-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, McTtYBT8FIEgHwYnmSFgMb+FYbVje7MrRInkD4v/gWU8BzW2iI1X2X8VYFM1ekCR kaarDcmBwAi/CxQ9AUKgLQ== 0000950144-00-003220.txt : 20000316 0000950144-00-003220.hdr.sgml : 20000316 ACCESSION NUMBER: 0000950144-00-003220 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POPULAR INC CENTRAL INDEX KEY: 0000763901 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 660416582 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-96018 FILM NUMBER: 570509 BUSINESS ADDRESS: STREET 1: 209 MUNOZ RIVERA AVE STREET 2: POPULAR CENTER BUILDING CITY: HATO REY STATE: PR ZIP: 00918 BUSINESS PHONE: 7877659800 MAIL ADDRESS: STREET 1: P.O. BOX 362708 CITY: SAN JUAN STATE: PR ZIP: 00936-2708 FORMER COMPANY: FORMER CONFORMED NAME: BANPONCE CORP DATE OF NAME CHANGE: 19920703 10-K 1 POPULAR, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K --------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the Fiscal Year Ended December 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) Commission File No. 0-13818 POPULAR, INC. ------------- Incorporated in the Commonwealth of Puerto Rico IRS Employer Identification No. 66-0416582 Principal Executive Offices: ---------------------------- 209 Munoz Rivera Avenue Hato Rey, Puerto Rico 00918 Telephone Number: (787) 765-9800 - ------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock ($6.00 par value) 8.35% Non-Cumulative Monthly Income Preferred Stock, 1994 Series A (Liquidation Preference $25.00 Per Share) Series A Participating Cumulative Preferred Stock Purchase Rights 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] ------------------------------------------------------ As of February 29, 2000 the Corporation had 135,763,765 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Corporation was $3,028,890,000 based upon the reported closing price of $22.31 on the NASDAQ National Market System on that date. 1 2 DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Corporation's Annual Report to Shareholders for the fiscal year ended December 31, 1999 are incorporated herein by reference in response to Item 1 of Part I, Items 5 through 8 of Part II and Item 14(a)(1) of Part IV. (2) Portions of the Corporation's Proxy Statement relating to the 2000 Annual Meeting of Stockholders of the Corporation are incorporated herein by reference in response to Items 10 through 13 of Part III. 2 3 TABLE OF CONTENTS
Page ---- PART I -------- Item 1 Business 4 Item 2 Properties 13 Item 3 Legal Proceedings 14 Item 4 Submission of Matters to a Vote of Security Holders 14 PART II -------- Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 15 Item 6 Selected Financial Data 16 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A Quantitative and Qualitative Disclosures About Market Risk 17 Item 8 Financial Statements and Supplementary Data 17 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 PART III -------- Item 10 Directors and Executive Officers of the Registrant 17 Item 11 Executive Compensation 17 Item 12 Security Ownership of Certain Beneficial Owners and Management 17 Item 13 Certain Relationships and Related Transactions 17 PART IV -------- Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 18
3 4 PART I POPULAR, INC. ITEM 1 BUSINESS Popular, Inc. (the "Corporation") is a diversified, publicly owned bank holding company, registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act") and, accordingly, subject to the supervision and regulation of the Board of Governors of the Federal Reserve System ("the Federal Reserve Board"). The Corporation was incorporated in 1984 under the laws of the Commonwealth of Puerto Rico and is the largest financial institution in Puerto Rico, with consolidated assets of $25.5 billion, total deposits of $14.2 billion and stockholders' equity of $1.7 billion at December 31, 1999. Based on total assets at December 31, 1999, the Corporation was the 37th largest bank holding company in the United States. The Corporation's principal subsidiary, Banco Popular de Puerto Rico ("Banco Popular" or the "Bank"), was incorporated in 1893 and is Puerto Rico's largest bank with total assets of $18.3 billion, deposits of $10.4 billion and stockholders' equity of $1.0 billion at December 31, 1999. The Bank accounted for 72% of the total consolidated assets of the Corporation at December 31, 1999. A consumer-oriented bank, Banco Popular has the largest retail franchise in Puerto Rico, operating 199 branches and 442 automated teller machines. The Bank has the largest trust operation in Puerto Rico. The Bank also operates seven branches in the U.S. Virgin Islands, one branch in the British Virgin Islands and one branch in New York. Banco Popular's deposits are insured under the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation (the "FDIC"). Banco Popular has three subsidiaries, Popular Leasing & Rental, Inc., Puerto Rico's largest vehicle leasing and daily rental company, Popular Finance, Inc., a small-loan and second mortgage company with 47 offices in Puerto Rico, and Popular Mortgage, Inc., a mortgage loan company with 13 offices in Puerto Rico. The Corporation has three other principal subsidiaries: Popular Securities, Inc., Popular International Bank, Inc. ("PIB") and GM Group, Inc. Popular Securities, Inc. is a securities broker-dealer in Puerto Rico with financial advisory, investment and security brokerage operations for institutional and retail customers. Popular International Bank, Inc. ("PIB"), owns all of the outstanding stock of Popular North America, Inc. ("PNA") and ATH Costa Rica. The latter provides ATM switching and driving services in San Jose, Costa Rica. In addition, PIB owns 57% of the outstanding stock of Banco Fiduciario, S. A. ("BF"), a commercial bank in the Dominican Republic with total assets of $436 million as of December 31, 1999. In July 1999 the Corporation acquired GM Group, Inc., which provides electronic data processing and consulting services, sale and rental of electronic data processing equipment, and sale and maintenance of computer software to clients in ten countries and through offices in Puerto Rico, Venezuela, Miami and the Dominican Republic. At December 31, 1999 GM Group, Inc. had total assets of $58 million. In August 1999 the Corporation acquired 85% of Newco Mortgage Holding Corporation (d/b/a Levitt Mortgage), a mortgage banking organization with operations in Puerto Rico, as part of the strategic initiative of enhancing its mortgage business in Puerto Rico. At December 31, 1999, the assets of Levitt Mortgage totaled $10 million. PIB is a wholly-owned subsidiary of the Corporation organized in 1992 that operates as an "international banking entity" under the International Banking Center Regulatory Act of Puerto Rico (the "IBC Act"). PIB is a registered bank holding company under the BHC Act and is principally engaged in providing managerial services to its subsidiaries. PNA, a wholly-owned subsidiary of PIB and an indirect wholly-owned subsidiary of the Corporation, was organized in 1991 under the laws of the State of Delaware and is a registered bank holding company under the BHC Act. PNA functions as a holding company for the Corporation's mainland U.S. operations. As of December 31, 1999, PNA had four direct subsidiaries, all of which were wholly-owned: Popular Holdings USA, Inc. ("PHUSA"), the holding company of Banco Popular North America 4 5 ("BPNA") and Banco Popular, N.A. (Texas), Equity One, Inc. a diversified consumer finance company, Popular Cash Express, Inc., a retail financial services company and BanPonce Trust 1, a statutory business trust. Banco Popular, N.A. (Texas) merged with and into BPNA on January 1, 2000. The banking operations of BPNA in the mainland United States are based in six states. In New York, BPNA operates 32 branches, which accounted for aggregate assets of $2.0 billion and total deposits of $1.7 billion at December 31, 1999. BPNA also operates 19 branches in Illinois and 17 in California with total assets of $1.9 billion and $448 million, respectively, and deposits of $1.6 billion and $324 million, respectively. In addition, BPNA has 10 branches in New Jersey with total assets of $440 million and deposits of $354 million as of December 31, 1999 and eight branches in Florida with aggregate total assets of $328 million and $132 million in deposits at the same date. At December 31, 1999, Banco Popular, N.A. (Texas)'s banking operations had $186 million in assets and $146 million in deposits through five branches. The deposits of BPNA are insured under BIF by the FDIC. In addition, BPNA owned all of the outstanding stock of Popular Leasing, USA, a non-banking subsidiary that offers small ticket equipment leasing with 10 offices in seven states and total assets of $74 million as of December 31, 1999. Equity One, Inc. is engaged in the business of granting personal and mortgage loans and providing dealer financing through 138 offices in 32 states with total assets of $1.6 billion as of December 31, 1999. Popular Cash Express, Inc. offers services such as check cashing, money transfers to other countries, money order sales and processing of payments through 64 offices and 38 mobile check cashing units in four states in the United States. Its assets totaled $43 million as of December 31, 1999. REORGANIZATION In 1998, the Corporation commenced a program to reorganize and streamline its operations in the mainland United States. The reorganization allows the Corporation to take advantage of recent changes in U.S. federal banking laws involving branch banking across state lines. The reorganization, which was largely completed on January 1, 1999, was finalized on January 1, 2000 with the merger of Banco Popular, N.A. (Texas) with and into BPNA. COMPETITION The business of banking is highly competitive. In addition to competition from other commercial banks, banks face significant competition from nonbank financial institutions. Savings associations compete aggressively with commercial banks for deposits and loans. Credit unions and finance companies are significant players in the consumer loan market. Investment firms and retailers are significant competitors for some types of business. Banks compete for deposits with a broad spectrum of other types of investments such as mutual funds, stocks and debt securities of corporations, and debt securities of the federal government, state governments and their respective agencies. The principal methods of competition for financial services are price (interest rates paid on deposits, interest rates charged on borrowings, and fees charged for services) and service (convenience and quality of services rendered to customers). FORWARD-LOOKING STATEMENTS This report 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 the Corporation'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- 5 6 looking statements. With respect to the adequacy of the allowance for loan losses and market risk, these factors include, among others; the rate of growth in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, the performance of the stock and bond markets and the magnitude of interest rate changes. Moreover, the outcome of litigation, as discussed in "Part I, Item 3. Legal Proceedings" is inherently uncertain and depends on judicial interpretations of law and the findings of judges and juries. The Corporation's business is described on pages 1 through 19 of the Business Review Section of the Annual Report to Shareholders for the year ended December 31, 1999, which is incorporated herein by reference. REGULATION AND SUPERVISION GENERAL The Corporation, PIB, PNA and PHUSA are bank holding companies subject to supervision and regulation by the Federal Reserve Board under the BHC Act. Under the BHC Act prior to recent legislation that significantly altered these rules, bank holding companies activities and those of their banking and non-banking subsidiaries have been limited to the business of banking and activities closely related to banking, and no bank holding company could directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company in the United States, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies have generally been prohibited under the BHC Act from engaging in non-banking activities, subject to certain exceptions. See "Financial Services Modernization below for information about the recent legislation that changed these rules." Banco Popular is considered a foreign bank for purposes of the International Banking Act of 1978 (the "IBA"). Under the IBA, Banco Popular is not permitted to operate a branch or agency that is located outside of its "home state", except to the extent that a national bank with the same home state is permitted to do so as described under "Interstate Banking and Legislation" below. Puerto Rico is not considered a state for purposes of these geographic limitations. Banco Popular has designated the state of New York as its home state. Banco Popular and BPNA are subject to supervision and examination by applicable federal and state banking agencies including, in the case of Banco Popular, the Federal Reserve Board and the Office of the Commissioner of Financial Institutions of Puerto Rico and in the case of BPNA, the Federal Reserve Board and the New York State Banking Department. Banco Popular and BPNA are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of other investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Banco Popular and BPNA. In addition to the impact of regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. See- "Financial Services Modernization" below for information about recent legislation that changed these rules. On March 9, 2000 Banco Popular entered into an agreement with the Federal Reserve Bank of New York that imposed a number of compliance, reporting and control requirements. A substantial portion of the required controls had been implemented by Banco Popular prior to the date the agreement was signed. FDICIA Under the Federal Deposit Insurance Corporation Improvement Act of 1991 and the regulations promulgated thereunder ("FDICIA"), the federal banking regulators must take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA establishes five 6 7 capital tiers: "well capitalized", "adequately capitalized," "undercapitalized", "significantly undercapitalized", and "critically undercapitalized". A depository institution is deemed well capitalized if it maintains a leverage ratio of at least 5%, a risk-based Tier 1 capital ratio of at least 6% and a risk-based total capital ratio of at least 10% and is not subject to any written agreement or directive to meet a specific capital level. A depository institution is deemed adequately capitalized if it is not well capitalized but maintains a leverage ratio of at least 4% (or at least 3% if given the highest regulatory rating and not experiencing or anticipating significant growth), a risk-based Tier 1 capital ratio of at least 4% and a risk-based total capital ratio of at least 8%. A depository institution is deemed undercapitalized if it fails to meet the standards for adequately capitalized institutions (unless it is deemed significantly or critically undercapitalized). An institution is deemed significantly undercapitalized if it has a leverage ratio of less than 3%, a risk-based Tier 1 capital ratio of less than 3% or a risk-based total capital ratio of less than 6%. An institution is deemed critically undercapitalized if it has tangible equity equal to 2% or less of total assets. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any one of four categories. At December 31, 1999, Banco Popular and BPNA were well capitalized. An institution's capital category, as determined by applying the prompt corrective action provisions of law, may not constitute an accurate representation of the overall financial condition or prospects of the Corporation or its banking subsidiaries, and should be considered in conjunction with other available information regarding the Corporation's financial condition and results of operations. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. The capital-based prompt corrective action provisions of FDICIA apply to FDIC-insured depository institutions such as the subsidiaries of the Corporation, Banco Popular, BPNA and before January 1, 2000, Banco Popular, N.A. (Texas), but they are not directly applicable to holding companies such as the Corporation, PIB, PNA and PHUSA which control such institutions. However, federal banking agencies have indicated that, in regulating holding companies, they may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to such provisions and regulations. HOLDING COMPANY STRUCTURE Banco Popular and BPNA are subject to restrictions under federal law that limit the transfer of funds among them and the Corporation, PIB, PNA, PHUSA and any of the Corporation's other non-banking subsidiaries, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by Banco Popular and BPNA to any of the Corporation, PIB, PNA, PHUSA or any non-banking subsidiaries, are limited in amount to 10% of the transferring institution's capital stock and surplus and, with respect to the Corporation and all of its non-banking subsidiaries, to an aggregate of 20% of the 7 8 transferring institution's capital stock and surplus. For these purposes an institution's capital stock and surplus includes its total risk-based capital plus the balance of its allowance for loan losses not included therein. Furthermore, such loans and extensions of credit are required to be secured in specified amounts. Under the Federal Reserve Board policy, a bank holding company such as the Corporation, PIB, PNA or PHUSA is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each subsidiary bank. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In addition, any capital loans by a bank holding company to any of its subsidiary depository institutions are subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary depository institution. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary depository institution will be assumed by the bankruptcy trustee and entitled to a priority of payment. Banco Popular and BPNA are currently the only depository institution subsidiaries of the Corporation, PIB, PNA and PHUSA. Because the Corporation, PIB, PNA and PHUSA are holding companies, their right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of subsidiary depository institutions) except to the extent that the Corporation, PIB, PNA or PHUSA, as the case may be, may itself be a creditor with recognized claims against the subsidiary. Under the Federal Deposit Insurance Act (the "FDIA"), a depository institution, the deposits of which are insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default". "Default" is defined generally as the appointment of a conservator or a receiver, and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Banco Popular and BPNA are both currently FDIC-insured depository institution subsidiaries of the Corporation. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary depository institution to its parent company is subordinated to the subsidiary bank's cross-guarantee liability with respect to commonly controlled FDIC-insured depository institutions. DIVIDEND RESTRICTIONS The principal source of cash flow for the Corporation is dividends from Banco Popular. Various statutory provisions limit the amount of dividends Banco Popular can pay to the Corporation without regulatory approval. As a member bank subject to the regulation of the Federal Reserve Board, Banco Popular must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by the member bank in any calendar year would exceed the total of its net profits, as defined by the Federal Reserve Board, for that year, combined with its retained net profits for the preceding two years. In addition, a member bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. For this purpose, bad debts are generally defined to include the principal amount of loans that are in arrears with respect to interest by six months or more unless such loans are fully secured and in the process of collection. Moreover, for purposes of this limitation, a member bank is not permitted to add the balance in its allowance for loan losses account to its undivided profits then on hand. A member bank may, however, net the sum of its bad debts, as defined, against the balance in its allowance for loan losses account and deduct from undivided profits only bad debts, as so defined, in excess of that account. At December 31, 1999, Banco Popular could have declared a dividend of approximately $182 million without the approval of the Federal Reserve Board. The payment of dividends by Banco Popular and BPNA may also be affected by other regulatory 8 9 requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. In addition, all insured depository institutions are subject to the capital-based limitations required by the FDICIA. See "FDICIA". See "Puerto Rico Regulation-General" for a description of certain restrictions on Banco Popular's ability to pay dividends under Puerto Rico law. FDIC INSURANCE ASSESSMENTS Banco Popular and BPNA are subject to FDIC deposit insurance assessments. Pursuant to the FDICIA, the FDIC has adopted a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based partly upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also assigned to one of the following "supervisory subgroups": "A", "B" or "C". Group "A" institutions are financially sound institutions with only a few minor weaknesses; Group "B" institutions are institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration; and Group "C" institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. The FDIC reduced the insurance premiums it charges on bank deposits insured by the BIF to the statutory minimum of $2,000.00 for "well capitalized" banks, effective January 1, 1996. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was signed into law. DIFA repealed the statutory minimum premium, and currently premiums related to deposits assessed by both the BIF and the Savings Association Insurance Fund ("SAIF") are to be assessed at an annual rate of between 0 cents and 27 cents per $100.00 of deposits. DIFA also separated the Financing Corporation ("FICO") assessment to service the interest on its bond obligations from the BIF and SAIF assessments. The amount assessed on individual institutions by the FICO is in addition to the amount, if any, paid for deposit insurance according to the FDIC's risk-related assessment rate schedules. The current FICO annual assessment rate is 2.12 cents per $100 of deposits. As of December 31, 1999, the Corporation had a BIF deposit assessment base of approximately $14 billion. BROKERED DEPOSITS FDIC regulations adopted under the FDICIA govern the receipt of brokered deposits. Under these regulations, a bank cannot accept, roll over or renew brokered deposits (which term is defined also to include any deposit with an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a bank that is well capitalized. The Corporation does not believe the brokered deposits regulation has had or will have a material effect on the funding or liquidity of Banco Popular and BPNA. CAPITAL ADEQUACY Information about the capital composition of the Corporation as of December 31, 1999 and for the four previous years is presented in Table H "Capital Adequacy Data", on page F-14 in the "Management Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) and is incorporated herein by reference. 9 10 Under the Federal Reserve Board's risk-based capital guidelines for bank holding companies and member banks, the minimum guidelines for the ratio of qualifying total capital ("Total Capital") to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the Total Capital is to be comprised of common equity, retained earnings, minority interest in equity accounts of consolidated subsidiaries, non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock less goodwill and certain other intangible assets ("Tier 1 Capital"). The remainder may consist of a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan and lease loss reserves ("Tier 2 Capital"). In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies and member banks. These guidelines provide for a minimum ratio of Tier 1 Capital to total assets, less goodwill and certain other intangible assets discussed below (the "leverage ratio") of 3% for bank holding companies and member banks that have the highest regulatory rating or have implemented the Federal Reserve Board's market risk capital measure. All other bank holding companies and member banks will be required to maintain a leverage ratio of 4%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" and other indicia of capital strength in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital less all intangibles, to total assets less all intangibles. Banco Popular and BPNA are subject to the risk-based and leverage capital requirements adopted by the Federal Reserve Board. See Consolidated Financial Statements, Note 18 "Regulatory Capital Requirements" on pages F-49 and F-50, for the capital ratios of the Corporation, Banco Popular and BPNA. Failure to meet capital guidelines could subject the Corporation and its depository institutions subsidiaries to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC and to certain restrictions on its business. See - "FDICIA". INTERSTATE BANKING LEGISLATION The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits a bank holding company, with Federal Reserve Board approval, to acquire banks located in states other than the holding company's home state without regard to whether the transaction is prohibited under state law. In addition, national and state banks with different home states are permitted to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. States were allowed to "opt in" to permit interstate branching by merger prior to June 1, 1997 and to permit de novo interstate branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opted out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo. A foreign bank, like Banco Popular, may branch interstate by merger or de novo to the same extent as domestic banks in the foreign bank's home state, which, in the case of Banco Popular, is New York. FINANCIAL SERVICES MODERNIZATION On November 12, 1999, the President signed the Gramm-Leach-Bliley Act. Among other things, the Gramm-Leach-Bliley Act: (i) allows bank holding companies whose subsidiary depository institutions 10 11 meet management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than was previously permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies; (ii) allows insurers and other financial services companies to acquire banks; (iii) removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and (iv) establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. This part of the Gramm-Leach-Bliley Act became effective on March 11, 2000. In order for a bank holding company to engage in the broader range of activities that are permitted by the Gramm-Leach-Bliley Act. (i) all of its depository institutions must be well-capitalized and well-managed and (ii) it must file a declaration with the Federal Reserve Board that it elects to be a "financial holding company." In addition, to commence any new activity permitted by the Gramm-Leach-Bliley Act and to acquire any company engaged in any new activities permitted by the Gramm-Leach-Bliley Act, each insured depository institution of the financial holding company must have received at least a "satisfactory" rating in its most recent examination under the Community Reinvestment Act. The Gramm-Leach-Bliley Act also modified other laws, including laws related to financial privacy and community reinvestment. The new financial privacy provisions generally prohibit financial institutions, including the Corporation's bank subsidiaries, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to "opt out" of the disclosure. Various other legislation, including proposals to limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. The Corporation cannot determine the ultimate effect that such potential legislation, if enacted, or implementing regulations, would have upon its financial condition or results of operations. PUERTO RICO REGULATION GENERAL As a commercial bank organized under the laws of Puerto Rico, Banco Popular is subject to supervision, examination and regulation by the Office of the Commissioner of Financial Institutions of Puerto Rico (the "Office of the Commissioner"), pursuant to the Puerto Rico Banking Act of 1933, as amended (the "Banking Law"). Section 27 of the Banking Law requires that at least ten percent (10%) of the yearly net income of Banco Popular be credited annually to a reserve fund. This apportionment must be done every year until the reserve fund is equal to the total of paid-in capital on common and preferred stock. At the end of its most recent fiscal year, Banco Popular had a fund established in compliance with these requirements. Section 27 of the Banking Law also provides that when the expenditures of a bank are greater than its receipts, the excess of the former over the latter must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the reserve fund, as a reduction thereof. If the reserve fund is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and no dividend may be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital. Section 16 of the Banking Law requires every bank to maintain a legal reserve that, except as otherwise provided by the Office of the Commissioner, may not be less than 20% of its demand liabilities, excluding government deposits (federal, state and municipal) which are secured by actual collateral. If a bank is authorized to establish one or more bank branches in a State of the United States or in a foreign country, where such branches are subject to the reserve requirements of that state or country, the Office of the Commissioner may exempt said branch or branches from the reserve requirements of Section 16. Pursuant to an order of the Federal Reserve Board dated November 24, 1982, Banco Popular has been 11 12 exempted from the reserve requirements of the Federal Reserve System, with respect to deposits payable in Puerto Rico. Section 17 of the Banking Law permits a bank to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent 15% of the paid-in capital and reserve fund of the bank. As of December 31, 1999, the legal lending limit for the Bank under this provision was approximately $91 million. The above limitations do not apply to loans which are secured by collateral worth at least 25% more than the amount of the loan up to a maximum aggregate amount of one third of the paid-in capital of the bank, plus its reserve fund. If the institution is well capitalized and had been rated 1 in the last examination performed by the Office of the Commissioner or any regulatory agency, its legal lending limit shall also include 15% of 50% of its undivided profits and for loans secured by collateral worth at least 25% more than the amount of the loan, the capital of the bank shall also include 33 1/3% of 50% of its undivided profits. Institutions rated 2 in their last regulatory examination may include this additional component in their legal lending limit only with the previous authorization of the Office of the Commissioner. There are no restrictions under Section 17 on the amount of loans that are wholly secured by bonds, securities and other evidence of indebtedness of the Government of the United States or Puerto Rico, or by current debt bonds, not in default, of municipalities or instrumentalities of Puerto Rico. Section 14 of the Banking Law authorizes a bank to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property, originating and servicing mortgage loans and operating a small loan company. Banco Popular engages in these activities through its wholly-owned subsidiaries, Popular Leasing & Rental, Inc., Popular Mortgage, Inc. and Popular Finance, Inc., respectively, all of which are organized and operate in Puerto Rico. The Finance Board, which is a part of the Office of the Commissioner, but also includes as its members the Secretary of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Planning Board, and the President of the Government Development Bank for Puerto Rico, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses (including real estate development loans but excluding certain other personal and commercial loans secured by mortgages on real estate properties and finance charges on retail installment sales and for credit card purchases) is to be determined by free competition. IBC ACT Under the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not amend its articles of incorporation or issue additional shares of capital stock or other securities convertible into additional shares of capital stock unless such shares are issued directly to the shareholders of PIB previously identified in the application to organize the international banking entity, in which case notification to the Office of the Commissioner must be given within ten business days following the date of the issue. Pursuant to the IBC Act, without the prior approval of the Office of the Commissioner, PIB may not initiate the sale, encumbrance, assignment, merger or other transfer of shares if by such transaction a person or persons acting in concert could acquire direct or indirect control of 10% or more of any class of the PIB's stock. Such authorization must be requested at least 30 days prior to the transaction. PIB must submit to the Office of the Commissioner a report of its condition and results of operation on a quarterly basis and its annual audited financial statement at the close of its fiscal year. Under the IBC Act, PIB may not deal with "domestic persons" as such term is defined in the IBC Act. Also, it may only engage in those activities authorized in the IBC Act, the regulations adopted thereunder and its license. The IBC Act empowers the Office of the Commissioner to revoke or suspend, after a hearing, the license of an international banking entity if, among other things, it fails to comply with the IBC Act, 12 13 regulations issued by the Office of the Commissioner or the terms of its license or if the Office of the Commissioner finds that the business of the international banking entity is conducted in a manner not consistent with the public interest. EMPLOYEES At December 31, 1999, the Corporation employed 11,501 persons. None of its employees are represented by a collective bargaining group. SEGMENT DISCLOSURE Note 27 to the Financial Statements, "Segment Reporting" on pages F-59 and F-60 is herein incorporated by reference. The principal market for the Corporation is Puerto Rico, where the Corporation had $18 billion or 72% of its total assets as of December 31, 1999 and earned $1.6 billion or 70% of its total revenues for the year then ended. Total assets, loans and deposits of commercial banks and financial institutions in Puerto Rico as of September 30, 1999 were estimated at $74 billion, $36 billion and $32 billion, respectively. At that date the Corporation's commercial banking operation in the island had an estimated market share of 25% and 30% in loans and deposits, respectively. As previously mentioned, the Corporation's leasing operation in Puerto Rico is the largest one in the island with an estimated 38% market share, while the mortgage and consumer operations have market shares of approximately 24% and 9%, respectively. The Corporation has a 57% investment in BF in the Dominican Republic. As of the December 31, 1999, BF operation had $436 million, $290 million and $295 million in assets, loans and deposits, respectively, representing approximately 2% each of the consolidated figures of the Corporation. ITEM 2. PROPERTIES As of December 31, 1999, Banco Popular owned (and wholly or partially occupied) approximately 73 branch premises and other facilities throughout the Commonwealth and one building in the U.S. Virgin Islands. In addition, as of such date, Banco Popular leased properties for branch operations in approximately 130 locations in Puerto Rico and 7 locations in the U.S. Virgin Islands. At December 31, 1999, BPNA had 112 offices (principally bank branches) of which 59 were owned and 53 were leased. These offices were located throughout New York, Illinois, New Jersey, California and Florida. Banco Popular, N.A. (Texas) had six offices rented and owned one building. The Corporation's management believes that each of its facilities is well maintained and suitable for its purpose. The principal properties owned by the Corporation for banking operations and other services are described below: Popular Center, the San Juan metropolitan area headquarters, located at 209 Munoz Rivera Avenue, Hato Rey, Puerto Rico, a 20 story office building. Approximately 56% of the office space is leased to outside tenants. Cupey Center Complex, three buildings, one of three stories, and two of two stories each, located in Cupey, Rio Piedras, Puerto Rico. The computer center, operational and support services, and a recreational center for employees are some of the main activities conducted at these facilities. The facilities are fully occupied by Banco Popular's personnel. An adjacent two-story building is held for future expansion of the complex and is currently leased to an outside tenant. Stop 22 - Santurce building, a twelve-story structure located in Santurce, Puerto Rico. A branch, the accounting department, the human resources division and the auditing department are the main activities conducted at this facility, which is fully occupied by Banco Popular personnel. Old San Juan building, a twelve-story structure located at Old San Juan, Puerto Rico. Banco 13 14 Popular occupies approximately 27% of the building for a branch operation, a regional office, an exhibit room and other facilities. The rest of the building is rented to outside tenants. Mortgage Loan Center, a six-story building, a four story building, and a one story building, located at 153, 167 and 157 Ponce de Leon Avenue, Hato Rey, Puerto Rico, respectively, are fully occupied by Popular Mortgage, Inc. and Banco Popular's mortgage servicing departments. Banco Popular Virgin Islands Center, a three-story building housing a Banco Popular branch and centralized offices. The building is fully occupied by Banco Popular personnel. Dominican Republic building, an eight-story building located at 27 de febrero Avenue, Santo Domingo. BF's full service branch, the executive offices, corporate and retail banking division, finance and treasury division, credit review area and the human resources division, are the main activities conducted at this facility. Dominican Republic Parking Lot, a six-story building located at El Vergel Street #75 in Santo Domingo. This parking lot is used by BF's employees and customers. New York building, a nine-story structure with two underground levels located at 7 West 51st Street, New York City. BPNA occupies approximately 92% of the office space. The remaining space is rented or available for rent to outside tenants. Chicago building, a four-story building located at 4000-4008 West North Avenue, Chicago, Illinois. BPNA's full service branch, as well as BPNA's executive offices, human resources division and its operation department, are the main activities conducted at this facility. Orlando building, a two-story building located at 5551 Vanguard Street, Orlando, Florida. BPNA's Credit Card operations, finance and accounting department and BPNA's operation services are the main activities conducted at this facility. Houston building, a one-story building located at 1615 Little York Road, Houston, Texas. A full service branch of BPNA and its administrative offices are located at this facility. ITEM 3. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. Management believes, based on the opinion of legal counsel, that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the financial position and results of operations of the Corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Corporation`s common stock (the "Common Stock") is traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ) National Market System under the symbol BPOP. Information concerning the range of high and low sales prices for the Corporation's common shares 14 15 for each quarterly period during 1999 and the previous four years, as well as cash dividends declared is contained under Table I, "Common Stock Performance", on page F-15 and under the caption "Stockholders' Equity" on page F-14 in the MD&A, and is incorporated herein by reference. Information concerning legal or regulatory restrictions on the payment of dividends by the Corporation and Banco Popular is contained under the caption "Regulation and Supervision" in Item 1 herein. As of February 29, 2000, the Corporation had 9,130 stockholders of record of its Common Stock, not including beneficial owners whose shares are held in record names of brokers or other nominees. The last sales price for the Corporation's Common Stock on such date, as quoted on the NASDAQ was $22.31 per share. On August 4, 1999, a shelf registration statement filed by the Corporation, PIB and PNA with the Securities and Exchange Commission became effective. This shelf registration statement allows the Corporation, PIB and PNA to issue medium-term notes, debt securities and preferred stock in an aggregate amount of up to $1.5 billion. On September 7, 1999, PNA issued $250 million aggregate principal amount of medium-term notes due September 15, 2001 under this registration statement. These medium-term notes of PNA are, and any additional securities of PNA of PIB issued under the registration statement will be, fully and unconditionally guaranteed by the Corporation. The Corporation currently has outstanding $125 million aggregate principal amount of subordinated notes due December 15, 2005 with interest payable semi-annually at 6.75%. These notes are unsecured, subordinated obligations which are subordinated in right of payment in full to all present and future senior indebtedness of the Corporation. These notes do not provide for any sinking fund. On February 5, 1997, BanPonce Trust I, a statutory business trust created under the laws of the State of Delaware that is wholly-owned by PNA and indirectly wholly-owned by the Corporation, sold to institutional investors $150,000,000 of its 8.327% Capital Securities Series A (liquidation amount $1,000 per Capital Security) ("Capital Securities") through certain underwriters. The proceeds of the issuance, together with the proceeds of the purchase by PNA of $4,640,000 of BanPonce Trust I's 8.327% common securities (liquidation amount $1,000 per common security) were used to purchase $154,640,000 aggregate principal amount of PNA's 8.327% Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated Debentures"). The 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 I are fully and unconditionally guaranteed by the Corporation. The assets of BanPonce Trust I consist of $154,640,000 of Junior Subordinated Debentures and a related accrued interest receivable of $4,292,000 as of December 31, 1999. The Junior Subordinated Debentures mature on February 1, 2027; however, under certain circumstances, the maturity of the Junior Subordinated Debentures may be shortened (which shortening would result in a mandatory redemption of the Capital Securities). The Puerto Rico Internal Revenue Code of 1994, as amended, generally imposes a withholding tax on the amount of any dividends paid by corporations to individuals, whether residents of Puerto Rico or not, trusts, estates and special partnerships at a special 10% withholding tax rate. If the recipient is a foreign corporation or partnership not engaged in trade or business within Puerto Rico the withholding tax is also 10%. Prior to the first dividend distribution for the taxable year, individuals who are residents of Puerto Rico may elect to be taxed on the dividends at the regular rates, in which case the special 10% tax will not be withheld from such year's distributions. 15 16 United States citizen who is non-resident of Puerto Rico will not be subject to Puerto Rico tax on dividends if said individual's gross income from sources within Puerto Rico during the taxable year does not exceed $1,300 if single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury Department,"Withholding Tax Exemption Certificate for the Purpose of Section 1147", is filed with the withholding agent. U.S. income tax law permits a credit against U.S. income tax liability, subject to certain limitations, for certain foreign income taxes paid or deemed paid with respect to such dividends. ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears in Table C, "Selected Financial Data", on pages F-4 and F-5 and the text under the caption "Earnings Analysis" on page F-7 in the MD&A, and is incorporated herein by reference. The Corporation's ratio of earnings to fixed charges on a consolidated basis for each of the last five years is as follows:
Year ended December 31, ----------------------- Ratio of Earnings to Fixed Charges: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Excluding Interest on Deposits 1.7 1.8 1.8 2.0 2.0 Including Interest on Deposits 1.4 1.4 1.4 1.4 1.4 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends: Excluding Interest on Deposits 1.7 1.8 1.8 2.0 2.0 Including Interest on Deposits 1.4 1.4 1.4 1.4 1.4
For purposes of computing these consolidated ratios, earnings represent income before income taxes, plus fixed charges. Fixed charges represent all interest expense (ratios are presented both excluding and including interest on deposits), the portion of net rental expense which is deemed representative of the interest factor and the amortization of debt issuance expense. The Corporation's long-term senior debt and preferred stock on a consolidated basis as of December 31 of each of the last five years is:
Year ended December 31, ----------------------- (In thousands) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Long-term obligations $2,127,599 $1,582,161 $1,678,696 $1,111,713 $885,428 Non-Cumulative preferred stock of the Corporation 100,000 100,000 100,000 100,000 100,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item appears on page F-2 through F-28 under the caption "MD&A", and is incorporated herein by reference. Table K, "Maturity Distribution of Earning Assets", on page F-19 in the MD&A, has been prepared on the basis of expected maturities. The Corporation does not have a policy with respect to rolling over maturing loans, but rolls over loans only on a case-by-case basis after review of such loans in 16 17 accordance with the Corporation's lending criteria. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information regarding the market risk of the Corporation's investments appears on page F-16 through F-18 under the caption " MD&A", and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears on pages F-29 through F-67, and on page F-28 under the caption "Statistical Summary - Quarterly Financial Data" in the MD&A and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the captions "Shares Beneficially Owned by Directors, Nominees and Executive Officers of the Corporation", "Beneficial Ownership Reporting Compliance", "Board of Directors and Committees" including the "Nominees for Election as Directors" and "Executive Officers" of the Corporation's definitive proxy statement to be filed with the Securities and Exchange Commission on or about March 15, 2000 (the "Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Executive Compensation Program" and "Popular, Inc. Performance Graph" of the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Principal Stockholders" and "Shares Beneficially Owned by Directors, Nominees and Executive Officers of the Corporation and its Subsidiaries" of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Family Relationships" and "Other Relationships, Transactions and Events" of the Corporation's Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. The following financial statements and reports included on pages F-29 through F-67 of the financial review section of the Corporation's Annual Report to Shareholders, are incorporated herein by reference: 17 18 (1) Financial Statements: Report of Independent Accountants Consolidated Statements of Condition as of December 31, 1999 and 1998 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1999 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1999 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1999 Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 1999 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements described in A.1 above or in the notes thereto. (3) Exhibits The exhibits listed on the Exhibits Index on page 21 of this report are filed herewith or are incorporated herein by reference. B. The Corporation filed one report on Form 8-K during the quarter ended December 31, 1999. Dated: October 8, 1999 Filed: October 14, 1999 Items reported: Item 5 - Other Events (Operational results for the quarter and nine month period ended September 30, 1999) 18 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POPULAR, INC. (Registrant) By: /s/ RICHARD L. CARRION -------------------------------- Richard L. Carrion Chairman of the Board, President and Chief Executive Officer Dated: 02-10-2000 (Principal Executive Officer) ---------- By: /s/ JORGE A. JUNQUERA -------------------------------- Jorge A. Junquera Senior Executive Vice President Dated: 02-10-2000 (Principal Financial Officer) ---------- By: /s/ AMILCAR L. JORDAN -------------------------------- Amilcar L. Jordan Senior Vice President Dated: 02-10-2000 (Principal Accounting Officer) ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ RICHARD L. CARRION Chairman of the Board, - ------------------------------------ President and Chief Richard L. Carrion Executive Officer 02-10-2000 -------------- /s/ ALFONSO F. BALLESTER - ------------------------------------ Vice Chairman of Alfonso F. Ballester the Board 02-10-2000 -------------- /s/ ANTONIO LUIS FERRE - ------------------------------------ Vice Chairman of Antonio Luis Ferre the Board 02-10-2000 -------------- /s/ JUAN J. BERMUDEZ - ------------------------------------ Juan J. Bermudez Director 02-10-2000 -------------- /s/ FRANCISCO J. CARRERAS - ------------------------------------ Francisco J. Carreras Director 02-10-2000 -------------- /s/ DAVID H. CHAFEY, JR. - ------------------------------------ David H. Chafey Jr. Director 02-10-2000 -------------- - ------------------------------------ Luis E. Dubon Jr. Director -------------- /s/ HECTOR R. GONZALEZ - ------------------------------------ Hector R. Gonzalez Director 02-10-2000 -------------- /s/ JORGE A. JUNQUERA - ------------------------------------ Jorge A. Junquera Director 02-10-2000 -------------- /s/ MANUEL MORALES JR - ------------------------------------ Manuel Morales Jr. Director 02-10-2000 -------------- /s/ ALBERTO M. PARACCHINI - ------------------------------------ Alberto M. Paracchini Director 02-10-2000 -------------- /s/ FRANCISCO M. REXACH, JR. - ------------------------------------ Francisco M. Rexach Jr. Director 02-10-2000 -------------- /s/ J. ADALBERTO ROIG, JR. - ------------------------------------ J. Adalberto Roig Jr. Director 02-10-2000 --------------
19 20 /s/ FELIX J. SERRALLES JR - ------------------------------------ Felix J. Serralles Jr. Director 02-10-2000 -------------- /s/ JULIO E. VIZCARRONDO JR - ------------------------------------ Julio E. Vizcarrondo Jr. Director 02-10-2000 --------------
20 21 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of Popular, Inc., as amended (English Translation) (incorporated herein by reference to Exhibit 4(a) to Popular's Registration Statement No. 333-26941 dated May 12, 1997). 3.2 Bylaws of Popular, Inc., as amended (incorporated herein by reference to Exhibit 4.2 of Popular's Registration Statement dated June 8, 1999). 3.3 Form of Certificate representing Popular, Inc.'s common stock, par value $6.00 (incorporated herein by reference to Exhibit 4.1 of Popular's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 0-13818)). 4.2 Form of Certificate representing the Popular, Inc.'s 8.35% non-cumulative monthly Income Preferred Stock, 1994 Series A, Liquidation Preference $25.00 per share. 4.3 Stockholder Protection Rights Agreement, dated as of August 13, 1998, between Popular, Inc. and Banco Popular de Puerto Rico as Rights Agent, including Form of Rights Certificate attached as Exhibit B thereto (incorporated herein by reference to Exhibit 4.1 of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 13, 1998 and filed on August 21, 1998). 4.4 Certificate of Designation, Preference and Rights of Popular, Inc.'s Series A Participating Cumulative Preferred Stock (incorporated herein by reference to Exhibit 99.1 of Popular's Current Report on Form 8-K dated and filed on August 3, 1999). 4.5 Indenture, dated February 15, 1995, as supplemented by the First Supplemental Indenture thereto, dated May 8, 1997, each between Popular, Inc. and First National Bank of Chicago, as Trustee (incorporated herein by reference to Exhibit 4(d) of Popular's Registration Statement No. 333-26941 dated May 12, 1997). 4.6 Second Supplemental Indenture, dated as of August 8, 1999, to Popular's Indenture, dated as of February 15, 1995, each between Popular, Inc. and The First National Bank of Chicago, as Trustee (incorporated herein by reference to Exhibit 4(e) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 4.7 Subordinated Indenture dated as of November 30, 1995, between Popular, Inc. and First National Bank of Chicago, as Trustee (incorporated herein by reference to Exhibit 4(e) of Popular's Registration Statement No. 333-26941, dated May 12, 1997). 4.8 Indenture, dated as of October 1, 1991, among Popular North America, Inc., Popular, Inc., as Guarantor, and The First National Bank of Chicago, as Trustee, as supplemented by the First Supplemental Indenture thereto, dated February 28, 1995, and by the Second Supplemental Indenture thereto, dated as of May 8, 1997 (incorporated herein by reference to Exhibit 4(f) of Popular's Registration Statement No. 333-26941, dated May 12, 1997). 4.9 Third Supplemental Indenture to Popular's Indenture dated as of October 1, 1991, dated as of August 8, 1999, among Popular North America, Inc., Popular, Inc. as Guarantor, and The First National Bank of Chicago, as Trustee (incorporated herein by reference to Exhibit 4(h) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 4.10 Form of Subordinated Note of Popular, Inc. (incorporated herein by reference to Exhibit 4(p) of Popular's Current Report on Form 8-K (File No. 0-13818), dated December 7, 1995 and filed on December 13, 1995). 4.11 Form of Fixed Rate Medium-Term Note, Series 3, of Popular, Inc. (incorporated herein by reference to Exhibit 4(l) of Popular's Current Report on Form 8-K (File No. 0-13818), dated May 23, 1997 and filed on June 11, 1997).
21 22 4.12 Form of Floating Rate Medium-Term Note, Series 3, of Popular, Inc. (incorporated herein by reference to Exhibit 4(m) of Popular's Current Report on Form 8-K (File No. 0-13818), dated May 23, 1997 and filed on June 11, 1997). 4.13 Form of Fixed Rate Medium-Term Note, Series D, of Popular North America, Inc., guaranteed by Popular, Inc. (incorporated herein by reference to Exhibit 4(n) of Popular's Current Report on Form 8-K (File No. 0-13818), dated May 23, 1997 and filed on June 11, 1997). 4.14 Form of Floating Rate Medium-Term Note, Series D, of Popular North America, Inc., guaranteed by Popular, Inc. (incorporated herein by reference to Exhibit 4(o) of Popular's Current Report on Form 8-K (File No. 0-13818), dated May 23, 1997 and filed on June 11, 1997). 4.15 Form of Fixed Rate Medium-Term Note, Series 4, of Popular, Inc. (incorporated herein by reference to Exhibit 4(o) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 4.16 Form of Floating Rate Medium-Term Note, Series 4, of Popular, Inc. (incorporated by reference to Exhibit (4)(p) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed August 17, 1999). 4.17 Form of Fixed Rate Medium-Term Note, Series E, of Popular North America, Inc., endorsed with the guarantee of Popular, Inc. (incorporated herein by reference to Exhibit 4(q) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 4.18 Form of Floating Rate Medium-Term Note, Series E, of Popular North America, Inc., endorsed with the guarantee of Popular, Inc. (incorporated herein by reference to Exhibit 4(r) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 4.19 Administrative Procedures governing Medium-Term Notes, Series 4, of Popular, Inc. (incorporated herein by reference to Exhibit 10(a) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 4.20 Administrative Procedures governing Medium-Term Notes, Series E, of Popular North America, Inc., guaranteed by Popular, Inc. (incorporated herein by reference to Exhibit 10(b) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 10.1 Annual Management Incentive Compensation Plan for certain Division Supervisors approved in January, 1987 (incorporated herein by reference to Exhibit 10.8 of Popular's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 0-13818)). 10.2 Amendment to Popular, Inc. Senior Executive Long-Term Incentive Plan, dated April 23, 1998 (incorporated herein by reference to Exhibit 10.8.2. of Popular's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 0-13818)). 10.3 Stock Deferment Plan for Popular's outside directors, effective August 15, 1996 (incorporated herein by reference to Exhibit 10.9 of Popular's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (file No. 0-13818)). 10.4 Amended and Restated 364-day Credit Agreement dated as of October 18, 1999 among Popular, Inc. and Popular North America, Inc., the lenders named therein and The Chase Manhattan Bank as Administrative Agent for an aggregate principal amount of $445,000,000. 10.5 Interest Calculation Agency Agreement, dated as of August 6, 1999, between Popular, Inc. and The First National Bank of Chicago (incorporated herein by reference to Exhibit 10(c) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 10.6 Interest Calculation Agency Agreement, dated as of August 6, 1999, between Popular North America, Inc. and The First National Bank of Chicago (incorporated herein by reference to Exhibit 10(d) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 10.7 Distribution Agreement, dated October 6, 1995, among BanPonce Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation and First Chicago Capital Markets, Inc. (incorporated herein by reference to Exhibit 1(b) of BanPonce's Current Report on Form 8-K (File No. 0-13818), dated and filed on October 6, 1995).
