<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 June 30, 1997 Commission file number 0 - 13818
------------- -----------
POPULAR, INC.
------------------------------------------------------
(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 67,766,166
---------------------------- -----------------------------------------
(Title of Class) (Shares Outstanding as of August 13, 1997)
<PAGE> 2
2
POPULAR, INC.
INDEX
Part I - Financial Information Page
Item 1. Financial Statements ----
Unaudited consolidated statements of condition
June 30, 1997, December 31, 1996 and June 30, 1996 3
Unaudited consolidated statements of income - Quarter
ended June 30, 1997 and 1996 4
Unaudited consolidated statements of cash
flows - Quarter ended June 30, 1997 and 1996 5
Notes to unaudited consolidated financial
statements 6-13
Item 2. Management's discussion and analysis of
financial condition and results of operation 14-27
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 28
Item 5. Other information - None N/A
Item 6. Exhibits and reports on Form 8-K 28
-- Signature 29
<PAGE> 3
3
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, December 31, JUNE 30,
(In thousands) 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 609,160 $ 492,368 $ 524,344
- -------------------------------------------------------------------------------------------------------------------------
Money market investments:
Federal funds sold and securities and
mortgages purchased under agreements to resell 847,171 778,597 898,041
Time deposits with other banks 20,020 19,023 3,236
Banker's acceptances 2,376 2,656 1,555
- -------------------------------------------------------------------------------------------------------------------------
869,567 800,276 902,832
- -------------------------------------------------------------------------------------------------------------------------
Investment securities available-for-sale, at market value 4,905,562 3,415,934 3,127,423
Investment securities held-to-maturity, at cost 745,826 1,197,066 1,694,764
Trading account securities, at market value 340,749 292,150 329,258
Loans held-for-sale 314,916 255,129 153,278
Loans 10,969,960 9,854,911 9,456,881
Less - Unearned income 375,511 331,012 330,827
Allowance for loan losses 206,719 185,574 178,330
- -------------------------------------------------------------------------------------------------------------------------
10,387,730 9,338,325 8,947,724
- -------------------------------------------------------------------------------------------------------------------------
Premises and equipment 388,970 356,697 340,358
Other real estate 10,285 6,076 3,611
Customers' liabilities on acceptances 2,542 3,100 1,650
Accrued income receivable 109,346 95,487 118,774
Other assets 229,909 380,247 164,035
Intangible assets 231,282 131,248 134,088
- -------------------------------------------------------------------------------------------------------------------------
$ 19,145,844 $16,764,103 $16,442,137
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 2,496,684 $ 2,330,704 $ 2,140,105
Interest bearing 8,908,832 8,432,571 8,436,843
- -------------------------------------------------------------------------------------------------------------------------
11,405,516 10,763,275 10,576,948
Federal funds purchased and securities sold
under agreements to repurchase 2,623,292 1,875,465 2,747,186
Other short-term borrowings 1,630,976 1,404,006 802,364
Notes payable 1,412,407 986,713 692,435
Senior debentures 30,000 30,000
Acceptances outstanding 2,542 3,100 1,650
Other liabilities 371,981 314,012 279,416
- -------------------------------------------------------------------------------------------------------------------------
17,446,714 15,376,571 15,129,999
- -------------------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000 125,000 125,000
- -------------------------------------------------------------------------------------------------------------------------
Preferred beneficial interests in Popular North America's junior subordinate
deferrable interest debentures guaranteed
by the Corporation 150,000
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity :
Preferred stock 100,000 100,000 100,000
Common stock 411,697 396,531 396,007
Surplus 579,878 496,582 479,059
Retained earnings 340,267 267,719 217,725
Treasury stock-at cost (14,017)
Unrealized gains (losses) on securities available-for-sale, net of
deferred taxes 6,305 1,700 (5,653)
------------------------------------------------------------------------------------------------------------------------
1,424,130 1,262,532 1,187,138
------------------------------------------------------------------------------------------------------------------------
$ 19,145,844 $16,764,103 $16,442,137
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements
<PAGE> 4
4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended For the six months ended
June 30, June 30,
(Dollars in thousands, except per share amounts) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $260,804 $ 226,027 $ 507,157 $ 443,274
Money market investments 8,515 10,882 17,382 19,555
Investment securities 84,646 68,442 159,757 140,387
Trading account securities 5,040 4,624 8,974 9,686
- -----------------------------------------------------------------------------------------------------------
359,005 309,975 693,270 612,902
- -----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 87,092 86,693 173,287 169,689
Short-term borrowings 56,409 41,625 103,771 84,555
Long-term debt 24,898 13,449 44,962 27,990
- -----------------------------------------------------------------------------------------------------------
168,399 141,767 322,020 282,234
- -----------------------------------------------------------------------------------------------------------
Net interest income 190,606 168,208 371,250 330,668
Provision for loan losses 25,413 21,672 49,100 42,945
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 165,193 146,536 322,150 287,723
Service charges on deposit accounts 22,214 21,389 44,033 42,465
Other service fees 24,785 19,408 46,954 36,788
Gain (loss) on sale of securities 1,286 (20) (374) 709
Trading account profit (loss) 817 (1,383) 1,250 (445)
Other operating income 7,125 9,921 18,619 21,790
- -----------------------------------------------------------------------------------------------------------
221,420 195,851 432,632 389,030
- -----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 50,344 46,112 98,689 90,864
Profit sharing 6,788 5,685 13,228 11,755
Pension and other benefits 17,307 15,654 34,007 32,635
- -----------------------------------------------------------------------------------------------------------
74,439 67,451 145,924 135,254
Net occupancy expense 8,743 8,596 17,745 17,914
Equipment expenses 13,279 11,806 25,619 23,580
Other taxes 7,311 5,466 13,756 11,429
Professional fees 14,421 10,993 26,835 20,909
Communications 7,750 6,497 15,331 12,813
Business promotion 7,980 6,027 13,937 11,419
Printing and supplies 3,127 3,020 6,771 5,943
Other operating expenses 10,155 7,458 18,974 14,198
Amortization of intangibles 4,841 4,530 9,279 9,084
- -----------------------------------------------------------------------------------------------------------
152,046 131,844 294,171 262,543
- -----------------------------------------------------------------------------------------------------------
Income before taxes 69,374 64,007 138,461 126,487
Income tax 18,283 17,952 37,831 35,290
- -----------------------------------------------------------------------------------------------------------
NET INCOME $ 51,091 $ 46,055 $ 100,630 $ 91,197
===========================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 49,003 $ 43,967 $ 96,455 $ 87,022
===========================================================================================================
EARNINGS PER COMMON SHARE $ 0.74 $ 0.67 $ 1.46 $ 1.32
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
<PAGE> 5
5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
June 30,
(In thousands) 1997 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $100,630 $91,197
- --------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of premises and equipment 25,839 24,132
Provision for loan losses 49,100 42,945
Amortization of intangibles 9,279 9,084
Loss (gain) on sale of investment securities available-for-sale 374 (709)
Loss (gain) on disposition of premises and equipment 103 (7)
Gain on sale of loans (6,127) (5,325)
Amortization of premiums and accretion of discounts on investments 745 4,647
Increase in loans held-for-sale (59,787) (40,472)
Amortization of deferred loan fees and costs (1,824) 3,303
Net (increase) decrease in trading securities (48,580) 1,418
Net increase in interest receivable (6,872) (5,235)
Net decrease (increase) in other assets 190,723 (15,803)
Net increase in interest payable 4,953 3,390
Net decrease in current and deferred taxes (37,494) (22,196)
Net increase in postretirement benefit obligation 4,014 4,493
Net increase in other liabilities 51,137 13,227
- --------------------------------------------------------------------------------------------------------------------------------
Total adjustments 175,583 16,892
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 276,213 108,089
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in money market investments (46,595) (104,113)
Purchases of investment securities held-to-maturity (21,944,787) (5,620,734)
Maturities of investment securities held-to-maturity 22,453,433 5,566,537
Purchases of investment securities available-for-sale (3,839,435) (3,263,947)
Maturities of investment securities available-for-sale 878,497 1,580,601
Sales of investment securities available-for-sale 1,975,195 1,743,400
Net disbursements on loans (644,137) (638,924)
Proceeds from sale of loans 190,030 163,623
Acquisition of loan portfolios (14,390) (113,475)
Assets acquired, net of cash (140,602)
Acquisition of premises and equipment (55,034) (39,805)
Proceeds from sale of premises and equipment 11,696 526
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,176,129) (726,311)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (371,676) 700,286
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 690,570 (253,693)
Net increase in other short-term borrowings 226,970 347,656
Proceeds from issuance of notes payable 328,233 394,662
Payments of notes payable (432,655)
Payment of senior debentures (30,000)
Payment of subordinated notes (50,000)
Proceeds from issuance of Series A Capital Securities 150,000
Dividends paid (27,973) (23,952)
Proceeds from issuance of common stock 2,162 2,089
Liability for cash portion of merger 62,439
Treasury stock acquired (14,017)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,016,708 684,393
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and due from banks 116,792 66,171
Cash and due from banks at beginning of period 492,368 458,173
- --------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 609,160 $ 524,344
================================================================================================================================
</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 Popular, Inc. include the balance sheet
of the Corporation and its wholly-owned subsidiaries, Popular Securities, Inc.;
Popular International Bank, Inc. and its wholly-owned subsidiaries National
Bancorp, Inc., ATH Costa Rica, and Popular North America, Inc. including Banco
Popular, FSB, Pioneer Bancorp, Inc., CombanCorp., Banco Popular, N.A. (Florida),
CBC Bancorp, Ltd. (second tier subsidiaries), and Equity One, Inc.; Banco
Popular de Puerto Rico and its wholly-owned subsidiaries, Popular Leasing and
Rental, Inc., Popular Finance, Inc. and Popular Home Mortgage, Inc.; and
Metropolitana de Prestamos, Inc., as of June 30, 1997, December 31, 1996,
and June 30, 1996, and their related statements of income and cash flows for
the six-months ended June 30, 1997 and 1996.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 1997 presentation.
NOTE 2- ACCOUNTING CHANGES
Effective March 31, 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) 129, "Disclosure of Information about Capital
Structure." This statement establishes standards for disclosing information
about an entity's capital structure. However, it contains no change in
disclosure requirements for entities that were previously subject to the
requirements of Opinions 10 and 15 and SFAS 47.
Effective March 31, 1997, the Corporation adopted SFAS 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. It simplifies the standards for computing earnings
per share previously found in APB Opinion 15, "Earnings per Share," and makes
them comparable to international EPS standards. SFAS 128 replaces the
presentation of primary earnings per share with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Effective January 1, 1997, the Corporation adopted SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which supersedes SFAS 122 "Accounting for Mortgage Servicing Rights." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. Those standards
are based on a consistent application of a financial component approach that
focuses on the legal and physical control over the component. Under this
approach, following a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
and derecognizes financial assets for which control has been surrendered and
financial liabilities that have been extinguished. However, the FASB issued SFAS
127, "Deferral of the Effective Date of
<PAGE> 7
7
Certain Provisions of FASB Statement 125", that delays until January 1, 1998,
the effective date of those provisions of the statement that deal with
securities lending, repurchase agreements and similar transactions. The adoption
of this pronouncement did not have a financial impact on the consolidated
financial statements of the Corporation for the six-month period ended June 30,
1997.
In addition, this statement requires that mortgage banking enterprises recognize
as separate assets the rights to service mortgage loans for others, whether
those servicing rights are originated or purchased. Also, it requires mortgage
banking enterprises to assess capitalized mortgage servicing rights for
impairment based on the fair value of those rights. The total cost of mortgage
loans to be sold with servicing rights retained is allocated to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. These mortgage servicing rights are amortized in
proportion to and over the periods of estimated net servicing income.
To estimate the fair value of mortgage servicing rights the Corporation
considers prices for similar assets and the present value of expected future
cash flows associated with the servicing rights calculated using assumptions
that market participants would use in estimating future servicing income and
expense. For purposes of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Corporation stratifies such rights based on
predominant risk characteristics of underlying loans, such as loan type, rate
and term. The amount of impairment recognized if any, is the amount by which the
capitalized mortgage servicing rights per stratum exceeds its estimated fair
value. Impairment is recognized through a valuation allowance. As of June 30,
1997, the carrying value, estimated fair value and valuation allowance of
capitalized mortgage servicing rights were $26,321, $35,379 and $16,
respectively (1996- $24,112, $29,574 and $64).
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 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 de Puerto Rico 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 six-month period ended June 30, 1997,
the Corporation recognized an expense of $351 and $574, respectively, related to
this plan (1996 - $111 and $214).
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 six-month period ended June
30, 1997, the Corporation recognized an impairment of $3,561 in the market value
of a building which is held for sale. For the quarter and six-month period ended
June 30, 1996, no impairment recognition was necessary under this pronouncement.
<PAGE> 8
8
NOTE 3 - INVESTMENT SECURITIES
The average maturities as of June 30, 1997, and market value for the following
investment securities are:
Investment securities available-for-sale:
<TABLE>
<CAPTION>
June 30,
1997 1996
Amortized Marketed Amortized Market
Cost Value Cost Value
-------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury (average maturity of
1 year and 7 months) $3,007,496 $3,013,782 $2,461,354 $2,457,654
Obligations of other U.S. Government
agencies and corporations (average
maturity of 9 years and 10 months) 1,099,072 1,103,135 146,977 146,064
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 7 years and 10 months) 45,680 45,915 24,924 24,814
Collateralized mortgage obligations (average
maturity of 2 years and 1 month) 626,490 625,798 188,470 187,742
Mortgage-backed securities (average
maturity of 4 years) 80,473 79,143 266,433 261,648
Equity securities (without contractual
maturity) 20,183 20,444 27,257 31,531
Others (average maturity of 8 years
and 6 months) 17,321 17,345 18,050 17,970
--------------------------------------------------
$4,896,715 $4,905,562 $3,133,465 $3,127,423
==================================================
</TABLE>
Investment securities held-to-maturity:
<TABLE>
<CAPTION>
June 30,
1997 1996
Amortized Market Market Amortized
Cost Value Cost Value
-------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury (average maturity of 4 months) $350,397 $ 350,430 $ 923,106 $ 923,664
Obligations of other U.S. Government
agencies and corporations (average
maturity of 3 months) 89,731 89,399 210,600 209,506
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 6 years and 5 months) 61,746 62,958 220,456 222,090
Collateralized mortgage obligations (average
maturity of 1 year and 7 months) 102,970 102,701 223,416 221,881
Mortgage-backed securities (average
maturity of 4 years and 1 month) 51,294 51,641 57,048 56,150
Equity securities (without contractual
maturity) 70,660 65,611 47,674 47,674
Others (average maturity of 6 years
and 9 months) 19,028 18,997 12,464 12,484
------------------------------------------------
$745,826 $ 741,737 $1,694,764 $1,693,449
================================================
</TABLE>
<PAGE> 9
9
NOTE 4- PLEDGED ASSETS
Securities and insured mortgage loans of the Corporation of $3,930,814 (1996 -
$2,677,352) 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 June 30, 1997, amounted to $25,416 and
$114,372. There are also outstanding other commitments and contingent
liabilities, such as guarantees and commitments to extend credit, which are not
reflected in the accompanying financial statements. No losses are anticipated as
a result of these transactions.
NOTE 6- SUBORDINATED NOTES
Subordinated notes of $125,000 as of June 30, 1997 and 1996 consisted of notes
issued by the Corporation on December 12, 1995, maturing on December 15, 2005,
with interest payable semi-annually at 6.75%.
NOTE 7- STOCKHOLDERS' EQUITY
Authorized common stock is 180,000,000 shares with a par value of $6 per share
of which 68,236,048 were issued and outstanding at June 30, 1997. On May 8,
1997, the Board of Directors authorized the repurchase of up to three million
shares of the outstanding common stock of the Corporation for the sole purpose
of replenishing shares issued by Popular, Inc. in connection with acquisitions.
