-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BPqGj5dnLkODxiMDnLFpQ/Nne+NQmqglD+dTgUODm9KXOvcF+Q1u7VCadpdk9IxC 1hr2CAmJ6RerzRbDX5ZKtQ== 0000950144-99-006122.txt : 19990518 0000950144-99-006122.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950144-99-006122 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POPULAR INC CENTRAL INDEX KEY: 0000763901 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 660416582 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-61601 FILM NUMBER: 99624940 BUSINESS ADDRESS: STREET 1: 209 MUNOZ RIVERA AVE STREET 2: POPULAR CENTER BUILDING CITY: HATO REY STATE: PR ZIP: 00918 BUSINESS PHONE: 7877659800 MAIL ADDRESS: STREET 1: P.O. BOX 362708 CITY: SAN JUAN STATE: PR ZIP: 00936-2708 FORMER COMPANY: FORMER CONFORMED NAME: BANPONCE CORP DATE OF NAME CHANGE: 19920703 10-Q 1 POPULAR INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 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.)
Popular Center Building 209 Munoz Rivera Avenue, Hato Rey San Juan, Puerto Rico 00918 ---------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (787) 765-9800 ----------------- Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock $6.00 Par value 135,666,663 - ------------------------------------ --------------------------------------- (Title of Class) (Shares Outstanding as of May 14, 1999)
2 POPULAR, INC. INDEX
Part I - Financial Information Page - ------------------------------ ---- Item 1. Financial Statements Unaudited consolidated statements of condition - March 31, 1999, December 31, 1998 and March 31, 1998. 3 Unaudited consolidated statements of income - Quarter ended March 31, 1999 and 1998. 4 Unaudited consolidated statements of comprehensive income - Quarter ended March 31, 1999 and 1998. 5 Unaudited consolidated statements of cash flows - Quarter ended March 31, 1999 and 1998. 6 Notes to unaudited consolidated financial statements. 7-17 Item 2. Management's discussion and analysis of financial condition and results of operation. 18-31 Item 3. Quantitative and qualitative disclosures about market risk 21-22 Part II - Other Information - --------------------------- Item 1. Legal proceedings 32 Item 2. Changes in securities - None N/A Item 3. Defaults upon senior securities - None N/A Item 4. Submission of matters to a vote of security holders - None N/A Item 5. Other information 32 Item 6. Exhibits and reports on Form 8-K 32 --- Signature 33
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 3 POPULAR, INC. CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
MARCH 31, December 31, March 31, (In thousands) 1999 1998 1998 - ---------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 596,116 $ 667,707 $ 517,003 - ---------------------------------------------------------------------------------------------------------------- Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell 828,981 910,430 587,579 Time deposits with other banks 36,068 37,206 46,182 Banker's acceptances 563 262 696 - ---------------------------------------------------------------------------------------------------------------- 865,612 947,898 634,457 - ---------------------------------------------------------------------------------------------------------------- Investment securities available-for-sale, at 6,544,252 7,020,396 5,906,739 market value Investment securities held-to-maturity, at cost 484,958 226,134 416,773 Trading account securities, at market value 273,467 318,727 247,735 Loans held-for-sale 475,081 644,159 307,382 Loans 13,339,826 12,783,609 11,582,940 Less - Unearned income 356,662 348,973 347,153 Allowance for loan losses 277,116 267,249 217,708 - ---------------------------------------------------------------------------------------------------------------- Net loans 12,706,048 12,167,387 11,018,079 - ---------------------------------------------------------------------------------------------------------------- Premises and equipment 432,694 424,721 377,189 Other real estate 29,800 32,693 17,285 Customers' liabilities on acceptances 21,208 15,937 1,397 Accrued income receivable 161,258 156,314 132,092 Other assets 315,602 263,992 213,948 Intangible assets 267,979 274,292 228,141 - ---------------------------------------------------------------------------------------------------------------- $23,174,075 $23,160,357 $20,018,220 ================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 2,919,926 $ 3,176,309 $ 2,492,547 Interest bearing 10,656,746 10,495,905 9,513,253 - ---------------------------------------------------------------------------------------------------------------- 13,576,672 13,672,214 12,005,800 Federal funds purchased and securities sold under agreements to repurchase 3,651,208 4,076,500 2,959,925 Other short-term borrowings 1,954,489 1,639,082 1,567,346 Notes payable 1,521,093 1,307,160 1,304,268 Acceptances outstanding 21,208 15,937 1,397 Other liabilities 450,411 437,760 358,246 - ---------------------------------------------------------------------------------------------------------------- 21,175,081 21,148,653 18,196,982 - ---------------------------------------------------------------------------------------------------------------- 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 19,512 27,591 - ---------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 100,000 100,000 100,000 Common stock 826,121 825,690 412,238 Surplus 218,635 216,795 603,445 Retained earnings 573,068 530,481 433,062 Treasury stock-at cost (39,559) (39,559) (39,559) Accumulated other comprehensive income, net of deferred taxes of $8,812 (December 31, 1998 - $25,101; March 31, 1998 - $12,841 26,217 75,706 37,052 - ---------------------------------------------------------------------------------------------------------------- 1,704,482 1,709,113 1,546,238 - ---------------------------------------------------------------------------------------------------------------- $23,174,075 $23,160,357 $20,018,220 ================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 4 POPULAR, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended March 31, (Dollars in thousands, except per share information) 1999 1998 - ---------------------------------------------------------------------------------- INTEREST INCOME: Loans $326,033 $293,217 Money market investments 7,933 8,827 Investment securities 105,434 90,259 Trading account securities 4,795 4,065 - ---------------------------------------------------------------------------------- 444,195 396,368 - ---------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 110,823 97,330 Short-term borrowings 69,374 56,248 Long-term debt 27,759 30,086 - ---------------------------------------------------------------------------------- 207,956 183,664 - ---------------------------------------------------------------------------------- Net interest income 236,239 212,704 Provision for loan losses 35,771 33,565 - ---------------------------------------------------------------------------------- Net interest income after provision for loan losses 200,468 179,139 Service charges on deposit accounts 28,249 25,338 Other service fees 37,909 26,173 Gain on sale of securities 450 867 Trading account (loss) profit (282) 669 Other operating income 20,731 14,904 - ---------------------------------------------------------------------------------- 287,525 247,090 - ---------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 70,157 59,293 Profit sharing 6,320 5,683 Pension and other benefits 19,559 18,418 - ---------------------------------------------------------------------------------- 96,036 83,394 Net occupancy expense 14,258 11,561 Equipment expenses 20,734 18,028 Other taxes 8,265 7,968 Professional fees 15,312 12,878 Communications 10,829 8,824 Business promotion 11,000 8,216 Printing and supplies 4,990 4,003 Other operating expenses 12,847 10,724 Amortization of intangibles 7,620 6,784 - ---------------------------------------------------------------------------------- 201,891 172,380 - ---------------------------------------------------------------------------------- Net loss of minority interest 432 - ---------------------------------------------------------------------------------- Income before income tax 86,066 74,710 Income tax 22,402 19,915 - ---------------------------------------------------------------------------------- NET INCOME $ 63,664 $ 54,795 ================================================================================== NET INCOME APPLICABLE TO COMMON STOCK $ 61,577 $ 52,708 ================================================================================== EARNINGS PER COMMON SHARE (BASIC AND DILUTED) $ 0.45 $ 0.39 ==================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 5 POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Quarter ended March 31, (In thousands) 1999 1998 - --------------------------------------------------------------------------- Net Income $ 63,664 $54,795 - --------------------------------------------------------------------------- Other comprehensive income net of tax: Foreign currency translation adjustment (833) Unrealized (losses) gains on securities: Unrealized holding (losses) gains arising during the period (48,508) 4,311 Less: reclassification adjustment for gains included in net income, net of tax of $61 (1998 - $318) 148 605 - --------------------------------------------------------------------------- Total other comprehensive (loss) income $(49,489) $ 3,706 - --------------------------------------------------------------------------- Comprehensive income $ 14,175 $58,501 ===========================================================================
