortgage obligations (average
maturity of 3 years) 296,727 295,953 64,980 64,850
Mortgage-backed securities (average maturity
of 18 years and 3 months) 295,457 290,990 183,656 183,268
Equity securities (without contractual
maturity) 11,512 11,439 3,984 3,984
Others (average maturity of 13 years and
1 month) 19,050 18,890 35,786 43,324
----------------------------------------------------
$2,839,595 $2,832,553 $1,368,317 $1,377,192
====================================================
</TABLE>
NOTE 4 - PLEDGED ASSETS
Securities and insured mortgage loans of the Corporation of $3,007,804 (1995 -
$2,496,446) are pledged to secure public and trust deposits and securities and
mortgages sold under repurchase agreements.
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, 1996, amounted to $13,366 and
$119,143. 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.
17
<PAGE> 44
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
NOTE 6 - SUBORDINATED NOTES
Subordinated notes consist of the following:
September 30,
1996 1995
--------------------------
<S> <C> <C>
Subordinated notes issued by the Corporation on
December 12, 1995, maturing on December 15,
2005, with interest payable semi-annually at 6.75% $125,000
--------------------------
Subordinated notes issued by Banco Popular on March
29, 1989, which matured on June 15, 1996, with
interest payable quarterly and consisting of:
8.875% Fixed Rate Notes series A $15,000
8.6875% Fixed Rate Notes series B 15,000
Floating Rate Notes series A with interest
payable at 88% of LIBID rate 19,000
Floating Rate Notes series B with interest
payable at 86% of LIBID rate 1,000
-------------------------
50,000
-------------------------
$125,000 $50,000
=========================
</TABLE>
NOTE 7 - STOCKHOLDERS' EQUITY
Authorized common stock is 90,000,000 shares with a par value of $6 per share of
which 66,048,673 are issued and outstanding at September 30, 1996. On April
26,1996, the Corporation's Board of Directors authorized a stock split of one
share for each share outstanding effected in the form of a dividend, effective
July 1, 1996. As a result of the split, 33,000,590 shares were issued, and
$198,004 were transferred from retained earnings 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. 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, are issued and outstanding at September 30, 1996.
NOTE 8 - EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are calculated based on net income applicable to
common stockholders which amounted to $44,186 for the third quarter of 1996
(1995 -$36,220) and $131,208 for the nine months ended September 30, 1996 (1995
- - $99,847), after deducting the dividends on preferred stock. EPS are based
on 66,048,673 average shares outstanding for the third quarter of 1996 (1995 -
65,844,636) and 66,000,086 average shares outstanding for the first nine months
of 1996 (1995 - 65,789,014), 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, 1996, the Corporation paid
interest and income taxes amounting to $427,946 and $70,047, respectively (1995
- - $382,692 and $36,741). In addition, the loans receivable transferred to other
real estate and other property for the nine-month period ended September 30,
1996, amounted to $2,089 and $3,849, respectively (1995 - $5,072, and $2,669).
The Corporation's stockholders' equity at September 30, 1996, includes $6,001,
net of deferred taxes, in unrealized holding losses on securities
available-for-sale, as compared with unrealized holding gains of $5,845 at
September 30, 1995.
18
<PAGE> 45
<TABLE>
<CAPTION>
DIRETORS AND OFFICERS
- --------------------------------------------------------------------------------------------------
<S> <C>
Board of Directors OFFICES (CONT.)
Richard L. Carrion, Chairman VIRGIN ISLANDS OFFICE
Alfonso F. Ballester, Vice Chairman 80 Kronprindsens Gade
Antonio Luis Ferre, Vice Chairman Kronprindsens Quarter
Juan A. Albors Hernandez * Charlotte Amalie, St. Thomas
Salustiano Alvarez Mendez * U.S. Virgin Islands 00802
Jose A. Bechara Bravo * Telephone: (809) 774-2300
Juan J. Bermudez
Esteban D. Bird * SUBSIDIARIES
Francisco J. Carreras VEHICLE EQUIPMENT LEASING COMPANY, INC.
David H. Chafey, Jr. State Road #2 Km. 6.8
Luis E. Dubon, Jr. Villa Caparra
Hector R. Gonzalez Guaynabo, Puerto Rico 00966
Jorge A. Junquera Diez Telephone: (787) 792-9292
Franklin A. Mathias*
Manuel Morales, Jr. POPULAR LEASING AND RENTAL, INC.
Alberto M. Paracchini M-1046 Federico Costa St.