22 23 10.8 Amendment No. 1, dated May 23, 1997, to the Distribution Agreement, dated October 6, 1995, among Popular, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc., Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. (incorporated herein by reference to Exhibit 1(c) of Popular's Current Report on Form 8-K (File No. 0-13818), dated May 23, 1997, and filed on June 11, 1997). 10.9 Amendment No. 2, dated August 6, 1999, to the Distribution Agreement, dated October 6, 1995, among Popular, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation, Chase Securities Inc. and Popular Securities, Inc. (incorporated herein by reference to Exhibit 1(d) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 10.10 Distribution Agreement, dated October 11, 1991, among BanPonce Financial Corp., BanPonce Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and The First Boston Corporation (incorporated herein by reference to Exhibit 1(d) of Popular's Current Report on Form 8-K (File No. 0-13818), dated May 23, 1997 and filed on June 11, 1997). 10.11 Amendment No. 1, dated December 2, 1993, to the Distribution Agreement, dated October 11, 1991, among BanPonce Financial Corp., BanPonce Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse First Boston Corporation (incorporated herein by reference to Exhibit 1(d) of Popular's Current Report on Form 8-K (File No. 0-13818), dated May 23, 1997 and filed on June 11, 1997). 10.12 Amendment No. 2, dated October 6, 1995, to the Distribution Agreement, dated October 11, 1991, as amended on December 2, 1993, and supplemented on June 16, 1993 and August 1, 1994, among BanPonce Financial Corp., BanPonce Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, CS First Boston Corporation and First Chicago Capital Markets, Inc. (incorporated herein by reference to Exhibit 1(c) of BanPonce's Current Report on Form 8-K (File No. 0-13818), dated and filed on October 6, 1995). 10.13 Amendment No. 3, dated May 23, 1997, to the Distribution Agreement, dated October 11, 1991, among Popular North America, Inc., Popular, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc., Credit Suisse First Boston Corporation and First Chicago Capital Markets, Inc. (incorporated herein by reference to Exhibit 1(d) of Popular's Current Report on Form 8-K (File No. 0-13818), dated May 23, 1997 and filed on June 11, 1997). 10.14 Amendment No. 4, dated August 6, 1999, to the Distribution Agreement, dated October 6, 1991, among Popular North America, Inc., Popular, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston Corporation, Chase Securities Inc. and Popular Securities, Inc. (incorporated herein by reference to Exhibit 1(i) of Popular's Current Report on Form 8-K (File No. 0-13818), dated August 5, 1999 and filed on August 17, 1999). 12.1 Computation of Ratio of Earnings to Fixed Charges. 13.1 Popular's Annual Report to Shareholders for the year ended December 31, 1999. 21.1 Schedule of Subsidiaries of Popular, Inc. 23.1 Consents of Independent Accountants. 27.1 Financial Data Schedule. 99.1 Popular's Proxy Statement for the April 25, 2000 Annual Meeting of Stockholders. Popular, Inc. hereby agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of Popular, Inc., or of any of its consolidated subsidiaries.
23 EX-4.2 2 FORM OF CERTIFICATE FOR PREFERRED STOCK 1 EXHIBIT 4.2 POPULAR, INC. INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PUERTO RICO THIS CERTIFICATE IS TRANSFERABLE IN SAN JUAN, PUERTO RICO NUMBER SHARES 001679 STOCKHOLDER NO. 8.35% NON-CUMULATIVE MONTHLY INCOME PREFERRED STOCK 1994 SERIES A CUSIP 733174 20 5 This is to certify that SPECIMEN is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE 8.35% NON-CUMULATIVE MONTHLY INCOME PREFERRED STOCK, 1994 SERIES A OF POPULAR, INC., transferable only on the books of the Corporation by the holder hereof in person or by its duly authorized attorney upon surrender of this Certificate properly endorsed. The designations, preferences, limitations, and relative rights of the 8.35% Non-Cumulative Monthly Income Preferred Stock, 1994 Series A, are fixed in the Certificate of Incorporation and the Certificate of Resolution filed in the Department of State of the Commonwealth of Puerto Rico. IN WITNESS WHEREOF, the seal of the Corporation is affixed to this Certificate and is signed by duly authorized officers of the Corporation. POPULAR, INC. by ---------------------------------------- Authorized Officer Date ---------------------------------------- Authorized Officer 2 TRANSFER The signature on this transfer must correspond exactly with the name on the certificate, without changes or abbreviations of any kind. For value received, I (we) hereby sell and transfer to (Print Name, Address, Postal Zip Code and Social Security or Taxpayer Number of transferee, and number of shares transferred): - -------------------------------------------------------------------------------- shares of the 8.35% NON-CUMULATIVE MONTHLY INCOME PREFERRED STOCK, 1994 SERIES A represented by this certificate, and do hereby irrevocably appoint and constitute - -------------------------------------------------------------------------------- attorney to transfer the said shares on the books of the Corporation, with full power of substitution on the premises to that effect. Signed ___________________ Signature guaranteed by ________________ Date ______ (Signature must be guaranteed by a bank, trust company, or firm that is a member of a registered national securities exchange or of the National Association of Securities Dealers.) - -------------------------------------------------------------------------------- The following description of the terms of the 8.35% Non-Cumulative Monthly Income Preferred Stock, 1994 Series A (the "Series A Preferred Stock") of Popular, Inc. (the "Corporation") does not purport to be complete and is subject to and qualified in its entirety by reference to Article Five of the Certificate of Incorporation of the Corporation and the Certificate of Resolution of the Series A Preferred Stock, copies of which are filed with the Department of State of Puerto Rico. A. DESIGNATION. The shares of such series of Preferred Stock shall be designated as the "8.35% Non-Cumulative Monthly Income Preferred Stock, 1994 Series A". B. DIVIDENDS. 1. Holders of record of the Series A Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Corporation, out of funds of the Corporation legally available therefor, non-cumulative cash dividends at the annual rate per share of 8.35% of the liquidation preference of $25 per share, or $0.173958 per share per month. 2. Dividends on the Series A Preferred Stock will accrue from their date of original issuance and will be payable (when, as and if declared by the Board of Directors of the Corporation out of funds of the Corporation legally available therefor) monthly in arrears in United States dollars commencing on July 31, 1994, and on the last day of each calendar month of each year thereafter to the holders of record of the Series A Preferred Stock as they appear on the books of the Corporation on the second Business Day (as defined below) immediately preceding the relevant date of payment. 3. Dividends on the Series A Preferred Stock will be non-cumulative. The Corporation is not obligated or required to declare or pay dividends on the Series A Preferred Stock, even if it has funds available for the payment of such dividends. If the Board of Directors of the Corporation or an authorized committee thereof does not declare a dividend payable on a dividend payment date in respect of the Series A Preferred Stock, then the holders of the Series A Preferred Stock shall have no right to receive a dividend in respect of the monthly dividend period ending on such dividend payment date. 4. The amount of dividends payable for any monthly dividend period will be computed on the basis of twelve 30-day months and a 360-day year. The amount of dividends payable for any period shorter than a full monthly dividend period will be computed on the basis of the actual number of days elapsed in such period. 5. Subject to any applicable fiscal or other laws and regulations, each dividend payment will be made by dollar check drawn on a bank in New York, New York or San Juan, Puerto Rico and mailed to the record holder thereof at such holder's address as it appears on the register for such Series A Preferred Stock. 6. So long as any shares of the Series A Preferred Stock remain outstanding, the Corporation shall not declare, set apart, or pay any dividend, or make any other distribution of assets (other than dividends paid or other distributions made in stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution, or winding up of the Corporation) on, or redeem, purchase, set apart, or otherwise acquire (except upon conversion or exchange for stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution, or winding up of the Corporation), shares of common stock or any other class of stock of the Corporation ranking junior to the Series A Preferred Stock as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution, or winding up of the Corporation, unless (i) all accrued and unpaid dividends on the Series A Preferred Stock for the twelve monthly dividend periods ending on the immediately preceding dividend payment date shall have been paid or are paid contemporaneously and the full monthly dividend on the Series A Preferred Stock for the then current month has been or is contemporaneously declared and paid or declared and set apart for payment and (ii) the Corporation has not defaulted in the payment of the redemption price of any shares of Series A Preferred Stock called for redemption. 7. When dividends are not paid in full on the Series A Preferred Stock and any other shares of stock of the Corporation ranking on a parity as to the payment of dividends with the Series A Preferred Stock, all dividends declared upon the Series A Preferred Stock and any such other shares of stock of the Corporation will be declared pro rata so that the amount of dividends declared per share on the Series A Preferred Stock and any such other shares of stock will in all cases bear to each other the same ratio that the liquidation preference per share of the Series A Preferred Stock and any such other shares of stock bear to each other. 8. Holders of record of the Series A Preferred Stock will not be entitled to any dividend, whether payable in cash, property or stock, in excess of the dividends provided for herein on the shares of Series A Preferred Stock. C. CONVERSION; EXCHANGE. The Series A Preferred Stock will not be convertible into or exchangeable for any other securities of the Corporation. D. REDEMPTION AT THE OPTION OF THE CORPORATION. 1. The shares of the Series A Preferred Stock are not redeemable prior to June 30, 1994. On and after that date, the shares of the Series A Preferred Stock will be redeemable in whole or in part from time to time at the option of the Corporation, upon not less than thirty nor more than sixty days' notice by mail, at the following redemption prices, during the twelve-month periods beginning on June 30 of the following years, plus accrued and unpaid dividends for the then current monthly dividend period to the date fixed for redemption: 1998... $26.25; 1999...$26.00; 2000...$25.75; 2001...$25.50; 2002 and thereafter...$25.00. 2. In the event that less than all of the outstanding shares of the Series A Preferred Stock are to be redeemed in any redemption at the option of the Corporation, the total number of shares to be redeemed in such redemption shall be determined by the Board of Directors and the shares to be redeemed shall be allocated pro rata or by lot as may be determined by the Board of Directors or by such other method as the Board of Directors may approve and deem equitable. 3. Notice of any proposed redemption shall be given by the Corporation by mailing a copy of such notice to the holders of record of the shares of Series A Preferred Stock to be redeemed, at their address of record, not more than sixty days nor less than thirty days prior to the redemption date. 4. Notice having been mailed as aforesaid, from and after the redemption date (unless default be made in the payment of the redemption price for any shares to be redeemed), all dividends on the shares of Series A Preferred Stock called for redemption shall cease to accrue and all rights of the holders of such shares as stockholders of the Corporation by reason of the ownership of such shares (except the right to receive the redemption price, on presentation and surrender of the respective certificates representing the redeemed shares), shall cease on the redemption date. 5. At its option, the Corporation may, on or prior to the redemption date, irrevocably deposit the aggregate amount payable upon redemption of the shares of the Series A Preferred Stock to be redeemed with a bank or trust company designated by the Corporation (the "Depositary") to be held in trust by the Depositary for payment to the holders of the shares of the Series A Preferred Stock then to be redeemed. If such deposit is made and the funds so deposited are made immediately available to the holders of the shares of the Series A Preferred Stock to be redeemed, the Corporation shall thereupon be released and discharged (subject to the provisions of Section D.6) from any obligation to make payment of the amount payable upon redemption of the shares of the Series A Preferred Stock to be redeemed, and the holders of such shares shall look only to the Depositary for such payment. 6. Any funds remaining unclaimed at the end of two years from and after the redemption date in respect of which such funds were deposited shall be returned to the Corporation forthwith and thereafter the holders of shares of the Series A Preferred Stock called for redemption with respect to which such funds were deposited shall look only to the Corporation for the payment of the redemption price thereof. Any interest accrued on any funds deposited with the Depositary shall belong to the Corporation and shall be paid to it from time to time on demand. E. LIQUIDATION PREFERENCE. 1. Upon any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, the then record holders of shares of Series A Preferred Stock will be entitled to receive out of the assets of the Corporation available for distribution to shareholders, distributions upon liquidation in the amount of $25 per share plus an amount equal to any accrued and unpaid dividends for the current monthly dividend period to the date of payment. 2. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series A Preferred Stock and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series A Preferred Stock are not paid in full, the holders of the Series A Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full liquidation preferences to which each is entitled. After payment of the full amount of the liquidation preference to which they are entitled, the holders of shares of Series A Preferred Stock will not be entitled to any further participation in any distribution of assets of the Corporation. 3. If the assets distributable upon any dissolution, liquidation, or winding up of the Corporation shall be insufficient to permit the payment to the holders of the Series A Preferred Stock of the full preferential amounts aforesaid, then such assets or the proceeds thereof shall be distributed among the holders of the Series A Preferred Stock ratably in proportion to the respective amounts the holders of such shares of stock would be entitled to receive if they were paid the full preferential amounts aforesaid. F. VOTING RIGHTS. 1. Except as described in this Section F, or except as required by applicable law, holders of the Series A Preferred Stock will not be entitled to receive notice of or attend or vote at any meeting of stockholders of the Corporation. 2. If the Corporation does not pay dividends in full on the Series A Preferred Stock for eighteen consecutive monthly dividend periods, the holders of outstanding shares of the Series A Preferred Stock, together with the holders of any other shares of stock of the Corporation having the right to vote for the election of directors solely in the event of any failure to pay dividends, acting as a single class without regard to series, will be entitled, by written notice to the Corporation given by the holders of a majority in liquidation preference of such shares or by ordinary resolution passed by the holders of a majority in liquidation preference of such shares present in person or by proxy at a separate general meeting of such holders convened for the purpose, to appoint two additional members of the Board of Directors of the Corporation, to remove any such member from office and to appoint another person in place of such member. Not later than thirty days after such entitlement arises, if written notice by a majority of the holders of such shares has not been given as provided for in the preceding sentence, the Board of Directors or an authorized committee thereof will convene a separate general meeting for the above purpose. If the Board of Directors or such authorized committee fails to convene such meeting within such thirty-day period, the holders of 10% of the outstanding shares of the Series A Preferred Stock and any such other stock will be entitled to convene such meeting. The provisions of the Certificate of Incorporation and By-laws of the Corporation relating to the convening and conduct of general meetings of stockholders will apply with respect to any such separate general meeting. Any member of the Board of Directors so appointed shall vacate office if, following the event which gave rise to such appointment, the Corporation shall have resumed the payment of dividends in full on the Series A Preferred Stock and each such other series of stock for twelve consecutive monthly dividend periods. 3. Any variation or abrogation of the rights, preferences, and privileges of the Series A Preferred Stock by way of amendment of the Corporation's Certificate of Incorporation or otherwise (including, without limitation, the authorization or issuance of any shares of the Corporation ranking, as to dividend rights or rights on liquidation, winding up and dissolution, senior to the Series A Preferred Stock) shall not be effective (unless otherwise required by applicable law) except with the consent in writing of the holders of at least two-thirds of the outstanding shares of the Series A Preferred Stock or with the sanction of a special resolution passed at a separate general meeting by the holders of at least two-thirds in liquidation preference of the outstanding shares of the Series A Preferred Stock. Notwithstanding the foregoing, the Corporation may, without the consent or sanction of the holders of the Series A Preferred Stock, authorize and issue shares of the Corporation ranking, as to dividend rights and rights on liquidation, winding up, and dissolution, on a parity with or junior to the Series A Preferred Stock. G. RANK. The Series A Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up, and dissolution, rank (i) senior to all classes of common stock of the Corporation, to the Corporation's Series A Participating Cumulative Preferred Stock and to all other equity securities issued by the Corporation, the terms of which specifically provide that such equity securities will rank junior to the Series A Preferred Stock (or to all series of the Preferred Stock in general); (ii) on a parity with all equity securities issued by the Corporation, the terms of which specifically provide that such equity securities will rank on a parity with the Series A Preferred Stock (or to all series of the Preferred Stock in general); and (iii) junior to all equity securities issued by the Corporation, the terms of which specifically provide that such equity securities will rank senior to the Series A Preferred Stock (or to all series of the Preferred Stock in general). For this purpose, the term "equity securities" does not include debt securities convertible into or exchangeable for equity securities. H. FORM OF CERTIFICATE FOR SERIES A PREFERRED STOCK; TRANSFER AND REGISTRATION. 1. The Series A Preferred Stock shall be issued in registered form only. The Corporation may treat the record holder of a share of Series A Preferred Stock, including the Depository Trust Company and its nominee and any other holder that holds such share on behalf of any other person, as such record holder appears on the books of the registrar for the Series A Preferred Stock, as the sole owner of such share for all purposes. 2. The transfer of a share of Series A Preferred Stock may be registered upon the surrender of the certificate evidencing the share of Series A Preferred Stock to be transferred, together with the form of transfer endorsed on it duly completed and executed, at the office of the transfer agent and registrar. 3. Registration of transfers of shares of Series A Preferred Stock will be effected without charge by or on behalf of the Corporation, but upon payment (or the giving of such indemnity as the transfer agent and registrar may require) in respect of any tax or other governmental charges which may be imposed in relation to it. I. NO PREEMPTIVE RIGHTS. Holders of the Series A Preferred Stock will have no preemptive rights to purchase any securities of the Corporation. J. NO REPURCHASE AT THE OPTION OF THE HOLDERS; MISCELLANEOUS. Holders of the Series A Preferred Stock will have no right to require the Corporation to repurchase any shares of Series A Preferred Stock, and the shares of Series A Preferred Stock are not subject to any sinking fund or similar obligation. The Corporation may, at its option, purchase shares of the Series A Preferred Stock from holders thereof from time to time, by tender, in privately negotiated transactions or otherwise. EX-10.4 3 AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT 1 EXHIBIT 10.4 EXECUTION COPY - -------------------------------------------------------------------------------- AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT Dated as of October 18, 1999 among POPULAR, INC., POPULAR NORTH AMERICA, INC., THE LENDERS NAMED HEREIN and THE CHASE MANHATTAN BANK, as Administrative Agent CHASE SECURITIES, INC. as advisor, arranger and book manger - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Article Section Page Page - ------- ------------ ---- I. DEFINITIONS................................................................... 1 1.01. Defined Terms ................................................. 1 1.02. Terms Generally ............................................... 11 1.03. Certain Date References........................................ 12 II. THE CREDITS ................................................................... 12 2.01. Commitments.................................................... 12 2.02. Loans ......................................................... 12 2.03. Competitive Bid Procedure ..................................... 13 2.04. Borrowing Procedure ........................................... 15 2.05. Interest Elections ............................................ 16 2.06. Evidence of Debt; Repayment of Loans.................................... 17 2.07. Fees .......................................................... 18 2.08. Interest on Loans ............................................. 18 2.09. Default Interest .............................................. 19 2.10. Alternate Rate of Interest .................................... 19 2.11. Termination and Reduction of Commitments........................................... 19 2.12. Prepayment .................................................... 20 2.13. Reserve Requirements; Change in Circumstances...................................... 20 2.14. Change in Legality ............................................ 21 2.15. Indemnity ..................................................... 22 2.16. Pro Rata Treatment ............................................ 22 2.17. Sharing of Setoffs ............................................ 23 2.18. Payments ...................................................... 23 2.19. Taxes ......................................................... 24 2.20. Assignment of Commitments Under Certain Circumstances........................... 26 2.21. Cross Guaranty................................................. 27 2.22. Extension of Termination Date.................................. 28 2.23. Increase in Commitments........................................ 29
3 III. REPRESENTATIONS AND WARRANTIES................................................. 30 3.01. Organization; Powers .......................................... 30 3.02. Authorization ................................................. 30 3.03. Enforceability ................................................ 31 3.04. Governmental Approvals ........................................ 31 3.05. Financial Statements .......................................... 31
4 3.06. No Material Adverse Change..................................... 31 3.07. Title to Properties; Possession Under Leases.......................................... 31 3.08. Subsidiaries................................................... 31 3.09. Litigation; Compliance with Laws............................................. 32 3.10. Agreements..................................................... 32 3.11. Federal Reserve Regulations.................................... 32 3.12. Investment Company Act; Public Utility Holding Company Act........................... 32 3.13. Use of Proceeds................................................ 32 3.14. Tax Returns.................................................... 32 3.15. No Material Misstatements...................................... 33 3.16. Employee Benefit Plans......................................... 33 3.17. Environmental and Safety Matters............................................... 33 3.18. Capital Commitments............................................ 33 3.19. Year 2000...................................................... 33 IV. CONDITIONS OF LENDING ......................................................... 34 4.01. All Credit Events ............................................. 34 4.02. First Credit Event ............................................ 34 V. AFFIRMATIVE COVENANTS.......................................................... 35 5.01. Existence; Businesses and Properties............................................ 35 5.02 Insurance...................................................... 36 5.03 Obligations and Taxes.......................................... 36 5.04. Financial Statements, Reports, etc................................................... 36 5.05. Litigation and Other Notices .................................. 37 5.06. Employee Benefits.............................................. 38 5.07. Maintaining Records; Access to Properties and Inspections.................................. 38 5.08 Use of Proceeds................................................ 38 5.09 Continuance of Business........................................ 38 5.10 Compliance with Regulatory Standards............................................. 38 5.11 Capital Requirements........................................... 39 VI. NEGATIVE COVENANTS............................................................. 39 6.01. Liens ...................................................... 39
5 6.02. Sale and Lease-Back Transactions.......................................... 40 6.03. Mergers, Consolidations, Sales of Assets ............................................ 40 6.04 Business of Borrowers and Subsidiaries.......................................... 40 6.05 Consolidated Tangible Net Worth............................................. 40 6.06 Ratio of Long-Term Indebtedness to Total Capitalization............................... 41 6.07 Non-Performing Assets.......................................... 41 6.08 Double Leverage................................................ 41 VII. EVENTS OF DEFAULT.............................................................. 41 VIII. THE ADMINISTRATIVE AGENT....................................................... 43 IX. MISCELLANEOUS ................................................................. 45 9.01. Notices ....................................................... 45 9.02. Survival of Agreement ......................................... 46 9.03. Binding Effect ................................................ 46 9.04. Successors and Assigns ........................................ 46 9.05. Expenses; Indemnity ........................................... 48 9.06. Right of Setoff................................................ 49 9.07. Applicable Law ................................................ 49 9.08. Waivers; Amendment ............................................ 49 9.09 Interest Rate Limitation....................................... 50 9.10. Entire Agreement .............................................. 50 9.11. WAIVER OF JURY TRIAL........................................... 50 9.12. Severability .................................................. 51 9.13. Counterparts .................................................. 51 9.14. Headings ...................................................... 51 9.15. Jurisdiction; Consent to Service of Process.................................... 51 9.16 Confidentiality................................................ 51
6 EXHIBITS AND SCHEDULES Exhibit A Form of Assignment and Acceptance Exhibit B Form of Opinion of Borrowers' Counsel EXHIBIT C Form of Request for Extension of Termination Date Schedule 2.01 Commitments Schedule 3.08 Subsidiaries Schedule 3.09 Litigation; Compliance with Laws Schedule 6.01 Liens 7 AMENDED AND RESTATED CREDIT AGREEMENT, dated as of October 18, 1999, among POPULAR, INC., a Puerto Rico corporation ("Popular"), Popular North America, Inc., a Delaware corporation ("Popular North America"), and together with Popular, the "Borrowers"), the financial institutions from time to time party hereto, initially consisting of those listed on Schedule 2.01 (the "Lenders"), and The Chase Manhattan Bank, a New York banking corporation, as agent (in such capacity, the "Administrative Agent") for the Lenders. The Borrowers, the Lenders and the Administrative Agent are parties to a Credit Agreement dated as of October 29, 1998, as amended on February 12, 1999 (the "Pre-Restatement Credit Agreement"), and have agreed, subject to the conditions set forth in Section 4.02, to amend and restate the Pre-Restatement Credit Agreement in the form of this Amended and Restated Credit Agreement. The Borrowers have requested the Lenders to extend credit in the form of Revolving Loans (such term and each other capitalized term used but not defined herein having the meaning given it in Article I) at any time and from time to time prior to the Termination Date, in an aggregate principal amount at any time outstanding not in excess of $445,000,000, as such amount may be increased pursuant to Section 2.23. The Borrowers have requested the Lenders to provide a procedure pursuant to which a Borrower may invite the Lenders to bid on an uncommitted basis on short-term borrowings by such Borrower. The proceeds of the Loans are to be used for general corporate purposes, including commercial paper back-up. The Lenders are willing to extend such credit to the Borrowers on the terms and subject to the conditions set forth herein. Accordingly, the parties hereto agree as follows: ARTICLE I. DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any Loan bearing interest at the Alternate Base Rate in accordance with the provisions of Article II. 8 "Administrative Agent Fees" shall have the meaning assigned to such term in Section 2.07(c). "Administrative Questionnaire" shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified. "Aggregate Revolving Credit Exposure" shall mean the aggregate amount of the Lenders' Revolving Credit Exposures. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the preceding sentence, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Percentage" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. "Applicable Rate" shall mean, with respect to any Eurodollar Loan (other than any Eurodollar Competitive Loan), or with respect to the Facility Fees, as the case may be, the Applicable Rate set forth below in the row across from the caption "Eurodollar Spread" or "Facility Fee", as the case may be, based upon the ratings by S&P and Moody's, respectively, applicable on such date to the Index Debt:
- ------------------------------------------------------------------------------------------------------ Category 1 Category 2 Category 3 Category 4 Category 5 ---------- ---------- ---------- ---------- ---------- A/A2 or A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3/ or Higher Lower - ------------------------------------------------------------------------------------------------------ Eurodollar Spread (bp) 25.00 30.00 35.00 42.50 50.00 - ------------------------------------------------------------------------------------------------------ Facility Fee (bp) 10.00 12.50 15.00 20.00 25.00 - ------------------------------------------------------------------------------------------------------
9 3 For purposes of the foregoing, (i) if S&P or Moody's shall not have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last sentence of this definition), then such rating agency shall be deemed to have established a rating in Category 5; (ii) if the ratings established or deemed to have been established by S&P and Moody's for the Index Debt shall fall within different Categories, the Applicable Rate shall be based on (A) if the ratings are in adjacent categories, the higher of the two ratings and (B) if the ratings are in non-adjacent categories, the rating immediately below the higher of the two ratings; and (iii) if the ratings established or deemed to have been established by S&P and Moody's for the Index Debt shall be changed (other than as a result of a change in the rating system of such rating agency), such change shall be effective as of the date on which it is first announced by the applicable rating agency. Each change in the Applicable Rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of S&P or Moody's shall change, or if any such rating agency shall cease to be in the business of rating corporate debt obligations, the Borrowers and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the non-availability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined using the rating of such rating agency most recently in effect prior to such change or cessation. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit A or such other form as shall be approved by the Administrative Agent. "Availability Period" means the period from and including the Closing Date to but excluding the earlier of the Termination Date and the date of termination of the Commitments in accordance with the terms of the Agreement. "Banco Popular" shall mean the Banco Popular de Puerto Rico, a Puerto Rico bank. "Bank Regulatory Authority" shall mean the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation and all other relevant bank regulatory authorities (including relevant state bank regulatory authorities). "Bank Subsidiary" shall mean any Subsidiary that is a commercial bank, banking corporation, savings and loan association, savings bank, trust company or Edge Act corporation. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. 10 4 "Borrowing" shall mean a group of Loans of a single Type made by the Lenders (or, in the case of a Competitive Borrowing, by the Lender or Lenders whose Competitive Bids have been accepted pursuant to Section 2.03) on a single date and as to which a single Interest Period is in effect. "Borrowing Request" shall mean a request by a Borrower in accordance with the terms of Section 2.04. "Business Day" shall mean any day other than a Saturday, Sunday or day on which banks in New York City are authorized or required by law to close; provided, however, that (i) when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in Dollar deposits in the London interbank market and (ii) when used in Sections 2.03 and 2.04, the Term "Business Day" shall also exclude any day on which banks in Puerto Rico are authorized or required by law to close. "Capital Commitment" shall mean any commitment to the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Director of the Office of Thrift Supervision, the Comptroller of the Currency, or the Board, or their predecessors or successors, to maintain the capital of an insured depository institution. "Capital Lease Obligations" of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. A "Change in Control" shall be deemed to have occurred if (a) any person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934 as in effect on the date hereof) shall own directly or indirectly, beneficially or of record, shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Popular; (b) a majority of the seats (other than vacant seats) on the board of directors of a Borrower shall at any time have been occupied by persons who were neither (i) nominated by the board of directors of a Borrower, nor (ii) appointed by directors so nominated; (c) Popular shall cease to own, directly or indirectly, all of the outstanding and issued voting stock of Popular North America; (d) Popular shall cease to own, directly or indirectly, all of the outstanding and issued capital stock of Banco Popular (other than directors' qualifying shares); or (e) any person or group shall otherwise directly or indirectly control Popular. "Closing Date" shall mean the date of execution of this Amended and Restated Credit Agreement. 11 5 "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment" shall mean, with respect to any Lender, such Lender's Revolving Credit Commitment. "Competitive Bid" shall mean an offer by a Lender to make a Competitive Loan pursuant to Section 2.03. "Competitive Bid Accept/Reject Letter" shall mean a notification made by a Borrower pursuant to Section 2.03(d) in a form approved by the Administrative Agent. "Competitive Bid Rate" shall mean, as to any Competitive Bid made by a Lender pursuant to Section 2.03(b), (i) in the case of a Eurodollar Loan, the Margin, and (ii) in the case of a Fixed Rate Loan, the fixed rate of interest offered by the Lender making such Competitive Bid. "Competitive Bid Request" shall mean a request made pursuant to Section 2.03 in a form approved by the Administrative Agent. "Competitive Borrowing" shall mean a Borrowing consisting of a Competitive Loan or concurrent Competitive Loans from the Lender or Lenders whose Competitive Bids for such Borrowing have been accepted by a Borrower under the bidding procedure described in Section 2.03. "Competitive Loan" shall mean a Loan from a Lender to a Borrower pursuant to the bidding procedure described in Section 2.03. Each Competitive Loan shall be a Eurodollar Competitive Loan or a Fixed Rate Loan. "Consolidated Net Worth" shall mean at any date the Net Worth of Popular and its consolidated Subsidiaries on such date, determined on a consolidated basis in accordance with GAAP. "Consolidated Tangible Net Worth" shall mean, at any date, (a) Consolidated Net Worth at such date minus (b) with respect to Popular and its Subsidiaries (determined on a consolidated basis in accordance with GAAP), the book value of all Intangibles reflected in clause (a) above. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and "Controlling" and "Controlled" shall have meanings correlative thereto. 12 6 "Credit Event" shall have the meaning assigned to such term in Section 4.01. "Default" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "Dollars" or "$" shall mean lawful money of the United States of America. "Equity Investments in Subsidiaries" shall mean, at any date, Popular's aggregate equity investments in the Subsidiaries, determined in accordance with GAAP. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that, together with a Borrower, is treated as a single employer under Section 414 of the Code. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Competitive Borrowing" shall mean a Borrowing comprised of Eurodollar Competitive Loans. "Eurodollar Competitive Loan" shall mean any Competitive Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Eurodollar Loan" shall mean any Eurodollar Revolving Loan or Eurodollar Competitive Loan. "Eurodollar Revolving Credit Borrowing" shall mean a Borrowing comprised of Eurodollar Revolving Loans. "Eurodollar Revolving Loan" shall mean any Revolving Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VII. "Facility Fee" shall have the meaning assigned to such term in Section 2.07(a). "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the 13 7 Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" shall mean the Fee Letter dated September 17, 1999, among the Borrowers, the Administrative Agent and Chase Securities Inc. "Fees" shall mean the Facility Fees, the Utilization Fees, the Administrative Agent Fees and the Participation Fees. "Financial Officer" of any corporation shall mean the chief financial officer, principal accounting officer, Treasurer or Controller of such corporation. "Fixed Rate Borrowing" shall mean a Borrowing comprised of Fixed Rate Loans. "Fixed Rate Loan" shall mean any Competitive Loan bearing interest at a fixed percentage rate per annum (expressed as a number of basis points to no more than four decimal places) specified by the Lender making such Loan in its Competitive Bid. "GAAP" shall mean generally accepted accounting principles applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantee" of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Guarantors" shall mean the Borrowers, in their capacity as guarantors under Section 2.21. 14 8 "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person and (i) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances, excluding (in all cases) (x) liabilities of any Bank Subsidiary that constitute "deposits" within the meaning of Section 3(i) of the Federal Deposit Insurance Act, as amended, and (y) repurchase agreements entered into in the ordinary course of business with a maturity of less than one year. The Indebtedness of any person shall include the Indebtedness of any partnership in which such person is a general partner. "Index Debt" shall mean the senior, unsecured, non-credit enhanced, long-term indebtedness for borrowed money of Popular. "Intangibles" shall mean with respect to any person at any date the amount of all assets of such person that would be classified as intangible assets in accordance with GAAP, but in any event including unamortized debt discount and expense, unamortized organization and reorganization expense, costs in excess of the net asset value of acquired companies, patents, copyrights, trade or service marks, franchises, trade names, goodwill and the amount of any write-up in the book value of any assets resulting from any revaluation thereof (other than (a) revaluations of tangible assets arising out of purchase accounting adjustments, (b) revaluations arising out of foreign currency valuations in accordance with GAAP, and (c) revaluations pursuant to the Statement of Financial Accounting Standards No. 115). "Interest Payment Date" shall mean, with respect to any Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Borrowing, and, in addition, the date of any refinancing of such Borrowing with a Borrowing of a different Type. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically 15 9 corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect, (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the earliest of (i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the Revolving Credit Maturity Date and (iii) the date such Borrowing is prepaid in accordance with Section 2.12 and (c) as to any Fixed Rate Borrowing, the period commencing on the date of such Borrowing and ending on the date specified in the Competitive Bids in which the offer to make the Fixed Rate Loans comprising such Borrowing were extended, which shall not be earlier than seven days after the date of such Borrowing or later than 360 days after the date of such Borrowing; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "LIBO Rate" shall mean, with respect to any Eurodollar Borrowing, the rate (rounded upwards, if necessary, to the next 1/16 of 1%) at which Dollar deposits approximately equal in principal amount to (i) in the case of a Revolving Credit Borrowing, the Administrative Agent's portion of such Eurodollar Borrowing and (ii) in the case of a Competitive Borrowing, a principal amount that would have been the Administrative Agent's portion of such Competitive Borrowing had such Competitive Borrowing been a Revolving Credit Borrowing, and for a maturity comparable to such Interest Period are offered to the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan Documents" shall mean this Agreement and the Fee Letter. "Loans" shall mean the Revolving Loans and the Competitive Loans. "Long-Term Indebtedness" shall mean, at any date, all Indebtedness of Popular and the consolidated Subsidiaries outstanding as of such date that does not mature or that is treated on the consolidated financial statements of Popular as not maturing, or otherwise come due and payable, within one year of such date. 16 10 "Margin" shall mean, as to any Eurodollar Competitive Loan, the margin (expressed as a number of basis points per annum in the form of a decimal to no more than four decimal places) to be added to or subtracted from the LIBO Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan. "Margin Stock" shall have the meaning assigned to such term in Regulation U. "Material Adverse Effect" shall mean (a) a materially adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, of the Borrowers and the Subsidiaries taken as a whole, (b) material impairment of the ability of any Borrower to perform any of its obligations under any Loan Document to which it is or will be a party or (c) material impairment of the rights of or benefits available to the Lenders under any Loan Document. "Moody's" shall mean Moody's Investors Service, Inc. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which a Borrower or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Net Worth" with respect to any person at any date shall mean (i) all amounts which would be included under shareholders' equity on a balance sheet of such person, as of such date, determined in accordance with GAAP, less (ii) such person's treasury stock (to the extent included in clause (i) above). "Nonperforming Assets" shall mean, at any date, the sum, for Popular and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of the following: (a) loans that are at least 90 days past-due as to principal or interest; (b) loans that are required to have been placed on nonaccrual status by the relevant Bank Regulatory Authority for Popular or its Subsidiaries; (c) loans that bear a rate of interest that has been reduced below market rates due to the deteriorating financial condition of a borrower; and (d) assets that have been acquired in satisfaction of indebtedness or have been classified as "in-substance foreclosures". "Note" shall mean a promissory note delivered pursuant to Section 9.04(h). "Obligations" shall have the meaning assigned to such term in the first paragraph of Section 2.21. 17 11 "Participation Fee" shall have the meaning assigned to such term in Section 2.07(d). "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code that is maintained for current or former employees, or any beneficiary thereof, of a Borrower or any ERISA Affiliate. "Pre-Restatement Credit Agreement" shall have the meaning specified in the preamble. "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. "Register" shall have the meaning given such term in Section 9.04(d). "Regulation U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation Y" shall mean Regulation Y of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Reportable Event" shall mean any reportable event as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414). "Required Lenders" shall mean, at any time, Lenders having Revolving Credit Commitments representing greater than 50% of the sum of all Revolving Credit Commitments at such time or, for purposes of acceleration pursuant to clause (ii) of Article VII, Lenders having Loans and unused Revolving Credit Commitments representing greater than 50% of the sum of all Loans outstanding and unused Revolving Credit Commitments. 18 12 "Responsible Officer" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "Revolving Credit Borrowing" shall mean a Borrowing comprised of Revolving Loans. "Revolving Credit Commitment" shall mean, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder as set forth in Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender assumed its Revolving Credit Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.11, (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04, (c) increased from time to time pursuant to Section 2.23 and (d) extended from time to time pursuant to Section 2.22. The initial aggregate amount of the Lenders' Revolving Credit Commitments is $445,000,000. "Revolving Credit Exposure" shall mean, with respect to any Lender at any time, the aggregate principal amount at such time of all outstanding Revolving Loans of such Lender. "Revolving Credit Lender" shall mean a Lender with a Revolving Credit Commitment. "Revolving Credit Maturity Date" shall mean the first anniversary of the Termination Date (as the Termination Date may be extended pursuant to Section 2.22). "Revolving Loans" shall mean the revolving loans made by the Lenders to a Borrower pursuant to Section 2.01. Each Revolving Loan shall be a Eurodollar Revolving Loan or an ABR Revolving Loan. "Significant Subsidiary" shall mean any Subsidiary which, at the time any determination is being made, constitutes a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X of the Securities and Exchange Commission, 17 C.F.R. ss. 210.1-02, as in effect on the date hereof. "S&P" shall mean Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. "Subsidiary" shall mean any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held by either Borrower, or (b) which is, at the time any determination is made, otherwise Controlled, by either Borrower or one or more Subsidiaries of either Borrower or by either Borrower and one or more Subsidiaries of either Borrower. 19 13 "Termination Date" means October 16, 2000, or, in the case of any Lender, any later date to which the Termination Date shall have been extended as to such Lender pursuant to Section 2.22. "Total Assets" shall mean, at any date, the total assets that would be included on a balance sheet of Popular and its Subsidiaries (determined on a consolidated basis in accordance with GAAP) as of such date. "Total Capitalization" shall mean, at any date, the sum of Consolidated Net Worth and Long-Term Indebtedness, each determined as of such date. "Total Revolving Credit Commitment" shall mean, at any time, the aggregate amount of the Revolving Credit Commitments, as in effect at such time. "Transactions" shall have the meaning assigned to such term in Section 3.02. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, "Rate" shall include the LIBO Rate and the Alternate Base Rate. "Utilization Fee" shall have the meaning assigned to such term in Section 2.07(b). "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented or otherwise modified from time to time and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that for purposes of determining compliance with the covenants contained in Article VI, all accounting terms herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP as in effect on the date of this Agreement and applied on a basis consistent with the application used in the financial statements referred to in Section 3.05. 20 14 SECTION 1.03. Certain Date References. All references herein to "the date hereof" and "the date of this Agreement" shall be deemed references to the date of this Amended and Restated Credit Agreement. ARTICLE II. THE CREDITS SECTION 2.01. Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Revolving Loans to the Borrowers, at any time and from time to time during the Availability Period, in an aggregate principal amount that will not result in such Lender's Revolving Credit Exposure exceeding such Lender's Revolving Credit Commitment (minus the amount by which the Competitive Loans outstanding at such time shall be deemed to have used such Commitment pursuant to Section 2.16), subject, however, to the conditions that during the Availability Period, (i) at no time shall (A) the sum of (x) the outstanding aggregate principal amount of all Revolving Credit Loans made by all Lenders plus (y) the outstanding aggregate principal amount of all Competitive Loans made by all Lenders exceed (B) the Total Revolving Credit Commitment and (ii) at all times, the outstanding aggregate principal amount of all Revolving Loans made by each Lender shall equal the product of (A) the percentage which its Revolving Credit Commitment represents of the Total Revolving Credit Commitment times (B) the outstanding aggregate principal amount of all Revolving Loans. Within the foregoing limits, a Borrower may borrow, pay or prepay and reborrow Revolving Loans, subject to the terms, conditions and limitations set forth herein. SECTION 2.02. Loans. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their applicable Revolving Credit Commitments; provided, however, that the failure of any Lender to make any Revolving Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.03. The Loans comprising any Borrowing shall be in an aggregate principal amount which is (i) an integral multiple of $1,000,000 and not less than $5,000,000 or (ii) equal to the remaining available balance of the applicable Commitments. (b) Subject to Sections 2.10 and 2.14, each Competitive Borrowing shall be comprised entirely of Eurodollar Competitive Loans or Fixed Rate Loans, and each other Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request pursuant to Section 2.03 or 2.04, as applicable. