<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
<TABLE>
<S> <C>
For Quarter Ended June 30, 1999 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.)
</TABLE>
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:
<TABLE>
<S> <C>
Common Stock $6.00 Par value 135,862,258
- ---------------------------- -------------------------------------------
(Title of Class) (Shares Outstanding as of August 16, 1999)
</TABLE>
<PAGE> 2
POPULAR, INC.
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
<S> <C>
Item 1. Financial Statements
Unaudited consolidated statements of condition - June 30,
1999, December 31, 1998 and June 30, 1998. 3
Unaudited consolidated statements of income - Quarters and six
months ended June 30, 1999 and 1998. 4
Unaudited consolidated statements of comprehensive income -
Quarters and six months ended June 30, 1999 and 1998. 5
Unaudited consolidated statements of cash flows - Six months
ended June 30, 1999 and 1998. 6
Notes to unaudited consolidated financial statements. 7-18
Item 2. Management's discussion and analysis of financial condition
and results of operation. 19-36
Item 3. Quantitative and qualitative disclosures about market risk 24
Part II - Other Information
Item 1. Legal proceedings 36
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 36
Item 5. Other information 37
Item 6. Exhibits and reports on Form 8-K 37
--- Signature 38
</TABLE>
FORWARD LOOKING INFORMATION. This Quarterly Report on Form 10-Q
contains certain forward looking statements with respect to the adequacy of the
allowance for loan losses, the Corporation's market risk, the effect of legal
proceedings on Popular, Inc.'s financial condition and results of operations and
the Year 2000 issue. These forward looking statements involve certain risks,
uncertainties, estimates and assumptions by management.
Various factors could cause actual results to differ from those
contemplated by such forward looking statements. With respect to the adequacy of
the allowance for loan losses and market risk, these factors include, among
others, the rate of growth in the economy, the relative strength and weakness in
the consumer and commercial credit sectors and in the real estate markets, the
performance of the stock and bond markets, the magnitude of interest rate
changes and the potential effects of the Year 2000 issue. Moreover, the outcome
of litigation, as discussed in "Part II, Item I. Legal Proceedings," is
inherently uncertain and depends on judicial interpretations of law and the
findings of judges and juries. The information regarding Year 2000 compliance is
based on management's current assessment. However, this is an ongoing process
involving continual evaluation, and unanticipated problems could develop that
could cause compliance to be more difficult or costly than currently
anticipated.
2
<PAGE> 3
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
(In thousands)
1999 1998 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 567,143 $ 667,707 $ 500,941
- --------------------------------------------------------------------------------------------------------------
Money market investments:
Federal funds sold and securities and mortgages
purchased under agreements to resell 715,618 910,430 650,881
Time deposits with other banks 74,986 37,206 42,779
Banker's acceptances 681 262 827
- --------------------------------------------------------------------------------------------------------------
791,285 947,898 694,487
- --------------------------------------------------------------------------------------------------------------
Investment securities available-for-sale, at
market value 6,804,004 7,020,396 5,795,668
Investment securities held-to-maturity, at cost 316,860 226,134 232,316
Trading account securities, at market value 320,416 318,727 250,090
Loans held-for-sale 603,643 644,159 338,566
Loans 13,655,881 12,783,609 11,767,063
Less - Unearned income 372,132 348,973 352,416
Allowance for loan losses 282,590 267,249 224,045
- --------------------------------------------------------------------------------------------------------------
Net loans 13,001,159 12,167,387 11,190,602
- --------------------------------------------------------------------------------------------------------------
Premises and equipment 440,167 424,721 380,684
Other real estate 30,018 32,693 20,283
Customers' liabilities on acceptances 14,768 15,937 454
Accrued income receivable 160,146 156,314 128,897
Other assets 355,510 263,992 239,267
Intangible assets 260,502 274,292 225,381
- --------------------------------------------------------------------------------------------------------------
$ 23,665,621 $ 23,160,357 $ 19,997,636
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,278,464 $ 3,176,309 $ 2,585,256
Interest bearing 10,623,923 10,495,905 9,517,338
- --------------------------------------------------------------------------------------------------------------
13,902,387 13,672,214 12,102,594
Federal funds purchased and securities sold
under agreements to repurchase 3,319,780 4,076,500 2,672,811
Other short-term borrowings 2,554,433 1,639,082 1,864,562
Notes payable 1,531,723 1,307,160 1,137,709
Acceptances outstanding 14,768 15,937 454
Other liabilities 396,604 437,760 350,813
- --------------------------------------------------------------------------------------------------------------
21,719,695 21,148,653 18,128,943
- --------------------------------------------------------------------------------------------------------------
Subordinated notes 125,000 125,000 125,000
- --------------------------------------------------------------------------------------------------------------
Preferred beneficial interests in Popular
North America's Junior subordinated
deferrable interest debentures guaranteed
by the Corporation 150,000 150,000 150,000
- --------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 20,244 27,591
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 100,000 100,000 100,000
Common stock 826,595 825,690 412,426
Surplus 220,559 216,795 604,983
Retained earnings 616,022 530,481 473,531
Treasury stock-at cost (72,524) (39,559) (39,559)
Accumulated other comprehensive income (loss), net of
deferred taxes of ($11,595) (December 31,
1998 - $25,101; June 30, 1998 - $ 14,232) (39,970) 75,706 42,312
- --------------------------------------------------------------------------------------------------------------
1,650,682 1,709,113 1,593,693
- --------------------------------------------------------------------------------------------------------------
$ 23,665,621 $ 23,160,357 $ 19,997,636
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE> 4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
(Dollars in thousands, except per share information) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $335,739 $296,476 $661,772 $589,693
Money market investments 7,500 9,192 15,433 18,018
Investment securities 105,411 93,177 210,845 183,436
Trading account securities 4,751 4,020 9,546 8,085
- ------------------------------------------------------------------------------------------------------------
453,401 402,865 897,596 799,232
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 110,147 101,777 220,970 199,108
Short-term borrowings 73,138 58,330 142,513 114,577
Long-term debt 31,265 28,366 59,024 58,451
- ------------------------------------------------------------------------------------------------------------
214,550 188,473 422,507 372,136
- ------------------------------------------------------------------------------------------------------------
Net interest income 238,851 214,392 475,089 427,096
Provision for loan losses 36,631 33,524 72,402 67,089
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 202,220 180,868 402,687 360,007
Service charges on deposit accounts 29,731 25,494 57,980 50,832
Other service fees 39,691 28,818 77,600 54,991
Gain on sale of securities 286 3,049 736 3,917
Trading account (loss) profit (582) 1,311 (863) 1,981
Other operating income 17,800 14,214 38,531 29,116
- ------------------------------------------------------------------------------------------------------------
289,146 253,754 576,671 500,844
- ------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Personnel costs:
Salaries 69,983 59,623 140,140 118,916
Profit sharing 6,084 6,264 12,403 11,947
Pension and other benefits 18,572 16,770 38,131 35,188
- ------------------------------------------------------------------------------------------------------------
94,639 82,657 190,674 166,051
Net occupancy expense 14,715 11,737 28,974 23,298
Equipment expenses 21,557 18,481 42,291 36,509
Other taxes 7,941 7,899 16,206 15,867
Professional fees 17,356 13,816 32,668 26,694
Communications 10,580 9,194 21,409 18,017
Business promotion 12,209 8,917 23,209 17,133
Printing and supplies 4,828 4,415 9,818 8,418
Other operating expenses 13,806 11,080 26,653 21,804
Amortization of intangibles 7,586 6,849 15,206 13,633
- ------------------------------------------------------------------------------------------------------------
205,217 175,045 407,108 347,424
- ------------------------------------------------------------------------------------------------------------
Income before income tax and minority interest 83,929 78,709 169,563 153,420
Income tax 20,334 21,248 42,736 41,164
Net loss of minority interest 382 0 814 0
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 63,977 $ 57,461 $127,641 $112,256
============================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 61,890 $ 55,374 $123,466 $108,081
============================================================================================================
EARNINGS PER COMMON SHARE (BASIC AND DILUTED) $ 0.46 $ 0.41 $ 0.91 $ 0.80
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE> 5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 63,977 $57,461 $ 127,641 $112,256
-----------------------------------------------------
Other comprehensive income net of tax:
Foreign currency translation adjustment (62) (895)
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising
during the period net of tax of ($20,407)
(1998 - $1,391) for the quarter and
($36,696) (1998 - $3,052) for the six-month period (65,989) 7,248 (114,497) 11,559
Less: reclassification adjustment for gains
included in net income, net of tax of $78 (1998 -
$1,060) for the quarter and $139 (1998 - $1,378)
for the six-month period 135 1,988 283 2,593
-----------------------------------------------------
Total other comprehensive (loss) income $(66,186) $ 5,260 $(115,675) $ 8,966
-----------------------------------------------------
Comprehensive (loss) income $ (2,209) $62,721 $ 11,966 $121,222
=====================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
<PAGE> 6
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 127,641 $ 112,256
- ------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization of premises and equipment 34,837 30,574
Provision for loan losses 72,402 67,089
Amortization of intangibles 15,206 13,633
Gain on sale of investment securities available-for-sale (736) (3,917)
(Gain) loss on disposition of premises and equipment 108 (63)
Gain on sale of loans (11,651) (10,943)
Amortization of premiums and accretion of discounts
on investments 3,221 1,044
Decrease (increase) in loans held-for-sale 40,516 (73,362)
Amortization of deferred loan fees and costs 12 (1,384)
Net increase in trading securities (1,689) (27,787)
Net increase in interest receivable (3,831) (10,220)
Net (increase) decrease in other assets (54,991) 47,870
Net (decrease) increase in interest payable (311) 3,714
Net increase in current and deferred taxes (40,113) (12,080)
Net increase in postretirement benefit obligation 4,144 4,359
Net decrease in other liabilities (1,136) (28,108)
- ------------------------------------------------------------------------------------------------
Total adjustments 55,988 419
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 183,629 112,675
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments 156,613 119,603
Purchases of investment securities held-to-maturity (3,933,805) (8,660,288)
Maturities of investment securities held-to-maturity 4,082,963 8,836,116
Purchases of investment securities available-for-sale (3,856,526) (3,410,698)
Maturities of investment securities available-for-sale 3,534,843 2,111,428
Sales of investment securities available-for-sale 149,025 762,267
Net disbursements on loans (1,385,302) (679,918)
Proceeds from sale of loans 477,970 358,598
Acquisitions of loan portfolios (2,490) (41,988)
Assets acquired, net of cash (4,094)
Acquisition of premises and equipment (62,059) (59,217)
Proceeds from sale of premises and equipment 11,668 13,641
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (827,100) (654,550)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 230,173 313,419
Net deposits acquired 36,297
Net decrease in federal funds purchased and securities
sold under agreements to repurchase (756,721) (50,518)
Net increase in other short-term borrowings 915,351 276,347
Proceeds from issuance of notes payable 394,569 34,727
Payments of notes payable (170,006)
Dividends paid (42,164) (33,963)
Proceeds from issuance of common stock 4,670 3,356
Treasury stock acquired (32,965)
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 542,907 579,665
- ------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and due from banks (100,563) 37,790
Cash and due from banks at beginning of period 667,707 463,151
- ------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 567,143 $ 500,941
================================================================================================
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
<PAGE> 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share information)
NOTE 1 - CONSOLIDATION
Popular, Inc. (the Corporation) is a bank holding company offering a full range
of financial services through banking offices in Puerto Rico, the U.S. and
British Virgin Islands, New York, Illinois, New Jersey, Florida, California and
Texas. The Corporation is also the principal shareholder of Banco Fiduciario,
S.A. in the Dominican Republic with a 57% ownership interest therein.
Furthermore, the Corporation is engaged in mortgage and consumer finance, lease
financing, investment banking and broker/dealer activities, retail financial
services and ATM processing services through its non-banking subsidiaries in
Puerto Rico, the United States and Costa Rica. Refer to note 10 to the
consolidated financial statements for further information on the nature of
operations of the Corporation by business segments.
The consolidated financial statements include the accounts of Popular, Inc. and
its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. 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 1999
presentation.
NOTE 2 - ACCOUNTING CHANGES
Effective the first quarter of 1999, the Corporation adopted SFAS 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held For Sale by a Mortgage Banking Enterprise." This statement
requires that an entity engaged in mortgage banking activities classify the
mortgage-backed securities or other retained interests resulting from the
securitization of mortgage loans held for sale, based on its ability and intent
to sell or hold those investments, in accordance with SFAS 115. This statement
did not have a material impact on the results of operations or financial
position of the Corporation.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities in the statement of condition
measured at fair value. It also establishes unique accounting treatment for the
following three different types of hedges: fair value hedges, cash flows hedges
and foreign currency hedges. The accounting for each of the three types of
hedges results in recognizing offsetting changes in value or cash flows of both
the derivative instrument and the hedged item in earnings in the same period.