Francisco Perez, Jr. ** Tres Monjitas Industrial Development
Francisco M. Rexach, Jr. San Juan, Puerto Rico 00903
Jose E. Rossi ** Telephone: (787) 751-4848
Felix J. Serralles Nevares
Emilio Jose Venegas ** POPULAR CONSUMER SERVICES, INC.
Julio E. Vizcarrondo, Jr. 10 Salud Street
El Senorial Condominium, Suite 613
Samuel T. Cespedes, Secretary Ponce, Puerto Rico 00731
Telephone: (787) 844-2860
* Director of Banco Popular de Puerto Rico only
** Director of BanPonce Corporation only EQUITY ONE, INC.
523 Fellowship Road, Suite 220
Mt. Laurel, New Jersey 08054
EXECUTIVE OFFICERS Telephone: (609) 273-1119
Richard L. Carrion, Chairman of the Board,
President and Chief Executive Officer PIONEER BANCORP, INC.
David H. Chafey, Jr., Senior Executive Vice President 4000 West North Avenue
Jorge A. Junquera Diez, Senior Executive Vice President Chicago, Illinois 60639
Maria Isabel Burckhart, Executive Vice President Telephone: (312) 772-8600
Larry Kesler, Executive Vice President
Humberto Martin, Executive Vice President BANCO POPULAR, FSB
Emilio E. Pinero, Executive Vice President 500 Bloomfield Avenue
Newark, New Jersey 07107
OFFICES Telephone: (201) 484-6525
CENTRAL OFFICE POPULAR MORTGAGE, INC.
Banco Popular Center, Hato Rey 268 Ponce de Leon Avenue
209 Munoz Rivera Avenue San Juan, Puerto Rico 00918
San Juan, Puerto Rico 00918 Telephone: (787) 753-0245
Telephone: (787) 765-9800
BP Capital Markets, Inc.
NEW YORK OFFICE 1020 Popular Center
7 West 51st. St.
New York, N.Y. 10019 Hato Rey, Puerto Rico 00918
Telephone: (212) 315-2800 Telephone: (787) 766-4200
LOS ANGELES OFFICE COMBANCORP
354 South Spring St. 6001 E. Washington Blvd.
Los Angeles, California 90013 Telephone:(213) 724-8800
Telephone: (213) 626-1160 City of Commerce, California 90040
Telephone: (213) 724-8800
</TABLE>
19
<PAGE> 46
BANPONCE
CORPORATION
PO Box 362708
San Juan, Purerto Rico 00936-2708
[RECYCLE LOGO] PRINTED ON RECYCLED PAPER.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BANPONCE CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1,000
<CASH> 488,151
<INT-BEARING-DEPOSITS> 5,348
<FED-FUNDS-SOLD> 1,152,352
<TRADING-ASSETS> 372,354
<INVESTMENTS-HELD-FOR-SALE> 2,832,553
<INVESTMENTS-CARRYING> 1,712,154
<INVESTMENTS-MARKET> 1,711,407
<LOANS> 9,589,288
<ALLOWANCE> 182,372
<TOTAL-ASSETS> 16,755,578
<DEPOSITS> 10,588,981
<SHORT-TERM> 3,665,257
<LIABILITIES-OTHER> 292,249
<LONG-TERM> 986,933
0
100,000
<COMMON> 396,292
<OTHER-SE> 723,813
<TOTAL-LIABILITIES-AND-EQUITY> 16,755,578
<INTEREST-LOAN> 679,269
<INTEREST-INVEST> 211,646
<INTEREST-OTHER> 49,084
<INTEREST-TOTAL> 939,999
<INTEREST-DEPOSIT> 259,540
<INTEREST-EXPENSE> 437,095
<INTEREST-INCOME-NET> 502,904
<LOAN-LOSSES> 65,381
<SECURITIES-GAINS> 5,620
<EXPENSE-OTHER> 397,996
<INCOME-PRETAX> 192,233
<INCOME-PRE-EXTRAORDINARY> 137,470
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,470
<EPS-PRIMARY> 1.99
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.79
<LOANS-NON> 146,235
<LOANS-PAST> 12,216
<LOANS-TROUBLED> 2,625
<LOANS-PROBLEM> 164,567
<ALLOWANCE-OPEN> 168,393
<CHARGE-OFFS> 76,222
<RECOVERIES> 24,418
<ALLOWANCE-CLOSE> 182,372
<ALLOWANCE-DOMESTIC> 181,597
<ALLOWANCE-FOREIGN> 775
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
