10-Q 1 e10-q.txt 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 June 30, 2000 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 136,009,462 ---------------------------- ------------------------------------------ (Title of Class) (Shares Outstanding as of August 14, 2000) 2 POPULAR, INC. INDEX
Page ---- Part I - Financial Information Item 1. Financial Statements Unaudited consolidated statements of condition - June 30, 2000, December 31, 1999 and June 30, 1999. 3 Unaudited consolidated statements of income - Quarters and six months ended June 30, 2000 and 1999. 4 Unaudited consolidated statements of comprehensive income (loss)- Quarters and six months ended June 30, 2000 and 1999. 5 Unaudited consolidated statements of cash flows - Six months ended June 30, 2000 and 1999. 6 Notes to unaudited consolidated financial statements. 7-21 Item 2. Management's discussion and analysis of financial condition and results of operations. 22-36 Item 3. Quantitative and qualitative disclosures about market risk 26 Part II - Other Information Item 1. Legal proceedings 36 Item 2. Changes in securities - None N/A Item 3. Defaults upon senior securities - None N/A Item 4. Submission of matters to a vote of security holders 36 Item 5. Other information 37 Item 6. Exhibits and reports on Form 8-K 37 --- Signature 38
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 and the effect of legal proceedings on Popular, Inc.'s financial condition and results of operations. 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 market and the magnitude of interest rate changes. 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. 2 3 POPULAR, INC. CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
JUNE 30, December 31, June 30, (In thousands) 2000 1999 1999 ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 698,012 $ 663,696 $ 567,143 ------------------------------------------------------------------------------------------------------------------------------ Money market investments: Federal funds sold and securities purchased under agreements to resell 1,159,754 931,123 715,618 Time deposits with other banks 31,206 54,354 74,986 Banker's acceptances 551 517 681 ------------------------------------------------------------------------------------------------------------------------------ 1,191,511 985,994 791,285 ------------------------------------------------------------------------------------------------------------------------------ Investment securities available-for-sale, at market value 7,137,188 7,324,950 6,804,004 Investment securities held-to-maturity, at amortized cost 383,887 299,312 316,860 Trading account securities, at market value 190,458 236,610 320,416 Loans held-for-sale, at lower of cost or market 790,831 619,298 603,643 ------------------------------------------------------------------------------------------------------------------------------ Loans 15,335,791 14,659,400 13,655,881 Less - Unearned income 352,018 370,944 372,132 Allowance for loan losses 305,526 292,010 282,590 ------------------------------------------------------------------------------------------------------------------------------ 14,678,247 13,996,446 13,001,159 ------------------------------------------------------------------------------------------------------------------------------ Premises and equipment 437,181 440,971 440,167 Other real estate 36,426 29,268 30,018 Customers' liabilities on acceptances 5,735 12,041 14,768 Accrued income receivable 176,540 175,746 160,146 Other assets 429,584 371,421 355,510 Intangible assets 295,646 304,786 260,502 ------------------------------------------------------------------------------------------------------------------------------ $ 26,451,246 $ 25,460,539 $ 23,665,621 ============================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,067,579 $ 3,284,949 $ 3,278,464 Interest bearing 11,392,875 10,888,766 10,623,923 ------------------------------------------------------------------------------------------------------------------------------ 14,460,454 14,173,715 13,902,387 Federal funds purchased and securities sold under agreements to repurchase 4,937,816 4,414,480 3,319,780 Other short-term borrowings 2,854,035 2,612,389 2,554,433 Notes payable 1,752,722 1,852,599 1,531,723 Acceptances outstanding 5,735 12,041 14,768 Other liabilities 407,260 436,718 396,604 ------------------------------------------------------------------------------------------------------------------------------ 24,418,022 23,501,942 21,719,695 ------------------------------------------------------------------------------------------------------------------------------ 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 subsidiaries 21,334 22,611 20,244 ------------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity: Preferred stock 100,000 100,000 100,000 Common stock 828,959 827,662 826,595 Surplus 247,479 243,855 220,559 Retained earnings 775,975 694,301 616,022 Treasury stock-at cost (64,150) (64,123) (72,524) Accumulated other comprehensive loss, net of deferred taxes of $(39,339) (December 31, 1999 - $(35,993); June 30, 1999 - $(11,595)) (151,373) (140,709) (39,970) ------------------------------------------------------------------------------------------------------------------------------ 1,736,890 1,660,986 1,650,682 ------------------------------------------------------------------------------------------------------------------------------ $ 26,451,246 $ 25,460,539 $ 23,665,621 ==============================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 4 POPULAR, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended Six months ended June 30, June 30, (Dollars in thousands, except per share information) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 392,437 $ 335,739 $ 768,957 $ 661,772 Money market investments 14,308 7,500 27,556 15,433 Investment securities 114,624 105,411 226,754 210,845 Trading account securities 3,405 4,751 7,308 9,546 --------------------------------------------------------------------------------------------------------------------------------- 524,774 453,401 1,030,575 897,596 --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 129,399 110,147 251,873 220,970 Short-term borrowings 113,684 73,138 216,509 142,513 Long-term debt 35,775 31,265 74,037 59,024 --------------------------------------------------------------------------------------------------------------------------------- 278,858 214,550 542,419 422,507 --------------------------------------------------------------------------------------------------------------------------------- Net interest income 245,916 238,851 488,156 475,089 Provision for loan losses 48,719 36,631 98,732 72,402 --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 197,197 202,220 389,424 402,687 Service charges on deposit accounts 30,831 29,731 61,054 57,980 Other service fees 55,443 39,691 102,808 77,600 Gain on sale of securities 329 286 13,593 736 Trading account profit (loss) 693 (582) 1,510 (863) Other operating income 21,989 17,800 46,046 38,531 --------------------------------------------------------------------------------------------------------------------------------- 306,482 289,146 614,435 576,671 --------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 77,301 69,983 155,895 140,140 Profit sharing 5,569 6,084 9,701 12,403 Pension and other benefits 15,341 18,572 35,839 38,131 --------------------------------------------------------------------------------------------------------------------------------- 98,211 94,639 201,435 190,674 Net occupancy expense 16,177 14,715 32,736 28,974 Equipment expenses 25,079 21,557 48,513 42,291 Other taxes 8,341 7,941 16,916 16,206 Professional fees 16,826 17,356 34,504 32,668 Communications 12,034 10,580 22,836 21,409 Business promotion 12,572 12,209 26,659 23,209 Printing and supplies 5,313 4,828 10,485 9,818 Other operating expenses 16,282 13,806 34,663 26,653 Amortization of intangibles 8,537 7,586 17,129 15,206 --------------------------------------------------------------------------------------------------------------------------------- 219,372 205,217 445,876 407,108 --------------------------------------------------------------------------------------------------------------------------------- Income before income tax and minority interest 87,110 83,929 168,559 169,563 Income tax 21,684 20,334 40,440 42,736 Net (gain) loss of minority interest (303) 382 1,193 814 --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 65,123 $ 63,977 $ 129,312 $ 127,641 ================================================================================================================================= NET INCOME APPLICABLE TO COMMON STOCK $ 63,036 $ 61,890 $ 125,137 $ 123,466 ================================================================================================================================= EARNINGS PER COMMON SHARE (BASIC AND DILUTED) $ 0.46 $ 0.46 $ 0.92 $ 0.91 ================================================================================================================================= DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ 0.14 $ 0.32 $ 0.28 =================================================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 5 POPULAR, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Quarter ended Six months ended June 30, June 30, (In thousands) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------------------- Net Income $ 65,123 $ 63,977 $ 129,312 $ 127,641 ------------------------------------------------------------ Other comprehensive income (loss), net of tax: Foreign currency translation adjustment 88 (62) (297) (895) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period, net of tax of $1,458 (1999 - $(20,407)) for the quarter and $131 (1999 - $(36,696)) for the six-month period 10,991 (65,989) 163 (114,497) Less: reclassification adjustment for gains included in net income, net of tax of $88 (1999 - $78) for the quarter and $3,477 (1999 - $139) for the six-month period 241 135 10,530 283 ------------------------------------------------------------ Total other comprehensive income (loss) $ 10,838 $ (66,186) $ (10,664) $(115,675) ------------------------------------------------------------ Comprehensive income (loss) $ 75,961 $ (2,209) $ 118,648 $ 11,966 ============================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
JUNE 30, December 31, June 30, (In thousands) 2000 1999 1999 ------------------------------------------------------------------------------------------------------------ Foreign currency translation adjustment $ (1,562) $ (1,265) $ (1,110) Unrealized losses on securities (149,811) (139,444) (38,860) ----------------------------------------------------- Accumulated other comprehensive loss $ (151,373) $ (140,709) $ (39,970) =====================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 6 POPULAR, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30, (In thousands) 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 129,312 $ 127,641 ----------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment 38,488 34,837 Provision for loan losses 98,732 72,402 Amortization of intangibles 17,129 15,206 Gain on sale of investment securities available-for-sale (13,593) (736) Loss on disposition of premises and equipment 47 108 Gain on sale of loans (8,813) (11,651) Amortization of premiums and accretion of discounts on investments 1,088 3,221 (Increase) decrease in loans held-for-sale (171,533) 40,516 Amortization of deferred loan fees and costs (2,104) 12 Net decrease (increase) in trading securities 46,152 (1,689) Net increase in interest receivable (794) (3,831) Net increase in other assets (26,831) (54,991) Net decrease in interest payable (8,751) (311) Net increase in current and deferred taxes (24,514) (40,113) Net increase in postretirement benefit obligation 3,447 4,144 Net decrease in other liabilities (20,106) (1,136) ----------------------------------------------------------------------------------------------------------------------------- Total adjustments (71,956) 55,988 ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 57,356 183,629 ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in money market investments (205,517) 156,613 Purchases of investment securities held-to-maturity (4,735,460) (3,933,805) Maturities of investment securities held-to-maturity 4,649,771 4,082,963 Purchases of investment securities available-for-sale (1,463,371) (3,856,526) Maturities of investment securities available-for-sale 1,565,792 3,534,843 Sales of investment securities available-for-sale 89,648 149,025 Net disbursements on loans (1,004,874) (1,385,302) Proceeds from sale of loans 349,896 477,970 Acquisition of loan portfolios (144,925) (2,490) Assets acquired, net of cash 715 Acquisition of premises and equipment (37,996) (62,059) Proceeds from sale of premises and equipment 4,600 11,668 ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (931,721) (827,100) ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 286,739 230,173 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 523,336 (756,721) Net increase in other short-term borrowings 241,209 915,351 Proceeds from issuance of notes payable 303,208 394,569 Payments of notes payable (403,085) (170,006) Dividends paid (47,620) (42,164) Proceeds from issuance of common stock 4,921 4,670 Treasury stock acquired (27) (32,965) ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 908,681 542,907 ----------------------------------------------------------------------------------------------------------------------------- Net increase in cash and due from banks 34,316 (100,564) Cash and due from banks at beginning of period 663,696 667,707 ============================================================================================================================ Cash and due from banks at end of period $ 698,012 $ 567,143 ============================================================================================================================