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of a Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided, however, that a Borrower shall not be entitled to request any Borrowing which, if made, would result in more than five Eurodollar 21 15 Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings. (c) Subject to paragraph (f) below, each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer to such account as the Administrative Agent may designate in federal funds not later than 11:00 a.m., New York City time, and the Administrative Agent shall by 12:00 (noon), New York City time, credit the amounts so received to an account with the Administrative Agent designated by the applicable Borrower in the applicable Borrowing Request or Competitive Bid Request, which account must be in the name of the Borrower or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. (d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with paragraph (c) above and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If the Administrative Agent shall have so made funds available then, to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the applicable Borrower severally agree to repay to the Administrative Agent, in the case of such Lender, forthwith on demand and, in the case of the applicable Borrower, within two Business Days of demand, such corresponding amount together with interest thereon, for each day from the date such amount is made available to such Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of such Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, a rate determined by the Administrative Agent to represent its cost of overnight or short-term funds (which determination shall be conclusive absent manifest error). If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (e) Notwithstanding any other provision of this Agreement, a Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Revolving Credit Maturity Date. (f) A Borrower may refinance all or any part of a Borrowing with another Borrowing, subject to the conditions and limitations set forth in this Agreement (including the condition that the Aggregate Revolving Credit Exposure after giving effect thereto will not exceed the Total Revolving Credit Commitment). Any Borrowing or part thereof so refinanced shall be deemed to be repaid or prepaid in accordance with the applicable provisions of this Agreement with the proceeds of the new Borrowing, and the proceeds of such new Borrowing, to the extent they do not exceed the principal amount of the Borrowing being refinanced, shall 22 16 not be paid by the Lenders to the Administrative Agent or by the Administrative Agent to such Borrower pursuant to paragraph (c) above. SECTION 2.03. Competitive Bid Procedure. (a) In order to request Competitive Bids, a Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Competitive Bid Request (i) in the case of a Eurodollar Competitive Borrowing, not later than 10:00 a.m., New York City time, four Business Days before the proposed date of such Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before the proposed date of such Borrowing. A Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request. No ABR Loan shall be requested in, or made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does not conform to a form approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Borrower of such rejection as promptly as practicable. Each Competitive Bid Request shall refer to this Agreement and specify (i) whether the Borrowing being requested is to be a Eurodollar Borrowing or a Fixed Rate Borrowing; (ii) the date of such Borrowing (which shall be a Business Day); (iii) the number and the location of the account to which funds are to be disbursed (which shall be an account that complies with the requirements of Section 2.02(c)); (iv) the aggregate principal amount of such Borrowing, which shall be a minimum of $5,000,000 and an integral multiple of $1,000,000; and (v) the Interest Period with respect thereto (which may not end after the Revolving Credit Maturity Date). Promptly after its receipt of a Competitive Bid Request that is not rejected, the Administrative Agent shall by telecopy in a form approved by the Administrative Agent invite the Revolving Credit Lenders to bid to make Competitive Loans pursuant to the Competitive Bid Request. (b) Each Revolving Credit Lender may make one or more Competitive Bids to the applicable Borrower responsive to a Competitive Bid Request. Each Competitive Bid by a Revolving Credit Lender must be received by the Administrative Agent by telecopy in a form approved by the Administrative Agent, (i) in the case of a Eurodollar Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before the proposed date of such Competitive Borrowing, and (ii) in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform to the form of approved by the Administrative Agent may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender as promptly as practicable. Each Competitive Bid shall refer to this Agreement and specify (x) the principal amount (which shall be a minimum of $5,000,000 and an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Revolving Credit Lender is willing to make, (y) the Competitive Bid Rate or Rates at which the Revolving Credit Lender is prepared to make such Loan or Loans and (z) the Interest Period applicable to such Loan or Loans and the last day thereof. (c) The Administrative Agent shall promptly notify the applicable Borrower by telecopy of the Competitive Bid Rate and the principal amount of each Competitive Loan in 23 17 respect of which a Competitive Bid shall have been made and the identity of the Revolving Credit Lender that shall have made each bid. (d) The applicable Borrower may, subject only to the provisions of this paragraph (d), accept or reject any Competitive Bid. Such Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in the form of a Competitive Bid Accept/Reject Letter, whether and to what extent it has decided to accept or reject each Competitive Bid, (x) in the case of a Eurodollar Competitive Borrowing, not later than 10:30 a.m., New York City time, three Business Days before the date of the proposed Competitive Borrowing, and (y) in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the proposed date of the Competitive Borrowing; provided, however, that (i) the failure of such Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) such Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if such Borrower has decided to reject a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by such Borrower shall not exceed the principal amount specified in the Competitive Bid Request, (iv) if such Borrower shall accept a Competitive Bid or Bids made at a particular Competitive Bid Rate but the amount of such Competitive Bid or Bids would cause the total amount to be accepted by such Borrower to exceed the amount specified in the Competitive Bid Request, then such Borrower shall accept a portion of such Competitive Bid or Bids in an amount equal to the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids so accepted, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further, however, that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner determined by such Borrower. A notice given by any Borrower pursuant to this paragraph (d) shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Revolving Credit Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, in what amount and at what Competitive Bid Rate), and each successful bidder will thereupon become bound, upon the terms and subject to the conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. (f) No Competitive Borrowing shall be requested or made hereunder if after giving effect thereto any of the conditions set forth in clause (i) of Section 2.01 would not be met. 24 18 (g) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Revolving Credit Lender, it shall submit such Competitive Bid directly to the applicable Borrower at least one quarter of an hour earlier than the time by which the other Revolving Credit Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) above. SECTION 2.04. Borrowing Procedure. (a) In order to request a Borrowing (other than a Competitive Loan, as to which this Section 2.04 shall not apply), the applicable Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Borrowing Request in a form approved by the Administrative Agent (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 10:00 a.m., New York City time, on the day of such Borrowing; provided, however, that Borrowing Requests with respect to Borrowings to be made on the Closing Date may, at the discretion of the Administrative Agent, be delivered later than the times specified above. Each Borrowing Request shall be irrevocable, signed by or on behalf of the applicable Borrower and shall specify the following information: (i) whether the Borrowing then being requested is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date of such Borrowing (which shall be a Business Day), (iii) the number and location of the account to which funds are to be disbursed (which shall be an account that complies with the requirements of Section 2.02(c)); (iv) the amount of such Borrowing; and (v) if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with respect thereto; provided, however, that, notwithstanding any contrary specification in any Borrowing Request, each requested Borrowing shall comply with the requirements set forth in Section 2.02. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall promptly (and in any event on the same day that the Administrative Agent receives such notice, if received by 1:00 p.m., New York City time, on such day) advise the applicable Lenders of any notice given pursuant to this Section 2.04 (and the contents thereof), of each Lender's portion of the requested Borrowing. (b) If the applicable Borrower shall not have delivered a Borrowing Request in accordance with this Section 2.04 prior to the end of the Interest Period then in effect for any Revolving Credit Borrowing and requesting that such Borrowing be refinanced, then such Borrower shall (unless such Borrower has notified the Administrative Agent, not less than three Business Days prior to the end of such Interest Period, that such Borrowing is to be repaid at the end of such Interest Period) be deemed to have delivered a Borrowing Request requesting that such Borrowing be refinanced with a new Borrowing of equivalent amount, and such new Borrowing shall be an ABR Borrowing. SECTION 2.05. Interest Elections. (a) Each Revolving Credit Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Revolving Credit Borrowing, shall have an initial Interest Period as specified in 25 19 such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Credit Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.04 if the Borrower were requesting a Revolving Credit Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. 26 20 (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Credit Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Revolving Credit Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.06. Evidence of Debt; Repayment of Loans. (a) The outstanding principal balance of each Loan shall be payable on the Revolving Credit Maturity Date. Each Loan shall bear interest from the date of the first Borrowing hereunder on the outstanding principal balance thereof as set forth in Section 2.08. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type of each Loan made and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) of this Section 2.06 shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrower to repay the Loans in accordance with their terms. (e) Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive a Note payable to such Lender and its registered assigns (which Note shall be consistent in all respects with this Agreement), the interests represented by that Note shall at all times (including after any assignment of all or part of such interests pursuant to Section 9.04) be represented by one or more Notes payable to the payee named therein or its registered assigns. SECTION 2.07. Fees. (a) The Borrowers agree to pay to the Administrative Agent for the account of each Lender a facility fee (the "Facility Fee"), which shall accrue at the Applicable Rate on the average daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the date hereof to but excluding the date on 27 21 which such Commitment terminates; provided that, if such Lender continues to have any Revolving Credit Exposure after its Commitment terminates, then such Facility Fee shall continue to accrue on the daily amount of such Lender's Revolving Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Revolving Credit Exposure. Accrued Facility Fees shall be payable in arrears on the last day of March, June, September and December of each year, commencing on the first such date to occur after the date hereof, and on the date on which the Commitments shall have terminated and the Lenders shall have no further Revolving Credit Exposures. All Facility Fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Borrower shall pay to the Administrative Agent for the account of each Lender, for each Utilization Fee Day for such Lender, a utilization fee (a "Utilization Fee") equal to 0.0625% per annum on the aggregate amount of each Lender's outstanding Loans on such day. Accrued and unpaid Utilization Fees, if any, shall be payable on the last day of each March, June, September and December and on the date on which the Commitments shall have terminated and no Loans shall be outstanding. All Utilization Fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). "Utilization Fee Day" shall mean (i) as to each Lender with an effective Commitment, each day on which the outstanding principal amount of Loans made by all Lenders with effective Commitments shall be greater than 50% of the aggregate Commitments, and (ii) as to each Lender the Commitment of which has expired or been terminated, each day on which such Lender has any Loan outstanding. (c) The Borrowers agree to pay to the Administrative Agent, for its own account, the fees set forth in the Fee Letter at the times specified therein (the "Administrative Agent Fees"). (d) The Borrowers agree to pay to the Administrative Agent for the accounts of the Lenders participation fees (the "Participation Fees") on the Closing Date in the amounts separately agreed upon among the Borrowers and the Administrative Agent. (e) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.08. Interest on Loans. (a) Subject to the provisions of Section 2.09, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate; provided that between November 1, 1999 and January 31, 2000, Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal 28 22 to the highest of (x) the rate otherwise applicable to such Borrowing, (y) Prime Rate and (z) Federal Funds Effective Rate plus the sum of 1.50% per annum and the Applicable Rate. (b) Subject to the provisions of Section 2.09, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to (i) in the case of each Eurodollar Revolving Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate; provided that between November 1, 1999 and January 31, 2000, Loans comprising each Eurodollar Revolving Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the highest of (x) the rate otherwise applicable to such Borrowing, (y) Prime Rate and (z) Federal Funds Effective Rate plus the sum of 1.50% per annum and the Applicable Rate, and (ii) in the case of each Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Margin offered by the Lender making such Loan and accepted by the applicable Borrower pursuant to Section 2.03. (c) Subject to the provisions of Section 2.09, Fixed Rate Loans shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the fixed rate of interest offered by the Lender making such Loan and accepted by the applicable Borrower pursuant to Section 2.03. (d) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or LIBO Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.09. Default Interest. If a Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, by acceleration or otherwise, such Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the sum of (i) the Alternate Base Rate (or the rate applicable to each ABR Borrowing between November 1, 1999 and January 31, 2000, as the case may be), plus (ii) 2.00%. SECTION 2.10. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that Dollar deposits in the principal amount of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such Dollar deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurodollar Loan during such Interest Period, or that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy 29 23 notice of such determination to the Borrowers and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any request by a Borrower for a Eurodollar Revolving Credit Borrowing pursuant to Section 2.04 shall be deemed to be a request for an ABR Borrowing and (ii) any request by a Borrower for a Eurodollar Competitive Borrowing pursuant to Section 2.03 shall be of no force and effect and shall be denied by the Administrative Agent. Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.11. Termination and Reduction of Commitments. (a) Unless previously terminated, the Revolving Credit Commitments shall be automatically terminated on the Termination Date. (b) Upon at least three Business Days' prior irrevocable written or telecopy notice to the Administrative Agent, the Borrowers may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Revolving Credit Commitments; provided, however, that (i) each partial reduction of the Revolving Credit Commitments shall be in an integral multiple of $1,000,000 and in a minimum principal amount of $5,000,000 and (ii) the Total Revolving Credit Commitment shall not be reduced to an amount that is less than the sum of the Aggregate Revolving Credit Exposure and the aggregate outstanding amount of the Competitive Loans at the time, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.12. (c) Each reduction in the Revolving Credit Commitments hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrowers shall pay to the Administrative Agent for the account of the Lenders, on the date of each termination or reduction, the Facility Fees on the amount of the Commitments so terminated or reduced accrued to the date of such termination or reduction. SECTION 2.12. Prepayment. (a) Each Borrower shall have the right at any time and from time to time to prepay any Borrowing (other than a Competitive Borrowing) consisting of Loans made to such Borrower, in whole or in part, upon at least three Business Days' prior written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent before 11:00 a.m., New York City time; provided, however, that each partial prepayment shall be in an amount which is an integral multiple of $1,000,000 and not less than $5,000,000. The Borrowers shall not have the right to prepay any Competitive Borrowing. (b) In the event of any termination of the Revolving Credit Commitments prior to the Termination Date, each Borrower shall repay or prepay all its outstanding Revolving Credit Borrowings on the date of such termination. In the event of any partial reduction of the Revolving Credit Commitments prior to the Termination Date, then (i) at or prior to the effective date of such reduction, the Administrative Agent shall notify the Borrowers and the Revolving Credit Lenders of the Aggregate Revolving Credit Exposure and (ii) if the Aggregate Revolving 30 24 Credit Exposure would exceed the Total Revolving Credit Commitment after giving effect to such reduction, then the Borrowers shall, on the date of such reduction, repay or prepay Revolving Credit Borrowings in an amount sufficient to eliminate such excess. (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the applicable Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Section 2.15 but otherwise without premium or penalty. All prepayments under this Section 2.12 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.13. Reserve Requirements; Change in Circumstances. (a) If after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Loan or Fixed Rate Loan made by such Lender or any Fees or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender, or shall impose on such Lender or the London interbank market (or other relevant interbank market) any other condition affecting this Agreement or Eurodollar Loans or Fixed Rate Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan, or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then each Borrower will pay to such Lender upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender shall have determined that the adoption after the date hereof of any law, rule, regulation, agreement or guideline regarding capital adequacy, or any change after the date hereof in any such law, rule, regulation, agreement or guideline (whether such law, rule, regulation, agreement or guideline has been adopted) or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any Governmental Authority has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with 31 25 respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time each Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company as specified in paragraph (a) or (b) above shall be delivered to the Borrowers and shall be conclusive absent manifest error. Each Borrower shall pay each Lender the amount shown as due from such Borrower on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure or delay on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender's right to demand such compensation. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, agreement, guideline or other change or condition which shall have occurred or been imposed. Notwithstanding any other provision of this Section, no Lender shall be entitled to demand compensation hereunder in respect of any Competitive Loan if it shall have been aware of the event or circumstance giving rise to such demand at the time it submitted the Competitive Bid pursuant to which such Loan was made. SECTION 2.14. Change in Legality. (a) Notwithstanding any other provision herein, if, after the date hereof, any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrowers and to the Administrative Agent: (i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness or impracticability) be made by such Lender hereunder, whereupon such Lender shall not submit a Competitive Bid in response to a request for a Eurodollar Competitive Loan and any request for a Eurodollar Borrowing, shall, as to such Lender only, be deemed a request for an ABR Loan unless such declaration shall be subsequently withdrawn (or, if a Loan to a Borrower cannot be made for the reasons specified above, such request shall be deemed to have been withdrawn); and (ii) such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such 32 26 Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.14, a notice to a Borrower by any Lender shall be effective as to each Eurodollar Loan, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by such Borrower. SECTION 2.15. Indemnity. The Borrowers shall indemnify each Lender against any loss or expense which such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Loan prior to the end of the Interest Period in effect therefor or (ii) any Loan to be made by such Lender not being made after notice of such Loan shall have been given by a Borrower hereunder (any of the events referred to in this clause (a) being called a "Breakage Event") or (b) any default in the making of any payment or prepayment required to be made hereunder; provided, however, that any Breakage Event caused by the prepayment by a Borrower of an ABR Loan shall not result in such Borrower becoming liable to such Lender pursuant to this Section 2.15. In the case of any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Loan which is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or which would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to the applicable Borrower and shall be conclusive absent manifest error. SECTION 2.16. Pro Rata Treatment. Except as provided in the succeeding sentence with respect to Competitive Borrowings, as required under Section 2.14 or as required under Section 2.22(c), (a) each Borrowing, each payment of the Facility Fees and each reduction of the Revolving Credit Commitments shall be allocated pro rata among the Lenders in accordance with their respective applicable Commitments (or, as to any Lenders the Commitments of which have been expired or been terminated, the respective principal amounts of their outstanding Loans), (b) each payment or prepayment of principal of any Borrowing (including any Borrowing comprised in part of Loans of Non-Extending Lenders), each payment of interest on the Loans comprising any Borrowing and each continuation or conversion of any Borrowing as or to a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with the respective principal amounts of their outstanding Loans comprising such Borrowing and (c) each payment of Utilization Fees shall be allocated pro rata among the Lenders in accordance with the amounts of such Utilization Fees accrued for their respective accounts. Each payment of principal of any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective principal amounts of their outstanding Competitive Loans comprising such Borrowing. Each payment of 33 27 interest on any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective amounts of accrued and unpaid interest on their outstanding Competitive Loans comprising such Borrowing. For purposes of determining the available Revolving Credit Commitment of each Lender at any time, each outstanding Competitive Borrowing shall be deemed to have utilized the Revolving Credit Commitments of the Lenders (including those Lenders which shall not have made Loans as part of such Competitive Borrowing) pro rata in accordance with such respective Revolving Credit Commitments. Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing, computed in accordance with Section 2.01, to the next higher or lower whole Dollar amount. SECTION 2.17. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against a Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans as a result of which the unpaid principal portion of its Loans shall be proportionately less than the unpaid principal portion of the Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans of such other Lender, so that the aggregate unpaid principal amount of the Loans and participations in Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Loans outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that, if any such purchase or purchases or adjustments shall be made pursuant to this Section and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrowers expressly consent to the foregoing arrangements and agree that any Lender holding a participation in a Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by a Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to such Borrower in the amount of such participation. SECTION 2.18. Payments. (a) The Borrowers shall make each payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 (noon), New York City time, on the date when due in immediately available funds by wire transfer to such account as the Administrative Agent may designate. Each such payment shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York. Each such payment shall be made in Dollars. 34 28 (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.19. Taxes. (a) Any and all payments by a Borrower hereunder and under any other Loan Document shall be made, in accordance with Section 2.18, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) income taxes imposed on the net income of the Administrative Agent or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity a "Transferee")) and (ii) franchise taxes imposed on the net income of the Administrative Agent or any Lender (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent or such Lender (or Transferee) is organized or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, being called "Taxes"). If a Borrower shall be required to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document to the Administrative Agent or any Lender (or any Transferee), (i) the sum payable shall be increased by the amount (an "additional amount") necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.19) the Administrative Agent or such Lender (or Transferee), as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, each Borrower agrees to bear and to pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under any other Loan Document or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document ("Other Taxes"). (c) Each Borrower will indemnify the Administrative Agent and each Lender (or Transferee) for the full amount of Taxes and Other Taxes paid by the Administrative Agent or such Lender (or Transferee), as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorney's fees and expenses)) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability prepared by the Administrative Agent or a Lender (or Transferee), or the Administrative Agent on its behalf, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date the Administrative Agent or any Lender (or Transferee), as the case may be, makes written demand therefor. 35 29 (d) If the Administrative Agent or a Lender (or Transferee) shall become aware that it is entitled to claim a refund from a Governmental Authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrowers, or with respect to which a Borrower has paid additional amounts, pursuant to this Section 2.19, it shall promptly notify such Borrower of the availability of such refund claim and shall, within 30 days after receipt of a request by such Borrower, make a claim to such Governmental Authority for such refund at such Borrower's expense. If the Administrative Agent or a Lender (or Transferee) receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it determines in its sole discretion that it has been indemnified by the Borrowers or with respect to which a Borrower has paid additional amounts pursuant to this Section 2.19, it shall within 30 days from the date of such receipt pay over such refund to such Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by such Borrower under this Section 2.19 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender (or Transferee) and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund); provided, however, that such Borrower, upon the request of the Administrative Agent or such Lender (or Transferee), agrees to repay the amount paid over to such Borrower (plus penalties, interest or other charges) to the Administrative Agent or such Lender (or Transferee) in the event the Administrative Agent or such Lender (or Transferee) is required to repay such refund to such Governmental Authority. (e) As soon as practicable after the date of any payment of Taxes or Other Taxes by a Borrower to the relevant Governmental Authority, such Borrower will deliver to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof. (f) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.19 shall survive the payment in full of the principal of and interest on all Loans made hereunder. (g) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a "Non-U.S. Lender") shall deliver to the Borrowers and the Administrative Agent two copies of either United States Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of a Borrower and is not a controlled foreign corporation related to a Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by a Borrower under this Agreement and the other Loan Documents. Such forms shall 36 30 be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of a Transferee that is a participation holder, on or before the date such participation holder becomes a Transferee hereunder) and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office (a "New Lending Office"). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.19(g), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.19(g) that such Non-U.S. Lender is not legally able to deliver. (h) The Borrowers shall not be required to indemnify any Non-U.S. Lender or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to paragraph (a) or (c) above to the extent that (i) the obligation to withhold amounts with respect to United States Federal withholding tax existed on the date such Non U.S. Lender became a party to this Agreement (or, in the case of a Transferee that is a participation holder, on the date such participation holder became a Transferee hereunder) or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan; provided, however, that this paragraph (h) shall not apply (x) to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, participation, transfer or designation made at the request of a Borrower and (y) to the extent the indemnity payment or additional amounts any Transferee, or any Lender (or Transferee), acting through a New Lending Office, would be entitled to receive (without regard to this paragraph (h)) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such assignment, participation, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of paragraph (g) above. (i) Any Lender (or Transferee) claiming any indemnity payment or additional amounts payable pursuant to this Section 2.19 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested in writing by a Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such indemnity payment or additional amounts that may thereafter accrue and would not, in the sole determination of such Lender (or Transferee), be otherwise disadvantageous to such Lender (or Transferee). (j) Nothing contained in this Section 2.19 shall require any Lender (or any Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary). SECTION 2.20. Assignment of Commitments Under Certain Circumstances. (a) In the event (i) any Lender delivers a certificate requesting compensation pursuant to Section 2.13, (ii) any Lender delivers a notice described in Section 2.14, (iii) a Borrower is 37 31 required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender pursuant to Section 2.19 or (iv) the short-term ratings of any Lender drop below A-1 or P-1, such Borrower may, at its sole expense, effort and discretion, upon notice to such Lender and the Administrative Agent, require such Lender to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all of its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee which shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) such Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, and (z) such Borrower or such assignee shall have paid to the affected Lender in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans (other than Competitive Loans) of such Lender plus all Fees and other amounts accrued for the account of such Lender hereunder (including any amounts under Section 2.13 and Section 2.15); provided further that if prior to any such transfer and assignment the circumstances or event that resulted in such Lender's claim for compensation under Section 2.13 or notice under Section 2.14 or the amounts paid pursuant to Section 2.19, as the case may be, cease to cause such Lender to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.14, or cease to result in amounts being payable under Section 2.19, as the case may be (including as a result of any action taken by such Lender pursuant to paragraph (b) below), or if such Lender shall waive its right to claim further compensation under Section 2.13 in respect of such circumstances or event or shall withdraw its notice under Section 2.14 or shall waive its right to further payments under Section 2.19 in respect of such circumstances or event, as the case may be, then such Lender shall not thereafter be required to make any such transfer and assignment hereunder. (b) If (i) any Lender shall request compensation under Section 2.13, (ii) any Lender delivers a notice described in Section 2.14 or (iii) a Borrower is required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender, pursuant to Section 2.19, then, such Lender shall exercise reasonable efforts (which shall not require such Lender to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or suffer any disadvantage or burden deemed by it to be significant) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such assignment would reduce its claims for compensation under Section 2.13 or enable it to withdraw its notice pursuant to Section 2.14 or would reduce amounts payable pursuant to Section 2.19, as the case may be, in the future. The Borrowers hereby agree to pay all reasonable costs and expenses incurred by any Lender in connection with any such assignment, delegation and transfer. SECTION 2.21. Cross Guaranty. Each Guarantor unconditionally guarantees, as a primary obligor and not merely as a surety, jointly and severally with the other Guarantor, (a) the due and punctual payment of (i) the principal of and premium, if any, and interest on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for 38 32 prepayment or otherwise, and (ii) all other monetary obligations (other than those referred to in the preceding clause (i)) of the Borrowers under the Loan Documents and (b) the due and punctual performance of all covenants, agreements, obligations and liabilities of the Borrowers under or pursuant to the Loan Documents (collectively, the "Obligations"). Each Guarantor further agrees that the Obligations may be extended and renewed, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its guarantee notwithstanding any extension or renewal of any Obligation. Each Guarantor waives presentment to, demand of payment from and protest to the Borrowers of any of the Obligations, and also waives notice of acceptance of its guarantee and notice of protest for nonpayment. The obligations of a Guarantor hereunder shall not be affected by (a) the failure of any Lender or the Administrative Agent to assert any claim or demand or to enforce any right or remedy against the Borrowers or the other Guarantor under the provisions of this Agreement or any of the other Loan Documents or otherwise; (b) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement any of the other Loan Documents, any guarantee or any other agreement; or (c) the failure of any Lender to exercise any right or remedy against any other guarantor of the Obligations. Each Guarantor further agrees that its guarantee constitutes a guarantee of payment when due and not of collection, and waives any right to require that any resort be had by any Lender to any balance of any deposit account or credit on the books of any Lender in favor or any Borrower or any other person. The obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, compromise, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agent or any Lender to assert any claim or demand or to enforce any remedy under this Agreement or under any other Loan Document, any guarantee or any other agreement, by any waiver or modification in respect of any thereof, by any default, failure or delay, wilful or otherwise, in the performance of the Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of such Guarantor or otherwise operate as a discharge of such Guarantor as a matter of law or equity. Each Guarantor further agrees that its guarantee shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Administrative Agent or any Lender upon the bankruptcy or reorganization of any of the Borrowers or otherwise. 39 33 In furtherance of the foregoing and not in limitation of any other right which the Administrative Agent or any Lender may have at law or in equity against any Guarantor by virtue hereof, upon the failure of a Borrower to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, each Guarantor hereby promises to and will, upon receipt of written demand by the Administrative Agent, forthwith pay, or cause to be paid, in cash the amount of such unpaid Obligations, and thereupon each Lender shall, in a reasonable manner, assign the amount of the Obligations owed to it and paid by such Guarantor pursuant to this guarantee to such Guarantor, such assignment to be pro tanto to the extent to which the Obligations in question were discharged by such Guarantor, or make such disposition thereof as such Guarantor shall direct (all without recourse to any Lender and without any representation or warranty by any Lender). Upon payment by a Guarantor of any sums as provided above, all rights of such Guarantor against a Borrower, as the case may be, arising as a result thereof by way of right of subrogation or otherwise shall in all respects be subordinated and junior in right of payment to the prior indefeasible payment in full of all the Obligations to the Lenders. SECTION 2.22. Extension of Termination Date. (a) The Borrowers may, by notice to the Administrative Agent in the form of Exhibit C hereto (which shall promptly deliver a copy to each of the Lenders) not less than 45 days and not more than 60 days prior to the Termination Date then in effect (the "Existing Termination Date"), request that the Lenders extend the Termination Date for an additional 364 days from the Existing Termination Date. Each Lender shall, by notice to the Borrowers and the Administrative Agent given not less than 20 and not more than 30 days prior to the Existing Termination Date, advise the Borrowers whether or not such Lender agrees to such extension (and any Lender that does not advise the Borrowers on or before the later of such days shall be deemed to have advised the Borrowers that it will not agree to such extension). (b) The Borrower shall have the right, on or before the Existing Termination Date, to require any Lender which shall have advised or been deemed to advise the Borrower that it will not agree to an extension of the Termination Date (each a "Non-Extending Lender") to transfer without recourse (in accordance with and subject to the restrictions contained in Section 9.04) all its interests, rights and obligations under this Agreement to one or more other banks or other financial institutions (any such bank or other financial institution being called a "Substitute Lender"), which may include any Lender; provided that (i) such Substitute Lender, if not already a Lender hereunder, shall have been approved by the Administrative Agent (which approval shall not be unreasonably withheld) and shall execute all such documentation as the Administrative Agent shall specify to evidence its status as a Lender hereunder, (ii) such assignment shall become effective as of the Existing Termination Date and (iii) the Borrower or such Substitute Lender shall pay to such Non-Extending Lender in immediately available funds on the effective date of such assignment the principal of and interest accrued to the date of payment on the Loans made by it hereunder and all other amounts accrued for its account or owed to it hereunder. 40 34 (c) If (and only if) Lenders (including Substitute Lenders) holding Commitments that represent at least 66_% of the Total Commitment on the 60th day prior to the Existing Termination Date shall have agreed to extend the Existing Termination Date (the "Continuing Lenders"), then the Termination Date shall be extended to the date 364 days after the Existing Termination Date (provided, that if such date is not a Business Day, then the Termination Date shall be extended to the next preceding Business Day). The decision to agree or withhold agreement to any extension of the Termination Date hereunder shall be at the sole discretion of each Lender. The Commitment of each Non-Extending Lender (after giving effect to each transfer and assignment pursuant to paragraph (b) above) shall terminate, any accrued Facility Fee on the amount of the Commitment of such Non-Extending Lender shall be paid on the Existing Termination Date and all Loans of such Non-Extending Lender shall become due and payable, together with all interest accrued thereon and all other amounts owed to such Lender hereunder, on the Revolving Credit Maturity Date in effect prior to the extension of the Existing Termination Date. Notwithstanding the foregoing, no extension of the Termination Date shall be effective with respect to any Lender unless, on and as of the Existing Termination Date, the conditions set forth in paragraphs (b) and (c) of Section 4.01 shall be satisfied (with all references in such paragraphs to a Credit Event being deemed to be references to such extension) and the Agent shall have received a certificate to that effect, dated the Existing Termination Date and executed by a Responsible Officer of the Borrower. SECTION 2.23. Increase in Commitments. (a) The Borrowers may, by written notice to the Administrative Agent executed by the Borrowers and one or more banks or other financial institutions (any such bank or other financial institution referred to in this clause (a) being called an "Augmenting Lender"), which may include any Lender, cause the Commitments of the Augmenting Lenders to be increased (or cause Commitments to be extended by the Augmenting Lenders, as the case may be) in an amount for each Augmenting Lender set forth in such notice and an aggregate amount not less than $50,000,000, provided, that the total Commitments shall in no event be increased to an amount greater than $500,000,000; provided further, that each Augmenting Lender, if not already a Lender hereunder, shall be subject to the approval of the Administrative Agent (which approval shall not be unreasonably withheld) and each Augmenting Lender shall execute all such documentation as the Administrative Agent shall specify to evidence its Commitment and its status as a Lender hereunder. Increases and new Commitments created pursuant to this clause (a) shall become effective on the date specified in the notice delivered pursuant to this paragraph. Each existing Lender whose Commitment is not increased pursuant to this Section 2.23 is hereby referred to as a "Non-Increasing Lender". Notwithstanding the foregoing, no increase in the total Commitments (or in the Commitment of any Lender) shall become effective under this paragraph unless, (i) on the date of such increase, the conditions set forth in paragraphs (b) and (c) of Section 4.01 shall be satisfied (with all references in such paragraphs to a Credit Event being deemed to be references to such increase) and the Administrative Agent shall have received a certificate to that effect dated such date and executed by a Financial Officer of the Borrower, and (ii) the Administrative Agent shall have received (with sufficient copies for each of the Lenders) documents consistent with those 41 35 delivered on the Closing Date under clauses (a) and (c) of Section 4.02 as to the corporate power and authority of the Borrower to borrow hereunder after giving effect to such increase. (b) On the effective date (the "Increase Effective Date") of any increase in the total Commitments pursuant to Section 2.23(a) (the "Commitment Increase"), (i) the aggregate principal amount of the Loans outstanding (the "Initial Loans") immediately prior to giving effect to the Commitment Increase on the Increase Effective Date shall be deemed to be paid, (ii) each Augmenting Lender that shall have been a Lender prior to the Commitment Increase shall pay to the Administrative Agent in same day funds an amount equal to the difference between (A) the product of (1) such Lender's Applicable Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings (as hereinafter defined) and (B) the product of (1) such Lender's Applicable Percentage (calculated without giving effect to the Commitment Increase) multiplied by (2) the amount of the Initial Loans, (iii) each Augmenting Lender that shall not have been a Lender prior to the Commitment Increase shall pay to Administrative Agent in same day funds an amount equal to the product of (1) such Augmenting Lender's Applicable Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings, and (iv) after the Administrative Agent receives the funds specified in clauses (ii) and (iii) above, the Administrative Agent shall pay to each Non-Increasing Lender the portion of such funds that is equal to the difference between (A) the product of (1) such Non-Increasing Lender's Applicable Percentage (calculated without giving effect to the Commitment Increase) multiplied by (2) the amount of the Initial Loans, and (B) the product of (1) such Non-Increasing Lender's Applicable Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings, (v) after the effectiveness of the Commitment Increase, the Borrower shall be deemed to have made new Borrowings (the "Subsequent Borrowings") in an aggregate principal amount equal to the aggregate principal amount of the Initial Loans and of the types and for the Interest Periods specified in a Borrowing Request delivered to the Administrative Agent in accordance with Section 2.04, (vi) each Non-Increasing Lender and each Augmenting Lender shall be deemed to hold its Applicable Percentage of each Subsequent Borrowing (calculated after giving effect to the Commitment Increase) and (vii) the Borrower shall pay each Augmenting Lender that shall have been a Lender prior to the Commitment Increase and each Non-Increasing Lender any and all accrued but unpaid interest on the Initial Loans. The deemed payments made pursuant to clause (i) above in respect of each Eurodollar Loan shall be subject to indemnification by the Borrower pursuant to the provisions of Section 2.15 if the Increase Effective Date occurs other than on the last day of the Interest Period relating thereto. 42 36 ARTICLE III. REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to each of the Lenders that: SECTION 3.01. Organization; Powers. (a) Each Borrower and each of the Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a Material Adverse Effect, and (iv) has the corporate power and authority to execute, deliver and perform its obligations under each of the Loan Documents and each other agreement or instrument contemplated thereby to which it is or will be a party and, in the case of each Borrower, to borrow hereunder. (b) Popular is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. SECTION 3.02. Authorization. The execution, delivery and performance by each Borrower of each of the Loan Documents and the borrowings hereunder (collectively, the "Transactions") (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of such Borrower or any Subsidiary, (B) any order of any Governmental Authority or (C) any provision of any indenture, agreement or other instrument to which such Borrower or any Subsidiary is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by such Borrower or any Subsidiary. SECTION 3.03. Enforceability. This Agreement has been duly executed and delivered by each Borrower and constitutes, and each other Loan Document when executed and delivered by such Borrower will constitute, a legal, valid and binding obligation of such Borrower enforceable against such Borrower in accordance with its terms. SECTION 3.04. Governmental Approvals. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions, except for such as have been made or obtained and are in full force and effect. SECTION 3.05. Financial Statements. Popular has heretofore furnished to the Lenders its consolidated balance sheets and statements of income and changes in financial condition (i) as of and for the fiscal year ended December 31, 1998, audited by and accompanied by the opinion of PricewaterhouseCoopers L.L.P., independent public accountants, and (ii) as 43 37 of and for the fiscal quarter and portion of the fiscal year ended June 30, 1999. Such financial statements present fairly the financial condition and results of operations of Popular and its consolidated Subsidiaries as of such dates and for such periods. Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of the Popular and its consolidated Subsidiaries as of the dates thereof. Such financial statements were prepared in accordance with GAAP applied on a consistent basis subject to, in the case of the statements referred to in clause (ii) above, normal year-end audit adjustments and the absence of footnotes. SECTION 3.06. No Material Adverse Change. There has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrowers and the Subsidiaries, taken as a whole, since December 31, 1998. SECTION 3.07. Title to Properties; Possession Under Leases. (a) Each of the Borrowers and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens prohibited by Section 6.01. (b) Each of the Borrowers and the Subsidiaries has complied with all obligations under all material leases to which it is a party and all such leases are in full force and effect. Each of the Borrowers and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases. SECTION 3.08. Subsidiaries. Schedule 3.08 sets forth a complete and correct list, as of the date hereof, of all Subsidiaries. Except as set forth in Schedule 3.08, all the issued and outstanding shares of capital stock or the partnership interests, as the case may be, of each of the Subsidiaries have been validly issued and are fully paid and nonassessable and are owned directly or indirectly by either of the Borrowers free and clear of all Liens whatsoever, and there are no options, warrants, calls, conversion or exchange rights, commitments or agreements of any character obligating any of the Subsidiaries to issue, deliver or sell additional shares of capital stock of any class or any securities convertible into or exchangeable for any such capital stock or any additional partnership interests. SECTION 3.09. Litigation; Compliance with Laws. (a) Except as set forth in Schedule 3.09, there are not any actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of either of the Borrowers, threatened against or affecting either of the Borrowers or any Subsidiary or any business, property or rights of any such person (i) which involve any Loan Document or the Transactions or (ii) as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, could, individually or in the aggregate, result in a Material Adverse Effect. (b) None of the Borrowers or any of the Subsidiaries or any of their respective material properties or assets is in violation of, nor will the continued operation of their material 44 38 properties and assets as currently conducted violate, any law, rule or regulation, or is in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default could result in a Material Adverse Effect. SECTION 3.10. Agreements. (a) Neither of the Borrowers nor any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted or could result in a Material Adverse Effect. (b) Neither of the Borrowers nor any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could result in a Material Adverse Effect. SECTION 3.11. Federal Reserve Regulations. (a) Neither of the Borrowers nor any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which entails a violation of, or which is inconsistent with, the provisions of the Regulations of the Board, including Regulation U or X. SECTION 3.12. Investment Company Act; Public Utility Holding Company Act. Neither of the Borrowers nor any Subsidiary is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.13. Use of Proceeds. The Borrowers will use the proceeds of the Loans only for the purposes specified in the preamble to this Agreement. SECTION 3.14. Tax Returns. Each of the Borrowers and the Subsidiaries has filed or caused to be filed all Federal, state and local tax returns required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which a Borrower shall have set aside on its books adequate reserves. SECTION 3.15. No Material Misstatements. No information, report, financial statement, exhibit or schedule furnished by or on behalf of a Borrower to the Administrative Agent or any Lender in connection with the negotiation of any Loan Document or included therein or delivered pursuant thereto contained, contains or will contain any material misstatement of fact or omitted, omits or will omit to state any material fact necessary to make 45 39 the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading. SECTION 3.16. Employee Benefit Plans. Each of the Borrowers and their respective ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No Reportable Event has occurred in respect of any Plan of a Borrower or any ERISA Affiliate. The present value of all benefit liabilities under each Plan (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed by more than $10,000,000 the value of the assets of such Plan, and the present value of all benefit liabilities of all underfunded Plans (based on those assumptions used to fund each such Plan) did not, as of the last annual valuation dates applicable thereto, exceed by more than $10,000,000 the value of the assets of all such underfunded Plans. Neither of the Borrowers nor any ERISA Affiliate has incurred any Withdrawal Liability that materially adversely affects the financial condition of a Borrower and its ERISA Affiliates taken as a whole. Neither of the Borrowers nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated, where such reorganization or termination has resulted or can reasonably be expected to result in an increase in the contributions required to be made to such Plan that would materially and adversely affect the financial condition of a Borrower and its ERISA Affiliates taken as a whole. SECTION 3.17. Environmental and Safety Matters. The Borrowers are aware of no events, conditions or circumstances involving environmental pollution or contamination or employee health or safety that could reasonably be expected to result in a Material Adverse Effect. SECTION 3.18. Capital Commitments. Popular is not a party to any Capital Commitment, other than such Capital Commitments entered into after the Closing Date that, individually and in the aggregate, could not reasonably be expected to have a Material Adverse Effect. SECTION 3.19. Year 2000. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (i) the Borrower's computer systems and equipment containing embedded microchips (including systems and equipment supplied by others or with which Borrower's systems interface) and the testing of all such systems and equipment, as so reprogrammed, has been completed. The cost to the Borrower of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Borrower (including, without limitation, reprogramming errors and the failure of others' systems or equipment) has not resulted and will not result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrower and its Subsidiaries are and, 46 40 with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrower to conduct its business without Material Adverse Effect. ARTICLE IV. CONDITIONS OF LENDING The obligations of the Lenders to make Loans hereunder are subject to the satisfaction of the following conditions: SECTION 4.01. All Credit Events. On the date of each Borrowing, including each Borrowing in which Loans are refinanced with new Loans as contemplated by Section 2.02(f) (each such event being called a "Credit Event"): (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 or 2.04, as applicable (or such notice shall have been deemed given in accordance with the last paragraph of Section 2.04). (b) The representations and warranties set forth in Article III (other than, in the case of a Borrowing that does not increase the aggregate outstanding principal amount of the Loans of any Lender, Sections 3.06 and 3.09(a)) shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) Each Borrower shall be in compliance with all the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after such Credit Event, no Event of Default or Default shall have occurred and be continuing. Each Credit Event shall be deemed to constitute a representation and warranty by each Borrower on the date of such Credit Event as to the matters specified in paragraphs (b) and (c) of this Section 4.01. SECTION 4.02. First Credit Event. On the Closing Date: (a) The Administrative Agent shall have received, on behalf of itself and the Lenders, a favorable written opinion of Estela Martinez de Miranda, Esq., Assistant Vice President and Legal Counsel for the Borrowers, substantially to the effect set forth in Exhibit B (A) dated the Closing Date, (B) addressed to the Administrative Agent and the Lenders, and (C) covering such other matters relating to the Loan Documents and the Transactions as the Administrative Agent shall reasonably request, and the Borrowers hereby instruct such counsel to deliver such opinion. 