As of June 30, 1997, 380,000 common shares were purchased at a cost of $14,017.
Authorized preferred stock is 10,000,000 shares without par value of which
4,000,000, non-cumulative with a dividend rate of 8.35% and a liquidation
preference value of $25 per share, were issued and outstanding at June 30, 1997.
NOTE 8- EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are calculated based on net income applicable to
common stockholders which amounted to $49,004 for the second quarter of 1997
(1996 - $43,967), and $96,455 for the six months ended June 30, 1997 (1996 -
$87,022), after deducting the dividends on preferred stock. EPS are based on
66,350,298 average shares outstanding for the second quarter of 1997 (1996 -
66,001,180) and 66,235,718 average shares outstanding for the first six months
of 1997 (1996 - 65,975,526).
NOTE 9- SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the six-month period ended June 30, 1997 the Corporation paid interest
and income taxes amounting to $288,126 and $56,247, respectively (1996 -
$276,030 and $56,790). In addition, the loans receivable transferred to other
real estate and other property for the six-month period ended June 30, 1997,
amounted to $3,683 and $2,323, respectively (1996 - $1,150 and $2,436). The
Corporation's stockholders' equity at June 30, 1997 includes $6,305, in
unrealized holding gains on securities available-for-sale, net of deferred
taxes, as compared with $5,653 in unrealized losses as of June 30, 1996.
<PAGE> 10
10
NOTE 10- POPULAR INTERNATIONAL BANK, INC. (A WHOLLY-OWNED SUBSIDIARY OF POPULAR,
INC.) FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular International Bank, Inc. (PIB) and
its wholly-owned subsidiaries, National Bancorp, Inc., ATH Cost Rica, and
Popular North America, Inc., including Banco Popular, FSB, Pioneer Bancorp,
Inc., CombanCorp., Banco Popular, N.A. (Florida), CBC Bancorp, LTD, (second-tier
subsidiaries) and Equity One, Inc. as of May 31, 1997 and 1996, and the results
of their operations for the six-month periods then ended.
Popular, Inc. has not presented separate financial statements and any other
disclosures concerning Popular International Bank, Inc., other than the
following summarized financial information, because management has determined
that such information is not material to holders of debt securities issued by
PIB which is guaranteed by the Corporation.
POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
<TABLE>
<CAPTION>
May 31,
1997 1996
<S> <C> <C>
Assets:
Cash $ 76,421 $ 17,960
Money market investments 125,575 40,453
Investment securities 289,738 200,372
Loans 2,054,913 1,328,947
Less: Unearned income 50,998 45,148
Allowance for loan losses 29,330 18,793
---------- ----------
1,974,585 1,265,006
Other assets 151,371 68,798
---------- ----------
Total assets $2,617,690 $1,592,589
========== ==========
Liabilities and Stockholder's Equity:
Deposits $1,115,418 $ 576,487
Short-term borrowings 308,267 308,615
Notes payable 713,695 519,771
Other liabilities 49,059 42,007
Preferred beneficial interests in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 -0-
Stockholder's equity 281,251 145,709
---------- ----------
Total liabilities and stockholder's equity $2,617,690 $1,592,589
========== ==========
</TABLE>
<PAGE> 11
11
POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Quarter ended For the six months ended
May 31, May 31,
-------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Interest and fees $52,017 $36,926 $ 97,894 $72,267
Other income 4,697 6,343 7,491 10,537
------- ------- -------- -------
Total income 56,714 43,269 105,385 82,804
------- ------- -------- -------
Expenses:
Interest expense 27,311 19,708 51,161 39,527
Provision for loan losses 4,422 4,202 8,107 7,012
Operating expenses 19,200 10,726 32,935 20,978
------- ------- -------- -------
Total expenses 50,933 34,636 92,203 67,517
------- ------- -------- -------
Income before income tax 5,781 8,633 13,182 15,287
Income tax 2,383 3,337 5,677 6,007
------- ------- -------- -------
Net income $ 3,398 $ 5,296 $ 7,505 $ 9,280
======= ======= ======== =======
</TABLE>
<PAGE> 12
12
NOTE 11- POPULAR NORTH AMERICA, INC. (A SECOND-TIER SUBSIDIARY OF POPULAR, INC.)
FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular North America, Inc. (PNA) and its
wholly-owned subsidiaries Banco Popular, FSB, Pioneer Bancorp Inc., CombanCorp,
Banco Popular, N.A. (Florida), CBC Bancorp, Ltd., and Equity One, Inc. (second
tier subsidiary) as of May 31, 1997 and 1996, and the results of their
operations for the six-month periods then ended.
Popular, Inc. has not presented separate financial statements and any other
disclosures concerning Popular North America, Inc., other than the following
summarized financial information, because management has determined that such
information is not material to holders of debt securities issued by PNA which
is guaranteed by the Corporation.
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
<TABLE>
<CAPTION>
May 31,
1997 1996
<S> <C> <C>
Assets:
Cash $ 55,975 $ 17,950
Money market investments 119,170 39,477
Investment securities 212,310 200,372
Loans 1,991,417 1,328,947
Less: Unearned income 50,944 45,148
Allowance for loan losses 28,426 18,793
---------- ----------
1,912,047 1,265,006
Other assets 122,939 68,536
---------- ----------
Total assets $2,422,441 $1,591,341
========== ==========
Liabilities and Stockholder's Equity:
Deposits $ 972,548 $ 576,487
Short-term borrowings 297,018 308,615
Notes payable 713,695 519,771
Other liabilities 47,389 41,992
Preferred beneficial interests in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 -0-
Stockholder's equity 241,791 144,476
---------- ----------
Total liabilities and stockholder's equity $2,422,441 $1,591,341
========== ==========
</TABLE>
<PAGE> 13
13
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Quarter ended For the six-months ended
May 31, May 31,
-------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Interest and fees $50,395 $36,910 $ 95,523 $72,234
Other income 4,533 6,343 7,329 10,537
------- ------- -------- -------
Total income 54,928 43,253 102,852 82,771
------- ------- -------- -------
Expenses:
Interest expense 26,994 19,708 50,844 39,527
Provision for loan losses 4,417 4,202 8,102 7,012
Operating expenses 18,477 10,748 32,103 21,024
------- ------- -------- -------
Total expenses 49,888 34,658 91,049 67,563
------- ------- -------- -------
Income before income tax 5,040 8,595 11,803 15,208
Income tax 2,298 3,337 5,592 6,007
------- ------- -------- -------
Net income $ 2,742 $ 5,258 $ 6,211 $ 9,201
======= ======= ======== =======
</TABLE>
<PAGE> 14
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial review contains the analysis of the consolidated financial
position and financial performance of Popular, Inc. and its subsidiaries (the
Corporation). The Corporation is a regional diversified bank holding company
engaged in the following businesses through its subsidiaries.
- Commercial Banking/Savings and Loans - This business has experienced the
largest growth within the last twelve months with five acquisitions made
over that period. The Corporation acquired Banco Popular, N.A. (California)
on September 30, 1996, Banco Popular, N.A. (Florida) on April 30, 1997,
National Bancorp and CBC Bancorp, Ltd. on May 31, 1997, and on June 30,
1997 the former Roig Commercial Bank (RCB) was merged with and into Banco
Popular de Puerto Rico (BPPR). Previously established banking operations
included BPPR, the Corporation's largest subsidiary founded in 1893, Banco
Popular, Illinois, and Banco Popular, FSB.
- Lease Financing - Popular Leasing and Rental, Inc. (Popular Leasing) and
Popular Leasing, USA
- Mortgage Banking/Consumer Finance - Popular Home Mortgage, Inc. (Popular
Home Mortgage), Equity One, Inc. (Equity One) and Popular Finance, Inc.
(Popular Finance)
- Broker / Dealer - Popular Securities, Inc. (Popular Securities)
- ATM Processing Services - ATH Costa Rica
This financial review should be read together with the unaudited consolidated
financial statements, supplemental financial data and tables included in this
report.
NET INCOME
The Corporation's net income for the second quarter of 1997 reached $51.1
million, compared with $46.1 million reported for the same period in 1996, and
$49.5 million reported during the first quarter of 1997. Earnings per common
share (EPS) for the quarter were $0.74, based on 66,350,298 average shares
outstanding, compared with EPS of $0.67 for the second quarter of 1996, based on
66,001,180 average shares outstanding and EPS of $0.72 for the first quarter of
1997, based on 66,121,855 average shares outstanding. Return on assets (ROA) and
return on common equity (ROE) for the quarter ended June 30, 1997, were 1.16%
and 16.03%, respectively, compared with 1.16% and 16.56% reported during the
same period in 1996 and 1.19% and 16.32% for the first quarter of 1997.
Of the $5.0 million increase in net income, $22.3 million were attributed to net
interest income, followed by an increase in non-interest revenues of $3.4
million, and by higher gains on sale of securities and trading transactions of
$3.5 million. These positive variances were partially offset by rises of $20.2
million in operating expenses, $3.7 million in the provision for loan losses and
$0.3 million in the income tax provision.
For the six-month period ended June 30,1997, the Corporation reported net
earnings of $100.6 million, an increase of $9.4 million when compared with the
$91.2 million reported for the same period in 1996. EPS for both periods were
$1.46 and $1.32, respectively, based on 66,235,718 average shares outstanding
for the first six months of 1997 and 65,975,526 for the same period in 1996. ROA
and ROE for the six-month period ended June 30,1997, were 1.17% and 16.17%,
respectively, compared with 1.16% and 16.48% reported in 1996.
<PAGE> 15
15
TABLE A
COMPONENTS OF NET INCOME AS A PERCENTAGE OF AVERAGE TOTAL ASSETS
<TABLE>
<CAPTION>
Second Quarter
- ------------------------------------------------------------------
1997 1996
----------------------------
<S> <C> <C>
Net interest income 4.34% 4.23%
Provision for loan losses (0.58) (0.55)
Securities and trading gains 0.05 (0.04)
Other income 1.23 1.29
---- ----
5.04 4.93
Operating expenses (3.46) (3.32)
---- ----
Income before tax 1.58 1.61
Provision for income tax (0.42) (0.45)
---- ----
Net income 1.16% 1.16%
==== ====
</TABLE>
NET INTEREST INCOME
Net interest income for the second quarter of 1997 reached $190.6 million
compared with $168.2 million reported for the same quarter in 1996. On a taxable
equivalent basis, net interest income increased to $205.1 million from $180.6
million in the second quarter of 1996 and $193.3 million in the first quarter of
1997. The rise from the second quarter of 1996, resulted from a $22.0 million
increase due to a higher volume of earning assets and a $2.5 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.
Average earning assets reached $16.7 billion for the quarter ended June 30,
1997, compared with $15.0 billion for the same quarter of 1996. The increase
relates primarily to a rise of $1.1 billion in average loans, reaching $10.1
billion for the quarter ended June 30, 1997, as compared with $9.0 billion for
the same quarter in 1996. The rise stems from an increase of $546 million in
average commercial loans principally at BPPR. Also, an increase of $331 million
in average consumer loans was attained, mostly at BPPR and Equity One, while the
average mortgage portfolio grew $220 million of which $219 million were at
Equity One. The average lease portfolio grew $34 million. The banking operations
acquired since the second quarter of 1996, accounted for $188 million of the
increase in average loans.
The average yield on loans, on a taxable equivalent basis, rose to 10.35% from
10.11% reported during the second quarter of 1996. The rise in the yields of
commercial and consumer loans was the main contributor to the increase in the
yield on total loans. Commercial loans had a taxable equivalent yield for the
quarter of 9.32%, compared with 8.92% reported during the second quarter of
1996. The yield on commercial loans has benefited from two factors; the rise of
25 basis points in the prime rate at the end of the first quarter of 1997 and
the elimination of Section 936 of the U.S. Internal Revenue Code during the last
quarter of 1996. Some loans that were previously priced using a 936 index rate,
have changed its pricing to a higher base in accordance with the prevailing
funds market, thus improving the yield on the commercial loan portfolio.
<PAGE> 16
16
Consumer loans had an average yield for the quarter of 13.26%, compared with
12.84% for the second quarter of 1996, while the yield on the leasing portfolio
increased 19 basis points to 13.22%. The taxable equivalent yield on mortgage
loans decreased to 8.42% from 8.62% reported for the second quarter in 1996.
Average money market investments decreased to $636 million for the second
quarter of 1997, compared with $858 million for the same period of 1996. The
decrease in money market investments is directly related to the decrease in size
of Popular Securities, as a result of a lower balance of 936 funds. The yield on
money market investments increased to 5.37% from 5.10% reported in the second
quarter of 1996.
Average investment securities reached $5.6 billion in the quarter ended June 30,
1997, compared with $4.8 billion reported for the same quarter in 1996. The
increase relates to a higher average volume of U.S. Treasury and agencies
securities, collateralized mortgage obligations and mortgage-backed securities
at BPPR. These increases were partially offset by a lower average balance of
investments required by local regulations to all recipients of 936 funds which
have a yield substantially below market rates. The average taxable equivalent
yield of the Corporation's investment portfolio increased 36 basis points to
6.94% during the three-month period ended June 30, 1997, from 6.58% during the
same period of 1996, as a result of the higher interest rate scenario.
The average balance of trading account securities for the second quarter of 1997
was $325 million compared with $341 million reported for the same quarter last
year. The taxable equivalent yield on trading account securities increased 48
basis points to 6.66% from 6.18% reported in the second quarter of 1996.
The increases in the yields of investments and loans, mentioned above, resulted
in a rise in the average yield on earning assets on a taxable equivalent basis,
which increased to 8.95% for the second quarter of 1997, from 8.61% reported
during the same quarter of 1996.
Average interest-bearing liabilities of the Corporation were $13.7 billion for
the three-month period ended June 30, 1997, compared with $12.5 billion for the
same period of 1996. Average interest-bearing deposits totaled $8.3 billion, a
slight decrease from the $8.4 billion reported for the same quarter in 1996.
Although most deposit categories showed increases, a decrease of $531 million in
average 936 certificates of deposits caused the aforementioned decline. Average
certificates of deposit, excluding 936 deposits, rose $168 million, average
savings accounts increased $194 million and NOW and money market deposits
averaged $102 million more than in 1996. Average demand deposits grew by $213
million from $2.1 billion for the second quarter of 1996, to $2.3 billion for
the same quarter this year. The operations acquired since the second quarter of
1996, contributed $244 million to the increase in average deposits.
The average cost of interest-bearing deposits for the quarters ended June 30,
1997 and 1996 was 4.19% and 4.15%, respectively. The average cost of savings
accounts and NOW and money market deposits for the second quarter of 1997,
increased to 3.06% and 3.32%, respectively, from 3.01% and 3.26% for the same
quarter last year.
<PAGE> 17
17
The increase of four basis points in the average cost of interest-bearing
deposits was principally attributed to the rise in the cost of certificates of
deposit from 5.22% in the second quarter of 1996 to 5.43% for the same quarter
in 1997. Traditionally 936 certificates of deposit had a cost below the U.S. or
the Eurodollar market. During the second quarter of 1996 these deposits had an
average cost of 4.51% and comprised 12.5% of average interest-bearing deposits,
compared with 4.90% and 6.2%, respectively, in the second quarter of 1997. That
reduction in the proportion of 936 deposits as well as the increase in its cost
were among the factors that caused the increase in the average cost of
certificates of deposit. Notwithstanding the repeal of Section 936, some 936
corporations have chosen not to withdraw all their funds from financial
institutions and have instead, invested those funds at a longer term to reduce
the tollgate taxes applicable upon repatriating these funds. As a result, the
cost of these funds have remained below that of the U.S. or Eurodollar market.
At June 30, 1997, the Corporation held $1.8 billion in 936 funds, including $162
million in funds acquired from RCB, representing 9.9% of its liabilities,
compared with $2.9 billion or 18.8% at the same date in 1996 and $1.8 billion or
11.5% at the end of the first quarter of 1997.