5 6 POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Quarters ended March 31, (In thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 63,664 $ 54,795 - ------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment 17,495 14,205 Provision for loan losses 35,771 33,565 Amortization of intangibles 7,620 6,784 Gain on sale of investment securities available-for-sale (450) (867) (Gain) loss on disposition of premises and equipment (20) 21 Gain on sale of loans (7,877) (4,974) Amortization of premiums and accretion of discounts on investments 670 712 Decrease (increase) in loans held-for-sale 169,077 (42,178) Amortization of deferred loan fees and costs (509) (196) Net decrease (increase) in trading securities 45,260 (25,433) Net increase in interest receivable (4,944) (13,416) Net (increase) decrease in other assets (46,951) 70,051 Net (decrease) increase in interest payable (16,020) 40 Net increase in current and deferred taxes 32,430 12,233 Net increase in postretirement benefit obligation 3,195 2,161 Net increase (decrease) in other liabilities 1,682 (35,092) - ------------------------------------------------------------------------------------------------------ Total adjustments 236,429 17,616 - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 300,093 72,411 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments 82,286 179,633 Purchases of investment securities held-to-maturity (1,120,189) (1,081,608) Maturities of investment securities held-to-maturity 1,050,510 373,475 Purchases of investment securities available-for-sale (2,056,570) (4,835,174) Maturities of investment securities available-for-sale 2,087,975 4,608,579 Sales of investment securities available-for-sale 194,301 264,482 Net disbursements on loans (887,509) (307,687) Proceeds from sale of loans 315,535 155,680 Acquisition of loan portfolios (2,275) (4,628) Acquisition of premises and equipment (28,253) (35,396) Proceeds from sale of premises and equipment 2,805 9,431 - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (361,384) (673,213) - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (decrease) increase in deposits (95,541) 216,625 Net deposits acquired 36,297 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (425,293) 236,596 Net increase in other short-term borrowings 315,407 279,911 Proceeds from issuance of notes payable 1,067,029 301,450 Payments of notes payable (853,097) (400,877) Dividends paid (21,077) (16,978) Proceeds from issuance of common stock 2,272 1,630 - ------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (10,300) 654,654 - ------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and due from banks (71,591) 53,852 Cash and due from banks at beginning of period 667,707 463,151 - ------------------------------------------------------------------------------------------------------ Cash and due from banks at end of period $ 596,116 $ 517,003 ======================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 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. The Corporation will adopt this statement effective January 1, 2000. Management estimates that the adoption of this statement will not have a material effect on the consolidated financial statements of the Corporation. 7 8 NOTE 3 - INVESTMENT SECURITIES The average maturities as of March 31, 1999, and market value for the following investment securities are: Investment securities available-for-sale:
March 31, --------- 1999 1998 ---- ---- Amortized Market Amortized Market Cost Value Cost Value ---------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 5 months) $2,456,707 $2,477,732 $3,479,951 $3,498,379 Obligations of other U.S. Government agencies and corporations (average maturity of 7 years and 10 months) 2,312,930 2,289,475 1,050,998 1,051,667 Obligations of Puerto Rico, States and political subdivisions (average maturity of 8 years and 7 months) 75,634 76,549 58,970 59,793 Collateralized mortgage obligations (average maturity of 21 years and 6 months) 1,140,210 1,142,019 831,877 831,826 Mortgage-backed securities (average maturity of 23 years and 1 month) 348,127 355,850 396,850 403,844 Equity securities (without contractual maturity) 122,000 150,483 34,360 57,362 Others (average maturity of 4 years and 2 months) 52,567 52,144 3,839 3,868 ---------------------------------------------------------- $6,508,175 $6,544,252 $5,856,845 $5,906,739 ==========================================================
Investment securities held-to-maturity:
March 31, --------- 1999 1998 ---- ---- Amortized Market Amortized Market Cost Value Cost Value ---------------------------------------------------- (In thousands) Obligations of other U.S. Government agencies and corporations (average maturity of 1 month) $154,966 $160,819 $125,129 $125,130 Obligations of Puerto Rico, States and political subdivisions (average maturity of 7 years and 4 months) 31,547 32,590 94,011 94,977 Collateralized mortgage obligations (average maturity of 11 years and 2 months) 25,999 26,109 52,879 52,981 Mortgage-backed securities (average maturity of 11 years and 8 months) 31,020 31,269 43,588 44,595 Equity securities (without contractual maturity) 88,312 88,312 76,264 76,264 Others (average maturity of 5 years and 7 months) 153,114 153,101 24,902 24,895 ---------------------------------------------------- $484,958 $492,200 $416,773 $418,842 ====================================================
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. 8 9 NOTE 4 - PLEDGED ASSETS Securities and insured mortgage loans of the Corporation of $4,738,716 (1998 - $4,329,480) 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 March 31, 1999, amounted to $15,664 and $78,234. 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 March 31, 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 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 I capital, are fully and unconditionally guaranteed by the Corporation, and are presented in the Consolidated Statements of Condition as "Guaranteed Preferred Beneficial Interest in Popular North America's Subordinated Debentures." The obligations of PNA under the Junior Subordinated Debentures and its guarantees of the obligations of BanPonce Trust I are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust I consisted of $154,640 of Junior Subordinated Debentures and a related accrued interest receivable of $1,073. 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 135,709,287 were issued and outstanding at March 31, 1999. As of March 31, 1999, a total of 1,977,600 common shares with a total cost of $39,559 were maintained as treasury stock. Authorized preferred stock is 10,000,000 shares without par value of which 4,000,000, non-cumulative with a dividend rate of 8.35% and a liquidation preference value of $25 per share, were issued and outstanding at March 31, 1999. Popular International Bank, Inc. (PIB) and Popular North America, Inc.'s (PNA) bank subsidiaries (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 $61,577 for the first quarter of 1999 (1998 - $52,708), after deducting the dividends on preferred stock. EPS are based on 135,709,287 average shares outstanding for the first quarter of 1999 (1998 - 135,435,096). 9 10 NOTE 9 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS During the quarter ended March 31, 1999, the Corporation paid interest and income taxes amounting to $233,369 and $3,636, respectively (1998 - $181,828 and $2,613). In addition, the loans receivable transferred to other real estate and other property for the quarter ended March 31, 1999, amounted to $3,147 and $5,057, respectively (1998 - $1,790 and $8,131). 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 first quarter of 1999 and 1998. 10 11
Mortgage and Commercial Consumer Lease banking Finance financing Other Eliminations Total - ----------------------------------------------------------------------------------------------------------------------------- (In thousands) March 31, 1999 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 202,243 $ 21,170 $ 10,696 $ 2,143 $ (13) $ 236,239 Provision for loan losses 27,036 6,106 2,629 0 0 35,771 Other income 57,929 13,909 5,050 11,567 (1,398) 87,057 Amortization expense 7,062 84 189 285 0 7,620 Depreciation expense 13,562 375 2,246 1,312 0 17,495 Other operating expense, net of minority interest 141,778 17,009 5,558 12,117 (118) 176,344 Income tax 16,250 4,246 1,937 294 (325) 22,402 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 54,484 $ 7,259 $ 3,187 $ (298) $ (968) $ 63,664 - ----------------------------------------------------------------------------------------------------------------------------- Segment Assets $19,812,764 $1,760,856 $695,302 $ 5,621,060 $(4,715,907) $23,174,075 - -----------------------------------------------------------------------------------------------------------------------------
Mortgage and Commercial Consumer Lease banking Finance financing Other Eliminations Total - ----------------------------------------------------------------------------------------------------------------------------- (In thousands) March 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income $ 182,838 $ 20,655 $ 10,161 $ (933) $ (17) $ 212,704 Provision for loan losses 25,535 5,151 2,879 0 0 33,565 Other income 51,947 6,513 4,814 4,738 (61) 67,951 Amortization expense 6,244 250 320 (30) 0 6,784 Depreciation expense 11,566 339 2,282 18 0 14,205 Other operating expense 130,535 12,612 5,368 2,998 (122) 151,391 Income tax 15,477 3,440 1,549 (568) 17 19,915 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 45,428 $ 5,376 $ 2,577 $ 1,387 $ 27 $ 54,795 - ----------------------------------------------------------------------------------------------------------------------------- Segment Assets $17,555,655 $1,556,456 $647,467 $ 3,998,271 $(3,739,629) $20,018,220 - -----------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
March 31, March 31, 1999 1998 - -------------------------------------------------------------------------- (In thousands) Revenues*: Puerto Rico $370,734 $343,315 United States 131,210 108,341 Other 29,308 12,663 - -------------------------------------------------------------------------- Total consolidated revenues $531,252 $464,319 - --------------------------------------------------------------------------
* 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. 11 12
MARCH 31, March 31, 1999 1998 - --------------------------------------------------------------------- (IN THOUSANDS) Selected Balance Sheet Information: Puerto Rico Total assets $16,693,266 $14,799,930 Loans 8,158,015 7,377,247 Deposits 9,427,049 8,631,686 United States Total assets $ 5,587,988 $ 4,635,153 Loans 4,674,741 3,763,801 Deposits 3,365,559 2,865,107 Other Total assets $ 892,821 $ 583,137 Loans 625,489 402,121 Deposits 784,064 509,007
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 February 28, 1999 and 1998, and the results of their operations for the quarters 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 that 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 statements for 1998, presented below, were 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. 12 13 POPULAR INTERNATIONAL BANK, INC. CONSOLIDATED STATEMENTS OF CONDITION (In thousands)