Changes in the fair value of derivatives that do not meet the criteria of one of
these types of hedges are included in earnings in the period of change. As
issued, this statement was effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, though the FASB delayed its effective date one
year to fiscal years beginning after June 15, 2000 based on the provisions of
SFAS No. 137. Management estimates that the adoption of this statement will not
have a material effect on the consolidated financial statements of the
Corporation.
7
<PAGE> 8
NOTE 3 - INVESTMENT SECURITIES
The average maturities as of June 30, 1999, and market value for the following
investment securities are:
Investment securities available-for-sale:
<TABLE>
<CAPTION>
June 30,
--------
1999 1998
---- ----
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury (average maturity of 1 year
and 5 months) $2,434,112 $2,436,440 $3,123,686 $3,141,595
Obligations of other U.S. Government
Agencies and corporations (average
Maturity of 7 years and 1 month) 2,631,361 2,553,441 1,415,991 1,419,231
Obligations of Puerto Rico, States and
Political subdivision (average maturity
of 9 years and 4 months) 73,716 72,417 58,061 59,159
Collateralized mortgage obligations (average
Maturity of 22 years and 7 months) 1,184,577 1,180,034 717,931 718,634
Mortgage-backed securities (average maturity
of 22 years and 5 months) 346,945 352,399 381,319 388,691
Equity securities (without contractual
maturity) 126,567 153,034 30,206 56,592
Others (average maturity 3 months) 57,181 56,239 11,930 11,766
-----------------------------------------------------------
$6,854,459 $6,804,004 $5,739,124 $5,795,668
===========================================================
</TABLE>
Investment securities held-to-maturity:
<TABLE>
<CAPTION>
June 30,
--------
1999 1998
---- ----
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Obligations of Puerto Rico, States and
Political subdivision (average maturity
of 10 years and 9 months) $ 66,569 $ 64,255 $ 38,563 $ 39,740
Collateralized mortgage obligations (average
Maturity of 11 years and 4 months) 22,009 22,100 42,516 42,640
Mortgage-backed securities (average maturity of
10 years and 10 months) 27,029 27,295 39,608 40,470
Equity securities (without contractual
maturity) 91,769 91,769 78,668 78,668
Others (average maturity of 3 months) 109,484 104,970 32,961 32,971
-----------------------------------------------------------
$316,860 $310,389 $232,316 $234,489
===========================================================
</TABLE>
8
<PAGE> 9
The expected maturity of collateralized mortgage obligations, mortgage-backed
securities and certain other securities differs from their contractual
maturities because they may be subject to prepayments.
NOTE 4 - PLEDGED ASSETS
Securities and insured mortgage loans of the Corporation of $4,872,805 (1998 -
$4,288,426) 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, 1999, amounted to $16,073 and
$91,045 (1998 - $18,907 and $65,816). 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 AND PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH
AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED BY THE
CORPORATION
Subordinated notes of $125,000 as of June 30, 1999 and 1998 consisted of notes
issued by the Corporation on December 12, 1995, maturing on December 15, 2005,
with interest payable semi-annually at 6.75%.
On February 5, 1997, BanPonce Trust I, a statutory business trust created under
the laws of the State of Delaware that is wholly-owned by Popular North America,
Inc. (PNA) and indirectly wholly-owned by the Corporation, sold to institutional
investors $150,000 of its 8.327% Capital Securities Series A (liquidation amount
$1,000 per Capital Security) through certain underwriters. The proceeds of the
issuance, together with the proceeds of the purchase by PNA of $4,640 of its
8.327% common securities (liquidation amount $1,000 per common security) were
used to purchase $154,640 aggregate principal amount of PNA 8.327% Junior
Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated
Debentures"). These capital securities qualify as Tier 1 capital, are fully and
unconditionally guaranteed by the Corporation, and are presented in the
Consolidated Statements of Condition as "Guaranteed Preferred Beneficial
Interest in Popular North America's Subordinated Debentures." The obligations of
PNA under the Junior Subordinated Debentures and its guarantees of the
obligations of BanPonce Trust 1 are fully and unconditionally guaranteed by the
Corporation. The assets of BanPonce Trust 1 consisted of $154,640 of Junior
Subordinated Debentures and a related accrued interest receivable of $4,292. The
Junior Subordinated Debentures mature on February 1, 2027; however, under
certain circumstances, the maturity of the Junior Subordinated Debentures (which
shortening would result in a mandatory redemption of the Capital Securities) may
be shortened.
NOTE 7 - STOCKHOLDERS' EQUITY
Authorized common stock is 180,000,000 shares with a par value of $6 per share
of which 134,698,572 were issued and outstanding at June 30, 1999. During the
second quarter of 1999, the Corporation repurchased a total of 1,089,700 shares
of its common stock under the stock repurchase program approved by its Board of
Directors on May 8, 1997. As of June 30, 1999, a total of 3,067,300 common
shares with a total cost of $72,524 were maintained as treasury stock.
Authorized preferred stock consists of 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, 1999.
9
<PAGE> 10
Popular International Bank, Inc. (PIB) and the bank subsidiaries of Popular
North America, Inc. (PNA), Banco Popular North America and Banco Popular,
National Association (Texas), have certain statutory provisions and regulatory
requirements and policies, such as the maintenance of adequate capital, that
limit the amount of dividends they can pay. Other than these limitations, no
other restrictions exist on the ability of PIB and PNA to make dividend and
asset distributions to the Corporation, nor on the ability of PNA's subsidiaries
to make distributions to PNA.
NOTE 8 - EARNINGS PER COMMON SHARE
Earnings per common share (EPS) are calculated based on net income applicable to
common stockholders which amounted to $61,890 for the second quarter of 1999
(1998 - $55,374) and $123,466 for the six months ended June 30, 1999 (1998 -
$108,081), after deducting the dividends on preferred stock. EPS are based on
135,491,324 average shares outstanding for the second quarter of 1999 (1998 -
135,497,786 ) and 135,599,703 average shares outstanding for the first six
months of 1999 (1998 - 135,466,614).
NOTE 9 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS
During the six-month period ended June 30, 1999, the Corporation paid interest
and income taxes amounting to $422,817 and $81,437, respectively (1998 -
$370,373 and $65,399). In addition, the loans receivable transferred to other
real estate and other property for the six-month period ended June 30, 1999,
amounted to $6,192 and $9,364, respectively (1998 - $3,619 and $14,114).
NOTE 10 - SEGMENT REPORTING
Popular, Inc. operates three major reportable segments: commercial banking,
mortgage and consumer finance, and lease financing. Management has determined
its reportable segments based on legal entity, which is the way that operating
decisions and performance is measured. These entities have then been aggregated
by products, services and markets with similar characteristics.
The Corporation's commercial banking segment includes all banking subsidiaries
engaged in business in Puerto Rico and the U.S. mainland, which provide
individuals, corporations and institutions with commercial and retail banking
services, including loans and deposits, trusts, mortgage banking and servicing,
asset management, credit cards and other financial services. These services are
offered through a delivery system of branches throughout Puerto Rico, the U.S.
and British Virgin Islands, New York, Illinois, California, Florida, Texas and
New Jersey.
The Corporation's mortgage and consumer finance segment includes those
non-banking subsidiaries whose principal activity is originating mortgage and
consumer loans such as Popular Mortgage, Popular Finance and Equity One.
The Corporation's lease financing segment provides financing for vehicles and
equipment through Popular Leasing and Rental, Inc. in Puerto Rico and Popular
Leasing, USA in the U.S. mainland. The "Other" category includes all holding
companies and non-banking subsidiaries which provide investment banking and
broker/dealer activities, as well as those providing ATM processing services and
retail financial services. It also includes the banking operations of Banco
Fiduciario in the Dominican Republic.
The accounting policies of the segments are the same as those followed by the
Corporation in the ordinary course of business and conform with generally
accepted accounting principles and with general practices within the financial
industry. Following are the results of operations and selected financial
information by operating segments for the second quarter and six-month period
ended on June 30, 1999 and 1998.
10
<PAGE> 11
<TABLE>
<CAPTION>
Mortgage and
Commercial consumer Lease
Banking finance Financing Other Eliminations Total
- ----------------------------------------------------------------------------------------------------------------
(In thousands) Quarter ended June 30, 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 203,958 $ 22,931 $ 10,651 $ 1,311 $ 238,851
Provision for loan losses 28,036 6,398 1,814 383 36,631
Other income 61,076 8,930 5,202 12,760 $ (1,042) 86,926
Amortization expense 7,057 84 189 256 7,586
Depreciation expense 13,847 415 2,167 913 17,342
Other operating expense, net
of minority interest 144,199 17,698 6,204 11,911 (105) 179,907
Income tax 16,227 2,429 2,033 (110) (245) 20,334
- ----------------------------------------------------------------------------------------------------------------
Net income $ 55,668 $ 4,837 $ 3,446 $ 718 ($692) $63,977
- ----------------------------------------------------------------------------------------------------------------
Segment Assets $20,245,986 $1,916,340 $722,881 $5,820,924 $(5,040,510) $23,665,621
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mortgage and
Commercial consumer Lease
Banking finance Financing Other Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands) Six-month period ended June 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 406,200 $ 44,101 $ 21,347 $ 3,454 (13) $ 475,089
Provision for loan losses 55,072 12,504 4,443 383 72,402
Other income 119,006 22,839 10,252 24,327 (2,440) 173,984
Amortization expense 14,119 168 378 541 15,206
Depreciation expense 27,409 790 4,413 2,225 34,837
Other operating expense, net
of minority interest 285,977 34,707 11,762 24,028 (223) 356,251
Income tax 32,477 6,675 3,970 184 (570) 42,736
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 110,152 $ 12,096 $ 6,633 $ 420 $ (1,660) $ 127,641
- ------------------------------------------------------------------------------------------------------------------------------
Segment Assets $20,245,986 $1,916,340 $722,881 $5,820,924 $(5,040,510) $23,665,621
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
Mortgage and
Commercial consumer Lease
Banking finance Financing Other Eliminations Total
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands) Quarter ended June 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 184,722 $ 20,564 $ 9,537 $ (418) $ (13) $ 214,392
Provision for loan losses 25,790 5,290 2,444 33,524
Other income 53,895 7,970 4,877 6,206 (62) 72,886
Amortization expense 6,288 250 320 (9) 6,849
Depreciation expense 13,685 286 2,253 145 16,369
Other operating expense 129,211 13,309 5,339 4,086 (118) 151,827
Income tax 15,272 3,612 1,491 856 17 21,248
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 48,371 $ 5,787 $ 2,567 $ 710 $ 26 $ 57,461
- ---------------------------------------------------------------------------------------------------------------------------------
Segment Assets $17,323,880 $ 1,605,387 $ 658,966 $ 4,093,093 $(3,683,690) $19,997,636
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mortgage and
Commercial consumer Lease
Banking finance Financing Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) Six-month period ended June 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 367,560 $ 41,219 $ 19,698 (1,351) (30) $ 427,096
Provision for loan losses 51,325 10,441 5,323 67,089
Other income 105,842 14,483 9,691 10,944 (123) 140,837
Amortization expense 12,532 500 640 (39) 13,633
Depreciation expense 25,251 625 4,535 163 30,574
Other operating expense 259,745 25,921 10,707 7,084 (240) 303,217
Income tax 30,750 7,052 3,040 288 34 41,164
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 93,799 $ 11,163 $ 5,144 $ 2,097 $ 53 $ 112,256
- -----------------------------------------------------------------------------------------------------------------------------
Segment Assets $17,323,880 $1,605,387 $658,966 $ 4,093,093 $(3,683,690) $19,997,636
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC INFORMATION Quarter ended Six-month period ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Revenues*
Puerto Rico $377,411 $350,634 $748,146 $693,948
United States 134,472 112,023 265,682 220,364
Other 28,444 13,094 57,752 25,757
- ---------------------------------------------------------------------------------------------------
Total consolidated revenues $540,327 $475,751 $1,071,580 $940,069
===================================================================================================
</TABLE>
* Total revenues include interest income, service charges on deposit accounts,
other service fees, gain on sale of securities, trading account profit
(loss), and other income.
12
<PAGE> 13
<TABLE>
<CAPTION>
JUNE 30, June 30,
1999 1998
- ---------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Selected Balance Sheet information:
Puerto Rico
Total assets $16,999,393 $14,771,890
Loans 8,370,636 7,524,244
Deposits 9,725,275 8,713,768
United States
Total assets $ 5,729,437 $ 4,710,279
Loans 4,876,454 3,872,597
Deposits 3,344,581 2,870,778
Other
Total assets $ 936,791 $ 515,467
Loans 640,302 356,372
Deposits 832,531 518,048
</TABLE>
NOTE 11 - POPULAR INTERNATIONAL BANK, INC. (A WHOLLY-OWNED SUBSIDIARY OF
POPULAR, INC.) FINANCIAL INFORMATION:
The following summarized financial information presents the unaudited
consolidated financial position of Popular International Bank, Inc. (PIB) and
its subsidiaries, ATH Costa Rica, Banco Fiduciario, S.A. and Popular North
America, Inc., including Popular Holdings USA, Inc. and its subsidiaries; Banco
Popular North America and Banco Popular, National Association (Texas); Popular
Cash Express, Inc. and Equity One, Inc. (second-tier subsidiaries), as of May
31, 1999 and 1998, and the results of their operations for the quarters and the
six month periods then ended.