Average short-term borrowings increased $617 million reaching $3.9 billion
during the second quarter of 1997, compared with $3.3 billion during the same
period of 1996. The increase was mainly realized at BPPR with a $1.2 billion
increase in its average balance, due to the reduction in 936 deposits and
arbitrage opportunities undertaken during the quarter. This increase was
partially offset by a decrease in Popular Securities as a result of lower 936
borrowings. The average cost of short-term borrowings for the quarter ended June
30, 1997, increased by 70 basis points, from 5.06% to 5.76% due to both, a
change in the mix of short-term borrowings and general market conditions.
Average long and medium-term debt increased $722 million from $744 million in
the second quarter of 1996 to $1.5 billion for the same quarter of 1997. This
increase was mostly directed to finance the growth of the Corporation's
operations. Also, in February 1997, the Corporation issued $150 million in
Capital Securities which qualified as Tier I capital for regulatory purposes.
These securities mature on February 2027.
<PAGE> 18
18
TABLE B
NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
<TABLE>
<CAPTION>
(Dollars in millions) Second Quarter
- ---------------------------------------------------------------------------------
1997 Average 1996 Average
----------------------------------------------
Balance Rate Balance Rate
----------------------------------------------
<S> <C> <C> <C> <C>
Money market-investment
and trading securities $ 6,565 6.77% $ 5,987 6.35%
Loans 10,164 10.35 9,033 10.11
------- -------
Total earning assets $16,729 8.95% $15,020 8.61%
======= =======
Financed by:
Interest bearing deposits $ 8,343 4.19% $ 8,410 4.15%
Borrowings 5,393 6.05 4,054 5.46
------- -------
Total interest bearing funds 13,736 4.92% 12,464 4.57%
Net-interest bearing funds 2,993 2,556
------- -------
Total $16,729 4.04% $15,020 3.80%
======= =======
Net interest income per book $ 190.6 $ 168.2
Taxable equivalent adjustments 14.5 12.4
------- -------
Net interest income on a taxable
basis $ 205.1 $ 180.6
======= =======
Spread 4.03% 4.04%
Net interest yield 4.91% 4.81%
</TABLE>
The increase in borrowings combined with the reduction in 936 funds and the
higher interest rate scenario, caused the total cost of interest-bearing
liabilities to rise 35 basis points, from 4.57% to 4.92% for the second quarter
of 1997. The cost of funding earning assets also increased from 3.80% for the
second quarter of 1996 to 4.04% for the same quarter in 1997.
The improvement of 34 basis points in the taxable equivalent yield on earning
assets, partially offset by the higher cost of funds mentioned above, prompted
the net interest margin, on a taxable equivalent basis to rise 10 basis points
to 4.91% for the quarter ended June 30, 1997, from 4.81% reported during the
second quarter of 1996. During the first quarter of 1997 the Corporation
reported a taxable equivalent net interest margin of 4.90%. For the six-month
period ended June 30, 1997, the taxable equivalent net interest margin was
4.91%, compared with 4.80% for the same period in 1996.
Table B contains a summary of the results of the Corporation's net interest
margin, on a taxable equivalent basis, for the second quarter of 1997 and 1996.
<PAGE> 19
19
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses was $25.4 million for the quarter ended June 30,
1997, and $49.1 million for the first six months of 1997, reflecting rises of
$3.7 million or 17.3% and $6.2 million or 14.3%, respectively, over the same
periods in 1996. During the first quarter of 1997, the provision amounted to
$23.7 million. Net charge-offs for the quarter ended June 30, 1997, reached
$22.9 million or 0.90% of average loans, compared with $18.1 million or 0.80%
for the same quarter in 1996, and $17.9 million or 0.73% for the quarter ended
on March 31, 1997. The increase in provision for loan losses is attributable to
the growth in the loan portfolio, non-performing assets and net charge-offs
experienced by the Corporation. Table C below presents information for the
quarter ended June 30, 1997 and the previous four quarters.
TABLE C
- -----------------------------------------------------------------------
Quarter Provision for Net Allowance for
Ended Loan Losses Charge Offs Loan Losses
- -----------------------------------------------------------------------
(In millions)
June 30, 1997 $25.4 $22.9 $207
March 31, 1997 23.7 17.9 191
December 31, 1996 23.5 20.3 186
September 30, 1996 22.4 18.8 182
June 30, 1996 21.7 18.1 178
<PAGE> 20
20
TABLE D
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
<TABLE>
<CAPTION>
Second Quarter First Six Months
(Dollars in thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $191,360 $174,724 $185,574 $168,393
Allowance purchased 12,832 12,832
Provision for loan losses 25,413 21,672 49,100 42,945
--------------------------------------------
229,605 196,396 247,506 211,338
--------------------------------------------
Losses charged to the allowance
Commercial 12,442 9,185 23,642 18,400
Construction 500 300 1,193
Lease financing 5,834 4,869 12,117 8,194
Mortgage 477 459 1,006 1,056
Consumer 15,617 10,668 27,618 20,181
--------------------------------------------
34,370 25,681 64,683 49,024
--------------------------------------------
Recoveries
Commercial 3,549 2,045 7,372 5,904
Construction 80 21 81 22
Lease financing 3,930 1,962 9,059 2,909
Mortgage 70 81 106 193
Consumer 3,855 3,506 7,278 6,988
--------------------------------------------
11,484 7,615 23,896 16,016
--------------------------------------------
Net loans charged-off 22,886 18,066 40,787 33,008
--------------------------------------------
Balance at end of period $206,719 $178,330 $206,719 $178,330
============================================
Ratios:
Allowance for losses to loans 1.89% 1.92% 1.89% 1.92%
Allowance to non-performing assets 97.87 117.01 97.87 117.01
Allowance to non-performing loans 104.58 122.03 104.58 122.03
Non-performing assets to loans 1.94 1.64 1.94 1.64
Non-performing assets to total assets 1.10 0.93 1.10 0.93
Net charge-offs to average loans 0.90 0.80 0.82 0.74
Provision to net charge-offs 1.11X 1.20x 1.20X 1.30x
Net charge-offs earnings coverage 4.14 4.74 4.60 5.13
</TABLE>
<PAGE> 21
21
Consumer loans net charge-offs totaled $11.8 million or 1.71% of average
consumer loans for the quarter ended June 30, 1997, representing a rise of $4.6
million from the second quarter of 1996. For the same quarter last year,
consumer loans net charge-offs represented 1.19% of the average portfolio. Most
of the rise in net credit losses in the consumer category was experienced at
BPPR which recorded $3.8 million over the amount recognized for the same quarter
of the previous year. The increase in net charge-offs is mostly related to
higher levels of bankruptcies in the U.S. mainland and Puerto Rico. Commercial
loans net charge-offs rose $1.8 million, amounting to $8.9 million for the
quarter ended June 30, 1997, compared with $7.1 million for the same quarter a
year ago. Lease financing and construction loans net charge-offs decreased $1.0
million and $0.6 million, respectively, when compared with the second quarter of
1996. Mortgage loans net charge-offs amounted to $0.4 million for the second
quarter of both, 1997 and 1996.
Net charge-offs for the six-month period ended June 30, 1997, reached $40.8
million or 0.82% of average loans, compared with $33.0 million or 0.74% for the
same period of 1996. Most of the increase in net credit losses was related to
the consumer and commercial loan portfolios, that reflected rises of $7.1
million and $3.8 million, respectively, compared with the six-month period ended
June 30, 1996. Conversely, lease financing and construction loans net
charge-offs decreased $2.2 million and $1.0 million, respectively, when compared
to prior year. The decrease in net charge-offs in the lease financing portfolio
resulted from a higher level of recoveries, as a result of the more aggressive
charge-off policy implemented in 1996 by Popular Leasing. Mortgage loans net
charge-offs remained stable compared to prior year, showing $0.9 million for
both periods.
As shown in Table D, the allowance for loan losses at June 30, 1997, amounted to
$207 million, representing 1.89% of loans, compared with $178 million or 1.92%
at the same date last year. Management considers that the allowance for loan
losses is adequate to absorb potential write-offs of the loan portfolio, based
on the process established to assess its adequacy. This process incorporates
portfolio risk characteristics, results of periodic credit reviews, prior loss
experience, current and anticipated economic conditions and loan impairment
measurement.
As required by SFAS 114, the Corporation has defined impaired loans as all loans
with interest and/or principal past due 90 days or more and other specific loans
for which, based on current information and events, it is probable that the
debtor will be unable to pay all amounts due according to the contractual terms
of the loan agreement. Loan impairment is measured based on the present value of
expected cash flows discounted at the loan's effective rate, on the observable
market price or, on the fair value of the collateral if the loan is collateral
dependent. Large groups of smaller balance homogenous loans are collectively
evaluated for impairment based on past experience. All other loans are evaluated
on a loan-by-loan basis. Impaired loans for which the discounted cash flows,
collateral value or market price equals or exceeds its carrying value do not
require an allowance. At June 30, 1997, the Corporation had $135 million in
loans considered impaired of which $78 million had a related allowance for
possible loan losses of $22 million. As of the same date last year, loans
considered impaired amounted to $90 million of which $55 million had a related
allowance for loan losses of $15 million. Average impaired loans during the
second quarter of 1997 and 1996 were $112 million and $85 million, respectively.
The Corporation recognized interest income on impaired loans of $1.3 million,
and $0.7 million respectively, for the quarter ended June 30, 1997 and 1996.
<PAGE> 22
22
CREDIT QUALITY
Non-performing assets (NPA) consist of past-due loans on which no interest
income is being accrued, renegotiated loans and other real estate. The
Corporation reports NPA on a more conservative basis than most U.S. banks. The
standard industry practice is to place non-performing commercial loans on
non-accrual status when payments of principal or interest are delinquent 90
days. However, the Corporation's policy is to place commercial loans on
non-accrual status when payments of principal or interest are delinquent 60
days. Lease financing, conventional mortgage and closed-end consumer loans are
placed on non-accrual status when payments are delinquent 90 days. Closed-end
consumer loans are charged-off against the allowance when delinquent 120 days.
Open-end (revolving credit) consumer loans are charged-off when payments are
delinquent 180 days. Certain loans which would be treated as non-accrual loans
pursuant to the foregoing policy, are treated as accruing loans if they are
considered well-secured and in the process of collection. Under the standard
industry practice, closed-end consumer loans are charged-off when delinquent 120
days, but these consumer loans are not customarily placed on non-accrual status
prior to being charged-off.
TABLE E
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
NPA Allowance
as a % as a %
Date NPA of Loans of NPA
- ---------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
June 30, 1997 $211 1.94% 97.9%
March 31, 1997 174 1.76 110.0
December 31, 1996 155 1.58 119.9
September 30, 1996 153 1.60 118.9
June 30, 1996 152 1.64 117.0
</TABLE>
As shown in Table E, as of June 30, 1997, NPA amounted to $211 million or 1.94%
of loans, compared with $152 million or 1.64% at June 30, 1996. NPA were $174
million or 1.76% of loans at March 31, 1997.
Non-performing loans totaled $198 million as of June 30, 1997, compared with
$146 million at the same date last year and $164 million as of March 31, 1997.
The increase from June 30, 1996, was reflected in non-performing commercial,
including construction, mortgage and consumer loans which rose $26 million, $20
million and $7 million, respectively. The increase in non-performing commercial,
including construction, loans was mainly attributable to the classification on
non-accrual of an $11 million commercial income-producing real estate loan in
the U.S. Virgin Islands region of BPPR. Furthermore, the non-performing loans of
the banks acquired during the quarter ended June 30, 1997, accounted for $17
million of the increase in this category, driven by the implementation of the
Corporation's conservative policy as explained above. Non-performing mortgage
loans at Equity One increased $16 million from the $9 million reported as of the
same date last year. Most of the rise relates to the increase in personal
bankruptcies in the U.S. mainland and the growth in the mortgage loan portfolio
of that subsidiary. Bankruptcy filings over the 12-month period ended on March
31, 1997, increased 27% over the
<PAGE> 23
23
same period a year before, reaching record-breaking levels. At BPPR,
non-performing consumer loans increased $3 million over the amount as of June
30, 1996, and the banks acquired during this quarter accounted for $2 million of
the increase in non-performing consumer loans. In addition, other real estate
increased $7 million compared with June 30, 1996, including a $3 million
increase at Equity One and $2 million related to the banks acquired during this
quarter. Non- performing lease financings decreased $0.7 million as compared
with the amount reported as of June 30, 1996.
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 June 30, 1997, amounted to $163 million or 1.49% of loans, and the
allowance for loan losses would be 127.2% of non-performing assets. At June 30,
1996 and March 31, 1997, adjusted non-performing assets were $118 million and
$129 million, respectively, or 1.28% and 1.31% of loans.
Accruing loans that are contractually past due 90 days or more as to principal
or interest as of June 30, 1997, amounted to $15 million compared with $13
million at June 30, 1996, and $11 million at March 31, 1997.
OTHER OPERATING INCOME
Other operating income, excluding securities and trading gains, amounted to
$54.1 million for the three-month period ended June 30, 1997, compared with
$50.7 million for the same quarter in 1996, an increase of $3.4 million or 6.7%.
The rise in other income was principally driven by an increase of $5.4 million
in other service fees and $0.8 million in service charges on deposit accounts.
Partially offsetting these increases was a decrease of $2.8 million in other
operating income. For the six-month periods ended June 30, 1997 and 1996, these
revenues were $109.6 million and $101.0 million, respectively.
Service charges on deposit accounts, totaled $22.2 million in the second quarter
of 1997, compared with $21.4 million for the same quarter of 1996. This increase
mostly resulted from the operations acquired since June 30, 1996, which
contributed approximately $0.5 million in these service charges for the quarter.
Other service fees rose $5.4 million for the quarter ended June 30, 1997,
amounting to $24.8 million compared with $19.4 million for the same quarter of
1996. The increase in other service fees was principally attained at BPPR where
credit card fees and discounts rose $1.5 million, as credit card net sales rose
31.1% and the number of credit card active accounts grew 15.0%. Also, debit card
fees rose $1.4 million, reflecting the growing volume of point-of-sale (POS)
terminals and transactions. The volume of transactions at POS terminals
increased from a monthly average of 1.7 million in June 1996 to 2.8 million a
year later. In addition, fees related to the sale and administration of
investment products rose $0.7 million as a result of the sale of the Puerto Rico
Investors Tax-Free Fund V.
Other operating income decreased $2.8 million, from $9.9 million for the second
quarter of 1996 to $7.1 million for the same period in 1997. This decrease
mainly resulted from the recording of a loss of $3.6 million in the market value
of a building which is held for sale as well as lower
<PAGE> 24
24
gains realized on the sale of mortgage loans, which amounted to $2.9 million for
the quarter ended June 30, 1997, compared with $4.4 million for the same period
in 1996. Partially offsetting this reduction were higher investment banking fees
realized by Popular Securities and an increase in the income from daily rental
operations of Popular Leasing.
TABLE F
OTHER OPERATING INCOME
<TABLE>
<CAPTION>
Second Quarter
- -----------------------------------------------------------------
1997 1996 Change
- -----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit
accounts $22,214 $21,389 $ 825
Other service fees:
Credit card fees and
discounts 7,244 5,728 1,516
Credit life insurance fees 2,168 1,749 419
Debit card fees 3,833 2,386 1,447
Mortgage servicing fees, net of
amortization 2,405 1,932 473
Trust fees 1,702 1,561 141
Other fees 7,433 6,052 1,381
Other income 7,125 9,921 (2,796)
---------------------------
Total $54,124 $50,718 $ 3,406
===========================
</TABLE>
For the second quarter of 1997, the Corporation recognized a net gain of $1.3
million in the sale of securities and a net trading account profit of $0.8
million compared with net losses of $20 thousand and $1.4 million, respectively,
for the second quarter of 1996.