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. The Corporation is engaged in mortgage and consumer finance, lease financing, investment banking and broker/dealer activities, retail financial services, and information technology, ATM and data processing services through its non-banking subsidiaries in Puerto Rico, the United States and Costa Rica. Also, in January 2000, the Corporation acquired CreST, S.A., a local card processor and POS provider in 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 presentation of the results for 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 2000 presentation. NOTE 2 - ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Later in June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," amending certain provisions of SFAS 133. These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require recognition of all derivatives as either assets or liabilities in the statement of condition measured at fair value. They also establish 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 FASB has delayed the effective date of these statements to fiscal years beginning after June 15, 2000. Management estimates that the adoption of the statements will not have a material effect on the consolidated financial statements of the Corporation. 7 8 NOTE 3 - INVESTMENT SECURITIES The average contractual maturities as of June 30, 2000, and market value for the following investment securities are: Investment securities available-for-sale:
June 30, -------- 2000 1999 ---- ---- AMORTIZED MARKET Amortized Market COST VALUE Cost Value ------------------------------------------------------------------ (In thousands) U.S. Treasury (average maturity of 1 year and 4 months) $ 1,736,034 $ 1,721,602 $ 2,434,112 $ 2,436,440 Obligations of other U.S. Government agencies and corporations (average maturity of 5 years and 6 months) 3,513,201 3,372,838 2,631,361 2,553,441 Obligations of Puerto Rico, States and political subdivisions (average maturity of 10 years and 2 months) 78,784 78,233 73,716 72,417 Collateralized mortgage obligations (average maturity of 23 years and 5 months) 1,301,343 1,272,453 1,184,577 1,180,034 Mortgage-backed securities (average maturity of 24 years and 5 months) 489,265 489,018 346,945 352,399 Equity securities (without contractual maturity) 138,289 136,573 126,567 153,034 Others (average maturity of 10 years and 8 months) 69,422 66,471 57,181 56,239 ------------------------------------------------------------------ $ 7,326,338 $ 7,137,188 $ 6,854,459 $ 6,804,004 ==================================================================
Investments held to maturity:
June 30, -------- 2000 1999 ---- ---- AMORTIZED MARKET Amortized Market COST VALUE Cost Value -------------------------------------------------------------------- (In thousands) Obligations of other U.S. Government agencies and corporations (average maturity of 1 month) $ 9,130 $ 9,140 Obligations of Puerto Rico, States and political subdivisions (average maturity of 8 years and 2 months) 139,386 138,567 $ 66,569 $ 64,255 Collateralized mortgage obligations (average maturity of 12 years and 2 months) 16,196 16,089 22,009 22,100 Mortgage-backed securities (average maturity of 9 years and 11 months) 21,077 20,826 27,029 27,295 Equity securities (without contractual maturity) 91,638 91,638 91,769 91,769 Others (average maturity of 4 years and 2 months) 106,460 101,657 109,484 104,970 -------------------------------------------------------------------- $ 383,887 $ 377,917 $ 316,860 $ 310,389 ====================================================================
8 9 The expected maturity of collateralized mortgage obligations, mortgage-backed securities and certain other securities differs from their contractual maturities because they may be subject to prepayments. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank stock, is included as equity securities held-to-maturity and reported at amortized cost. NOTE 4 - PLEDGED ASSETS Securities and loans of the Corporation of $5,687,994 (1999 - $4,872,805) are pledged to secure public and trust deposits and securities sold under repurchase agreements. NOTE 5 - COMMITMENTS In the normal course of business there are letters of credit outstanding and stand-by letters of credit which at June 30, 2000, amounted to $19,562 and $66,162 (1999 - $16,073 and $91,045). 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 consist of notes issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semi-annually at 6.75%. On February 5, 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware that is wholly-owned by Popular North America, Inc. (PNA) and indirectly wholly-owned by the Corporation, sold to institutional investors $150,000 of its 8.327% Capital Securities Series A (liquidation amount $1,000 per Capital Security) through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by PNA of $4,640 of its 8.327% common securities (liquidation amount $1,000 per common security) were used to purchase $154,640 aggregate principal amount of PNA 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated Debentures"). These capital securities qualify as Tier 1 capital, are fully and unconditionally guaranteed by the Corporation, and are presented in the Consolidated Statements of Condition as "Guaranteed Preferred Beneficial Interest in Popular North America's Subordinated Debentures." The obligations of PNA under the Junior Subordinated Debentures and its guarantees of the obligations of BanPonce Trust 1 are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust 1 consisted of $154,640 of Junior Subordinated Debentures and a related accrued interest receivable of $4,292. The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures (which shortening would result in a mandatory redemption of the Capital Securities) may be shortened. NOTE 7 - STOCKHOLDERS' EQUITY Authorized common stock is 180,000,000 shares with a par value of $6 per share. At June 30, 2000, there were 138,159,859 (1999 - 137,765,872) shares issued and 135,865,104 (1999 - 134,698,572) outstanding. As of June 30, 2000, a total of 2,294,755 (1999 - 3,067,300) common shares with a total cost of $64,150 (1999 - $72,524) were maintained as treasury stock. Authorized preferred stock consists of 10,000,000 shares without par value of which 4,000,000, non-cumulative with a dividend rate of 8.35% and a liquidation preference value of $25 per share, were issued and outstanding at June 30, 2000 and 1999. 9 10 Popular International Bank, Inc. (PIB) and Popular North America, Inc.'s (PNA) bank subsidiaries 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 $63,036 for the second quarter of 2000 (1999 - $61,890) and $125,137 for the six months ended June 30, 2000 (1999 - $123,466), after deducting the dividends on preferred stock. EPS are based on 135,878,677 average shares outstanding for the second quarter of 2000 (1999 - 135,491,324), and 135,821,221 average shares outstanding for the first six months of 2000 (1999 - 135,599,703). NOTE 9 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS During the six-month period ended June 30, 2000, the Corporation paid interest and income taxes amounting to $551,170 and $61,781, respectively (1999 - $422,817 and $81,437). In addition, the loans receivable transferred to other real estate and other property for the six-month period ended June 30, 2000, amounted to $17,653 and $12,634, respectively (1999 - $6,192 and $9,364). NOTE 10 - SEGMENT REPORTING Popular, Inc. operates three major reportable segments: commercial banking, mortgage and consumer lending, 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, Equity One and Levitt Mortgage. 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 retail financial services, investment banking and broker/dealer activities, as well as those providing ATM processing services, electronic data processing and consulting services, sale and rental of electronic data processing equipment and selling and maintenance of computer software. It also includes the banking operations of Banco Fiduciario in the Dominican Republic. The accounting policies of the segments are the same as those followed by the Corporation in the ordinary course of business and conform with generally accepted accounting principles and with general practices within the financial industry. Following are the results of operations and selected financial information by operating segments for the second quarter and the six-month period ended June 30, 2000 and 1999. 10 11
Mortgage and Commercial consumer Lease banking finance financing Other Eliminations Total ------------------------------------------------------------------------------------------------------------------------------ (In thousands) QUARTER ENDED JUNE 30, 2000 ------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 211,211 $ 23,119 $ 10,498 $ 1,123 $ (35) $ 245,916 Provision for loan losses 34,631 7,205 4,948 1,935 48,719 Other income 60,871 9,500 5,038 36,740 (2,864) 109,285 Amortization expense 6,971 161 189 1,216 8,537 Depreciation expense 14,532 843 2,305 1,887 19,567 Other operating expenses 137,816 18,470 5,603 30,294 (915) 191,268 Minority interest 22 (325) (303) Income tax 20,191 1,977 894 (856) (522) 21,684 ------------------------------------------------------------------------------------------------------------------------------ Net income $ 57,941 $ 3,985 $ 1,597 $ 3,062 $ (1,462) $ 65,123 ------------------------------------------------------------------------------------------------------------------------------ Segment Assets $ 22,275,886 $ 2,512,861 $875,729 $ 6,645,141 $ (5,858,371) $ 26,451,246 ------------------------------------------------------------------------------------------------------------------------------ Mortgage and Commercial consumer Lease banking finance financing Other Eliminations Total ------------------------------------------------------------------------------------------------------------------------------ (In thousands) SIX-MONTH PERIOD ENDED JUNE 30, 2000 ------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 419,565 $ 45,685 $ 21,508 $ 1,466 $ (68) $ 488,156 Provision for loan losses 73,074 12,688 9,343 3,627 98,732 Other income 125,288 20,087 11,348 73,156 (4,868) 225,011 Amortization expense 13,993 322 377 2,437 17,129 Depreciation expense 28,748 1,314 4,727 3,699 38,488 Other operating expenses 288,603 38,009 11,710 53,902 (1,965) 390,259 Minority interest 22 1,171 1,193 Income tax 32,542 4,561 2,498 1,626 (787) 40,440 ------------------------------------------------------------------------------------------------------------------------------ Net income $ 107,893 $ 8,900 $ 4,201 $ 10,502 $ (2,184) $ 129,312 ------------------------------------------------------------------------------------------------------------------------------ Segment Assets $ 22,275,886 $ 2,512,861 $875,729 $ 6,645,141 $ (5,858,371) $ 26,451,246 ------------------------------------------------------------------------------------------------------------------------------ Mortgage and Commercial consumer Lease banking finance financing Other Eliminations Total ------------------------------------------------------------------------------------------------------------------------------ (In thousands) QUARTER ENDED JUNE 30, 2000 ------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 203,958 $ 22,931 $ 10,651 $ 1,311 $ 238,851 Provision for loan losses 28,036 6,398 1,814 383 36,631 Other income 61,076 8,930 5,202 12,760 $ (1,042) 86,926 Amortization expense 7,057 84 189 256 7,586 Depreciation expense 13,847 415 2,167 913 17,342 Other operating expenses 144,199 17,698 6,204 12,293 (105) 180,289 Minority interest 382 382 Income tax 16,227 2,429 2,033 (110) (245) 20,334 ------------------------------------------------------------------------------------------------------------------------------ Net income $ 55,668 $ 4,837 $ 3,446 $ 718 $ (692) $ 63,977 ------------------------------------------------------------------------------------------------------------------------------ Segment Assets $ 20,245,986 $ 1,916,340 $722,881 $ 5,820,924 $ (5,040,510) $ 23,665,621 ------------------------------------------------------------------------------------------------------------------------------
11 12
Mortgage and Commercial consumer Lease banking finance financing Other Eliminations Total ------------------------------------------------------------------------------------------------------------------------------ (In thousands) SIX-MONTH PERIOD ENDED JUNE 30, 1999 ------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 406,200 $ 44,101 $ 21,347 $ 3,454 $ (13) $ 475,089 Provision for loan losses 55,072 12,504 4,443 383 72,402 Other income 119,006 22,839 10,252 24,327 (2,440) 173,984 Amortization expense 14,119 168 378 541 15,206 Depreciation expense 27,409 790 4,413 2,225 34,837 Other operating expenses 285,977 34,707 11,762 24,842 (223) 357,065 Minority interest 814 814 Income tax 32,477 6,675 3,970 184 (570) 42,736 ------------------------------------------------------------------------------------------------------------------------------ Net income $ 110,152 $ 12,096 $ 6,633 $ 420 $ (1,660) $ 127,641 ------------------------------------------------------------------------------------------------------------------------------ Segment Assets $ 20,245,986 $ 1,916,340 $722,881 $ 5,820,924 $ (5,040,510) $ 23,665,621 ------------------------------------------------------------------------------------------------------------------------------
During the quarter ended March 31, 2000, the Corporation's Bank Holding Company exercised its conversion right and exchanged its investment in preferred stock of a financial corporation in Puerto Rico for common stock of the same entity, resulting in a $13.4 million gain. This gain is included in "other income" within the "other" reportable segment category.