Effective January 1, 1999 the Corporation completed the first phase of a
reorganization of its U.S. operations. As of that date, most of the banking
subsidiaries in California, Florida, New Jersey and Illinois, and the Banco
Popular branches in New York were merged with and into one bank named Banco
Popular North America (BPNA). Also during the first quarter of 1999, First State
Bank of Southern California, The Bronson-Gore Bank in Prospect Heights, The
Irving Bank and Water Tower Bank, banking subsidiaries which were not part of
the initial phase of the reorganization effected on January 1, were merged with
and into BPNA. Banco Popular, National Association (Texas) is expected to be
merged into BPNA later during 1999 to complete the reorganization. The financial
information for 1998, presented below, was restated to reflect the
reorganization as if it had been consummated at the beginning of fiscal year
1998.
Popular, Inc. has not presented separate financial statements nor any other
disclosures concerning PIB, 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 are guaranteed by the
Corporation.
13
<PAGE> 14
POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
<TABLE>
<CAPTION>
May 31,
-------
1999 1998
---- ----
<S> <C> <C>
Assets:
Cash $ 205,831 $ 152,687
Money market investments 84,105 28,071
Investment and trading securities 404,446 425,431
Loans 5,216,824 3,871,675
Less: Unearned income 76,849 64,078
Allowance for loan losses 93,812 45,765
--------------------------
5,046,163 3,761,832
Other assets 301,797 149,915
Intangible assets 144,801 93,551
--------------------------
Total assets $6,187,143 $4,611,487
==========================
Liabilities and Stockholder's Equity:
Deposits $3,635,807 $2,826,136
Short-term borrowings 986,557 527,483
Notes payable 752,497 618,306
Other liabilities 99,578 64,726
Preferred beneficial interest in Popular North
America's junior subordinated deferrable
interest debentures guaranteed by the
Corporation 150,000 150,000
Minority interest in consolidated subsidiary 20,244
Stockholder's equity 542,460 424,836
--------------------------
Total liabilities and stockholder's equity $6,187,143 $4,611,487
==========================
</TABLE>
14
<PAGE> 15
POPULAR INTERNATIONAL BANK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Quarter ended Six months ended
May 31, May 31,
------- -------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income:
Interest and fees $126,204 $ 97,652 $248,738 $192,730
Other income 25,424 16,073 52,165 29,760
---------------------- ----------------------
Total income 151,628 113,725 300,903 222,490
---------------------- ----------------------
Expenses:
Interest expense 64,668 48,212 128,130 94,831
Provision for loan losses 11,399 8,138 20,994 18,549
Operating expenses 72,594 47,967 141,019 92,013
---------------------- ----------------------
Total expenses 148,661 104,317 290,143 205,393
---------------------- ----------------------
Income before income tax 2,967 9,408 10,760 17,097
Income tax 1,195 4,273 5,315 7,092
---------------------- ----------------------
$ 1,772 $ 5,135 $ 5,445 $ 10,005
====================== ======================
</TABLE>
15
<PAGE> 16
NOTE 12 - 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, Popular Cash Express, Inc., Equity One, Inc. and
Popular Holdings USA, and its wholly-owned subsidiaries, Banco Popular North
America and Banco Popular, National Association (Texas) as of May 31, 1999 and
1998, and the results of their operations for the quarters and the six month
periods then ended.
Effective January 1, 1999 the Corporation completed the first phase of a
reorganization of its U.S. operations. As of that date, most of the banking
subsidiaries in California, Florida, New Jersey and Illinois, and the Banco
Popular branches in New York were merged with and into one bank named Banco
Popular North America (BPNA). Also during the first quarter of 1999, First State
Bank of Southern California, The Bronson-Gore Bank in Prospect Heights, The
Irving Bank and Water Tower Bank, banking subsidiaries which were not part of
the initial phase of the reorganization effected on January 1, were merged with
and into BPNA. Banco Popular, National Association (Texas) is expected to be
merged into BPNA later during 1999 to complete the reorganization. The financial
information for 1998, presented below, was restated to reflect the
reorganization as if it had been consummated at the beginning of fiscal year
1998.
Popular, Inc. has not presented separate financial statements nor any other
disclosures concerning PNA, 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 are guaranteed by the
Corporation.
16
<PAGE> 17
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
<TABLE>
<CAPTION>
May 31,
-------
1999 1998
---------- ----------
<S> <C> <C>
Assets:
Cash $ 153,518 $ 152,274
Money market investments 24,590 25,978
Investment securities 386,079 420,357
Loans 4,967,803 3,871,675
Less: Unearned income 76,849 64,078
Allowance for loan losses 69,085 45,765
---------- ----------
4,821,869 3,761,832
Other assets 215,690 147,534
Intangible assets 143,164 93,551
---------- ----------
Total assets $5,744,910 $4,601,526
========== ==========
Liabilities and Stockholder's Equity:
Deposits $3,344,581 $2,826,136
Short-term borrowings 950,413 522,482
Notes payable 713,288 618,306
Other liabilities 76,146 64,338
Preferred beneficial interest in Popular North
America's junior subordinated deferrable
Interest debentures guaranteed by the
Corporation 150,000 150,000
Stockholder's equity 510,482 420,264
---------- ----------
Total liabilities and stockholder's equity $5,744,910 $4,601,526
========== ==========
</TABLE>
17
<PAGE> 18
POPULAR NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Quarter ended Six months ended
May 31, May 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income:
Interest and fees $112,968 $ 97,603 $220,821 $192,420
Other income 21,621 16,050 45,027 29,928
---------------------- ----------------------
Total income 134,589 113,653 265,848 222,348
---------------------- ----------------------
Expenses:
Interest expense 53,608 48,137 105,131 94,534
Provision for loan losses 11,016 8,138 20,611 18,549
Operating expenses 66,039 47,752 127,339 91,612
---------------------- ----------------------
Total expenses 130,663 104,027 253,081 204,695
---------------------- ----------------------
Income before income tax 3,926 9,626 12,767 17,653
Income tax 1,461 4,272 5,938 7,092
---------------------- ----------------------
Net income $ 2,465 $ 5,354 $ 6,829 $ 10,561
====================== ======================
</TABLE>
18
<PAGE> 19
TABLE A
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
AT JUNE 30, AVERAGE FOR THE SIX MONTHS
-------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS 1999 1998 Change 1999 1998 Change
(In thousands)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money market investments $ 791,285 $ 694,487 $ 96,798 $ 1,036,604 $ 732,328 $ 304,276
Investment and trading securities 7,441,280 6,278,074 1,163,206 7,547,411 6,283,034 1,264,377
Loans 13,887,392 11,753,213 2,134,179 13,452,576 11,541,256 1,911,320
Total assets 23,665,621 19,997,636 3,667,985 23,178,177 19,711,518 3,466,659
Deposits 13,902,387 12,102,594 1,799,793 13,697,877 12,001,807 1,696,070
Borrowings 7,680,936 5,950,082 1,730,854 7,340,492 5,878,283 1,462,209
Stockholders' equity 1,650,682 1,593,693 56,989 1,678,159 1,512,723 165,436
- --------------------------------------------------------------------------------------------------------------
SECOND QUARTER SIX MONTHS
-------------------------------------------------------------------
OPERATING HIGHLIGHTS 1999 1998 Change 1999 1998 Change
(In thousands, except per share
information)
- --------------------------------------------------------------------------------------------------------------
Net interest income $238,851 $214,392 $24,459 $475,089 $427,096 $47,993
Provision for loan losses 36,631 33,524 3,107 72,402 67,089 5,313
Fees and other income 86,926 72,886 14,040 173,984 140,837 33,147
Other expenses, net of minority 225,169 196,293 28,876 449,030 388,588 60,442
interest
Net income $ 63,977 $ 57,461 $ 6,516 $127,641 $112,256 $15,385
Net income applicable to common stock $ 61,890 $ 55,374 $ 6,516 $123,466 $108,081 $15,385
Earnings per common share 0.46 0.41 0.05 0.91 0.80 0.11
- --------------------------------------------------------------------------------------------------------------
SECOND QUARTER SIX MONTHS
---------------------------------------------
SELECTED STATISTICAL INFORMATION 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA- Market price
High $ 32.88 $ 36.16 $ 37.88 $ 36.16
Low 28.81 29.22 28.81 23.03
End 30.31 33.25 30.31 33.25
Book value at period end 11.51 11.02 11.51 11.02
Dividends declared 0.14 0.11 0.28 0.22
Dividend payout ratio 30.70% 26.90% 30.77% 27.56%
Price/earnings ratio 17.22x 21.18x 17.22x 21.18x
- --------------------------------------------------------------------------------------------------------------
PROFITABILITY RATIOS - Return on assets 1.08% 1.16% 1.11% 1.15%
Return on common equity 15.53 15.50 15.78 15.43
Net interest spread (taxable equivalent) 3.72 4.08 3.81 4.11
Net interest yield (taxable equivalent) 4.58 4.93 4.67 4.97
Effective tax rate 24.23 27.00 25.20 26.83
Overhead ratio 49.53 47.65 49.07 48.37
- --------------------------------------------------------------------------------------------------------------
CAPITALIZATION RATIOS - Equity to assets 7.18% 7.69% 7.24% 7.67%
Tangible equity to assets 6.13 6.63 6.16 6.60
Equity to loans 12.40 13.20 12.47 13.11
Internal capital generation 10.12 10.56 10.19 10.35
Tier I capital to risk-adjusted assets 10.37 12.35 10.37 12.35
Total capital to risk-adjusted assets 12.59 14.70 12.59 14.70
Leverage ratio 6.37 7.17 6.37 7.17
- --------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
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) and should be read in conjunction with the consolidated financial
statements, tables and notes included in this report. The Corporation is a
diversified bank holding company, which offers a wide range of products and
services through its subsidiaries and is engaged in the following businesses:
- Commercial Banking - Banco Popular de Puerto Rico (BPPR),
Banco Popular North America (BPNA), Banco Popular, National
Association (Texas) and Banco Fiduciario, S.A. (BF)
- Lease Financing - Popular Leasing and Rental, Inc. and Popular
Leasing, U.S.A.
- Mortgage and Consumer Finance - Popular Mortgage, Inc., Equity
One, Inc. and Popular Finance, Inc.
- Broker / dealer - Popular Securities Incorporated
- ATM Processing Services - ATH Costa Rica
- Retail Financial Services - Popular Cash Express, Inc.
NET INCOME
The Corporation reported net income of $64.0 million for the second quarter of
1999, compared with $57.5 million for the same quarter of 1998, an increase of
$6.5 million or 11.3%. Earnings per common share (EPS) for the second quarter of
1999 were $0.46, based on 135,491,324 average shares outstanding, or 12.2%
higher than $0.41 reported on the second quarter of 1998, based on 135,497,786
average shares outstanding. Net earnings for the first quarter of 1999 were
$63.7 million, or $0.45 per common share, based on 135,709,287 average shares
outstanding. Return on assets (ROA) and return on common equity (ROE) for the
quarter ended June 30, 1999 were 1.08% and 15.53%, respectively, compared with
1.16% and 15.50% for the same period in 1998 and 1.14% and 16.03% for the first
quarter of 1999.
The Corporation's results of operations for the quarter ended June 30, 1999,
when compared with the same quarter in 1998, reflected an increase of $24.5
million in net interest income coupled with an increase of $14.0 million in
other revenues. These improvements were partially offset by rises of $30.2
million in operating expenses and $3.1 million in the provision for loan losses.
For the first six months of 1999, the Corporation's net earnings rose to $127.6
million, compared with $112.3 million for the same period in 1998. EPS for the
first six months of 1999 were $0.91 compared with $0.80 for the same period of
1998. ROA and ROE for the period ended June 30,1999 were 1.11% and 15.78%
respectively, compared with 1.15% and 15.43% for the same period last year.
NET INTEREST INCOME
Net interest income for the second quarter of 1999 reached $238.9 million,
compared with $214.4 million reported in the same period of 1998 and $236.2
million for the first quarter of 1999. On a taxable equivalent basis, net
interest income increased to $258.2 million from $231.3 million reported in the
same quarter of 1998.
20
<PAGE> 21
The growth of $26.9 million in net interest income on a taxable equivalent basis
from the second quarter of 1998 resulted from a $40.6 million increase due to a
higher volume of earning assets, partially offset by a $13.7 million decrease
due to a lower net interest yield. For analytical purposes, the interest earned
on tax-exempt assets is adjusted to a taxable equivalent basis assuming the
applicable statutory income tax rates.