February 28, ------------ 1999 1998 ---- ---- Assets: Cash $ 215,652 $ 136,111 Money market investments 107,219 62,362 Investment securities 438,335 456,810 Loans 4,999,610 3,721,449 Less: Unearned income 70,632 56,763 Allowance for loan losses 94,300 46,741 -------------------------- 4,834,678 3,617,945 Other assets 294,701 142,603 Intangible assets 148,073 92,016 -------------------------- Total assets $6,038,658 $4,507,847 ========================== Liabilities and Stockholder's Equity: Deposits $3,657,803 $2,812,382 Short-term borrowings 716,484 425,403 Notes payable 862,820 648,173 Other liabilities 89,438 51,501 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 19,512 0 Stockholder's equity 542,601 420,388 -------------------------- Total liabilities and stockholder's equity $6,038,658 $4,507,847 ==========================
13 14 POPULAR INTERNATIONAL BANK, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands)
Quarter ended February 28, ------------- 1999 1998 -------- ------- Income: Interest and fees $122,534 $95,078 Other income 26,741 13,688 -------- ------- Total income 149,275 108,766 -------- ------- Expenses: Interest expense 63,462 46,619 Provision for loan losses 9,595 10,411 Operating expenses 68,425 44,046 -------- ------- Total expenses 141,482 101,076 -------- ------- Income before income tax 7,793 7,690 Income tax 4,120 2,820 -------- ------- Net income $ 3,673 $ 4,870 ======== =======
14 15 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 February 28, 1999 and 1998, and the results of their operations for the quarters 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 that 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 statements for 1998, presented below, were 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 and 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. 15 16 POPULAR NORTH AMERICA, INC. CONSOLIDATED STATEMENTS OF CONDITION (In thousands)
February 28, ------------ 1999 1998 ---------- ---------- Assets: Cash $ 160,111 $ 135,800 Money market investments 75,692 60,491 Investment securities 400,536 436,714 Loans 4,745,373 3,721,449 Less: Unearned income 70,632 56,763 Allowance for loan losses 69,578 46,741 ---------- ---------- 4,605,163 3,617,945 Other assets 205,578 139,591 Intangible assets 145,053 92,016 ---------- ---------- Total assets $5,592,133 $4,482,557 ========== ========== Liabilities and Stockholder's Equity: Deposits $3,365,559 $2,812,382 Short-term borrowings 683,306 405,203 Notes payable 823,274 648,173 Other liabilities 59,763 51,201 Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 Stockholder's equity 510,231 415,598 ---------- ---------- Total liabilities and stockholder's equity $5,592,133 $4,482,557 ========== ==========
16 17 POPULAR NORTH AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands)
Quarter ended February 28, ------------- 1999 1998 -------- ------- Income: Interest and fees $107,853 $ 94,817 Other income 23,406 13,878 -------- -------- Total income 131,259 108,695 -------- -------- Expenses: Interest expense 51,523 46,397 Provision for loan losses 9,595 10,411 Operating expenses 61,300 43,860 -------- -------- Total expenses 122,418 100,668 -------- -------- Income before income tax 8,841 8,027 Income tax 4,477 2,820 -------- -------- Net income $ 4,364 $ 5,207 ======== ========
17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE A FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------------------ AT MARCH 31, AVERAGE FOR THE QUARTER ------------------------------------------------------------------------------------------ BALANCE SHEET HIGHLIGHTS 1999 1998 Change 1999 1998 Change (In thousands) - -------------------------------------------------------------------------------------------------------------------------------- Money market investments $ 865,612 $ 634,457 $ 231,155 $ 968,845 $ 700,123 $ 268,722 Investment and trading securities 7,302,677 6,571,247 731,430 7,361,873 6,174,230 1,187,643 Loans 13,458,245 11,543,169 1,915,076 13,211,405 11,466,638 1,744,767 Total assets 23,174,075 20,018,220 3,155,855 22,695,779 19,485,912 3,209,867 Deposits 13,576,672 12,005,800 1,570,872 13,578,244 11,805,324 1,772,920 Borrowings 7,401,790 6,106,539 1,295,251 7,021,406 5,871,602 1,149,804 Stockholders' equity 1,704,482 1,546,238 158,244 1,659,015 1,492,184 166,831 - -------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER ----------------------------------- OPERATING HIGHLIGHTS 1999 1998 Change (In thousands, except per share information) - --------------------------------------------------------------------------------------- Net interest income $236,239 $212,704 $23,535 Provision for loan losses 35,771 33,565 2,206 Fees and other income 87,057 67,951 19,106 Other expenses, net of minority 223,861 192,295 31,566 interest Net income $ 63,664 $ 54,795 $ 8,869 Net income applicable to common $ 61,577 $ 52,708 $ 8,869 stock Earnings per common share 0.45 0.39 0.06
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FIRST QUARTER SELECTED STATISTICAL ---------------------- INFORMATION 1999 1998 - ---------------------------------------------------------------------- COMMON STOCK DATA- Market price High $ 37.88 $ 29.34 Low 30.88 23.03 End 30.88 29.34 Book value at period ended 11.82 10.68 Dividend declared 0.14 0.11 Dividend payout ratio 30.84% 28.25% Price/earnings ratio 18.06X 19.18x
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PROFITABILITY RATIOS- Return on assets 1.14% 1.14% Return on common equity 16.03 15.36 Net interest spread (taxable equivalent) 3.89 4.15 Net interest yield (taxable equivalent) 4.77 5.00 Effective tax rate 26.16 26.66 Overhead ratio 48.61 49.10
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CAPITALIZATION RATIOS- Equity to assets 7.31% 7.66% Tangible equity to assets 6.19 6.56 Equity to loans 12.56 13.01 Internal capital generation 10.27 10.14 Tier I capital to risk-adjusted assets 10.73 12.17 Total capital to risk-adjusted assets 12.98 14.54 Leverage ratio 6.69 7.11
- ------------------------------------------------------------------------------- NOTE: All common stock data has been adjusted to reflect the stock split effected in the form of a dividend on July 1, 1998. 18 19 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 Net income for the first quarter of 1999 was $63.7 million as compared with $54.8 million reported for the same quarter of 1998 and $62.5 million during the last quarter of 1998. Earnings per common share (EPS) for the first quarter of 1999 were $0.45, based on 135,709,287 average shares outstanding, or 15.4% higher than $0.39 for the first quarter of 1998, based on 135,435,096 average shares outstanding. EPS for the last quarter of 1998 were $0.44, based on 135,637,327 average shares outstanding. Return on assets (ROA) and return on common equity (ROE) for the quarter ended March 31, 1999 were 1.14% and 16.03%, respectively, compared with 1.14% and 15.36% for the same period in 1998 and 1.13% and 15.84% for the fourth quarter of 1998. The rise in the Corporation's net income for the first quarter of 1999, when compared with the same period a year ago, was driven by an increase of $23.5 million in net interest income and $19.1 million in other revenues. These increases were partially offset by rises of $29.5 million in operating expenses, $2.2 million in the provision for loan losses and $2.5 million in income taxes. 19 20 NET INTEREST INCOME Net interest income for the first quarter of 1999 grew to $236.2 million, compared with $212.7 million reported in the same period of 1998 and $230.9 million for the fourth quarter of 1998. On a taxable equivalent basis, net interest income increased to $256.1 million from $228.0 million reported for the first quarter of 1998. The increase of $28.1 million in net interest income on a taxable equivalent basis was driven by a $34.2 million increase attributable to a higher volume of earning assets, partially offset by a decrease of $6.1 million due to lower yields. 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 first quarter of 1999, as compared with the same quarter in 1998. The increase of $3.2 billion in average earning assets was primarily related to the increase in loans, which accounted for $1.7 billion of the total increase. As seen in Table B, the commercial and mortgage portfolios reflected the major growth, due to the sustained business expansion of the Corporation and greater marketing efforts, both in Puerto Rico and the U.S. mainland. Also the acquisitions made by the Corporation in California, Illinois and the Dominican Republic during the second half of 1998, accounted for part of the increase in average loans. Total loans at December 31, 1998, amounted to $13.1 million. The increase in investment securities, when compared with the first 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 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 to 8.68% for the first quarter of 1999, primarily due to a lower yield on loans by 36 basis points when compared with the first quarter in 1998, as a result of a lower interest rate scenario, a strong competitive environment and a higher proportion of investment securities within the Corporation's earning assets portfolio. The rise in average interest bearing liabilities for the quarter ended March 31, 1999, as compared with the same quarter in 1998, was mostly reflected in average short-term borrowings and interest bearing deposits, mainly savings and certificates of deposits. The rise in short-term borrowings was mostly related to investment and loan growth. The increase in deposits was partially attributed to funds that entered into the banking system in Puerto Rico as a result of payments by insurance companies and federal government agencies for claims after hurricane Georges hit the island in September 1998. Also, the operations acquired during the second half of 1998, had $484 million in interest bearing deposits at their respective acquisition dates. Interest bearing liabilities at December 31, 1998, amounted to $17.8 billion. 20 21 TABLE B ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS QUARTER ENDED ON MARCH 31,