GEOGRAPHIC INFORMATION Quarter ended Six-month period ended JUNE 30, June 30, JUNE 30, June 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------ (In thousands) (In thousands) Revenues* Puerto Rico $ 433,611 $ 376,110 $ 864,183 $ 745,888 United States 167,891 135,773 327,744 267,940 Other 32,557 28,444 63,659 57,752 ------------------------------------------------------------------------------------------------------------------ Total consolidated revenues $ 634,059 $ 540,327 $ 1,255,586 $ 1,071,580 ------------------------------------------------------------------------------------------------------------------
* Total revenues include interest income, service charges on deposit accounts, other service fees, gain (loss) on sale of securities, trading account profit (loss), and other income.
JUNE 30, June 30, 2000 1999 ----------------------------------------------------------------------------------------- (IN THOUSANDS) Selected Balance Sheet Information: Puerto Rico: Total assets $18,289,327 $16,914,395 Loans 8,954,743 8,353,280 Deposits 9,631,099 9,725,275 United States: Total assets $7,097,333 $5,814,436 Loans 6,113,555 4,893,810 Deposits 3,829,456 3,344,581 Other: Total assets $1,064,586 $936,790 Loans 706,306 640,302 Deposits 999,899 832,531
12 13 NOTE 11 - POPULAR INTERNATIONAL BANK, INC. (A WHOLLY-OWNED SUBSIDIARY OF POPULAR, INC.) FINANCIAL INFORMATION: The following financial information presents the unaudited consolidated financial position of Popular International Bank, Inc. (PIB) and its subsidiaries, ATH Costa Rica, CreST, S.A., Banco Fiduciario, S.A. and Popular North America, Inc., including Popular Holdings USA, Inc. and its wholly-owned subsidiary Banco Popular North America; Popular Cash Express, Inc. and Equity One, Inc. (second-tier subsidiaries), as of May 31, 2000 and May 31,1999, and their related statements of income, cash flows and comprehensive income for each of the quarters and six-months periods then ended. The results of Popular Holdings USA, Inc. and its subsidiary are included as of June 30, 2000 and 1999. PIB has a fiscal year that ends on November 30. Accordingly, the consolidated financial information of PIB presented below, corresponds to the financial information of PIB included in the consolidated financial statements of Popular, Inc. as of June 30, 2000 and 1999. Popular, Inc. has not presented separate financial statements nor any other disclosures concerning PIB, other than the following financial information. Management understands that such information is not material to holders of debt securities issued by PIB which are guaranteed by the Corporation. 13 14 POPULAR INTERNATIONAL BANK, INC. CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
MAY 31, May 31, (In thousands) 2000 1999 ---------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 224,649 $ 205,831 Money market investments 77,561 84,105 Investment securities available-for-sale, at market value 350,172 349,726 Investment securities held-to-maturity, at amortized cost 48,237 54,720 Trading account securities, at market value Loans held-for-sale, at lower of cost or market 59,649 157,509 ---------------------------------------------------------------------------------------------------------- Loans 6,334,990 5,059,315 Less - Unearned income 76,543 76,849 Allowance for loan losses 103,900 93,812 ---------------------------------------------------------------------------------------------------------- 6,154,547 4,888,654 ---------------------------------------------------------------------------------------------------------- Premises and equipment 142,182 135,293 Other real estate 26,751 21,666 Customers' liabilities on acceptances 4,898 13,184 Accrued income receivable 48,007 42,526 Other assets 95,564 89,128 Intangible assets 146,311 144,801 ---------------------------------------------------------------------------------------------------------- $ 7,378,528 $ 6,187,143 ========================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 653,501 $ 624,402 Interest bearing 3,920,195 3,011,405 ---------------------------------------------------------------------------------------------------------- 4,573,696 3,635,807 Federal funds purchased and securities sold under agreements to repurchase 75,148 81,473 Other short-term borrowings 590,617 905,084 Notes payable 1,309,224 752,497 Acceptances outstanding 4,898 13,184 Other liabilities 107,479 86,394 ---------------------------------------------------------------------------------------------------------- 6,661,062 5,474,439 ---------------------------------------------------------------------------------------------------------- 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 subsidiaries 20,485 20,244 ---------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock 3,962 3,962 Surplus 482,226 470,226 Retained earnings 66,786 70,123 Accumulated other comprehensive loss, net of deferred taxes of $(1,791); (May 31, 1999 - $(838)) (5,993) (1,851) ---------------------------------------------------------------------------------------------------------- 546,981 542,460 ---------------------------------------------------------------------------------------------------------- $ 7,378,528 $ 6,187,143 =========================================================================================================
14 15 POPULAR INTERNATIONAL BANK, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended Six months ended May 31, May 31, (In thousands) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 149,739 $ 119,995 $ 290,979 $ 234,567 Money market investments 774 600 1,535 1,254 Investment securities 5,756 5,609 11,320 12,917 ------------------------------------------------------------------------------------------------------------------------- 156,269 126,204 303,834 248,738 ------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 52,029 35,874 100,958 72,904 Short-term borrowings 9,197 11,713 16,710 22,893 Long-term debt 26,227 17,081 51,427 32,333 ------------------------------------------------------------------------------------------------------------------------- 87,453 64,668 169,095 128,130 ------------------------------------------------------------------------------------------------------------------------- Net interest income 68,816 61,536 134,739 120,608 Provision for loan losses 18,893 11,399 32,275 20,994 ------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for 49,923 50,137 102,464 99,614 loan losses Service charges on deposit accounts 7,863 7,470 15,437 14,209 Other service fees 15,932 12,765 31,060 23,628 Gain on sale of securities 247 640 Other operating income 3,322 4,942 8,159 13,688 ------------------------------------------------------------------------------------------------------------------------- 77,040 75,561 157,120 151,779 ------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 26,644 25,734 54,207 50,785 Profit sharing 168 315 349 1,028 Pension and other benefits 7,588 6,445 14,853 12,652 ------------------------------------------------------------------------------------------------------------------------- 34,400 32,494 69,409 64,465 Net occupancy expense 7,050 6,351 14,039 12,522 Equipment expenses 5,989 4,411 11,485 8,533 Other taxes 746 480 1,543 901 Professional fees 8,915 8,671 17,550 15,231 Communications 3,721 3,438 7,143 6,667 Business promotion 5,988 5,762 13,408 11,526 Printing and supplies 2,247 2,209 4,360 4,106 Other operating expenses 6,735 5,733 15,612 10,999 Amortization of intangibles 3,686 3,427 7,403 6,883 ------------------------------------------------------------------------------------------------------------------------- 79,477 72,976 161,952 141,833 ------------------------------------------------------------------------------------------------------------------------- (Loss) income before income tax and minority loan losses (2,437) 2,585 (4,832) 9,946 Income tax (1,663) 1,195 (918) 5,315 Net (gain) loss of minority interest (325) 382 1,171 814 ------------------------------------------------------------------------------------------------------------------------- NET (LOSS) INCOME $ (1,099) $ 1,772 $ (2,743) $ 5,445 =========================================================================================================================
15 16 POPULAR INTERNATIONAL BANK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended MAY 31, May 31, (In thousands) 2000 1999 ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (2,743) $ 5,445 ------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment 8,817 7,364 Provision for loan losses 32,275 20,994 Amortization of intangibles 7,403 6,883 Gain on sale of investment securities available-for-sale (640) (Gain) loss on disposition of premises and equipment (16) 38 Gain on sale of loans (5,222) (11,647) Amortization of premiums and accretion of discounts on investments (33) 136 Decrease in loans held-for-sale 27,486 70,129 Amortization of deferred loan fees and costs (3,692) (442) Net decrease (increase) in interest receivable 1,431 (1,547) Net increase in other assets (184) (20,074) Net increase in interest payable 7,722 1,415 Net (decrease) increase in current and deferred taxes (5,235) 2,247 Net increase in other liabilities 8,470 3,026 ------------------------------------------------------------------------------------------------------------ Total adjustments 79,222 77,882 ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 76,479 83,327 ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments 11,316 73,453 Purchases of investment securities held-to-maturity (1,163) (30) Maturities of investment securities held-to-maturity 1,816 51,851 Purchases of investment securities available-for-sale (76,357) (1,489,566) Maturities of investment securities available-for-sale 55,391 1,491,257 Sales of investment securities available-for-sale 184 71,674 Net disbursements on loans (933,501) (876,561) Proceeds from sale of loans 354,778 477,970 Capital contribution to subsidiaries -- (78,125) Acquisition of loan portfolios (126,421) Assets acquired, net of cash 715 Acquisition of premises and equipment (12,183) (13,490) Proceeds from sale of premises and equipment 199 1,333 ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (725,226) (290,234) ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 198,321 (91,536) Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 34,608 (324,338) Net increase in other short-term borrowings 237,128 375,054 Proceeds from issuance of notes payable 167,329 179,462 Payments of notes payable (19,139) (93,734) Capital contribution received from Parent company 12,000 67,671 ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 630,247 112,579 ------------------------------------------------------------------------------------------------------------ Net decrease in cash and due from banks (18,500) (94,328) Cash and due from banks at beginning of period 243,149 300,159 ------------------------------------------------------------------------------------------------------------ Cash and due from banks at end of period $ 224,649 $ 205,831 ============================================================================================================
16 17 POPULAR INTERNATIONAL BANK, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Quarter ended Six months ended May 31, May 31, (In thousands) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Net (loss) income $(1,099) $ 1,772 $(2,743) $ 5,445 ------------------------------------------------------- Other comprehensive loss, net of tax: Foreign currency translation adjustment 65 (62) (297) (895) Unrealized holding losses arising during the period, net of tax of $(251) (1999 - $(1,425)) for the quarter and $(731) (1999 - $(1,708) for the six-month period (163) (1,745) (2,845) (2,334) Less: reclassification adjustment for gains included in net income (loss), net tax of $69 for the quarter in 1999 and $130 for the six-month period in 1999 106 197 ------------------------------------------------------- Total other comprehensive loss $ (98) $(1,913) $(3,142) $(3,426) ------------------------------------------------------- Comprehensive (loss) income $(1,197) $ (141) $(5,885) $ 2,019 =======================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE LOSS:
MAY 31, November 30, May 31, (In thousands) 2000 1999 1999 ---------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment $(1,535) $(1,238) $(1,110) Unrealized losses on securities (4,458) (1,613) (741) ---------------------------------------------- Accumulated other comprehensive loss $(5,993) $(2,851) $(1,851) ==============================================