OPERATING EXPENSES
Operating expenses for the second quarter of 1997 rose $20.2 million or 15.3% to
$152.0 million, compared with $131.8 million for the same quarter in 1996,
principally reflecting higher personnel costs, professional fees, business
promotion, other taxes and other operating expenses.
Personnel costs, the largest category of operating expenses, totaled $74.4
million for the second quarter of 1997, compared with $67.4 million for the same
period in 1996 for an increase of $7.0 million or 10.4%. Salaries accounted for
the largest portion of the increase in personnel costs, rising $4.2 million or
9.2% to $50.3 million, compared with $46.1 million in 1996. This rise resulted
from increased employment levels due to acquisitions, increased business
activity and annual merit increases. Full-time equivalent employees (FTE)
amounted to 8,782 at the end of this quarter, compared with 7,867 FTEs at the
same date in 1996. Of the increase of 915 FTEs, the acquisitions completed
during the second quarter of 1997 accounted for 636 FTEs. Profit sharing expense
rose $1.1 million as a result of higher eligible salaries and stronger
profitability ratios at BPPR. Pension and other benefits totaled $17.3 million
for the quarter ended June 30, 1997,
<PAGE> 25
25
compared with $15.7 million for the same period a year ago, principally
reflecting a rise in medical insurance expenses. In addition, staff training
expenses showed an increase of $0.3 million as a result of the Corporation's
commitment to maintain a well-trained work force. Of the total increase in
personnel costs, $2.2 million were reflected in the operations acquired since
June 30, 1996.
Other operating expenses, excluding personnel costs, increased $13.2 million,
reaching $77.6 million for the second quarter of 1997, compared with $64.4
million for the same period in 1996. The increase in other operating expenses
was mostly in professional fees which grew $3.4 million, reflecting higher
expenses associated with system developments and technical support. Other
operating expenses and business promotion grew a combined $4.7 million due to
the impact of the business expansion and costs related with the development of
new products and services, including the expenses related with the institutional
campaign launched in the continental U.S. and the new credit card operation in
Florida. Other taxes also reflected an increase as a result of higher levels of
taxable property, increased business volume and an increase in the tax rate for
personal property in the municipality of San Juan, Puerto Rico, where the
Corporation's headquarters are located. Also, equipment expenses increased,
mostly as a result of the expansion of the electronic payment system and
enhanced uses of technology. During the second quarter of 1997, the Corporation
increased its automated teller machine (ATM) network by 38 ATMs, and 1,087
additional POS terminals were connected in order to expand our electronic
delivery capabilities.
Income tax expense rose $0.3 million from $18.0 million in the second quarter of
1996 to $18.3 million in the same quarter this year, primarily as a result of
the growth in pre-tax earnings. The effective tax rate for the second quarter of
1997 decreased to 26.4% from 28.1% for the same period in 1996. For the
six-month periods ended June 30, 1997 and 1996, income tax expense amounted to
$37.8 million and $35.3 million, respectively.
BALANCE SHEET COMMENTS
At June 30, 1997, the Corporation's total assets reached $19.1 billion,
reflecting an increase of 16.4% when compared with $16.4 billion at June 30,
1996. Most of the growth was at BPPR, whose total assets increased $2.1 billion.
This rise included $787 million related to the acquisition of RCB effective on
June 30, 1997. Also, the operations acquired in California, Florida and Illinois
since June 30, 1996, had $696 million in total assets as of the end of the
second quarter of 1997. Total assets at March 31, 1997 were $17.4 billion.
Average assets for the first six months of 1997 were $17.3 billion compared with
$15.8 billion for the same period in 1996, an increase of 9.5%. Average assets
for the year ended December 31, 1996, were $16.3 billion.
Earning assets at June 30, 1997, amounted to $17.8 billion compared with $15.3
billion at June 30, 1996 and $16.3 billion at March 31, 1997. Total loans
amounted to $10.9 billion at June 30, 1997, compared with $9.3 billion a year
ago. Commercial, including construction, and consumer loans contributed $848
million and $514 million, respectively, to the growth in the Corporation's loan
portfolio. The commercial loan portfolio increased 22.8% to $4.6 billion as of
June 30, 1997, from $3.7 billion as of the same date last year. Consumer loans
rose 21.0% from $2.5 billion as of June 30, 1996, to $3.0 billion as of June 30,
1997. BPPR was responsible for the largest growth in both portfolios, increasing
$553 million in commercial loans and $371 million in consumer loans
particularly, personal loans. Mortgage loans rose to $2.8 billion for an
increase of $233 million or 9.0% as compared with June 30, 1996. The increase
was mostly experienced
<PAGE> 26
26
at Equity One, which rose $225 million. The lease financing portfolio rose $35
million or 6.8%, totaling $553 million as of June 30, 1997, compared with $518
million at June 30, 1996. RCB contributed $361 million in total loans at June
30, 1997, while the other operations acquired since June 30, 1996, had $368
million in total loans as of the end of the second quarter of 1997.
Total loans at March 31, 1997 amounted to $9.9 billion.
Money market investments totaled $870 million at June 30, 1997, compared with
$903 million at the same date in 1996. Investment securities as of June 30,
1997, totaled $5.7 billion compared with $4.8 billion as of June 30, 1996. Most
of this growth was reflected at BPPR, whose investment securities portfolio
increased $736 million. This rise included $382 million related to the
acquisition of RCB. Investment securities included $4.9 billion in investment
securities available-for-sale as of June 30, 1997 and $3.1 billion as of June
30, 1996. Investment securities as of March 31, 1997 amounted to $5.4 billion.
At June 30, 1997, trading account securities totaled $341 million compared with
$329 million at the same date last year.
Intangible assets rose $97 million from $134 million as of June 30, 1996 to $231
million at the same date in 1997. The rise in intangible assets was a result of
the acquisitions since June 30, 1996, of which RCB accounted for $64 million of
the total increase while the operations acquired in Illinois resulted in $40
million in intangibles.
Total deposits reached $11.4 billion at June 30, 1997, from $10.6 billion a year
earlier, an increase of $829 million, in spite of a reduction of $655 million in
936 deposits at BPPR. Interest- bearing deposits rose $472 million and
non-interest bearing deposits increased $357 million. The merger with RCB
contributed $584 million in deposits at June 30, 1997. At the same date,
National Bancorp, Inc., CBC Bancorp, Ltd., Banco Popular, N.A. (Florida) and
Banco Popular, N.A. (California), in aggregate, had $532 million in total
deposits. Total deposits at March 31, 1997 were $10.5 billion.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings increased $705 million from $3.5 billion as of June
30, 1996 to $4.2 billion as of June 30, 1997. BPPR accounted for most of the
growth as a result of the reduction in 936 certificates of deposits and due to
arbitrage opportunities undertaken during the quarter. Notes payable rose $720
million, particularly at the holding company and BPPR. Borrowed funds were used
primarily to finance loan growth and arbitrage activities. On May 22, 1997, a
"shelf" registration was filed with the Securities and Exchange Commission,
allowing the Corporation to issue medium-term notes, unsecured debt securities
and preferred stock in an aggregate amount of up to $1 billion. These securities
are guaranteed by the Corporation. As of June 30, 1997, the Corporation had
issued $30 million in medium-term notes under the new "shelf" registration.
Moreover, during the first quarter of 1997, the Corporation issued $150 million
in Capital Securities at 8.327%, through BanPonce Trust I, a statutory business
trust owned by Popular North America (formerly BanPonce Financial Corp.). The
proceeds were upstreamed to Popular North America as junior subordinated debt
under the same terms and conditions. The Capital Securities qualify as Tier I
capital for regulatory purposes. Such Tier I treatment provides the Corporation
with a more cost-effective means of obtaining capital for regulatory purposes.
<PAGE> 27
27
Stockholders' equity at June 30, 1997, amounted to $1.42 billion, compared with
$1.19 billion at June 30, 1996. The increase is mainly due to earnings retention
and the issuance of 2,462,272 common shares for the acquisitions of RCB and
National Bancorp, Inc. This issuance resulted in $96 million in additional
capital. Also, the Dividend Reinvestment Plan contributed $4.2 million in
additional capital since June 30, 1996. On May 8, 1997, the Board of Directors
approved a stock repurchase program of up to three million shares of the
outstanding common stock of the Corporation. As of June 30, 1997, the
Corporation had purchased 380,000 shares under this program. The Corporation's
stockholders' equity at June 30, 1997, included $6.3 million, net of deferred
taxes, in unrealized holding gains on securities available-for-sale, compared
with $5.7 million in unrealized losses on securities available-for-sale at June
30, 1996. Stockholders' equity at March 31, 1997 amounted to $1.29 billion.
The market value of the Corporation's common stock at June 30, 1997, was $40.38
per share compared with $22.50 at June 30, 1996 and $35.50 at March 31, 1997.
The Corporation's total market capitalization at June 30, 1997 was $2.8 billion.
Book value per common share increased to $19.41 as of June 30, 1997, compared
with $16.47 as of the same date last year. The dividend payout ratio to common
stockholders for the quarter ended June 30, 1997, was 24.29% compared with
22.50% for the same period last year.
The market value of the Corporation's preferred stock at June 30, 1997 and 1996,
was $26.50 per share, compared with $26.75 at March 31, 1997.
The Corporation's Tier I, total capital and leverage ratios at June 30, 1997
were 12.56%, 14.98% and 7.71%, respectively, as compared with 11.76%, 14.41% and
6.68%, at June 30, 1996.
<PAGE> 28
28
PART II - OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation held its Annual Stockholder's Meeting on April 25, 1997, at
which common stockholders elected the following three directors: Salustiano
Alvarez Mendez, Alfonso F. Ballester and Jorge A. Junquera.
All three directors were elected for a three year term, with a favorable votes
ranging from 86.70% to 86.72% of the voting shares issued and outstanding which
amounted to 66,121,855 as of the record date, March 7, 1997.
In addition, two other matters were considered and voted by the common
stockholders; (1) The amendment to Article First of the Restated Articles of
Incorporation to change the name of the Corporation to Popular, Inc. and; (2)
The amendment to Article Fifth of the Restated Articles of Incorporation to
increase the authorized numbers of shares of common stock, per value $6, from
ninety million (90,000,000) to one hundred eighty million (180,000,000). Both
amendments were approved with a favorable voting of 85.61% and 83.37%,
respectively, of the voting shares issued and outstanding at the record date
presented above.
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 June 30, 1997
27 Financial Data Schedule (For SEC Use Only) Exhibit "B"
b) Four reports on Form 8-K were filed for the quarter ended June 30, 1997:
Dated: April 7, 1997, May 7, 1997, May 8, 1997 and June 11, 1997
Items reported: Item 5 - Other Events
Item 7 - Financial Statements, Pro-Forma, Financial Information
and Exhibits
</TABLE>
<PAGE> 29
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned thereunto duly authorized.
POPULAR, INC.
(Registrant)
Date: August 13, 1997 By: /s/ JORGE A. JUNQUERA
-------------------------
Jorge A. Junquera
Senior Executive Vice President
Date: August 13, 1997 By: /s/ AMILCAR L. JORDAN
-------------------------
Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller
<PAGE> 1
EXHIBIT 19
EXHIBIT A
---------
(PICTURE)
QUARTERLY REPORT / JUNE 30, 1997
<PAGE> 2
TO OUR STOCKHOLDERS
- --------------------------------------------------------------------------------
Popular Inc. (the Corporation) earned $51.1 million in the second quarter of
1997, reflecting an increase of 10.9% over the $46.1 million recognized during
the same period in 1996. Earnings per common share (EPS) for the quarter were
$0.74, based on 66,350,298 average shares outstanding, compared with $0.67,
based on 66,001,180 average shares outstanding for the quarter ended June 30,
1996. Net earnings for the first quarter of 1997 were $49.5 million, or $0.72
per share, based on 66,121,855 average shares outstanding.
The second quarter results represented rates of return of 1.16% on assets
(ROA) and 16.03% on common equity (ROE), compared with 1.16% and 16.56%,
respectively, for the same quarter of 1996.
For the six-month period ended June 30, 1997, net income reached $100.6
million, or $1.46 per share, with a ROA and ROE of 1.17% and 16.17%,
respectively. For the same period in 1996, net income was $91.2 million, or
$1.32 per share, with a ROA and ROE of 1.16% and 16.48%, respectively.
Besides focusing on this quarter's financial performance, the Corporation
completed several acquisitions in the continental U.S. including that of
Seminole National Bank, now Banco Popular, N.A. (Florida), on April 30, 1997,
which operates three branches in Sanford and Orlando. In Illinois, the
Corporation acquired National Bancorp, Inc. and CBC Bancorp, Ltd. National
Bancorp, Inc. is the holding company of American Midwest Bank and Trust, which
operates two branches in Chicago, while CBC Bancorp has two banking
subsidiaries, Capitol Bank & Trust and Capitol Bank of Westmont operating three
branches. Moreover, in Puerto Rico, the Corporation completed the acquisition of
Roig Commercial Bank (RCB) on June 30, 1997, with its branch network of 25
branches mostly located in the eastern part of the island. Continuing with the
geographic expansion, during the first week of July 1997, Banco Popular opened
two new branches, one located in the state of Illinois and the other in Florida.
The Corporation's results of operations for the quarter ended June 30, 1997,
when compared with the same quarter of 1996, reflected an increase of $22.3
million in net interest income coupled with an increase of $6.9 million in other
revenues, including gains on sale of securities and trading transactions. These
improvements were tempered by rises of $3.7 million in the provision for loan
losses, $20.2 million in operating expenses and $0.3 million in income taxes.
The increase of $22.3 million in the net interest income was mainly due to a
$1.7 billion increase in average earning assets, reflecting growth in the
investment securities and in the commercial and consumer loan portfolios, as
well as a higher fully taxable equivalent net interest yield of 4.91%, up from
4.81% for the second quarter of 1996.
In order to maintain an adequate level of reserve for credit losses and allow
for loan growth and increased charge-offs, the loan loss provision continued to
exceed net charge-offs. For the second quarter of 1997, the provision for loan
losses amounted to $25.4 million, as compared with $21.7 million for the same
period in 1996. The higher provision for loan losses reflected loan growth,
higher levels of net charge-offs, particularly in the consumer loan portfolio,
and a higher level of non-performing assets. Net charge-offs increased $4.8
million, to $22.9 million reported for the quarter ended June 30, 1997.
Non-performing assets (NPA) amounted to $211 million, or 1.94% of loans at
June 30, 1997, compared with $152 million or 1.64% at the same date last year.
The increase in NPA was primarily attributed to a rise of $22 million in NPA at
Equity One and $16 million at Banco Popular de Puerto Rico (BPPR). In addition,
the non-performing assets of the banks acquired during the second quarter of
1997 amounted to $22 million. When adjusted to conform to standard industry
practice, as further explained in the financial review section, NPA were $163
million or 1.49% of loans at the end of this quarter, compared with $118 million
or 1.28% a year earlier.
Total assets at June 30, 1997, were $19.1 billion, compared with $16.4
billion at the same date in 1996 and $17.4 billion as of March 31, 1997. Total
loans were $10.9 billion at the end of the second quarter of 1997 compared with
$9.3 billion a year earlier. The growth in loans was led by an increase of $848
million in the commercial loan portfolio, including $207 million acquired from
RCB. The allowance for loan losses at June 30, 1997 amounted to $207 million,
representing 1.89% of loans, compared with $178 million or 1.92% at the same
date in 1996. Total deposits amounted to $11.4 billion as of June 30, 1997, for
an increase of $829 million or 7.8% from the
1
<PAGE> 3
- --------------------------------------------------------------------------------
$10.6 billion reported for the same date in 1996, notwithstanding the reduction
of $655 million in 936 deposits. The acquisitions completed during the second
quarter of 1997 contributed $1.0 billion in deposits.