Table B summarizes the changes in the composition of average earning assets and
interest bearing liabilities, and their respective interest income and expense
and yields and costs, on a taxable equivalent basis, for the second quarter of
1999, as compared with the same quarter in 1998.
TABLE B
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT
BASIS
QUARTER ENDED ON JUNE 30,
<TABLE>
<CAPTION>
Variance
Average Volume Average Yields Interest attributed to
- ------------------------------------------------------- -----------------------------------------------
1999 1998 Variance 1999 1998 Variance 1999 1998 Variance Rate Volume
- ------------------------------------------------------- -----------------------------------------------
($ in millions) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,104 $ 764 $ 340 2.73% 4.84% (2.11%)Money market investments $ 7,501 $ 9,191 $(1,690) $(5,173) $ 3,483
7,403 6,127 1,276 6.65 7.06 (0.41) Investment securities 122,926 107,912 15,014 (6,595) 21,609
328 264 64 6.17 6.77 (0.60) Trading 5,041 4,445 596 (418) 1,014
- ------------------------------------------------------- -----------------------------------------------
8,835 7,155 1,680 6.14 6.81 (0.67) 135,468 121,548 13,920 (12,186) 26,106
- ------------------------------------------------------- -----------------------------------------------
Loans:
6,336 5,036 1,300 9.04 9.21 (0.17) Commercial 142,867 115,577 27,290 (2,054) 29,344
639 659 (20) 12.25 12.22 0.03 Leasing 19,559 20,137 (578) 46 (624)
3,515 2,902 613 8.04 8.66 (0.62) Mortgage 70,644 62,846 7,798 (4,760) 12,558
3,201 3,018 183 13.02 13.21 (0.19) Consumer 104,199 99,629 4,570 (2,311) 6,881
- ------------------------------------------------------- -----------------------------------------------
13,691 11,615 2,076 9.87 10.28 (0.41) 337,269 298,189 39,080 (9,079) 48,159
- ------------------------------------------------------- -----------------------------------------------
$22,526 $18,770 $3,756 8.40% 8.96% (0.56)% TOTAL EARNING ASSETS $472,737 $419,737 $53,000 $(21,265) $74,265
======================================================= ===============================================
Interest bearing
deposits:
$ 1,720 $ 1,466 $254 3.08% 3.37% (0.29)% NOW and money market $ 13,207 $ 12,321 $ 886 $(1,103) $ 1,989
4,116 3,745 371 2.93 3.09 (0.16) Savings 30,085 28,832 1,253 (1,971) 3,224
4,899 4,392 507 5.48 5.54 (0.06) Time deposits 66,856 60,623 6,233 192 6,041
- ------------------------------------------------------- -----------------------------------------------
10,735 9,603 1,132 4.12 4.25 (0.13) 110,148 101,776 8,372 (2,882) 11,254
- ------------------------------------------------------- -----------------------------------------------
6,030 4,306 1,724 4.87 5.43 (0.56) Short-term borrowings 73,137 58,329 14,808 (6,706) 21,514
1,626 1,579 47 7.71 7.20 0.51 Medium and long-term debt 31,265 28,366 2,899 2,059 840
- ------------------------------------------------------- -----------------------------------------------
18,391 15,488 2,903 4.68 4.88 (0.20) TOTAL INTEREST-BEARING 214,550 188,471 26,079 (7,529) 33,608
LIABILITIES
3,081 2,593 488 Demand deposits
1,054 689 365 Other sources of funds
- ------------------------------------------------------- -----------------------------------------------
$22,526 $18,770 $3,756 3.82% 4.03% (0.21)%
=======================================================
4.58% 4.93% (0.35)% NET INTEREST MARGIN
==========================
NET INTEREST INCOME 258,187 231,266 26,921 ($13,736) $40,657
===================
3.72% 4.08% (0.36)% NET INTEREST SPREAD
==========================
Taxable equivalent
adjustment 19,336 16,874 2,462
---------------------------
Net interest income $238,851 $214,392 $24,459
===========================
</TABLE>
Note: The changes that are not due solely to volume or rate are allocated to
volume and rate based on the proportion of the change in each category.
The increase of $3.8 billion in average earning assets was primarily related to
the increase in loans, which accounted for $2.1 billion of the total increase.
As seen in Table B, the commercial and mortgage portfolios reflected the major
growth, mostly due to the sustained business expansion of the Corporation and to
the acquisitions made by the Corporation in California, Illinois and the
Dominican Republic during the second half of 1998.
21
<PAGE> 22
The increase in average investment securities, when compared with the second
quarter of 1998, mostly relates to an attractive environment for investments and
arbitrage activities, which has driven the Corporation to invest in
mortgage-backed securities, which carry a higher return, and U.S. Government
agencies obligations. The income derived from the latter is exempt for income
tax purposes in Puerto Rico.
The average yield on earning assets, on a taxable equivalent basis, decreased 56
basis points from 8.96% for the second quarter of 1998 to 8.40% during the
second quarter of 1999. This decline resulted primarily from a lower yield on
loans, which decreased by 41 basis points, and to a higher proportion of
investment securities within the Corporation's earning assets, which carry a
lower yield. The reduction in the average yield on earning assets mostly
resulted from a lower interest rate scenario and a strong competitive
environment.
The increase in average interest bearing liabilities for the second quarter of
1999, as compared with the same quarter in 1998, was mostly reflected in average
short-term borrowings and interest bearing deposits, mainly certificates of
deposits. The increase in borrowings was used to finance the loan growth and the
expansion of the Corporation and was also due to arbitrage opportunities
undertaken during the quarter.
The increase in average interest bearing deposits partially relates to funds
that entered into the banking system in Puerto Rico during the latter part of
1998, attributed to payments by insurance companies and federal government
agencies for claims after hurricane Georges hit the island. The level of
deposits in Banco Popular de Puerto Rico has remained steady since then. Also,
the operations acquired during the second half of 1998, contributed with $484
million in interest bearing deposits at their respective acquisition dates.
The average cost of interest bearing liabilities decreased 20 basis points when
compared with the same quarter of 1998. The decrease is mostly attributed to the
lower interest rate scenario that prevailed during the first half of 1999 as
compared with the same period in 1998.
The decrease in the yield on earning assets, particularly in the loan portfolio,
together with a higher volume of investments funded with short-term borrowings
caused the net interest yield, on a taxable equivalent basis, to decrease 35
basis points this quarter compared with the second quarter of 1998.
For the six-month period ended June 30, 1999, net interest income, on a taxable
equivalent basis, increased $55.0 million, compared with the same period of
1998. The increase in the average volume of earning assets, partially offset by
an increase in the average volume of interest bearing liabilities, caused a
positive variance of $80.5 million, which was offset by a negative variance of
$25.5 million due to changes in rates and the mix of the portfolios.
As shown in Table C average earning assets increased by $3.5 billion for the
six-month period ended June 30, 1999, when compared with $18.6 billion reported
in the same period of 1998, of which 55% represented an increase in average
loans and 35% in investment securities. Average interest bearing liabilities
increased $2.7 billion when compared with the six-month period ended June 30,
1998. The continued growth of the Corporation and the aforementioned
acquisitions in the latter part of 1998, were responsible for this growth.
22
<PAGE> 23
TABLE C
ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS
YEAR-TO-DATE JUNE 30,
<TABLE>
<CAPTION>
Variance
Average Volume Average Yields Interest attributed to
- ----------------------------------------------------- -------------------------------------------------
1999 1998 Variance 1999 1998 Variance 1999 1998 Variance Rate Volume
- ----------------------------------------------------- -------------------------------------------------
($ in millions) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,037 $ 732 $ 305 3.00% 4.97% (1.97)% Money market investments $ 15,433 $ 18,052 $ (2,619) $ (8,929) $ 6,310
7,224 6,021 1,203 6.84 7.07 (0.23) Investment securities 246,274 211,455 34,819 (6,378) 41,197
323 262 61 6.34 6.79 (0.45) Trading 10,146 8,819 1,327 (624) 1,951
- --------------------------------------------------- -------------------------------------------------
8,584 7,015 1,569 6.36 6.83 (0.47) 271,853 238,326 33,527 (15,931) 49,458
- --------------------------------------------------- -------------------------------------------------
Loans:
6,226 4,988 1,238 9.08 9.28 (0.20) Commercial 280,418 229,616 50,802 (5,044) 55,846
630 624 6 12.67 12.63 0.04 Leasing 39,917 39,410 507 114 393
3,417 2,887 530 8.09 8.69 (0.60) Mortgage 138,122 125,434 12,688 (9,181) 21,869
3,180 3,043 137 13.03 13.10 (0.07) Consumer 206,528 198,667 7,861 (3,092) 10,953
- --------------------------------------------------- -------------------------------------------------
13,453 11,542 1,911 9.93 10.32 (0.39) 664,985 593,127 71,858 (17,203) 89,061
- --------------------------------------------------- -------------------------------------------------
$22,037 $18,557 $3,480 8.54% 9.00% (0.46)% TOTAL EARNING ASSETS $936,838 $831,453 $105,385 $(33,134) $138,519
=================================================== =================================================
Interest bearing deposits:
$ 1,697 $ 1,423 $ 274 3.12% 3.36% (0.24)% NOW and money market $ 26,243 $ 23,719 $ 2,524 $ (1,770) $ 4,294
4,139 3,693 446 2.91 3.08 (0.17) Savings 59,709 56,487 3,222 (3,680) 6,902
4,825 4,342 483 5.64 5.52 0.12 Time deposits 135,018 118,901 16,117 4,860 11,257
- --------------------------------------------------- -------------------------------------------------
10,661 9,458 1,203 4.18 4.25 (0.07) 220,970 199,107 21,863 (590) 22,453
- --------------------------------------------------- -------------------------------------------------
5,708 4,198 1,510 5.03 5.50 (0.47) Short-term borrowings 142,512 114,577 27,935 (9,271) 37,206
1,632 1,680 (48) 7.28 7.01 0.27 Medium and long-term debt 59,024 58,451 573 2,217 (1,644)
- --------------------------------------------------- --------------------------------------------------
18,001 15,336 2,665 4.73 4.89 (0.16) TOTAL INTEREST-BEARING 422,506 372,135 50,371 (7,644) 58,015
LIABILITIES
3,037 2,544 493 Demand deposits
999 677 322 Other sources of funds
- --------------------------------------------------- -------------------------------------------------
$22,037 $18,557 $3,480 3.87% 4.03% (0.16)%
===================================================
4.67% 4.97% (0.30)% NET INTEREST MARGIN
========================
NET INTEREST INCOME 514,332 459,318 55,014 $(25,490) $ 80,504
==================
3.81% 4.11% (0.30)% NET INTEREST SPREAD
========================
Taxable equivalent
adjustment 39,243 32,222 7,021
-----------------------------
Net interest income $475,089 $427,096 $ 47,993
=============================
</TABLE>
Note: The changes that are not due solely to volume or rate are allocated to
volume and rate based on the proportion of the change in each category.
===============================================================================
The decline in the yield on earning assets, on a taxable equivalent basis,
partially offset by a decline in the cost of interest bearing liabilities,
resulted in a lower net interest yield by 30 basis points to 4.67% reported for
the first six months of 1999. As previously explained, the decline in the net
interest margin was mostly the result of a lower interest rate scenario that
prevailed during the first six months of 1999 as compared to 1998 and the
arbitrage activities undertaken by the Corporation to take advantage of market
conditions.
23
<PAGE> 24
MARKET RISK
Market risk is the risk of economic loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates,
commodity prices, and other relevant market or price changes. The Corporation's
primary market risk exposure is that to interest rates, as primarily interest
rate volatility and its impact on the repricing of assets and liabilities
affect the net interest income. The Corporation maintains a formal asset and
liability management process to quantify, monitor and control interest rate
risk and to assist management in maintaining stability in the net interest
margin under varying interest rate environments.
The Corporation uses various techniques to assess the degree of interest rate
risk, including static gap analysis, simulation and duration analysis. Each
focuses on different aspects of the interest rate risk that is assumed at any
point in time, and are therefore used jointly to make informed judgements about
the risk levels and the appropriateness of strategies under consideration. An
interest rate sensitivity analysis, performed at the Corporation level, is the
primary tool used in expressing the potential loss in future earnings resulting
from selected hypothetical changes in interest rates.
Sensitivity is calculated on a monthly basis using a simulation model which
incorporates actual balance sheet figures detailed by maturity and interest
yields or costs, the expected balance sheet dynamics, reinvestments, and other
non-interest related data. Simulations are run using various interest rate
scenarios to determine potential changes to the future earnings of the
Corporation.
Computations of the prospective effects of hypothetical interest rate changes
are based on many assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay. They should not be relied upon as
indicative of actual results. Further, the computations do not contemplate
actions that management could take to respond to changes in interest rates. By
their nature, these forward-looking choices are only estimates and may be
different from what actually may occur in the future.