47 41 (b) All legal matters incident to this Agreement, the borrowings and extensions of credit hereunder and the other Loan Documents shall be satisfactory to the Lenders and to Cravath, Swaine & Moore, counsel for the Administrative Agent. (c) The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of each Borrower, certified as of a recent date by the Secretary of State of the state of its organization, and a letter sealed by such Secretary of State from each Borrower requesting a certificate as to the good standing of each Borrower as of a recent date from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of each Borrower dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of such Borrower as in effect on the Closing Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Borrower authorizing the execution, delivery and performance of the Loan Documents and the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate or articles of incorporation of such Borrower have not been amended since the date of the last amendment thereto which date will be shown on the certificate of good standing to be furnished pursuant to Section 5.04(g), and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of such Borrower; (iii) a certificate of another officer of each Borrower as to the incumbency and specimen signature of the Secretary or Assistant Secretary of such Borrower executing the certificate pursuant to (ii) above; and (iv) such other documents as the Lenders or Cravath, Swaine & Moore, counsel for the Administrative Agent, may reasonably request. (d) The Administrative Agent shall have received a certificate of each Borrower, dated the Closing Date and signed by a Financial Officer of such Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01. (e) The Administrative Agent shall have received the financial statements referred to in Section 3.05. (f) The Administrative Agent shall have received all Fees and other amounts due and payable hereunder on or prior to the Closing Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrowers hereunder or under any other Loan Document. (g) No Loans shall be outstanding under the Pre-Restatement Credit Agreement and all interest and fees accrued under such Pre-Restatement Credit Agreement through the Closing Date shall have been paid. 48 42 (h) The Administrative Agent shall have received a certificate of a Financial Officer of each of the Borrowers certifying as to (i) the termination of the Pre-Restatement Credit Agreement, and (ii) the payment in full of all obligations of the Borrowers outstanding under the Pre-Restatement Credit Agreement. ARTICLE V. AFFIRMATIVE COVENANTS Each Borrower covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document shall have been paid in full, unless the Required Lenders shall otherwise consent in writing, such Borrower will, and will cause each of the Subsidiaries to: SECTION 5.01. Existence; Businesses and Properties. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.04. (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; maintain and operate such business in substantially the manner in which it is presently conducted and operated (provided that the Borrowers may engage in new businesses not prohibited by Section 6.04); comply in all material respects with all applicable laws, rules, regulations and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 5.02. Insurance. Keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law. SECTION 5.03. Obligations and Taxes. Pay its Indebtedness and other obligations promptly and in accordance with their terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise which, if 49 43 unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Borrower shall have set aside on its books adequate reserves with respect thereto and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien. SECTION 5.04. Financial Statements, Reports, etc. In the case of Popular, furnish to the Administrative Agent and each Lender: (a) within 90 days after the end of each fiscal year, its consolidated balance sheets and related statements of operations, stockholders' equity and cash flows showing the financial condition of Popular and its consolidated subsidiaries as of the close of such fiscal year and the results of its operations and the operations of such subsidiaries during such year, setting forth in each case in comparative form the figures for the previous fiscal year, all audited by PricewaterhouseCoopers L.L.P. or other independent public accountants of recognized national standing acceptable to the Required Lenders and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present the financial condition and results of operations of Popular on a consolidated basis in accordance with GAAP consistently applied; (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, its consolidated balance sheets and related statements of operations, stockholders' equity and cash flows showing the financial condition of Popular and its consolidated subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such subsidiaries during such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the previous fiscal year, all certified by one of its Financial Officers as fairly presenting the financial condition and results of operations of Popular on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; (c) concurrently with any delivery of financial statements under (a) or (b) above, a certificate of a Financial Officer (i) setting forth in reasonable detail the calculations required to establish whether Popular was in compliance with the requirements of Sections 6.05, 6.06, 6.07 and 6.08 and (ii) certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto; (d) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by it with the Securities and Exchange Commission, or any Governmental Authority succeeding to any of or all the 50 44 functions of said Commission, or with any national securities exchange, or distributed to its shareholders, as the case may be; (e) as soon as is reasonably practicable after the same becomes available, the "Parent Company Only Financial Statement for Bank Holding Companies" (report No. FR Y-9LP or any successor form of the Federal Reserve System) of Popular and Popular North America, Inc. and the "Consolidated Financial Statements for Bank Holding Companies" (report no. FR Y-9C or any successor form of the Federal Reserve System) of Popular that Popular shall have filed with the Board; (f) promptly upon the request of the Administrative Agent or any Lender, copies of all call reports of each Significant Subsidiary; (g) promptly, upon receipt by each Borrower, the certificate of good standing delivered by the Secretary of State to the Borrower in response to the Borrower's request for such certificate in the letter delivered to the Administrative Agent pursuant to Section 4.02(c)(i); (h) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of Popular or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request; and (i) promptly, upon entering such agreement, notice of the terms of any agreement entered into by Banco Popular after the date of this Agreement restricting or limiting Banco Popular's right to declare and make payments of dividends to the Borrower, and any changes to any existing restrictions or limits on Banco Popular's right to declare or pay dividends to the Borrower. SECTION 5.05. Litigation and Other Notices. Furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; (b) the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against a Borrower or any Affiliate thereof which could reasonably be expected to result in a Material Adverse Effect; and (c) any other development that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect. 51 45 SECTION 5.06. Employee Benefits. (a) Comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent (i) as soon as possible after, and in any event within 30 days after any Responsible Officer of such Borrower or any ERISA Affiliate knows or has reason to know that, any Reportable Event has occurred that alone or together with any other Reportable Event could reasonably be expected to result in liability of such Borrower to the PBGC in an aggregate amount exceeding $10,000,000, a statement of a Financial Officer setting forth details as to such Reportable Event and the action that the Borrower proposes to take with respect thereto, together with a copy of the notice, if any, of such Reportable Event given to the PBGC, (ii) promptly after receipt thereof, a copy of any notice that the Borrower or any ERISA Affiliate may receive from the PBGC relating to the intention of the PBGC to terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414) or to appoint a trustee to administer any such Plan, (iii) within 10 days after the due date for filing with the PBGC pursuant to Section 412(n) of the Code a notice of failure to make a required installment or other payment with respect to a Plan, a statement of a Financial Officer setting forth details as to such failure and the action that such Borrower proposes to take with respect thereto, together with a copy of any such notice given to the PBGC and (iv) promptly and in any event within 30 days after receipt thereof by the Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice received by the Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability or (B) a determination that a Multiemployer Plan is, or is expected to be, terminated or in reorganization, both within the meaning of Title IV of ERISA. SECTION 5.07. Maintaining Records; Access to Properties and Inspections. Maintain all financial records in accordance with GAAP and permit any representatives designated by any Lender to visit and inspect the financial records and the properties of a Borrower or any Subsidiary at reasonable times and upon reasonable notice and as often as requested and to make extracts from and copies of such financial records, and permit any representatives designated by any Lender to discuss the affairs, finances and condition of such Borrower or any Subsidiary with the officers thereof and independent accountants therefor. SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans only for the purposes set forth in the preamble to this Agreement. SECTION 5.09. Continuance of Business. With respect to Popular, at all times be a bank holding company duly registered with the Board under the Bank Holding Company Act of 1956, as amended, and continue (and will cause each Subsidiary to continue) to (a) engage in business of the same general type as now conducted by it or any other business permitted under, and in accordance with, the Bank Holding Company Act of 1956, as amended, and any regulation of, or ruling by, the Board issued thereunder and (b) unless otherwise permitted by this Agreement, maintain its corporate existence and keep in full force and effect all licenses and permits necessary to the proper conduct of its business. 52 46 SECTION 5.10. Compliance with Regulatory Standards. At all times substantially comply with all applicable regulatory guidelines, policy statements, regulations or other legal requirements and cause each Bank Subsidiary (other than any Edge Act corporation) to maintain membership with the Federal Deposit Insurance Corporation. SECTION 5.11. Capital Requirements. Maintain and cause each of its Bank Subsidiaries to, (a) maintain (at all times 120 days or more after the date such person became a Bank Subsidiary), such amount of capital as may be prescribed from time to time by each Bank Regulatory Authority with jurisdiction over such Borrower or such Bank Subsidiary, whether by regulation, agreement or order. (b) Cause each Bank Subsidiary that is a Significant Subsidiary to be "adequately capitalized" (within the meaning of 12 U.S.C. 1831, as amended, reenacted or redesignated from time to time) at all times 120 days or more after the date such person became a Bank Subsidiary. ARTICLE VI. NEGATIVE COVENANTS Each Borrower covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document have been paid in full, unless the Required Lenders shall otherwise consent in writing, such Borrower will not, and will not cause or permit any of the Subsidiaries to: SECTION 6.01. Liens. In the case of the Borrowers, create, incur, assume or permit to exist any Lien on any property or assets (including stock or other securities of any person, including any Subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except: (a) Liens on property or assets of such Borrower existing on the date hereof and set forth in Schedule 6.01; provided that such Liens shall secure only those obligations which they secure on the date hereof; (b) any Lien existing on any property or asset prior to the acquisition thereof by such Borrower; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition and (ii) such Lien does not apply to any other property or assets of such Borrower; (c) Liens for taxes not yet due or which are being contested in compliance with Section 5.03; 53 47 (d) carriers', warehousemen's, mechanic's, materialmen's, repairmen's or other like Liens arising in the ordinary course of business and securing obligations that are not due and payable or which are being contested in compliance with Section 5.03; (e) pledges and deposits made in the ordinary course of business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations; (f) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) zoning restrictions, easements, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of such Borrower; (h) purchase money security interests in real property, improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by such Borrower; provided that (i) such security interests are incurred, and the Indebtedness secured thereby is created, within 90 days after such acquisition (or construction) and (ii) such security interests do not apply to any other property or assets of such Borrower or any Subsidiary; (i) any Lien (a "replacement Lien") replacing, refinancing, extending or renewing any Lien permitted under clause (a), (b) or (h) above; provided that such replacement Lien shall secure only those obligations that are secured by, and shall not apply to any property of any Borrower other than property of such Borrower subject to, the Lien replaced, refinanced, extended or renewed by such replacement Lien on the date of incurrence of such replacement Lien; and (j) securities repurchase agreements entered into in the ordinary course of business with a maturity of less than one year. SECTION 6.02. Sale and Lease-Back Transactions. In the case of the Borrowers, enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred. SECTION 6.03. Mergers, Consolidations, Sales of Assets. Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with 54 48 it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or any substantial part of the assets of Popular or its Subsidiaries, taken as a whole (whether now owned or hereafter acquired), except that if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing (a) any Subsidiary may merge into either Borrower in a transaction in which such Borrower is the surviving corporation, (b) any Subsidiary may merge into or consolidate with any other Subsidiary in a transaction in which the surviving entity is a Subsidiary and (c) a wholly owned Subsidiary (other than a Subsidiary that owns a substantial portion of the assets of Popular and its Subsidiaries, taken as a whole) may merge with any person if the surviving corporation is a Subsidiary. SECTION 6.04. Business of Borrowers and Subsidiaries. Engage at any time in any business or business activity other than the business currently conducted by it and business activities reasonably incidental thereto. Notwithstanding the previous sentence, either Borrower may acquire, develop or otherwise engage in any new business (consistent with applicable regulatory requirements); provided, however, that all such new businesses (taken together) shall not materially affect the overall nature and character of the business of Popular and its Subsidiaries (taken as a whole), as currently conducted. SECTION 6.05. Consolidated Tangible Net Worth. Permit at any time Consolidated Tangible Net Worth to be less than 5% of Total Assets. SECTION 6.06. Ratio of Long-Term Indebtedness to Total Capitalization. Permit at any time the ratio of Long-Term Indebtedness to Total Capitalization to exceed .65 to 1.0. SECTION 6.07. Non-Performing Assets. Permit Non-Performing Assets at any time to exceed 4.5% of total (gross) loans, leases and other owned real estate, in each case for Popular and its Subsidiaries (determined on a consolidated basis in accordance with GAAP), as at such time. SECTION 6.08. Double Leverage. Permit at any time the ratio of (a) the sum of Equity Investments in Subsidiaries and the Intangibles of Popular and its consolidated Subsidiaries, in each case determined as of such time, to (b) Consolidated Net Worth less the goodwill of Popular and its consolidated Subsidiaries (determined on a consolidated basis in accordance with GAAP), in each case determined as of such time, to exceed 130%. 55 49 ARTICLE VII. EVENTS OF DEFAULT In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of three Business Days; (d) default shall be made in the due observance or performance by a Borrower or any Subsidiary of any covenant, condition or agreement contained in Section 5.01(a), 5.05, 5.08 or 5.11 or in Article VI; (e) default shall be made in the due observance or performance by a Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those specified in (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent or any Lender to such Borrower; (f) a Borrower or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $25,000,000 when and as the same shall become due and payable, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf (with or without the giving of notice, the lapse of time or both) to cause, such Indebtedness to become due prior to its stated maturity; (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of a Borrower or any Subsidiary, or of a substantial part of the property or assets of such Borrower or a Subsidiary, under Title 11 of the United States Code, as now constituted 56 50 or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for such Borrower or any Subsidiary or for a substantial part of the property or assets of such Borrower or a Subsidiary or (iii) the winding-up or liquidation of such Borrower or any Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (h) a Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for such Borrower or any Subsidiary or for a substantial part of the property or assets of such Borrower or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (i) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against a Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of such Borrower or any Subsidiary to enforce any such judgment; (j) (i) a Reportable Event or Reportable Events, or a failure to make a required installment or other payment (within the meaning of Section 412(n)(1) of the Code), shall have occurred with respect to any Plan or Plans that reasonably could be expected to result in liability of a Borrower to the PBGC or to a Plan in an aggregate amount exceeding $10,000,000 and, within 30 days after the reporting of any such Reportable Event to the Administrative Agent or after the receipt by the Administrative Agent of a statement required pursuant to Section 5.06(b)(iii) hereof, the Administrative Agent shall have notified such Borrower in writing that (A) the Required Lenders have made a determination that, on the basis of such Reportable Event or Reportable Events or the failure to make a required payment, there are reasonable grounds for the termination of such Plan or Plans by the PBGC, the appointment by the appropriate United States district court of a trustee to administer such Plan or Plans or the imposition of a lien in favor of a Plan and (B) as a result thereof an Event of Default exists hereunder; or (ii) a trustee shall be appointed by a United States district court to administer any such Plan or Plans; or (iii) the PBGC shall institute proceedings (including giving notice of intent thereof) to terminate any such Plan or Plans; 57 51 (k) (i) a Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) such Borrower or such ERISA Affiliate does not have reasonable grounds for contesting such Withdrawal Liability or is not contesting such Withdrawal Liability in a timely and appropriate manner and (iii) the amount of such Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date or dates of such notification), either (A) exceeds $10,000,000 or requires payments exceeding $1,000,000 in any year or (B) is less than $10,000,000 but any Withdrawal Liability payment remains unpaid 30 days after such payment is due; (l) a Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if solely as a result of such reorganization or termination the aggregate annual contributions of such Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or have been or are being terminated have been or will be increased over the amounts required to be contributed to such Multiemployer Plans for their most recently completed plan years by an amount exceeding $1,000,000; or (m) there shall have occurred a Change in Control; then, and in every such event (other than an event with respect to a Borrower described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrowers, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein or in any other Loan Document to the contrary notwithstanding; and in any event with respect to a Borrower described in paragraph (g) or (h) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of such Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by such Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding. 58 52 ARTICLE VIII. THE ADMINISTRATIVE AGENT In order to expedite the transactions contemplated by this Agreement, The Chase Manhattan Bank is hereby appointed to act as Administrative Agent on behalf of the Lenders. Each of the Lenders and each assignee of any such Lender, hereby irrevocably authorizes the Administrative Agent to take such actions on behalf of such Lender or assignee and to exercise such powers as are specifically delegated to the Administrative Agent by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrowers of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by a Borrower pursuant to this Agreement as received by the Administrative Agent. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his own gross negligence or wilful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by a Borrower of any of the terms, conditions, covenants or agreements contained in any Loan Document. The Administrative Agent shall not be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement or any other Loan Documents or other instruments or agreements. The Administrative Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. The Administrative Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall have any responsibility to the Borrowers on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or a Borrower of any of their respective obligations hereunder or under any other Loan Document or in connection herewith or therewith. The Administrative Agent may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. 59 53 Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders and the Borrowers. Upon any such resignation, the Required Lenders shall have the right to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. With respect to the Loans made by it hereunder, the Administrative Agent in its individual capacity and not as Administrative Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not the Administrative Agent, and the Administrative Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrowers or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent. Each Lender agrees (i) to reimburse the Administrative Agent, on demand, in the amount of its pro rata share (based on its Commitments hereunder) of any expenses incurred for the benefit of the Lenders by the Administrative Agent, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, which shall not have been reimbursed by the Borrowers and (ii) to indemnify and hold harmless the Administrative Agent and any of its directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against it in its capacity as the Administrative Agent or any of them in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by it or any of them under this Agreement or any other Loan Document, to the extent the same shall not have been reimbursed by the Borrowers; provided that no Lender shall be liable to the Administrative Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or wilful misconduct of the Administrative Agent or any of its directors, officers, employees or agents. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance 60 54 upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX. MISCELLANEOUS SECTION 9.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to a Borrower, to it at Banco Popular Center Building, 209 Munoz Rivera Avenue, San Juan, Puerto Rico 00918, Attention of Mr. Richard Barrios (Telecopy No. 787-754-9290); (b) if to the Administrative Agent, to The Chase Manhattan Bank Agency Services Group, One Chase Manhattan Plaza, New York, New York 10081, Attention of [Laura Rebecca (Telecopy No. 212-552-7490), with a copy to The Chase Manhattan Bank, at 270 Park Avenue, New York 10017, Attention of Christine M. Herrick (Telecopy No. 212-270-1789); and (c) if to a Lender, to it at its address (or telecopy number) set forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 9.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 9.01. SECTION 9.02. Survival of Agreement. All covenants, agreements, representations and warranties made by each Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid and so long as the Commitments have not been terminated. 61 55 SECTION 9.03. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrowers and the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of each Borrower, the Administrative Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided, however, that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender, each Borrower and the Administrative Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000, (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 and (iv) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Upon acceptance and recording pursuant to paragraph (e) of this Section 9.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 9.05, as well as to any Fees accrued for its account and not yet paid). (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Revolving Credit Commitment, and the outstanding balances of its Revolving Loans and Competitive Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in 62 56 connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of the Borrowers or any Subsidiary or the performance or observance by the Borrowers or any Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements, if any, delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive and the Borrowers, the Administrative Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrowers and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and, if required, the written consent of each Borrower and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e). (f) Each Lender may without the consent of the Borrowers or the Administrative Agent sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto 63 57 for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if they were Lenders; provided that no such participating bank or entity shall be entitled to receive any greater amount pursuant to such Sections than a Lender would have been entitled to receive in respect of the amount of the participation sold by such Lender to such participating bank or entity had no sale occurred, and (iv) the Borrowers, the Administrative Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrowers relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans or changing or extending the Commitments). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.04, disclose to the assignee or participant or proposed assignee or participant any information relating to a Borrower furnished to such Lender by or on behalf of the Borrowers; provided that, prior to any such disclosure of information designated by a Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 9.16. (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to a Federal Reserve Bank to secure extensions of credit by such Federal Reserve Bank to such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such Bank for such Lender as a party hereto. In order to facilitate such an assignment to a Federal Reserve Bank, the applicable Borrower shall, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes evidencing the Loans made to such Borrower by the assigning Lender hereunder. (i) A Borrower shall not assign or delegate any of its rights or duties hereunder without the prior written consent of the Administrative Agent and each Lender, and any attempted assignment without such consent shall be null and void. SECTION 9.05. Expenses; Indemnity. (a) Each Borrower agrees to pay all out-of-pocket expenses incurred by the Administrative Agent in connection with the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby contemplated shall be consummated) or incurred by the Administrative Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement and the other Loan Documents or in connection with the Loans 64 58 made issued hereunder, including the fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent, and, in connection with any such enforcement or protection, the fees, charges and disbursements of any other counsel for the Administrative Agent or any Lender. (b) Each Borrower agrees to indemnify the Administrative Agent and each Lender, each Affiliate of any of the foregoing persons and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans, or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) The provisions of this Section 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent or any Lender. All amounts due under this Section 9.05 shall be payable on written demand therefor. SECTION 9.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the applicable Borrower against any of and all the obligations of such Borrower now or hereafter existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 65 59 SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the Administrative Agent or any Lender in exercising any power or right hereunder or under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by a Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on a Borrower in any case shall entitle such Borrower to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by each of the Borrowers and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of any Loan, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender affected thereby, (ii) change or extend the Commitment of any Lender or postpone the date for the payment thereof, or decrease the Facility Fees of any Lender or postpone the date for the payment thereof, in each case without the prior written consent of such Lender, or (iii) amend or modify the provisions of Section 2.16 or 2.21, the provisions of this Section or the definition of "Required Lenders", or release any Guarantor from its agreements pursuant to Section 2.21, without the prior written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder or under any other Loan Document without the prior written consent of the Administrative Agent. SECTION 9.09. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. 66 60 SECTION 9.10. Entire Agreement. This Agreement and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11. SECTION 9.12. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 9.13. Counterparts. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 9.03. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement. SECTION 9.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 9.15. Jurisdiction; Consent to Service of Process. (a) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive 67 61 jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against a Borrower or its properties in the courts of any jurisdiction. (b) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this agreement or the other Loan Documents in any New York State court or Federal court sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.16. Confidentiality. The Administrative Agent and each of the Lenders agrees to keep confidential (and to use its best efforts to cause its respective agents and representatives to keep confidential) the Information (as defined below) and all copies thereof, extracts therefrom and analyses or other materials based thereon, except that the Administrative Agent or any Lender shall be permitted to disclose Information (a) to such of its respective officers, directors, employees, agents, affiliates and representatives as need to know such Information, (b) to the extent requested by any regulatory authority, (c) to the extent otherwise required by applicable laws and regulations or by any subpoena or similar legal process, (d) in connection with any suit, action or proceeding relating to the enforcement of its rights hereunder or under the other Loan Documents or (e) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Agreement or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than a Borrower. For the purposes of this Section, "Information" shall mean all financial statements, certificates, reports, agreements and information (including all analyses, compilations and studies prepared by the Administrative Agent or any Lender based on any of the foregoing) that are received from a Borrower and related to a Borrower, any shareholder of a Borrower or any employee, customer or supplier of a Borrower, other than any of the foregoing that were available to the Administrative Agent or any Lender on a nonconfidential basis prior to its disclosure thereto by a Borrower, and which are in the case of Information provided after the date hereof, clearly identified at the time of delivery as confidential. The provisions of this 68 62 Section 9.16 shall remain operative and in full force and effect regardless of the expiration and term of this Agreement. [The remainder of this page is left blank intentionally.] 69 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. POPULAR, INC., by ---------------------------- Name: Title: by ---------------------------- Name: Title: POPULAR NORTH AMERICA, INC., by ---------------------------- Name: Title: by ---------------------------- Name: Title: THE CHASE MANHATTAN BANK, individually and as Administrative Agent, by ---------------------------- Name: Title: 70 64 BARCLAYS BANK PLC by ---------------------------- Name: Title: 71 65 ARGENTARIA, CAJA POSTAL Y BANCO HIPOTECARIO, S.A. by ---------------------------- Name: Title: 72 66 THE BANK OF NOVA SCOTIA by ---------------------------- Name: Title: 73 67 BANK ONE N.A. by ---------------------------- Name: Title: 74 68 CARIPLO-CASSA DI RISPARMIO DELLE PROVINCIE LOMBARDE S.P.A. by ---------------------------- Name: Title: by ---------------------------- Name: Title: 75 69 CREDIT SUISSE FIRST BOSTON by ---------------------------- Name: Title: by ---------------------------- Name: Title: 76 70 CITIBANK, N.A. by ---------------------------- Name: Title: 77 71 COMERICA BANK by ---------------------------- Name: Title: 78 72 LASALLE BANK NATIONAL ASSOCIATION by ---------------------------- Name: Title: 79 73 NORDDEUTSCHE LANDESBANK by ---------------------------- Name: Title: by ---------------------------- Name: Title: 80 74 BANCO BILBAO VIZCAYA S.A. by ---------------------------- Name: Title: 81 75 BANCA MONTE DEI PASCHI DI SIENA by ---------------------------- Name: Title: by ---------------------------- Name: Title: 82 76 MELLON BANK, N.A. by ---------------------------- Name: Title: 83 EXHIBIT A [Form of] ASSIGNMENT AND ACCEPTANCE Reference is made to the Amended and Restated 364-Day Credit Agreement dated as of October 18, 1999 (the "Credit Agreement"), among Popular, Inc., a Puerto Rico corporation ("Popular"), Popular North America, Inc., a Delaware corporation ("Popular North America") (each a "Borrower", and collectively, the "Borrowers"), the lenders from time to time party thereto, initially consisting of those listed on Schedule 2.01 thereto (the "Lenders") and The Chase Manhattan Bank, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). Terms defined in the Credit Agreement are used herein with the same meanings. 1. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Effective Date set forth below (but not prior to the registration of the information contained herein in the Register pursuant to Section 9.04(e) of the Credit Agreement), the interests set forth below (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement, including, without limitation, the amounts and percentages set forth below of (i) the Commitments of the Assignor on the Effective Date and (ii) the Loans owing to the Assignor which are outstanding on the Effective Date. Each of the Assignor and the Assignee hereby makes and agrees to be bound by all the representations, warranties and agreements set forth in Section 9.04(c) of the Credit Agreement, a copy of which has been received by each such party. From and after the Effective Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and under the Loan Documents and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 2. This Assignment and Acceptance is being delivered to the Administrative Agent together with (i) if the Assignee is organized under the laws of a jurisdiction outside the United States, the forms specified in Section 2.19(g) of the Credit Agreement, duly completed and executed by such Assignee, (ii) if the Assignee is not already a Lender under the Credit Agreement, an Administrative Questionnaire in a form supplied by the Administrative Agent and (iii) a processing and recordation fee of $3,500. 3. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: Legal Name of Assignor: 84 Legal Name of Assignee: Assignee's Address for Notices: Effective Date of Assignment (may not be fewer than 5 Business Days after the Date of Assignment):
Percentage Assigned of Applicable Principal Amount Facility/Commitment (set forth, Assigned (and to at least 8 decimals, as a Identifying information percentage of the Facility and as to individual the aggregate Commitments of Competitive Loans) all Lenders thereunder) Facility/Commitment ------------------ ----------------------- $ % Revolving Credit Competitive Loans
3 The terms set forth above and on the reverse side hereof are hereby agreed to: Accepted (*) _________________, as Assignor THE CHASE MANHATTAN BANK, as Administrative Agent By: By: --------------------------- ------------------------- Name: Name: Title: Title: _________________, as Assignee POPULAR, INC. By: By: --------------------------- ------------------------- Name: Name: Title: Title: POPULAR NORTH AMERICA, INC. By: ------------------------- Name: Title: 85 EXHIBIT B 86 EXHIBIT C FORM OF REQUEST FOR EXTENSION OF TERMINATION DATE -----------------, ---- The Chase Manhattan Bank 270 Park Avenue New York, New York 10017 Dear Madam or Sir: We refer to Section ___ of the Amended and Restated 364-Day Credit Agreement dated as of October 18, 1999 among Popular, Inc., Popular North America, Inc. the Banks listed on the signature pages thereof, and the Chase Manhattan Bank, as Administrative Agent, and hereby request that the Banks extend the Termination Date (as defined therein) to _____, ____. The undersigned hereby represents to the Administrative Agent and the Banks that as of the date hereof no Default or Event of Default exists. Very truly yours, POPULAR, INC., By: ------------------------------ Title: POPULAR NORTH AMERICA, By: ------------------------------ Title: 87 SCHEDULE 2.01 Commitments
- ------------------------------------------------------------------------------------------------------ CONTACT PERSON NAME AND ADDRESS AND TELEPHONE COMMITMENT (U.S.$) OF THE LENDERS AND TELECOPY NUMBERS - ------------------------------------------------------------------------------------------------------ THE CHASE MANHATTAN BANK Ms. Christine Herrick $50,000,000.00 270 Park Avenue Tel: 212-270-9747 New York, NY 10017 Fax: 212-270-1789 - ---------------------------------------------------------------------------------------------------- ARGENTARIA, CAJA POSTAL Y BANCO HIPOTECARIO, S.A. Emilio Cristobal $25,000,000.00 320 Park Avenue Tel: 212-605-7423 New York, NY 10022 Fax: 212-319-0823 - ---------------------------------------------------------------------------------------------------- BANCA MONTE DEI PASCHI DI SIENA S.P.A. NEW YORK BRANCH Nick Kanaris $25,000,000.00 55 East 59th Street Tel: 212-891-3655 (9th Floor) Fax: 212-891-3661 New York, NY 10022-1112 - ---------------------------------------------------------------------------------------------------- BANCO BILBAO VIZCAYA S.A. (Puerto Rico) Elizabeth Loza $25,000,000.00 P.O. Box 364745 Tel: 787-766-6973 San Juan, PR 00936-4745 Fax: 787-766-6963 - ---------------------------------------------------------------------------------------------------- THE BANK OF NOVA SCOTIA John Neylan $15,000,000.00 One Liberty Plaza Tel: 212-225-5065 (25th Floor) Fax: 212-225-5286 New York, NY 10006 - ---------------------------------------------------------------------------------------------------- BANK ONE N.A. Elizabeth Johnston $50,000,000.00 1 Bank One Plaza, 20th Fl. Tel: 312-732-1301 (Suite 0556) Fax: 312-732-1786 Chicago, IL 60670-0556 - ---------------------------------------------------------------------------------------------------- BARCLAYS BANK PLC Harry Brautigam $50,000,000.00 801 Brickell Avenue Tel: 305-579-8578 (18th Floor) Fax: 305-358-9504 Miami, FL 33131 - ---------------------------------------------------------------------------------------------------- CARIPLO-CASSA DI RISPARMIO DELLE PROVINCIE LOMBARDE Lola Molins $25,000,000.00 S.P.A. Tel: 212-527-8747 10 East 53rd Street Fax: 212-527-8777 New York, NY 10022 - ----------------------------------------------------------------------------------------------------
88
- ------------------------------------------------------------------------------------------------------ CONTACT PERSON NAME AND ADDRESS AND TELEPHONE COMMITMENT (U.S.$) OF THE LENDERS AND TELECOPY NUMBERS - ------------------------------------------------------------------------------------------------------ CITIBANK, N.A. Rudolf Zamora $25,000,000.00 P.O. Box 70301 Tel: 787-771-2810 San Juan, PR 00936-8301 Fax: 787-766-1116 - ---------------------------------------------------------------------------------------------------- COMERICA BANK Laura Wrocklage $25,000,000.00 One Detroit Center Tel: 313-222-6178 500 Woodward Avenue (M/C3330) Fax: 313-222-7421 Detroit, MI 48226 - ---------------------------------------------------------------------------------------------------- CREDIT SUISSE FIRST BOSTON Jay Schall $35,000,000.00 11 Madison Avenue Tel: 212-325-9010 New York, NY 10010-3692 Fax: 212-325-8320 - ---------------------------------------------------------------------------------------------------- LASALLE BANK NATIONAL ASSOCIATION Jeff Borden $35,000,000.00 135 South LaSalle Street Tel: 312-904-2754 Chicago, IL 60603 Fax: 312-904-6352 - ---------------------------------------------------------------------------------------------------- MELLON BANK, N.A. Geoffrey Callahan $35,000,000.00 One Mellon Bank Center Tel: 412-234-9364 (Room 4425) Fax: 412-234-9047 Pittsburgh, PA 15258-0001 - ---------------------------------------------------------------------------------------------------- NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK BRANCH Stephen Hunter $25,000,000.00 AND/OR CAYMAN ISLANDS BRANCH Tel: 212-812-6803 1114 Avenue of the Americas, 37th Floor Fax: 212-812-6860 New York, NY 10036 - ----------------------------------------------------------------------------------------------------
Total Commitment $445,000,000.00 89 Schedule 3.08 Subsidiaries Popular, Inc. is the owner of all issued and outstanding shares of common stock of: a. Banco Popular De Puerto Rico which, in turn, owns as subsidiaries: Popular Finance, Inc., Popular Leasing @ Rental, Inc. and Popular Mortgage, Inc. Besides Popular, Inc. is the owner of the following wholly-owned subsidiaries: b. Popular International Bank, Inc. Popular North America Inc. is a wholly-owned subsidiary of Popular International Bank, Inc., and is the parent of Banco Popular North America, Banco Popular (Texas), Equity One, Inc., and Popular Cash Express, Inc. Banco Popular North America is the owner of Popular Leasing, U.S. c. Popular Securities, Inc. d. G. M. Group 90 Schedule 3.09 Litigation; Compliance with Laws None 91 Schedule 6.01 Liens as of September 30, 1999. A. Securities Pledged for potential daylight overdrafts in Popular, Inc. demand deposit account with Popular de Puerto Rico (at par value): 1. Non Voting Common Stock of Venture Capital Fund, Inc. (1,500 shares)................................... $ 1,500,000 2. Municipality of Bayamon-Municipal Revenue Bond 1995 Series A, at 8.50% due 6/30/05................................. 250,000 3. Doral Financial Corporation 8% Convertible Preferred Stock (8,460 shares)...................................... 8,460,000 4. Tax Credit Enhanced Film Fund of Puerto Rico (75 shares of common stock)............................. 1,500,000 ----------- TOTAL $11,710,000
EX-12.1 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 POPULAR, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in thousands)
Year Ended December 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 Income before income taxes 340,224 306,691 284,026 256,027 206,130 Fixed charges: Interest expense 897,932 778,692 707,348 591,540 521,624 Estimated interest component of net rental payments 10,970 8,817 7,779 7,065 6,012 Total fixed charges including interest on deposits 908,902 787,509 715,127 598,605 527,636 Less: Interest on deposits 452,215 411,492 366,528 350,221 329,783 Total fixed charges excluding interest on deposits 456,687 376,017 348,599 248,384 197,853 Income before income taxes and fixed charges (including interest on deposits) $1,249,126 $1,094,200 $999,153 $854,632 $733,766 Income before income taxes and fixed charges (excluding interest on deposits) $ 796,911 $ 682,708 $632,625 $504,411 $403,983 Preferred stock dividends 8,350 8,350 8,350 8,350 8,350 Ratio of earnings to fixed charges Including Interest on Deposits 1.4 1.4 1.4 1.4 1.4 Excluding Interest on Deposits 1.7 1.8 1.8 2.0 2.0 Ratio of earnings to fixed charges & Preferred Stock Dividends Including Interest on Deposits 1.4 1.4 1.4 1.4 1.4 Excluding Interest on Deposits 1.7 1.8 1.8 2.0 2.0
EX-13.1 5 POPULAR'S ANNUAL REPORT TO SHAREHOLDERS 1 [POPULAR, INC. LOGO] [COMPUTERIZED ARTS GRAPHIC DESIGN] ACHIEVE EXCELLENCE 1999 ANNUAL REPORT 2 THE VALUES, THE VISION AND THE WILL TO ACHIEVE EXCELLENCE Popular, Inc., a bank holding company with $25.5 billion in assets, is a complete financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the Corporation offers full individual and commercial banking services through its principal subsidiary, Banco Popular, as well as investment banking, auto leasing, mortgage, personal loans, and information processing through specialized subsidiaries. In the United States, the Corporation has established the largest Hispanic financial services franchise, providing solutions to the fastest growing population segment in the country. The Corporation continues to use its technological expertise as a competitive advantage on its Caribbean and Latin American expansion, and is now exporting its 106 years of retail banking experience to the region. Popular, Inc. has always been committed to meeting the needs of individual and business clients through innovation and to fostering growth in the communities where it does business. Popular, Inc. is focused on achieving excellence with employees, customers, shareholders and the communities it serves. [INSTITUTIONAL FLOW CHART] 3 1999 FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS 1 OUR MARKETS 2 OUR CREED, OUR PEOPLE 4 LETTER TO SHAREHOLDERS 5 OUR COMMUNITY 17 MANAGEMENT 20 BOARDS OF DIRECTORS 22 FINANCIAL INFORMATION 23
[GRAPH] 4 PROFILE OUR MARKETS PUERTO RICO - - 3.9 MILLION POPULATION - - LOCAL ECONOMY GROWING AT APPROXIMATELY 3.5% - - 42% OF THE POPULATION IS UNBANKED, WHICH PRESENTS AN INTERESTING OPPORTUNITY TO EXPAND PRODUCTS AND SERVICES MAIN BRANDS Banco Popular, ATH Network, Popular Mortgage, Popular Leasing, Popular Securities, Popular Finance, Popular Asset Management, GM Group, Levitt Mortgage BANCO POPULAR DE PUERTO RICO Offers the most extensive distribution network in Puerto Rico, with 199 branches, 442 proprietary automated teller machines (ATMs), 22,163 point-of-sale (POS) terminals, telephone banking through TeleBanco Popular (retail and commercial), PC Banco system and Web Cash Manager. It maintains its position as market leader with $9.8 billion in deposits and $7.9 billion in loans. The ATH Network is the most extensive in Puerto Rico, with 555 ATMs and worldwide acceptance of its cards. POPULAR MORTGAGE Among the top three mortgage origination businesses in Puerto Rico, it expanded with the acquisition of 85% of Levitt Mortgage. It now operates 13 mortgage centers and the number of representatives increased from 47 to 66. UNITED STATES - - 33.9 MILLION HISPANICS - - IN 20 YEARS, ONE OUT OF EVERY FIVE RESIDENTS IN THE U.S. WILL BE HISPANIC - - AVERAGE U.S. HISPANIC HOUSEHOLD INCOME OF $43,570 MAIN BRANDS Banco Popular, Popular Cash Express, Popular Leasing, Equity One BANCO POPULAR NORTH AMERICA The largest U.S. Hispanic bank consolidated its banking regions to operate under one organization, Banco Popular North America. At year end, it had a total of 91 branches in six states and continued to expand its national lines of business: credit cards, retail mortgages, SBA loans, and small and medium-sized business franchise lending. CARIBBEAN/LATIN AMERICA - - IN THE DOMINICAN REPUBLIC, POPULATION OF 8.5 MILLION AND ECONOMY GROWING AT OVER 7% - - HIGH LEVELS OF MONEY TRANSFERS FROM THE U.S. - - LACK OF ELECTRONIC NETWORKS IN THE REGIONS MAIN BRANDS Banco Popular, Banco Fiduciario, ATH Dominicana, ATH Costa Rica, CreST, S.A. BANCO POPULAR VIRGIN ISLANDS Operations consist of eight branches, four credit centers and three mortgage centers in the U.S. and British Virgin Islands. Deposits reached $616 million. BANCO FIDUCIARIO Investment in the fourth largest bank in the Dominican Republic. Total of $436 million in assets and $295 million in deposits. 2 5 20-YEAR SUMMARY
(DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1980 1981 1982 1983 1984 ----------- ----------- ----------- ----------- ----------- SELECTED FINANCIAL INFORMATION Net Interest Income $ 130.0 $ 135.9 $ 151.7 $ 144.9 $ 156.8 Non-Interest Income 14.2 15.8 15.9 19.6 19.0 Operating Expenses 101.3 109.4 121.2 127.3 137.2 Net Income 23.5 24.3 27.3 26.8 29.8 ----------- ----------- ----------- ----------- ----------- Total Assets $ 2,630.1 $ 2,677.9 $ 2,727.0 $ 2,974.1 $ 3,526.7 Net Loans 988.4 1,007.6 976.8 1,075.7 1,373.9 Deposits 2,060.5 2111.7 2,208.2 2,347.5 2,870.7 Total Stockholders' Equity 122.1 142.3 163.5 182.2 203.5 ----------- ----------- ----------- ----------- ----------- Market Capitalization $ 45.0 $ 66.4 $ 99.0 $ 119.3 $ 159.8 ROA 0.92% 0.90% 0.96% 0.95% 0.94% ROE 19.96% 18.36% 17.99% 15.86% 15.83% PER COMMON SHARE(1) Earnings $ 0.34 $ 0.34 $ 0.38 $ 0.37 $ 0.41 Dividends (Declared) 0.07 0.06 0.08 0.11 0.12 Book Value 1.66 1.93 2.22 2.47 2.76 Market Price 1.01 0.92 1.38 1.66 2.22 ASSETS BY GEOGRAPHICAL AREA Puerto Rico 95.53% 94.65% 94.63% 93.70% 91.31% United States 4.47% 5.14% 5.01% 5.23% 7.52% Caribbean 0.00% 0.22% 0.36% 1.07% 1.17% ----------- ----------- ----------- ----------- ----------- Total 100.00% 100.00% 100.00% 100.00% 100.00% TRADITIONAL DELIVERY SYSTEM Commercial Banking Branches Puerto Rico 110 110 110 112 113 Virgin Islands 1 2 3 3 United States 7 7 7 6 9 Banco Fiduciario (D.R.) ----------- ----------- ----------- ----------- ----------- Subtotal 117 118 119 121 125 ----------- ----------- ----------- ----------- ----------- Non-Commercial Banking Branches Equity One Popular Cash Express(2) Popular Finance Popular Leasing Popular Leasing, U.S.A Popular Mortgage Popular Securities Levitt Mortgage GM Group ----------- ----------- ----------- ----------- ----------- Subtotal ----------- ----------- ----------- ----------- ----------- Total 117 118 119 121 125 ELECTRONIC DELIVERY SYSTEM ATMs Owned Puerto Rico 30 78 Caribbean United States Subtotal 30 78 Driven Puerto Rico 6 Caribbean ----------- ----------- ----------- ----------- ----------- Subtotal 6 ----------- ----------- ----------- ----------- ----------- Total 30 84 TRANSACTIONS (IN MILLIONS) Electronic Transactions 0.6 4.4 Items Processed 94.8 96.9 98.5 102.1 110.3 EMPLOYEES (FTES)(3) 3,838 3,891 3,816 3,832 4,110 (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1985 1986 1987 1988 1989 ----------- ----------- ----------- ----------- ----------- SELECTED FINANCIAL INFORMATION Net Interest Income $ 174.9 $ 184.2 $ 207.7 $ 232.5 $ 260.9 Non-Interest Income 26.8 41.4 41.0 54.9 63.3 Operating Expenses 156.0 168.4 185.7 195.6 212.4 Net Income 32.9 38.3 38.3 47.4 56.3 ----------- ----------- ----------- ----------- ----------- Total Assets $ 4,141.7 $ 4,531.8 $ 5,389.6 $ 5,706.5 $ 5,972.7 Net Loans 1,715.7 2,271.0 2,768.5 3,096.3 3,320.6 Deposits 3,365.3 3,820.2 4,491.6 4,715.8 4,926.3 Total Stockholders' Equity 226.4 283.1 308.2 341.9 383.0 ----------- ----------- ----------- ----------- ----------- Market Capitalization $ 216.0 $ 304.0 $ 260.0 $ 355.0 $ 430.1 ROA 0.89% 0.88% 0.76% 0.85% 0.99% ROE 15.59% 15.12% 13.09% 14.87% 15.87% PER COMMON SHARE(1) Earnings $ 0.46 $ 0.50 $ 0.48 $ 0.59 $ 0.70 Dividends (Declared) 0.14 0.15 0.17 0.17 0.20 Book Value 3.07 3.46 3.77 4.19 4.69 Market Price 3.00 4.00 3.34 4.44 5.38 ASSETS BY GEOGRAPHICAL AREA Puerto Rico 92.42% 91.67% 94.22% 93.45% 92.18% United States 6.47% 7.23% 5.01% 5.50% 6.28% Caribbean 1.11% 1.10% 0.77% 1.05% 1.54% ----------- ----------- ----------- ----------- ----------- Total 100.00% 100.00% 100.00% 100.00% 100.00% TRADITIONAL DELIVERY SYSTEM Commercial Banking Branches Puerto Rico 115 124 126 126 128 Virgin Islands 3 3 3 3 3 United States 9 9 9 10 10 Banco Fiduciario (D.R.) ----------- ----------- ----------- ----------- ----------- Subtotal 127 136 138 139 141 ----------- ----------- ----------- ----------- ----------- Equity One Popular Cash Express(2) Popular Finance 14 17 18 Popular Leasing 4 Popular Leasing, U.S.A Popular Mortgage Popular Securities Levitt Mortgage GM Group ----------- ----------- ----------- ----------- ----------- Subtotal 14 17 22 ----------- ----------- ----------- ----------- ----------- Total 127 136 152 156 163 ELECTRONIC DELIVERY SYSTEM ATMs Owned Puerto Rico 94 113 136 153 151 Caribbean 3 3 3 United States ----------- ----------- ----------- ----------- ----------- Subtotal 94 113 139 156 154 ----------- ----------- ----------- ----------- ----------- Driven Puerto Rico 36 51 55 68 65 Caribbean ----------- ----------- ----------- ----------- ----------- Subtotal 36 51 55 68 65 ----------- ----------- ----------- ----------- ----------- Total 130 164 194 224 219 TRANSACTIONS (IN MILLIONS) Electronic Transactions 7.0 8.3 12.7 14.9 16.1 Items Processed 123.8 134.0 139.1 159.8 161.9 EMPLOYEES (FTES)(3) 4,314 4,400 4,699 5,131 5,213 (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1990 1991 1992 1993 1994 ----------- ----------- ------------ ------------ ------------ SELECTED FINANCIAL INFORMATION Net Interest Income $ 284.2 $ 407.8 $ 440.2 $ 492.1 $ 535.5 Non-Interest Income 70.9 131.8 124.5 125.2 141.3 Operating Expenses 229.6 345.7 366.9 412.3 447.8 Net Income 63.4 64.6 85.1 109.4 124.7 ----------- ----------- ------------ ------------ ------------ Total Assets $ 8,983.6 $ 8,780.3 $ 10,002.3 $ 11,513.4 $ 12,778.4 Net Loans 5,373.3 5,195.6 5,252.1 6,346.9 7,781.3 Deposits 7,422.7 7,207.1 8,038.7 8,522.7 9,012.4 Total Stockholders' Equity 588.9 631.8 752.1 834.2 1,002.4 ----------- ----------- ------------ ------------ ------------ Market Capitalization $ 479.1 $ 579.0 $ 987.8 $ 1,014.7 $ 923.7 ROA 1.09% 0.72% 0.89% 1.02% 1.02% ROE 15.55% 10.57% 12.72% 13.80% 13.80% PER COMMON SHARE(1) Earnings $ 0.79 $ 0.54 $ 0.70 $ 0.84 $ 0.92 Dividends (Declared) 0.20 0.20 0.20 0.23 0.25 Book Value 4.92 5.25 5.76 6.38 6.87 Market Price 4.00 4.81 7.56 7.75 7.03 ASSETS BY GEOGRAPHICAL AREA Puerto Rico 88.59% 86.67% 87.33% 79.42% 75.86% United States 9.28% 10.92% 10.27% 16.03% 19.65% Caribbean 2.13% 2.41% 2.40% 4.55% 4.49% ----------- ----------- ------------ ------------ ------------ Total 100.00% 100.00% 100.00% 100.00% 100.00% TRADITIONAL DELIVERY SYSTEM Commercial Banking Branches Puerto Rico 173 161 162 165 166 Virgin Islands 3 3 3 8 8 United States 24 24 30 32 34 Banco Fiduciario (D.R.) ----------- ----------- ------------ ------------ ------------ Subtotal 200 188 195 205 208 ----------- ----------- ------------ ------------ ------------ Equity One 27 41 58 73 Popular Cash Express(2) Popular Finance 26 26 26 26 28 Popular Leasing 9 9 9 8 10 Popular Leasing, U.S.A Popular Mortgage Popular Securities Levitt Mortgage GM Group ----------- ----------- ------------ ------------ ------------ Subtotal 35 62 76 92 111 ----------- ----------- ------------ ------------ ------------ Total 235 250 271 297 319 ELECTRONIC DELIVERY SYSTEM ATMs Owned Puerto Rico 211 206 211 234 262 Caribbean 3 3 3 8 8 United States 6 11 26 ----------- ----------- ------------ ------------ ------------ Subtotal 214 209 220 253 296 ----------- ----------- ------------ ------------ ------------ Driven Puerto Rico 54 73 81 86 88 Caribbean ----------- ----------- ------------ ------------ ------------ Subtotal 54 73 81 86 88 ----------- ----------- ------------ ------------ ------------ Total 268 282 301 339 384 TRANSACTIONS (IN MILLIONS) Electronic Transactions 18.0 23.9 28.6 33.2 43.0 Items Processed 164.0 166.1 170.4 171.8 174.5 EMPLOYEES (FTES)(3) 7,023 7,006 7,024 7,533 7,606 (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 1995 1996 1997 1998 1999 ------------ ------------ ------------ ------------ ------------ SELECTED FINANCIAL INFORMATION Net Interest Income $ 584.2 $ 681.3 $ 784.0 $ 873.0 $ 953.7 Non-Interest Income 173.3 205.5 247.6 291.2 372.9 Operating Expenses 486.8 541.9 636.9 720.4 837.5 Net Income 146.4 185.2 209.6 232.3 257.6 ------------ ------------ ------------ ------------ ------------ Total Assets $ 15,675.5 $ 16,764.1 $ 19,300.5 $ 23,160.4 $ 25,460.5 Net Loans 8,677.5 9,779.0 11,376.6 13,077.8 14,907.8 Deposits 9,876.7 10,763.3 11,749.6 13,672.2 14,173.7 Total Stockholders' Equity 1,141.7 1,262.5 1,503.1 1,709.1 1,661.0 ------------ ------------ ------------ ------------ ------------ Market Capitalization $ 1,276.8 $ 2,230.5 $ 3,350.3 $ 4,602.4 3,907.5 ROA 1.04% 1.14% 1.14% 1.14% 1.08% ROE 14.22% 16.17% 15.83% 15.41% 15.45% PER COMMON SHARE(1) Earnings $ 1.05 $ 1.34 $ 1.50 $ 1.65 $ 1.84 Dividends (Declared) 0.29 0.35 0.40 0.50 0.60 Book Value 7.91 8.80 10.37 11.86 11.51 Market Price 9.69 16.88 24.75 34.00 27.94 ASSETS BY GEOGRAPHICAL AREA Puerto Rico 75.49% 73.88% 74.10% 71.32% 71.54% United States 20.76% 22.41% 23.34% 24.44% 24.58% Caribbean 3.75% 3.71% 2.56% 4.24% 3.88% ------------ ------------ ------------ ------------ ------------ Total 100.00% 100.00% 100.00% 100.00% 100.00% TRADITIONAL DELIVERY SYSTEM Commercial Banking Branches Puerto Rico 166 178 201 198 199 Virgin Islands 8 8 8 8 8 United States 40 44 63 89 91 Banco Fiduciario (D.R.) 27 31 ------------ ------------ ------------ ------------ ------------ Subtotal 214 230 272 322 329 ------------ ------------ ------------ ------------ ------------ Equity One 91 102 117 128 138 Popular Cash Express(2) 51 102 Popular Finance 31 39 44 48 47 Popular Leasing 9 8 10 10 12 Popular Leasing, U.S.A 7 8 10 Popular Mortgage 3 3 3 11 13 Popular Securities 1 2 2 2 Levitt Mortgage 2 GM Group 4 ------------ ------------ ------------ ------------ ------------ Subtotal 134 153 183 258 330 ------------ ------------ ------------ ------------ ------------ Total 348 383 455 580 659 ELECTRONIC DELIVERY SYSTEM ATMs Owned Puerto Rico 281 327 391 421 442 Caribbean 8 9 17 59 68 United States 38 53 71 94 99 ------------ ------------ ------------ ------------ ------------ Subtotal 327 389 479 574 609 ------------ ------------ ------------ ------------ ------------ Driven Puerto Rico 120 162 170 187 102 Caribbean 97 192 265 851 ------------ ------------ ------------ ------------ ------------ Subtotal 120 259 362 452 953 ------------ ------------ ------------ ------------ ------------ Total 447 648 841 1,026 1,562 TRANSACTIONS (IN MILLIONS) Electronic Transactions 56.6 78.0 111.2 130.5 159.4 Items Processed 175.0 173.7 171.9 170.9 171.0 EMPLOYEES (FTES)(3) 7,815 7,996 8,854 10,549 11,501