Average Volume Average Yields - ------------------------------------------------------------- 1999 1998 Variance 1999 1998 Variance - ------------------------------------------------------------- $(in millions) $ 969 $ 700 $ 269 3.32% 5.11% (1.79)% Money market investments 7,044 5,914 1,130 7.05 7.06 (0.01) Investment securities 318 260 58 6.51 6.82 (0.31) Trading - ------------------------------------------------------------- 8,331 6,874 1,457 6.59 6.85 (0.26) - ------------------------------------------------------------- Loans: 6,113 4,939 1,174 9.13 9.37 (0.24) Commercial 621 589 32 13.10 13.10 -- Leasing 3,318 2,871 447 8.14 8.72 (0.58) Mortgage 3,159 3,068 91 13.02 12.99 (0.03) Consumer - ------------------------------------------------------------- 13,211 11,467 1,744 10.00 10.36 (0.36) - ------------------------------------------------------------- $21,542 $18,341 $ 3,201 8.68% 9.05% (0.37)% TOTAL EARNING ASSETS ============================================================= Interest bearing deposits: $ 1,673 $ 1,379 $ 294 3.16% 3.35% (0.19)% NOW and money market 4,104 3,641 463 2.93 3.08 (0.15) Savings 4,808 4,291 517 5.75 5.51 0.24 Time deposits - ------------------------------------------------------------- 10,585 9,311 1,274 4.25 4.24 0.01 - ------------------------------------------------------------- 5,383 4,090 1,293 5.23 5.58 (0.35) Short-term borrowings 1,639 1,781 (142) 6.85 6.83 0.02 Medium and long-term debt - ------------------------------------------------------------- 17,607 15,182 2,425 4.79 4.90 (0.11) TOTAL INTEREST-BEARING LIABILITIES 2,993 2,494 499 Demand deposits 942 665 277 Other sources of funds - ------------------------------------------------------------- $21,542 $18,341 $3,201 3.91% 4.05% (0.14)% ============================================================= 4.77% 5.00% (0.23)% NET INTEREST MARGIN AND ============================== NET INTEREST INCOME 3.89% 4.15% (0.26)% NET INTEREST SPREAD ============================== Taxable equivalent adjustment Net interest income Variance Interest Attributable to ------------------------------------------------------ 1999 1998 Variance Rate Volume ------------------------------------------------------ (in thousands) Money market investments $ 7,932 $ 8,826 $ (894) $ (3,709) $ 2,815 Investment securities 123,348 103,544 19,804 531 19,273 Trading 5,105 4,374 731 (206) 937 ------------------------------------------------------ 136,385 116,744 19,641 (3,384) 23,025 ------------------------------------------------------ Loans: Commercial 137,552 114,072 23,480 (3,018) 26,498 Leasing 20,357 19,273 1,084 -- 1,084 Mortgage 67,478 62,588 4,890 (4,387) 9,277 Consumer 102,329 99,038 3,291 (326) 3,617 ------------------------------------------------------ 327,716 294,971 32,745 (7,731) 40,476 ------------------------------------------------------ TOTAL EARNING ASSETS $464,101 $411,715 $ 52,386 $(11,115) $ 63,501 ====================================================== Interest bearing deposits: NOW and money market $ 13,036 $ 11,399 $ 1,637 $ (675) $ 2,312 Savings 29,626 27,654 1,972 (993) 2,965 Time deposits 68,161 58,277 9,884 (673) 10,557 ------------------------------------------------------ 110,823 97,330 13,493 (2,341) 15,834 ------------------------------------------------------ Short-term borrowings 69,374 56,247 13,127 (2,727) 15,854 Medium and long-term debt 27,759 30,086 (2,327) 12 (2,339) ------------------------------------------------------ TOTAL INTEREST-BEARING 207,956 183,663 24,293 (5,056) 29,349 LIABILITIES Demand deposits Other sources of funds ------------------------------------------------------ NET INTEREST MARGIN AND NET INTEREST INCOME 256,145 228,052 28,093 $ (6,059) $ 34,152 ==================== NET INTEREST SPREAD Taxable equivalent adjustment 19,906 15,348 4,558 ------------------------------ Net interest income $236,239 $212,704 $ 23,535 ==============================
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 average cost of interest bearing liabilities decreased 11 basis points when compared with the same quarter in 1998. The decrease is mostly attributed to the lower interest rate scenario that prevailed during the first three months of 1999 as compared with the same quarter of 1998. The decrease in the yield on earning assets, particularly in the loan portfolio, together with a higher volume of investment funded with short-term borrowings caused the net interest yield, on a taxable equivalent basis, to decrease 23 basis points this quarter compared with the first quarter of 1998. 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. 21 22 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 March 31, 1999, the change in net interest income on a hypothetical rising rate scenario for the next twelve months was a $63 thousand decrease and the change for the same period utilizing a hypothetical declining rate scenario was an increase of $1 million. Both hypothetical rate scenarios consider a gradual change of 150 basis points during the twelve-month period. These estimated changes are well within the policy guidelines established by the Board. In the course of its business, the Corporation occasionally enters into foreign exchange transactions. These transactions are executed as an intermediary primarily for its commercial and retail clients, and any foreign exchange positions assumed by the Corporation as a result are offset in the currency markets. Management therefore believes that the market risk assumed by the Corporation in its foreign currency transactions is not significant. The Corporation is the largest shareholder of BF, a commercial banking institution in the Dominican Republic, with a 57% ownership interest. Most of BF's business is conducted in Dominican `pesos' (DR$). 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. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses for the first quarter of 1999 was $35.8 million, exceeding by $2.2 million the amount recorded for the same period of 1998. During the fourth quarter of 1998 the provision amounted to $35.5 million. The elements considered for the increase in the provision for loan losses were the growth of $1.9 billion in the Corporation's loan portfolio from March 31, 1998 to the same date this year, an increase in non-performing assets and the Corporation's objective of strengthening its reserve level. 22 23 As shown in Table C, net charge-offs for the first quarter of 1999 amounted to $25.9 million, a decrease of $1.6 million or 5.8%, compared with $27.5 million recorded in the same period of 1998. Net charge-offs for the quarter ended December 31, 1998 totaled $30.6 million. Net charge-offs represented 0.78% of average loans for the quarter ended March 31, 1999, compared with 0.96% for the same period in 1998 and 0.95% for the year ended December 31, 1998. TABLE C ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
FIRST QUARTER (Dollars in thousands) 1999 1998 - --------------------------------------------------------------------- Balance at beginning of period $267,249 $211,651 Provision for loan losses 35,771 33,565 ----------------------- 303,020 245,216 ----------------------- Losses charged to the allowance: Commercial 11,296 9,991 Construction 500 125 Lease financing 5,846 6,185 Mortgage 943 492 Consumer 20,572 22,480 ----------------------- 39,157 39,273 ----------------------- Recoveries: Commercial 2,972 4,040 Construction 2 40 Lease financing 3,918 3,746 Mortgage 294 119 Consumer 6,067 3,820 ----------------------- 13,253 11,765 ----------------------- Net loans charged-off (recovered): Commercial 8,324 5,951 Construction 498 85 Lease financing 1,928 2,439 Mortgage 649 373 Consumer 14,505 18,660 ----------------------- 25,904 27,508 ----------------------- Balance at end of period $277,116 $217,708 ======================= Ratios: Allowance for losses to loans 2.06% 1.89% Allowance to non-performing assets 92.81 102.04 Allowance to non-performing loans 103.10 111.03 Non-performing assets to loans 2.22 1.85 Non-performing assets to total assets 1.29 1.07 Net charge-offs to average loans 0.78 0.96 Provision to net charge-offs 1.38X 1.22x Net charge-offs earnings coverage 4.70 3.94
As shown above, lower net losses were principally in the consumer and lease financing portfolios, indicative of general market trends as the number of bankruptcy filings has begun to decline during the beginning of 1999, after setting breaking record highs during 1998, and to higher recoveries resulting from continuous collection efforts. Consumer loans net charge-offs represented 1.84% of average consumer loans for the quarter ended March 31, 1999, compared with 2.43% for the same quarter last year. 23 24 On the other hand, commercial loans net charge-offs increased $2.4 million for the quarter ended March 31, 1999, when compared with the same quarter of 1998. Commercial loans net charge-offs, including construction loans, represented 0.58% of average commercial loans for the quarter ended March 31, 1999, compared with 0.49% for the same quarter last year. This increase is mostly related to the growth in the commercial loan portfolio experienced since March 31, 1998, as further explained in the Balance Sheet Comments section. 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. The allowance for loan losses increased to $277 million or 2.06% of loans at the end of March 31, 1999, compared with $218 million or 1.89% one year earlier, and $267 million or 2.04% at December 31, 1998. Besides the factors explained above for the increase in the provision for loan losses, the rise in the allowance coverage ratio was also 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. 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 recorded investment in impaired loans at March 31, 1999 was $173 million, an increase of $51 million from March 31, 1998. The related valuation allowance (as calculated under SFAS 114) on impaired loans at March 31, 1999, was $36.6 million compared with $22.3 million at the same date in 1998. Average impaired loans during the first quarter of 1999 and 1998 were $171 million and $122 million, respectively. The Corporation recognized interest income on impaired loans of $1.8 million and $1.2 million, respectively, for the quarters ended March 31, 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 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. Although the Corporation experienced decreases in net charge-off levels in the first quarter of 1999, non-performing assets as a percentage of total loans increased when compared with the same period in 1998. Non-performing assets as a percentage of total loans increased to 2.22% as of March 31, 1999, compared with 1.85% at the same date in 1998. Table D shows information on non-performing assets as of March 31, 1999, 24 25 December 31, 1998 and March 31, 1998. All loan categories reflected increases as compared with March 31, 1998. Compared with balances at December 31, 1998, only non-performing commercial and mortgage loans reflected increases of $5.8 million and $0.9 million, respectively. These increases were mostly related to the growth in the loan portfolios. TABLE D NON-PERFORMING ASSETS