Based on the results of the sensitivity analysis as of June 30, 1999, the
change in net interest income on a hypothetical rising rate scenario for the
next twelve months was a $9.8 million increase and the change for the same
period utilizing a hypothetical declining rate scenario was a decrease of $6.5
million. Both hypothetical rate scenarios consider a gradual change of 150
basis points during the twelve-month period. These estimated changes are well
within the policy guidelines established by the Board.
In the course of its business, the Corporation occasionally enters into foreign
exchange transactions. These transactions are executed as an intermediary
primarily for its commercial and retail clients, and any foreign exchange
positions assumed by the Corporation as a result are offset in the currency
markets. Management therefore believes that the market risk assumed by the
Corporation in its foreign currency transactions is not significant.
The Corporation is the largest shareholder of BF, a commercial banking
institution in the Dominican Republic, with a 57% ownership interest. Most of
BF's business is conducted in Dominican `pesos' (DR$). Local (DR) regulations
limit the ability of BF to assume unhedged foreign currency positions. The
value of the Corporation's investment in BF may be affected prospectively by
fluctuations in future exchange rates between the DR$ and US$. However,
management does not expect future fluctuations between these two currencies to
affect materially the value of the Corporation's investment in BF.
24
<PAGE> 25
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses for the second quarter of 1999, increased $3.1
million or 9.3% when compared with the same period of 1998. For the six-month
period ended June 30, 1999 the provision totaled $72.4 million, an increase of
$5.3 million or 7.9% compared with the same period in 1998. The rise in the
provision for loan losses was due to the growth of $2.1 billion in the
Corporation's loan portfolio from June 30, 1998 to the same date this year, and
increases in non-performing assets and net charge-offs.
As shown in Table D, net charge-offs for the second quarter of 1999, increased
$4 million or 14.6% when compared with the same quarter of 1998. Net
charge-offs represented 0.91% of average loans for the quarter ended June 30,
1999, compared with 0.94% for the same period in 1998. The increase in net
charge-offs was principally the result of the growth in the loan portfolios.
Net losses for the quarter were principally in the commercial and consumer loan
portfolios. Commercial loans net charge-offs increased $2.5 million for the
quarter ended June 30, 1999, when compared with the same quarter of 1998.
Commercial loans net charge-offs, including construction loans, represented
0.51% of average commercial loans for the quarter ended June 30, 1999, compared
with 0.46% for the same quarter last year. This increase is mostly the result
of a $3 million charge-off of a commercial relationship in our New York banking
operations.
Consumer loans net charge-offs rose $1.0 million, representing 2.62% of average
consumer loans for the quarter ended June 30, 1999, compared with 2.65% for the
second quarter of 1998. The increase in consumer loans net charge-offs was
mostly related to the growth in the consumer loan portfolio.
Net charge-offs for the six-month period ended June 30, 1999, reached $57.1
million or 0.85% of average loans, compared with $54.7 million or 0.95% for the
same period of 1998. The increase in net credit losses was related to the
commercial loan portfolio, which reflected a rise of $4.9 million mostly due to
the aforementioned net charge-off in our New York banking operations. Partially
offsetting this increase was a reduction in consumer loans net charge-offs of
$3.2 million. The decrease in net charge-offs in the consumer loan portfolio
was principally the result of a decline in the delinquency levels and
bankruptcy filings for the six-month period ended June 30, 1999, when compared
to the same period last year.
The allowance for credit losses is maintained at a level considered appropriate
by management based on its estimate of losses inherent in the loan portfolio.
The methodology established for the evaluation of the adequacy of the allowance
for loan losses includes portfolio risk characteristics, prior loss experience,
results of periodic credit reviews, current and anticipated economic
conditions, as well as loan impairment measurement.
25
<PAGE> 26
TABLE D
ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $277,116 $217,708 $267,249 $211,651
Provision for loan losses 36,631 33,524 72,402 67,089
-------------------------------------------------------------------
313,747 251,232 339,651 278,740
-------------------------------------------------------------------
Losses charged to the allowance:
Commercial 14,026 9,558 25,322 19,549
Construction -- 65 500 190
Lease financing 5,795 4,954 11,641 11,139
Mortgage 910 789 1,853 1,281
Consumer 26,180 25,039 46,752 47,519
-------------------------------------------------------------------
46,911 40,405 86,068 79,678
-------------------------------------------------------------------
Recoveries:
Commercial 5,786 3,861 8,758 7,901
Construction 89 1 91 41
Lease financing 4,547 4,245 8,465 7,991
Mortgage 88 55 382 174
Consumer 5,244 5,056 11,311 8,876
-------------------------------------------------------------------
15,754 13,218 29,007 24,983
-------------------------------------------------------------------
Net loans charged-off (recovered):
Commercial 8,240 5,697 16,564 11,648
Construction (89) 64 409 149
Lease financing 1,248 709 3,176 3,148
Mortgage 822 734 1,471 1,107
Consumer 20,936 19,983 35,441 38,643
-------------------------------------------------------------------
31,157 27,187 57,061 54,695
-------------------------------------------------------------------
Balance at end of period $282,590 $224,045 $282,590 $224,045
===================================================================
Ratios:
Allowance for losses to loans 2.03% 1.91% 2.03% 1.91%
Allowance to non-performing assets 93.26 99.79 93.26 99.79
Allowance to non-performing loans 103.51 109.70 103.51 109.70
Non-performing assets to loans 2.18 1.91 2.18 1.91
Non-performing assets to total assets 1.28 1.12 1.28 1.12
Net charge-offs to average loans 0.91 0.94 0.85 0.95
Provision to net charge-offs 1.18x 1.23x 1.27x 1.23x
Net charge-offs earnings coverage 3.87 4.13 4.24 4.03
</TABLE>
26
<PAGE> 27
As shown in Table D, the allowance for loan losses at June 30, 1999, amounted to
$283 million, representing 2.03% of loans, compared with $224 million or 1.91%
at the same date last year, and $267 million or 2.04% at December 31, 1998. The
rise in the allowance coverage ratio when compared with the same date last year
was mainly the result of the inclusion of BF which has a higher ratio of
allowance to cover potential losses, as it is considered a higher risk
portfolio. Although the ratio of allowance to loans shows a slight decrease from
December 31, 1998, the Corporation allowance position is considered adequate
since a significant portion of the increase in loans has been attained in the
mortgage portfolio where the Corporation historically has not experienced
significant losses. Table D provides a summary of activity in the allowance for
losses and shows selected loan loss statistics for the quarters and the
six-month periods ended June 30, 1998 and 1999. Additional information regarding
the allowance and asset quality appears in the Credit Quality section.
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 homogeneous 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.
The following table shows the Corporation's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 (as
amended by SFAS No. 118) at June 30, 1999 and June 30, 1998.
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
(In millions)
<S> <C> <C> <C> <C>
Impaired loans:
Valuation allowance required $132 $ 30 $104 $ 28
No valuation allowance required 35 36
---- ---- ---- ----
Total impaired loans $167 $ 30 $140 $ 28
==== ==== ==== ====
</TABLE>
Average impaired loans during the second quarter of 1999 and 1998 were $170
million and $131 million, respectively. The Corporation recognized interest
income on impaired loans of $1.6 million, and $1.5 million, respectively, for
the quarters ended June 30, 1999 and 1998.
CREDIT QUALITY
Non-performing assets consist of past-due loans on which no interest income is
being accrued, renegotiated loans and other real estate. The Corporation's
policy is to place commercial loans on non-accrual status if payments of
27
<PAGE> 28
principal or interest are delinquent 60 days rather than the standard industry
practice of 90 days. Financing leases, conventional mortgages and close-end
consumer loans are placed on non-accrual status if payments are delinquent 90
days. Closed-end consumer loans are charged-off when payments are delinquent
120 days. Open-end (revolving credit) consumer loans are charged-off if
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, close-end consumer loans are charged-off
when delinquent 120 days, but are not customarily placed on non-accrual status
prior to being charged-off.
As shown in Table E, the rise in non-performing assets when compared with
amounts reported as of June 30, 1998, was reflected mostly in non-performing
commercial, consumer and mortgage loans which rose $36 million, $16 million and
$16 million, respectively, when compared with amounts reported as of June 30,
1998. Non-performing assets increased $7 million when compared to amounts
reported as of December 31, 1998. Non-performing assets as a percentage of
total loans amounted to 2.18% as of June 30, 1999, compared with 1.91% at the
same date in 1998 and 2.26% as of December 31, 1998.
TABLE E
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
1999 1998 1998
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Commercial, construction, industrial
and agricultural $152,233 $142,515 $115,767
Lease financing 3,053 4,937 2,665
Mortgage 70,264 68,527 54,523
Consumer 47,457 46,626 31,282
Renegotiated accruing loans 578
Other real estate 30,018 32,693 20,284
-----------------------------------------------
Total $303,025 $295,876 $224,521
===============================================
Accruing loans past-due
90 days or more $ 23,206 $ 24,426 $ 22,896
===============================================
Non-performing assets to loans 2.18% 2.26% 1.91%
Non-performing assets to assets 1.28 1.28 1.12
</TABLE>
28
<PAGE> 29
The increase of $79 million in non-performing assets from June 30, 1998, was
due in part to the inclusion of $34 million of non-performing assets of BF and
to other operations acquired in the second half of 1998. Those increases were
mainly the result of implementing the Corporation's more conservative
non-accrual policy. Non-performing commercial loans increased $36 million as
compared with June 30, 1998, after including $19 million of non-performing
commercial loans of BF. Also, the banking operations in Puerto Rico and the
U.S. Virgin Islands reflected an increase of $3 million, mostly as a result of
the continued growth in these portfolios. The banking operations in the U.S.
mainland reflected an increase of $14 million in non-performing commercial
loans mainly as a result of the aforementioned acquisitions. Non-performing
mortgage loans increased $16 million, principally due to a rise of $6 million
in non-performing mortgage loans at Equity One and $5 million in Puerto Rico
and the U.S. Virgin Islands. The non-performing consumer loan portfolio also
showed a rise, principally due to an increase of $4 million in Popular Finance
and the inclusion of $8 million in non-performing assets of BF. Due to the
higher risk nature of BF's loan portfolio, the non-performing loans of this
banking subsidiary have been substantially reserved at June 30, 1999.
At June 30, 1999, the allowance for loan losses as a percentage of
non-performing assets was 93.3% compared with 99.8% at June 30, 1998 and 90.3%
at December 31, 1998.
Assuming the standard industry practice of placing commercial loans on
non-accrual status when payments of principal and interest are past due 90 days
or more and excluding the closed-end consumer loans from non-accruing, the
Corporation's non-performing assets at June 30, 1999, would have been $222
million or 1.60% of loans, and the allowance for loan losses would have been
127.0% of non-performing assets. At June 30, 1998 and December 31, 1998,
adjusted non-performing assets would have been $166 million and $227 million,
respectively, or 1.41% and 1.73% of loans.
OTHER OPERATING INCOME
Other operating income, excluding securities and trading gains, amounted to
$87.2 million for the three-month period ended June 30, 1999, compared with
$68.5 million for the same period in 1998. As seen on Table F, the rise in
other income was principally driven by an increase of $10.9 million in other
service fees, $4.2 million in service charges on deposit accounts, and $3.6
million in other operating income. For the six-month periods ended June 30,
1999 and 1998, these revenues were $174.1 million and $134.9 million,
respectively.
Service charges on deposit accounts reflect higher activity on commercial and
retail accounts and a higher volume of deposits mostly resulting from the
Corporation's business expansion and acquisitions. Other service fees, which
represented 45.7% of non-interest income for the second quarter of 1999,
increased $10.9 million or 37.7% from the amount reported in 1998. This
increase is mostly attributed to the expansion of the Corporation's operations
in the U.S. due to the acquisitions made during the latter part of 1998, and
the growth in the credit card and retail financial businesses. As shown in
Table F, the increase in other service fees from the same quarter last year is
primarily attributed to the rise in check cashing and credit card fees and
discounts. The increase in the check cashing category is basically driven by
the expansion of the Corporation's retail financial services subsidiary, which
provides services such as check cashing, money transfers to other countries,
money order sales and processing of payments. This subsidiary operated 48
stores in four states plus 32 mobile units at the end of the second quarter of
1999, compared with 15 stores and no mobile units as of June 30, 1998. Credit
card net sales
29
<PAGE> 30
and the number of credit card active accounts rose 35.3% and 30.7%,
respectively, as compared with June 30,1998. For the six-month period ended
June 30, the credit card net sales increased 33.8% when compared to prior year.
The launching of the new Banco Popular American Express card in Puerto Rico in
August 1998, as well as the growth of the credit card business in the U.S.
mainland has been critical to this rise.