1 Per common share data adjusted for stock splits in 1981, 1985, 1989, 1996 and 1998. 2 Number of offices for Popular Cash Express include mobile units, 28 in 1998, and 38 in 1999. 3 Includes 853 FTEs from Banco Fiduciario in the Dominican Republic, partially owned by Popular, Inc. 6 ACHIEVE EXCELLENCE POPULAR LEASING Leader in Puerto Rico's leasing business with a total of 36 account executives who offer service from 12 sales and daily rental offices. POPULAR SECURITIES Offers full investment services from Banco Popular's branches in Puerto Rico through 45 retail sales representatives. In the institutional business, during the last five years it participated in more than 100 transactions with a value of over $19 billion. POPULAR FINANCE Ranked among the top consumer finance institutions in Puerto Rico, it is engaged in small personal loans and second mortgages. It operates 45 offices and six mortgage centers, with a portfolio of $193.2 million. POPULAR ASSET MANAGEMENT Institutional investment management services with more than $2 billion in assets under management. GM GROUP Main service provider of integrated solutions in the processing business with offices in San Juan, Caracas, Santo Domingo and Miami. It has clients from 10 Latin American countries. POPULAR CASH EXPRESS The check-cashing operation expanded its business to three new markets. It currently has a total of 64 offices and 38 mobile units in five states and Washington, D.C. Assets total $43.0 million. POPULAR LEASING, U.S.A. Subsidiary that offers small-ticket equipment leasing with $74.4 million in assets. Operates 10 offices in seven states. EQUITY ONE Subsidiary engaged in the business of personal and mortgage loans and retail financing to merchants and dealers. Assets reached $1.6 billion. Operates 138 offices in 32 states. ATH DOMINICANA The largest ATM network in the Dominican Republic. ATM and POS transactions increased by 48% during 1999. ATH COSTA RICA ATM driving and administration business in Costa Rica. Transactions increased by 355%. Recently entered the POS acquiring business with the acquisition of CreST, S.A. 3 7 VALUES SOCIAL RESPONSIBILITY We are committed to work for the social and economic well-being of the communities we serve with particular regard for the lowest socio-economic component of the population. FOCUS ON THE CUSTOMER Our customers are the lifeblood of our organization. We are an institution that values relationships more than transactions. The needs and satisfaction of our customers are our primary concern. INTEGRITY We are guided by the highest moral and ethical standards. The trust of our customers is essential for our existence. PASSION FOR EXCELLENCE We firmly believe in doing things the right way, the first time, every time. Continuous improvement and measurement of all our processes are essential for our success. OUR CREED Banco Popular is a local institution dedicating its efforts exclusively to the enhancement of the social and economic conditions in Puerto Rico and inspired by the most sound principles and fundamental practices of good banking. Banco Popular pledges its efforts and resources to the development of a banking service for Puerto Rico within strict commercial practices and so efficient that it could meet the requirement of the most progressive community of the world. These words, written in 1928 by Don Rafael Carrion Pacheco, Executive Vice President and President (1927-1956), embody the philosophy of Popular, Inc. OUR PEOPLE The men and women who work for our institution, from the highest executive to the employees who handle the most routine tasks, feel a special pride in serving our customers with care and dedication. All of them feel the personal satisfaction of belonging to the "Banco Popular Family", which fosters affection and understanding among its members, and which at the same time firmly complies with the highest ethical and moral standards of behavior. These words by Don Rafael Carrion Jr., President and Chairman of the Board (1956-1991) were written in 1988 to commemorate the 95th anniversary of Banco Popular de Puerto Rico and reflect our commitment to human resources. 4 8 INNOVATION Constant innovation is a competitive advantage. We have a tradition of adopting new techniques in all business areas to anticipate the changing needs of our customers. OUR PEOPLE We strive to recruit, train and retain the most qualified people. We believe in a direct relation between our employees' compensation and their commitment to the organization's objectives, their individual performance, their team's performance and the Corporation's. SHAREHOLDER VALUE Our goal is to produce above-average and consistent financial returns for our shareholders. Our decisions are based on a long-term view of the future and are characterized by prudence in assuming risk. LETTER TO SHAREHOLDERS [PHOTO] Richard L. Carrion, Chairman, President and Chief Executive Officer In the past 106 years, Banco Popular de Puerto Rico has grown and evolved into Popular, Inc., a diversified financial services corporation. But the values that have inspired us have remained constant. These values motivate us, they provide meaning to our actions and they inspire us to persevere, especially when faced with great challenges. Inspired by these values, we have crafted a vision that has guided our steps for over a decade. Our strategic plan reflects our vision. Each of our strategic principles represents an aspect of our vision, an integral part of the whole, since they are all intertwined. Fortress Puerto Rico recognizes that Puerto Rico is our principal market, but that rather than let success turn us complacent, we must constantly strengthen our position. Our experience 5 9 LETTER TO SHAREHOLDERS in Puerto Rico has led us to expand our operations to markets that are natural to us - Hispanics in the United States and our neighboring Caribbean and Latin American countries - in an effort to develop a PanAmerican Bank. In addition to geographic expansion, we are constantly looking to diversify our sources of income by offering more alternatives to our customers - Diversification. None of this would be possible without an organization committed to the Corporation's goals - Organizational Quality. We need our employees to excel at what they do, to develop and enhance our professional capabilities and processes, and to always seek additional efficiencies. We have summarized each of these strategic principles with a verb, because principles must be translated into action. Values and vision, by themselves, can remain just a goal. The most important ingredient is our individual and collective will to make it happen. That will to be the best at what we do allowed us to fulfill our expectations for 1999. [GRAPH] At year-end, the Corporation reported net income of $257.6 million, a 10.9% increase compared to 1998. Total assets amounted to $25.5 billion, compared with $23.2 billion at December 1998. This growth reflects the Corporation's continued business expansion in Puerto Rico, the Caribbean and Latin America and the continental United States. Earnings per common share (EPS) increased from $1.65 in 1998 to $1.84 in 1999, an increase of 11.5%, while return on average equity (ROE) and assets (ROA) were 15.45% and 1.08%, respectively, compared with 15.41% and 1.14% for 1998. Popular, Inc. stock (BPOP) closed at $27.94 at December 31, 1999, a decline of 17.83% over the same period last year. Over a ten-year period, our stock's total return has averaged 21.20% annually, outperforming broad and industry-specific market indexes. STRENGTHEN Throughout the last century, we have built a formidable franchise in Puerto Rico, our home base and principal market. Notwithstanding our success, we are convinced that we must continue to strengthen our position by segmenting our client base and aligning our products and delivery channels to serve the unique needs of our customers in the most efficient manner. This commitment is what we call Fortress Puerto Rico. In terms of our banking franchise, we continued to improve the coverage and convenience of our traditional, electronic and online delivery systems. Our complete delivery system is our competitive advantage in our efforts to attract new clients as well as broaden our relationships with current clients. 6 10 FORTRESS PUERTO RICO RECOGNIZES THAT PUERTO RICO IS OUR PRINCIPAL MARKET, BUT THAT RATHER THAN LET SUCCESS TURN US COMPLACENT, WE MUST CONSTANTLY STRENGTHEN OUR POSITION. We continued the reconfiguration of our branch system in Puerto Rico by adding more branches in convenient locations and high-traffic areas. By year-end, our extensive banking branch network included a total of 199 branches, of which 22 were in-store branches. We began to deploy a new sales and service standard computing platform in all of the Bank's branches. This new system is designed as a sales tool and will assist branch employees in offering the right product to each customer. With it, our employees will provide our clients faster and more efficient service, spending less time on administrative tasks and more time serving them. Banco Popular also strengthened its position as Puerto Rico's leading driver of electronic transactions in 1999. The continuous growth of electronic transactions in recent years has truly transformed Puerto Rico's banking system, and has allowed us to efficiently offer more convenience to customers. The number of electronic transactions as a percentage of total transactions increased from 76% in December 1998 to 78% in December 1999. Our various electronic delivery channels contributed to these results. Our ATH (A Toda Hora) network of automated teller machines and point-of-sale terminals continued to grow and improve in 1999. We added 21 new ATMs, for a total of 442, and 3,369 additional POS terminals, for a total of 22,000 terminals in 18,500 businesses throughout the island. Our complete network processed over 129 million transactions during 1999. Our telephone banking system, TeleBanco Popular, received over 19 million calls, a 12.5% increase over last year, evidence of the greater acceptance of the telephone as a practical channel to obtain information and conduct transactions. Recognizing that the future of online banking is on the Internet, we have developed various projects that allow our clients to conduct a wide variety of transactions online. We began in 1998 with Popular AutoNet (www.popularautonet.com), an online service for auto loan customers in Puerto Rico. This year we implemented Web Cash Manager, which offers commercial clients detailed account information on the Internet. We expect to launch a new service, Mi Banco Popular, in early 2000. This new functional web site will allow our retail clients to personalize contents, access all financial relations, and securely conduct transactions over the Internet. The new system will replace PC Banco, the highly successful dial-up PC banking system introduced in 1997. 7 11 LETTER TO SHAREHOLDERS In addition to the expansion and development of new delivery alternatives, we developed new products and services to remain competitive and meet the changing needs of our clients. We introduced Popular Balanced IRA, a fund managed by Popular Asset Management that includes equity and fixed income securities from Puerto Rico and the United States. This new product offers our customers the benefit of a higher return on their investment than traditional fixed-interest products, and expands our product offerings. We also expanded the options for opening individual retirement accounts, through any branch, TeleBanco Popular, PC Banco, and a dedicated web site, www.irapopular.com. Our 1999 IRA campaign results proved our undisputed leadership in this important portion of the market. In June we expanded our successful partnership with American Express by launching the Banco Popular American Express Platinum Card, the first platinum card issued in Puerto Rico. This new credit card product is targeted toward the upscale market. The combination of these two strong brands has proved a great formula for success. We expect to repeat the success of the Banco Popular American Express Card launched last year. [GRAPH] Banco Popular was the first institution in Puerto Rico and among the first in the United States to participate in a new program sponsored by the U.S. Treasury Department that offers an electronic transfer account (ETA) to federal benefits recipients. Acceso ETA is a low-cost account that allows clients to receive their benefits via direct deposit, advancing our goal of transforming paper-based transactions to electronic. It offers full access to all traditional and electronic distribution channels. It also fits our strategy to attract clients from among the unbanked and underbanked, since many benefit recipients currently do not have a bank account. We continued seeking new products, services and value-added solutions for our commercial clients in Puerto Rico. They have benefited from the development of innovative products and services tailored to specific markets, as well as programs developed to enhance the performance of their business. Last year we continued to branch out with our Professional Banking Program, Banca de Profesionales. Our commitment to the small and middle market commercial segment was evidenced by our collaboration with the Small Business Administration in the creation of a Business Resource Center at Sacred Heart University in Puerto Rico. This center contains a wealth of free information and resources for small 8 12 business owners and aspiring entrepreneurs. For this segment we also launched new products such as Prospera, a fixed-term, fixed-payment loan and InfoFax, a service that provides daily balance statements via fax to businesses without access to computers. An important initiative undertaken by Banco Popular de Puerto Rico in 1999 was a new refocused and revitalized marketing campaign. Launched to coincide with the Corporation's 106th anniversary, the institutional campaign communicates that "Whatever you want to achieve, this is your Bank". In addition to illustrating the multiple ways our banking services help people achieve their personal, family and business goals, the campaign conveys the message that our commitment to Puerto Rico transcends business relationships in our continuous contributions to the many community-building and culture-promoting activities that we support. An essential element of our Fortress Puerto Rico principle is the strength that comes from all of the units that complement our banking franchise and expand our financial services offering. Through these operations, we support our clients in the purchase of their homes, in the financing of their automobiles, in managing their investments. In essence, in meeting all their financial needs. Popular Mortgage, our mortgage-origination subsidiary, continued to expand and enhance its services. The company developed a new image-building campaign to position itself as a strong contender in this market. Under the theme "Easy. Reliable.", we emphasize our commitment to streamlining the loan application process and offering a variety of rate-competitive products to meet the different priorities of different customers. In May, we launched the Popular Mortgage-American Airlines AAdvantage Program. As part of an alliance with American Airlines, we are offering mortgage customers up to 30,000 AAdvantage frequent flier miles when they sign a mortgage loan with Popular Mortgage. This is an exclusive program with Popular Mortgage and is the first of its kind in the mortgage industry in Puerto Rico. Two innovative products were introduced: the Biweekly Mortgage, which lets clients make payments every 14 days, and the Mixed-Use Property Mortgage, which allows customers to use residential mortgages for mixed commercial-residential properties. We expanded the reach of our mortgage operations, opening two new offices in 1999, and relocated another five to more convenient locations. In August we acquired 85% of Levitt Mortgage, a mortgage bank with strong presence in the new project loan origination market. 9 13 OUR EXPERIENCE IN PUERTO RICO HAS LED US TO EXPAND OUR OPERATIONS TO NATURAL MARKETS - HISPANICS IN THE UNITED STATES AND OUR NEIGHBORING CARIBBEAN AND LATIN AMERICAN COUNTRIES - IN AN EFFORT TO DEVELOP A PANAMERICAN BANK. Popular Leasing & Rental, Inc., improved the efficiency of its core business operations in 1999 and branched out into leasing of high-tech equipment through a strategic alliance with El Camino Resources, Ltd., the largest leasing company of this type in the United States. This partnership will focus on the leasing of high-tech equipment in Puerto Rico, such as telecommunications systems, hospital and medical equipment and heavy machinery. In addition, we capitalized on our relationship with American Airlines by offering, for a limited time, frequent flier miles in the AAdvantage program for new leases. [GRAPH] Popular Finance, our consumer lending subsidiary, opened three new branches, bringing the total islandwide to 47. To increase customer convenience and choices, Popular Finance began to sell money orders and prepaid cellular phone cards in all of its offices and to receive payments for utility and other bills. This year, Popular Securities' institutional investment banking group participated in more than 25 financial transactions with a total value of over $6 billion. With regard to its retail operations, it continued its steady growth by adding more investment representatives during the year to expand our islandwide coverage through the Banco Popular branch network. We also launched an aggressive Keogh account campaign spearheaded by a series of seminars throughout Puerto Rico. And for individual investors, Popular Securities created PopularStreet, a quarterly newsletter that reviews market trends and announces the company's new investment products. EXPAND In the United States, the major thrust of our strategy is to maintain steady growth in areas of the United States with a high concentration of Hispanics. Although we have been servicing this market since we established our first branch in New York in 1961, we have aggressively expanded during the past five years. We are developing our franchise through 10 14 delivery system growth and expansion of our business lines, with the clear goal of becoming the principal financial services provider to Hispanics in the United States. In order to better serve our market and implement our strategies more efficiently, during 1999 we made significant improvements to our organization. The corporate reorganization of Banco Popular's operations in the United States took effect on January 1, 1999. The creation of Banco Popular North America will allow us to improve internal communications and achieve administrative efficiency by consolidating support divisions and by enabling better integration of our information and telecommunications systems. The unification of our U.S. franchise enabled us to roll out our first nationally marketed deposit products. For example, our Dream CD campaign attracted over $265 million in deposits in a very short period of time, evidence of the efficiency achieved by the restructuring and the high potential for growth. We also established a new separate Board of Directors for Banco Popular North America to provide U.S. operations with additional insight and guidance. Beyond our corporate restructuring, we completed comprehensive marketing and financial assessments to focus future efforts concerning our brand and our distribution system growth. We expanded and reconfigured our branch network, opening three branches in California and one in Texas, and consolidating two in Florida. We ended the year with 91 branches in six states. The U.S. Credit Card Division, one of our national lines of business, carried out a spirited marketing campaign driven by customer contests, employee incentives and an expanded Hispanic affinity program. One of our newer businesses, Popular Cash Express, grew significantly during the past year. It now ranks among the top ten check-cashing operations in the United States and is the second-largest mobile check-cashing operator with 38 trucks. Committed to serving the unbanked and underbanked, Popular Cash Express opened or acquired 41 new locations for a total of 64 and entered three new markets: Texas, Arizona and Washington, D.C. The centralization of financial and accounting functions in California has improved efficiency and a newly formed product development team is focusing on new products designed especially to appeal to unbanked and underbanked customers. Our mortgage business originated $390 million in residential mortgages in its six U.S. markets in 1999. It restructured its centralized mortgage processing operation in California to increase efficiency, and hired new management and sales teams. 11 15 LETTER TO SHAREHOLDERS Regarding our national commercial lines of business, in 1999 we solidified our position as a national leader in Small Business Administration (SBA) and minority lending. Banco Popular North America originated $99.1 million in SBA loans. We are among the top SBA lenders in New York, Chicago and Florida. SBA lending is a crucial lifeline for Hispanic entrepreneurs in the United States, and our partnership with them is clearly in line with our intent to grow with this community and contribute to its economic development. Franchise lending is a niche market with considerable potential for growth, and we increased our participation in 1999. The Franchise Lending section surpassed our budgeted goal of $200 million in loans before the end of November and finished the year with an increase of 59.6% over 1998. [GRAPH] Popular Leasing, U.S.A., has shown continuous improvement and exceeded the budgeted goal of $40 million in sales by November. Two new offices were opened, for a total of 10 in seven states. The company's marketing strategy focuses on equipment leasing through vendors and customers in nearly every state through a toll-free number (1-800-829-9411) and a web site (www.popularleasingusa.com). Equity One turned in a favorable performance in 1999 by changing the emphasis on certain products to reflect the downturn in the refinancing segment of the mortgage market. We also focused on increasing the diversity of products in each of our offices. We ended the year with 138 offices in 32 states. In the third quarter, Equity One opened a new call center, which allows us to offer more complete and convenient service to our clients. In the Caribbean and Latin America we have continued to invest in our banking franchises. In March, we opened our new regional office in the Virgin Islands. The state-of-the-art building provides spacious accommodations for the region's central offices and a modern branch with eight drive-through windows. The headquarters serves St. Thomas, St. Croix and Tortola. In addition to a new bank center, Banco Popular Virgin Islands inaugurated a new marketing campaign designed to position the bank as the most complete provider of financial services in the region. Performance for 1999 was promising, with a 24% increase in deposits to $616 million and a 7% increase in loans to $390 million. 12 16 IN ADDITION TO GEOGRAPHIC EXPANSION, WE ARE CONSTANTLY LOOKING TO DIVERSIFY OUR SOURCES OF INCOME BY OFFERING MORE ALTERNATIVES TO OUR CUSTOMERS. In the Dominican Republic, we increased our ownership of Banco Fiduciario to 57% and completed the integration of Popular, Inc. management specialists into a reorganized management structure, solidifying the alliance we established in 1998. The new team identified and prioritized areas to be improved and set to work accomplishing the strategic plan. Moving forward, our principal strategy is growing our retail business and reducing the cost of funds. To support this strategy we have increased the number of retail outlets from 27 to 31 branches and will develop new marketing communications strategies. Our expertise and resources in electronic banking have provided an effective entry into Caribbean and Latin American markets. The two ATM/POS networks we have developed so far, in the Dominican Republic and Costa Rica, have experienced tremendous growth. ATH Dominicana added six institutions to its membership list, which at year-end included all the major financial institutions in the country. Transaction volume increased 48%, surpassing expectations. A significant portion of this growth has come from the POS platform, which alone processed over one million transactions. After connecting the ATMs of the principal financial institutions, we see the POS segment as the next logical step to grow the network. In ATH Costa Rica, transaction volume increased by 335% over 1998. The number of institutions on the network more than doubled, growing from eight to 18. ATH Costa Rica also reached an agreement with MasterCard International that paved the way for including MasterCard and CIRRUS-affiliated cards among those accepted by ATH Costa Rica ATMs. We expect to continue this growth with the acquisition of CreST, a local card processor and POS provider. This acquisition will definitely expand our capabilities in the country and the region by allowing us to penetrate more rapidly the POS segment. DIVERSIFY Throughout the years, the incorporation and growth of other financial services have strengthened our Corporation. The diversification strategy stems from our commitment to seek new sources of revenue and to serve all our clients' financial needs. We continuously strive to anticipate these needs, and we evolve to serve them in the way our clients expect of us. This allows us to deepen our relationship with current clients and attract new ones. 13 17 4 EXCEL WE NEED OUR EMPLOYEES TO EXCEL AT WHAT THEY DO, TO DEVELOP AND ENHANCE OUR CAPABILITIES AND SEEK ADDITIONAL EFFICIENCIES -- ORGANIZATIONAL QUALITY. On June 30, 1999, we finalized the acquisition of GM Group, Inc., the largest, most advanced, and most complete information systems services organization in the Caribbean Basin. With offices in San Juan, Caracas, Santo Domingo and Miami, GM Group today offers an array of IT services in 10 Latin American countries and Puerto Rico. GM Group has been successfully and consistently fulfilling the information systems needs of banks, public utilities, insurance companies, universities, government agencies, service companies, manufacturers, retailers and other clients for over 30 years. Puerto Rico is part of the nationwide Electronic Benefits Transfer (EBT) program, which seeks to deliver federal government benefits electronically to improve cost efficiencies and increase convenience. This year, GM Group was awarded the contract to be the federal government's local partner in the processing of all related transactions and launched a pilot program. This initiative is very much in line with our strategy of transforming Puerto Rico's payment system. GM Group will allow us to remain in the vanguard of all aspects of information systems and to expand our electronic processing businesses in Puerto Rico, the Caribbean and Latin America. [GRAPH] EXCEL While our strategic plan is a reflection of our shared vision, our values dictate our way of doing business. One of these values calls for a passion for excellence. To achieve our strategic goals we need to have an organization focused on quality. Therefore, we are constantly reinforcing the quality of our organization to develop an infrastructure that affords us the tools to realize our vision. The success of our business is founded on people. Recognizing the importance compensation has on attracting and retaining the best talent, we are in the process of re-evaluating our compensation and benefits system for most subsidiaries. The new options will allow us to offer more benefits to our employees in a more efficient manner. They will also afford us the internal flexibility to adapt to the specific characteristics of each market. 14 18 Achieving excellence demands continuous learning. To ensure that our employees continue to develop the skills and abilities needed to excel in their jobs, we emphasize in-job training and professional preparation. Through our Corporate Development Center, established in 1992, this year we focused our efforts on five areas: credit review and analysis, managerial skills, sales, customer service and information systems. This was done in response to the evolution of our industry, and will better prepare our employees to tend to our customers' needs. Technology allows us to have better, stronger relationships with our customers. We have expanded the technological capabilities of our systems to process transactions faster and more efficiently. We have also equipped our employees with the right tools to tend to our clients through all our delivery channels. We have also improved our customer data bases to expand our understanding of our customers and better develop products and services to satisfy their needs. Our expansion and diversification have given the Corporation greater reach and potential for growth, and as we branch out we place special efforts to unite under a common identity. Thus, last year we again prioritized efforts to integrate new subsidiaries into our corporate culture. We want the new members of Popular, Inc. to adopt as their own the great tradition that we uphold, and to enrich it with their unique contributions. As with previous acquisitions we have dedicated the necessary resources to ensure the maximization of the acquisition. In the case of GM Group, the most important elements we acquired are the intellectual property and the human capital. We focused on accommodating employee needs and making the transition as smooth as possible, both for GM and Banco Popular employees. On October 3, 1999, we celebrated Nuestra Gran Reunion (Our Grand Gathering). Attended by over 6,500 Popular, Inc. employees, the meeting was an opportunity for Puerto Rico employees from throughout the Corporation to come together. We reviewed our principles, shared our successes and discussed future opportunities and challenges. I took advantage of the occasion to challenge all of us to continue aspiring for, and seeking, excellence at every level. Excellence in our personal lives, excellence in the service we offer our clients, excellence in our relationship with the community, excellence in adding value to our shareholders. Despite the seriousness of the occasion, the enthusiasm was sincere and truly contagious, because we realized we share the same values, goals and commitment. 15 19 We have a service commitment with our clients. We are focused on satisfying our clients' needs, helping them achieve their goals. We are committed to offering our employees the best and most challenging professional environment, and our employees have a commitment to deliver our promise to our clients. We are committed to our shareholders to honor and respect the trust they place on us, and to follow sound business practices to maximize the value of our investments. We have a commitment to the community to be a responsible corporate citizen, to be an agent of change and foster growth and prosperity. This commitment is shared by the people who serve on our Board of Directors. This year, one of our members, Esteban D. Bird, passed away. Mr. Bird served on the Board of Banco Popular de Puerto Rico since 1991 and on the Board of Banco de Ponce for the two previous years. We extend our condolences to his family, along with our gratitude for his significant contributions to our organization throughout the years. We are extremely proud of our achievements and look forward to the challenges of the future. Our success will continue to be inspired by our values, planned by our vision, and forged by our will. /s/ Richard L. Carrion - -------------------------- RICHARD L. CARRION CHAIRMAN PRESIDENT CHIEF EXECUTIVE OFFICER 16 20 OUR COMMUNITY NEW STRATEGIES TO ENRICH OUR COMMUNITY. Popular, Inc.'s sense of social responsibility dates back more than 100 years, when the founders of Banco Popular de Puerto Rico set to establish an institution that would offer financial services to those who needed them most. But the call to service went beyond that, and translated into significant philanthropic efforts. Banco Popular became an important force in the modernization of Puerto Rican society. Officials and employees proved once and again that the institution's involvement was not limited to offering banking services, but that it had a social mission to accomplish as well. During 1999, more than 100 non-profit institutions benefited from the Bank's donations program, which disbursed more than $1.5 million for civic, community, cultural, educational and sports projects. The donations program focuses mainly on institutions that work for the solution of socioeconomic and housing problems in low-income areas. As we have entered new markets, the reach of our social initiatives has expanded to include the communities we serve outside Puerto Rico. In the United States, we focus our efforts on education and youth-related initiatives, with a strong emphasis on Hispanics and other minority groups. We have formed joint partnerships with national and regional organizations of great drive and credibility, such as the American Red Cross, to extend the impact of our contributions. As in Puerto Rico, an important aspect of our participation in the community is the active involvement of our employees, a direct result of our efforts to promote and support a culture of volunteerism in our organization. In the '70s, as the Bank's social role evolved and grew, and philanthropy established itself as a central part of its creed and set of beliefs, the need for a structure to ensure consistency and continuity was recognized. As a result, in 1979, Rafael Carrion Jr., then Chairman of the Board and former President of the Bank, established the Banco Popular Foundation to institutionalize the Bank's commitment to the community. Thus, throughout the last two decades, our donations program and the Banco Popular Foundation have been a source of significant support and funding for many projects and institutions in the communities we serve. 17 21 FOUNDATION THE BANCO POPULAR FOUNDATION HAS BEEN CREATED TO SUPPORT EFFORTS DEDICATED TO IMPROVE THE QUALITY OF LIFE FOR PUERTO RICANS. IT FULFILLS ITS MISSION BY PROMOTING IN THE COMMUNITY A GENUINE ASPIRATION FOR EXCELLENCE, AND INSPIRING IN OUR YOUTH A SENSE OF FULFILLMENT. [GRAPH] Because initiatives that broaden our youth's intellectual and spiritual horizons are the foundation for a better society, we have focused our efforts on education. More than 60 institutions have benefited from the Foundation's support. For example, in 1999, we made possible the establishment of a music room at the Escuela Libre de Musica Ernesto Ramos Antonini. This music room will provide these gifted students state-of-the-art equipment to further their studies. Another important initiative was the renovation of the library at the Escuela Central de Artes Visuales (Central Visual Arts School), which will be named in honor of Rafael Carrion Jr., a graduate of that high school. The Foundation is committed to facilitating access to education to students who have demonstrated outstanding academic talent and dedication. The Rafael Carrion Jr. Scholarship Fund, established in 1992, has granted a total of 554 scholarships to help defray college education costs for the children of our employees and retirees. Another nine scholarships have been awarded to Puerto Rican students to study at the Wharton School of the University of Pennsylvania. We also seek to foster the preservation of our popular culture, heritage and values. An annual musical production is an important part of these efforts, which also generate funds to support related initiatives and institutions. The 1999 production, Con la Musica por Dentro: Cien Anos de Historia, provided a lively overview of music in Puerto Rico during the century. Students from the Central Visual Arts School were chosen to design the promotion materials. The Rafael Carrion Pacheco Exhibition Hall commemorated its 10th anniversary during the year. In the last decade, it has presented important exhibitions and forums about matters relevant to our culture and social reality. The most recent exhibition, EntreSiglos Puerto Rico 1890-1910, documented daily life at the turn of the century. It attracted a record attendance, with more than 18,000 visitors during its year-long presentation. 18 22 ENRICH DURING THE LAST 20 YEARS, WE HAVE SUPPORTED OVER 200 ORGANIZATIONS THAT PROMOTE COMMUNITY DEVELOPMENT, EDUCATION, SOCIAL WELFARE, SPORTS AND CULTURE. AIDS FOUNDATION AMERICAN CANCER SOCIETY AMERICAN RED CROSS ANA G. MENDEZ FOUNDATION BILL'S KITCHEN BOYS AND GIRLS CLUBS BOY SCOUTS OF AMERICA CATHOLIC UNIVERSITY OF PUERTO RICO EASTER SEAL SOCIETY FONDITA DE JESUS SOUP KITCHEN HEAD START PROGRAMS INTER AMERICAN UNIVERSITY OF PUERTO RICO JANE STERN DORADO COMMUNITY LIBRARY JUAN DOMINGO EN ACCION COMMUNITY PROGRAM LITTLE LEAGUES MUSCULAR DYSTROPHY ASSOCIATION NATIONAL COALITION FOR THE HOMELESS PARALYZED VETERANS OF AMERICA PENINSULA DE CANTERA RESIDENTS COUNCIL PUERTO RICO COMMUNITY FOUNDATION PUERTO RICO CONSERVATORY OF MUSIC PUERTO RICO GOLF ASSOCIATION PUERTO RICO SYMPHONY ORCHESTRA RONALD MCDONALD PUERTO RICO CHAPTER SACRED HEART UNIVERSITY SALVATION ARMY SAN FRANSICO EDUCATIONAL CENTER UNITED WAY UNIVERSITY OF PUERTO RICO YMCA The past 20 years have given us the opportunity to strengthen the Foundation enough to convert it into the Corporation's philanthropic arm. These years have also given us the insight to refine our vision and chart the Foundation's future course. As part of this process, we have embraced excellence as part of our philanthropic goals. While we work in our traditional areas of focus, we will seek to promote excellence by instilling the value of aspiring and seeking excellence in all our community endeavors. Consistent with the Foundation's new direction, we redefined our mission and identified key areas in which we would focus our efforts: The Banco Popular Foundation has been created to support efforts dedicated to improve the quality of life for Puerto Ricans. It fulfills its mission by promoting in the community a genuine aspiration for excellence, and inspiring in our youth a sense of fulfillment. To fulfill our mission, we will continue providing the financial support that is crucial for endeavors of this sort. However, recognizing the need for technical and managerial assistance as much as grant dollars, we will promote a more active approach, prompting others who also share our vision and passion for excellence to become directly involved with the causes they support. At Our Grand Gathering of Popular, Inc.'s employees in Puerto Rico, special emphasis was placed on the Corporation's long-standing commitment and sense of social responsibility to the communities it serves. We made a direct appeal to all employees to get involved, to be an active agent of change and progress. Therefore, we will direct our efforts more and more to provide for employee involvement, giving them the opportunity to enhance their vision of excellence, share it with others and promote them in our communities. 19 23 MANAGEMENT SENIOR MANAGEMENT COUNCIL POPULAR, INC. [PHOTO] RICHARD L. CARRION CHAIRMAN PRESIDENT CHIEF EXECUTIVE OFFICER [PHOTO] [PHOTO] DAVID H. CHAFEY, JR. JORGE A. JUNQUERA SENIOR EXECUTIVE VICE PRESIDENT SENIOR EXECUTIVE VICE PRESIDENT RETAIL BANKING CHIEF FINANCIAL OFFICER [PHOTO] [PHOTO] MARIA ISABEL P. DE BURCKHART ROBERTO R. HERENCIA EXECUTIVE VICE PRESIDENT EXECUTIVE VICE PRESIDENT ADMINISTRATION NORTH AMERICA [PHOTO] [PHOTO] LARRY B. KESLER HUMBERTO MARTIN EXECUTIVE VICE PRESIDENT EXECUTIVE VICE PRESIDENT RETAIL CREDIT OPERATIONS [PHOTO] [PHOTO] EMILIO E. PINERO FERRER, ESQ. CARLOS ROM JR. EXECUTIVE VICE PRESIDENT EXECUTIVE VICE PRESIDENT COMMERCIAL BANKING CARIBBEAN AND LATIN AMERICAN EXPANSION [PHOTO] [PHOTO] CARLOS J. VAZQUEZ BRUNILDA SANTOS DE ALVAREZ, ESQ. EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT RISK MANAGEMENT GENERAL COUNSEL 20 24 MANAGEMENT GROUP POPULAR, INC. PUERTO RICO Valentino I. McBean Jorge R. Hernandez, Esq. Orlando Berges Virgin Islands Region Electronic Banking Finance and Administration BANCO POPULAR DE PUERTO RICO Richard L. Carrion COMMERCIAL BANKING GROUP Hector Torres L. Gene Beube Chairman Emilio E. Pinero Ferrer, Esq. Security Risk Management President Chief Executive Officer Maria M. Fuentes RISK MANAGEMENT GROUP Emily Arean Structured Finance Carlos J. Vazquez Human Resources OFFICE OF THE PRESIDENT Jesus Aldarondo Tere Loubriel Arnaldo Soto Couto Operational Risk Manuel Chinea Year 2000 Office Construction Loans Management Marketing Ramon D. Lloveras, Esq. Cynthia Toro Jose A. Mendez Victor Perez Legal Division Business Banking General Auditor Operations RETAIL BANKING GROUP Ricardo Toro Dianna Soler, Esq. Jose Riera David H. Chafey Jr. Corporate Banking Corporate Compliance Popular Cash Express Jorge Biaggi FINANCIAL MANAGEMENT GROUP Felix Villamil Donald R. Simanoff Hato Rey Region Jorge A. Junquera Credit Risk Management Consumer Lending Francisco Cestero Richard Barrios Other Subsidiaries Vernon V. Aguirre Ponce Region Investments and Treasury POPULAR MORTGAGE, INC. California Region Silvio Lopez Felix Leon Luis R. Cintron, Esq. Mercedes F. McCall Eastern Region Trust POPULAR LEASING & RENTAL, INC. Florida Region Andres F. Morrell Carlos J. Mangual Amilcar L. Jordan, Esq. William Sperling Caguas Region Comptroller POPULAR FINANCE, INC. Illinois Region Edgardo Novoa Wilbert Medina Ivan Pagan Jose A. Torres Arecibo/Manati Region Acquisitions and Corporate POPULAR SECURITIES, INC. New York/New Jersey Region Investments Kenneth W. McGrath Maritza Mendez Javier Ubarri Rio Piedras Region ADMINISTRATION GROUP GM GROUP, INC. Texas Region Maria Isabel P. de Burckhart Julio J. Pascual Miguel Ripoll Other Subsidiaries San Juan Region Ginoris Lopez-Lay LEVITT MORTGAGE EQUITY ONE, INC. Strategic Planning Silvio Lopez C.E. (Bill) Williams Carlos Rodriguez and Marketing Western Region UNITED STATES POPULAR CASH EXPRESS, INC. Lourdes Perez Diaz Gary Gagerman Eli Sepulveda Jr. Public Relations and BANCO POPULAR Bayamon Region Communications NORTH AMERICA, INC. POPULAR LEASING, U.S.A. Richard L. Carrion Bruce D. Horton Juan Guerrero Luz M. Tous de Torres Chairman Financial and Investment Corporate Real Estate CARIBBEAN AND LATIN AMERICA Services Jorge A. Junquera Human Resources President Carlos Rom Jr. Nestor O. Rivera Retail Banking OPERATIONS GROUP Roberto R. Herencia BANCO FIDUCIARIO Humberto Martin Chief Operating Officer Jorge J. Besosa Lizzie Rosso Alternative Delivery Segundo Bernier ATH DOMINICANA Channels Operations Miguel Gil-Mejia RETAIL CREDIT GROUP Victor V. Echevarria ATH COSTA RICA Larry B. Kesler Information Technology Luis Diego Escalante Linda C. Colon Ileana M. Gonzalez Individual Lending Operational Financial Support Raul Colon Mortgage Servicing
21 25 BOARDS OF DIRECTORS POPULAR, INC. Julio E. Vizcarrondo Jr. Francisco J. Carreras BANCO POPULAR NORTH AMERICA Richard L. Carrion President Educator Richard L. Carrion Chairman of the Board Chief Executive Officer Executive Director Chairman of the Board President Desarrollos Metropolitanos, S.E. Fundacion Angel Ramos, Inc. Chief Executive Officer Jorge A. Junquera Samuel T. Cespedes, Esq. David H. Chafey Jr. President Alfonso F. Ballester Secretary Senior Executive Vice President Banco Popular North America Vice Chairman of the Board Board of Directors Banco Popular de Puerto Rico President Roberto R. Herencia Ballester Hermanos, Inc. Brunilda Santos de Hector R. Gonzalez Chief Operating Officer Alvarez, Esq. President Banco Popular North America Antonio Luis Ferre Assistant Secretary Chief Executive Officer Vice Chairman of the Board Board of Directors TPC Communications Francisco M. Rexach Jr. President of PR, Inc. President El Nuevo Dia Ramon D. Lloveras, Esq. Capital Assets, Inc. Assistant Secretary Jorge A. Junquera Juan J. Bermudez Board of Directors Senior Executive Vice President Richard Speer Partner Banco Popular de Puerto Rico President Bermudez & Longo, S.E. Ernesto N. Mayoral, Esq. Speer & Associates, Inc. Assistant Secretary Manuel Morales Jr. Francisco J. Carreras Board of Directors President Alfonso F. Ballester Educator Parkview Realty, Inc. President Executive Director BANCO POPULAR DE PUERTO RICO Ballester Hermanos, Inc. Fundacion Angel Ramos, Inc. Richard L. Carrion Alberto M. Paracchini Chairman of the Board Private Investor Felix J. Serralles Jr. David H. Chafey Jr. President President Senior Executive Vice President Chief Executive Officer Francisco M. Rexach Jr. Chief Executive Officer Popular, Inc. President Destileria Serralles, Inc. Alfonso F. Ballester Capital Assets, Inc. Hector R. Gonzalez Vice Chairman of the Board Julio E. Vizcarrondo Jr. President President J. Adalberto Roig Jr. President Chief Executive Officer Ballester Hermanos, Inc. Chairman Chief Executive Officer TPC Communications Antonio Roig Sucesores, Inc. Desarrollos Metropolitanos, S.E. of PR, Inc. Antonio Luis Ferre Vice Chairman of the Board Felix J. Serralles Jr. Lcda. Brunilda Santos de Jorge A. Junquera President President Alvarez, Esq. Senior Executive Vice President El Nuevo Dia Chief Executive Officer Secretary Popular, Inc. Destileria Serralles, Inc. Board of Directors Juan A. Albors Hernandez Manuel Morales Jr. Chairman Julio E. Vizcarrondo Jr. President President President Parkview Realty, Inc. Chief Executive Officer Chief Executive Officer Albors Development Corp. Desarrollos Metropolitanos, S.E. Alberto M. Paracchini Private Investor Salustiano Alvarez Mendez Samuel T. Cespedes, Esq. President Secretary Francisco M. Rexach Jr. Mendez & Company, Inc. Board of Directors President Capital Assets, Inc. Jose A. Bechara Bravo Brunilda Santos de Alvarez, President Esq. J. Adalberto Roig Jr. Empresas Bechara Inc. Assistant Secretary Chairman Board of Directors Antonio Roig Sucesores, Inc. Juan J. Bermudez Partner Ramon D. Lloveras, Esq. Felix J. Serralles Jr. Bermudez & Longo, S.E. Assistant Secretary President Board of Directors Chief Executive Officer Destileria Serralles, Inc. Ernesto N. Mayoral, Esq. Assistant Secretary Board of Directors
22 26 FINANCIAL REVIEW AND SUPPLEMENTARY INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations F-2 Statistical Summaries F-24 FINANCIAL STATEMENTS Report of Independent Accountants F-29 Consolidated Statements of Condition as of December 31, 1999 and 1998 F-30 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1999 F-31 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1999 F-32 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1999 F-33 Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 1999 F-34 Notes to Consolidated Financial Statements F-35
F-1 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial discussion contains an analysis of the consolidated financial position and financial performance of Popular, Inc. and its subsidiaries (the Corporation) and should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. The Corporation is a bank holding company, which offers a wide range of products and services through its subsidiaries and is engaged in the following businesses: - - Commercial Banking - Banco Popular de Puerto Rico (BPPR), Banco Popular North America (BPNA), Banco Popular, N.A. (Texas), merged into BPNA on January 1, 2000, and Banco Fiduciario, S.A. (BF) - - Lease Financing - Popular Leasing and Rental, Inc. and Popular Leasing, U.S.A. - - Consumer and Mortgage Banking - Popular Mortgage, Inc., Equity One, Inc., Popular Finance, Inc. and Newco Mortgage Holding Company (d/b/a Levitt Mortgage, Inc.) - - Broker/Dealer - Popular Securities Inc. - - ATM Processing and Information Technology Services and Products - ATH Costa Rica and GM Group - - Retail Financial Services - Popular Cash Express, Inc. OVERVIEW During 1999, Europe finally achieved monetary union with the widely expected Euro, while in the U.S., an early wave of refinancing and an outstanding stock market performance generated expanding wealth, which continued to fuel demand. The economy grew at a faster pace than anticipated, prompting the Federal Reserve in July to begin a tightening cycle. In fact, by the end of 1999, Gross Domestic Product (GDP) had grown 4.2%, the target Fed Funds rate was at 5.50% and the Fed was expecting to raise rates further. Popular, Inc. began 1999 with the corporate reorganization of its U.S. banking subsidiaries, consolidating most banking operations within the U.S. mainland into one legal entity, Banco Popular North America, with offices in Florida, California, New York, New Jersey and Illinois. This new structure facilitates the communication and geographic expansion, while at the same time increases efficiency and provides more flexibility to the Corporation. Furthermore, in January 2000, Banco Popular, N.A. (Texas) became part of Banco Popular North America. On March 2, 1999, the Corporation acquired 9.99% of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) from the Government of Puerto Rico. As part of the transaction GTE, a telecommunications company, acquired a 40% share of TELPRI, while the government retained 44% ownership. With this investment, the Corporation strengthened its ties with the future of telecommunications in Puerto Rico. Later during the year, the Corporation acquired GM Group, Inc., a leading company in information technology services and products in Puerto Rico and the Caribbean, with offices in San Juan, Caracas, Santo Domingo and Miami, servicing customers in ten countries in America. Also, the Corporation acquired 85% of Levitt Mortgage, a mortgage banking organization with operations in Puerto Rico, as part of the strategic initiative of enhancing its mortgage business in Puerto Rico. In addition to the acquisitions mentioned above, the Corporation increased its presence in its established Hispanic markets, with three additional branches in the United States and one in Puerto Rico. Equity One, the Corporation's consumer and mortgage financing subsidiary in the U.S. mainland, had 10 more offices at the end of 1999 for a total of 138 offices in 32 states. Continuing with the Corporation's objective of penetrating the unbanked segment, during 1999 Popular Cash Express acquired 26 check cashing outlets, opened 14 stores and operated 10 additional mobile check-cashing locations. All these facilities offer services such as check cashing, money transfers, money orders and processing of payments. TABLE A Components of Net Income as a Percentage of Average Total Assets
For the Year - --------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- Net interest income 4.01% 4.27% 4.26% 4.18% 4.14% Provision for loan losses (0.63) (0.67) (0.60) (0.55) (0.46) Securities and trading gains 0.06 0.03 0.02 0.05 Other income 1.57 1.36 1.31 1.24 1.18 - --------------------------------------------------------------------------------------------------------- 4.95 5.02 5.00 4.89 4.91 Operating expenses (3.52) (3.52) (3.46) (3.32) (3.45) - --------------------------------------------------------------------------------------------------------- Net income before tax and minority interest 1.43 1.50 1.54 1.57 1.46 Income tax (0.36) (0.36) (0.40) (0.43) (0.42) Net loss of minority interest 0.01 - --------------------------------------------------------------------------------------------------------- Net income 1.08% 1.14% 1.14% 1.14% 1.04% =========================================================================================================
F-2 28 TABLE B Changes in Net Income and Earnings per Common Share
1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per common share amounts) DOLLARS PER SHARE Dollars Per share Dollars Per share - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock for prior year $ 223,998 $ 1.65 $ 201,215 $ 1.50 $ 176,800 $ 1.34 Increase (decrease) from changes in: Other operating income 95,200 0.70 37,264 0.28 39,126 0.30 Net interest income 80,726 0.60 89,057 0.66 102,642 0.78 Net loss of minority interest 2,126 0.02 328 Trading account profit (5,235) (0.04) (281) 3,826 0.03 Gain on sale of investment securities (8,295) (0.06) 6,665 0.05 (826) (0.01) Income tax (10,449) (0.08) (210) (3,584) (0.03) Provision for loan losses (11,735) (0.09) (26,606) (0.20) (21,768) (0.16) Operating expenses (117,128) (0.86) (83,434) (0.62) (95,001) (0.72) - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal 249,208 1.84 223,998 1.67 201,215 1.53 Change in average common shares* (0.02) (0.03) - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 249,208 1.84 $ 223,998 $ 1.65 $ 201,215 $ 1.50 ==================================================================================================================================