The Corporation's stockholders' equity increased to $1.42 billion at June 30,
1997, compared with $1.19 billion a year ago and $1.29 billion as of March 31
1997. On May 8, 1997, the Board of Directors approved a stock repurchase program
of up to three million shares of the outstanding common stock of the
Corporation. At June 30, 1997, the Corporation had purchased 380,000 shares
under this program. During this quarter, the Corporation issued 2,462,272 common
shares in connection with the acquisitions of National Bancorp, Inc. and RCB.
The Corporation continues enjoying strong risk-weighted capital ratios with a
Tier I capital ratio of 12.56%, a total capital ratio of 14.98% and a leverage
ratio of 7.71%.
The Corporation's stock market value was $40.38 at the end of the quarter,
representing an appreciation of 79.4% and 13.7% from the market value of $22.50
at June 30, 1996, and $35.50 at March 31, 1997, respectively.
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.
================================================================================
During the second quarter of 1997, the economy sustained its pace of growth
while inflation remained at a very low level. This environment has led the
Federal Reserve to maintain the monetary policy unchanged. Notwithstanding this
economic environment, most financial institutions have been affected by the
increase in the level of bankruptcies in the U.S. For the period from January 1,
1997 to March 31, 1997, the number of bankruptcies filed reached 335, 073, the
highest number ever for a quarter, while the unemployment rate rose to 5.0% in
June, from a 23-year low of 4.8%. This scenario makes financial institutions
place additional emphasis on its credit risk management in order to safeguard
the assets and maintain the increasing trend in earnings.
================================================================================
On April 25, 1997, the Corporation's shareholders approved the change of the
Corporation's name to Popular, Inc. as a corporate strategy of marketing and
identification of its subsidiaries. As part of this strategy, most of the
banking subsidiaries have changed their name to Banco Popular and an
institutional campaign was launched in the continental U.S. emphasizing the
Bank's strength and history as well as its strong Hispanic ties. Also, other
non-banking subsidiaries such as Puerto Rico Home Mortgage, BP Capital Markets
and Popular Consumer Services changed their names to Popular Home Mortgage,
Popular Securities and Popular Finance, respectively.
================================================================================
To further enhance the Corporation's ability to secure financing in the U.S.
money and capital markets a "shelf " registration was filed with the Securities
and Exchange Commission. Under this registration, which became effective on May
22, 1997, the Corporation may issue unsecured debt securities, or shares of
preferred stock in an aggregate amount of up to $1 billion. As of June 30, 1997,
the Corporation had issued $30 million in medium-term notes under this new
"shelf" registration.
================================================================================
On May 21, 1997, BPPR signed an Agreement of Cooperation with the Spanish
Group of Banco Popular Espanol. This agreement will ensure that the clients of
BPPR who visit Spain will receive excellent service while those clients of the
Spanish Group of Banco Popular will receive the same quality service in all the
offices of BPPR. Except for the name of Banco Popular and the terms of this
agreement, there is no other legal or commercial link between both banking
entities. The Spanish Group of Banco Popular Espanol is composed of six banking
institutions including Banco Popular Espanol, which is the fifth largest
institution in Spain with assets of $34.6 billion and 1,881 offices in Spain.
/s/ Richard L. Carrion
Richard L. Carrion
Chairman, President and
Chief Executive Officer
2
<PAGE> 4
POST MEETING REPORT
- --------------------------------------------------------------------------------
The Annual Stockholders Meeting of BanPonce Corporation was held on April 25,
1997, at 10:00 a.m. on the third floor of the Centro Europa Building in
Santurce, Puerto Rico.
Mr. Richard L. Carrion, Chairman of the Board and President of the
Corporation, presided over the meeting. The secretary of the Board, Samuel T.
Cespedes, Esq., reported that out of 66,121,855 common shares issued and
outstanding as of March 7, 1997, the record date for the meeting, a total of
57,386,034, or 86.79%, were represented at the meeting, which complied with the
quorum required by law.
Mr. Carrion expressed appreciation for the years of service rendered by
Messrs. Emilio J. Venegas, Francisco J. Perez and Jose E. Rossi as BanPonce
Corporation Board members, and by Mr. Franklin A. Mathias as Banco Popular de
Puerto Rico Board member.
Mr. Carrion reported the names of the three directors nominated for
re-election until the 2000 Annual Stockholders Meeting: Messrs. Salustiano
Alvarez Mendez, Alfonso F. Ballester and Jorge A. Junquera.
In addition, Mr. Carrion reported about the two other items on the agenda: 1)
the amendment to Article First to change the name of the Corporation to Popular,
Inc. and 2) the amendment to Article Fifth to increase the authorized number of
shares of common stock of the Corporation, par value $6 per share, from ninety
million (90,000,000) to one hundred eighty million (180,000,000).
While the votes were being counted, Mr. Carrion, using a slide and video
presentation, discussed the Corporation's Annual Report. He also focused on the
development and the achievements of the Corporation, including new services to
clients such as PC Bank, and the two acquisitions that were pending of Roig
Commercial Bank and National Bancorp, Inc. He also explained the strategic goals
of the Corporation. At the end of the presentation, some of the shareholders
expressed their appreciation to the Board of Directors, Senior Management and
all the employees for the excellent work performed during the year. Upon a
motion duly presented and seconded, the 1996 Annual Report was approved.
The Ballot Committee rendered its report on the voting results on the matters
submitted: 1) All three candidates were elected for a three-year term, with
favorable votes ranging from 86.70% to 86.72% of the voting shares issued and
outstanding as of the record date. 2) The amendment to Article First of the
Restated Articles of Incorporation to change the name of the Corporation to
Popular, Inc. was approved with a favorable voting of 85.61%. 3) The amendment
to Article Fifth of the Restated Articles of Incorporation to increase the
authorized number of shares of common stock, par value $6, from ninety million
(90,000,000) to one hundred eighty million (180,000,000) was approved with a
favorable voting of 83.37%.
After thanking those present for their attendance and cooperation, the
Chairman adjourned the meeting.
[PICTURE]
3
<PAGE> 5
FINANCIAL REVIEW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS At June 30, Average for the six months
(In thousands) 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money market investments $ 869,567 $ 902,832 $ (33,265) $ 663,047 $ 757,492 $ (94,445)
Investment and trading securities 5,992,137 5,151,443 840,694 5,659,576 5,177,103 482,473
Loans 10,909,365 9,279,332 1,630,033 9,972,014 8,890,918 1,081,096
Total assets 19,145,844 16,442,137 2,703,707 17,272,791 15,772,465 1,500,326
Deposits 11,405,516 10,576,948 828,568 10,548,874 10,264,199 284,675
Borrowings 5,941,675 4,396,985 1,544,690 5,126,364 4,081,960 1,044,404
Stockholders' equity 1,424,130 1,187,138 236,992 1,303,003 1,162,372 140,631
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPERATING HIGHLIGHTS
(In thousands, except Second Quarter Six Months
per share information) 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 190,606 $ 168,208 $ 22,398 $ 371,250 $ 330,668 $ 40,582
Provision for loan losses 25,413 21,672 3,741 49,100 42,945 6,155
Fees and other income 56,227 49,315 6,912 110,482 101,307 9,175
Other expenses 170,329 149,796 20,533 332,002 297,833 34,169
Net income $ 51,091 $ 46,055 $ 5,036 $ 100,630 $ 91,197 $ 9,433
Net income applicable
to common stock $ 49,003 $ 43,967 $ 5,036 $ 96,455 $ 87,022 $ 9,433
Earnings per common share 0.74 0.67 0.07 1.46 1.32 0.14
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECTED STATISTICAL Second Quarter Six Months
INFORMATION 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROFITABILITY RATIOS - Return on assets 1.16% 1.16% 1.17% 1.16%
Return on common equity 16.03 16.56 16.17 16.48
Net interest spread (taxable equivalent) 4.03 4.04 4.06 4.03
Net interest yield (taxable equivalent) 4.91 4.81 4.91 4.80
Effective tax rate 26.35 28.05 27.32 27.90
Overhead ratio 50.27 49.06 49.48 48.76
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION RATIOS - Equity to assets 7.52% 7.30% 7.54% 7.37%
Tangible equity to assets 6.84 6.51 6.81 6.55
Equity to loans 13.05 12.93 13.07 13.07
Internal capital generation 11.16 10.99 11.14 11.23
Tier I capital to risk-adjusted assets 12.56 11.76 12.56 11.76
Total capital to risk-adjusted assets 14.98 14.41 14.98 14.41
Leverage ratio 7.71 6.68 7.71 6.68
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA - Market price
High $ 42.88 $ 23.85 $ 42.88 $ 23.85
Low 33.75 21.88 33.06 19.38
End 40.38 22.50 40.38 22.50
Book value at period end 19.41 16.47 19.41 16.47
Dividends declared 0.18 0.18 0.36 0.33
Dividend payout ratio 24.29% 22.50% 24.67% 22.73%
Price/earnings ratio 14.32X 9.18x 14.32X 9.18x
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA - Common shares outstanding 68,236,048 66,001,180
Full-time equivalent employees 8,782 7,867
Branches (banking operations) 265 219
Automated teller machines 429 353
Stockholders 5,912 5,412
</TABLE>
4
<PAGE> 6
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
This financial review contains the analysis of the consolidated financial
position and financial performance of Popular, Inc. and its subsidiaries (the
Corporation). The Corporation is a regional diversified bank holding company
engaged in the following businesses through its subsidiaries.
- Commercial Banking/Savings and Loans - This business has experienced the
largest growth within the last twelve months with five acquisitions made
over that period. The Corporation acquired Banco Popular, N.A.
(California) on September 30, 1996, Banco Popular, N.A. (Florida) on April
30, 1997, National Bancorp and CBC Bancorp, Ltd. on May 31, 1997, and on
June 30, 1997 the former Roig Commercial Bank (RCB) was merged with and
into Banco Popular de Puerto Rico (BPPR). Previously established banking
operations included BPPR, the Corporation's largest subsidiary founded in
1893, Banco Popular, Illinois, and Banco Popular, FSB.
- Lease Financing - Popular Leasing and Rental, Inc. (Popular Leasing) and
Popular Leasing, USA
- Mortgage Banking/Consumer Finance - Popular Home Mortgage, Inc. (Popular
Home Mortgage), Equity One, Inc. (Equity One) and Popular Finance, Inc.
(Popular Finance)
- Broker / Dealer - Popular Securities, Inc. (Popular Securities)
- ATM Processing Services - ATH Costa Rica
This financial review should be read together with the consolidated financial
statements, supplemental financial data and tables included in this report.
NET INCOME
The Corporation's net income for the second quarter of 1997 reached $51.1
million, compared with $46.1 million reported for the same period in 1996, and
$49.5 million reported during the first quarter of 1997. Earnings per common
share (EPS) for the quarter were $0.74, based on 66,350,298 average shares
outstanding, compared with EPS of $0.67 for the second quarter of 1996, based on
66,001,180 average shares outstanding and EPS of $0.72 for the first quarter of
1997, based on 66,121,855 average shares outstanding. Return on assets (ROA) and
return on common equity (ROE) for the quarter ended June 30, 1997, were 1.16%
and 16.03%, respectively, compared with 1.16% and 16.56% reported during the
same period in 1996 and 1.19% and 16.32% for the first quarter of 1997.
Of the $5.0 million increase in net income, $22.3 million were attributed to
net interest income, followed by an increase in non-interest revenues of $3.4
million, and by higher gains on sale of securities and trading transactions of
$3.5 million. These positive variances were partially offset by rises of $20.2
million in operating expenses, $3.7 million in the provision for loan losses and
$0.3 million in the income tax provision.
For the six-month period ended June 30,1997, the Corporation reported net
earnings of $100.6 million, an increase of $9.4 million when compared with the
$91.2 million reported for the same period in 1996. EPS for both periods were
$1.46 and $1.32, respectively, based on 66,235,718 average shares outstanding
for the first six months of 1997 and 65,975,526 for the same period in 1996. ROA
and ROE for the six-month period ended June 30, 1997, were 1.17% and 16.17%,
respectively, compared with 1.16% and 16.48% reported in 1996.
TABLE A
COMPONENTS OF NET INCOME AS A PERCENTAGE OF AVERAGE TOTAL ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Second Quarter
1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Net interest income 4.34% 4.23%
Provision for loan losses (0.58) (0.55)
Securities and trading gains 0.05 (0.04)
Other income 1.23 1.29
---- ----
5.04 4.93
Operating expenses (3.46) (3.32)
---- ----
Income before tax 1.58 1.61
Provision for income tax (0.42) (0.45)
--------------------
Net income 1.16% 1.16%
====================
</TABLE>
NET INTEREST INCOME
Net interest income for the second quarter of 1997 reached $190.6 million
compared with $168.2 million reported for the same quarter in 1996. On a taxable
equivalent basis, net interest income increased to $205.1 million from $180.6
million in the second quarter of 1996 and $193.3 million in the first quarter of
1997. The rise from the second quarter of 1996, resulted from a $22.0 million
increase due to a higher volume of earning assets and a $2.5 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.
Average earning assets reached $16.7 billion for the quarter ended June 30,
1997, compared with $15.0 billion for the same quarter of 1996. The increase
relates primarily to a rise of $1.1 billion in average loans, reaching $10.1
billion for the quarter ended June 30, 1997, as compared with $9.0 billion for
the same quarter
5
<PAGE> 7
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in 1996. The rise stems from an increase of $546 million in average commercial
loans principally at BPPR. Also, an increase of $331 million in average consumer
loans was attained, mostly at BPPR and Equity One, while the average mortgage
portfolio grew $220 million of which $219 million were at Equity One. The
average lease portfolio grew $34 million. The banking operations acquired since
the second quarter of 1996, accounted for $188 million of the increase in
average loans.
The average yield on loans, on a taxable equivalent basis, rose to 10.35%
from 10.11% reported during the second quarter of 1996. The rise in the yields
of commercial and consumer loans was the main contributor to the increase in the
yield on total loans. Commercial loans had a taxable equivalent yield for the
quarter of 9.32%, compared with 8.92% reported during the second quarter of
1996. The yield on commercial loans has benefited from two factors; the rise of
25 basis points in the prime rate at the end of the first quarter of 1997 and
the elimination of Section 936 of the U.S. Internal Revenue Code during the last
quarter of 1996. Some loans that were previously priced using a 936 index rate,
have changed its pricing to a higher base in accordance with the prevailing
funds market, thus improving the yield on the commercial loan portfolio.
Consumer loans had an average yield for the quarter of 13.26%, compared with
12.84% for the second quarter of 1996, while the yield on the leasing portfolio
increased 19 basis points to 13.22%. The taxable equivalent yield on mortgage
loans decreased to 8.42% from 8.62% reported for the second quarter in 1996.
Average money market investments decreased to $636 million for the second
quarter of 1997, compared with $858 million for the same period of 1996. The
decrease in money market investments is directly related to the decrease in size
of Popular Securities, as a result of a lower balance of 936 funds. The yield on
money market investments increased to 5.37% from 5.10% reported in the second
quarter of 1996.
Average investment securities reached $5.6 billion in the quarter ended June
30, 1997, compared with $4.8 billion reported for the same quarter in 1996. The
increase relates to a higher average volume of U.S. Treasury and agencies
securities, collateralized mortgage obligations and mortgage-backed securities
at BPPR. These increases were partially offset by a lower average balance of
investments required by local regulations to all recipients of 936 funds which
have a yield substantially below market rates. The average taxable equivalent
yield of the Corporation's investment portfolio increased 36 basis points to
6.94% during the three-month period ended June 30, 1997, from 6.58% during the
same period of 1996, as a result of the higher interest rate scenario.
The average balance of trading account securities for the second quarter of
1997 was $325 million compared with $341 million reported for the same quarter
last year. The taxable equivalent yield on trading account securities increased
48 basis points to 6.66% from 6.18% reported in the second quarter of 1996. The
increases in the yields of investments and loans, mentioned above, resulted in a
rise in the average yield on earning assets on a taxable equivalent basis, which
increased to 8.95% for the second quarter of 1997, from 8.61% reported during
the same quarter of 1996.