- --------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, 1999 1998 1998 - --------------------------------------------------------------------------------------- (Dollars in thousands) Commercial, construction, industrial and agricultural $148,334 $142,515 $109,150 Lease financing 4,481 4,937 2,627 Mortgage 69,419 68,527 52,841 Consumer 46,555 46,626 31,463 Renegotiated accruing loans 578 Other real estate 29,800 32,693 17,285 ------------------------------------------ Total $298,589 $295,876 $213,366 ========================================== Accruing loans past-due 90 days or more $ 24,712 $ 24,426 $ 22,425 ========================================== Non-performing assets to loans 2.22% 2.26% 1.85% Non-performing assets to assets 1.29 1.28 1.07
The increase of $85.2 million in non-performing assets from March 31, 1998, was due in part to the inclusion of $33.5 million of non-performing assets of BF, acquired in the second half of 1998. Non-performing commercial loans increased $39.2 million as compared with March 31, 1998, after including $19.5 million of non-performing assets of BF. Also, the banking operation in Puerto Rico and the U.S. Virgin Islands reflected an increase of $13.5 million, mostly as a result of the growth in their loan portfolio. Non-performing mortgage loans increased $16.6 million, principally due to a rise of $5.0 million in non-performing mortgage loans at Equity One. Non-performing consumer loans increased $15.1 million, mostly as a result of the inclusion of $7.2 million of non-performing consumer loans of BF and the large volume of personal bankruptcy filings during 1998. Due to the higher risk nature of BF's loan portfolio, the non-performing assets of this banking subsidiary were substantially reserved at the end of 1998 and March 31, 1999. 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 March 31, 1999, would have been $226 million or 1.68% of loans, and the allowance for loan losses would have been 1.22% of non-performing assets. At March 31, 1998 and December 31, 1998, adjusted non-performing assets would have been $160 million and $227 million, respectively, or 1.39% and 1.73% of loans. OTHER OPERATING INCOME Total non-interest income, including securities and trading gains, amounted to $87.1 million for the first quarter of 1999, compared with $68.0 million for the same quarter in 1998, an increase of $19.1 million or 28.1%. This rise was driven by increases of $11.7 million in other service fees, $5.8 million in other operating income and $2.9 million in service charges on deposit accounts, partially offset by a decrease of $1.3 million in gain on sale of securities and trading account profit. 25 26 The increase in service charges on deposits accounts, compared with the first quarter of 1998, reflects higher transaction volume and account activity mainly driven by the acquisitions made after March 31, 1998, and the Corporation's growth. Other service fees rose to $37.9 million for the first quarter of 1999, from $26.2 million for the same quarter of the previous year. As shown in Table E, the increase in other service fees was mainly due to higher credit card fees and discounts, check cashing fees, debit card fees, and fees from the sale and administration of investment products. The increase in credit card fees and discounts was driven by the rise of 32.2% in credit card net sales and a growth of 25.8% in the number of credit card active accounts. The launching of the new Banco Popular American Express card in Puerto Rico in August 1998 was critical to this growth. Check cashing fees increased $2.1 million as a result of the expansion of the Corporation's retail financial services subsidiary, and debit card fees rose $1.3 million, reflecting the increasing trend of new merchants, point of sale (POS) terminals and transactions. There was a sustained growth in the number of activated debit cards and in the volume of transactions at point-of-sale (POS) terminals, which increased from a monthly volume of approximately 3.6 million in March 1998 to 4.6 million a year later. In addition, fees related to the sale and administration of investment products rose $1.7 million, mostly as a result of the issuance of a mutual fund during the first quarter of 1999, through the Corporation's broker/dealer subsidiary. Other operating income increased $5.8 million, from $14.9 million for the first quarter of 1998 to $20.7 million for the same period in 1999. This increase resulted mainly from a loan securitization of $125 million at Equity One, which resulted in a pre-tax gain of $3.2 million, and higher gains on sale of mortgage loans. During the first three months of 1999, the Corporation realized net gains on sale of securities and trading transactions amounting to $0.2 million, compared with gains of $1.5 million in the first quarter of 1998. The net gain in 1999 resulted from a $0.5 million gain on sale of securities, partially offset by a $0.3 million loss in the trading account. TABLE E OTHER OPERATING INCOME
First Quarter - ------------------------------------------------------------------------------------------------- 1999 1998 Change - ------------------------------------------------------------------------------------------------- (Dollars in thousands) Service charges on deposit accounts $28,249 $25,338 $2,911 Other service fees: Credit cards fees and discounts 12,136 8,067 4,069 Credit life insurance fees 2,173 2,066 107 Debit card fees 5,434 4,112 1,322 Sale and administration of investment Products 4,498 2,778 1,720 Mortgage servicing fees, net of Amortization 3,022 2,392 630 Trust fees 2,459 2,000 459 Check cashing fees 2,202 113 2,089 Other fees 5,985 4,645 1,340 ------------------------------------- Subtotal 37,909 26,173 11,736 ------------------------------------- Other income 20,731 14,904 5,827 ------------------------------------- Total $86,889 $66,415 $20,474 =====================================
26 27 OPERATING EXPENSES Operating expenses for the first quarter of 1999 were $201.9 million compared with $172.4 million for the same quarter in 1998, an increase of $29.5 million, principally reflecting higher personnel costs, business promotion, equipment expenses, net occupancy expenses and professional fees. Personnel costs, the largest category of operating expenses, totaled $96.0 million for the first three months of 1999, compared with $83.4 million for the same period in 1998, an increase of $12.6 million or 15.2%. Salaries accounted for the largest portion of the increase in personnel costs, rising $10.9 million or 18.3% when compared with $59.3 million in 1998. The increase in salaries is mostly related to the growth of the Corporation through the acquisitions performed in the U.S. mainland and the Dominican Republic during the second half of 1998, the expansion of its operations and annual merit increases. Full-time equivalent employees (FTE) amounted to 10,616 at the end of this quarter, up 1,654 from 8,962 FTEs at the same date in 1998. Pension and other benefits rose $1.1 million reflecting the impact of the increase in salaries, while profit sharing rose $0.6 million compared with the first quarter of 1998. Other operating expenses, excluding personnel costs, increased $16.9 million, reaching $105.9 million for the first quarter of 1999, compared with $89.0 million for the same period in 1998. The increase in other operating expenses was mostly in business promotion, which grew $2.8 million, mostly as a result of the institutional campaign in the continental U.S. and the promotional efforts related to the credit card program in the U.S. Also, there were expenses related to the new television and newspaper campaign of Popular Mortgage in Puerto Rico, after its merger with the mortgage origination department of BPPR during 1998. Equipment expenses rose $2.7 million mostly due to the investment needed to support the growth of the Corporation's business activity and geographical expansion, including costs related to the expansion of the electronic payment system and new technology. During the first quarter of 1999, the Corporation increased its automated teller machine (ATM) network by 89 and 2,241 additional POS terminals were connected in order to expand the electronic delivery capabilities, when compared with the same period in 1998. In addition, there were higher expenses related to equipment and software upgrades. Net occupancy expenses increased $2.7 million mostly as a result of the Corporation's growth and expansion. The increase in professional fees of $2.4 million mainly resulted from higher legal and consulting fees for business expansion. Income tax expense rose $2.5 million from $19.9 million in the first quarter of 1998, to $22.4 million in the same quarter this year, primarily as a result of the growth in pre-tax earnings. The effective tax rate for the first quarter of 1999 was 26.2% compared with 26.7% for the same period in 1998. 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 are verifying and validating the work done in this important project, which has been classified as the top priority of the Corporation for 1999. A four phase action plan is being used to drive the activities related with the information technology components (in-house processed core applications; data processing center computers, software and equipment; networks and communication backbones; decentralized managed applications; personal computers with their corresponding software) and date-sensitive operating equipment as explained below: 27 28 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, 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 March 31, 1999, the information technology action plan was 87% completed, which is in line with our 89% projection. 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 quarters.