* Reflects the effect of the issuance of shares of common stock for the acquisitions completed, net of the shares repurchased, plus the shares issued through the Dividend Reinvestment Plan in the years presented. The average common shares outstanding for the years presented above were 135,585,634 for 1999, 135,532,086 for 1998, and 134,036,964 for 1997, after restating for the stock split effected in the form of a dividend of one share for each share outstanding on July 1, 1998. - -------------------------------------------------------------------------------- The Corporation's financial results for 1999 continued its increasing trend. Net income amounted to $257.6 million, exceeding the $232.4 million reported in 1998 by $25.2 million or 10.9%, while earnings per common share (EPS) for the year ended 1999 were $1.84, or 11.5% higher than the $1.65 reported for 1998. Popular, Inc.'s earnings in 1999 reflected an increase of $80.7 million in net interest income as well as a rise of $81.7 million in non-interest income. The increase in net interest income mostly resulted from the growth in average earning assets, particularly average loans, while the growth in non-interest income reflected our strategic objective of diversifying sources of revenue. These increases were tempered by an increase in operating expenses of $117.1 million, a higher provision for loan losses of $11.7 million and a rise of $10.4 million in income taxes. The increase in operating expenses reflected the Corporation's business growth and expansion, including the impact of the acquisitions performed in the latter part of 1998 and during 1999, while the higher provision was necessary to provide for the increased levels in the loan portfolio, net charge-offs and non-performing assets. The Corporation's return on average assets (ROA) for 1999 was 1.08% compared with 1.14% in 1998, while the return on common stockholders' equity was 15.45% in 1999 compared with 15.41% in 1998. Table A presents a five-year summary of the components of net income as a percentage of average assets. Total assets amounted to $25.5 billion at December 31, 1999, compared with $23.2 billion a year earlier. Loans were $14.9 billion at December 31, 1999, an increase of 14.0% compared with $13.1 billion at the same date in 1998. Loan growth was led by increases in the commercial and mortgage loan portfolios. Total deposits amounted to $14.2 billion as of December 31, 1999, compared with $13.7 billion at the same date in 1998. The rise in deposits was principally reflected in time deposits. Stockholders' equity totaled $1.66 billion at December 31, 1999 compared with $1.71 billion a year earlier. At December 31, 1999, the market value and book value per share of the Corporation's common stock was $27.94 and $11.51, respectively, compared with $34.00 and $11.86 at the same date in 1998. On August 12, 1999, the Board of Directors declared a quarterly cash dividend of $0.16 per common share for the third quarter of 1999. This represented a 14.3% increase over the $0.14 per share paid in previous quarterly cash dividends. Most of the acquisitions completed in the past years involved the payment of a premium which is being amortized over periods ranging from 4 to 15 years. Cash-based earnings, net income adjusted for the impact of such amortization, may be more indicative of the Corporation's ability to generate income. This method of presentation is not in accordance with generally accepted accounting principles and is included here for illustrative purposes only. F-3 29 TABLE C Selected Financial Data
- -------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- CONDENSED INCOME STATEMENTS Interest income $ 1,851,670 $ 1,651,703 $ 1,491,303 Interest expense 897,932 778,691 707,348 - -------------------------------------------------------------------------------------------------------------------- Net interest income 953,738 873,012 783,955 Securities and trading (losses) gains (944) 12,586 6,202 Operating income 373,860 278,660 241,396 Operating expenses 837,482 720,354 636,920 Provision for loan losses 148,948 137,213 110,607 Net loss of minority interest 2,454 328 Income tax 85,120 74,671 74,461 Dividends on preferred stock of BPPR Cumulative effect of accounting changes - -------------------------------------------------------------------------------------------------------------------- Net income $ 257,558 $ 232,348 $ 209,565 ==================================================================================================================== Net income applicable to common stock $ 249,208 $ 223,998 $ 201,215 ==================================================================================================================== PER COMMON SHARE DATA(*) Net income (basic and diluted) $ 1.84 $ 1.65 $ 1.50 Dividends declared 0.60 0.50 0.40 Book value 11.51 11.86 10.37 Market price 27.94 34.00 24.75 Outstanding shares: Average 135,585,634 135,532,086 134,036,964 End of period 135,654,292 135,637,327 135,365,408 AVERAGE BALANCES Net loans $ 13,901,290 $ 11,930,621 $ 10,548,207 Earning assets 22,244,959 19,261,949 17,409,634 Total assets 23,806,372 20,432,382 18,419,144 Deposits 13,791,338 12,270,101 10,991,557 Subordinated notes 125,000 125,000 125,000 Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 122,877 Total stockholders' equity 1,712,792 1,553,258 1,370,984 PERIOD END BALANCES Net loans $ 14,907,754 $ 13,078,795 $ 11,376,607 Allowance for loan losses 292,010 267,249 211,651 Earning assets 23,754,620 21,591,950 18,060,998 Total assets 25,460,539 23,160,357 19,300,507 Deposits 14,173,715 13,672,214 11,749,586 Subordinated notes 125,000 125,000 125,000 Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 150,000 Total stockholders' equity 1,660,986 1,709,113 1,503,092 SELECTED RATIOS Net interest yield (taxable equivalent basis) 4.65% 4.91% 4.84% Return on average total assets 1.08 1.14 1.14 Return on average common stockholders' equity 15.45 15.41 15.83 Dividend payout ratio to common stockholders 31.56 28.42 25.19 Efficiency ratio 63.08 62.55 62.12 Overhead ratio 48.71 49.15 49.66 Tier I capital to risk-adjusted assets 10.17 10.82 12.17 Total capital to risk-adjusted assets 12.29 13.14 14.56
* Per share data is based on the average number of shares outstanding during the periods, except for the book value which is based on total shares at the end of the periods. All per share data has been adjusted to reflect two stock splits effected in the form of a dividend on July 1, 1998 and July 1, 1996. F-4 30
Year ended December 31, - ------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------ $ 1,272,853 $ 1,105,807 $ 887,141 $ 772,136 $ 740,354 $ 794,943 $ 565,807 591,540 521,624 351,633 280,008 300,135 387,134 281,561 - ------------------------------------------------------------------------------------------------------------------ 681,313 584,183 535,508 492,128 440,219 407,809 284,246 3,202 7,153 451 1,418 625 19,376 91 202,270 166,185 140,852 123,762 123,879 112,398 70,865 541,919 486,833 447,846 412,276 366,945 345,738 229,563 88,839 64,558 53,788 72,892 97,633 121,681 53,033 70,877 59,769 50,043 28,151 14,259 6,793 9,240 385 770 770 807 6,185 - ------------------------------------------------------------------------------------------------------------------ $ 185,150 $ 146,361 $ 124,749 $ 109,404 $ 85,116 $ 64,564 $ 63,366 ================================================================================================================== $ 176,800 $ 138,011 $ 120,504 $ 109,404 $ 85,116 $ 64,564 $ 63,366 ================================================================================================================== $ 1.34 $ 1.05 $ 0.92 $ 0.84 $ 0.70 $ 0.54 $ 0.79 0.35 0.29 0.25 0.23 0.20 0.20 0.20 8.80 7.91 6.87 6.38 5.76 5.25 4.92 16.88 9.69 7.04 7.75 7.57 4.82 4.00 132,044,624 131,632,600 131,192,972 130,804,944 121,845,976 120,142,404 80,467,880 132,177,012 131,794,544 131,352,512 130,929,692 130,619,456 120,375,408 119,769,624 $ 9,210,964 $ 8,217,834 $ 7,107,746 $ 5,700,069 $ 5,150,328 $ 5,302,189 $ 3,377,463 15,306,311 13,244,170 11,389,680 9,894,662 8,779,981 8,199,195 5,461,938 16,301,082 14,118,183 12,225,530 10,683,753 9,528,518 8,944,357 5,836,749 10,461,796 9,582,151 8,837,226 8,124,885 7,641,123 7,198,187 5,039,422 147,951 56,850 56,082 73,967 85,585 94,000 50,000 1,193,506 1,070,482 924,869 793,001 668,990 610,641 407,611 $ 9,779,028 $ 8,677,484 $ 7,781,329 $ 6,346,922 $ 5,252,053 $ 5,195,557 $ 5,365,917 185,574 168,393 153,798 133,437 110,714 94,199 89,335 15,484,454 14,668,195 11,843,806 10,657,994 9,236,024 8,032,556 8,219,279 16,764,103 15,675,451 12,778,358 11,513,368 10,002,327 8,780,282 8,983,624 10,763,275 9,876,662 9,012,435 8,522,658 8,038,711 7,207,118 7,422,711 125,000 175,000 50,000 62,000 74,000 94,000 94,000 1,262,532 1,141,697 1,002,423 834,195 752,119 631,818 588,884 4.77% 4.74% 5.06% 5.50% 6.11% 5.97% 6.30% 1.14 1.04 1.02 1.02 0.89 0.72 1.09 16.17 14.22 13.80 13.80 12.72 10.57 15.55 24.63 26.21 27.20 25.39 28.33 34.13 25.33 61.33 64.88 66.21 66.94 65.05 66.46 64.65 49.38 53.66 57.24 58.34 55.07 52.47 55.80 11.63 11.91 12.85 12.29 12.88 11.01 10.10 14.18 14.65 14.25 13.95 14.85 13.35 12.74
F-5 31 TABLE D Net Interest Income - Taxable Equivalent Basis
- ---------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) (In thousands) Variance Average Volume Average Yields Interest Attributable to 1999 1998 Variance 1999 1998 Variance 1999 1998 Variance Rate Volume - -------------------------------------------------- --------------------------------------------------- $ 681 $ 754 $ (73) 4.91% 4.88% 0.03% Money market investment $ 33,434 $ 36,781 $ (3,347) $ (1,111) $ (2,236) 7,349 6,290 1,059 6.79 7.13 (0.34) Investment securities 499,046 448,426 50,620 (18,929) 69,549 314 287 27 6.56 6.60 (0.04) Trading 20,584 18,943 1,641 (110) 1,751 - -------------------------------------------------- --------------------------------------------------- 8,344 7,331 1,013 6.63 6.88 (0.25) 553,064 504,150 48,914 (20,150) 69,064 - -------------------------------------------------- --------------------------------------------------- Loans: 6,378 5,221 1,157 9.13 9.24 (0.11) Commercial and construction 582,571 482,234 100,337 (5,358) 105,695 690 628 62 12.50 12.73 (0.23) Leasing 86,291 79,929 6,362 (1,494) 7,856 3,605 3,000 605 8.04 8.57 (0.53) Mortgage 289,757 256,902 32,855 (16,590) 49,445 3,228 3,082 146 13.06 12.97 0.09 Consumer 421,711 399,784 21,927 (569) 22,496 - -------------------------------------------------- --------------------------------------------------- 13,901 11,931 1,970 9.93 10.22 (0.29) 1,380,330 1,218,849 161,481 (24,011) 185,492 - -------------------------------------------------- --------------------------------------------------- $22,245 $19,262 $2,983 8.69% 8.95% (0.26)% TOTAL EARNING ASSETS $1,933,394 $1,722,999 $210,395 $(44,161) $254,556 ================================================== Interest bearing deposits: =================================================== $ 1,746 $ 1,460 $ 286 3.08% 3.35% (0.27)% NOW and money market $ 53,687 $ 48,846 $ 4,841 $ (3,922) $ 8,763 4,132 3,761 371 2.91 3.06 (0.15) Savings 120,259 114,958 5,301 (6,432) 11,733 4,874 4,437 437 5.71 5.58 0.13 Time deposits 278,269 247,688 30,581 12,989 17,592 - -------------------------------------------------- --------------------------------------------------- 10,752 9,658 1,094 4.21 4.26 (0.05) 452,215 411,492 40,723 2,635 38,088 - -------------------------------------------------- --------------------------------------------------- 5,993 4,623 1,370 5.30 5.45 (0.15) Short-term borrowings 317,646 251,724 65,922 (6,514) 72,436 1,833 1,646 187 6.99 7.01 (0.02) Medium and long-term debt 128,071 115,475 12,596 (203) 12,799 - -------------------------------------------------- --------------------------------------------------- TOTAL INTEREST BEARING 18,578 15,927 2,651 4.83 4.89 (0.06) LIABILITIES 897,932 778,691 119,241 (4,082) 123,323 3,039 2,612 427 Demand deposits 628 723 (95) Other sources of funds - -------------------------------------------------- $22,245 $19,262 $2,983 4.04% 4.04% (0.00%) ================================================== 4.65% 4.91% (0.26%) NET INTEREST MARGIN AND ====================== NET INTEREST INCOME 1,035,462 944,308 91,154 $(40,079) $131,233 3.86% 4.06% (0.20%) NET INTEREST SPREAD ================== ====================== TAXABLE EQUIVALENT ADJUSTMENT 81,724 71,296 10,428 ------------------------------- NET INTEREST INCOME $ 953,738 $ 873,012 $ 80,726 ===============================
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. - ------------------------------------------------------------------------------
Cash-based earnings 1999 1998 Change % - ------------------------------------------------------------------------------ (Dollars in thousands) Net income $ 257,558 $ 232,348 10.9% Add: Amortization of intangibles 31,788 27,860 14.1 Less: Tax effect (1,537) (2,146) (28.4) - ------------------------------------------------------------------------------ Cash-based earnings $ 287,809 $ 258,062 11.5% ==============================================================================
The Corporation's transition to the Year 2000 occurred without experiencing any significant problems in its computer systems and other date sensitive operating equipment, and business is proceeding as usual throughout all its subsidiaries. The ATM network and point-of-sale (POS) terminals, as well as all branches continue operating normally after the commencement of the Year 2000. The Corporation will continue to monitor other critical dates in the future to fulfill this corporate-wide effort that actively began in 1997. Further discussion of operating results and the Corporation's financial condition is presented in the following narrative and tables. In addition, Table C provides selected financial data for the past 10 years. This report 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 F-6 32
Year ended December 31, - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) (In thousands) Variance Average Volume Average Yields Interest Attributable to 1998 1997 Variance 1998 1997 Variance 1998 1997 Variance Rate Volume - -------------------------------------------------- --------------------------------------------------- $ 754 $ 632 $ 122 4.88% 5.36% (0.48)% Money market investment $ 36,781 $ 33,923 $ 2,858 $ (4,049) $ 6,907 6,290 5,928 362 7.13 6.90 0.23 Investment securities 448,426 409,127 39,299 13,629 25,670 287 302 (15) 6.60 6.55 0.05 Trading 18,943 19,769 (826) 123 (949) - -------------------------------------------------- --------------------------------------------------- 7,331 6,862 469 6.88 6.75 0.13 504,150 462,819 41,331 9,703 31,628 - -------------------------------------------------- --------------------------------------------------- Loans: 5,221 4,427 794 9.24 9.26 (0.02) Commercial and construction 482,234 409,965 72,269 (1,092) 73,361 628 554 74 12.73 12.99 (0.26) Leasing 79,929 72,029 7,900 (1,454) 9,354 3,000 2,699 301 8.57 8.54 0.03 Mortgage 256,902 230,601 26,301 561 25,740 3,082 2,868 214 12.97 13.07 (0.10) Consumer 399,784 374,872 24,912 (8,767) 33,679 - -------------------------------------------------- -------------------------------------------------- 11,931 10,548 1,383 10.22 10.31 (0.09) 1,218,849 1,087,467 131,382 (10,752) 142,134 - -------------------------------------------------- -------------------------------------------------- $19,262 $17,410 $1,852 8.95% 8.90% 0.05% TOTAL EARNING ASSETS $1,722,999 $1,550,286 $172,713 $ (1,049) $173,762 ================================================== Interest bearing deposits: ================================================== $ 1,460 $ 1,281 $ 179 3.35% 3.35% 0.00% NOW and money market $ 48,846 $ 42,917 $ 5,929 $ (78) $ 6,007 3,761 3,393 368 3.06 3.08 (0.02) Savings 114,958 104,404 10,554 (1,161) 11,715 4,437 4,024 413 5.58 5.45 0.13 Time deposits 247,688 219,207 28,481 1,258 27,223 - -------------------------------------------------- -------------------------------------------------- 9,658 8,698 960 4.26 4.21 0.05 411,492 366,528 44,964 19 44,945 - -------------------------------------------------- -------------------------------------------------- 4,623 4,281 342 5.45 5.55 (0.10) Short-term borrowings 251,724 237,738 13,986 (3,978) 17,964 1,646 1,593 53 7.01 6.47 0.54 Medium and long-term debt 115,475 103,082 12,393 8,277 4,116 - -------------------------------------------------- TOTAL INTEREST BEARING -------------------------------------------------- 15,927 14,572 1,355 4.89 4.85 0.04 LIABILITIES 778,691 707,348 71,343 4,318 67,025 2,612 2,294 318 Demand deposits 723 544 179 Other sources of funds - -------------------------------------------------- $19,262 $17,410 $1,852 4.04% 4.06% (0.02)% ================================================== 4.91% 4.84% 0.07% NET INTEREST MARGIN AND ====================== NET INTEREST INCOME 944,308 842,938 101,370 $(5,367) $106,737 4.06% 4.05% 0.01% NET INTEREST SPREAD ================= ====================== TAXABLE EQUIVALENT ADJUSTMENT 71,296 58,983 12,313 ------------------------------- NET INTEREST INCOME $ 873,012 $783,955 $89,057 ===============================
the Corporation'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. EARNINGS ANALYSIS NET INTEREST INCOME Net interest income represents the excess of interest income generated by the Corporation's earning assets over the interest expense on deposits and borrowed funds. It is the main source of earnings of Popular, Inc. The level of net interest income is primarily determined by variations in the volume and mix of earning assets and interest bearing liabilities and changes in their related yields and costs. The latter is principally affected by the repricing characteristics of these assets and liabilities and the prevailing interest rate environment. During the period from 1997 to 1999, the average key index rates, which impact most financial instruments of the Corporation, were as follows: F-7 33
1999 1998 1997 - --------------------------------------------------- Prime rate 8.00% 8.35% 8.44% Fed funds rate 4.95 5.35 5.49 3-month LIBOR 5.42 5.56 5.74 3-month Treasury 4.76 4.89 5.19 2-year Treasury 5.42 5.12 5.97 FNMA 30-year 7.66 7.11 7.90
As further discussed in the Risk Management section, the Corporation has a comprehensive set of policies and procedures that are utilized to monitor and control the risk associated with the composition and repricing of its earning assets and interest bearing liabilities. Net interest income for the year ended December 31, 1999 amounted to $953.7 million, compared with $873.0 million reported in 1998. This represents a 9.2% increase over prior year's results. In 1997, net interest income totaled $784.0 million. Table D presents the different components of net interest income segregated by its major categories. The Corporation's investment and loan portfolios include assets that derive tax-exempt interest income. In order to present the data on a comparable basis, the interest income generated by these assets has been converted to a taxable equivalent basis, using the applicable statutory income tax rates. This adjustment amounted to $81.7 million in 1999, $71.3 million in 1998 and $59.0 million in 1997. The increase in this adjustment experienced during the past years was mostly due to a higher average volume of exempt investments. As a percentage of average earning assets this adjustment has remained relatively stable, averaging 37 basis points in 1999 and 1998 and 34 basis points in 1997. The increase of $91.2 million in net interest income, on a taxable equivalent basis, in 1999 was the net effect of a positive variance of $131.2 million due to a higher volume of average earning assets and a negative variance of $40.0 million due to a lower net interest margin. The increase of $101.4 million in net interest income, on a taxable equivalent basis, from 1997 to 1998 was the result of a positive variance of $106.7 million due to a higher volume of earning assets and a negative variance of $5.3 million due to changes in average yields and costs. In 1998, the variance due to volume was mostly due to a higher volume of loans. The variance due to yields was the result of a lower average yield on loans and a higher cost of interest bearing liabilities, partially offset by a higher yield on investments and a higher volume of non-interest bearing funds. As a result of the above, the Corporation's net interest margin, on a taxable equivalent basis, improved by seven points to 4.91% in 1998, from 4.84% in 1997. The rise in net interest income in 1999 was mostly due to the increase of $3.0 billion or 15.5% experienced in average earning assets from 1998. This increase resulted mainly from the growth of $2.0 billion in the average loan portfolio. Commercial and mortgage loans accounted for 89.4% of the increase in the average loan balance. The increase resulted from the Corporation's sustained business growth and the aggressive marketing campaign to attract mortgage loans. Also, a boom in the construction business in Puerto Rico has increased the family units available in the market, which coupled with the relatively low level of interest rates contributed to the rise in mortgage loans. In addition, the acquisition during the last quarter of 1998 of banking businesses in Illinois, California and the Dominican Republic contributed to the increase in the average loan balance as of December 31, 1999. The yield on average loans decreased by 29 basis points during 1999. This is primarily related to the lower yield generated by mortgage loans as a result of the increase in that portfolio, both new and refinanced loans, and the lower yield on commercial loans due to an environment of lower interest rates as compared with 1998. As shown in Table D, the average volume of the investment portfolio increased by $1.0 billion principally related to greater arbitrage activity during the year. The category that increased the most was U.S. Agency securities, which increased by $1.6 billion over the average balance in 1998. The income derived from these securities is exempt for income tax purposes in Puerto Rico. The average interest yield on investment securities decreased by 34 basis points to 6.79%, from 7.13% reported in 1998, mostly as a result of the lower market rates. As a result of the decreases in the average yield on loans and investment securities, and the changes in the mix of these portfolios, the average yield on earning assets decreased 26 basis points to 8.69% in 1999. Average interest bearing deposits experienced an 11.3% increase during the current year, while average non-interest bearing deposits grew by 16.3%. The rise was mostly related to the increase in time deposits, mainly retail deposits, and average demand deposits. Also, average savings, NOW and money market deposits experienced growth when compared with 1998. Table L presents a detail of average deposits by category. The average cost of interest bearing deposits decreased by five basis points compared with 1998. The decrease in the average cost of interest bearing deposits relates to the lower cost in savings accounts, NOW and money market deposits primarily related to the lower interest rate environment, partially offset by a higher cost in time deposits due in part to the higher cost of longer term money and an increase in rates during the latter part of the year. The increase in the average balance of short-term borrowings, which are mainly comprised of Fed funds, repurchase agreements and commercial paper, was primarily used to fund the growth in the investment portfolio. F-8 34 TABLE E Non-Interest Income
Year ended December 31, - ------------------------------------------------------------------------------------------------------------------------- Five-Year (Dollars in thousands) 1999 1998 1997 1996 1995 C.G.R. - ------------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $118,187 $103,732 $ 94,141 $ 85,846 $ 78,607 10.50% - ------------------------------------------------------------------------------------------------------------------------- Other service fees: Credit card fees and discounts 49,233 36,038 29,437 23,735 20,676 21.47 Debit card fees 22,785 17,702 15,768 10,430 5,425 48.22 Sale and administration of investment products 17,452 11,890 9,557 5,384 2,999 71.10 Check cashing fees 11,999 2,631 414 482 Mortgage servicing fees, net of amortization 11,300 9,131 9,129 7,534 5,956 37.48 Trust fees 9,928 8,873 6,799 6,174 5,851 13.99 Processing fees 8,312 Credit life insurance fees 6,903 8,690 9,537 7,955 5,766 7.14 Other fees 31,815 21,620 18,009 15,377 17,052 14.89 - ------------------------------------------------------------------------------------------------------------------------- Total other service fees 169,727 116,575 98,650 77,071 63,725 27.07 - ------------------------------------------------------------------------------------------------------------------------- Other income 85,946 58,353 48,605 39,353 23,853 36.88 - ------------------------------------------------------------------------------------------------------------------------- Total $373,860 $278,660 $241,396 $202,270 $166,185 21.56% ========================================================================================================================= Non-interest income to average assets 1.57% 1.36% 1.31% 1.24% 1.18% Non-interest income to operating expenses 44.64 38.68 37.90 37.32 34.14 =========================================================================================================================
During the last few months of 1999, the cost of short-term financing in the money markets increased substantially compared with the rates more closely controlled by the Fed. This had an adverse effect on the Corporation's cost of funds primarily during the last quarter, as money market rates increased more than was expected as a result of a tightening policy by the Fed in November. Management believes that this increase was due primarily to substantially greater demand for funding maturing over the year-end, due to Y2K risk. After the year-end, money market rates reverted to more normal levels relative to Fed policy. The Corporation's net interest margin, on a taxable equivalent basis, decreased by 26 basis points as a result of the decrease of 26 basis points experienced in the average yield on earning assets, the increase in relatively high cost funding sources, and to a lesser extent, the impact of the Y2K factor as explained above. PROVISION FOR LOAN LOSSES The provision for loan losses reflects management's assessment of the adequacy of the allowance for loan losses to cover losses inherent in the loan portfolio after taking into account the net charge-offs for the current period and loan impairment. The provision for loan losses in 1999 was $148.9 million, exceeding net charge-offs in 1999 by $24.2 million, compared with a provision of $137.2 million in 1998 and $110.6 million in 1997. The increase in the provision for 1999 is primarily the result of a rise in the Corporation's loan portfolio, increases in net charge-offs and non-performing assets, and current and expected economic conditions. Please refer to the Credit Risk Management and Loan Quality section for a more detailed analysis of the allowance for loan losses, net charge-offs, and credit quality statistics. NON-INTEREST INCOME Non-interest income has become an increasingly important contributor to the growth in the Corporation's revenues. The Corporation has increased its other income by expanding the range of services offered to customers and by building more customer relationships, taking advantage of its technological leadership in the Island and its expansion within and outside Puerto Rico. As shown in Table E, non-interest income, excluding securities and trading gains, grew to $373.9 million in 1999, an increase of $95.2 million or 34.2% from the amount reported in 1998. In 1997, these revenues totaled $241.4 million. As a percentage of average assets, these revenues F-9 35 TABLE F Operating Expenses
Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------- Five-Year (Dollars in thousands) 1999 1998 1997 1996 1995 C.G.R. - --------------------------------------------------------------------------------------------------------------------------- Salaries $289,995 $247,590 $211,741 $185,946 $172,504 12.49% Pension and other benefits 72,820 67,743 69,468 64,609 57,568 9.84 Profit sharing 23,881 22,067 25,684 22,692 19,003 4.45 - --------------------------------------------------------------------------------------------------------------------------- Total personnel costs 386,696 337,400 306,893 273,247 249,075 11.37 - --------------------------------------------------------------------------------------------------------------------------- Equipment expenses 88,334 75,302 66,446 57,186 47,854 15.91 Professional fees 67,955 58,087 46,767 36,953 28,677 20.27 Net occupancy expense 60,814 48,607 39,617 36,899 32,850 16.42 Business promotion 45,938 39,376 33,569 26,229 17,801 23.07 Communications 43,146 36,941 33,325 26,470 23,106 16.27 Other taxes 33,290 32,191 30,283 23,214 20,872 10.94 Amortization of intangibles 31,788 27,860 22,874 18,054 20,204 12.04 Printing and supplies 20,709 17,604 15,539 11,964 11,069 18.62 Other operating expenses: Transportation and travel 10,426 7,968 7,186 5,852 4,424 21.45 FDIC assessment 1,782 1,497 1,499 1,544 10,257 (37.93) All other 46,604 37,521 32,922 24,307 20,644 21.05 - --------------------------------------------------------------------------------------------------------------------------- Subtotal 450,786 382,954 330,027 268,672 237,758 15.21 - --------------------------------------------------------------------------------------------------------------------------- Total $837,482 $720,354 $636,920 $541,919 $486,833 13.34% =========================================================================================================================== Efficiency ratio 63.08% 62.55% 62.12% 61.33% 64.88% Personnel costs to average assets 1.62 1.65 1.67 1.68 1.76 Operating expenses to average assets 3.52 3.53 3.46 3.32 3.45 Assets per employee (in millions) $ 2.21 $ 2.20 $ 2.18 $ 2.10 $ 2.01 - ---------------------------------------------------------------------------------------------------------------------------
represented 1.57%, 1.36% and 1.31% for 1999, 1998 and 1997, respectively. The sustained increase in most categories in recent years has helped to consistently improve the ratio of non-interest income to operating expenses from 34.14% in 1995 to 44.64% in 1999. Service charges on deposit accounts grew to $118.2 million for the year ended December 31, 1999, an increase of 13.9% over the amount reported in 1998. The increase from 1998 was primarily attributable to a higher volume of deposits, partly resulting from the Corporation's growth and expansion, the offering of new deposit accounts and revisions to the fee structure. Also, there was an increase in the volume of transactions with commercial accounts. In 1997 these revenues totaled $94.1 million. The increase of $9.6 million from 1997 to 1998, was mostly related to higher activity in commercial and retail accounts and a higher volume of deposits resulting from business expansion and acquisitions. Measured as a percentage of average deposits, service charges were 0.86% in 1999, 0.85% in 1998 and 0.86% in 1997. Other service fees increased $53.2 million or 45.6% from 1998. Higher credit card fees and discounts led this rise, growing $13.2 million from 1998, reflecting a higher portfolio level, increased fees and higher customer activity. The launching of Banco Popular American Express card in Puerto Rico in August 1998, as well as the growth of the credit card business in the U.S. mainland were critical to this rise. Also contributing to the growth in other service fees from 1998 were higher check cashing fees by $9.4 million, basically driven by the expansion of the Corporation's retail financial subsidiary in the United States. The $8.3 million in processing fees are associated to fees generated by GM Group, acquired in the second half of 1999. In addition, fees related to the sale and administration of investment products reflected growth, driven by the performance of the retail brokerage division of Popular Securities, which included the issuance of the Puerto Rico Investors Tax-Free Fund VI and the Puerto Rico Flexible Allocation Fund. The growth in debit card fees reflected higher rental income from POS terminals and interchange income, and the sustained growth in the volume of transactions. Average monthly transactions increased to 5,155,000 in December 1999 from 4,010,000 in December 1998. The number of POS terminals increased 17.9% to 22,163 as of December 1999, from 18,794 a year earlier. Other service fees categories also reflected F-10 36 growth, as further detailed in Table E, partly driven by the subsidiaries acquired during the second half of 1998. Partially offsetting these rises were lower credit life insurance fees resulting from the enactment of a statute during 1999 that requires financial institutions in Puerto Rico to reimburse the unearned portion of the credit life insurance fee collected if the loan is prepaid. In 1997 other service fees amounted to $98.7 million. The increase of $17.9 million from 1997 to 1998, was primarily attributable to higher credit card fees, higher fees related to the sale and administration of investment products, and increases in trust fees and debit card fees. Other service fees have experienced a compounded growth rate of 27.1% over the last five years and have been an increasingly important component of non-interest income. They represented 45.4% of non-interest income in 1999, compared with 38.3% in 1995. Other operating income in 1999 amounted to $85.9 million, 47.3% higher than the amount reported in 1998. The increase in other income was fueled by $7.2 million in fees earned from the Corporation's investment in TELPRI, beginning in March 1999. Also contributing to the rise were $5.6 million in fees earned by GM Group and increases in gains on sale of SBA and mortgage loans. During the last quarter of 1999, BPPR sold $39 million in SBA loans, realizing a $2.5 million gain on the transaction. Also, during 1999 Equity One securitized $320 million in loans, which resulted in pre-tax gains of $7.9 million. In 1997 other operating income totaled $48.6 million. The increase of $9.7 million from 1997 to 1998, was mostly due to a loss on the sale of a real estate asset recorded in 1997, higher investment banking fees and higher revenues derived from the daily rental business. SECURITIES AND TRADING GAINS/LOSSES During 1999, the Corporation sold $168 million in investment securities available-for-sale as part of its asset/liability strategy, realizing a net gain of $0.6 million. In 1998, $923 million of the investment securities available-for-sale were sold for a net gain of $8.9 million, including gains of $4.3 million on the sale of equity securities by Popular, Inc.'s holding company. Trading account activities for the year ended December 31, 1999, resulted in losses of $1.6 million compared with profits of $3.7 million in 1998. OPERATING EXPENSES The Corporation's operating expenses for the year ended December 31, 1999 were $837.5 million, representing an increase of $117.1 million or 16.3% over the previous year. Operating expenses for 1997 totaled $636.9 million. As a percentage of average assets, operating expenses maintained their level at 3.52% in 1999 compared with 3.53% in 1998 and 3.46% in 1997. The acquisitions performed during the latter part of 1998 in the Dominican Republic and in 1999 in Puerto Rico accounted for approximately $38.8 million of the increase in 1999. Also, the acquisitions of the banking operations in Illinois and California during the latter part of 1998, contributed to the increase in operating expenses. Table F presents a detail of operating expenses for the last five years. Personnel expenses, the largest category of operating expenses, increased $49.3 million during 1999, or 14.6% from $337.4 million in 1998. Salaries, its main component, rose 17.1% primarily as a result of increased employment levels due to acquired operations, business expansion, incentive compensation, annual merit increases and additional personnel hired for the Y2K project. Full-time equivalent employees increased to 11,501 at December 31, 1999 from 10,549 at the end of 1998. The ratio of assets per employee remained at $2.21 million in 1999 from $2.20 million in 1998, while personnel costs as a percentage of average assets decreased slightly to 1.62% from 1.65% in 1998. Employee benefits, including profit sharing expense, rose $6.9 million or 7.7% to $96.7 million in 1999, compared with $89.8 million in 1998 and $95.2 million in 1997. The rise in fringe benefits was primarily related to increases in the costs of post-retirement health benefits, medical plan costs and higher payroll tax expenses resulting from the increase in salaries. Partially offsetting these increases was a decline in pension costs, mostly resulting from an improvement in the expected return of the pension plan assets. Furthermore, profit sharing expense rose $1.8 million, as a result of stronger profitability ratios at BPPR. Personnel expenses totaled $306.9 million in 1997. The increase of $30.5 million from 1997 to 1998, was reflected in salaries, which increased $35.8 million, mainly resulting from increased employment levels due to acquisitions and business expansion, annual merit increases and incentive compensation. Employee benefits, including profit sharing, decreased $5.3 million as a result of lower pension plan costs due to a higher return on the pension plan assets, and a decrease in profit sharing expense because of an amendment to the profit sharing plan to encourage stronger profitability ratios. Operating expenses, excluding personnel costs, totaled $450.8 million for the year ended December 31, 1999, compared with $383.0 million in 1998. The increase from 1998 includes the impact of the operations acquired during the latter part of 1998 and in 1999. Equipment and communications expenses grew a combined $19.2 million or 17.1% in 1999. Net occupancy expenses rose $12.2 million or 25.1% from 1998. These increases were mostly due to investments required to support the growth of the Corporation's business activity, geographical expansion and the impact of the operations acquired. The expansion of the electronic payment system and network of POS terminals contributed to the rise in these expense categories. Since the end of 1998, the Corporation F-11 37 had increased its automated teller machine (ATM) network by 35 machines, and 3,369 POS terminals had been added to its electronic delivery system. By the end of 1999, the Corporation owned 609 ATMs and 22,163 POS terminals. The rise in professional fees of $9.9 million when compared with 1998, reflected the expenditures associated with consulting and technical support fees related to the expansion of the business and expenses corresponding to the operations acquired as described before. Business promotion rose $6.6 million or 16.7% in 1999, mainly due to a new institutional advertising campaign launched in Puerto Rico for Banco Popular and also due to the marketing efforts to expand the mortgage banking business in Puerto Rico and the retail banking business in the Dominican Republic. The rise of $11.8 million in other operating expenses was mostly related to higher interchange and processing expenses on credit cards, as a result of the growth of the credit card business, and to rises in other expenses such as travelling costs associated with the Corporation's expansion, and expenses related to foreclosed properties. The amortization of intangibles also reflected an increase of $3.9 million related to the premiums paid on the operations acquired in the latter part of 1998 and during 1999. In 1997, operating expenses, excluding personnel costs, were $330.0 million. The increase of $52.9 million from 1997 to 1998, was mostly reflected in professional fees, net occupancy expenses, equipment expenses, business promotion and the amortization of intangibles. The rise in most of these categories reflected the Corporation's growth and expansion, and also included the impact of the operations acquired in the latter part of 1998. INCOME TAX EXPENSE Income tax expense for the year ended December 31, 1999, was $85.1 million compared with $74.7 million in 1998 and $74.5 million in 1997. The increase in 1999 was primarily due to higher pre-tax earnings for the current year and the reversal of $1.7 million of a valuation allowance related to a deferred tax asset that became realizable in 1999 as compared with $4.0 million realized in 1998. This increase was partially offset by higher benefits resulting from higher net tax-exempt interest income. The effective tax rate increased to 25.0% in 1999, from 24.3% in 1998 and 26.2% in 1997. The difference between the effective tax rates and the maximum statutory tax rate for the Corporation, which is 39%, is primarily due to the interest income earned on certain investments and loans which is exempt from income tax, net of the disallowance of related expenses attributable to the exempt income. Please refer to Note 22 to the consolidated financial statements for additional information on income taxes. IMPACT OF THE YEAR 2000 ISSUE The Corporation, after being actively engaged for the past two years in modifying and testing its computer systems, as well as ensuring that customers and business partners did likewise, completed successfully the rollover to the Year 2000. This was accomplished without operational problems or business disruptions. All our systems and equipment worked as usual on the critical dates of January 1, 2 and 3 and thereafter. Contingency plans did not have to be activated and the deposit balances were not affected despite concerns by some outside parties. This demonstrated the success of our Year 2000 project and our communication campaign. However, the Corporation's contingency plans developed to support critical business processes in case an unforeseen hardware or software failure occurs were completed and tested and are still in place. COSTS TO ADDRESS THE YEAR 2000 ISSUE The principal costs of the Year 2000 project were those related with the renovation and validation phases. The major part of these expenses was met from the existing resources through the deferral of technology projects and the use of existing technical personnel. The remainder represented incremental costs. The incremental costs were mainly related to additional programmers and other skilled technical personnel, external consultants used in specific tasks during the project, and scheduled upgrades to the equipment that were accelerated due to the Year 2000 issue. The Corporation funded its project through operating cash flows. The incremental costs and the impact of the deferral of technology development initiatives were not material to the financial condition and results of operations of 1998 or 1999. The total incremental costs of achieving Year 2000 compliance were approximately $10.2 million over the two-year period ended on December 31, 1999. Of this total, $3.6 million was related to consultants contracted, $4.0 million to additional technical employees hired, $1.4 million to new hardware and software acquired and $1.2 million to communication and other miscellaneous expenses. The $10.2 million spent over the life of the project included $5.2 million in 1998 and $5.0 million in 1999. STATEMENT OF CONDITION ANALYSIS The Corporation's total assets as of December 31, 1999 reached $25.5 billion, representing an increase of $2.3 billion or 9.9% compared with $23.2 billion a year earlier and $19.3 billion in 1997. F-12 38 TABLE G Loans Ending Balances
As of December 31, - ---------------------------------------------------------------------------------------------------------------------------- Five-Year (In thousands) 1999 1998 1997 1996 1995 C.G.R. - ---------------------------------------------------------------------------------------------------------------------------- Commercial, industrial and agricultural $ 6,656,411 $ 5,646,027 $ 4,637,409 $3,822,096 $3,205,031 18.13% Construction 247,288 257,786 250,111 200,083 215,835 8.93 Lease financing 728,644 645,280 581,927 516,001 498,750 10.21 Mortgage* 3,933,663 3,351,748 2,833,896 2,576,887 2,403,631 12.55 Consumer 3,341,748 3,177,954 3,073,264 2,663,961 2,354,237 9.73 - -------------------------------------------------------------------------------------------------------------------------- Total $14,907,754 $13,078,795 $11,376,607 $9,779,028 $8,677,484 13.89% ========================================================================================================================== *Includes loans held-for-sale - --------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS Earning assets at December 31, 1999 increased to $23.8 billion from $21.6 billion at December 31, 1998 and $18.1 billion at the same date in 1997. Money market investments, investment and trading securities amounted to $8.8 billion at December 31, 1999, representing an increase of $334 million when compared with $8.5 billion at December 31, 1998. The increase was mainly reflected in investment securities which totaled $7.6 billion at December 31, 1999, $378 million or 5.2% higher than $7.2 billion at December 31, 1998. This increase resulted mostly from an attractive environment for investments and arbitrage opportunities undertaken by the Corporation mostly through securities of U.S. Government agencies and corporations, which allowed the Corporation to generate additional revenues. Also, during 1999, $151 million in trading securities, mostly tax-exempt mortgage-backed securities, were reclassified to available-for-sale and held-to-maturity securities, as permitted by a new accounting pronouncement adopted by the Corporation during 1999. Please refer to Note 1 to the consolidated financial statements for more details on this pronouncement. As shown in Table G, the Corporation continued to experience growth in its loan portfolio during 1999. Total loans increased $1.8 billion or 14.0% from December 31, 1998. Commercial and mortgage loans, which accounted for the largest increases in the portfolio, rose $1.0 billion and $582 million, respectively. This growth in the commercial loan portfolio resulted principally from the continued marketing efforts directed to the retail and middle market, the sustained growth in Puerto Rico and the expansion in the United States. The rise in the mortgage loan portfolio was principally attained in Puerto Rico with an increase of $385 million, at the banking operations in the U.S. mainland with $140 million and at Equity One with $55 million. The latter was achieved despite loan securitizations of $125 million and $195 million made by Equity One in the first and third quarters of 1999, respectively. The rise in mortgage loans has been attained as a result of higher loan origination and refinancing activity as a result of a favorable interest rate environment, particularly during the first half of 1999, and increased marketing efforts. Consumer loans, which include personal, auto and boat, credit cards and reserve lines grew $164 million or 5.2% since December 31, 1998. The growth in this loan category was led by an increase of $91 million in the U.S. mainland operations, $67 million at BPPR, and $22 million at Popular Finance. Personal loans, the largest category of consumer loans with 50.9%, experienced a decrease of $88 million, totaling $1.7 billion as of December 31, 1999. The decrease was mostly related to the high volume of refinancing activity of mortgage loans, which are utilized in many cases to prepay personal loans. Credit card loans, which represented 26.0% of the consumer loan portfolio as of December 31, 1999, rose $198 million to $868 million. The increase in this category was mostly achieved through business expansion, marketing efforts both in Puerto Rico and the U.S. mainland and the launching of the American Express / Banco Popular revolving credit card in Puerto Rico during the latter part of 1998. The number of active credit card accounts increased 18.1% from 1998. Auto and boat secured loans represented about 19.1% of the total consumer loan portfolio, while revolving credit lines represented 4.0% at December 31, 1999. The Corporation's lease financing portfolio increased $83 million from 1998. The Corporation's leasing subsidiary in the United States, engaged in equipment leasing, contributed $35 million of the increase. Also, the rise in truck and vehicles sales in Puerto Rico contributed to generate a higher volume of leases. As a result, the lease financing portfolio in Puerto Rico increased $22 million. The increase of $107 million in other assets as compared with December 31, 1998, was mainly due to an increase in deferred taxes, as a result of the unrealized loss on securities available-for-sale. Intangible assets increased $31 million since December 31, F-13 39 TABLE H Capital Adequacy Data
As of December 31, - -------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Risk-based capital: Tier I capital $ 1,557,096 $ 1,450,187 $ 1,335,391 $ 1,121,128 $ 1,003,072 Supplementary (Tier II) capital 324,519 310,091 263,115 246,350 231,091 - -------------------------------------------------------------------------------------------------------------------------------- Total capital $ 1,881,615 $ 1,760,278 $ 1,598,506 $ 1,367,478 $ 1,234,163 ================================================================================================================================ Risk-weighted assets: Balance sheet items $ 14,878,731 $ 12,955,995 $ 10,687,847 $ 9,368,420 $ 8,175,420 Off-balance sheet items 428,780 443,926 287,822 275,397 249,529 - -------------------------------------------------------------------------------------------------------------------------------- Total risk-weighted assets $ 15,307,511 $ 13,399,921 $ 10,975,669 $ 9,643,817 $ 8,424,949 ================================================================================================================================ Ratios: Tier I capital (minimum required - 4.00%) 10.17% 10.82% 12.17% 11.63% 11.91% Total capital (minimum required - 8.00%) 12.29 13.14 14.56 14.18 14.65 Leverage ratio (minimum required - 3.00%) 6.40 6.72 6.86 6.71 6.66 Equity to assets 7.19 7.60 7.44 7.33 7.58 Tangible equity to assets 6.09 6.50 6.52 6.55 6.60 Equity to loans 12.32 13.02 13.00 12.97 13.03 Internal capital generation rate 10.77 10.06 10.76 10.99 9.36 ================================================================================================================================
1998, as a result of acquisitions, as further detailed in the Stockholders' Equity section. DEPOSITS AND OTHER INTEREST BEARING LIABILITIES Total deposits at December 31, 1999 amounted to $14.2 billion compared with $13.7 billion on December 31, 1998, an increase of $502 million or 3.7%. Interest bearing deposits increased $393 million or 3.7%, mostly in certificates of deposit. Non-interest bearing deposits rose $109 million or 3.4%. Despite concerns by outside parties, deposit balances were not affected by the Y2K issue. Refer to Table L for a detail of average deposits by category. The geographic distribution of the Corporation's total deposits at the end of 1999, included 69% in Puerto Rico, 25% in the United States and the remaining 6% in the Caribbean region, including deposits from BPPR's operations in the Virgin Islands. The increase in deposits was reflected in time and demand deposits, which rose $434 million or 9.2% and $109 million or 3.4%, respectively, from amounts reported in 1998. The increase in time deposits was mostly experienced in retail deposits, resulting from the Corporation's marketing efforts to obtain longer term funds in anticipation to the rising trend of market interest rates and funding needs. Demand deposits continued their growing trend based on the continued development of products and services and the Corporation's growth and expansion. On the other hand, saving, NOW and money market accounts had a decrease of $41 million compared with the amount as of December 31, 1998. This decrease is attributable to the strong competitive environment and a shift to time deposits paying higher rates. Borrowed funds, including subordinated notes and capital securities increased $1.9 billion from $7.3 billion on December 31, 1998 to $9.2 billion at the end of 1999. The increase in borrowed funds was used primarily to fund the Corporation's business expansion, loan growth and arbitrage activities. On August 4, 1999, a "shelf" registration was filed with the Securities and Exchange Commission, allowing the Corporation and some subsidiaries to issue medium-term notes, unsecured debt securities and preferred stock in an aggregate amount of up to $1.5 billion. During 1999, the Corporation issued $250 million in medium-term notes under this shelf registration. As part of the investment in BF and Levitt Mortgage, the Corporation recognized a minority interest, which amounted to $23 million as of December 31, 1999, representing the beneficial interest of the minority investors of these two entities. As of December 31, 1998, this minority interest totaled $28 million. The decrease from the end of 1998 was mainly attributed to the increase in the ownership interest of the Corporation in BF from 45% to 57%, partially offset by the minority interest of Levitt Mortgage, acquired during the second half of 1999. STOCKHOLDERS' EQUITY The Corporation's stockholders' equity at December 31, 1999 was $1.66 billion compared with $1.71 billion at the end of 1998. This slight decrease from 1998, despite the increase in retained earnings, was due to a reduction of $216 million in accumulated other comprehensive income, mostly attributed to unrealized losses on available-for-sale securities. Also, during 1999 the Corporation repurchased at a cost of $54 million a total of 1,811,727 shares of its F-14 40 TABLE I Common Stock Performance
Market Price Cash Book -------------------------- Dividends Value Dividend Price/ Market/ Declared Per Payout Dividend Earnings Book High Low Per Share Share Ratio Yield * Ratio Ratio - ------------------------------------------------------------------------------------------------------------------------- 1999 $11.51 31.56% 1.90% 15.18x 242.72% 4TH QUARTER $32 $ 25 7/16 $0.16 3RD QUARTER 31 25 13/16 0.16 2ND QUARTER 37 7/8 28 13/16 0.14 1ST QUARTER 37 7/8 30 7/8 0.14 1998 11.86 28.42 1.55 20.61 286.68 4th quarter $34 $ 25 3/8 $0.14 3rd quarter 36 3/4 28 0.14 2nd quarter 36 5/32 29 7/32 0.11 1st quarter 29 11/32 23 1/32 0.11 1997 10.37 25.19 1.76 16.50 238.78 4th quarter $27 3/16 $ 22 7/8 $0.11 3rd quarter 27 15/16 20 9/16 0.11 2nd quarter 21 7/16 16 7/8 0.09 1st quarter 18 3/8 16 17/32 0.09 1996 8.80 24.63 2.65 12.59 191.87 4th quarter $17 1/2 $ 12 15/16 $0.09 3rd quarter 13 7/8 11 5/16 0.09 2nd quarter 11 13/14 10 15/16 0.09 1st quarter 11 9/16 9 11/16 0.08 1995 7.91 26.21 3.15 9.24 122.55 4th quarter $9 31/32 $ 9 17/32 $0.08 3rd quarter 9 3/4 8 7/8 0.07 2nd quarter 8 7/8 7 13/16 0.07 1st quarter 7 15/16 7 1/32 0.07