NOTE 12 - POPULAR NORTH AMERICA, INC. (A SECOND-TIER SUBSIDIARY OF POPULAR, INC.) FINANCIAL INFORMATION: The following 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 subsidiary Banco Popular North America, as of May 31, 2000 and May 31, 1999, and their related statements of income, cash flows and comprehensive income for each of the quarters and six-month periods then ended. The results of Popular Holdings USA, Inc. and its subsidiary are included as of June 30, 2000 and 1999. PNA has a fiscal year that ends on November 30. Accordingly, the consolidated financial information of PNA presented below, corresponds to the financial information of PNA included in the consolidated financial statements of Popular, Inc. as of June 30, 2000 and 1999. 17 18 Popular, Inc. has not presented separate financial statements nor any other disclosures concerning PNA, other than the following financial information. Management understands that such information is not material to holders of debt securities issued by PNA which are guaranteed by the Corporation. POPULAR NORTH AMERICA, INC. CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
MAY 31, May 31, (In thousands) 2000 1999 ------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 177,014 $ 153,518 Money market investments 50,504 24,590 Investment securities available-for-sale, at market value 334,140 331,359 Investment securities held-to-maturity, at cost 48,237 54,720 Trading account securities, at market value Loans held-for-sale 59,649 157,509 ------------------------------------------------------------------------------------------------------------ Loans 6,043,793 4,810,294 Less - Unearned income 76,543 76,849 Allowance for loan losses 80,646 69,085 ------------------------------------------------------------------------------------------------------------ 5,886,604 4,664,360 ------------------------------------------------------------------------------------------------------------ Premises and equipment 112,361 107,406 Other real estate 11,961 14,818 Customers' liabilities on acceptances 137 390 Accrued income receivable 43,798 37,098 Other assets 61,720 55,978 Intangible assets 133,870 143,164 ------------------------------------------------------------------------------------------------------------ $6,919,995 $ 5,744,910 ============================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 610,818 $ 582,970 Interest bearing 3,669,430 2,761,611 ------------------------------------------------------------------------------------------------------------ 4,280,248 3,344,581 Federal funds purchased and securities sold under agreements to repurchase 75,148 81,473 Other short-term borrowings 540,447 868,940 Notes payable 1,260,445 713,288 Acceptances outstanding 137 390 Other liabilities 102,441 75,756 ------------------------------------------------------------------------------------------------------------ 6,258,866 5,084,428 ------------------------------------------------------------------------------------------------------------ Preferred beneficial interests in Popular North America's Junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 ------------------------------------------------------------------------------------------------------------ Stockholders' equity: Common stock 2 2 Surplus 439,964 439,964 Retained earnings 73,771 71,882 Accumulated other comprehensive loss, net of deferred taxes of $(1,791); (May 31, 1999 - $(838)) (2,608) (1,366) ------------------------------------------------------------------------------------------------------------ 511,129 510,482 ------------------------------------------------------------------------------------------------------------ $6,919,995 $ 5,744,910 ============================================================================================================
18 19 POPULAR NORTH AMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended Six months ended May 31, May 31, (In thousands) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $135,674 $106,888 $263,311 $208,034 Money market investments 566 533 1,128 1,248 Investment securities 5,628 5,548 11,140 11,539 ------------------------------------------------------------------------------------------------------------------- 141,868 112,969 275,579 220,821 ------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 42,821 26,606 82,900 53,604 Short-term borrowings 8,193 10,507 14,673 20,215 Long-term debt 25,214 16,495 49,141 31,312 ------------------------------------------------------------------------------------------------------------------- 76,228 53,608 146,714 105,131 ------------------------------------------------------------------------------------------------------------------- Net interest income 65,640 59,361 128,865 115,690 Provision for loan losses 16,958 11,016 28,648 20,611 ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan 48,682 48,345 100,217 95,079 Service charges on deposit accounts 6,652 6,366 13,069 12,080 Other service fees 14,131 10,941 27,457 20,024 Gain on sale of securities 176 565 Other operating income 2,231 4,137 6,096 12,358 ------------------------------------------------------------------------------------------------------------------- 71,696 69,965 146,839 140,106 ------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 23,619 23,140 48,081 45,327 Profit sharing 168 315 349 1,028 Pension and other benefits 7,272 6,104 14,247 11,881 ------------------------------------------------------------------------------------------------------------------- 31,059 29,559 62,677 58,236 Net occupancy expense 6,319 5,512 12,640 10,853 Equipment expenses 4,346 3,381 8,233 6,487 Other taxes 522 444 1,016 801 Professional fees 8,371 8,453 16,213 14,392 Communications 3,388 2,949 6,496 5,673 Business promotion 5,659 5,509 12,794 10,937 Printing and supplies 1,966 1,988 3,788 3,771 Other operating expenses 6,789 4,851 13,464 9,460 Amortization of intangibles 3,448 3,393 6,945 6,729 -------------------------------------------------------------------------------------------------------------------- 71,867 66,039 144,266 127,339 ------------------------------------------------------------------------------------------------------------------- (Loss) Income before income tax and minority (171) 3,926 2,573 12,767 Income tax 821 1,461 2,806 5,938 ------------------------------------------------------------------------------------------------------------------- NET (LOSS) INCOME $ (992) $ 2,465 $ (233) $ 6,829 ==================================================================================================================
19 20 POPULAR NORTH AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended MAY 31, May 31, (In thousands) 2000 1999 ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (233) $ 6,829 ------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment 6,450 5,352 Provision for loan losses 28,648 20,611 Amortization of intangibles 6,945 6,729 Gain on sale of investment securities available-for-sale (564) (Gain) loss on disposition of premises and equipment (16) 38 Gain on sale of loans (5,222) (11,647) Amortization of premiums and accretion of discounts on investments (33) 136 Decrease in loans held-for-sale 27,486 70,129 Amortization of deferred loan fees and costs (3,692) (442) Net decrease (increase) in interest receivable 328 (2,318) Net increase in other assets (4,756) (12,339) Net increase in interest payable 7,881 1,372 Net increase in current and deferred taxes (8,388) (1,642) Net increase (decrease) in other liabilities 24,558 (406) ------------------------------------------------------------------------------------------------------------ Total adjustments 80,189 75,009 ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 79,956 81,838 ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in money market investments 5,617 84,283 Purchases of investment securities held-to-maturity (1,163) (30) Maturities of investment securities held-to-maturity 1,816 51,851 Purchases of investment securities available-for-sale (76,348) (1,480,731) Maturities of investment securities available-for-sale 55,391 1,491,257 Sales of investment securities available-for-sale 184 71,674 Net disbursements on loans (869,706) (887,540) Proceeds from sale of loans 337,817 477,970 Capital contribution to subsidiaries (60,000) (163,922) Acquisition of loan portfolios (126,421) (12,659) Acquisition of premises and equipment (7,774) Proceeds from sale of premises and equipment 30 328 ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (740,557) (367,519) ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 197,915 (63,107) Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 34,608 (324,338) Net increase in other short-term borrowings 215,542 382,384 Proceeds from issuance of notes payable 149,877 179,462 Payments of notes payable (14,444) (93,596) Capital contribution received from Parent company 60,000 159,854 ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 643,498 240,659 ------------------------------------------------------------------------------------------------------------ Net decrease in cash and due from banks (17,103) (45,022) Cash and due from banks at beginning of period 194,117 198,540 ------------------------------------------------------------------------------------------------------------ Cash and due from banks at end of period $ 177,014 $ 153,518 ============================================================================================================
20 21 POPULAR NORTH AMERICA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Quarter ended Six months ended May 31, May 31, (In thousands) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ Net (loss) income $ (992) $ 2,465 $ (233) $ 6,829 ------------------------------------------------------- Other comprehensive loss, net of tax: Unrealized losses on securities: Unrealized holding losses arising during the period, net of tax of $(251) (1999 - $(1,425)) for the quarter and $(731) (1999 - $(1,708) for the six- month period (574) (2,108) (1,044) (2,864) Less: reclassification adjustment for gains included in net income, net of tax of $69 for the quarter in 1999 and $130 for the six-month period in 1999 106 197 ------------------------------------------------------- Total other comprehensive loss $ (574) $(2,214) $(1,044) $(3,061) ------------------------------------------------------- Comprehensive income (loss) $(1,566) $ 251 $(1,277) $ 3,768 =======================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): MAY 31, November 30, May 31, (In thousands) 2000 1999 1999 ---------------------------------------------------------------------------------------------- Unrealized losses on securities $(2,608) $(1,564) $(1,366) --------------------------------------- Accumulated other comprehensive loss $(2,608) $(1,564) $(1,366) =======================================
21 22 TABLE A ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------------------------------------------------- AT JUNE 30, AVERAGE FOR THE SIX MONTHS --------------------------------------------------------------------------- BALANCE SHEET HIGHLIGHTS 2000 1999 Change 2000 1999 Change (In thousands) -------------------------------------------------------------------------------------------------------------------------- Money market investments $ 1,191,511 $ 791,285 $ 400,226 $ 882,850 $ 687,542 $ 195,308 Investment and trading securities 7,711,533 7,441,280 270,253 7,810,596 7,547,412 263,184 Loans 15,774,604 13,887,392 1,887,212 15,354,380 13,442,576 1,911,804 Total assets 26,451,246 23,665,621 2,785,625 25,719,423 23,178,177 2,541,246 Deposits 14,460,454 13,902,387 558,067 14,284,696 13,697,877 586,819 Borrowings 9,819,573 7,680,936 2,138,637 9,120,375 7,334,285 1,786,090 Stockholders' equity 1,736,890 1,650,682 86,208 1,836,261 1,678,159 158,102 -------------------------------------------------------------------------------------------------------------------------- SECOND QUARTER SIX MONTHS --------------------------------------------------------------------------- OPERATING HIGHLIGHTS 2000 1999 Change 2000 1999 Change (In thousands, except per share information) -------------------------------------------------------------------------------------------------------------------------- Net interest income $245,916 $238,851 $ 7,065 $488,156 $475,089 $13,067 Provision for loan losses 48,719 36,631 12,088 98,732 72,402 26,330 Fees and other income 109,285 86,926 22,359 225,011 173,984 51,027 Other expenses, net of minority interest 241,359 225,169 16,190 485,123 449,030 36,093 Net income $ 65,123 $ 63,977 $ 1,146 $129,312 $127,641 $ 1,671 Net income applicable to common stock $ 63,036 $ 61,890 $ 1,146 $125,137 $123,466 $ 1,671 Earnings per common share $ 0.46 $ 0.46 $ 0.92 $ 0.91 $ 0.01 -------------------------------------------------------------------------------------------------------------------------- SELECTED STATISTICAL INFORMATION SECOND QUARTER SIX MONTHS ------------------------------------------------------------------------------ 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------- COMMON STOCK DATA- Market price High $23.56 $32.88 $26.88 $37.88 Low 19.06 28.81 18.63 28.81 End 19.06 30.31 19.06 30.31 Book value at period end 12.05 11.51 12.05 11.51 Dividends declared 0.16 0.14 0.32 0.28 Dividend payout ratio 34.46% 30.70% 34.72% 30.77% Price/earnings ratio 10.30X 17.22x 10.30X 17.22x -------------------------------------------------------------------------------------------------------------------------- PROFITABILITY RATIOS - Return on assets 1.01% 1.08% 1.01% 1.11% Return on common equity 14.43 15.53 14.50 15.78 Net interest spread (taxable equivalent) 3.46 3.89 3.54 3.95 Net interest yield (taxable equivalent) 4.30 4.68 4.36 4.76 Effective tax rate 24.89 24.23 23.99 25.20 Overhead ratio 44.77 49.53 45.24 49.07 Efficiency ratio 61.94 62.94 63.87 62.71 -------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION RATIOS - Equity to assets 7.15% 7.18% 7.14% 7.24% Tangible equity to assets 6.08 6.13 6.05 6.16 Equity to loans 11.85 12.40 11.96 12.47 Internal capital generation 8.89 10.12 8.90 10.19 Tier I capital to risk - adjusted assets 10.09 10.37 10.09 10.37 Total capital to risk - adjusted assets 12.12 12.59 12.12 12.59 Leverage ratio 6.42 6.37 6.42 6.37 --------------------------------------------------------------------------------------------------------------------------