TABLE F
OTHER OPERATING INCOME
<TABLE>
<CAPTION>
Second Quarter Year-to-Date
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 Change 1999 1998 Change
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $29,731 $25,494 $ 4,237 $ 57,980 $ 50,832 $ 7,148
Other service fees:
Credit cards fees and discounts 12,105 8,742 3,363 23,004 16,809 6,195
Credit life insurance fees 1,483 2,184 (701) 3,655 4,250 (595)
Debit card fees 5,323 4,547 776 10,417 8,659 1,758
Sale and administration of investment
products 4,027 3,304 723 8,526 6,082 2,444
Mortgage servicing fees, net of
amortization 2,584 2,287 297 5,568 4,679 889
Trust fees 2,595 2,237 358 5,056 4,237 819
Check cashing fees 3,802 407 3,395 6,602 520 6,082
Other fees 7,772 5,110 2,662 14,772 9,755 5,017
------------------------------------------------------------------------------
Subtotal 39,691 28,818 10,873 77,600 54,991 22,609
Other income 17,800 14,214 3,586 38,531 29,116 9,415
------------------------------------------------------------------------------
Total $87,222 $68,526 $18,696 $174,111 $134,939 $39,172
==============================================================================
</TABLE>
Other fees increased $2.7 million mainly driven by the subsidiaries acquired
after the second quarter of 1998. The increase in debit card fees, which consist
primarily of rental income of point-of-sale (POS) terminals and interchange
income, mainly resulted from the sustained growth in the number of POS terminals
and the volume of transactions, which rose from a monthly average volume of 3.8
million in June 1998 to 4.9 million a year later. In addition, fees related to
the sale and administration of investment products increased, mostly as a result
of the issuance of mutual funds. Partially offsetting these increases, was a
decline in credit life insurance fees resulting from the enactment of a statute,
effective April 1999, that requires financial institutions in Puerto Rico to
reimburse the unearned portion of the credit life insurance fee collected if the
loan is prepaid.
The increase in other income mainly resulted from higher gains on sale of
mortgage loans, increased revenues from the daily rental business and fees
generated from the Corporation's joint venture in Puerto Rico's local telephone
company.
For the second quarter of 1999, the Corporation recognized a net gain of $0.3
million in the sale of securities and a net trading account loss of $0.6
million, compared with profits of $3.0 million and $1.3 million, respectively,
for the second quarter of 1998.
30
<PAGE> 31
OPERATING EXPENSES
Operating expenses for the second quarter of 1999 were $205.2 million compared
with $175.0 million for the same quarter in 1998, an increase of $30.2 million.
For the first six months of 1999, operating expenses rose to $407.1 million
from $347.4 million for the same period in 1998.
Personnel costs, the largest category of operating expenses, totaled $94.6
million for the second quarter of 1999, an increase of $12.0 million or 14.5%
when compared with the same period of 1998. Salaries accounted for the largest
portion of the increase in personnel costs rising $10.4 million. This rise
resulted from increased employment levels due to the Corporation's business
expansion and the acquisitions made after the second quarter of 1998, and
normal merit adjustments. Full-time equivalent employees (FTE) amounted to
10,777 at the end of this quarter, up 1,634 from 9,143 FTEs at the same date in
1998.
Other operating expenses, excluding personnel costs, increased $18.2 million,
reaching $110.6 million for the second quarter of 1999, compared with $92.4
million for the same period in 1998. This increase was reflected in professional
fees, which rose $3.5 million when compared with the same quarter last year,
mainly as a result of higher consulting fees, technical support fees and
conversion costs related to business expansion and the reorganization of the
U.S. operations. The increase of $3.3 million in business promotion is mainly
related to aggressive marketing efforts to expand the mortgage banking business
in Puerto Rico and to penetrate the Hispanic market in the U.S. Moreover,
equipment expenses rose $3.1 million, mostly due to the Corporation's
expenditures associated with new technology and system enhancements and the
business and geographic expansion. Since the end of the second quarter of 1998,
the Corporation increased its automated teller machine (ATM) network by 82 and
3,030 additional POS terminals were connected. The rise of $3.0 million in net
occupancy expense also reflected the Corporation's growth and expansion.
In spite of a higher income before tax, income tax expense decreased $0.9
million from $21.2 million in the second quarter of 1998, primarily as a result
of a higher volume of tax exempt income. The effective tax rate for the second
quarter of 1999 decreased to 24.2% from 27.0% for the same period in 1998. For
the six-month periods ended June 30, 1999 and 1998, income tax expense amounted
to $42.7 million and $41.2 million, respectively.
IMPACT OF THE YEAR 2000 ISSUE
The Corporation, under the direction of the Year 2000 Office, has been actively
engaged in modifying, converting, and testing its computer systems and
date-sensitive operating equipment. It is also working with customers and
business partners to ascertain their progress toward Year 2000 compliance.
Internal auditors of the Corporation have verified and validated the work done
in this important project, which has been classified as the top priority of the
Corporation for 1999. As of June 30, 1999, the project was substantially
completed as required by regulators.
A four phase action plan was used to drive the activities related with the
information technology components (in-house processed core applications; data
processing center computers, software and equipment; networks and communication
backbones; decentralized managed applications; personal computers with their
corresponding software) and date-sensitive operating equipment as explained
below:
ASSESSMENT - identification of the components that may be impacted
by the arrival of the new century. Determination of
resources needed, time frame and sequencing of the
Year 2000 efforts,
31
<PAGE> 32
RENOVATION - modification, conversion, replacement or elimination
of components not Year 2000 ready,
VALIDATION - testing and verification of the components by
simulating data conditions for the Year 2000,
IMPLEMENTATION - installation of renovated components into production.
INFORMATION TECHNOLOGY
As of June 30, 1999, the information technology action plan was 98% completed.
Following is a summarized report of actual results by phase, including both
mission critical and non-mission critical systems, and what is expected to be
achieved during the next quarter.
<TABLE>
<CAPTION>
Actual Projected
---------------- --------------------------
6/30/99 6/30/99 9/30/99
---------------- --------------------------
<S> <C> <C> <C>
Assessment 100% 100% --
Renovation 99% 100% --
Validation 98% 100% --%
Implementation 96% 99% 100%
</TABLE>
The expected completion dates are based on assumptions of future events
considering the continued availability of resources and the completion of work
by third parties. Even though the Corporation feels that as of June 30, 1999,
is substantially Year 2000 complaint, there is no guarantee that these
estimates will be achieved.
NON-INFORMATION TECHNOLOGY
The action plan of date-sensitive operating equipment, including specialized
banking equipment such as ATMs, statement rendering and check processing
machines, was 100% completed as of June 30, 1999.
Significant third parties with which the Corporation interfaces with regard to
the Year 2000 problem include customers and business partners (counterparties,
technology vendors, service providers, payment and clearing systems, utilities,
etc.). Unreadiness by these third parties would expose the Corporation to a
potential loss, through impairment of business processes and activities.
The Corporation has assessed and is monitoring the progress of customers in
their efforts to become Year 2000 compliant and the possible effects of their
inability to become Year 2000 compliant. Also, the Corporation has assessed and
is monitoring and testing the progress of its business partners and
counterparties to determine whether they will be able to successfully interact
with the Corporation in the Year 2000.
As of June 30, 1999, the processing service bureaus of the Corporation's
operations in the United States have certified 100% of the applications
presently used as Year 2000 complaint.
32
<PAGE> 33
OVERALL STATE OF READINESS
As indicated earlier, at June 30, 1999, the Year 2000 plan, including
information technology components, date-sensitive operating equipment,
customers and business partners was substantially completed as 98% of the tasks
had already been finished.
CONTINGENCY PLANS AND BUSINESS CONTINUITY
Even after thorough testing plans are executed, there is a possibility that
problems may arise in relation to all the changes made to systems and equipment
to ascertain they are ready for the Year 2000. Based on the current status of
the Year 2000 action plans, the Corporation's most reasonably likely worst case
scenario is that an unforeseen hardware or system failure might impair the
execution of one or more critical business processes during a limited period of
time. Business resumption plans are based on the assumption that the
Corporation will correct any hardware or software systems failure within five
working days.
The Corporation's strategy was to focus on the assessment, renovation,
validation, and implementation phases of its Year 2000 action plans so as to
limit errors, and therefore the need to implement business resumption plans.
Nevertheless, the Corporation has established company-wide business recovery
plans to support critical business processes in case of an unforeseen hardware
or software failure in the Year 2000. These business resumption plans include,
among other things, a business impact analysis, prioritization of business
processes, specific recovery strategies and alternative manual procedures for
critical business processes. All business resumption plans for critical
operations in Puerto Rico and the United States were completed and tested by
June 30,1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The principal costs of the Year 2000 project are those associated with the
renovation and validation phases. The major portion, however, was met from the
existing resources through the deferral of technology projects, with the
remainder representing incremental costs.
The Information Technology group was reinforced with additional programmers and
other skilled technical personnel to ascertain the availability of the
necessary resources. Other relevant incremental costs are the costs to contract
external consultants to manage the renovation and validation of certain
specific items and scheduled upgrades that were accelerated due to the Year
2000 issue. The Corporation is funding the project through operating cash
flows. The related incremental costs, and the impact of the technology
development initiatives being deferred were not material to the financial
condition and results of operations of 1998, nor it is anticipated to be for
1999.
Management estimates the total incremental costs of achieving Year 2000
compliance to be approximately $11.2 million over the two-year period ending in
December 31, 1999. Approximately $8.0 million had been incurred as of June 30,
1999, of which $2.9 million were incurred during the first six months of 1999.
Of the above total of $8.0 million, $3.4 million are related to consultants
contracted, $3.2 million for additional technical employees hired, $0.8 million
for new hardware and software acquired and $0.6 million related with costs to
contact customers, retain technical employees and other costs of the Year 2000
project.
Year 2000 costs are based on management's best estimates, which were derived
utilizing numerous assumptions of future events and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
costs could differ materially from those projected.
33
<PAGE> 34
BALANCE SHEET COMMENTS
Total assets as of June 30, 1999 were $23.7 billion compared with $20.0 billion
and $23.2 billion at June 30, 1998 and December 31,1998, respectively.
The investment portfolio reached $7.1 billion as of June 30, 1999 compared with
$7.2 billion as of December 31, 1998. The slight decline from the end of 1998
is mainly the result of a negative valuation allowance in the inventory of
available-for-sale securities due to market conditions. The investment
portfolio as of June 30, 1998 amounted to $6.0 billion. The increase from June
30, 1998 is mostly related to arbitrage opportunities undertaken by the
Corporation. Money market investments and trading account securities increased
$97 million and $70 million, respectively, when compared with June 30, 1998.
As shown in Table G, the loan portfolio increased $809 million as compared with
December 31, 1998 and $2.1 billion when compared with June 30, 1998. The
increase from June 30, 1998 was mostly related to the acquisitions in the U.S.
mainland and the Dominican Republic and the sustained growth in Puerto Rico,
particularly in the commercial loan portfolio. When compared with December 31,
1998, commercial loans contributed with $482 million to the growth in loans,
which resulted principally from the continued marketing efforts directed to the
retail and middle market, and the expansion in the United States. Despite the
loan securitization of $125 million at Equity One during the first quarter of
1999, the mortgage loan portfolio continued its growth, rising $234 million
from December 31, 1998, mostly due to significant mortgage loan origination and
refinancing activity as a result of a favorable interest rate environment and
increased marketing efforts. Consumer loans reflected an increase of $39
million from December 31, 1998, basically due to a rise in the credit card
portfolio mostly achieved through the issuance of the Banco Popular American
Express credit card in 1998, and marketing efforts both in Puerto Rico and the
U.S.
TABLE G
LOANS ENDING BALANCES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
1999 1998 1998
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Commercial, industrial and $ 6,128,351 $ 5,646,027 $ 4,811,921
Agricultural
Construction 293,845 257,786 251,264
Lease financing 663,146 645,280 629,588
Mortgage * 3,585,512 3,351,748 2,992,823
Consumer 3,216,538 3,177,954 3,067,617
-------------------------------------------------
Total $13,887,392 $13,078,795 $11,753,213
=================================================
</TABLE>
* Includes loans held-for-sale
Total deposits were $13.9 billion at June 30, 1999, an increase of $230 million
when compared with the $13.7 billion reported at December 31, 1998. Most of the
growth was realized in demand and savings deposits, which increased $102
million and $144 million, respectively, from December 31, 1998. At June 30,
1998 total deposits amounted to $12.1 billion.
34
<PAGE> 35
Borrowed funds, including subordinated notes and capital securities, amounted
to $7.7 billion at June 30, 1999, from $7.3 billion as of December 31, 1998 and
$6.0 billion at June 30, 1998. The increase in borrowed funds from December 31,
1998 was mainly used to finance loan growth and arbitrage activities. Also,
during the first six months of 1999 the Corporation issued $455 million in
medium-term notes under the shelf registration filed with the Securities and
Exchange Commission in 1997. These funds were used for payment of commercial
paper and medium-term notes that matured during this quarter.
As part of the investment in BF, the Corporation recognized a minority interest
of $20 million as of June 30, 1999, which represents the beneficial interest of
the minority investors of BF. At December 31, 1998, this minority interest
totaled $28 million. The decrease was mainly related to the increase in the
ownership interest of the Corporation from 45% at December 31, 1998 to 57% at
June 30, 1999.