Average interest-bearing liabilities of the Corporation were $13.7 billion
for the three-month period ended June 30, 1997, compared with $12.5 billion for
the same period of 1996. Average interest-bearing deposits totaled $8.3 billion,
a slight decrease from the $8.4 billion reported for the same quarter in 1996.
Although most deposit categories showed increases, a decrease of $531 million in
average 936 certificates of deposits caused the aforementioned decline. Average
certificates of deposit, excluding 936 deposits, rose $168 million, average
savings accounts increased $194 million and NOW and money market deposits
averaged $102 million more than in 1996. Average demand deposits grew by $213
million from $2.1 billion for the second quarter of 1996, to $2.3 billion for
the same quarter this year. The operations acquired since the second quarter of
1996, contributed $244 million to the increase in average deposits.
The average cost of interest-bearing deposits for the quarters ended June 30,
1997 and 1996 was 4.19% and 4.15%, respectively. The average cost of savings
accounts and NOW and money market deposits for the second quarter of 1997,
increased to 3.06% and 3.32%, respectively, from 3.01% and 3.26% for the same
quarter last year.
The increase of four basis points in the average cost of interest-bearing
deposits was principally attributed to the rise in the cost of certificates of
deposit from 5.22% in the second quarter of 1996 to 5.43% for the same quarter
in 1997. Traditionally 936 certificates of deposit had a cost below the U.S. or
the Eurodollar market. During the second quarter of 1996 these deposits had an
average cost of 4.51% and comprised 12.5% of average interest-bearing deposits,
compared with 4.90% and 6.2%, respectively, in the second quarter of 1997. That
reduction in the proportion of 936 deposits as well as the increase in its cost
were among the factors that caused the increase in the average cost of
certificates of deposit. Notwithstanding the repeal of Section 936, some 936
corporations have chosen not to withdraw all their funds from financial
institutions and have instead, invested those funds at a longer term to reduce
the tollgate taxes applicable upon
6
<PAGE> 8
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repatriating these funds. As a result, the cost of these funds have remained
below that of the U.S. or Eurodollar market. At June 30, 1997, the Corporation
held $1.8 billion in 936 funds, including $162 million in funds acquired from
RCB, representing 9.9% of its liabilities, compared with $2.9 billion or 18.8%
at the same date in 1996 and $1.8 billion or 11.5% at the end of the first
quarter of 1997.
Average short-term borrowings increased $617 million reaching $3.9 billion
during the second quarter of 1997, compared with $3.3 billion during the same
period of 1996. The increase was mainly realized at BPPR with a $1.2 billion
increase in its average balance, due to the reduction in 936 deposits and
arbitrage opportunities undertaken during the quarter. This increase was
partially offset by a decrease in Popular Securities as a result of lower 936
borrowings. The average cost of short-term borrowings for the quarter ended June
30, 1997, increased by 70 basis points, from 5.06% to 5.76% due to both, a
change in the mix of short-term borrowings and general market conditions.
Average long and medium-term debt increased $722 million from $744 million in
the second quarter of 1996 to $1.5 billion for the same quarter of 1997. This
increase was mostly directed to finance the growth of the Corporation's
operations. Also, in February 1997, the Corporation issued $150 million in
Capital Securities which qualified as Tier I capital for regulatory purposes.
These securities mature on February 2027.
TABLE B
<TABLE>
<CAPTION>
NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS)
- -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) SECOND QUARTER
- -------------------------------------------------------------------------------
1997 AVERAGE 1996 AVERAGE
--------------------------------------------
BALANCE RATE BALANCE RATE
--------------------------------------------
<S> <C> <C> <C> <C>
Money market-investment
and trading securities 6,565 6.77% 5,987 6.35%
Loans 10,164 10.35 9,033 10.11
------- -------
Total earning assets $16,729 8.95% $15,020 8.61%
======= =======
Financed by:
Interest bearing deposits 8,343 4.19% 8,410 4.15%
Borrowings 5,393 6.05 4,054 5.46
------- -------
Total interest bearing funds 13,736 4.92% 12,464 4.57%
Non-interest
bearing funds 2,993 2,556
------- -------
Total $16,729 4.04% $15,020 3.80%
======= =======
Net interest income
per book $ 190.6 $ 168.2
Taxable equivalent
adjustments 14.5 12.4
------- -------
Net interest income on a
taxable basis $205.1 $180.6
======= =======
Spread 4.03% 4.04%
Net interest yield 4.91% 4.81%
</TABLE>
The increase in borrowings combined with the reduction in 936 funds and the
higher interest rate scenario, caused the total cost of interest-bearing
liabilities to rise 35 basis points, from 4.57% to 4.92% for the second quarter
of 1997. The cost of funding earning assets also increased from 3.80% for the
second quarter of 1996 to 4.04% for the same quarter in 1997.
The improvement of 34 basis points in the taxable equivalent yield on earning
assets, partially offset by the higher cost of funds mentioned above, prompted
the net interest margin, on a taxable equivalent basis to rise 10 basis points
to 4.91% for the quarter ended June 30, 1997, from 4.81% reported during the
second quarter of 1996. During the first quarter of 1997 the Corporation
reported a taxable equivalent net interest margin of 4.90%. For the six-month
period ended June 30, 1997, the taxable equivalent net interest margin was
4.91%, compared with 4.80% for the same period in 1996.
Table B contains a summary of the results of the Corporation's net interest
margin, on a taxable equivalent basis, for the second quarter of 1997 and 1996.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses was $25.4 million for the quarter ended June
30, 1997, and $49.1 million for the first six months of 1997, reflecting rises
of $3.7 million or 17.3% and $6.2 million or 14.3%, respectively, over the same
periods in 1996. During the first quarter of 1997, the provision amounted to
$23.7 million. Net charge-offs for the quarter ended June 30, 1997, reached
$22.9 million or 0.90% of average loans, compared with $18.1 million or 0.80%
for the same quarter in 1996, and $17.9 million or 0.73% for the quarter ended
on March 31, 1997. The increase in provision for loan losses is attributable to
the growth in the loan portfolio, non-performing assets and net charge-offs
experienced by the Corporation. Table C below presents information for the
quarter ended June 30, 1997 and the previous four quarters.
TABLE C
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Quarter Provision for Net Allowance for
Ended Loan Losses Charge-offs Loan Losses
- -------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
June 30, 1997 $25.4 $22.9 $207
March 31, 1997 23.7 17.9 191
December 31, 1996 23.5 20.3 186
September 30, 1996 22.4 18.8 182
June 30, 1996 21.7 18.1 178
</TABLE>
7
<PAGE> 9
- --------------------------------------------------------------------------------
TABLE D
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
<TABLE>
<CAPTION>
Second Quarter First Six Months
(Dollars in thousands) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period............................... $191,360 $174,724 $185,574 $168,393
Allowances purchased......................................... 12,832 12,832
Provision for loan losses.................................... 25,413 21,672 49,100 42,945
--------------------------------------------
229,605 196,396 247,506 211,338
--------------------------------------------
Losses charged to the allowance
Commercial ................................................ 12,442 9,185 23,642 18,400
Construction .............................................. 500 300 1,193
Lease financing ........................................... 5,834 4,869 12,117 8,194
Mortgage .................................................. 477 459 1,006 1,056
Consumer .................................................. 15,617 10,668 27,618 20,181
--------------------------------------------
34,370 25,681 64,683 49,024
--------------------------------------------
Recoveries
Commercial................................................. 3,549 2,045 7,372 5,904
Construction .............................................. 80 21 81 22
Lease financing............................................ 3,930 1,962 9,059 2,909
Mortgage................................................... 70 81 106 193
Consumer................................................... 3,855 3,506 7,278 6,988
--------------------------------------------
11,484 7,615 23,896 16,016
--------------------------------------------
Net loans charged-off........................................ 22,886 18,066 40,787 33,008
--------------------------------------------
Balance at end of period..................................... $206,719 $178,330 $206,719 $178,330
============================================
Ratios:
Allowance for losses to loans................................ 1.89% 1.92% 1.89% 1.92%
Allowance to non-performing assets........................... 97.87 117.01 97.87 117.01
Allowance to non-performing loans............................ 104.58 122.03 104.58 122.03
Non-performing assets to loans............................... 1.94 1.64 1.94 1.64
Non-performing assets to total assets ....................... 1.10 0.93 1.10 0.93
Net charge-offs to average loans............................. 0.90 0.80 0.82 0.74
Provision to net charge-offs ................................ 1.11X 1.20x 1.20X 1.30x
Net charge-offs earnings coverage ........................... 4.14 4.74 4.60 5.13
</TABLE>
Consumer loans net charge-offs totaled $11.8 million or 1.71% of average
consumer loans for the quarter ended June 30, 1997, representing a rise of $4.6
million from the second quarter of 1996. For the same quarter last year,
consumer loans net charge-offs represented 1.19% of the average portfolio. Most
of the rise in net credit losses in the consumer category was experienced at
BPPR which recorded $3.8 million over the amount recognized for the same quarter
of the previous year. The increase in net charge-offs is mostly related to
higher levels of bankruptcies in the U.S. mainland and Puerto Rico. Commercial
loans net charge-offs rose $1.8 million, amounting to $8.9 million for the
quarter ended June 30, 1997, compared with $7.1 million for the same quarter a
year ago. Lease financing and construction loans net charge-offs decreased $1.0
million and $0.6 million, respectively, when compared with the second quarter of
1996. Mortgage loans net charge-offs amounted to $0.4 million for the second
quarter of both, 1997 and 1996.
Net charge-offs for the six-month period ended June 30, 1997, reached $40.8
million or 0.82% of average loans, compared with $33.0 million or 0.74% for the
same period of 1996. Most of the increase in net credit losses was related to
the consumer and commercial loan portfolios, that reflected rises of $7.1
million and $3.8 million, respectively, compared with the six-month period ended
June 30, 1996. Conversely, lease financing and construction loans net
charge-offs decreased $2.2 million and $1.0 million, respectively, when compared
to prior year. The decrease in net charge-offs in the lease financing portfolio
resulted from a higher level of recoveries, as a result of the more aggressive
charge-off policy implemented in 1996 by Popular Leasing. Mortgage loans net
charge-offs remained stable compared to prior year, showing $0.9 million for
both periods.
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As shown in Table D, the allowance for loan losses at June 30, 1997, amounted
to $207 million, representing 1.89% of loans, compared with $178 million or
1.92% at the same date last year. Management considers that the allowance for
loan losses is adequate to absorb potential write-offs of the loan portfolio,
based on the process established to assess its adequacy. This process
incorporates portfolio risk characteristics, results of periodic credit reviews,
prior loss experience, current and anticipated economic conditions and loan
impairment measurement.
As required by SFAS 114, the Corporation has defined impaired loans as all
loans with interest and/or principal past due 90 days or more and other specific
loans for which, based on current information and events, it is probable that
the debtor will be unable to pay all amounts due according to the contractual
terms of the loan agreement. Loan impairment is measured based on the present
value of expected cash flows discounted at the loan's effective rate, on the
observable market price or, on the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogenous loans are
collectively evaluated for impairment based on past experience. All other loans
are evaluated on a loan-by-loan basis. Impaired loans for which the discounted
cash flows, collateral value or market price equals or exceeds its carrying
value do not require an allowance. At June 30, 1997, the Corporation had $135
million in loans considered impaired of which $78 million had a related
allowance for possible loan losses of $22 million. As of the same date last
year, loans considered impaired amounted to $90 million of which $55 million had
a related allowance for loan losses of $15 million. Average impaired loans
during the second quarter of 1997 and 1996 were $112 million and $85 million,
respectively. The Corporation recognized interest income on impaired loans of
$1.3 million, and $0.7 million respectively, for the quarter ended June 30, 1997
and 1996.
CREDIT QUALITY
Non-performing assets (NPA) consist of past-due loans on which no interest
income is being accrued, renegotiated loans and other real estate. The
Corporation reports NPA on a more conservative basis than most U.S. banks. The
standard industry practice is to place non-performing commercial loans on
non-accrual status when payments of principal or interest are delinquent 90
days. However, the Corporation's policy is to place commercial loans on
non-accrual status when payments of principal or interest are delinquent 60
days. Lease financing, conventional mortgage and closed-end consumer loans are
placed on non-accrual status when payments are delinquent 90 days. Closed-end
consumer loans are charged-off against the allowance when delinquent 120 days.
Open-end (revolving credit) consumer loans are charged-off when payments are
delinquent 180 days. Certain loans which would be treated as non-accrual loans
pursuant to the foregoing policy, are treated as accruing loans if they are
considered well-secured and in the process of collection. Under the standard
industry practice, closed-end consumer loans are charged-off when delinquent 120
days, but these consumer loans are not customarily placed on non-accrual status
prior to being charged-off.
TABLE E
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
NPA Allowance
as a % as a %
Date NPA of Loans of NPA
- ----------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C>
June 30, 1997 $211 1.94% 97.9%
March 31, 1997 174 1.76 110.0
December 31, 1996 155 1.58 119.9
September 30, 1996 153 1.60 118.9
June 30, 1996 152 1.64 117.0
</TABLE>
As shown in Table E, as of June 30, 1997, NPA amounted to $211 million or
1.94% of loans, compared with $152 million or 1.64% at June 30, 1996. NPA were
$174 million or 1.76% of loans at March 31, 1997.
Non-performing loans totaled $198 million as of June 30, 1997, compared with
$146 million at the same date last year and $164 million as of March 31, 1997.
The increase from June 30, 1996, was reflected in non-performing commercial,
including construction, mortgage and consumer loans which rose $26 million, $20
million and $7 million, respectively. The increase in non-performing commercial,
including construction, loans was mainly attributable to the classification on
non-accrual of an $11 million commercial income-producing real estate loan in
the U.S.Virgin Islands region of BPPR. Furthermore, the non-performing loans of
the banks acquired during the quarter ended June 30, 1997, accounted for $17
million of the increase in this category, driven by the implementation of the
Corporation's conservative policy as explained above. Non-performing mortgage
loans at Equity One increased $16 million from the $9 million reported as of the
same date last year. Most of the rise relates to the increase in personal
bankruptcies in the U.S. mainland and the growth in the mortgage loan portfolio
of that subsidiary. Bankruptcy filings over the 12-month period ended on March
31, 1997, increased 27% over the same period a year before, reaching
record-breaking levels. At BPPR, non-performing consumer loans increased $3
million over the amount as of June 30, 1996, and the banks acquired during this
quarter ac-
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counted for $2 million of the increase in non-performing consumer loans. In
addition, other real estate increased $7 million compared with June 30, 1996,
including a $3 million increase at Equity One and $2 million related to the
banks acquired during this quarter. Non-performing lease financings decreased
$0.7 million as compared with the amount reported as of June 30, 1996.
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 June 30, 1997, amounted to $163 million or 1.49% of
loans, and the allowance for loan losses would be 127.2% of non-performing
assets. At June 30, 1996 and March 31, 1997, adjusted non-performing assets
were $118 million and $129 million, respectively, or 1.28% and 1.31% of loans.
Accruing loans that are contractually past due 90 days or more as to
principal or interest as of June 30, 1997, amounted to $15 million compared
with $13 million at June 30, 1996, and $11 million at March 31, 1997.
OTHER OPERATING INCOME
Other operating income, excluding securities and trading gains, amounted to
$54.1 million for the three-month period ended June 30, 1997, compared with
$50.7 million for the same quarter in 1996, an increase of $3.4 million or 6.7%.
The rise in other income was principally driven by an increase of $5.4 million
in other service fees and $0.8 million in service charges on deposit accounts.
Partially offsetting these increases was a decrease of $2.8 million in other
operating income. For the six-month periods ended June 30, 1997 and 1996, these
revenues were $109.6 million and $101.0 million, respectively.
Service charges on deposit accounts, totaled $22.2 million in the second
quarter of 1997, compared with $21.4 million for the same quarter of 1996. This
increase mostly resulted from the operations acquired since June 30, 1996, which
contributed approximately $0.5 million in these service charges for the quarter.