Actual Projected ------------ ------------- ---------------- --------------- 3/31/99 3/31/99 6/30/99 9/30/99 ------------ ------------- ---------------- --------------- Assessment 99% 100% xxxxx xxxxxx Renovation 92% 95% 100% xxxxxx Validation 83% 85% 100% xxxxxx Implementation 78% 77% 99% 100%
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 its current state of readiness is adequate there is no guarantee that these estimates will be achieved. The renovation and validation phases of mission-critical systems (those that will have a significant adverse impact on the institution's operations and financial condition) were 99% and 90% completed, respectively, as of March 31, 1999. The validation phase of the mission critical systems is scheduled to be completed by June 30, 1999. 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 92% completed as of March 31, 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 already 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. For the Corporation's operations in the United States, which are highly dependable on processing service bureaus, several steps have been undertaken to reduce the exposure. Officers of the Corporation have an active participation in the client advisory board of the main business partner, which has contracted an external entity to conduct independent quarterly reviews of the Year 2000 action plan. Their progress is being monitored through the review of monthly reports and the detailed test plans that they use to accomplish the validation phase. 28 29 OVERALL STATE OF READINESS At March 31, 1999, the Year 2000 Plan, including information technology components, date-sensitive operating equipment, customers and business partners was 91% completed. The whole project will be substantially completed by June 30, 1999. CONTINGENCY PLANS AND BUSINESS CONTINUITY Even after thorough testing plans are executed, there is a possibility that problems may arise in relation to all the changes made to systems and equipment to ascertain they are ready for the Year 2000. Based on the current status of the Year 2000 action plans, the Corporation's most reasonably likely worst case scenario is that an unforeseen hardware or system failure might impair the execution of one or more critical business processes during a limited period of time. Business resumption plans are based on the assumption that the Corporation will correct any hardware or software systems failure within five working days. The Corporation's strategy is to focus on the assessment, 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. Most business resumption plans for critical operations in Puerto Rico and the United States were completed by December 31,1998. The first round of testing of the business resumption plans was completed for the Puerto Rico operations and most of Banco Popular's U.S. operations. The second round of tests is scheduled for the second quarter of 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, will be met from the existing resources through the deferral of technology projects, with the remainder representing incremental costs. The Information Technology group was reinforced with 55 additional programmers and other skilled technical personnel to ascertain the availability of the necessary resources. Other relevant incremental costs are the costs to contract external consultants to manage the 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 and does not anticipate that related incremental costs nor the impact of the technology development initiatives being deferred will be material to the financial condition and results of operations of any single year. Management estimates the total incremental costs of achieving Year 2000 compliance to be approximately $10.8 million over the two-year period ending in December 31, 1999. Approximately $6.0 million have been incurred at March 31, 1999, of which $0.8 million were incurred during the first quarter of 1999. Of the above total of $6.0 million, $2.9 million are related to consultants contracted, $2.5 million for additional technical employees hired, $0.3 million for new hardware and software acquired and $0.3 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. 29 30 BALANCE SHEET COMMENTS Total assets as of March 31, 1999 reached $23.2 billion compared with $20.0 billion reported as of the same date a year earlier. A significant portion of the growth relates to the acquisitions made in the second half of 1998, in California, Illinois and the Dominican Republic. Total assets at December 31, 1998, were $23.2 billion. Earning assets totaled $21.6 billion at March 31, 1999, compared with $21.6 billion at December 31, 1998 and $18.7 billion at March 31, 1998. The investment portfolio reached $7.0 billion as of March 31, 1999, a decrease of $217 million when compared with $7.2 billion as of December 31, 1998. Investment securities as of March 31, 1998 amounted to $6.3 billion. As shown in Table F, the loan portfolio increased $379 million as compared with December 31, 1998, of which $324 million were in commercial, industrial and agricultural loans. The mortgage loan portfolio increased $49 million from December 31, 1998, in spite of the loan securitization of $125 million at Equity One during this quarter. The growth in the commercial loan portfolio resulted principally from the continued marketing efforts directed to the retail and middle market and the sustained expansion in the United States. The mortgage loan portfolio continued rising, mostly due to the favorable low interest rate environment and increased marketing efforts. The increase in the loan portfolio compared with the same date last year, was mainly reflected in the commercial portfolio and the mortgage loan portfolio, which increased $1.2 billion and $509 million, respectively. This increase was related to the acquisitions in the U.S. mainland and the Dominican Republic and the sustained growth in Puerto Rico. TABLE F LOANS ENDING BALANCES
- ------------------------------------------------------------------------------------------------ MARCH 31, December 31, March 31, 1999 1998 1998 - ------------------------------------------------------------------------------------------------ (Dollars in thousands) Commercial, industrial and agricultural $5,970,388 $5,646,027 $4,739,551 Construction 285,796 257,786 260,232 Lease financing 638,693 645,280 593,493 Mortgage * 3,400,340 3,351,748 2,891,053 Consumer 3,163,028 3,177,954 3,058,840 ----------------------------------------------- Total $13,458,245 $13,078,795 $11,543,169 ===============================================
* Includes loans held-for-sale - ------------------------------------------------------------------------------- Total deposits were $13.6 billion at March 31, 1999, or $96 million lower than the $13.7 billion reported at December 31, 1998. At March 31, 1998 total deposits amounted to $12.0 billion. The decrease from December 31, 1998, was mostly related to the fact that during the last quarter of 1998, a large amount of funds entered into the banking system in Puerto Rico because of payments made by insurance companies and federal government agencies for claims after hurricane Georges hit the island on September 1998. The increase in total deposits compared with March 31, 1998, was the result of the acquisitions made in 1998, the Corporation's continued growth and the aforementioned funds that entered into the banking system in Puerto Rico in the latter part of 1998. 30 31 Note 10 to the unaudited consolidated financial statements presents the distribution of assets, loans and deposits by geographical area at March 31, 1998 and 1999. Borrowed funds, including subordinated notes and capital securities, amounted to $7.4 billion at March 31, 1999, from $7.3 billion as of December 31, 1998 and $6.1 billion at March 31, 1998. The increase in borrowed funds from December 31, 1998 was mainly used to finance loan growth and arbitrage activities. Also, during this quarter the Corporation issued $255 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 $19.5 million as of March 31, 1999, which represents the beneficial interest of the minority investors of BF. At December 31, 1998, this minority interest totaled $27.6 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 March 31, 1999. The Corporation's stockholders' equity at March 31, 1999 and December 31, 1998 was $1.70 billion and $1.71 billion, respectively, compared with $1.5 billion at March 31, 1998. The small decrease since December 31, 1998, was the result of a reduction of $49.5 million in the accumulated other comprehensive income. The dividend payout ratio to common stockholders for the quarter ended March 31, 1999, was 30.84% compared with 28.25% 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 G, the Corporation exceeds those regulatory risk-based capital requirements by wide margins, due to the high level of capital and the conservative nature of the Corporation's assets. The market value of the Corporation's common stock at March 31, 1999 was $30.88, compared with $34.00 at December 31, 1998 and $29.34 at March 31, 1998, after restating for the stock split effected in the form of a dividend. The Corporation's market capitalization at March 31, 1999, was $4.2 billion compared with $4.6 billion as of December 31, 1998 and $4.0 billion at March 31, 1998. TABLE G CAPITAL ADEQUACY DATA