22 23 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) and Banco Fiduciario, S.A. (BF) - Lease Financing - Popular Leasing and Rental, Inc. and Popular Leasing, U.S.A. - Consumer and Mortgage Lending - Popular Mortgage, Inc., Equity One, Inc. Popular Finance, Inc. and Levitt Mortgage - Broker / Dealer - Popular Securities, Inc. - ATM Processing and Information Technology Services - GM Group, ATH Costa Rica and CreST, S.A. - Retail Financial Services - Popular Cash Express, Inc. NET INCOME The Corporation's net income amounted to $65.1 million for the second quarter of 2000, compared with $64.0 million for the same quarter of 1999. Earnings per common share (EPS) for the second quarter of 1999 and 2000 were $0.46 based on 135,491,324 and 135,878,677 average common shares outstanding for each respective quarter. Net earnings for the first quarter of 2000 were $64.2 million or $0.46 per common share based on 135,763,765 average common shares outstanding. Return on assets (ROA) and return on common equity (ROE) for the quarter ended June 30, 2000 were 1.01% and 14.43%, respectively, compared with 1.08% and 15.53%, for the same period in 1999. For the first quarter of 2000 these ratios were 1.01% and 14.57%. The Corporation's results of operations for the quarter ended June 30, 2000 reflected increases of $7.1 million in net interest income and $22.4 million in other revenues when compared with the same quarter of 1999. These improvements were partially offset by rises of $14.2 million in operating expenses and $12.1 million in the provision for loan losses. For the first six months of 2000, the Corporation's net earnings rose to $129.3 million, compared with $127.6 million for the same period in 1999. EPS for the first six months of 2000 were $0.92 compared with $0.91 for the same period of 1999. ROA and ROE for the period ended June 30, 2000 were 1.01% and 14.50% respectively, compared with 1.11% and 15.78% for the same period last year. NET INTEREST INCOME Net interest income for the second quarter of 2000 reached $245.9 million, compared with $238.8 million reported for the same period in 1999, and $242.2 million for the first quarter of 2000. On a taxable equivalent basis, net interest income increased to $262.1 million from $258.2 million reported in the same quarter of 1999. The growth of $3.9 million in net interest income, on a taxable equivalent basis, compared with the second quarter of 1999, resulted from a $24.5 million increase mainly due to a higher volume of earning assets, partially offset by 23 24 a $20.6 million decrease due to a lower net interest yield. For analytical purposes, the interest earned on tax-exempt assets is adjusted to a taxable equivalent basis assuming the applicable statutory income tax rates. Table B summarizes the changes in the composition of average earning assets and interest bearing liabilities, and their respective interest income and expense and yields and costs, on a taxable equivalent basis, for the second quarter of 2000, as compared with the same quarter in 1999. TABLE B ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS QUARTER ENDED ON JUNE 30,
Variance Attributable Average Volume Average Yields Interest to ---------------------------------------------------------- -------------------------------------------- 2000 1999 Variance 2000 1999 Variance 2000 1999 Variance Rate Volume ---------------------------------------------------------- -------------------------------------------- ($ in millions) (in thousands) $ 912 $ 680 $ 232 6.31% 4.47% 1.84% Money market investments $ 14,308 $ 7,500 $ 6,808 $ 3,295 $ 3,513 7,537 7,403 134 6.88 6.67 0.21 Investment securities 129,393 122,926 6,467 4,501 1,966 207 328 (121) 6.63 6.24 0.39 Trading 3,413 5,042 (1,629) 340 (1,969) ---------------------------------------------------------- -------------------------------------------- 8,656 8,411 245 6.81 6.48 0.33 147,114 135,468 11,646 8,136 3,510 ---------------------------------------------------------- -------------------------------------------- Loans: 7,226 6,347 879 9.67 9.13 0.54 Commercial 173,744 142,867 30,877 10,183 20,694 794 618 176 11.20 12.67 (1.47) Leasing 22,228 19,559 2,669 (2,451) 5,120 4,261 3,515 746 8.11 8.04 0.07 Mortgage 86,407 70,644 15,763 631 15,132 3,400 3,201 199 13.11 13.09 0.02 Consumer 111,454 104,199 7,255 306 6,949 ---------------------------------------------------------- -------------------------------------------- 15,681 13,681 2,000 10.07 9.94 0.13 393,833 337,269 56,564 8,669 47,895 ---------------------------------------------------------- -------------------------------------------- $24,337 $22,092 $2,245 8.91% 8.62% 0.29% TOTAL EARNING ASSETS $540,947 $472,737 $68,210 $ 16,805 $51,405 ========================================================== ============================================ Interest bearing deposits: $ 1,728 $ 1,720 $ 8 3.43% 3.11% 0.32% NOW and money market $ 14,757 $ 13,207 $ 1,550 $ 1,468 $ 82 4,210 4,226 (16) 3.04 3.04 0.00 Savings 31,841 31,710 131 310 (179) 5,411 4,789 622 6.15 5.52 0.63 Time deposits 82,801 65,230 17,571 9,027 8,544 ---------------------------------------------------------- -------------------------------------------- 11,349 10,735 614 4.59 4.16 0.43 129,399 110,147 19,252 10,805 8,447 ---------------------------------------------------------- -------------------------------------------- 7,114 5,855 1,259 6.43 5.07 1.36 Short-term borrowings 113,684 73,138 40,546 27,018 13,528 2,102 1,807 295 6.84 7.00 (0.16) Medium and long-term debt 35,775 31,265 4,510 (409) 4,919 ---------------------------------------------------------- -------------------------------------------- TOTAL INTEREST-BEARING 20,565 18,397 2,168 5.45 4.73 0.72 LIABILITIES 278,858 214,550 64,308 37,414 26,894 3,073 3,081 (8) Demand deposits 699 614 85 Other sources of funds ---------------------------------------------------------- -------------------------------------------- $24,337 $22,092 $2,245 4.61% 3.94% 0.67% ========================================================== 4.30% 4.68% (0.38)% NET INTEREST MARGIN AND ============================ NET INTEREST INCOME $262,089 $258,187 $ 3,902 $(20,609) $24,511 ================== 3.46% 3.89% (0.43)% NET INTEREST SPREAD ============================ Taxable equivalent adjustment 16,173 19,336 (3,163) ------------------------- Net interest income $245,916 $238,851 $ 7,065 =========================
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. Average earning assets rose $2.2 billion primarily due to a higher average loan portfolio by $2.0 billion when compared with the same quarter in 1999. Commercial loans and mortgage loans accounted for 81% of the total increase in average loans. The increase resulted from the Corporation's efforts directed to the retail and middle 24 25 markets and to a higher loan origination and refinancing activity experienced during 1999 that increased the mortgage loan volume, as a result of the prevailing interest rate environment for these activities in the earlier part of 1999 and to the Corporation's marketing campaign. The increase in average interest bearing liabilities for the second quarter of 2000, as compared with the same quarter in 1999, was mostly reflected in average borrowings and time deposits. These funds were used primarily to fund the Corporation's business expansion, loan growth and investment portfolio opportunities. The net interest margin for the quarter ended June 30, 2000, on a taxable equivalent basis, decreased to 4.30% from 4.68% for the same period in 1999. This reduction was driven by a higher cost of interest bearing liabilities, mostly borrowed money, together with a higher proportion of borrowed money to total interest-bearing liabilities. A rising interest rate scenario has moved the Corporation's cost of interest-bearing liabilities up by 72 basis points, mainly in the cost of borrowed money and time deposits. The Federal Reserve started, in June 1999, a tightening cycle increasing the federal funds rate six times since then for a total of 175 basis points. The increase in the cost of funds was partially offset by a higher average yield on earning assets, which increased by 29 basis points, on a taxable equivalent basis, when compared with the same quarter in 1999. This improvement is primarily related to the increase of 13 basis points in the average yield on loans, mainly in commercial loans, and a higher return in the money market, investment and trading portfolios. For the six-month period ended June 30, 2000, net interest income, on a taxable equivalent basis, increased $10.5 million, when compared with $514.3 million in the same period of 1999. The increase in the average volume of earning assets, partially offset by an increase in the average volume of interest-bearing liabilities, triggered a positive variance of $36.9 million due to levels. An unfavorable variance of $26.4 million due to changes in interest rates and in the mix of the portfolios offset this variance. As shown in Table C average earning assets increased by $2.4 billion for the six-month period ended June 30, 2000, when compared with $21.7 billion reported in the same period of 1999. Loans accounted for 81% of the total increase in average earning assets. Average interest-bearing liabilities increased $2.3 billion when compared with the six-month period ended June 30, 1999. The increase in the cost of interest-bearing liabilities, partially offset by the increase in the yield on earning assets, on a taxable equivalent basis, resulted in a lower net interest yield by 40 basis points, which decreased from 4.76% in the first six months of 1999 to 4.36% in the same period of 2000. As previously explained, the decline in the net interest margin was mostly the result of a higher interest rate scenario that prevailed during the first six months of 2000 as compared to 1999, and to a higher proportion of borrowings and time deposits, which carry a higher cost. 25 26 TABLE C ANALYSIS OF LEVELS AND YIELDS ON A TAXABLE EQUIVALENT BASIS YEAR-TO-DATE JUNE 30,