Other service fees rose $5.4 million for the quarter ended June 30, 1997,
amounting to $24.8 million compared with $19.4 million for the same quarter of
1996. The increase in other service fees was principally attained at BPPR where
credit card fees and discounts rose $1.5 million, as credit card net sales rose
31.1% and the number of credit card active accounts grew 15.0%. Also, debit card
fees rose $1.4 million, reflecting the growing volume of point-of-sale (POS)
terminals and transactions. The volume of transactions at POS terminals
increased from a monthly average of 1.7 million in June 1996 to 2.8 million a
year later. In addition, fees related to the sale and administration of
investment products rose $0.7 million as a result of the sale of the Puerto Rico
Investors Tax-Free Fund V.
Other operating income decreased $2.8 million, from $9.9 million for the
second quarter of 1996 to $7.1 million for the same period in 1997. This
decrease mainly resulted from the recording of a loss of $3.6 million in the
market value of a building which is held for sale as well as lower gains
realized on the sale of mortgage loans, which amounted to $2.9 million for the
quarter ended June 30, 1997, compared with $4.4 million for the same period in
1996. Partially offsetting this reduction were higher investment banking fees
realized by Popular Securities and an increase in the income from daily rental
operations of Popular Leasing.
<TABLE>
<CAPTION>
TABLE F
OTHER OPERATING INCOME
- --------------------------------------------------------------------------------
Second Quarter
1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Service charges on
deposit accounts $22,214 $21,389 $ 825
Other service fees:
Credit card fees and
discounts 7,244 5,728 1,516
Credit life insurance fees 2,168 1,749 419
Debit card fees 3,833 2,386 1,447
Mortgage servicing fees,
net of amortization 2,405 1,932 473
Trust fees 1,702 1,561 141
Other fees 7,433 6,052 1,381
Other income 7,125 9,921 (2,796)
-------------------------------------
Total $54,124 $50,718 $ 3,406
=====================================
</TABLE>
For the second quarter of 1997, the Corporation recognized a net gain of $1.3
million in the sale of securities and a net trading account profit of $0.8
million compared with net losses of $20 thousand and $1.4 million, respectively,
for the second quarter of 1996.
OPERATING EXPENSES
Operating expenses for the second quarter of 1997 rose $20.2 million or 15.3%
to $152.0 million, compared with $131.8 million for the same quarter in 1996,
principally reflecting higher personnel costs, professional fees, business
promotion, other taxes and other operating expenses.
Personnel costs, the largest category of operating expenses, totaled $74.4
million for the second quarter of 1997, compared with $67.4 million for the same
period in 1996 for an increase of $7.0 million or 10.4%. Salaries accounted for
the largest portion of the increase in person-
10
<PAGE> 12
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nel costs, rising $4.2 million or 9.2% to $50.3 million, compared with $46.1
million in 1996. This rise resulted from increased employment levels due to
acquisitions, increased business activity and annual merit increases. Full-time
equivalent employees (FTE) amounted to 8,782 at the end of this quarter,
compared with 7,867 FTEs at the same date in 1996. Of the increase of 915 FTEs,
the acquisitions completed during the second quarter of 1997 accounted for 636
FTEs. Profit sharing expense rose $1.1 million as a result of higher eligible
salaries and stronger profitability ratios at BPPR. Pension and other benefits
totaled $17.3 million for the quarter ended June 30, 1997, compared with $15.7
million for the same period a year ago, principally reflecting a rise in medical
insurance expenses. In addition, staff training expenses showed an increase of
$0.3 million as a result of the Corporation's commitment to maintain a
well-trained work force. Of the total increase in personnel costs, $2.2 million
were reflected in the operations acquired since June 30, 1996.
Other operating expenses, excluding personnel costs, increased $13.2 million,
reaching $77.6 million for the second quarter of 1997, compared with $64.4
million for the same period in 1996. The increase in other operating expenses
was mostly in professional fees which grew $3.4 million, reflecting higher
expenses associated with system developments and technical support. Other
operating expenses and business promotion grew a combined $4.7 million due to
the impact of the business expansion and costs related with the development of
new products and services, including the expenses related with the institutional
campaign launched in the continental U.S and the new credit card operation in
Florida. Other taxes also reflected an increase as a result of higher levels of
taxable property, increased business volume and an increase in the tax rate for
personal property in the municipality of San Juan, Puerto Rico, where the
Corporation's headquarters are located. Also, equipment expenses increased,
mostly as a result of the expansion of the electronic payment system and
enhanced uses of technology. During the second quarter of 1997, the Corporation
increased its automated teller machine (ATM) network by 38 ATMs, and 1,087
additional POS terminals were connected in order to expand our electronic
delivery capabilities.
Income tax expense rose $0.3 million from $18.0 million in the second quarter
of 1996 to $18.3 million in the same quarter this year, primarily as a result of
the growth in pre-tax earnings. The effective tax rate for the second quarter of
1997 decreased to 26.4% from 28.1% for the same period in 1996. For the
six-month periods ended June 30, 1997 and 1996, income tax expense amounted to
$37.8 million and $35.3 million, respectively.
BALANCE SHEET COMMENTS
At June 30, 1997, the Corporation's total assets reached $19.1 billion,
reflecting an increase of 16.4% when compared with $16.4 billion at June 30,
1996. Most of the growth was at BPPR, whose total assets increased $2.1 billion.
This rise included $787 million related to the acquisition of RCB effective on
June 30, 1997. Also, the operations acquired in California, Florida and Illinois
since June 30, 1996, had $696 million in total assets as of the end of the
second quarter of 1997. Total assets at March 31, 1997 were $17.4 billion.
Average assets for the first six months of 1997 were $17.3 billion compared with
$15.8 billion for the same period in 1996, an increase of 9.5%. Average assets
for the year ended December 31, 1996, were $16.3 billion.
Earning assets at June 30, 1997, amounted to $17.8 billion compared with
$15.3 billion at June 30, 1996 and $16.3 billion at March 31, 1997. Total loans
amounted to $10.9 billion at June 30, 1997, compared with $9.3 billion a year
ago. Commercial, including construction, and consumer loans contributed $848
million and $514 million, respectively, to the growth in the Corporation's loan
portfolio. The commercial loan portfolio increased 22.8% to $4.6 billion as of
June 30, 1997, from $3.7 billion as of the same date last year. Consumer loans
rose 21.0% from $2.5 billion as of June 30, 1996, to $3.0 billion as of June 30,
1997. BPPR was responsible for the largest growth in both portfolios, increasing
$553 million in commercial loans and $371 million in consumer loans
particularly, personal loans. Mortgage loans rose to $2.8 billion for an
increase of $233 million or 9.0% as compared with June 30, 1996. The increase
was mostly experienced at Equity One, which rose $225 million. The lease
financing portfolio rose $35 million or 6.8%, totaling $553 million as of June
30, 1997, compared with $518 million at June 30, 1996. RCB contributed $361
million in total loans at June 30, 1997, while the other operations acquired
since June 30, 1996, had $368 million in total loans as of the end of the second
quarter of 1997. Total loans at March 31, 1997 amounted to $9.9 billion.
Money market investments totaled $870 million at June 30, 1997, compared with
$903 million at the same date in 1996. Investment securities as of June 30,
1997, totaled $5.7 billion compared with $4.8 billion as of June 30, 1996. Most
of this growth was reflected at BPPR, whose investment securities portfolio
increased $736 million. This rise included $382 million related to the
acquisition of RCB. Investment securities included $4.9 billion in investment
securities available-for-sale as of June 30, 1997 and $3.1 billion as of June
30, 1996. Investment securities as of March 31, 1997 amounted to $5.4 billion.
At June 30, 1997, trading account securities totaled $341 million compared with
$329 million at the same date last year.
11
<PAGE> 13
- --------------------------------------------------------------------------------
Intangible assets rose $97 million from $134 million as of June 30, 1996 to
$231 million at the same date in 1997. The rise in intangible assets was a
result of the acquisitions since June 30, 1996, of which RCB accounted for $64
million of the total increase while the operations acquired in Illinois resulted
in $40 million in intangibles.
Total deposits reached $11.4 billion at June 30, 1997, from $10.6 billion a
year earlier, an increase of $829 million, in spite of a reduction of $655
million in 936 deposits at BPPR. Interest-bearing deposits rose $472 million and
non-interest bearing deposits increased $357 million. The merger with RCB
contributed $584 million in deposits at June 30, 1997. At the same date,
National Bancorp, Inc., CBC Bancorp, Ltd., Banco Popular, N.A. (Florida) and
Banco Popular, N.A. (California), in aggregate, had $532 million in total
deposits. Total deposits at March 31, 1997 were $10.5 billion.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings increased $705 million from $3.5 billion as of June
30, 1996 to $4.2 billion as of June 30, 1997. BPPR accounted for most of the
growth as a result of the reduction in 936 certificates of deposits and due to
arbitrage opportunities undertaken during the quarter. Notes payable rose $720
million, particularly at the holding company and BPPR. Borrowed funds were used
primarily to finance loan growth and arbitrage activities. On May 22, 1997, a
"shelf" registration was filed with the Securities and Exchange Commission,
allowing the Corporation to issue medium-term notes, unsecured debt securities
and preferred stock in an aggregate amount of up to $1 billion. These securities
are guaranteed by the Corporation. As of June 30, 1997, the Corporation had
issued $30 million in medium-term notes under the new "shelf" registration.
Moreover, during the first quarter of 1997, the Corporation issued $150
million in Capital Securities at 8.327%, through BanPonce Trust I, a statutory
business trust owned by Popular North America (formerly BanPonce Financial
Corp.). The proceeds were upstreamed to Popular North America as junior
subordinated debt under the same terms and conditions. The Capital Securities
qualify as Tier I capital for regulatory purposes. Such Tier I treatment
provides the Corporation with a more cost-effective means of obtaining capital
for regulatory purposes.
Stockholders' equity at June 30, 1997, amounted to $1.42 billion, compared
with $1.19 billion at June 30, 1996. The increase is mainly due to earnings
retention and the issuance of 2,462,272 common shares for the acquisitions of
RCB and National Bancorp, Inc. This issuance resulted in $96 million in
additional capital. Also, the Dividend Reinvestment Plan contributed $4.2
million in additional capital since June 30, 1996. On May 8, 1997, the Board of
Directors approved a stock repurchase program of up to three million shares of
the outstanding common stock of the Corporation. As of June 30, 1997, the
Corporation had purchased 380,000 shares under this program. The Corporation's
stockholders' equity at June 30, 1997, included $6.3 million, net of deferred
taxes, in unrealized holding gains on securities available-for-sale, compared
with $5.7 million in unrealized losses on securities available-for-sale at June
30, 1996. Stockholders' equity at March 31, 1997 amounted to $1.29 billion.
The market value of the Corporation's common stock at June 30, 1997, was
$40.38 per share compared with $22.50 at June 30, 1996 and $35.50 at March 31,
1997. The Corporation's total market capitalization at June 30, 1997 was $2.8
billion. Book value per common share increased to $19.41 as of June 30, 1997,
compared with $16.47 as of the same date last year. The dividend payout ratio to
common stockholders for the quarter ended June 30, 1997, was 24.29% compared
with 22.50% for the same period last year.
The market value of the Corporation's preferred stock at June 30, 1997 and
1996, was $26.50 per share, compared with $26.75 at March 31, 1997.
The Corporation's Tier I, total capital and leverage ratios at June 30, 1997
were 12.56%, 14.98% and 7.71%, respectively, as compared with 11.76%, 14.41% and
6.68%, at June 30, 1996.