- ----------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, 1999 1998 1998 - ----------------------------------------------------------------------------------------------------- (Dollars in thousands) Risk-based capital Tier I capital $ 1,492,924 $ 1,450,187 $ 1,365,418 Supplementary (Tier II) capital 313,078 310,091 266,222 --------------------------------------------------- Total capital $ 1,806,002 $ 1,760,278 $ 1,631,640 =================================================== Risk-weighted assets Balance sheet items $13,490,781 $12,955,995 $10,925,383 Off-balance sheet items 428,202 443,926 295,845 --------------------------------------------------- Total risk-weighted assets $13,918,983 $13,399,921 $11,221,228 =================================================== Ratios: Tier I capital (minimum required - 4.00%) 10.73% 10.82% 12.17% Total capital (minimum required - 8.00%) 12.98 13.14 14.54 Leverage ratio (minimum required - 3.00%) 6.69 6.72 7.11
31 32 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. ITEM 5. OTHER INFORMATION During this quarter, the Corporation announced its plan to acquire 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. With this acquisition, the Corporation will continue making progress towards its strategic initiative of expanding its electronic capabilities and diversifying its sources of revenues. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit No. Exhibit Description Reference ----------- ------------------- --------- 19 Quarterly Report to Shareholders for the Exhibit "A" period ended March 31, 1999 27 Financial Data Schedule (for SEC use only) Exhibit "B" b) One report on Form 8-K was filed for the quarter ended March 31, 1999: Dated: January 11, 1999 Items reported: Item 5 - Other Events Item 7 - Financial Statements, Pro-Forma, Financial Information and Exhibits
32 33 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: May 14, 1999 By: S/ Jorge A. Junquera ----------------------- ---------------------- Jorge A. Junquera Senior Executive Vice President Date: May 14, 1999 By: S/ Amilcar L. Jordan ----------------------- --------------------- Amilcar L. Jordan, Esq. Senior Vice President & Comptroller 33 EX-19 2 QUARTERLY REPORT 1 EXHIBIT 19 TO OUR STOCKHOLDERS Nineteen ninety nine will be a year full of challenges for financial institutions and businesses in general. For Popular, Inc. these challenges include finalizing the modifications to the computer systems in order to have them ready for the Year 2000, completing the integration of the U.S. operations and diversifying our financial services to provide more quality service and alternatives to our clients. Besides focusing on these challenges, during the first quarter of 1999, the Corporation continued reflecting strong financial performance. Net income rose to $63.7 million for an increase of $8.9 million or 16.2% from $54.8 million in the same quarter of 1998. For the last quarter of 1998, the Corporation reported net income of $62.5 million. On a per common share basis, net income for the first quarter of 1999 rose to $0.45 from $0.39 for the same period in 1998 and $0.44 for the last quarter of 1998. The Corporation's return on assets (ROA) for the first quarter of 1999 amounted to 1.14%, the same as in the first quarter of 1998. The return on common equity (ROE) for the quarter ended March 31, 1999, increased to 16.03% from 15.36% for the same period a year earlier. For the fourth quarter of 1998, the Corporation attained ROA and ROE of 1.13% and 15.84%, respectively. Earnings for the first quarter of 1999, as compared with the same quarter in 1998, reflected a $23.5 million increase in net interest income as well as a $19.1 million rise in other operating income. These increases were tempered, in part, by an increase in operating expenses of $29.5 million, a higher provision for loan losses of $2.2 million and a rise of $2.5 million in income taxes. The improvement of $23.5 million in net interest income resulted from a growth of $3.2 billion in average earning assets, primarily as a result of a $1.7 billion increase in average loans. The net interest yield, on a taxable equivalent basis, amounted to 4.77% for the first quarter of 1999, compared with 5.00% for the same period a year earlier. The provision for loan losses amounted to $35.8 million for the first quarter of 1999, from $33.6 million in the same period of 1998, reflecting the growth in the loan portfolio and non-performing assets. Net charge-offs for the quarter ended March 31, 1999, amounted to $25.9 million as compared with $27.5 million for the same quarter in 1998, and $30.6 million for the fourth quarter of 1998. Our investment in new sources of revenues continued showing good results as all major categories of other income reflected improvements. This growth was fueled by increases of $4.1 million in credit card fees and discounts, $2.9 million in service charges on deposit accounts, $2.1 million in check cashing fees and $1.7 million in the sale and administration of investment products. In addition, the Corporation reflected an increase of $5.8 million in other income mainly resulting from a $3.2 million gain recorded at Equity One on a $125 million loan securitization. Operating expenses amounted to $201.9 million for the first quarter of 1999, up from $172.4 million for the same period a year earlier. The rise of $29.5 million in operating expenses for the three-month period ended March 31, 1999, was principally attributed to an increase in personnel costs. This category rose $12.6 million reflecting the salaries and benefits of the operations acquired during the second half of 1998 as well as annual merit increases. In addition, business promotion and equipment expenses both rose as a result of the Corporation's business expansion, particularly in the U.S. mainland, and investment in new technology. Total assets at March 31, 1999, were $23.2 billion, up $3.2 billion or 15.8% from $20.0 billion a year earlier. Loans were $13.5 billion at March 31, 1999, an increase of 16.6% compared with $11.5 billion at the same date in 1998 and $13.1 billion at December 31, 1998. Loan growth was mostly led by increases of $1.3 billion and $0.5 billion in the commercial and mortgage loan portfolios, respectively, when compared with the amounts reported as of March 31, 1998. At March 31, 1999, the allowance for loan losses was $277 million or 2.06 % of loans, compared with $218 million or 1.89% at March 31,1998, and $267 million or 2.04% at December 31, 1998. Non-performing assets (NPA) amounted to $298 million compared with $213 million at the same date last year and $296 million at the end of 1998. The increase in NPA was primarily due to the non-performing assets of Banco Fiduciario, acquired on the third quarter of 1998, which amounted to $33 million at March 31, 1999, and to the growth in the loan portfolio. 2 At March 31, 1999, total deposits were $13.6 billion compared with $12.0 billion at the same date in 1998, principally as a result of a $712 million increase in savings accounts. Total deposits amounted to $13.7 billion at December 31, 1998. In addition to the deposits of the acquired operations, the rise in deposits from March 31, 1998 was partially related to funds that entered into the banking system in Puerto Rico because of payments made by insurance companies and federal government agencies for claims after hurricane Georges hit the island in September 1998. Borrowings increased to $7.4 billion at the end of the first quarter of 1999, from $6.1 billion a year earlier. Stockholders' equity totaled $1.7 billion at March 31,1999, compared with $1.5 billion a year earlier and $1.7 billion as of December 31, 1998. Book value per common share was $11.82 as of March 31, 1999, compared with $10.68 as of the same date last year and $11.86 at the end of 1998. The Corporation's stock market value was $30.88 at the end of the quarter, compared with $29.34 at March 31, 1998 and $34.00 at December 31, 1998. The Corporation had a market capitalization of $4.2 billion at March 31, 1999, based on 135,709,287 common shares outstanding. Focusing on achieving a common platform in the United States from a legal, regulatory and operational perspective, on January 1, 1999 the Corporation substantially completed the previously mentioned reorganization of its U.S. operations by consolidating the banking subsidiaries in California, Florida, New Jersey and Illinois, and Banco Popular branches in New York into one bank named Banco Popular North America. Banco Popular, N.A. (Texas) is expected to become part of Banco Popular North America later during 1999. As the year 2000 approaches, we continue making progress towards preparing our systems for the new century. We have dedicated significant resources to address the issue as we understand