Variance Attributable Average Volume Average Yields Interest to ------------------------------------------------------ ---------------------------------------------------- 2000 1999 Variance 2000 1999 Variance 2000 1999 Variance Rate Volume ------------------------------------------------------ ---------------------------------------------------- ($ in millions) (in thousands) $ 882 $ 688 $ 194 6.28% 4.53% 1.75% Money market investments $ 27,556 $ 15,433 $ 12,123 $ 7,106 $ 5,017 7,591 7,224 367 6.77 6.84 (0.07) Investment securities 256,466 246,275 10,191 (2,937) 13,128 220 323 (103) 7.41 6.34 1.07 Trading 8,085 10,146 (2,061) 1,547 (3,608) ----------------------------------------------------- ----------------------------------------------------- 8,693 8,235 458 6.73 6.63 0.10 292,107 271,854 20,253 5,716 14,537 ----------------------------------------------------- ----------------------------------------------------- Loans: 7,124 6,226 898 9.56 9.08 0.48 Commercial 338,766 280,418 58,348 16,271 42,077 732 619 113 11.97 12.89 (0.92) Leasing 43,838 39,917 3,921 (2,979) 6,900 4,136 3,417 719 8.32 8.09 0.23 Mortgage 172,042 138,122 33,920 4,093 29,827 3,362 3,180 182 13.14 13.03 0.11 Consumer 220,476 206,528 13,948 523 13,425 ----------------------------------------------------- ----------------------------------------------------- 15,354 13,442 1,912 10.13 9.94 0.19 775,122 664,985 110,137 17,908 92,229 ----------------------------------------------------- ----------------------------------------------------- $24,047 $21,677 $2,370 8.90% 8.68% 0.22% TOTAL EARNING ASSETS $1,067,229 $936,839 $130,390 $ 23,624 $106,766 ===================================================== ===================================================== Interest bearing deposits $ 1,708 $ 1,697 $11 3.40% 3.12% 0.28% NOW and money market $ 28,856 $ 26,243 $ 2,613 $ 2,396 $ 217 4,189 4,195 (6) 2.96 2.99 (0.03) Savings 61,727 62,282 (555) (669) 114 5,315 4,769 546 6.10 5.60 0.50 Time deposits 161,290 132,445 28,845 11,796 17,049 ----------------------------------------------------- ----------------------------------------------------- 11,212 10,661 551 4.52 4.18 0.34 251,873 220,970 30,903 13,523 17,380 ----------------------------------------------------- ----------------------------------------------------- 6,969 5,623 1,346 6.25 5.11 1.14 Short-term borrowings 216,509 142,513 73,996 36,386 37,610 2,151 1,711 440 6.92 6.95 (0.03) Medium and long-term debt 74,037 59,024 15,013 148 14,865 ----------------------------------------------------- ---------------------------------------------------- TOTAL INTEREST-BEARING 20,332 17,995 2,337 5.36 4.73 0.63 LIABILITIES 542,419 422,507 119,912 50,057 69,855 3,073 3,037 36 Demand deposits 642 645 (3) Other sources of funds ----------------------------------------------------- ---------------------------------------------------- $24,047 $21,677 $2,370 4.54% 3.92% 0.62% ===================================================== 4.36% 4.76% (0.40)%NET INTEREST MARGIN AND =========================== NET INTEREST INCOME $ 524,810 $514,332 $ 10,478 $(26,433) $ 36,911 ================== 3.54% 3.95% (0.41)%NET INTEREST SPREAD =========================== Taxable equivalent 36,654 39,243 (2,589) adjustment -------------------------------- Net interest income $ 488,156 $475,089 $ 13,067 ================================
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. 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 to interest rates, as primarily interest rate volatility and its impact on the repricing of assets and liabilities affect the net interest income. The Corporation maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Corporation uses various techniques to assess the degree of interest rate risk, including static gap analysis, simulation and duration analysis. Each focuses on different aspects of the interest rate risk that is assumed at any point in time, and are therefore used jointly to make informed judgements about the risk levels and the 26 27 appropriateness of strategies under consideration. An interest rate sensitivity analysis, performed at the Corporation level, is the primary tool used in expressing the potential changes in future earnings resulting from selected hypothetical changes in interest rates. Sensitivity analysis 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 processed using various interest rate scenarios to determine potential changes to the future earnings of the Corporation. Computations of the prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking choices are only estimates and may be different from what actually may occur in the future. Based on the results of the sensitivity analysis as of June 30, 2000, the change in net interest income on a hypothetical rising rate scenario for the next twelve months was a $2.9 million increase and the change for the same period utilizing a hypothetical declining rate scenario was a decrease of $2.9 million. Both hypothetical rate scenarios consider a gradual change of 150 basis points during the twelve-month period. These estimated changes are well within the policy guidelines established by the Board. In the course of its business, the Corporation occasionally enters into foreign exchange transactions. These transactions are executed as an intermediary primarily for its commercial and retail clients, and any foreign exchange positions assumed by the Corporation as a result are offset in the currency markets. Management therefore believes that the market risk assumed by the Corporation in its foreign currency transactions is not significant. The Corporation is the largest shareholder of BF, a commercial banking institution in the Dominican Republic, with a 57% ownership interest. Most of BF's business is conducted in Dominican `pesos' (DR$). 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 exchange rate volatility between these two currencies to affect significantly the value of the Corporation's investment in BF. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses for the second quarter of 2000, increased $12.1 million or 33.0% when compared with the same period of 1999. For the six-month period ended June 30, 2000 the provision totaled $98.7 million, an increase of $26.3 million or 36.4% compared with the same period in 1999. The rise in the provision for loan losses was mostly due to the growth of $1.9 billion in the Corporation's loan portfolio from June 30, 1999 to the same date this year, and increases in non-performing assets and net charge-offs. Table D summarizes the movement in the allowance for loan losses and presents selected loan loss statistics for the quarters and six-month periods ended June 30, 2000 and 1999. Additional information regarding the allowance and asset quality appears in the Credit Quality section. 27 28 TABLE D ALLOWANCE FOR LOAN LOSSES AND SELECTED LOAN LOSSES STATISTICS
Second Quarter First Six Months (Dollars in thousands) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $293,442 $277,116 $292,010 $267,249 Allowance purchased 1,481 1,481 Provision for loan losses 48,719 36,631 98,732 72,402 ------------------------------------------------------- 343,642 313,747 392,223 339,651 ------------------------------------------------------- Losses charged to the allowance: Commercial 15,636 14,026 35,124 25,322 Construction 4 145 500 Lease financing 8,574 5,795 15,972 11,641 Mortgage 1,550 910 2,192 1,853 Consumer 29,511 26,180 61,709 46,752 ------------------------------------------------------- 55,275 46,911 115,142 86,068 ------------------------------------------------------- Recoveries: Commercial 5,600 5,786 8,461 8,758 Construction 89 91 Lease financing 5,384 4,547 7,755 8,465 Mortgage 120 88 181 382 Consumer 6,055 5,244 12,048 11,311 ------------------------------------------------------- 17,159 15,754 28,445 29,007 ------------------------------------------------------- Net loans charged-off (recovered): Commercial 10,036 8,240 26,663 16,564 Construction 4 (89) 145 409 Lease financing 3,190 1,248 8,217 3,176 Mortgage 1,430 822 2,011 1,471 Consumer 23,456 20,936 49,661 35,441 ------------------------------------------------------- 38,116 31,157 86,697 57,061 ------------------------------------------------------- Balance at end of period $305,526 $282,590 $305,526 $282,590 ======================================================= Ratios: Allowance for losses to loans 1.94% 2.03% 1.94% 2.03% Allowance to non-performing assets 80.30 93.26 80.30 93.26 Allowance to non-performing loans 88.80 103.51 88.80 103.51 Non-performing assets to loans 2.41 2.18 2.41 2.18 Non-performing assets to total assets 1.44 1.28 1.44 1.28 Net charge-offs to average loans 0.97 0.91 1.13 0.85 Provision to net charge-offs 1.28X 1.18x 1.14X 1.27x Net charge-offs earnings coverage 3.56 3.87 3.08 4.24
Net charge-offs for the second quarter of 2000, increased $7.0 million or 22.3% when compared with the same quarter of 1999. When compared with the first quarter of 2000, net charge-offs showed a decrease of $10.5 million. Net charge-offs represented 0.97% of average loans for the quarter ended June 30, 2000, compared with 0.91% for 28 29 the same period in 1999 and 1.29% in the first quarter of 2000. Net losses for the quarter were principally in the consumer, lease financing and commercial loan portfolios. Consumer loans net charge-offs rose $2.5 million, representing 2.76% of average consumer loans for the quarter ended June 30, 2000, compared with 2.62% for the second quarter of 1999. The increases experienced since June 30, 1999 were mostly in the credit card and personal loan portfolios in both, Puerto Rico and the U.S. mainland, mainly due to an increase in personal delinquencies. Commercial loans net charge-offs, including construction loans, increased $1.9 million for the quarter ended June 30, 2000, when compared with the same quarter of 1999. Commercial loans net charge-offs, including construction loans, represented 0.56% of average commercial loans for the quarter ended June 30, 2000, compared with 0.51% for the same quarter last year. This increase is mostly related to the growth in the commercial loan portfolio, as well as the deterioration in the credit quality of a limited number of commercial relationships in Puerto Rico and the United States. Lease financing net charge-offs totaled $3.2 million or 1.61% of the average lease financing portfolio for the quarter ended June 30, 2000, compared with $1.2 million or 0.81% for the same quarter last year. This rise is mostly due to a $2.5 million charge-off related to an external fraud scheme that was unveiled during this quarter in our U.S. operations, and represented the balance not covered by insurance. Net charge-offs for the six-month period ended June 30, 2000, reached $86.7 million or 1.13% of average loans, compared with $57.1 million or 0.85% for the same period of 1999. Similarly to the quarter results, the increase in net credit losses for the six-month period ended June 30, 2000 was mostly reflected in the commercial, consumer and lease financing portfolios. The increase of $9.8 million in commercial net charge-offs, including construction loans, when compared to the same six-months last year was also related to the rise in the commercial loan portfolio, as well as the deterioration of the credit quality of a limited number of commercial relationships. Commercial and construction loans net charge-offs represented 0.75% of the average balance of those loans for the six-months ended June 30, 2000, compared with 0.55% for the same period last year. Consumer loans net charge-offs totaled $49.7 million or 2.95% of average consumer loans in the six-month period ended June 30, 2000, compared with $35.4 million or 2.23% in the same period of 1999. Lease financing net charge-offs totaled $8.2 million or 2.25% of the average lease financing portfolio for the first six months of 2000, compared with $3.2 million or 1.0% for the same period last year. Besides the increase in net-charge offs related to the external fraud scheme, other factors such as the increase in personal delinquencies coupled with lower recovery activity in the lease financing portfolio during the first quarter of 2000, contributed to the rise in net charge-offs for the period. At June 30, 2000, the allowance for loan losses was $305.5 million, representing 1.94% of loans, compared with $282.6 million or 2.03% a year earlier, and $292.0 million or 1.96% at December 31, 1999. The allowance for loan losses is maintained at a level, which is considered by management to be sufficient to provide for estimated losses based on evaluations of known and inherent risks in the loan portfolio. The Corporation's management evaluates the adequacy of the allowance for loan losses on a monthly basis. In determining the allowance, management considers the portfolio risk characteristics, the results of periodic credit reviews of individual loans, prior loss experience, and prevailing and projected economic conditions and loan impairment measurement. 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 29 30 on the present value of expected future cash flows discounted at the loan's effective rate, on the observable market price of the loan 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, adjusted for current conditions. 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 allowance for impaired loans is part of the Corporation's overall allowance for loan losses. The following table shows the Corporation's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 (as amended by SFAS No. 118) at June 30, 2000 and June 30, 1999.