* Based on the average high and low market price for the four quarters. Note: All per share data has been adjusted to reflect the two stock splits effected in the form of a dividend of one share for each share outstanding on July 1, 1998 and July 1, 1996. common stock under the stock repurchase program approved by its Board of Directors on May 8, 1997. Dividends declared on common stock during 1999 totaled $81.4 million, compared with $67.8 million in 1998. On August 12, 1999, the Corporation's Board of Directors declared a quarterly cash dividend of $0.16 per common share. This represented a 14.3% increase over the $0.14 per common share paid in the previous quarterly cash dividends. Total dividends declared per common share for 1999 were $0.60 compared with $0.50 in 1998 and $0.40 in 1997. The dividend payout ratio to common stockholders for the year was 31.56% compared with 28.42% in 1998. Dividends declared on the preferred stock amounted to $8.3 million in 1999 and 1998. The Corporation has a Dividend Reinvestment Plan for its stockholders. This plan offers the stockholders the opportunity to automatically reinvest their dividends in shares of common stock at a 5% discount from the average market price at the time of issuance. During 1999, 328,693 shares, equivalent to $9.4 million in additional capital, were issued under the plan. In 1998, 271,918 shares, representing $7.4 million in additional capital, were issued under this plan. The Corporation had 4 million shares of preferred stock outstanding at December 31, 1999. These shares are non-convertible and are redeemable at the option of the Corporation. Dividends are non-cumulative and are payable monthly at an annual rate per share of 8.35% based on the liquidation preference value of $25 per share. As shown in Table H, which presents the Corporation's capital adequacy information for 1999 and previous four years, the Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. Further information is presented in Note 18 to the consolidated financial statements. F-15 41 Intangible assets totaled $305 million at December 31, 1999, an increase of $31 million from $274 million at December 31, 1998. The acquisitions of GM Group and Levitt Mortgage added $46 million in intangible assets at their acquisition dates. Total intangibles consisted of $215 million in goodwill, $52 million in core deposit intangibles, $32 million in mortgage servicing rights and $6 million in other intangibles. At the end of 1998 goodwill totaled $172 million, core deposit intangibles were $67 million, mortgage servicing rights were $30 million and other intangibles were $5 million. The average tangible equity increased to $1.43 billion for the year ended December 31, 1999, from $1.31 billion a year before, an increase of $119 million or 9.0%. Total tangible equity at December 31, 1999 was $1.36 billion compared with $1.43 billion at December 31, 1998. The tangible equity to assets ratio for 1999 was 6.09% compared with 6.50% in 1998. Book value per common share was $11.51 at December 31, 1999 compared with $11.86 at year-end 1998. The market value of the Corporation's common stock at the end of 1999 was $27.94 compared with $34.00 a year earlier. The total market capitalization was $3.8 billion compared with $4.6 billion as of December 31, 1998. The Corporation's stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System under the symbol BPOP. Table I shows the range of market quotations and cash dividends declared for each quarter during the last five years. The preferred stock of the Corporation is also traded on the NASDAQ National Market System under the symbol BPOPP. Its market value at December 31, 1999 and 1998 was $25.38 and $26.00 per share, respectively. As of February 29, 2000, the Corporation had 9,130 stockholders of record of its common stock, not including beneficial owners whose shares are held in record names of brokers or other nominees. RISK MANAGEMENT During 1999 the Corporation established a Risk Management Committee composed of members of the Board of Directors. This committee monitors and approves policies and procedures and evaluates the Corporation's activities affected by credit, market, operational, legal, liquidity, reputation and strategic risks. The Corporation has specific policies and procedures which structure and delineate the management of risks, particularly those related to interest rate exposure, liquidity and credit, all of which are discussed below. MARKET RISK Market risk refers to the impact of changes in interest rates on the Corporation's net interest income, market value of portfolio equity and trading operations. It also arises from fluctuations in the value of some foreign currencies against the U.S. dollar. Despite the varied nature of market risks, the primary source of market risk at the Corporation is the impact of changes in interest rates. The stability and level of the Corporation's net interest income, as well as its market value of equity, are subject to interest rate volatility. Changes in interest rates affect both the rates at which the Corporation's assets and liabilities reprice throughout time, and the market values of most of its assets and liabilities. Since net interest income accounted for 71.9% of the Corporation's gross revenues in 1999, the constant measurement and control of market risk is a major priority. The Corporation's Board of Directors (the Board) is responsible for establishing policies regarding the assumption and management of market risk, and delegates their implementation to the Market Risk Committee (the Committee) of Popular Inc. The objective of the Committee is to ensure that the market risk assumed by the Corporation remains within the parameters of the Board policies. Interest Rate Risk Interest rate risk (IRR) refers to the impact of changes in interest rates on the Corporation's net interest income. Depending on the duration and repricing characteristics of the Corporation's assets, liabilities and off-balance sheet items, changes in interest rates could either increase or decrease the level of net interest income. The Committee implements the market risk policies approved by the Board as well as risk management strategies reviewed and adopted in Committee meetings. The Committee measures and monitors the level of short and long-term IRR assumed at the Corporation and its subsidiaries. It uses simulation analysis and static gap estimates for measuring short-term IRR. Duration analysis is used to quantify the level of long-term IRR assumed, and focuses on the estimated economic value of the Corporation, that is, the difference between the estimated market value of financial assets less the estimated market value of financial liabilities. Static gap analysis measures the volume of assets and liabilities at a point in time and their repricing during future time periods. The repricing volumes typically include adjustments for anticipated future asset prepayments, and for differences in sensitivity to market rates. The volume of net assets or liabilities repricing during future periods, particularly within one year, is used as one short-term indicator of IRR. Table J presents the static gap estimate for the Corporation as of December 31, 1999. Simulation analysis is another measurement used by the Corporation for short-term IRR, and it addresses some of the deficiencies of gap analysis. It involves estimating the effect on net interest income of one or more future interest rate sce- F-16 42 TABLE J Interest Rate Sensitivity
As of December 31, 1999 - ------------------------------------------------------------------------------------ By Repricing Dates - ------------------------------------------------------------------------------------ After Within three months 0-30 31-90 but within (Dollars in thousands) days days six months - ------------------------------------------------------------------------------------ Assets: Money market investments $ 414,807 $ 496,278 $ 73,515 Investment and trading securities 1,517,466 602,747 223,945 Loans 4,473,811 900,092 654,637 Other assets - ------------------------------------------------------------------------------------ Total 6,406,084 1,999,117 952,097 - ------------------------------------------------------------------------------------ Liabilities and stockholders' equity: Savings, NOW and money market accounts 725,992 Other time deposits 1,500,510 935,289 768,214 Federal funds purchased and securities sold under agreements to repurchase 2,336,944 1,810,036 130,000 Other short-term borrowings 1,510,902 702,044 177,675 Notes payable 150 240,000 25,000 Subordinated notes and capital securities Non-interest bearing deposits Other non-interest bearing liabilities Stockholders' equity - ------------------------------------------------------------------------------------ Total 6,074,498 3,687,369 1,100,889 - ------------------------------------------------------------------------------------ Off-balance sheet financial instruments 20,000 Interest rate sensitive gap 351,586 (1,688,252) (148,792) Cumulative interest rate sensitive gap 351,586 (1,336,666) (1,485,458) Cumulative sensitive gap to earning assets 1.48% (5.63)% (6.25)% ================================================================================== As of December 31, 1999 - ------------------------------------------------------------------------------------ By Repricing Dates After After six months nine months Non-interest but within but within After one bearing (Dollars in thousands) nine months one year year funds Total - -------------------------------------------------------------------------------------------------------------- Assets: Money market investments $ 1,394 $ 985,994 Investment and trading securities $ 96,250 $ 723,774 4,696,690 7,860,872 Loans 627,320 615,184 7,636,710 14,907,754 Other assets $1,705,919 1,705,919 - -------------------------------------------------------------------------------------------------------------- Total 723,570 1,338,958 12,334,794 1,705,919 25,460,539 - -------------------------------------------------------------------------------------------------------------- Liabilities and stockholders' equity: Savings, NOW and money market accounts 5,018,543 5,744,535 Other time deposits 343,294 282,442 1,314,482 5,144,231 Federal funds purchased and securities sold under agreements to repurchase 17,500 120,000 4,414,480 Other short-term borrowings 159,022 59,954 2,792 2,612,389 Notes payable 1,587,449 1,852,599 Subordinated notes and capital securities 275,000 275,000 Non-interest bearing deposits 3,284,949 3,284,949 Other non-interest bearing liabilities 471,370 471,370 Stockholders' equity 1,660,986 1,660,986 - -------------------------------------------------------------------------------------------------------------- Total 502,316 359,896 8,318,266 5,417,305 25,460,539 - -------------------------------------------------------------------------------------------------------------- Off-balance sheet financial instruments (20,000) Interest rate sensitive gap 221,254 979,062 3,996,528 Cumulative interest rate sensitive gap (1,264,204) (285,142) 3,711,386 Cumulative sensitive gap to earning assets (5.32)% (1.20)% 15.62% ===============================================================================================================
narios as applied to the repricing of the Corporation's current assets and liabilities and the assumption of new balances. The simulation analyses reviewed in the Committee are based on various interest rate scenarios, and include assumptions made related to the prepayment of the Corporation's amortizing loans and securities, and the sensitivity of the Corporation's cost of retail deposits to changes in market rates. The computations do not contemplate actions management could take to respond to changes in interest rates. Computations of the prospective effects of hypothetical interest rate changes should not be relied upon as indicative of actual results. By their nature, these forward looking statements are only estimates and may be different from what actually occurs in the future. As of December 31, 1999, the difference in projected net interest income under a rising and declining rate scenario, which assumes interest rates change by 150 basis points up and down, within a twelve-month period, was an increase of $5.6 million and a decrease of $6.2 million, respectively, which represented changes of 0.5% and 0.6% in net interest income. These estimated changes are within the policy guidelines established by the Board. Duration analysis measures longer-term IRR, in particular the duration of market value of equity. It expresses in general terms the sensitivity of the market value of equity to changes in interest rates. The estimated market value of equity is obtained from the market values of the cash flows from the Corporation's financial assets and liabilities, which are primarily payments of interest and repayments of principal. Thus, the market value of equity incorporates most future cash flows from net interest income, whereas other measures of IRR focus primarily on short-term net interest income. As of December 31, 1999, the estimated duration of the market value of equity of the Corporation was 5.3 years. Duration measures the average length of a financial asset or liability. In particular it equals the weighted average maturity of all the cash flows of a financial asset or liability where the weights are equal to the present value of each cash flow. The present value of cash flows F-17 43 occurring in the future is its estimated market value as of a certain date. The sensitivity of the market value of a financial asset or liability to changes in interest rates is primarily a function of its duration. In general terms, the longer the duration of an asset or liability is, the greater is the sensitivity of its market value to interest rate changes. Since duration measures the length of a financial asset or liability, it is usually expressed in terms of years or months. Derivatives are used, to a limited extent, by the Corporation with the primary objective of controlling exposures to market risk. The primary instruments used include exchange-traded futures contracts and interest rate swaps. Financial futures are used primarily for hedging the cost of future debt issuances as well as protecting the value of assets from market risk. Interest rate swaps are used primarily to synthetically increase the duration of borrowings. Please refer to Note 25 to the consolidated financial statements for further information on the Corporation's derivative transactions. Trading The Corporation's trading activities are another source of market risk. These are mostly related to its mortgage banking and broker/dealer activities in Puerto Rico. The Corporation assumes positions in financial instruments, including futures and options, in the course of these activities that are carried at market value. Interest revenue and expense arising from trading securities are included in the income statement as part of net interest income and not included in trading profits or losses. In the opinion of management, the size and composition of the trading portfolio does not represent a potentially significant source of market risk for the Corporation. It consists primarily of mortgage loans and mortgage-backed securities in the process of being sold in the secondary markets, and securities issued by Puerto Rico-based entities for resale to retail customers. The Committee utilizes several approaches for measuring its risk, including duration and value at risk. As of December 31, 1999 the trading portfolio of the Corporation amounted to $237 million and represented 0.9% of total assets, compared with $319 million and 1.4% a year earlier. This portfolio was composed of the following assets as of December 31, 1999:
Weighted Amount Average Yield -------------- ------------- (In thousands) Mortgage-backed securities $ 51,288 6.62% Commercial paper 106,094 5.10 U.S. Treasury and agencies 62,989 5.89 Puerto Rico Government obligations 6,569 6.41 Other 9,670 5.58 -------- ---- $236,610 5.70% ======== ====
As of December 31, 1999, the trading portfolio of the Corporation had an estimated duration of 1.1 years and a one-month value at risk of $1.0 million, assuming a confidence level of 95%. Foreign Exchange In the ordinary course of business, the Corporation occasionally enters into foreign exchange transactions as an intermediary for its retail and commercial clients. Any risk assumed by these transactions is immediately offset in the foreign exchange markets. Management therefore believes that the market risk assumed by the Corporation in its foreign currency transactions is not significant. As of December 31, 1999 the Corporation held a 57% interest in BF. This banking institution is located in the Dominican Republic, thus most of its business is conducted in Dominican pesos (DR$). Local 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 the value of the DR$ against the 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. LIQUIDITY RISK Liquidity refers to the ability to fund current operations, including the cash flow requirements of depositors and borrowers as well as future growth. The Corporation utilizes various sources of funding to help ensure that adequate levels of liquidity are always available. Diversification of funding sources is a major priority, as it helps protect the liquidity of the Corporation from market disruptions. Since the duration and repricing characteristics of the Corporation's borrowings determine to a major extent the overall interest rate and liquidity risk of the Corporation, they are actively managed. The Corporation raises its funding from a combination of retail and wholesale markets. Retail sources of funds include individual and corporate depositors in the markets where the Corporation competes. These are the primary sources of funds for the Corporation and are usually more stable than financing from institutional sources. Wholesale or institutional sources of funds comprise primarily other financial intermediaries such as commercial banks, securities dealers, investment companies, insurance companies, as well as non-financial corporations. Deposits tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. The extensive branch network of the Corporation in the Puerto Rico market and its rapidly expanding network in major U.S. markets, have enabled it to maintain a significant and stable base of deposits. Deposits are the primary source of funding, although wholesale borrowings are an increasingly important F-18 44 TABLE K Maturity Distribution of Earning Assets
As of December 31, 1999 - ----------------------------------------------------------------------------------------------------------------------- Maturities ---------------------------------------------------------------------------------- After one year through five years After five years ----------------------------------------------------- Fixed Variable Fixed Variable One year interest interest interest interest (In thousands) or less rates rates rates rates Total - ---------------------------------------------------------------------------------------------------------------------- Money market securities $ 985,970 $ 24 $ 985,994 Investment and trading securities 1,879,241 $2,953,721 331,482 $2,004,006 $ 461,195 7,629,645 Loans: Commercial 2,796,181 1,503,860 1,086,343 854,707 415,320 6,656,411 Construction 213,283 9,943 6,879 7,897 9,286 247,288 Lease financing 173,644 549,486 5,51414 728,644 Consumer 892,530 1,481,251 164,191 799,927 3,849 3,341,748 Mortgage 446,899 624,294 212,973 2,281,140 368,357 3,933,663 - ---------------------------------------------------------------------------------------------------------------------- Total $7,387,748 $7,122,555 $1,801,892 $5,953,191 $1,258,007 $23,523,393 ======================================================================================================================
Note: Federal Reserve Bank stock, Federal Home Loan Bank stock, and other equity securities held by the Corporation are not included in this table. source. At December 31, 1999, the Corporation's core deposits amounted to $11.8 billion or 83.1% of total deposits, an increase of $314 million or 2.7% from the same date a year ago. Certificates of deposit with denominations of $100,000 and over as of December 31, 1999 totaled $2.4 billion, or 16.9% of total deposits. Their distribution by maturity was as follows:
(In thousands) -------------- 3 months or less $1,536,496 3 to 6 months 215,956 6 to 12 months 217,364 over 12 months 425,916 ---------- $2,395,732 ==========
For further detail on average deposits for the last five years, please refer to Table L. Wholesale or institutional sources of funding include the repo, federal funds and Eurodollar markets, commercial paper, senior debentures and asset securitizations. Notes 9 through 15 to the consolidated financial statements present details of the Corporation's deposits and borrowings by type, as of December 31, 1999 and 1998. The Corporation's assets, particularly the investment portfolio, are also an important source of liquidity. This portfolio consists primarily of liquid U.S. Treasury and Agency securities that can be used to raise funds in the repo markets. As of December 31, 1999, investment securities totaled $7.6 billion, of which $1.7 billion or 21.8% has an expected maturity of one year or less. Also, refer to Notes 3 and 4 to the consolidated financial statements for further information on the composition of the available-for-sale and held-to-maturity investment portfolios. Another important liquidity source for the Corporation is its loan portfolio since it generates substantial cash flow resulting from principal and interest payments and principal prepayments. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans and to a lesser extent commercial loans, have highly developed secondary markets, which the Corporation uses on a regular basis. Table K presents a maturity distribution of the loan portfolio as of December 31, 1999. As of that date $4.5 billion or 30.3% of the loan portfolio matured within one year. CREDIT RISK MANAGEMENT AND LOAN QUALITY One of the Corporation's primary risk exposures is its credit risk, which represents the possibility of loss from the failure of a borrower or counterparty to perform according to the terms of a credit-related contract. The Corporation identifies, measures, controls and monitors this risk with policies, procedures and various levels of managerial involvement. Credit extensions are approved by credit officers of the respective lending departments. The number and level of officer approvals depends on the dollar amount and risk characteristics of the credit facility. The Corporation receives collateral to support credit extensions and commitments, whenever it is considered necessary. The Corporation has a Credit Strategy Committee (CRESCO) that oversees all credit-related activities. This F-19 45 TABLE L Average Total Deposits
For the Year - ------------------------------------------------------------------------------------------------------------------ Five-Year (In thousands) 1999 1998 1997 1996 1995 C.G.R. - ------------------------------------------------------------------------------------------------------------------ Demand $ 3,032,001 $ 2,607,525 $ 2,289,300 $ 2,047,845 $1,839,722 11.13% Other non-interest bearing accounts 6,881 4,251 4,367 5,910 5,983 (0.25) - ---------------------------------------------------------------------------------------------------------------- Non-interest bearing 3,038,882 2,611,776 2,293,667 2,053,755 1,845,705 11.10 - ---------------------------------------------------------------------------------------------------------------- Savings accounts 4,132,397 3,748,599 3,393,279 3,095,898 2,913,380 7.79 NOW and money market accounts 1,745,579 1,472,533 1,281,298 1,148,727 1,102,593 9.03 - ---------------------------------------------------------------------------------------------------------------- Savings deposits 5,877,976 5,221,132 4,674,577 4,244,625 4,015,973 8.15 - ---------------------------------------------------------------------------------------------------------------- Certificates of deposit: Under $100,000 2,664,174 2,155,391 1,216,583 1,307,323 1,281,873 18.08 $100,000 and over 1,601,861 1,421,456 1,865,720 1,371,928 1,034,195 22.10 936 297,122 369,530 508,789 1,020,064 999,384 (21.66) - ---------------------------------------------------------------------------------------------------------------- Certificates of deposit 4,563,157 3,946,377 3,591,092 3,699,315 3,315,452 10.60 - ---------------------------------------------------------------------------------------------------------------- Other time deposits 311,323 490,816 432,221 464,101 405,021 (0.02) - ---------------------------------------------------------------------------------------------------------------- Interest bearing 10,752,456 9,658,325 8,697,890 8,408,041 7,736,446 8.83 - ---------------------------------------------------------------------------------------------------------------- Total $13,791,338 $12,270,101 $10,991,557 $10,461,796 $9,582,151 9.31% ================================================================================================================
committee is responsible for managing the Corporation's overall credit exposure and for developing credit policies, standards and guidelines that define, quantify, and monitor credit risk. Through the CRESCO, senior management reviews asset quality ratios, trends and forecasts, problem loans and the methodology for assessing the adequacy of the reserve for loan losses. Also, the Corporation has an independent Credit Risk Management Division (CRMD). This division is centralized and independent of the lending function. It manages the credit rating system and tests the adequacy of the allowance for loan losses in accordance with generally accepted accounting principles (GAAP) and regulatory standards. The CRMD manages and controls the Corporation's credit risk utilizing various techniques through the different stages of the credit process. A CRMD representative, who oversees the adherence to policies and procedures established for the initial underwriting of the credit portfolio, is a permanent non-voting member of the Executive Credit Committee. Another strategy followed by the CRMD to help manage credit risk is the ongoing monitoring of the portfolio, including potential areas of concern for specific borrowers and/or geographic regions. All commercial borrowers with loans which are past due over 90 days, have filed bankruptcy, or based on its risk profile are considered problem loans, are handled by specialized workout officers, objectively and independently from the originating unit. This group consistently evaluates those loan exposures to provide for a prompt recognition and accounting of loss exposures. The Corporation also has an independent Credit Process Review Group within the CRMD, which performs annual comprehensive credit process reviews of several middle market, construction and corporate banking lending groups, as well as reviews the work performed by outside loan review firms providing services to the Corporation in the U.S. mainland. This group examines the risk profile of each originating unit along with each unit's credit administration effectiveness, the quality of the credit and collateral documentation, and the adequacy of its staffing levels and competency. Furthermore, the Corporation continues emphasizing the development of the credit staff's skills and knowledge and improving the processing technology. At December 31, 1999, the Corporation's credit risk was centered in its $14.9 billion loan portfolio, which represented 62.8% of earning assets. The portfolio composition for the last five years is presented in Table G. For other risks associated with off-balance sheet lending activities, please refer to Note 23 to the consolidated financial statements. The loan portfolio is well-balanced as the Corporation's credit policies and procedures emphasize diversification among geographical areas, business and industry groups, to minimize the adverse impact of any single event or set of occurrences. The Corporation continues diversifying its geographical risk as a result of its expansion strategy throughout various markets in the United States and the Caribbean, as described in the Overview section and Note 1 to the consolidated financial statements. The Corporation' asset and revenue composition F-20 46 TABLE M Non-Performing Assets
As of December 31, - ----------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Commercial, industrial and agricultural $163,968 $142,371 $106,982 $ 82,381 $ 90,055 Construction 1,504 144 2,704 2,000 4,733 Lease financing 3,820 4,937 1,569 1,599 5,606 Mortgage 70,038 68,527 53,449 43,955 32,066 Consumer 57,515 46,626 30,840 16,320 14,827 Renegotiated accruing loans 578 3,308 2,742 Other real estate 29,268 32,693 18,012 6,076 7,807 - ----------------------------------------------------------------------------------------------- Total $326,113 $295,876 $213,556 $155,639 $157,836 =============================================================================================== Accruing loans past-due 90 days or more $ 28,731 $ 24,426 $ 20,967 $ 12,270 $ 11,660 =============================================================================================== Non-performing assets to loans 2.19% 2.26% 1.88% 1.59% 1.82% Non-performing loans to loans 1.99 2.01 1.72 1.50 1.70 Non-performing assets to assets 1.28 1.28 1.11 0.93 1.01 Interest lost $ 20,428 $ 15,258 $ 11,868 $ 7,696 $ 7,135
Note: The Corporation's policy is to place commercial and construction loans on non-accrual status if payments of principal or interest are past-due 60 days or more. Lease financing receivables and conventional residential mortgage loans are placed on non-accrual status if payments are delinquent 90 days or more. Close-end consumer loans are placed on non-accrual when they become 90 days or more past-due and are charged-off when they are 120 days past-due. Open-end consumer loans are not placed on non-accrual status and are charged-off when they are 180 days past-due. Loans past-due 90 days or more and still accruing are not considered as non-performing loans. by geographical area and by business line segments is further presented in Note 27 to the consolidated financial statements. Although Puerto Rico continues to be the Corporation's main market, its share of the total loan portfolio has decreased from 64.4% in 1997 and 60.4% in 1998 to 59.3% in 1999. Puerto Rico's economic outlook is generally similar to that of the mainland and its Government and its instrumentalities are all investment-grade rated borrowers in the United States capital markets. The Corporation's credit risk exposure is spread among individual consumers, small commercial loans and a diverse base of borrowers engaged in a wide variety of businesses. The Corporation has approximately 895,000 consumer loans and over 41,000 commercial lending relationships. Only 62 of these relationships have loans outstanding over $10 million. Highly leveraged transactions and credit facilities to finance speculative real estate ventures are minimal and there are no LDC loans. The Corporation limits its exposure to concentrations of credit risk by the nature of its lending limits, as approximately 24.7% of total commercial and construction loans outstanding are secured by real estate or cash collateral. In addition, the secured consumer loan portfolio was $1.1 billion or 33.2% of the total consumer portfolio at December 31, 1999. Furthermore, there are no significant concentrations in any one industry with a substantial portion of the customers having credit needs of less than $250,000. On a monthly basis, the Corporation's CRMD, senior management and the Risk Management Committee evaluate possible industry risk concentrations. Moreover, the Corporation is exposed to government risk. As further detailed in Notes 3 and 4 to the consolidated financial statements, a substantial portion of the Corporation's investment securities represented exposure to the U.S. Government in the form of U.S. Treasury securities and obligations of U.S. Government agencies and corporations. In addition, $80 million of residential mortgages and $479 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies. The Corporation is one of the largest SBA lenders in the United States. Furthermore, there was $135 million of investment securities representing obligations of the Puerto Rico Government and political subdivisions thereof, $49 million of loans issued to or guaranteed by these same entities and $34 million of loans issued to or guaranteed by the U.S. and British Virgin Islands' Governments. NON-PERFORMING ASSETS Non-performing assets consist of past-due loans that are no longer accruing interest, renegotiated loans and real estate acquired through foreclosure. Non-performing assets were $326 F-21 47 TABLE N Allowance for Loan Losses and Selected Loan Losses Statistics
(Dollars in thousands) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Balance at beginning of year $ 267,249 $ 211,651 $ 185,574 $ 168,393 $ 153,798 Allowances purchased 515 31,296 13,237 402 Provision for loan losses 148,948 137,213 110,607 88,839 64,558 - ----------------------------------------------------------------------------------------------------- 416,712 380,160 309,418 257,634 218,356 - ----------------------------------------------------------------------------------------------------- Losses charged to the allowance: Commercial 51,011 45,643 55,734 38,017 34,383 Construction 651 190 600 2,369 2,046 Lease financing 23,009 23,484 23,085 22,129 6,979 Mortgage 3,977 2,718 2,612 2,189 1,618 Consumer 104,062 92,646 65,559 43,257 33,681 - ----------------------------------------------------------------------------------------------------- 182,710 164,681 147,590 107,961 78,707 - ----------------------------------------------------------------------------------------------------- Recoveries: Commercial 18,589 17,844 18,385 11,498 9,404 Construction 169 337 122 207 288 Lease financing 15,839 14,998 15,890 9,749 2,342 Mortgage 771 323 356 295 243 Consumer 22,640 18,268 15,070 14,152 16,467 - ----------------------------------------------------------------------------------------------------- 58,008 51,770 49,823 35,901 28,744 - ----------------------------------------------------------------------------------------------------- Net loans charged-off 124,702 112,911 97,767 72,060 49,963 - ----------------------------------------------------------------------------------------------------- Balance at end of year $ 292,010 $ 267,249 $ 211,651 $ 185,574 $ 168,393 ===================================================================================================== Loans: Outstanding at year end $14,907,754 $13,078,795 $11,376,607 $9,779,028 $8,677,484 Average 13,901,290 11,930,621 10,548,207 9,210,964 8,217,834 Ratios: Allowance for loan losses to year end loans 1.96% 2.04% 1.86% 1.90% 1.94% Recoveries to charge-offs 31.75 31.44 33.76 33.25 36.52 Net charge-offs to average loans 0.90 0.95 0.93 0.78 0.61 Net charge-offs earnings coverage 3.92x 3.93x 4.04x 4.79x 5.42x Allowance for loan losses to net charge-offs 2.34 2.37 2.16 2.58 3.37 Provision for loan losses to: Net charge-offs 1.19 1.22 1.13 1.23 1.29 Average loans 1.07% 1.15% 1.05% 0.96% 0.79% Allowance to non-performing assets 89.54 90.32 99.11 119.23 106.69 =====================================================================================================
million and $296 million at December 31, 1999 and 1998, respectively. A summary of non-performing assets by loan categories and related ratios is presented in Tables M and N. The Corporation's policy is to place commercial loans on non-accrual status if payments of principal or interest are delinquent 60 days rather than the standard industry practice of 90 days. Financing leases, conventional mortgages and close-end consumer loans are placed on non-accrual status if payments are delinquent 90 days. Close-end consumer loans are charged-off when payments are delinquent 120 days. Open-end (revolving credit) consumer loans are charged-off if payments are delinquent 180 days. Certain loans which would be treated as non-accrual loans pursuant to the foregoing policy, are treated as accruing loans if they are considered well-secured and in the process of collection. Under the standard industry practice, close-end consumer loans are charged-off when delinquent 120 days, but are not customarily placed on non-accrual status prior to being charged-off. 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 close-end consumer loans from non-accruing, the Corporation's non-performing assets at December 31, 1999, would have been $247 million or 1.66% of loans, and the allowance for loan losses would have been 118.2% of non-performing assets. At December 31, 1998 and 1997, adjusted non- F-22 48 performing assets would have been $227 million or 1.73% of loans and $167 million or 1.47% of loans, respectively. The allowance for loan losses as a percentage of adjusted non-performing assets as of December 31, 1998 and 1997, would have been 118.0% and 126.9%, respectively. As Table M presents, the increase in non-performing assets is principally due to higher non-performing commercial loans and consumer loans. The rise of $22 million in non-performing commercial loans was attributed to a $26 million increase in non-per-forming commercial loans at BF in the Dominican Republic, principally resulting from the placement in non-accrual status of two large commercial relationships. The Corporation has intensified its credit management efforts to address the increase in non-accruing loans at this banking institution. Non-performing consumer loans represented 1.78% of the average consumer loan portfolio at December 31, 1999, compared with 1.51% at the same date in the prior year. Nonperforming consumer loans increased mainly as a result of the high level of personal bankruptcies in Puerto Rico and the U.S. mainland, increased delinquency levels and the growth in the consumer loan portfolio. The decrease in the other real estate category was principally the result of successful collection efforts through the legal process of several real estate secured loans. Once a loan is placed in non-accrual status the interest previously accrued and uncollected is charged against current earnings and thereafter, income is recorded only to the extent of any interest collected. The interest income that would have been realized had these loans been performing in accordance with their original terms amounted to $20.4 million in 1999, compared with $15.3 million in 1998 and $11.9 million in 1997. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level sufficient to provide for estimated loan 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, prior loss experience, prevailing and projected economic conditions and loan impairment measurement. A loan is considered impaired when, based on the current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Please refer to Notes 1 and 6 to the consolidated financial statements for further information related to impaired loans and the methodology used by the Corporation for their measurement. At December 31, 1999, the allowance for loan losses was $292 million or 1.96% of loans, compared with $267 million or 2.04% at the same date in 1998. At December 31, 1997, the allowance was $212 million or 1.86% of loans. The decrease in the allowance to ending loans coverage ratio was attributed to the fact that most of the increase in the loan portfolio was realized in a relatively low-risk portfolio, like mortgages, whereas consumer loans, which are considered the higher-risk portfolio, only had a modest increase. Based on current and expected economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses, management considers that the Corporation's level of the allowance for loan losses is adequate. Broken down by major loan categories, the allowance for the last five years was as follows: ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31,
(In millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Commercial $ 140.5 $ 130.2 $ 101.5 $ 91.8 $ 82.6 Construction 8.7 11.6 10.6 10.5 11.0 Lease financing 9.2 8.3 5.9 3.4 6.4 Consumer 119.0 103.1 82.8 69.6 60.6 Mortgage 14.6 14.0 10.9 10.3 7.8 - ------------------------------------------------------------------------------- $ 292.0 $ 267.2 $ 211.7 $ 185.6 $ 168.4 ===============================================================================
Table N summarizes the movement in the allowance for loan losses and presents selected loan loss statistics for the past five years. As this table demonstrates, net loan losses for 1999 totaled $124.7 million, an increase of $11.8 million or 10.4% from 1998. The rise primarily reflected higher net charge-offs in the consumer and commercial loan portfolios. However, net charge-offs as a percentage of average loans decreased from 0.95% in 1998 to 0.90% in 1999. Commercial loans net charge-offs amounted to $32.4 million in 1999, compared with $27.8 million a year earlier. As a percentage of average commercial loans, this figure slightly decreased from 0.56% in 1998 to 0.53% in 1999. Consumer loans net charge-offs totaled $81.4 million or 2.52% of average consumer loans for 1999, compared with $74.4 million or 2.41% of average consumer loans for 1998. Net charge-offs increased $4.3 million in personal loans and $3.7 million in credit cards. These increases were principally due to the high level of bankruptcies in the U.S. mainland and Puerto Rico, which is indicative of general market trends. Also, the banking operation in the Dominican Republic was responsible for a rise of $2.5 million in consumer loans net charge-offs. Lease financing net charge-offs decreased $1.3 million in 1999, from $8.5 million in 1998, whereas mortgage loans net charge-offs increased to $3.2 million from $2.4 million in 1998. F-23 49 STATISTICAL SUMMARY 1995-1999 STATEMENTS OF CONDITION
As of December 31, (In thousands) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 663,696 $ 667,707 $ 463,151 $ 492,368 $ 458,173 - ---------------------------------------------------------------------------------------------------------------------------- Money market investments: Federal funds sold and securities purchased under agreements to resell 931,123 910,430 802,803 778,597 796,417 Time deposits with other banks 54,354 37,206 9,013 19,023 100 Bankers' acceptances 517 262 2,274 2,656 2,202 - ---------------------------------------------------------------------------------------------------------------------------- 985,994 947,898 814,090 800,276 798,719 - ---------------------------------------------------------------------------------------------------------------------------- Trading securities 236,610 318,727 222,303 292,150 330,674 - ---------------------------------------------------------------------------------------------------------------------------- Investment securities available-for-sale, at market value 7,324,950 7,020,396 5,239,005 3,415,934 3,209,974 - ---------------------------------------------------------------------------------------------------------------------------- Investment securities held-to-maturity, at cost 299,312 226,134 408,993 1,197,066 1,651,344 - ---------------------------------------------------------------------------------------------------------------------------- Loans held-for-sale 619,298 644,159 265,204 255,129 112,806 - ---------------------------------------------------------------------------------------------------------------------------- Loans 14,659,400 12,783,609 11,457,675 9,854,911 8,883,963 Less - Unearned income 370,944 348,973 346,272 331,012 319,285 Allowance for loan losses 292,010 267,249 211,651 185,574 168,393 - ---------------------------------------------------------------------------------------------------------------------------- 13,996,446 12,167,387 10,899,752 9,338,325 8,396,285 - ---------------------------------------------------------------------------------------------------------------------------- Premises and equipment 440,971 424,721 364,892 356,697 325,203 Other real estate 29,268 32,693 18,012 6,076 7,807 Customers' liabilities on acceptances 12,041 15,937 1,801 3,100 2,208 Accrued income receivable 175,746 156,314 118,677 95,487 113,539 Other assets 371,421 263,992 252,040 380,247 125,742 Intangible assets 304,786 274,292 232,587 131,248 142,977 - ---------------------------------------------------------------------------------------------------------------------------- $25,460,539 $23,160,357 $19,300,507 $16,764,103 $15,675,451 ============================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,284,949 $ 3,176,309 $ 2,546,836 $ 2,330,704 $ 2,021,658 Interest bearing 10,888,766 10,495,905 9,202,750 8,432,571 7,855,004 - ---------------------------------------------------------------------------------------------------------------------------- 14,173,715 13,672,214 11,749,586 10,763,275 9,876,662 Federal funds purchased and securities sold under agreements to repurchase 4,414,480 4,076,500 2,723,329 1,875,465 3,000,878 Other short-term borrowings 2,612,389 1,639,082 1,287,435 1,404,006 454,707 Notes payable 1,852,599 1,307,160 1,403,696 986,713 730,428 Senior debentures 30,000 30,000 Acceptances outstanding 12,041 15,937 1,801 3,100 2,208 Other liabilities 436,718 437,760 356,568 314,012 263,871 - ---------------------------------------------------------------------------------------------------------------------------- 23,501,942 21,148,653 17,522,415 15,376,571 14,358,754 - ---------------------------------------------------------------------------------------------------------------------------- Subordinated notes 125,000 125,000 125,000 125,000 175,000 - ---------------------------------------------------------------------------------------------------------------------------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 150,000 - ---------------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiary 22,611 27,591 - ---------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 100,000 100,000 100,000 100,000 100,000 Common stock 827,662 825,690 412,029 396,531 197,692 Surplus 243,855 216,795 602,023 496,582 427,282 Retained earnings 694,301 530,481 395,253 267,719 350,480 Treasury stock - at cost (64,123) (39,559) (39,559) Accumulated other comprehensive income, net of deferred tax (140,709) 75,706 33,346 1,700 16,243 Capital reserves 50,000 - ---------------------------------------------------------------------------------------------------------------------------- 1,660,986 1,709,113 1,503,092 1,262,532 1,141,697 - ---------------------------------------------------------------------------------------------------------------------------- $25,460,539 $23,160,357 $19,300,507 $16,764,103 $15,675,451 ============================================================================================================================
F-24 50 STATISTICAL SUMMARY 1995-1999 STATEMENTS OF INCOME
For the year ended December 31, - ---------------------------------------------------------------------------------------------------------------------------- (In thousands, except per common share information) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $1,373,158 $1,211,850 $1,080,408 $ 924,076 $ 813,137 Money market investments 33,434 36,781 33,923 46,697 23,077 Investment securities 425,907 385,473 358,736 280,610 259,941 Trading account securities 19,171 17,599 18,236 21,470 9,652 - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 1,851,670 1,651,703 1,491,303 1,272,853 1,105,807 Less - Interest expense 897,932 778,691 707,348 591,540 521,624 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 953,738 873,012 783,955 681,313 584,183 Provision for loan losses 148,948 137,213 110,607 88,839 64,558 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 804,790 735,799 673,348 592,474 519,625 Gain on sale of investment securities 638 8,933 2,268 3,094 5,368 Trading account (loss) profit (1,582) 3,653 3,934 108 1,785 All other operating income 373,860 278,660 241,396 202,270 166,185 - ---------------------------------------------------------------------------------------------------------------------------- 1,177,706 1,027,045 920,946 797,946 692,963 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs 386,696 337,400 306,893 273,247 249,075 All other operating expenses 450,786 382,954 330,027 268,672 237,758 - ---------------------------------------------------------------------------------------------------------------------------- 837,482 720,354 636,920 541,919 486,833 - ---------------------------------------------------------------------------------------------------------------------------- Income before tax and minority interest 340,224 306,691 284,026 256,027 206,130 Income tax 85,120 74,671 74,461 70,877 59,769 Net loss of minority interest 2,454 328 - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 257,558 $ 232,348 $ 209,565 $ 185,150 $ 146,361 ============================================================================================================================ NET INCOME APPLICABLE TO COMMON STOCK $ 249,208 $ 223,998 $ 201,215 $ 176,800 $ 138,011 ============================================================================================================================ EARNINGS PER COMMON SHARE* $ 1.84 $ 1.65 $ 1.50 $ 1.34 $ 1.05 ============================================================================================================================ CASH DIVIDENDS DECLARED PER COMMON SHARE OUTSTANDING $ 0.60 $ 0.50 $ 0.40 $ 0.35 $ 0.29 ============================================================================================================================
*The average common shares used in the computation of earnings and cash dividend per common share were 135,585,634 for 1999; 135,532,086 for 1998; 134,036,964 for 1997; 132,044,624 for 1996; and 131,632,600 for 1995. F-25 51 STATISTICAL SUMMARY 1995-1999 AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
On a Taxable Equivalent Basis* - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ AVERAGE AVERAGE Average Average BALANCE INTEREST RATE Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest earning assets: Federal funds sold and securities purchased under agreements to resell $ 537,436 $ 24,238 4.51% $ 670,072 $ 31,814 4.75% Time deposits with other banks 143,154 9,144 6.39 82,935 4,889 5.89 Bankers' acceptances 516 52 10.08 778 78 10.03 - ------------------------------------------------------------------------------------------------------------------------------ Total money market investments 681,106 33,434 4.91 753,785 36,781 4.88 - ------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities 2,479,827 169,683 6.84 3,227,375 231,837 7.18 Obligations of other U.S. Government agencies and corporations 3,028,577 200,649 6.63 1,477,168 111,332 7.54 Obligations of Puerto Rico, States and political subdivisions 138,185 9,100 6.59 136,824 9,272 6.78 Collateralized mortgage obligations and mortgage-backed securities 1,246,582 92,960 7.46 1,318,097 81,970 6.22 Other 455,488 26,654 5.85 130,861 14,015 10.71 - ------------------------------------------------------------------------------------------------------------------------------ Total investment securities 7,348,659 499,046 6.79 6,290,325 448,426 7.13 - ------------------------------------------------------------------------------------------------------------------------------ Trading account securities 313,904 20,584 6.56 287,218 18,943 6.60 - ------------------------------------------------------------------------------------------------------------------------------ Loans (net of unearned income) 13,901,290 1,380,330 9.93 11,930,621 1,218,849 10.22 - ------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets/ Interest income 22,244,959 $1,933,394 8.69% 19,261,949 $1,722,999 8.95% - ------------------------------------------------------------------------------------------------------------------------------ Total non-interest earning assets 1,561,413 1,170,433 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $23,806,372 $20,432,382 ============================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Savings and NOW accounts $ 5,877,976 $ 173,946 2.96% $ 5,221,132 $ 163,805 3.14% Other time deposits 4,874,480 278,269 5.71 4,437,193 247,687 5.58 Short-term borrowings 5,992,445 317,646 5.30 4,622,549 251,724 5.45 Mortgages and notes payable 1,558,410 106,639 6.84 1,371,372 93,846 6.84 Subordinated notes 125,000 8,555 6.84 125,000 8,555 6.84 Guaranteed preferred beneficial interest in Popular North America's subordinated debentures 150,000 12,877 8.58 150,000 13,074 8.72 - ------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities/ Interest expense 18,578,311 897,932 4.83 15,927,246 778,691 4.89 - ------------------------------------------------------------------------------------------------------------------------------ Total non-interest bearing liabilities 3,515,269 2,951,878 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 22,093,580 18,879,124 - ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity 1,712,792 1,553,258 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,806,372 $20,432,382 ============================================================================================================================== Net interest income on a taxable equivalent basis $1,035,462 $ 944,308 - ------------------------------------------------------------------------------------------------------------------------------ Cost of funding earning assets 4.04% 4.04% - ------------------------------------------------------------------------------------------------------------------------------ Net interest yield 4.65% 4.91% ============================================================================================================================== Effect of the taxable equivalent adjustment 81,724 71,296 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income per books $ 953,738 $ 873,012 ==============================================================================================================================
* Shows the effect of the tax exempt status of some loans and investments on their yield, using the applicable statutory income tax rates. The computation considers the interest expense disallowance as required by the Puerto Rico Internal Revenue Code. This adjustment is shown in order to compare the yields of the tax exempt and taxable assets on a taxable basis. Note: Average loan balances include the average balance of non-accruing loans. No interest income is recognized for these loans in accordance with the Corporation's policy. F-26 52
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------------------- $ 595,715 $ 31,504 5.29% $ 878,138 $ 45,704 5.20% $ 399,413 $ 22,823 5.71% 34,271 2,181 6.36 12,562 770 6.13 2,661 165 6.20 2,463 238 9.66 2,202 223 10.13 941 89 9.46 - --------------------------------------------------------------------------------------------------------------------------------- 632,449 33,923 5.36 892,902 46,697 5.23 403,015 23,077 5.73 - --------------------------------------------------------------------------------------------------------------------------------- 3,553,347 249,739 7.03 3,198,912 222,520 6.96 2,893,797 197,554 6.83 967,973 69,709 7.20 531,711 34,725 6.53 428,563 30,912 7.21 141,625 9,716 6.86 231,363 11,224 4.85 247,176 14,798 5.99 1,150,214 72,245 6.28 772,278 46,434 6.01 727,175 47,191 6.49 114,201 7,718 6.76 95,985 5,483 5.71 171,013 6,491 3.80 - --------------------------------------------------------------------------------------------------------------------------------- 5,927,360 409,127 6.90 4,830,249 320,386 6.63 4,467,724 296,946 6.65 - --------------------------------------------------------------------------------------------------------------------------------- 301,618 19,770 6.55 372,196 23,004 6.18 155,597 9,831 6.32 - --------------------------------------------------------------------------------------------------------------------------------- 10,548,207 1,087,466 10.31 9,210,964 930,891 10.11 8,217,834 820,003 9.98 - --------------------------------------------------------------------------------------------------------------------------------- 17,409,634 $1,550,286 8.90% 15,306,311 $1,320,978 8.63% 13,244,170 $1,149,857 8.68% - --------------------------------------------------------------------------------------------------------------------------------- 1,009,510 994,771 874,013 - --------------------------------------------------------------------------------------------------------------------------------- $18,419,144 $16,301,082 $14,118,183 ================================================================================================================================= $ 4,674,577 $ 147,321 3.15% $ 4,244,625 $ 131,499 3.10% $ 4,015,973 $ 126,548 3.15% 4,023,313 219,207 5.45 4,163,416 218,722 5.25 3,720,473 203,235 5.46 4,280,900 237,738 5.55 3,464,892 184,682 5.33 2,600,246 141,522 5.44 1,345,650 83,936 6.24 757,604 46,417 6.13 598,027 46,149 7.72 125,000 8,558 6.85 147,951 10,220 6.91 56,850 4,170 7.34 122,877 10,588 8.62 - --------------------------------------------------------------------------------------------------------------------------------- 14,572,317 707,348 4.85 12,778,488 591,540 4.63 10,991,569 521,624 4.75 - --------------------------------------------------------------------------------------------------------------------------------- 2,475,843 2,329,088 2,056,132 - --------------------------------------------------------------------------------------------------------------------------------- 17,048,160 15,107,576 13,047,701 - --------------------------------------------------------------------------------------------------------------------------------- 1,370,984 1,193,506 1,070,482 - --------------------------------------------------------------------------------------------------------------------------------- $18,419,144 $16,301,082 $14,118,183 ================================================================================================================================= $ 842,938 $ 729,438 $ 628,233 - --------------------------------------------------------------------------------------------------------------------------------- 4.06% 3.86% 3.94% - --------------------------------------------------------------------------------------------------------------------------------- 4.84% 4.77% 4.74% ================================================================================================================================= 58,983 48,125 44,050 - --------------------------------------------------------------------------------------------------------------------------------- $ 783,955 $ 681,313 $ 584,183 =================================================================================================================================
F-27 53 STATISTICAL SUMMARY 1998-1999 QUARTERLY FINANCIAL DATA
1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- (In thousands, except per Fourth Third Second First Fourth Third Second First common share information) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ============================================================================================================================ SUMMARY OF OPERATIONS Interest income $485,542 $468,532 $453,401 $444,195 $441,649 $410,821 $402,865 $396,368 Interest expense 245,686 229,740 214,550 207,956 210,774 195,780 188,473 183,664 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 239,856 238,792 238,851 236,239 230,875 215,041 214,392 212,704 Provision for loan losses 39,466 37,080 36,631 35,771 35,457 34,667 33,524 33,565 Non-interest income 102,047 96,984 86,640 86,607 75,723 69,668 69,837 67,084 Gain (loss) on sale of investment securities (137) 39 286 450 465 4,553 3,049 867 Non-interest expense 215,670 214,704 205,217 201,891 194,311 178,618 175,045 172,380 - ---------------------------------------------------------------------------------------------------------------------------- Income before income tax and minority interest 86,630 84,031 83,929 85,634 77,295 75,977 78,709 74,710 Income tax 21,497 20,887 20,334 22,402 15,111 18,397 21,248 19,915 Net loss of minority interest 574 1,066 382 432 328 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 65,707 $ 64,210 $ 63,977 $ 63,664 $ 62,512 $ 57,580 $ 57,461 $ 54,795 ============================================================================================================================ Net income applicable to common stock $ 63,618 $ 62,123 $ 61,890 $ 61,577 $ 60,423 $ 55,493 $ 55,374 $ 52,708 ============================================================================================================================ Net income per common share $ 0.47 $ 0.46 $ 0.46 $ 0.45 $ 0.44 $ 0.41 $ 0.41 $ 0.39 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED AVERAGE BALANCES (In millions) Total assets $ 24,733 $ 24,115 $ 23,655 $ 22,696 $ 21,939 $ 20,344 $ 19,935 $ 19,486 Loans 14,573 14,132 13,681 13,201 12,699 11,928 11,615 11,467 Interest earning assets 23,060 22,546 22,093 21,258 20,761 19,149 18,770 18,341 Deposits 13,965 13,802 13,816 13,578 13,035 12,033 12,196 11,805 Interest bearing liabilities 19,388 18,874 18,406 17,622 17,120 15,897 15,488 15,182 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Return on assets 1.05% 1.06% 1.08% 1.14% 1.13% 1.12% 1.16% 1.14% Return on equity 15.06 15.23 15.53 16.03 15.84 14.94 15.50 15.36