12
<PAGE> 14
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
June 30,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $609,160 $ 524,344
----------------------------------
Money market investments:
Federal funds sold and securities and mortgages
purchased under agreements to resell ................... 847,171 898,041
Time deposits with other banks ........................... 20,020 3,236
Bankers' acceptances...................................... 2,376 1,555
----------------------------------
869,567 902,832
----------------------------------
Investment securities available-for-sale
at market value .......................................... 4,905,562 3,127,423
Investment securities held-to-maturity
at cost .................................................. 745,826 1,694,764
Trading account securities, at market value................ 340,749 329,256
Loans held-for-sale ....................................... 314,916 153,278
Loans ..................................................... 10,969,960 9,456,881
Less--Unearned income .................................... 375,511 330,827
Allowance for loan losses ..................... 206,719 178,330
----------------------------------
10,387,730 8,947,724
----------------------------------
Premises and equipment .................................... 388,970 340,358
Other real estate.......................................... 10,285 3,611
Customers' liabilities on acceptances...................... 2,542 1,650
Accrued income receivable.................................. 109,346 118,774
Other assets............................................... 229,909 164,035
Intangible assets ......................................... 231,282 134,088
---------------------------------
$19,145,844 $16,442,137
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing .................................. $2,496,684 $2,140,105
Interest bearing ....................................... 8,908,832 8,436,843
----------------------------------
11,405,516 10,576,948
Federal funds purchased and securities sold
under agreements to repurchase ......................... 2,623,292 2,747,186
Other short-term borrowings............................... 1,630,976 802,364
Notes payable ............................................ 1,412,407 692,435
Senior debentures......................................... 30,000
Acceptances outstanding................................... 2,542 1,650
Other liabilities......................................... 371,981 279,416
----------------------------------
17,446,714 15,129,999
----------------------------------
Subordinated notes ....................................... 125,000 125,000
----------------------------------
Guaranteed preferred beneficial interests in Popular
North America's subordinated debentures ............... 150,000
----------------------------------
Stockholders' equity:
Preferred stock .......................................... 100,000 100,000
Common stock.............................................. 411,697 396,007
Surplus .................................................. 579,878 479,059
Retained earnings......................................... 340,267 217,725
Treasury stock - at cost.................................. (14,017)
Unrealized gains (losses) on securities
available-for-sale, net of
deferred taxes ......................................... 6,305 (5,653)
----------------------------------
1,424,130 1,187,138
----------------------------------
$19,145,844 $16,442,137
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 15
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Quarter ended For the six months ended
June 30, June 30,
(Dollars in thousands, except per share information) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans ....................................................... $ 260,804 $ 226,027 $ 507,157 $ 443,274
Money market investments .................................... 8,515 10,882 17,382 19,555
Investment securities ....................................... 84,646 68,442 159,757 140,387
Trading account securities .................................. 5,040 4,624 8,974 9,686
--------------------------------------------------
359,005 309,975 693,270 612,902
--------------------------------------------------
INTEREST EXPENSE:
Deposits .................................................... 87,092 86,693 173,287 169,689
Short-term borrowings ....................................... 56,409 41,625 103,771 84,555
Long-term debt .............................................. 24,898 13,449 44,962 27,990
--------------------------------------------------
168,399 141,767 322,020 282,234
--------------------------------------------------
Net interest income ......................................... 190,606 168,208 371,250 330,668
Provision for loan losses ................................... 25,413 21,672 49,100 42,945
--------------------------------------------------
Net interest income after provision for loan losses ......... 165,193 146,536 322,150 287,723
Service charges on deposit accounts ......................... 22,214 21,389 44,033 42,465
Other service fees .......................................... 24,785 19,408 46,954 36,788
Gain (loss) on sale of securities ........................... 1,286 (20) (374) 709
Trading account profit (loss) ............................... 817 (1,383) 1,250 (445)
Other operating income ...................................... 7,125 9,921 18,619 21,790
--------------------------------------------------
221,420 195,851 432,632 389,030
--------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries .................................................. 50,344 46,112 98,689 90,864
Profit sharing ............................................ 6,788 5,685 13,228 11,755
Pension and other benefits ................................ 17,307 15,654 34,007 32,635
--------------------------------------------------
74,439 67,451 145,924 135,254
Net occupancy expense ....................................... 8,743 8,596 17,745 17,914
Equipment expenses .......................................... 13,279 11,806 25,619 23,580
Other taxes ................................................. 7,311 5,466 13,756 11,429
Professional fees ........................................... 14,421 10,993 26,835 20,909
Communications .............................................. 7,750 6,497 15,331 12,813
Business promotion .......................................... 7,980 6,027 13,937 11,419
Printing and supplies ....................................... 3,127 3,020 6,771 5,943
Other operating expenses .................................... 10,155 7,458 18,974 14,198
Amortization of intangibles ................................. 4,841 4,530 9,279 9,084
--------------------------------------------------
152,046 131,844 294,171 262,543
--------------------------------------------------
Income before taxes ......................................... 69,374 64,007 138,461 126,487
Income tax .................................................. 18,283 17,952 37,831 35,290
--------------------------------------------------
NET INCOME .................................................. $ 51,091 $ 46,055 $ 100,630 $ 91,197
==================================================
NET INCOME APPLICABLE TO COMMON STOCK ....................... $ 49,003 $ 43,967 $ 96,455 $ 87,022
==================================================
EARNINGS PER COMMON SHARE ................................... $ 0.74 $ 0.67 $ 1.46 $ 1.32
==================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the six months ended
June 30,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 100,630 $ 91,197
-------------------------------
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization of premises and equipment .................... 25,839 24,132
Provision for loan losses .................................................. 49,100 42,945
Amortization of intangibles ................................................ 9,279 9,084
Loss (gain) on sale of investment securities available-for-sale ............ 374 (709)
Loss (gain) on disposition of premises and equipment ....................... 103 (7)
Gain on sale of loans ...................................................... (6,127) (5,325)
Amortization of premiums and accretion of discounts on investments ......... 745 4,647
Increase in loans held-for-sale ............................................ (59,787) (40,472)
Amortization of deferred loan fees and costs ............................... (1,824) 3,303
Net (increase) decrease in trading securities .............................. (48,580) 1,418
Net increase in interest receivable ........................................ (6,872) (5,235)
Net decrease (increase) in other assets .................................... 190,723 (15,803)
Net increase in interest payable ........................................... 4,953 3,390
Net decrease in current and deferred taxes ................................. (37,494) (22,196)
Net increase in postretirement benefit obligation .......................... 4,014 4,493
Net increase in other liabilities .......................................... 51,137 13,227
-------------------------------
Total adjustments ........................................................... 175,583 16,892
-------------------------------
Net cash provided by operating activities ................................... 276,213 108,089
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in money market investments ................................... (46,595) (104,113)
Purchases of investment securities held-to-maturity ........................ (21,944,787) (5,620,734)
Maturities of investment securities held-to-maturity ....................... 22,453,433 5,566,537
Purchases of investment securities available-for-sale ...................... (3,839,435) (3,263,947)
Maturities of investment securities available-for-sale ..................... 878,497 1,580,601
Sales of investment securities available-for-sale .......................... 1,975,195 1,743,400
Net disbursements on loans ................................................. (644,137) (638,924)
Proceeds from sale of loans ................................................ 190,030 163,623
Acquisition of loan portfolios ............................................. (14,390) (113,475)
Assets acquired, net of cash ............................................... (140,602)
Acquisition of premises and equipment ...................................... (55,034) (39,805)
Proceeds from sale of premises and equipment ............................... 11,696 526
-------------------------------
Net cash used in investing activities ....................................... (1,176,129) (726,311)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits ........................................ (371,676) 700,286
Net increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase .......................................... 690,570 (253,693)
Net increase in other short-term borrowings ................................ 226,970 347,656
Proceeds from issuance of notes payable .................................... 328,233 394,662
Payments of notes payable .................................................. (432,655)
Payment of senior debentures ............................................... (30,000)
Payment of subordinated notes .............................................. (50,000)
Proceeds from issuance of Series A Capital Securities ...................... 150,000
Dividends paid ............................................................. (27,973) (23,952)
Proceeds from issuance of common stock ..................................... 2,162 2,089
Liability for cash portion of merger ....................................... 62,439
Treasury stock acquired .................................................... (14,017)
-------------------------------
Net cash provided by financing activities ................................... 1,016,708 684,393
-------------------------------
Net increase in cash and due from banks ..................................... 116,792 66,171
Cash and due from banks at beginning of period .............................. 492,368 458,173
-------------------------------
Cash and due from banks at end of period .................................... $ 609,160 $ 524,344
===============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
NOTE 1 - CONSOLIDATION
The consolidated financial statements of Popular, Inc. include the balance sheet
of the Corporation and its wholly-owned subsidiaries, Popular Securities, Inc.;
Popular International Bank, Inc. and its wholly-owned subsidiaries National
Bancorp, Inc., ATH Costa Rica, and Popular North America, Inc. including Banco
Popular, FSB, Pioneer Bancorp, Inc., Comban Corp., Banco Popular, N.A.
(Florida), CBC Bancorp, Ltd. (second tier subsidiaries), and Equity One, Inc.;
Banco Popular de Puerto Rico and its wholly-owned subsidiaries, Popular Leasing
and Rental, Inc., Popular Finance, Inc. and Popular Home Mortgage, Inc.; and
Metropolitana de Prestamos, Inc., as of June 30, 1997 and 1996, and their
related statements of income and cash flows for the six-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 1997 presentation.
NOTE 2 - ACCOUNTING CHANGES
Effective March 31, 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) 129, "Disclosure of Information about Capital
Structure." This statement establishes standards for disclosing information
about an entity's capital structure. However, it contains no change in
disclosure requirements for entities that were previously subject to the
requirements of Opinions 10 and 15 and SFAS 47.
Effective March 31, 1997, the Corporation adopted SFAS 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. It simplifies the standards for computing earnings
per share previously found in APB Opinion 15, "Earnings per Share," and makes
them comparable to international EPS standards. SFAS 128 replaces the
presentation of primary earnings per share with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Effective January 1, 1997, the Corporation adopted SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which supersedes SFAS 122 "Accounting for Mortgage Servicing Rights." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. Those standards
are based on a consistent application of a financial component approach that
focuses on the legal and physical control over the component. Under this
approach, following a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
and derecognizes financial assets for which control has been surrendered and
financial liabilities that have been extinguished. However, the FASB issued SFAS
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
125", that delays until January 1, 1998, the effective date of those provisions
of the statement that deal with securities lending, repurchase agreements and
similar transactions. The adoption of this pronouncement did not have a
financial impact on the consolidated financial statements of the Corporation for
the six-month period ended June 30, 1997.
In addition, this statement requires that mortgage banking enterprises recognize
as separate assets the rights to service mortgage loans for others, whether
those servicing rights are originated or purchased. Also, it requires mortgage
banking enterprises to assess capitalized mortgage servicing rights for
impairment based on the fair value of those rights. The total cost of mortgage
loans to be sold with servicing rights retained is allocated to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. These mortgage servicing rights are amortized in
proportion to and over the periods of estimated net servicing income.
16
<PAGE> 18
- --------------------------------------------------------------------------------
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 June 30,
1997, the carrying value, estimated fair value and valuation allowance of
capitalized mortgage servicing rights were $26,321, $35,379 and $16,
respectively (1996- $24,112, $29,574 and $64).
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 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 de Puerto Rico 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 six-month period ended June 30, 1997,
the Corporation recognized an expense of $351 and $574, respectively, related to
this plan (1996 - $111 and $214).
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 indentifiable 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 six-month period ended June
30, 1997, the Corporation recognized an impairment of $3,561 in the market value
of a building which is held for sale. For the quarter and six-month period ended
June 30, 1996, no impairment recognition was necessary under this pronouncement.
NOTE 3 - INVESTMENT SECURITIES
The average maturities as of June 30, 1997, and market value for the following
investment securities are:
Investments securities available-for-sale:
<TABLE>
<CAPTION>
June 30,
1997 1996
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury (average
maturity of 1 year and 7 months) $3,007,496 $3,013,782 $2,461,354 $2,457,654
Obligations of other U.S. Government
agencies and corporations
(average maturity of 9 years and 10 months) 1,099,072 1,103,135 146,977 146,064
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 7 years and 10 months) 45,680 45,915 24,924 24,814
Collateralized mortgage obligations
(average maturity of 2 years and 1 month) 626,490 625,798 188,470 187,742
Mortgage-backed securities (average
maturity of 4 years) 80,473 79,143 266,433 261,648
Equity securities (without contractual
maturity) 20,183 20,444 27,257 31,531
Others (average maturity of 8 years
and 6 months) 17,321 17,344 18,050 17,970
----------------------------------------------------------
$4,896,715 $4,905,562 $3,133,465 $3,127,423
==========================================================
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Investments securities held-to-maturity: June 30,
1997 1996
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury (average maturity
of 4 months) $ 350,397 $ 350,430 $ 923,106 $ 923,664
Obligations of other U.S. Government
agencies and corporations (average
maturity of 3 months) 89,731 89,399 210,600 209,506
Obligations of Puerto Rico, States and
political subdivisions (average
maturity of 6 years and 5 months) 61,746 62,958 220,456 222,090
Collateralized mortgage obligations (average
maturity of 1 year and 7 months) 102,970 102,701 223,416 221,881
Mortgage-backed securities (average maturity
of 4 years and 1 month) 51,294 51,641 57,048 56,150
Equity securities (without contractual
maturity) 70,660 65,611 47,674 47,674
Others (average maturity of 6 years and
9 months) 19,028 18,997 12,464 12,484
----------------------------------------------------------
$ 745,826 $ 741,737 $1,694,764 $1,693,449
==========================================================
</TABLE>
NOTE 4 - PLEDGED ASSETS
Securities and insured mortgage loans of the Corporation of $3,930,814 (1996 -
$2,677,352) 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 June 30, 1997, amounted to $25,416 and
$114,372. There are also outstanding other commitments and contingent
liabilities, such as guarantees and commitments to extend credit, which are not
reflected in the accompanying financial statements. No losses are anticipated as
a result of these transactions.
NOTE 6 - SUBORDINATED NOTES
Subordinated notes of $125,000 as of June 30, 1997 and 1996 consisted of notes
issued by the Corporation on December 12, 1995, maturing on December 15, 2005,
with interest payable semi-annually at 6.75%.
NOTE 7 - STOCKHOLDERS' EQUITY
Authorized common stock is 180,000,000 shares with a par value of $6 per share
of which 68,236,048 were issued and outstanding at June 30, 1997. On May 8,
1997, the Board of Directors authorized the repurchase of up to three million
shares of the outstanding common stock of the Corporation for the sole purpose
of replenishing shares issued by Popular, Inc. in connection with acquistions.
As of June 30, 1997, 380,000 common shares were purchased at a cost of $14,017.
Authorized preferred stock is 10,000,000 shares without par value of which
4,000,000, non-cumulative with a dividend rate of 8.35% and a liquidation
preference value of $25 per share, were issued and outstanding at June 30, 1997.
18
<PAGE> 20
- --------------------------------------------------------------------------------
NOTE 8 - EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are calculated based on net income applicable to
common stockholders which amounted to $49,004 for the second quarter of 1997
(1996 - $43,967), and $96,455 for the six months ended June 30, 1997 (1996 -
$87,022), after deducting the dividends on preferred stock. EPS are based on
66,350,298 average shares outstanding for the second quarter of 1997 (1996 -
66,001,180) and 66,235,718 average shares outstanding for the first six months
of 1997 (1996 - 65,975,526).
NOTE 9 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the six-month period ended June 30, 1997 the corporation paid interest
and income taxes amounting to $288,126 and $56,247, respectively (1996 -
$276,030 and $56,790). In addition, the loans receivable transferred to other
real estate and other property for the six-month period ended June 30, 1997,
amounted to $3,683 and $2,323, respectively (1996 - $1,150 and $2,436). The
Corporation's Stockholders' equity at June 30, 1997 includes $6,305, in
unrealized holding gains on securities available-for-sale, net of deferred
taxes, as compared with $5,653 in unrealized losses as of June 30, 1996.
19
<PAGE> 21
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Richard L. Carrion, Chairman
Alfonso F. Ballester, Vice Chairman
Antonio Luis Ferre, Vice Chairman
Juan A. Albors Hernandez *
Salustiano Alvarez Mendez **
Jose A. Bechara Bravo *
Juan J. Bermudez
Esteban D. Bird *
Francisco J. Carreras
David H. Chafey, Jr.
Luis E. Dubon, Jr.
Hector R. Gonzalez
Jorge A. Junquera Diez
Manuel Morales, Jr.
Alberto M. Paracchini
Francisco M. Rexach, Jr.
Felix J. Serralles Nevares
Julio E. Vizcarrondo, Jr.
Samuel T. Cespedes, Secretary
* Director of Banco Popular de Puerto Rico only
** Director of Popular Inc. only
EXECUTIVE OFFICERS
Richard L. Carrion, Chairman of the Board,
President and Chief Executive Officer
David H. Chafey, Jr., Senior Executive Vice President
Jorge A. Junquera Diez, Senior Executive Vice President
Maria Isabel Burckhart, Executive Vice President
Roberto R. Herencia, Executive Vice President
Larry Kesler, Executive Vice President
Humberto Martin, Executive Vice President
Emilio E. Pinero, Executive Vice President
Carlos Rom, Jr., Executive Vice President
Carlos J. Vazquez, Executive Vice President
CENTRAL OFFICE
Banco Popular Center, Hato Rey
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 765-9800
SUBSIDIARIES
ATH COSTA RICA
Cond. en Oficinas Ofiplaza del Este
Edif. D- Piso 1, San Pedro,
150 metros Oeste de la
Rotonda de la Bandera
San Jose, Costa Rica
Telephone: (011) 506-280-9796
BANCO POPULAR DE PUERTO RICO
OFFICES
PUERTO RICO OFFICE
Banco Popular Center, Hato Rey
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 765-9800
NEW YORK OFFICE
7 West 51st St.
New York, N.Y. 10019
Telephone: (212) 315-2800
VIRGIN ISLANDS OFFICE
80 Kronprindsens Gade
Kronprindsens Quarter
Charlotte Amalie, St. Thomas
U.S. Virgin Islands 00802
Telephone: (809) 774-2300
BANCO POPULAR, FSB
500 Bloomfield Avenue
Newark, New Jersey 07107
Telephone: (201) 484-6525
BANCO POPULAR, ILLINOIS
4000 West North Avenue
Chicago, Illinois 60639
Telephone: (312) 772-8600
BANCO POPULAR, N.A. (CALIFORNIA)
6001 E. Washington Blvd.
City of Commerce, California 90040
Telephone: (213) 724-8800
BANCO POPULAR, N.A. (FLORIDA)
5551 Vanguard Street
Suite 100
Orlando, Florida, 32819
Telephone: (407) 370-8000
CBC BANCORP, LTD.
4801 West Fullerton Ave.
Chicago, Ilinois, 60639
Telephone: (312) 622-7621
EQUITY ONE, INC.
523 Fellowship Road, Suite 220
Mt. Laurel, New Jersey 08054
Telephone: (609) 273-1119
METROPOLITANA DE PRESTAMOS, INC.
State Road #2 Km. 6.8
Villa Caparra
Guaynabo, Puerto Rico 00966
Telephone: (787) 792-9292
NATIONAL BANCORP, INC.
1600 West Lake Street
One Winston Plaza
Melrose Park, Illinois 60160
Telephone: (708) 681-8600
POPULAR FINANCE, INC.
10 Salud Street
El Senorial Condominium, Suite 613
Ponce, Puerto Rico 00731
Telephone: (787) 844-2860
POPULAR HOME MORTGAGE, INC.
268 Ponce de Leon Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 753-0245
POPULAR LEASING AND RENTAL, INC.
M-1046 Federico Costa St.
Tres Monjitas Industrial Development
San Juan, Puerto Rico 00903
Telephone: (787) 751-4848
Popular Securities, Inc.
1020 Popular Center
Hato Rey, Puerto Rico 00918
Telephone: (787) 766-4200
20
<PAGE> 22
[PICTURE]
POPULAR, Inc.
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