JUNE 30, 2000 June 30, 1999 RECORDED VALUATION Recorded Valuation INVESTMENT ALLOWANCE Investment Allowance -------------------------------------------------------------- Impaired loans: Valuation allowance required $156 $53 $132 $30 No valuation allowance required 37 35 -------------------------------------------------------------- Total impaired loans $193 $53 $167 $30 --------------------------------------------------------------
Average impaired loans during the second quarter of 2000 and 1999 were $188 million and $170 million, respectively. The Corporation recognized interest income on impaired loans of $1.3 million and $1.6 million, respectively, for the quarters ended June 30, 2000 and 1999. CREDIT QUALITY Non-performing assets consist of past-due loans on which no interest income is being accrued and other real estate. A summary of non-performing assets by loan categories and related ratios is presented in Tables D and E. 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 industry practice for most U.S. banks which is 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 industry practice for most U.S. banks, close-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. As presented in Table E, the rise in non-performing assets was reflected mostly in non-performing commercial, lease financing and consumer loans, which rose $47.1 million, $12.6 million and $7.3 million, respectively, when compared with June 30, 1999. Non-performing assets increased $54.4 million when compared to amounts reported as of December 31, 1999, principally in the commercial, lease financing and mortgage loan portfolios. Non-performing assets as a percentage of total loans amounted to 2.41% as of June 30, 2000, compared with 2.18% at the same date in 1999 and 2.19% as of December 31, 1999. 30 31 TABLE E NON-PERFORMING ASSETS
------------------------------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, 2000 1999 1999 ------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Commercial, construction, industrial and agricultural $199,289 $165,472 $152,233 Lease financing 15,674 3,820 3,053 Mortgage 74,333 70,038 70,264 Consumer 54,756 57,515 47,457 Other real estate 36,426 29,268 30,018 ------------------------------------------------------ Total $380,478 $326,113 $303,025 ====================================================== Accruing loans past-due 90 days or more $ 29,954 $ 28,731 $ 23,206 ====================================================== Non-performing assets to loans 2.41% 2.19% 2.18% Non-performing assets to assets 1.44 1.28 1.28
The rise in commercial non-performing loans since December 31, 1999 corresponded principally to the classification on non-accrual of a limited number of commercial loan relationships in Puerto Rico and the United States, as well as the growth in the portfolio. Most of the increase in non-performing leases is due to the inclusion of $13 million in leases that became delinquent due to the aforementioned external fraud scheme that was exposed during the quarter. The Corporation expects to recover this balance from the insurance companies, which have already confirmed coverage. The increase in non-performing mortgage loans from December 31, 1999 was principally due to the growth in the mortgage loan portfolio and higher delinquency levels. As displayed in Table E, the other real estate category also reflected an increase of $7.2 million from the end of 1999, principally as a result of various properties repossessed by the Corporation's banking subsidiary in the Dominican Republic. The rises described above were partially offset by a decrease of $2.8 million in non-performing consumer loans when compared with December 31, 1999. Non-performing consumer loans represented 1.63% of the average consumer loan portfolio at June 30, 2000 compared with 1.78% at December 31, 1999. This decrease mainly resulted from the fact that the growth in consumer loans was derived mainly from credit cards, which are not customarily placed on non-accrual status prior to being charged-off. At June 30, 2000, the allowance for loan losses as a percentage of non-performing assets was 80.30% compared with 93.26% at June 30, 1999 and 89.54% at December 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 June 30, 2000, would have been $310 million or 1.96% of loans, and the allowance for loan losses would have been 98.7% of non-performing assets. At June 30, 1999 and December 31, 1999, adjusted non-performing assets would have been $222 million or 1.60% of loans and $247 million or 1.66% of loans, respectively, and the allowance to non-performing assets would have been 127.0% and 118.2%, respectively. 31 32 NON-INTEREST INCOME Non-interest income, including securities and trading gains amounted to $109.3 million for the quarter ended June 30, 2000, compared with $86.9 million for the same period in 1999. As seen on Table F, the rise in non-interest income was principally driven by an increase of $15.8 million in other service fees, $4.2 million in other operating income, and $1.1 million in service charges on deposit accounts. TABLE F NON-INTEREST INCOME
Second Quarter Year-to-Date ---------------------------------------------------------------------------------------------------------------------------- 2000 1999 Change 2000 1999 Change ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Service charges on deposit accounts $ 30,831 $29,731 $ 1,100 $ 61,054 $ 57,980 $ 3,074 ------------------------------------------------------------------------------ Other service fees: Credit cards fees and discounts 18,305 12,105 6,200 32,675 23,004 9,671 Debit card fees 7,300 5,323 1,977 12,191 10,417 1,774 Processing fees 6,859 6,859 13,028 13,028 Other fees 6,767 7,412 (645) 12,809 14,070 (1,261) Sale and administration of investment products 4,582 4,027 555 8,496 8,526 (30) Check cashing fees 3,681 2,811 870 7,211 5,003 2,208 Mortgage servicing fees, net of amortization 2,967 2,584 383 5,713 5,568 145 Trust fees 2,323 2,595 (272) 4,737 5,056 (319) External payments fees 1,588 1,351 237 3,126 2,301 825 Credit life insurance fees 1,071 1,483 (412) 2,822 3,655 (833) ------------------------------------------------------------------------------ Subtotal 55,443 39,691 15,752 102,808 77,600 25,208 ------------------------------------------------------------------------------ Other income 21,989 17,800 4,189 46,046 38,531 7,515 ------------------------------------------------------------------------------ Total $108,263 $87,222 $ 21,041 $209,908 $174,111 $ 35,797 ==============================================================================
Other service fees, which represented 50.7% of non-interest income for the second quarter of 2000, increased $15.8 million or 39.7% from the amount reported in 1999. The continued business expansion as well as the acquisition of GM Group, early in the third quarter of 1999, were the driving factors for the growth in non-interest income. As shown in Table F, the increase in other service fees from the same quarter last year is mostly attributable to the rise in processing fees, credit card fees and discounts, debit card and check-cashing fees. The increase in processing fees was mostly driven by the aforementioned acquisition of GM Group. Credit card fees and discounts rose 51.2% when compared with the second quarter ended June 30, 1999, principally as a result of late payment and cash advance fees implemented during March 2000 in Puerto Rico upon the enactment of a new regulation authorizing these charges, and to the growth in credit card sales and active accounts. Banco Popular's American Express card, originally launched in August 1998, reflected an increase of 63.14% in active accounts and 125.7% in average outstanding balances, when compared with the quarter ended June 30, 1999. Moreover, our U.S. mainland credit card portfolio rose 39.7% in active accounts and 72.9% average outstanding balances when compared to the same quarter in 1999. The rise in debit card fees, which consist primarily of rental income of point-of-sale (POS) terminals and interchange income, was the result of a sustained growth in the number of POS terminals and in the volume of transactions. The increase in check-cashing fees was the result of the growth of the Corporation's retail financial services subsidiary, Popular Cash Express. This subsidiary operated 70 stores in five states plus 41 mobile 32 33 units at the end of the second quarter of 2000, compared with 48 stores and 32 mobile units as of June 30, 1999. The rises described above were partially offset by lower other fees and credit life insurance fees. The latter has been negatively affected upon the enactment of a new regulation that requires financial institutions to reimburse the unearned portion of the credit life insurance fees on loans prepaid. The increase in other income when compared with the same quarter a year earlier, was mostly attributed to revenues derived by GM Group, corresponding mainly to programming fees, consulting services for new technology and system engineering services, among others. Service charges on deposit accounts reflected higher activity on commercial accounts. For the six-month period ended June 30, 2000 and 1999, non-interest income, including securities and trading gains, totaled $225.0 million and $174.0 million, respectively. Processing fees, credit card fees and discounts, check-cashing fees and debit card fees within the other service fees category, all reflected significant growth when compared with the six-month period ended June 30, 1999, mainly due to the same reasons explained above. The increase in other income of $7.5 million when compared with the six-month period a year earlier was mostly due to revenues generated by GM Group, and higher revenues derived from the Corporation's investment in Telecomunicaciones de Puerto Rico, Inc. (TELPRI). These rises in other income were partially offset by lower gains on sale of loans and lower underwriting fees and other revenues derived by the Corporation's broker/dealer subsidiary due to lower related activity for the year. OPERATING EXPENSES Operating expenses for the second quarter of 2000 were $219.4 million, compared with $205.2 million for the same quarter in 1999, an increase of $14.2 million, or 6.9%. Personnel costs, the largest category of operating expenses, totaled $98.2 million for the second quarter of 1999, an increase of $3.6 million or 3.8% when compared with the same period of 1999. Salaries accounted for the largest portion of the increase in personnel costs rising $7.3 million. This rise resulted from increased employment levels due to the Corporation's business expansion and the acquisitions of GM Group, Levitt Mortgage and Crest, S.A. made after the second quarter of 1999, and to normal merit increases. Full-time equivalent employees (FTE's) amounted to 11,619 at the end of this quarter, up 808 from 10,811 FTE's at the same date in 1999. Partially offsetting the increase in salaries was a reduction of $3.2 million in pension and other benefits, mainly as a result of revisions made to Banco Popular de Puerto Rico's health insurance plan effective April 1, 2000, and to lower pension and post-retirement benefit expenses. Other operating expenses, excluding personnel costs, increased $10.6 million, reaching $121.2 million for the second quarter of 2000, compared with $110.6 million for the same period in 1999. The increase was mostly attributed to rises in equipment, net occupancy, communications and other operating expenses. The increase in equipment