The Corporation's stockholders' equity at June 30, 1999 was $1.65 billion
compared with $1.71 billion and $1.59 billion at December 31, 1998 and June 30,
1998, respectively. The decrease in the stockholders' equity since December 31,
1998, was mostly due to the reduction of $116 million in accumulated other
comprehensive income. Also, during the second quarter of 1999, the Corporation
repurchased a total of 1,089,700 shares of its common stock under the stock
repurchase program approved by its Board of Directors on May 8, 1997 for a cost
of $33 million. The Corporation may continue repurchasing its common stock if
market conditions so warrant.
The dividend payout ratio to common stockholders for the quarter ended June 30,
1999, was 30.70% compared with 26.90% for the same quarter last year and 28.42%
for the year ended December 31, 1998.
Under the regulatory framework for prompt corrective action, banks and bank
holding companies, which meet or exceed a Tier I ratio of 6%, a total capital
ratio of 10% and a leverage ratio of 5% are considered well capitalized. As
shown on Table H, the Corporation exceeds those regulatory risk-based capital
requirements, due to the high level of capital and the conservative nature of
the Corporation's assets.
The market value of the Corporation's common stock at June 30, 1999 was $30.31,
compared with $34.00 at December 31, 1998 and $33.25 at June 30, 1998. The
Corporation's market capitalization at June 30, 1999, was $4.1 billion compared
with $4.6 billion as of December 31, 1998 and $4.5 billion at June 30, 1998.
35
<PAGE> 36
TABLE H
CAPITAL ADEQUACY DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
June 30, December 31, June 30,
1999 1998 1998
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Risk-based capital
Tier I capital $ 1,481,761 $ 1,450,187 $ 1,407,738
Supplementary (Tier II) capital 316,608 310,091 268,501
-----------------------------------------------
Total capital $ 1,798,369 $ 1,760,278 $ 1,676,239
===============================================
Risk-weighted assets
Balance sheet items $13,773,374 $12,955,995 $11,146,081
Off-balance sheet items 512,093 443,926 253,461
-----------------------------------------------
Total risk-weighted assets $14,285,467 $13,399,921 $11,399,542
===============================================
Ratios:
Tier I capital (minimum required - 4.00%) 10.37% 10.82% 12.35%
Total capital (minimum required - 8.00%) 12.59 13.14 14.70
Leverage ratio (minimum required - 3.00%) 6.37 6.72 7.17
</TABLE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation is a defendant in a number of legal proceedings arising in the
normal course of business. Management believes, based on the opinion of legal
counsel, that the final disposition of these matters will not have a material
adverse effect on the Corporation's financial position or results of
operations.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Corporation held its Annual Stockholder's Meeting on April 27, 1999, at
which common stockholders elected the following seven directors: Juan J.
Bermudez, Francisco J. Carreras, Richard L. Carrion, David H. Chafey Jr.,
Antonio Luis Ferre, Alberto M. Paracchini and Felix J. Serralles Jr.
All seven directors were elected for a three year term with favorable votes
ranging from 87.16% to 88.34% of the voting shares issued and outstanding which
amounted to 135,709,287 as of the record date, March 8, 1999. An 88.43% of the
common shares issued an outstanding as of the mentioned record date, were
represented at the meeting, which complied with the quorum required by law.
36
<PAGE> 37
ITEM 5. OTHER INFORMATION
Effective July 1, 1999 the Corporation acquired GM Group. This company provides
electronic data processing and consulting services, sale and rental of
electronic data processing equipment, and selling and maintenance of computer
software to clients in Puerto Rico, as well as Venezuela and the Dominican
Republic. On August 3, 1999, the Corporation acquired 85% of the outstanding
stock of Levitt Mortgage, a mortgage origination company doing business in
Puerto Rico.
On August 4, 1999, a shelf registration filed by the Corporation with the
Securities and Exchange Commission became effective. This shelf registration
allows the Corporation to issue medium-term notes, debt securities and
preferred stock in an aggregate amount of up to $1.5 billion. These securities
are guaranteed by the Corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
a) Exhibit No. Exhibit Description Reference
---------- ------------------- ---------
<S> <C> <C>
19 Quarterly Report to Shareholders for the Exhibit "A"
period ended June 30, 1999
27 Financial Data Schedule (for SEC use only) Exhibit "B"
</TABLE>
<TABLE>
<CAPTION>
b) One report on Form 8-K was filed for the quarter ended June 30, 1999:
--------------------------------------------------------------------
<S> <C>
Dated: April 9, 1999
Items reported: Item 5 - Other Events
Item 7 - Financial Statements, Pro-Forma, Financial Information
and Exhibits
</TABLE>
37
<PAGE> 38
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 16, 1999 By:S/ Jorge A. Junquera
----------------------- --------------------
Jorge A. Junquera
Senior Executive Vice President
Date: August 16, 1999 By:S/ Amilcar L. Jordan
----------------------- --------------------
Amilcar L. Jordan, Esq.
Senior Vice President & Comptroller
38
<PAGE> 1
EXHIBIT 19
EXHIBIT A
TO OUR STOCKHOLDERS
For the second quarter of 1999, Popular, Inc. reported net income of $64.0
million, up $6.5 million or 11.3% from the $57.5 million reported for the same
quarter in 1998. For the first quarter of 1999, the Corporation reported net
income of $63.7 million. On a per common share basis, net income for the second
quarter of 1999 rose to $0.46 from $0.41 for the same period in 1998 and $0.45
for the first quarter of 1999.
The Corporation's return on assets (ROA) and return on common equity
(ROE) for the second quarter of 1999 amounted to 1.08% and 15.53%, respectively.
These profitability ratios compare with an ROA of 1.16% and ROE of 15.50%
attained during the second quarter of 1998. The ROA and ROE for the first
quarter of 1999 was 1.14% and 16.03%.
For the six-month period ended June 30, 1999, net income reached $127.6
million or $0.91 per common share, while the ROA and ROE were 1.11% and 15.78%,
respectively. These figures compare with a net income of $112.3 million and an
ROA of 1.15% and an ROE of 15.43% for the same period a year earlier.
Operating results for the quarter ended June 30, 1999, reflected a
$24.5 million increase in net interest income and a growth of $14.0 million in
other operating income when compared with the same quarter of 1998. These
increases were tempered by a rise in operating expenses of $30.2 million and a
$3.1 million increase in the provision for loan losses.
Net interest income for the second quarter of 1999 amounted to $238.9
million from $214.4 million for the same period a year earlier. This growth was
primarily due to an increase of $3.8 billion in average earning assets,
particularly a $2.1 billion growth in loans. The net interest yield, on a
taxable equivalent basis, decreased to 4.58% for the second quarter of 1999,
compared with 4.93% for the same period a year earlier, mainly as a result of a
higher volume of investment securities on which the net interest margin earned
by the Corporation is lower.
The provision for loan losses amounted to $36.6 million for the second
quarter of 1999, compared with $33.5 million for the same period a year earlier,
reflecting the growth in the loan portfolio, non-performing assets and net
charge-offs. Net charge-offs for the second quarter of 1999 were $31.2 million
or 0.91% of average loans, an increase over the $27.2 million or 0.94% of
average loans reported for the same period in 1998. For the six-month period
ended June 30, 1999, net charge-offs as a percentage of average loans decreased
to 0.85% from 0.95% for the same period last year.
Other operating income is a growing source of revenue for the
Corporation, representing 16.1% of total revenues in the second quarter of 1999,
an increase from 15.3% of total revenues for the same period in 1998. For the
second quarter of 1999, other operating income amounted to $86.9 million
compared with $72.9 million for the same period in 1998. This growth was driven
by an increase of $10.9 million in other service fees, particularly a rise of
$3.4 million in both check cashing fees and credit card fees and discounts. In
addition, service charges on deposit accounts rose $4.2 million while other
operating income increased $3.6 million.
Operating expenses amounted to $205.2 million for the second quarter of
1999, up from $175.0 million for the same period a year earlier. The rise of
$30.2 million in operating expenses for the quarter ended June 30, 1999, was led
by an increase of $12.0 million in personnel costs. This category rose primarily
as a result of the acquisitions completed during the second half of 1998, the
continued business expansion in the U.S. mainland as well as annual merit
increases. Professional fees, business promotion and equipment expenses also
rose reflecting the technical support and system conversion costs pertaining to
the U.S. reorganization together with increased spending on strategic business
initiatives and software packages.
Total assets at June 30, 1999, were $23.7 billion, compared with $20.0
billion at the same date in 1998 and $23.2 billion as of March 31, 1999. Loans
were $13.9 billion at June 30, 1999, an increase of 18.2% compared with $11.8
billion at the same date in 1998 and $13.5 billion at March 31, 1999.
At June 30, 1999, the allowance for loan losses was $283 million or
2.03% of loans, compared with $224 million or 1.91% at June 30, 1998, and $277
million or 2.06% at March 31, 1999. Non-performing assets (NPA) amounted to $302
million compared with $225 million at the same date last year and $299 million
at the end of the first quarter of 1999. The increase in NPA was led by a $34
million rise in non-performing assets of Banco Fiduciario, acquired on the third
quarter of 1998. In addition, the non-performing mortgage loans rose $14
million.
At June 30, 1999, total deposits were $13.9 billion, compared with
$12.1 billion at the same date in 1998, mainly as a result of an increased level
of core deposits, primarily savings and demand deposits. Total deposits amounted
to $13.6 billion at March 31, 1999. Borrowings increased to $7.7 billion at the
end of the second quarter of 1999, from $6.0 billion a year earlier.
Stockholders' equity totaled $1.7 billion at June 30, 1999, compared
with $1.6 billion a year earlier and $1.7 billion as of March 31, 1999. During
the second quarter of 1999, the Corporation repurchased a total of 1,089,700
shares of its common stock under the stock repurchase program approved by its
Board of Directors on May 8, 1997. The Corporation may continue repurchasing its
common stock if market conditions so warrant.
The Corporation's stock market value was $30.31 at the end of the
quarter, compared with $33.25 at June 30, 1998, and $30.88 at March 31, 1999.
The Corporation had a market capitalization of $4.1
<PAGE> 2
billion at June 30, 1999, based on 134,698,572 common shares outstanding.
The Annual Stockholders Meeting of Popular, Inc. was held on April 27, 1999. An
88.43% of the common shares issued and outstanding as of record date of March 8,
1999 were represented at the meeting, which complied with the quorum required by
law. All seven directors nominated for re-election were elected for a three-year
term. During the meeting, the 1998 Corporation's Annual Report was discussed and
approved.
We are very proud to announce that the Corporation has renovated and modified
its equipment, programs and computer systems in order to have them ready for the
year 2000 date change. We successfully completed validation tests to our
equipment and programs before the June 30, 1999, deadline. In addition, we have
established contingency plans that will ensure the continuity of our operations
in the event of any casualty.
On June 30, 1999, U.S. Vice President Al Gore and U.S. Treasury Secretary Robert
E. Rubin announced the final details of the Treasury's Electronic Transfer
Account (ETA), including the first six institutions that reached a preliminary
agreement to offer the ETA account. The ETA is a low-cost account that will
allow federal payment recipients to take advantage of Direct Deposit. Banco
Popular was chosen among these first six institutions, becoming the only
Hispanic bank in the United States and the only one in Puerto Rico to offer this
transfer account.