that having our systems operating correctly is key to serving the needs of our shareholders and customers. As of March 31, 1999, the Year 2000 Plan, including information technology components, date-sensitive operating equipment, customers and business partners was 91% completed. The plan as a whole should be substantially completed by June 30, 1999. Continuing with the Corporation's strategy of penetrating the unbanked segment, during this quarter, Popular Cash Express acquired Houston Check Cashers, Inc., with ten offices in Texas, and Valley Check Cashers, Inc., which operates six stores in Los Angeles, California. In addition, Popular Cash Express opened one additional store in Los Angeles and one in Arizona. At the end of the first quarter of 1999, Popular Cash Express was operating 42 stores in five states plus 31 mobile units in California. On March 2, 1999, the Corporation acquired 9.99% of the Puerto Rico Telephone Company (PRTC) from the Government of Puerto Rico. This acquisition is part of a joint venture with GTE, a telecommunications company, which acquired a 50% share of PRTC, while the government retains between 44% and 47% of ownership. During this quarter, the Corporation announced its plan to acquire 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. With this acquisition, the Corporation will continue making progress towards its strategic initiative of expanding its electronic capabilities and diversifying its sources of revenues. Mr. Esteban D. Bird, a director of Banco Popular de Puerto Rico since 1990 recently passed away. We will certainly miss his sound advice and profoundly appreciate his many years of dedication to our organization. Richard L. Carrion Chairman, President and Chief Executive Officer 3 FINANCIAL HIGHLIGHTS
At March 31, Average for the quarter ----------------------------------- ---------------------------------- BALANCE SHEET HIGHLIGHTS 1999 1998 Change 1999 1998 Change (In thousands) Money market investments $ 865,612 $ 634,457 $ 231,155 $ 968,845 $ 700,123 $ 268,722 Investment and trading securities 7,302,677 6,571,247 731,430 7,361,873 6,174,230 1,187,643 Loans 13,458,245 11,543,169 1,915,076 13,211,405 11,466,638 1,744,767 Total assets 23,174,075 20,018,220 3,155,855 22,695,779 19,485,912 3,209,867 Deposits 13,576,672 12,005,800 1,570,872 13,578,244 11,805,324 1,772,920 Borrowings 7,401,790 6,106,539 1,295,251 7,021,406 5,871,602 1,149,804 Stockholders' equity 1,704,482 1,546,238 158,244 1,659,015 1,492,184 166,831
First quarter --------------------------------- OPERATING HIGHLIGHTS 1999 1998 Change (In thousands, except per share information) Net interest income $236,239 $212,704 $23,535 Provision for loan losses 35,771 33,565 2,206 Fees and other income 87,057 67,951 19,106 Other expenses 223,861 192,295 31,566 Net income $ 63,664 $ 54,795 $ 8,869 Net income applicable to common stock $ 61,577 $ 52,708 $ 8,869 Earnings per common share 0.45 0.39 0.06
First quarter ------------------ SELECTED STATISTICAL INFORMATION 1999 1998 COMMON STOCK DATA Market price High $ 37.88 $ 29.34 Low 30.88 23.03 End 30.88 29.34 Book value at period end 11.82 10.68 Dividends declared 0.14 0.11 Dividend payout ratio 30.84% 28.25% Price/earnings ratio 18.06x 19.18x PROFITABILITY RATIOS Return on assets 1.14% 1.14% Return on common equity 16.03 15.36 Net interest spread (taxable equivalent) 3.89 4.11 Net interest yield (taxable equivalent) 4.77 5.00 Effective tax rate 26.16 26.66 Overhead ratio 48.61 49.10 CAPITALIZATION RATIOS Equity to assets 7.31% 7.66% Tangible equity to assets 6.19 6.56 Equity to loans 12.56 13.01 Internal capital generation 10.27 10.14 Tier I capital to risk-adjusted assets 10.73 12.17 Total capital to risk-adjusted assets 12.98 14.54 Leverage ratio 6.69 7.11 CREDIT QUALITY RATIOS Allowance for losses to loans 2.06% 1.89% Allowance to non-performing assets 92.84 102.04 Allowance to non-performing loans 103.14 111.03 Non-performing assets to loans 2.22 1.85 Non-performing assets to total assets 1.29 1.07 Net charge-offs to average loans 0.78 0.96 Provision to net charge-offs 1.38x 1.22x Net charge-offs earnings coverage 4.69 3.94
Note: All common stock data has been adjusted to reflect the stock split effected in the form of a dividend on July 1, 1998. 4 ADDITIONAL INFORMATION Board Of Directors Richard L. Carrion, Chairman Alfonso F. Ballester, Vice Chairman Antonio Luis Ferre, Vice Chairman Juan A. Albors Hernandez * Jose A. Bechara Bravo * Juan J. Bermudez Esteban D. Bird * Francisco J. Carreras David H. Chafey Jr. Luis E. Dubon Jr. Hector R. Gonzalez Jorge A. Junquera Diez Manuel Morales Jr. Alberto M. Paracchini Francisco M. Rexach Jr. 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. 5
CONSOLIDATED STATEMENTS OF CONDITION March 31, ------------------------------ Dollars in thousands 1999 1998 ASSETS Cash and due from banks $ 596,116 $ 517,003 ------------ ------------ Money market investments: Federal funds sold and securities and mortgages purchased under agreements to resell 828,981 587,579 Time deposits with other banks 36,068 46,182 Bankers' acceptances 563 696 ------------ ------------ 865,612 634,457 ------------ ------------ Investment securities available-for-sale, at market value 6,544,252 5,906,739 Investment securities held-to-maturity, at cost 484,958 416,773 Trading account securities, at market value 273,467 247,735 Loans held-for-sale 475,081 307,382 ------------ ------------ Loans 13,339,826 11,582,940 Less__ Unearned income 356,662 347,153 Allowance for loan losses 277,116 217,708 ------------ ------------ 12,706,048 11,018,079 ------------ ------------ Premises and equipment 432,694 377,189 Other real estate 29,800 17,285 Customers' liabilities on acceptances 21,208 1,397 Accrued income receivable 161,258 132,092 Other assets 315,602 213,948 Intangible assets 267,979 228,141 ------------ ------------ $ 23,174,075 $ 20,018,220 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 2,919,926 $ 2,492,547 Interest bearing 10,656,746 9,513,253 ------------ ------------ 13,576,672 12,005,800 Federal funds purchased and securities sold under agreements to repurchase 3,915,208 2,959,925 Other short-term borrowings 1,690,489 1,567,346 Notes payable 1,521,093 1,304,268 Acceptances outstanding 21,208 1,397 Other liabilities 450,411 358,246 ------------ ------------ 21,175,081 18,196,982 ------------ ------------ 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 19,512 ------------ ------------ Stockholders' equity: Preferred stock 100,000 100,000 Common stock 826,121 412,238 Surplus 218,635 603,445 Retained earnings 573,068 433,062 Treasury stock, at cost (39,559) (39,559) Accumulated other comprehensive income, net of deferred taxes 26,217 37,052 ------------ ------------ 1,704,482 1,546,238 ------------ ------------ $ 23,174,075 $ 20,018,220 ============ ============
6
CONSOLIDATED STATEMENTS OF INCOME Dollars in thousands, except per share information Quarter ended March 31, ------------------------------ 1999 1998 Interest Income: Loans $326,033 $293,217 Money market investments 7,933 8,827 Investment securities 105,434 90,259 Trading account securities 4,795 4,065 -------- -------- 444,195 396,368 -------- -------- Interest Expense: Deposits 110,823 97,330 Short-term borrowings 69,374 56,248 Long-term debt 27,759 30,086 -------- -------- 207,956 183,664 -------- -------- Net interest income 236,239 212,704 Provision for loan losses 35,771 33,565 -------- -------- Net interest income after provision for loan losses 200,468 179,139 Service charges on deposit accounts 28,249 25,338 Other service fees 37,909 26,173 Gain on sale of securities 450 867 Trading account (loss) profit (282) 669 Other operating income 20,731 14,904 -------- -------- 287,525 247,090 -------- -------- Operating Expenses: Personnel costs: Salaries 70,157 59,293 Profit sharing 6,320 5,683 Pension and other benefits 19,559 18,418 -------- -------- 96,036 83,394 Net occupancy expenses 14,258 11,561 Equipment expenses 20,734 18,028 Other taxes 8,265 7,968 Professional fees 15,312 12,878 Communications 10,829 8,824 Business promotion 11,000 8,216 Printing and supplies 4,990 4,003 Other operating expenses 12,847 10,724 Amortization of intangibles 7,620 6,784 -------- -------- 201,891 172,380 -------- -------- Income before income tax and minority interest 85,634 74,710 Income tax 22,402 19,915 Net loss of minority interest 432 -------- -------- Net income $ 63,664 $ 54,795 ======== ======== Net income applicable to common stock $ 61,577 $ 52,708 ======== ======== Earnings per common share (basic and diluted) $ 0.45 $ 0.39 ======== ========
EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 U.S. DOLLARS 3-MOS MAR-31-1999 JAN-01-1999 MAR-31-1999 1,000 596,116 36,068 828,981 273,467 6,544,252 484,958 492,200 13,458,245 277,116 23,174,075 13,576,672 5,605,697 450,411 1,796,093 0 100,000 826,121 778,361 23,174,075 326,033 105,434 12,728 444,195 110,823 207,956 236,239 35,771 450 201,891 86,066 63,664 0 0 63,664 0.45 0 4.77 268,789 24,712 0 110,126 267,249 39,157 13,253 277,116 250,647 26,469 0
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