expenses of $3.5 million and in net occupancy expenses of $1.5 million, when compared with the same quarter a year earlier, was mainly due to the Corporation's expenditures associated to new technology and systems enhancements, and the Corporation's growth and expansion. The increase of $1.5 million in communication expenses was mostly related to the acquisition of GM Group earlier in the third quarter of 1999, and to a growth in the electronic banking network of ATMs and POS terminals and in the volume of electronic transactions, which require additional communication lines and associated costs. Other operating expenses grew primarily due to higher sundry losses, travelling and miscellaneous expenses, and to costs associated with the operations of GM Group. For the first six months of 2000, operating expenses rose to $445.9 million from $407.1 million for the same period in 1999. Besides the reasons for the increases described above which also apply for the six-month period, the Corporation experienced rises in business promotion expenses, professional fees and in the amortization of intangibles, when compared with the six-month period ended June 30, 1999. Business promotion rose mostly due to advertising costs associated with the credit cards operations, IRA campaigns and the launching of the internet site "Mi Banco Popular", as well as business promotional efforts launched by Equity One during the year. The rise 33 34 in professional fees resulted mainly from consulting and temporary services needed to support the growth of the Corporation's business activity, coupled with the legal and consulting expenses incurred in connection with enhancing and improving Banco Popular de Puerto Rico's anti-money laundering policies and procedures as agreed with the Federal Reserve Bank of New York. The increase in the amortization of intangibles was mostly associated with the aforementioned acquisition of GM Group. BALANCE SHEET COMMENTS Total assets as of June 30, 2000 were $26.5 billion compared with $23.7 billion and $25.5 billion at June 30, 1999 and December 31, 1999, respectively. Earning assets increased $0.9 billion, reaching $24.7 billion as of June 30, 2000, from $23.8 billion as of December 31, 1999. Earning assets totaled $22.1 billion at June 30, 1999. The investment portfolio reached $7.5 billion as of June 30, 2000 compared with $7.6 billion as of December 31, 1999, and $7.1 billion as of June 30, 1999. The increase from June 30, 1999 is mostly related to increased investment portfolio activity in the second half of 1999. Money market investments increased $400 million and trading securities decreased $130 million when compared with June 30, 1999. These same categories reflected a rise of $206 million and a reduction of $46 million, respectively, when compared with December 31, 1999. The increase in money market investments from the end of 1999 was mostly associated with securities purchased under agreements to resell. As presented in Table G, the loan portfolio increased $867 million, reaching $15.8 billion when compared with December 31, 1999. Total loans amounted to $13.9 billion at June 30, 1999. The growth was mostly reflected in the commercial, including construction, and mortgage loan portfolios, which contributed with 88.9% or $771 million of the increase since the end of 1999. The growth in the commercial loan portfolio resulted principally from the continued marketing efforts directed to the retail and middle market, mostly in our U.S. banking operations, which contributed with a rise of $285 million since December 31, 1999. The increase in the loan portfolio compared with the same date last year was also reflected in the commercial, including construction, and mortgage loan portfolios, which increased $817 million and $783 million, respectively. TABLE G LOANS ENDING BALANCES
---------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, 2000 1999 1999 ---------------------------------------------------------------------------------------------------- (Dollars in thousands) Commercial, industrial and agricultural $ 6,957,801 $ 6,656,411 $ 6,128,351 Construction 281,790 247,288 293,845 Lease financing 743,191 728,644 663,146 Mortgage * 4,368,381 3,933,663 3,585,512 Consumer 3,423,441 3,341,748 3,216,538 ---------------------------------------------- Total $15,774,604 $14,907,754 $13,887,392 ==============================================
* Includes loans held-for-sale The increase of $58.2 million in other assets when compared with December 31, 1999 is mainly due to an increase in prepaid taxes, receivables from brokers and dealers and other accounts receivables, mostly related to revenues derived from the investment in TELPRI. 34 35 Total deposits were $14.5 billion at June 30, 2000, an increase of $287 million when compared with the $14.2 billion reported at December 31, 1999. Most of the growth was realized in time deposits, which increased $367 million from December 31, 1999 mainly as a result of the higher interest rate scenario, which has prompted clients to invest in longer term funds which derive a higher interest rate of return. Savings deposits increased $141 million, while demand deposits decreased $221 million when compared with the amount at December 31, 1999. The decrease in demand deposits is mainly attributable to a reduction in the funds held in trust for the benefit of third parties and lower commercial checking account balances. At June 30, 1999 total deposits amounted to $13.9 billion. Borrowed funds, including subordinated notes and capital securities, amounted to $9.8 billion at June 30, 2000, compared with $9.2 billion as of December 31, 1999 and $7.7 billion at June 30, 1999. The increase in borrowed funds from December 31, 1999 was mainly used to finance loan growth. As part of the investment in BF and Levitt Mortgage, the Corporation recognized a minority interest of $21.3 million as of June 30, 2000, which represents the beneficial interest of the minority investors of these two entities. At June 30, 1999, this minority interest totaled $20.2 million. The Corporation's stockholders' equity at June 30, 2000 was $1.74 billion compared with $1.66 billion and $1.65 billion at December 31, 1999 and June 30, 1999, respectively. Included in stockholders equity at June 30, 2000 were $150 million in unrealized losses on securities available-for-sale, net of tax, compared with $139 million and $39 million in unrealized losses on securities available-for-sale, net of taxes, as of December 31, 1999 and June 30, 1999, respectively. Under the regulatory framework for prompt corrective action, banks, 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. Information pertaining to the Corporation's regulatory risk-based capital requirements is shown on Table H. The market value of the Corporation's common stock at June 30, 2000 was $19.06, compared with $27.94 at December 31, 1999 and $30.31 at June 30, 1999. The Corporation's market capitalization at June 30, 2000, was $2.6 billion, compared with $3.8 billion as of December 31, 1999 and $4.1 billion at June 30, 1999. 35 36 TABLE H CAPITAL ADEQUACY DATA
------------------------------------------------------------------------------------------------------------ JUNE 30, December 31, June 30, 2000 1999 1999 (Dollars in thousands) ------------------------------------------------------------------------------------------------------------ Risk-based capital Tier I capital $ 1,640,921 $ 1,557,096 $ 1,481,761 Supplementary (Tier II) capital 329,591 324,519 316,608 ------------------------------------------------------- Total capital $ 1,970,512 $ 1,881,615 $ 1,798,369 ======================================================= Risk-weighted assets Balance sheet items 15,732,466 14,878,731 $13,773,374 Off-balance sheet items 528,748 428,780 512,093 ------------------------------------------------------- Total risk-weighted assets $16,261,214 $15,307,511 $14,285,467 ======================================================= Ratios: Tier I capital (minimum required - 4.00%) 10.09% 10.17% 10.37% Total capital (minimum required - 8.00%) 12.12% 12.29% 12.59 Leverage ratio (minimum required - 3.00%) 6.42% 6.40% 6.37
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation's financial position or results of operations. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS The Corporation held its Annual Stockholder's Meeting on April 25, 2000, at which common stockholders elected the following four directors: Juan J. Bermudez, Richard L. Carrion, Jorge A. Junquera and Francisco M. Rexach Jr. All four directors were elected for a three year term with favorable votes ranging from 90.05% to 90.68% of the voting shares issued and outstanding which amounted to 135,763,765 as of the record date, March 6, 2000. A 90.71% of the common shares issued an outstanding as of the mentioned record date, were represented at the meeting, which complied with the quorum required by law. 36 37 ITEM 5. OTHER INFORMATION During this quarter the Corporation acquired Centro Finance, a small personal loan company that operates nine offices in Puerto Rico with a loan portfolio of approximately $23 million. The operations of Centro Finance became part of Popular Finance, which will now operate 53 branches throughout the island. In addition, on July 1, 2000, Popular North America purchased Aurora National Bank in Illinois. This bank operates two branches with approximately $111 million in deposits and $81 million in loans. With the acquisition of Aurora National Bank and two new branches opened during this quarter in New Jersey and Florida, Banco Popular North America now operates 95 branches in the U.S. mainland. With the objective of providing more services to our customers and participating in the competitive insurance business, effective July 1, 2000, Popular, Inc. created Banco Popular, National Association, a national bank in Orlando, Florida that will oversee the operations of the recently created Popular Insurance. Popular Insurance will begin operations immediately as it is simultaneously acquiring the operations of R&B Insurance Agency, Inc., whose management has a vast experience in the insurance business in Puerto Rico. During the end of the second quarter of 2000, the Corporation signed a letter of intent to sell its ownership interest in Banco Fiduciario to a local financial institution in the Dominican Republic. The transaction, which was awaiting regulatory approval from local regulatory agencies, will be effective in August 2000. During the month of July, the Corporation signed an agreement for the sale of its credit card operations in the United States. This transaction is awaiting the approval from the regulatory agencies. The agency agreement signed by the buyer will enable the Corporation to continue offering credit cards, particularly in the Hispanic market. 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 June 30, 2000 27 Financial Data Schedule Exhibit "B"
b) One report on Form 8-K was filed for the quarter ended June 30, 2000: Dated: April 10, 2000 Items reported: Item 5 - Other Events 37 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be filed on its behalf by the undersigned thereunto duly authorized. POPULAR, INC. (Registrant) Date: August 14, 2000 By: /s/ Jorge A. Junquera --------------- ----------------------------------- Jorge A. Junquera Senior Executive Vice President Date: August 14, 2000 By: /s/ Amilcar L. Jordan --------------- ----------------------------------- Amilcar L. Jordan, Esq. Senior Vice President & Comptroller 38