/s/ Richard L. Carrion
Richard L. Carrion
Chairman, President and Chief
Executive Officer
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At June 30, Average for the six months
-------------------------------------------- --------------------------------------------
BALANCE SHEET HIGHLIGHTS 1999 1998 Change 1999 1998 Change
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Money market investments $ 791,285 $ 694,487 $ 96,798 $ 1,036,604 $ 732,328 $ 304,276
Investment and trading securities 7,441,280 6,278,074 1,163,206 7,547,411 6,283,034 1,264,377
Loans 13,887,392 11,753,213 2,134,179 13,452,576 11,541,256 1,911,320
Total assets 23,665,621 19,997,636 3,667,985 23,178,177 19,711,518 3,466,659
Deposits 13,902,387 12,102,594 1,799,793 13,697,877 12,001,807 1,696,070
Borrowings 7,680,936 5,950,082 1,730,854 7,340,492 5,878,283 1,462,209
Stockholders' equity 1,650,682 1,593,693 56,989 1,678,159 1,512,723 165,436
</TABLE>
<TABLE>
<CAPTION>
Second quarter Six months
----------------------------------------- -----------------------------------------
OPERATING HIGHLIGHTS 1999 1998 Change 1999 1998 Change
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share
information)
Net interest income $238,851 $214,392 $24,459 $475,089 $427,096 $47,993
Provision for loan losses 36,631 33,524 3,107 72,402 67,089 5,313
Fees and other income 86,926 72,886 14,040 173,984 140,837 33,147
Other expenses, net of minority interest 225,169 196,293 28,876 449,030 388,588 60,442
Net income $ 63,977 $ 57,461 $ 6,516 $127,641 $112,256 $15,385
Net income applicable to common stock $ 61,890 $ 55,374 $ 6,516 $123,466 $108,081 $15,385
Earnings per common share 0.46 0.41 0.05 0.91 0.80 0.11
</TABLE>
<TABLE>
<CAPTION>
Second quarter Six months
----------------------- --------------------------
SELECTED STATISTICAL INFORMATION 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
COMMON STOCK DATA
Market price
High $ 32.88 $ 36.16 $ 37.88 $ 36.16
Low 28.81 29.22 28.81 23.03
End 30.31 33.25 30.31 33.25
Book value at period end 11.51 11.02 11.51 11.02
Dividends declared 0.14 0.11 0.28 0.22
Dividend payout ratio 30.70% 26.90% 30.77% 27.56%
Price/earnings ratio 17.22x 21.18x 17.22x 21.18x
------- ------- ------- -------
PROFITABILITY RATIOS
Return on assets 1.08% 1.16% 1.11% 1.15%
Return on common equity 15.53 15.50 15.78 15.43
Net interest spread (taxable equivalent) 3.72 4.08 3.81 4.11
Net interest yield (taxable equivalent) 4.58 4.93 4.67 4.97
Effective tax rate 24.23 27.00 25.20 26.83
Overhead ratio 49.53 47.65 49.07 48.37
------- ------- ------- -------
CAPITALIZATION RATIOS
Equity to assets 7.18% 7.69% 7.24% 7.67%
Tangible equity to assets 6.13 6.63 6.16 6.60
Equity to loans 12.40 13.20 12.47 13.11
Internal capital generation 10.12 10.56 10.19 10.35
Tier I capital to risk-adjusted assets 10.37 12.35 10.37 12.35
Total capital to risk-adjusted assets 12.59 14.70 12.59 14.70
Leverage ratio 6.37 7.17 6.37 7.17
------- ------- ------- -------
CREDIT QUALITY RATIOS
Allowance for losses to loans 2.03% 1.91% 2.03% 1.91%
Allowance to non-performing assets 93.62 99.79 93.62 99.79
Allowance to non-performing loans 103.96 109.70 103.96 109.70
Non-performing assets to loans 2.17 1.91 2.17 1.91
Non-performing assets to total assets 1.28 1.12 1.28 1.12
Net charge-offs to average loans 0.91 0.94 0.85 0.95
Provision to net charge-offs 1.18x 1.23x 1.27x 1.23x
Net charge-offs earnings coverage 3.87 4.13 4.24 4.03
</TABLE>
<PAGE> 4
ADDITIONAL INFORMATION
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
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.
J. Adalberto Roig Jr.
Felix J. Serralles Nevares
Julio E. Vizcarrondo Jr.
Samuel T. Cespedes, Secretary
* Director of Banco Popular de Puerto Rico 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 P. de Burckhart, Executive Vice President
Roberto R. Herencia, Executive Vice President
Larry B. 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
Shareholder Information
Shareholder Assistance: Shareholders requiring a change of address, records or
information about lost certificates, dividend checks or dividend reinvestment
should contact:
Banco Popular de Puerto Rico
Trust Division (725)
Popular Center Building
4th Floor Suite 400
209 Munoz Rivera Ave.
Hato Rey, Puerto Rico 00918
Publications: For printed material (annual and quarterly reports, 10-K and 10-Q
reports), contact Mr. Amilcar L. Jordan at the Comptroller's Division at
(787) 765-9800 ext. 6101, or visit our web site at http://www.popularinc.com.
Dividend Reinvestment Plan: The Corporation has a dividend reinvestment plan
that provides the shareholder a simple, convenient and cost-effective way to
acquire Popular, Inc. common stock.
- Dividends can be automatically reinvested in additional shares at 95%
of the Average Market Price.
- Participants may make optional cash payments of at least $25 and not
more than $10,000 per calendar month for investment in additional
shares.
- No brokerage commissions are charged on purchases under this plan.
- Participant's funds will be fully invested, because the plan permits
fractions of shares to be credited to a participant's account.
If you would like more information on this plan, please contact our Trust
Division at (787) 756-3908 or (787) 765-9800 exts. 5637, 5525 and 5897.
<PAGE> 5
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
June 30,
-------------------------------
Dollars in thousands 1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 567,143 $ 500,941
------------ ------------
Money market investments:
Federal funds sold and securities and mortgages purchased
under agreements to resell 715,618 650,881
Time deposits with other banks 74,986 42,779
Bankers' acceptances 681 827
------------ ------------
791,285 694,487
------------ ------------
Investment securities available-for-sale, at market value 6,804,004 5,795,668
Investment securities held-to-maturity, at cost 316,860 232,316
Trading account securities, at market value 320,416 250,090
Loans held-for-sale 603,643 338,566
------------ ------------
Loans 13,655,881 11,767,063
Less -- Unearned income 372,132 352,416
Allowance for loan losses 282,590 224,045
------------ ------------
13,001,159 11,190,602
------------ ------------
Premises and equipment 440,167 380,684
Other real estate 30,018 20,283
Customers' liabilities on acceptances 14,768 454
Accrued income receivable 160,146 128,897
Other assets 355,510 239,267
Intangible assets 260,502 225,381
------------ ------------
$ 23,665,621 $ 19,997,636
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing $ 3,278,464 $ 2,585,256
Interest bearing 10,623,923 9,517,338
------------ ------------
13,902,387 12,102,594
Federal funds purchased and securities sold
under agreements to repurchase 3,319,780 2,672,811
Other short-term borrowings 2,554,433 1,864,562
Notes payable 1,531,723 1,137,709
Acceptances outstanding 14,767 454
Other liabilities 396,605 350,813
------------ ------------
21,719,695 18,128,943
------------ ------------
Subordinated notes 125,000 125,000
------------ ------------
Preferred beneficial interests in Popular North America's
junior subordinated deferrable interest debentures
guaranteed by the Corporation 150,000 150,000
------------ ------------
Minority interest in consolidated subsidiary 20,244
------------ ------------
Stockholders' equity:
Preferred stock 100,000 100,000
Common stock 826,595 412,426
Surplus 220,559 604,983
Retained earnings 616,022 473,531
Treasury stock, at cost (72,524) (39,559)
Accumulated other comprehensive (loss) income, net of deferred taxes (39,970) 42,312
------------ ------------
1,650,682 1,593,693
------------ ------------
$ 23,665,621 $ 19,997,636
============ ============
</TABLE>
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
------------------------ ------------------------
Dollars in thousands, except per share information 1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 335,739 $296,476 $ 661,772 $589,693
Money market investments 7,500 9,192 15,433 18,018
Investment securities 105,411 93,177 210,845 183,436
Trading account securities 4,751 4,020 9,546 8,085
--------- -------- --------- --------
453,401 402,865 897,596 799,232
--------- -------- --------- --------
Interest Expense:
Deposits 110,147 101,777 220,970 199,108
Short-term borrowings 73,138 58,330 142,513 114,577
Long-term debt 31,265 28,366 59,024 58,451
--------- -------- --------- --------
214,550 188,473 422,507 372,136
--------- -------- --------- --------
Net interest income 238,851 214,392 475,089 427,096
Provision for loan losses 36,631 33,524 72,402 67,089
--------- -------- --------- --------
Net interest income after provision for loan losses 202,220 180,868 402,687 360,007
Service charges on deposit accounts 29,731 25,494 57,980 50,832
Other service fees 39,691 28,818 77,600 54,991
Gain on sale of securities 286 3,049 736 3,917
Trading account (loss) profit (582) 1,311 (863) 1,981
Other operating income 17,800 14,214 38,531 29,116
--------- -------- --------- --------
289,146 253,754 576,671 500,844
--------- -------- --------- --------
Operating Expenses:
Personnel costs:
Salaries 69,983 59,623 140,140 118,916
Profit sharing 6,084 6,264 12,403 11,947
Pension and other benefits 18,572 16,770 38,131 35,188
--------- -------- --------- --------
94,639 82,657 190,674 166,051
Net occupancy expenses 14,715 11,737 28,974 23,298
Equipment expenses 21,557 18,481 42,291 36,509
Other taxes 7,941 7,899 16,206 15,867
Professional fees 17,356 13,816 32,668 26,694
Communications 10,580 9,194 21,409 18,017
Business promotion 12,209 8,917 23,209 17,133
Printing and supplies 4,828 4,415 9,818 8,418
Other operating expenses 13,806 11,080 26,653 21,804
Amortization of intangibles 7,586 6,849 15,206 13,633
--------- -------- --------- --------
205,217 175,045 407,108 347,424
--------- -------- --------- --------
Net loss of minority interest 382 814
--------- -------- --------- --------
Income before income tax 84,311 78,709 170,377 153,420
Income tax 20,334 21,248 42,736 41,164
--------- -------- --------- --------
Net income $ 63,977 $ 57,461 $ 127,641 $112,256
========= ======== ========= ========
Net income applicable to common stock $ 61,890 $ 55,374 $ 123,466 $108,081
========= ======== ========= ========
Earnings per common share (basic and diluted) $ 0.46 $ 0.41 $ 0.91 $ 0.80
========= ======== ========= ========
</TABLE>
<PAGE> 7
SUBSIDIARIES
Central Office
Popular Center
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 765-9800
ATH Costa Rica
Cond. Ofiplaza del Este
Edif. D- Piso 1
San Pedro de la Rotonda
de la Bandera
150 metros Oeste
San Jose, Costa Rica
Telephone: (011) 506-280-9796
Banco Popular de Puerto Rico
Puerto Rico Office
Popular Center
209 Munoz Rivera Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 765-9800
Virgin Islands Office
193 Estate Altona & Welgunst
St. Thomas, Virgin Islands 00802
Telephone: (340) 693-2777
Banco Popular North America
4000 West North Avenue
Chicago, Illinois 60639
Telephone: (773) 772-8600
Banco Popular, N.A. (Texas)
9600 Long Point #300
Houston, Texas 77055
Telephone: (713) 463-2400
Equity One, Inc.
523 Fellowship Road, Suite 220
Mt. Laurel, New Jersey 08054
Telephone: (609) 273-1119
Metropolitana de Prestamos, Inc.
Road #2 Km. 6.8
Villa Caparra
Guaynabo, Puerto Rico 00966
Telephone: (787) 792-9292
Popular Finance, Inc.
10 Salud Street
El Senorial Condominium
Suite 613
Ponce, Puerto Rico 00731
Telephone: (787) 844-2860
Popular Mortgage, Inc.
268 Ponce de Leon Avenue
San Juan, Puerto Rico 00918
Telephone: (787) 753-0245
Popular Leasing & Rental, Inc.
M-1046 Federico Costa St.
Tres Monjitas Industrial
Development
San Juan, Puerto Rico 00903
Telephone: (787) 751-4848
Popular Securities Incorporated
Popular Center
Suite 1020
San Juan, Puerto Rico 00918
Telephone: (787) 766-4200
Popular Cash Express
6200 North Hiawatha
Suite 200
Chicago, Illinois 60646
Telephone: (773) 205-8300
Banco Fiduciario
27 de Febrero Ave. #50
Santo Domingo
Republica Dominicana
Telephone: (809) 473-9400
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF POPULAR, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 567,143
<INT-BEARING-DEPOSITS> 74,986
<FED-FUNDS-SOLD> 715,618
<TRADING-ASSETS> 320,416
<INVESTMENTS-HELD-FOR-SALE> 6,804,004
<INVESTMENTS-CARRYING> 316,860
<INVESTMENTS-MARKET> 310,389
<LOANS> 13,887,392
<ALLOWANCE> 282,590
<TOTAL-ASSETS> 23,665,621
<DEPOSITS> 13,902,387
<SHORT-TERM> 5,874,213
<LIABILITIES-OTHER> 416,849
<LONG-TERM> 1,806,723
0
100,000
<COMMON> 826,595
<OTHER-SE> 724,087
<TOTAL-LIABILITIES-AND-EQUITY> 23,665,621
<INTEREST-LOAN> 661,772
<INTEREST-INVEST> 210,845
<INTEREST-OTHER> 24,979
<INTEREST-TOTAL> 897,596
<INTEREST-DEPOSIT> 220,970
<INTEREST-EXPENSE> 422,507
<INTEREST-INCOME-NET> 475,089
<LOAN-LOSSES> 72,402
<SECURITIES-GAINS> 736
<EXPENSE-OTHER> 407,922
<INCOME-PRETAX> 170,377
<INCOME-PRE-EXTRAORDINARY> 127,641
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,641
<EPS-BASIC> 0.91
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.67
<LOANS-NON> 273,008
<LOANS-PAST> 23,206
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 149,651
<ALLOWANCE-OPEN> 267,249
<CHARGE-OFFS> 86,068
<RECOVERIES> 29,007
<ALLOWANCE-CLOSE> 282,590
<ALLOWANCE-DOMESTIC> 255,867
<ALLOWANCE-FOREIGN> 26,723
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