F-28 54 REPORT OF INDEPENDENT ACCOUNTANTS [PRICEWATERHOUSECOOPERS LOGO] To the Board of Directors and Stockholders of Popular, Inc. In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, of comprehensive income, of changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Popular, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /S/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP San Juan, Puerto Rico February 24, 2000 Stamp 1603157 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report. F-29 55 CONSOLIDATED STATEMENTS OF CONDITION
December 31, ----------------------------- Dollars in thousands, except per share information 1999 1998 - --------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 663,696 $ 667,707 - --------------------------------------------------------------------------------------------------------------- Money market investments: Federal funds sold and securities purchased under agreements to resell 931,123 910,430 Time deposits with other banks 54,354 37,206 Bankers' acceptances 517 262 - --------------------------------------------------------------------------------------------------------------- 985,994 947,898 - --------------------------------------------------------------------------------------------------------------- Trading securities, at market value 236,610 318,727 Investment securities available-for-sale, at market value 7,324,950 7,020,396 Investment securities held-to-maturity, at amortized cost (market value $295,075; 1998 - $228,039) 299,312 226,134 Loans held-for-sale, at lower of cost or market 619,298 644,159 - --------------------------------------------------------------------------------------------------------------- Loans 14,659,400 12,783,609 Less - Unearned income 370,944 348,973 Allowance for loan losses 292,010 267,249 - --------------------------------------------------------------------------------------------------------------- 13,996,446 12,167,387 - --------------------------------------------------------------------------------------------------------------- Premises and equipment 440,971 424,721 Other real estate 29,268 32,693 Customers' liabilities on acceptances 12,041 15,937 Accrued income receivable 175,746 156,314 Other assets 371,421 263,992 Intangible assets 304,786 274,292 - --------------------------------------------------------------------------------------------------------------- $ 25,460,539 $ 23,160,357 =============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Non-interest bearing $ 3,284,949 $ 3,176,309 Interest bearing 10,888,766 10,495,905 - --------------------------------------------------------------------------------------------------------------- 14,173,715 13,672,214 Federal funds purchased and securities sold under agreements to repurchase 4,414,480 4,076,500 Other short-term borrowings 2,612,389 1,639,082 Notes payable 1,852,599 1,307,160 Acceptances outstanding 12,041 15,937 Other liabilities 436,718 437,760 - --------------------------------------------------------------------------------------------------------------- 23,501,942 21,148,653 - --------------------------------------------------------------------------------------------------------------- Subordinated notes 125,000 125,000 - --------------------------------------------------------------------------------------------------------------- Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 - --------------------------------------------------------------------------------------------------------------- Commitments and contingencies - --------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 22,611 27,591 - --------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $25 liquidation value; 10,000,000 shares authorized; 4,000,000 issued and outstanding 100,000 100,000 Common stock, $6 par value; 180,000,000 shares authorized; 137,943,619 shares issued (1998 - 137,614,927) and 135,654,292 shares outstanding (1998 - 135,637,327) 827,662 825,690 Surplus 243,855 216,795 Retained earnings 694,301 530,481 Accumulated other comprehensive (loss) income, net of deferred taxes of ($35,993) (1998 - $25,174) (140,709) 75,706 Treasury stock - at cost, 2,289,327 shares (1998 - 1,977,600) (64,123) (39,559) - --------------------------------------------------------------------------------------------------------------- 1,660,986 1,709,113 - --------------------------------------------------------------------------------------------------------------- $ 25,460,539 $ 23,160,357 ===============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. F-30 56 CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, ------------------------------------------------ (In thousands, except per share information) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 1,373,158 $1,211,850 $1,080,408 Money market investments 33,434 36,781 33,923 Investment securities 425,907 385,473 358,736 Trading securities 19,171 17,599 18,236 - --------------------------------------------------------------------------------------------------------------------------------- 1,851,670 1,651,703 1,491,303 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 452,215 411,492 366,528 Short-term borrowings 317,646 251,724 237,738 Long-term debt 128,071 115,475 103,082 - --------------------------------------------------------------------------------------------------------------------------------- 897,932 778,691 707,348 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income 953,738 873,012 783,955 Provision for loan losses 148,948 137,213 110,607 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 804,790 735,799 673,348 Service charges on deposit accounts 118,187 103,732 94,141 Other service fees 169,727 116,575 98,650 Gain on sale of investment securities 638 8,933 2,268 Trading account (loss) profit (1,582) 3,653 3,934 Other operating income 85,946 58,353 48,605 - --------------------------------------------------------------------------------------------------------------------------------- 1,177,706 1,027,045 920,946 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Personnel costs: Salaries 289,995 247,590 211,741 Profit sharing 23,881 22,067 25,684 Pension and other benefits 72,820 67,743 69,468 - --------------------------------------------------------------------------------------------------------------------------------- 386,696 337,400 306,893 Net occupancy expense 60,814 48,607 39,617 Equipment expenses 88,334 75,302 66,446 Other taxes 33,290 32,191 30,283 Professional fees 67,955 58,087 46,767 Communications 43,146 36,941 33,325 Business promotion 45,938 39,376 33,569 Printing and supplies 20,709 17,604 15,539 Other operating expenses 58,812 46,986 41,607 Amortization of intangibles 31,788 27,860 22,874 - --------------------------------------------------------------------------------------------------------------------------------- 837,482 720,354 636,920 - --------------------------------------------------------------------------------------------------------------------------------- Income before income tax and minority interest 340,224 306,691 284,026 Income tax 85,120 74,671 74,461 Net loss of minority interest 2,454 328 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 257,558 $ 232,348 $ 209,565 ================================================================================================================================= NET INCOME APPLICABLE TO COMMON STOCK $ 249,208 $ 223,998 $ 201,215 ================================================================================================================================= NET INCOME PER COMMON SHARE (BASIC AND DILUTED) $ 1.84 $ 1.65 $ 1.50 =================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements F-31 57 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------------------------ (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 257,558 $ 232,348 $ 209,565 - --------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of premises and equipment 71,320 62,649 54,523 Provision for loan losses 148,948 137,213 110,607 Amortization of intangibles 31,788 27,860 22,874 Gain on sale of investment securities available-for-sale (638) (8,933) (2,268) Loss on disposition of premises and equipment 365 167 2,681 Gain on sale of loans (24,158) (23,036) (23,315) Amortization of premiums and accretion of discounts on investments 6,878 2,945 2,746 Net decrease (increase) in loans held-for-sale 26,818 (378,955) (10,075) Amortization of deferred loan origination fees and costs (713) (2,399) (3,019) Net decrease (increase) in trading securities 82,117 (96,424) 69,847 Net increase in accrued income receivable (19,414) (35,933) (15,872) Net (increase) decrease in other assets (38,201) 70,005 175,286 Net increase in interest payable 18,592 10,138 6,668 Net decrease in current and deferred taxes (50,987) (10,546) (28,555) Net increase in postretirement benefit obligation 9,708 9,254 7,323 Net increase in other liabilities 28,709 11,190 4,887 - --------------------------------------------------------------------------------------------------------------------------------- Total adjustments 291,132 (224,805) 374,338 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 548,690 7,543 583,903 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in money market investments (38,096) (26,726) 9,671 Purchases of investment securities held-to-maturity (6,070,728) (11,713,516) (68,040,431) Maturities of investment securities held-to-maturity 6,095,690 11,893,268 68,835,925 Purchases of investment securities available-for-sale (6,305,513) (5,372,719) (8,635,781) Maturities of investment securities available-for-sale 5,467,356 2,815,884 2,191,521 Sales of investment securities available-for-sale 168,337 923,409 5,212,194 Net disbursements on loans (2,921,860) (1,558,253) (1,468,552) Proceeds from sale of loans 920,421 734,417 521,853 Acquisition of loan portfolios (5,945) (62,247) (48,481) Assets acquired, net of cash (1,718) (17,168) (83,404) Acquisition of premises and equipment (108,428) (103,577) (120,226) Proceeds from sale of premises and equipment 24,923 16,630 68,082 - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (2,775,561) (2,470,598) (1,557,629) - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 501,501 1,189,771 (68,957) Net deposits acquired 36,297 Net increase in federal funds purchased and securities sold under agreements to repurchase 337,980 1,353,171 790,607 Net increase (decrease) in other short-term borrowings 972,474 295,281 (116,571) Proceeds from issuance of notes payable 789,436 176,986 1,246,237 Payment of notes payable (246,701) (319,307) (932,853) Payment of senior debentures (30,000) Proceeds from issuance of Capital Securities 150,000 Dividends paid (87,012) (72,021) (59,037) Proceeds from issuance of common stock 9,387 7,433 4,642 Treasury stock acquired (54,205) (39,559) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,222,860 2,667,611 944,509 - --------------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and due from banks (4,011) 204,556 (29,217) Cash and due from banks at beginning of year 667,707 463,151 492,368 - --------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of year $ 663,696 $ 667,707 $ 463,151 =================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. F-32 58 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended December 31, ------------------------------------------------ (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK: Balance at beginning and end of year $ 100,000 $ 100,000 $ 100,000 - --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK: Balance at beginning of year 825,690 412,029 396,531 Transfer from surplus resulting from stock split 412,426 Common stock issued in acquisitions 14,774 Common stock issued under Dividend Reinvestment Plan 1,972 1,235 724 - --------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 827,662 825,690 412,029 - --------------------------------------------------------------------------------------------------------------------------------- SURPLUS: Balance at beginning of year 216,795 602,023 496,582 Common stock issued under Dividend Reinvestment Plan 7,415 6,198 3,918 Transfer to common stock resulting from stock split (412,426) Treasury stock issued for acquisition 15,645 Common stock issued in acquisitions 81,523 Transfer from retained earnings 4,000 21,000 20,000 ================================================================================================================================= Balance at end of year 243,855 216,795 602,023 - --------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of year 530,481 395,253 267,719 Net income 257,558 232,348 209,565 Cash dividends declared on common stock (81,388) (67,770) (53,681) Cash dividends declared on preferred stock (8,350) (8,350) (8,350) Transfer to surplus (4,000) (21,000) (20,000) - --------------------------------------------------------------------------------------------------------------------------------- Balance at end of year 694,301 530,481 395,253 - --------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: Balance at beginning of year 75,706 33,346 1,700 Other comprehensive (loss) income, net of taxes (216,415) 42,360 31,646 - --------------------------------------------------------------------------------------------------------------------------------- Balance at end of year (140,709) 75,706 33,346 - --------------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK - AT COST (64,123) (39,559) (39,559) - --------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 1,660,986 $1,709,113 $1,503,092 =================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements F-33 59 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, ------------------------------------------------ (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 257,558 $ 232,348 $ 209,565 - --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment (1,050) (215) Unrealized (losses) gains on securities: Unrealized holding (losses) gains arising during the period, net of tax of ($61,064) (1998 - $15,721; 1997 - $10,337) (215,140) 49,826 33,267 Less: reclassification adjustment for gains or losses included in net income, net of tax of $106 (1998 - $1,727; 1997 - $647) 225 7,251 1,621 - --------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive (loss) income (216,415) 42,360 31,646 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income, net of taxes $ 41,143 $ 274,708 $ 241,211 =================================================================================================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: Year ended December 31, ------------------------------------------------ (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustment $ (1,265) $ (215) Unrealized (losses) gains on securities (139,444) 75,921 $ 33,346 - --------------------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive (loss) income $ (140,709) $ 75,706 $ 33,346 =================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. F-34 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of Popular, Inc. and its subsidiaries (the Corporation) conform with generally accepted accounting principles and with general practices within the financial industry. The following is a description of the more significant of these policies: Nature of operations Popular, Inc. 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 (BF) 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 ATM processing services through its non-banking subsidiaries in Puerto Rico, the United States and Costa Rica. Also, effective July 1, 1999, the Corporation acquired GM Group, a leading company in information technology and data processing in Puerto Rico and the Caribbean with offices in San Juan, Caracas, Santo Domingo and Miami, servicing customers in 10 countries in America. Note 27 to the consolidated financial statements presents 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. Acquisitions For the three-year period ended December 31, 1999, the Corporation completed the following acquisitions:
(Dollars in millions) - --------------------------------------------------------------------------------- Consi- Assets Date Entity deration Acquired Business ================================================================================= Aug./99 Newco Mortgage 100% cash $ 7* Mortgage Holding Corporation Banking (d/b/a Levitt Mortgage) (Puerto Rico) Jul./99 GM Group 100% stock $ 69 Technology (Puerto Rico) Services Apr./99 Telemex, Inc. 100% cash $1.5 Retail (Arizona) Financial Services Feb./99 Valley Check 100% cash $1.9 Retail Cashers, Inc. Financial (California) Services Jan./99 Houston Check 100% cash $2.5 Retail Cashers, Inc. Financial (Texas) Services Oct./98 Inglewood 100% cash $ 11 Retail Quik Check, Inc. Financial (California) Services Oct./98 Gore-Bronson Bancorp 100% cash $281 Banking (Illinois) Oct./98 First State Bank of Southern California 100% cash $194 Banking (California) Sep./98 Banco Fiduciario 100% cash $496* Banking (Dominican Republic) Apr./98 Mirando J. Corp./ 100% cash $ 6 Retail Florida Exchange Financial Ltd. (Florida) Services Dec./97 Houston Ban- corporation 100% cash $ 63 Banking (Texas) Jun./97 Roig Commercial 50% cash and Bank 50% stock $791 Banking (Puerto Rico) May/97 National Bancorp, Inc. 100% stock $189 Banking (Illinois) May/97 CBC Bancorp 100% cash $325 Banking (Illinois) Apr./97 Seminole National Bank 100% cash $ 34 Banking (Florida)
* Popular, Inc. is the principal shareholder of Banco Fiduciario (BF) and Levitt Mortgage, Inc. with a 57% and 85% ownership interest, respectively, at December 31, 1999. Both are presented as consolidated subsidiaries of the Corporation. All of the above acquisitions were accounted for as purchases and their results included in the consolidated statements of income from the date of acquisition. Reorganization During 1999 the Corporation reorganized its U.S. operations. The Corporation's banking subsidiaries in California, Florida, New Jersey and Illinois, and the Banco Popular branches in New York were merged with and into one bank named Banco F-35 61 Popular North America (BPNA). Banco Popular, N.A. (Texas) was subsequently merged into Banco Popular North America effective January 1, 2000. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Trading securities Financial instruments, including, to a limited extent, derivatives such as interest rate futures and options contracts, are utilized by the Corporation in trading activities and are carried at market value. Realized and unrealized changes in market values are recorded separately in the trading profit or loss account in the period in which the changes occur. Interest revenue and expense arising from trading instruments are included in the income statement as part of net interest income rather than in the trading profit or loss account. Securities sold but not yet purchased, which represent the Corporation's obligation to deliver securities sold which were not owned at the time of sale, are recorded at market value. Investment securities Investment securities are classified in three categories and accounted for as follows: - Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and reported at amortized cost. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold other debt securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Reserve Bank and Federal Home Loan Bank stock, is also included in this category. - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. - Debt and equity securities not classified as either securities held-to-maturity or trading securities are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred taxes in other comprehensive income. The amortization of premiums is deducted and the accretion of discounts is added to interest income based on the interest method over the outstanding period of the related securities. Net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any, on securities available-for-sale and held-to maturity are reported separately in the statement of income. Risk management instruments The Corporation occasionally uses derivative financial instruments, such as interest rate caps and swaps, in the management of its interest rate exposure. These instruments are accounted for primarily on an accrual basis. Under the accrual method, interest income or expense on the derivative contract is accrued and there is no recognition of unrealized gains and losses on the derivative instrument. Premiums on option contracts are amortized to interest income or interest expense over the life of such contracts. Income and expenses arising from the instruments are recorded in the category appropriate to the related asset or liability. Gains and losses related to contracts that are effective hedges are deferred and recognized in income in the same period as gains and losses on the hedged item. Gains and losses on early termination of contracts that modify the characteristics of specified assets or liabilities are deferred and amortized as an adjustment to the yield of the related assets or liabilities over their remaining terms. Loans held-for-sale Loans held-for-sale are stated at the lower of cost or market, cost being determined based on the outstanding loan balance less unearned income, and fair market value determined on an aggregate basis according to secondary market prices. The amount by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes included in the determination of net income for the period in which the change occurs. Loans Loans are stated at the outstanding balance less unearned income and allowance for loan losses. Fees collected and costs incurred in the origination of new loans are deferred and amortized using the interest method over the term of the loan as an adjustment to interest yield. Unearned interest on lease financing and installment loans is recognized as income on a F-36 62 basis which results in approximate level rates of return over the term of the loans. Recognition of interest income on commercial and construction loans is discontinued when loans are 60 days or more in arrears on payments of principal or interest or when other factors indicate that collection of principal and interest is doubtful. Interest accrual for lease financing, conventional mortgage loans and close-end consumer loans is ceased when loans are 90 days or more in arrears. Loans designated as non-accruing are not returned to an accrual status until interest is received on a current basis and those factors indicative of doubtful collection cease to exist. Close-end consumer loans and leases are charged-off against the allowance for loan losses when 120 days in arrears. Open-end (revolving credit) consumer loans are charged-off when 180 days in arrears. Income is generally recognized on open-end consumer loans until the loans are charged-off. Lease financing The Corporation leases passenger and commercial vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in Statement of Financial Accounting Standards (SFAS) 13, "Accounting for Leases", as amended. Aggregate rentals due over the term of the leases less unearned income are included in finance lease contracts receivable. Unearned income is amortized using a method which results in approximate level rates of return on the principal amounts outstanding. Finance lease origination fees and costs are deferred and amortized over the average life of the portfolio as an adjustment to the yield. All other leases are accounted for under the operating method. Under this method, revenue is recognized as it becomes due under the terms of the agreement. Allowance for loan losses The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio as well as in other credit-related financial instruments. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, results of periodic credit reviews of individual loans and financial accounting standards. The provision for loan losses charged to current operations is based on such methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses. The Corporation has defined impaired loans as all loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected 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. Once a specific measurement methodology is chosen it is consistently applied unless there is a significant change in the financial position of the borrower. 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. Cash payments received on impaired loans are recorded in accordance with the contractual terms of the loan. The principal portion of the payment is used to reduce the principal balance of the loan, whereas the interest portion is recognized as interest income. However, when management believes the ultimate collectibility of principal is in doubt, the interest portion is then applied to principal. Servicing assets Servicing rights, an intangible asset, represents the cost of acquiring the contractual right to service loans for others. Loan servicing fees, which are based on a percentage of the principal balances of the loans serviced, are credited to income as loan payments are collected. The Corporation recognizes as separate assets the rights to service loans for others, whether those servicing rights are originated or purchased. The total cost of loans to be sold with servicing rights retained is allocated to the servicing rights and the loans (without the servicing rights), based on their relative fair values. Servicing rights are amortized in proportion to and over the period of estimated net servicing income. In addition, the Corporation assesses capitalized servicing rights for impairment based on the fair value of those rights. To estimate the fair value of servicing rights the Corporation considers prices for similar assets and the present value of expected future cash flows associated with the servicing rights calculated using assumptions that market participants would use in estimating future servicing income and expense. For purposes of evaluating and measuring impairment of capitalized servicing rights, the Corporation stratifies such rights based on predominant risk characteristics of underlying loans, such as loan type, rate and term. The amount of impairment recognized, if any, is the amount by which the capitalized servicing rights per stratum exceed its estimated fair value. Impairment is recognized through a valuation allowance. F-37 63 Total loans serviced for others were $4,007,345,000 at December 31, 1999 (1998 - $3,674,092,000). The carrying value, estimated fair value and valuation allowance of capitalized servicing rights were $33,852,000, $45,273,000 and $14,000, respectively, at December 31, 1999 (1998 - $29,667,000, $36,210,000 and $11,000). Premises and equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs of maintenance and repairs which do not improve or extend the life of the respective assets are expensed as incurred. Costs of renewals and betterments are capitalized. When assets are disposed of, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in earnings as realized or incurred, respectively. The Corporation evaluates for impairment its long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Other real estate Other real estate comprises properties acquired through foreclosure. Upon foreclosure, the recorded amount of the loan is written-down, if required, to the appraised value less estimated costs of disposal of the real estate acquired, by charging the allowance for loan losses. Subsequent to foreclosure, the properties are carried at the lower of carrying value or fair value less estimated costs of disposal. Gains or losses on the sale of these properties are credited or charged to expense of operating other real estate. The cost of maintaining and operating such properties is expensed as incurred. Intangible assets Intangible assets consist of goodwill and other identifiable intangible assets, mainly core deposits and servicing rights. The values of core deposits and credit customer relationships are amortized using various methods over the periods benefited, which range from 4 to 10 years. Goodwill represents the excess of the Corporation's cost of purchased operations over the fair value of the net assets acquired and is amortized on the straight-line basis over periods ranging from 7 to 15 years. Securities sold/purchased under agreements to repurchase/resale Repurchase and resale agreements are treated as financing transactions and are carried at the amounts at which the securities will be reacquired or resold as specified in the respective agreements. It is the Corporation's policy to take possession of securities purchased under resale agreements. However, the counterparties to such agreements maintain effective control over such securities, accordingly, are not reflected in the Corporation's statement of condition. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral where deemed appropriate. It is the Corporation's policy to maintain effective control over securities sold under agreements to repurchase, accordingly, such securities continue to be carried on the statements of condition. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing rates of exchange. Revenues, expenses, gains and losses are translated using weighted average rates for the period. The resulting foreign currency translation adjustment from operations for which the functional currency is other than the U.S. dollar, is reported in other comprehensive income. Income taxes The Corporation uses an asset and liability approach to the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Employees' retirement and other postretirement benefit plans Banco Popular de Puerto Rico (BPPR) and BPNA have trusteed, noncontributory retirement and other benefit plans covering substantially all full-time employees. Pension costs are computed on the basis of accepted actuarial methods and are charged to current operations. Net pension costs are based on various actuarial assumptions regarding future experience under the plan, which include costs for services rendered during the period, interest costs and return on plan assets, as F-38 64 well as deferral and amortization of certain items such as actuarial gains or losses. The funding policy is to contribute to the plan as necessary to provide for services to date and for those expected to be earned in the future. To the extent that these requirements are fully covered by assets in the plan, a contribution may not be made in a particular year. BPPR also provides certain health and life insurance benefits for eligible retirees and their dependents. The cost of postretirement benefits, which is determined based on actuarial assumptions and estimates of the costs of providing these benefits in the future, is accrued during the years that the employee renders the required service. Stock compensation BPPR provides a stock-based compensation plan for its Senior Management. It is a three-year incentive plan under which shares of stock of the Corporation are granted if long-term corporate performance and objectives are met. Compensation cost is determined based on the market value of the stock. The compensation expense related to each award is recognized when probable, based on the best estimate of the outcome of the performance condition. Transfers and servicing of financial assets and extinguishment of liabilities In January 1997, the Corporation adopted, SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Certain provisions related with repurchase agreements, dollar-roll, securities lending, and similar transactions, which were delayed by SFAS 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," were adopted in January 1998. Under these standards, after a transfer of financial assets, the Corporation recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The adoption of these statements did not have a material effect on the consolidated financial statements of the Corporation. Earnings per common share Earnings per common share are computed by dividing net income, reduced by dividends on preferred stock, by the weighted average number of common shares of the Corporation outstanding during the year. No dilutive potential common shares were outstanding during the years ended December 31, 1999, 1998 and 1997. Accordingly, there is no difference between basic and diluted earnings per share. Comprehensive income Effective January 1, 1998, the Corporation adopted SFAS 130, "Reporting Comprehensive Income." Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except those resulting from investments by owners and distributions to owners. The presentation of comprehensive income required by this statement is included in a separate statement of comprehensive income. Disclosure about segments of an enterprise and related information In 1998, the Corporation adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Note 27 includes the required disclosure of selected information about operating segments, products and services, and geographic areas. Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise In 1999, the Corporation adopted SFAS 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement requires that an entity engaged in mortgage banking activities classify the mortgage-backed securities or other retained interests resulting from the securitization of mortgage loans held-for-sale, based on its ability and intent to sell or hold those investments, in accordance with SFAS 115. During 1999, the Corporation reclassified $150,740,000 in securities held for trading to the available-for-sale and held-to-maturity categories based on the adoption provisions of SFAS 134. Statement of cash flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. Reclassifications Certain minor reclassifications have been made to the 1998 and 1997 consolidated financial statements to conform with the 1999 presentation. F-39 65 Recently issued accounting pronouncements and regulations In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires recognition of all derivatives as either assets or liabilities in the statement of condition measured at fair value. It also establishes unique accounting treatment for the following three different types of hedges: fair value hedges, cash flow 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 three types of hedges are included in earnings in the period of change. The FASB has delayed the effective date of this statement to fiscal years beginning after June 15, 2000. Management estimates that the adoption of this statement will not have a material effect on the consolidated financial statements of the Corporation. Uniform Retail Credit Classification and Account Management Policy On February 10, 1999, the Federal Financial Institutions Examination Council (FFIEC) issued a revised Uniform Retail Credit Classification and Account Management Policy. This policy statement updates and expands the classification policy for retail credit loans that was first issued in 1980. The policy retains and clarifies a requirement to charge-off all open-end loans, such as credit card loans, which are 180 days or more past due. Close-end loans, such as installment loans, should be charged-off after they are 120 days delinquent. In addition, based on the revised policy, unsecured retail loans to borrowers who declare bankruptcy should generally be charged-off within 60 days of receipt of notification of filing from the bankruptcy court, or within the charge-off time frames adopted in the classification policy, whichever is shorter. Also, the revised policy details criteria that should be met before banks may consider a delinquent open-end loan current, such as the process of account reaging, extension and deferral. Changes in the policies and practices should be implemented by December 31, 2000. Management understands that the adoption of these revisions will not have a material effect on the consolidated financial statements of the Corporation. NOTE 2 - CASH AND DUE FROM BANKS: The Corporation's subsidiary banks are required by regulatory agencies to maintain average reserve balances. The amount of those average reserve balances was approximately $531,324,000 at December 31, 1999 (1998 - $464,838,000). NOTE 3 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE: The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and contractual maturities of investment securities available-for-sale as of December 31, 1999 and 1998 (1997 - only market value is presented) were as follows: F-40 66
1999 - ---------------------------------------------------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average cost gains losses value yield - ---------------------------------------------------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 7 months): Within 1 year $ 621,487 $ 985 $ 620,502 5.34% After 1 to 5 years 1,396,617 12,942 1,383,675 5.69 - ------------------------------------------------------------------------------------------------------------ 2,018,104 13,927 2,004,177 5.58 - ------------------------------------------------------------------------------------------------------------ Obligations of other U.S. Government agencies and corporations (average maturity of 5 years and 3 months): Within 1 year 733,917 $ 9 720 733,206 5.62 After 1 to 5 years 1,026,476 13,963 1,012,513 5.57 After 5 to 10 years 1,456,566 102,571 1,353,995 6.19 After 10 years 300,000 32,312 267,688 6.40 - ------------------------------------------------------------------------------------------------------------ 3,516,959 9 149,566 3,367,402 5.91 - ------------------------------------------------------------------------------------------------------------ Obligations of P.R., States and political subdivisions (average maturity of 10 years): Within 1 year 2,485 3 2,488 5.14 After 1 to 5 years 13,349 33 98 13,284 5.75 After 5 to 10 years 29,741 248 393 29,596 5.96 After 10 years 30,137 750 337 30,550 5.91 - ------------------------------------------------------------------------------------------------------------ 75,712 1,034 828 75,918 5.88 - ------------------------------------------------------------------------------------------------------------ Collateralized mort- gage obligations (average maturity of 23 years and 2 months): Within 1 year 6,878 3 6,881 6.83 After 1 to 5 years 35,492 29 35,463 6.80 After 5 to 10 years 91,848 61 1,397 90,512 6.36 After 10 years 1,089,877 243 26,914 1,063,206 6.65 - ------------------------------------------------------------------------------------------------------------ 1,224,095 307 28,340 1,196,062 6.63 - ------------------------------------------------------------------------------------------------------------ Mortgage-backed securities (average maturity of 24 years and 5 months): Within 1 year 36 36 9.80 After 1 to 5 years 23,447 704 22,743 5.54 After 5 to 10 years 28,935 190 444 28,681 6.81 After 10 years 431,622 7,888 1,809 437,701 6.71 - ------------------------------------------------------------------------------------------------------------ 484,040 8,078 2,957 489,161 6.66 - ------------------------------------------------------------------------------------------------------------ Equity securities (without contractual maturity) 126,430 15,405 54 141,781 0.58 - ------------------------------------------------------------------------------------------------------------ Other (average maturity of 7 years and 9 months): Within 1 year 894 894 14.00 After 1 to 5 years 9,901 2,186 7,715 3.01 After 5 to 10 years 5,131 183 4,948 6.35 After 10 years 28,176 5 3,279 24,902 5.05 Without contractual maturity 10,945 1,045 11,990 3.57 - ------------------------------------------------------------------------------------------------------------ 55,047 1,050 5,648 50,449 4.66 - ------------------------------------------------------------------------------------------------------------ $7,500,387 $ 25,883 $ 201,320 $ 7,324,950 5.89% ============================================================================================================
1998 1997 - -------------------------------------------------------------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average Market cost gains losses value yield value - -------------------------------------------------------------------------------------------------------------------- (In thousands) U.S. Treasury securities (average maturity of 1 year and 4 months): Within 1 year $1,885,916 $ 9,888 $1,895,804 6.17% $ 362,502 After 1 to 5 years 1,229,208 33,431 $ 11 1,262,628 5.73 2,765,854 - -------------------------------------------------------------------------------------------------------------------- 3,115,124 43,319 11 3,158,432 6.00 3,128,356 - -------------------------------------------------------------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations (average maturity of 7 years and 7 months): Within 1 year 149,046 704 149,750 6.27 198,981 After 1 to 5 years 480,042 3,271 103 483,210 5.53 307,645 After 5 to 10 years 1,114,443 9,050 6,356 1,117,137 6.26 299,864 After 10 years 300,000 2,651 302,651 6.40 - -------------------------------------------------------------------------------------------------------------------- 2,043,531 15,676 6,459 2,052,748 6.11 806,490 - -------------------------------------------------------------------------------------------------------------------- Obligations of P.R., States and political subdivisions (average maturity of 9 years and 5 months): Within 1 year 4,483 241 4,724 6.36 9,823 After 1 to 5 years 13,272 298 13,570 5.43 7,556 After 5 to 10 years 21,612 929 3 22,538 5.64 18,210 After 10 years 29,379 645 33 29,991 6.64 25,549 - -------------------------------------------------------------------------------------------------------------------- 68,746 2,113 36 70,823 6.07 61,138 - -------------------------------------------------------------------------------------------------------------------- Collateralized mort- gage obligations (average maturity of 25 years): Within 1 year 7,831 7 7,838 5.97 After 1 to 5 years 28,998 13 90 28,921 5.47 40,619 After 5 to 10 years 185,782 278 24 186,036 6.18 55,654 After 10 years 984,195 2,160 729 985,626 6.18 703,925 - -------------------------------------------------------------------------------------------------------------------- 1,206,806 2,458 843 1,208,421 6.16 800,198 - -------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities (average maturity of 22 years and 1 month): Within 1 year 72 8 80 6.37 80,075 After 1 to 5 years 27,835 6 11 27,830 5.55 6,768 After 5 to 10 years 22,719 315 124 22,910 6.40 12,134 After 10 years 286,540 8,554 64 295,030 6.77 300,794 - -------------------------------------------------------------------------------------------------------------------- 337,166 8,883 199 345,850 6.64 399,771 - -------------------------------------------------------------------------------------------------------------------- Equity securities (without contractual maturity) 27,688 36,241 63,929 3.96 39,196 - -------------------------------------------------------------------------------------------------------------------- Other (average maturity of 2 years and 2 months): Within 1 year 94,696 94,696 5.52 After 1 to 5 years 2,458 5 2,463 7.66 After 5 to 10 years 5,169 64 209 5,024 7.21 2,887 After 10 years 14,143 93 14,236 7.26 969 Without contractual maturity 3,774 3,774 9.55 - -------------------------------------------------------------------------------------------------------------------- 120,240 162 209 120,193 5.97 3,856 - -------------------------------------------------------------------------------------------------------------------- $6,919,301 $108,852 $ 7,757 $7,020,396 6.08% $5,239,005 ====================================================================================================================
F-41 67 The weighted average yield on investment securities available-for-sale is based on amortized cost, therefore it does not give effect to changes in fair value. 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. The aggregate amortized cost and approximate market value of investment securities available-for-sale at December 31, 1999, by contractual maturity are shown below:
(In thousands) Amortized cost Market value - -------------------------------------------------------------------------------- Within 1 year $1,365,697 $1,364,007 After 1 to 5 years 2,505,282 2,475,393 After 5 to 10 years 1,612,221 1,507,732 After 10 years 1,879,812 1,824,047 - -------------------------------------------------------------------------------- Total 7,363,012 7,171,179 Without contractual maturity 137,375 153,771 - -------------------------------------------------------------------------------- Total investment securities available-for-sale $7,500,387 $7,324,950 ================================================================================
Proceeds from the sale of investment securities available-for-sale during 1999 were $168,337,000 (1998 - $923,409,000; 1997 - $5,212,194,000). Gross realized gains and losses on those sales during the year were $978,000 and $340,000, respectively (1998 - $9,190,000 and $257,000; 1997 - $6,266,000 and $3,998,000). The basis on which cost was determined in computing the realized gains and losses was the specific identification method. NOTE 4 - INVESTMENT SECURITIES HELD-TO-MATURITY: The amortized cost, gross unrealized gains and losses, approximate market value (or fair value for certain investment securities where no market quotations are available), weighted average yield and contractual maturities of investment securities held-to-maturity as of December 31, 1999 and 1998 (1997 - only amortized cost is presented) were as follows:
1999 - ------------------------------------------------------------------------------------------------- Weighted Amortized Unrealized Unrealized Market average cost gains losses value yield - ------------------------------------------------------------------------------------------------- (In thousands) Obligations of P.R., States and political subdivisions (average maturity of 7 years and 4 months): Within 1 year $ 4,067 $ 3 $ 11 $ 4,059 6.31% After 1 to 5 years 15,199 299 47 15,451 7.76 After 5 to 10 years 5,289 136 108 5,317 6.73 After 10 years 34,224 68 397 33,895 7.15 - ------------------------------------------------------------------------------------------------- 58,779 506 563 58,722 7.21 - ------------------------------------------------------------------------------------------------- Collateralized mort- gage obligations (average maturity of 12 years and 4 months): After 1 to 5 years 9,586 45 9,631 7.27 After 10 years 9,344 19 70 9,293 7.04 - ------------------------------------------------------------------------------------------------- 18,930 64 70 18,924 7.16 - ------------------------------------------------------------------------------------------------- Mortgage-backed securities (average maturity of 9 years and 5 months): After 5 to 10 years 21,298 161 21,459 7.34 After 10 years 2,461 2,461 6.75 - ------------------------------------------------------------------------------------------------- 23,759 161 23,920 7.28 - ------------------------------------------------------------------------------------------------- Equity securities (without contractual maturity held for regulatory purposes) 89,445 89,445 6.19 - ------------------------------------------------------------------------------------------------- Other (average maturity of 4 years and 3 months): Within 1 year 6,008 15 5,993 5.67 After 1 to 5 years 58,518 1,820 56,698 5.13 After 5 to 10 years 43,873 2,500 41,373 5.41 - ------------------------------------------------------------------------------------------------- 108,399 4,335 104,064 5.27 - ------------------------------------------------------------------------------------------------- $299,312 $ 731 $ 4,968 $295,075 6.21% =================================================================================================
F-42 68
1998 1997 - -------------------------------------------------------------------------------------------------------- Weighted Amortized Amortized Unrealized Unrealized Market average yield cost gains losses value cost - -------------------------------------------------------------------------------------------------------- (In thousands) Obligations of other U.S. Government agencies and corporations (average maturity of 3 months): Within 1 year $ 4,943 $ 4,943 4.98% $156,422 - -------------------------------------------------------------------------------------------------------- 4,943 4,943 4.98 156,422 - -------------------------------------------------------------------------------------------------------- Obligations of P.R., States and political subdivisions (average maturity of 5 years and 4 months): Within 1 year 21,265 $ 83 21,348 3.89 8,455 After 1 to 5 years 11,666 822 12,488 7.79 17,726 After 5 to 10 years 3,941 127 4,068 7.51 11,465 After 10 years 11,375 201 11,576 9.07 15,280 - -------------------------------------------------------------------------------------------------------- 48,247 1,233 49,480 6.35 52,926 - -------------------------------------------------------------------------------------------------------- Collateralized mortgage obliga- tions (average maturity of 10 years): After 1 to 5 years 13,932 97 14,029 6.33 19,384 After 5 to 10 years 2,868 $ 11 2,857 5.00 4,445 After 10 years 13,301 40 3 13,338 6.24 39,849 - -------------------------------------------------------------------------------------------------------- 30,101 137 14 30,224 6.16 63,678 - -------------------------------------------------------------------------------------------------------- Mortgage-backed securities (average maturity of 11 years and 4 months): After 5 to 10 years 9,743 202 9,945 7.54 48 After 10 years 23,231 363 26 23,568 7.31 45,947 - -------------------------------------------------------------------------------------------------------- 32,974 565 26 33,513 7.38 45,995 - -------------------------------------------------------------------------------------------------------- Equity securities (without contractual maturity held for re- gulatory purposes) 76,979 76,979 6.31 70,771 - -------------------------------------------------------------------------------------------------------- Other (average maturity of 6 years and 3 months): Within 1 year 9,045 9,045 3.56 3,150 After 1 to 5 years 7,972 7,972 8.14 5,645 After 5 to 10 years 4,656 10 4,666 7.82 4,229 After 10 years 11,217 11,217 7.80 6,177 - -------------------------------------------------------------------------------------------------------- 32,890 10 32,900 6.72 19,201 - -------------------------------------------------------------------------------------------------------- $226,134 $ 1,945 $ 40 $228,039 6.49% $408,993 ========================================================================================================
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. The aggregate amortized cost and approximate market value of investment securities held-to-maturity at December 31, 1999, by contractual maturity are shown below:
(In thousands) Amortized cost Market value - -------------------------------------------------------------------------------- Within 1 year $ 10,075 $ 10,052 After 1 to 5 years 83,303 81,780 After 5 to 10 years 70,460 68,149 After 10 years 46,029 45,649 - -------------------------------------------------------------------------------- Total 209,867 205,630 Without contractual maturity 89,445 89,445 - -------------------------------------------------------------------------------- Total investment securities held-to-maturity $299,312 $295,075 ================================================================================
During 1999, investment securities held-to-maturity with an amortized cost of $1,410,000 were called by the issuer. Proceeds from the sale of those securities were $1,435,000. Gains realized on these transactions were $25,000. As of December 31, 1999 and 1998, the investments in obligations that are payable from and secured by the same source of revenue or taxing authority, other than the U.S. government, did not exceed 10 percent of stockholders' equity. NOTE 5 - PLEDGED ASSETS: At December 31, 1999, investment securities and loans amounting to $6,319,366,000 (1998 - $5,078,009,000) were pledged to secure public and trust deposits and securities and mortgages sold under agreements to repurchase. F-43 69 NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES: The composition of the loan portfolio at December 31, was as follows:
(In thousands) 1999 1998 - -------------------------------------------------------------------------------- Loans secured by real estate: Insured or guaranteed by the U.S. Government or its agencies $ 79,926 $ 85,350 Guaranteed by the Commonwealth of Puerto Rico 49,135 56,296 Commercial loans secured by real estate 1,315,135 1,250,210 Residential conventional mortgages 3,199,873 2,595,578 Construction and land development 257,511 250,572 Consumer 391,597 424,327 - -------------------------------------------------------------------------------- 5,293,177 4,662,333 Financial institutions 74,017 69,120 Commercial, industrial and agricultural 5,070,801 4,090,906 Lease financing 882,362 791,356 Consumer for household, credit cards and other consumer expenditures 3,170,266 2,968,618 Other 168,777 201,276 - -------------------------------------------------------------------------------- $14,659,400 $12,783,609 ================================================================================
As of December 31, 1999, loans on which the accrual of interest income had been discontinued amounted to $294,847,000 (1998 - $262,604,000; 1997 - $195,544,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $20,428,000 (1998 - $15,258,000; 1997- $11,868,000). In addition, there were $578,000 of renegotiated loans still accruing interest at December 31, 1998. Non-accruing loans as of December 31, 1999 include $57,515,000 (1998 - $46,626,000; 1997 - $30,840,000) in consumer loans. The recorded investment in loans that were considered impaired at December 31, and the related disclosures follow:
December 31, (In thousands) 1999 1998 - -------------------------------------------------------------------------------- Impaired loans with a related allowance $149,803 $140,905 Impaired loans that do not require allowance 30,311 37,213 - -------------------------------------------------------------------------------- Total impaired loans $180,114 $178,118 ================================================================================ Allowance for impaired loans $ 51,252 $ 36,191 ================================================================================ Impaired loans measured based on fair value of collateral $ 87,790 $ 83,399 Impaired loans measured based on discounted cash flows 92,324 94,719 - -------------------------------------------------------------------------------- $180,114 $178,118 ================================================================================ Average balance of impaired loans during the year $175,459 $168,054 ================================================================================ Interest income recognized on impaired loans during the year $ 9,747 $ 6,332 ================================================================================
The changes in the allowance for loan losses for the year ended December 31, were as follows:
(In thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Balance at beginning of year $ 267,249 $ 211,651 $ 185,574 Reserves acquired 515 31,296 13,237 Provision for loan losses 148,948 137,213 110,607 Recoveries 58,008 51,770 49,823 Loans charged-off (182,710) (164,681) (147,590) - -------------------------------------------------------------------------------- Balance at end of year $ 292,010 $ 267,249 $ 211,651 ================================================================================
The components of the net financing leases receivable at December 31, were:
(In thousands) 1999 1998 - -------------------------------------------------------------------------------- Total minimum lease payments $ 727,380 $ 632,669 Estimated residual value of leased property 150,799 155,341 Deferred origination costs 4,183 3,346 Less - Unearned financing income (153,718) (146,076) - -------------------------------------------------------------------------------- Net minimum lease payments 728,644 645,280 Less - Allowance for loan losses (9,163) (8,312) - -------------------------------------------------------------------------------- $ 719,481 $ 636,968 ================================================================================
F-44 70 Estimated residual value is generally established at amounts expected to be sufficient to cover the Corporation's investment. At December 31, 1999, future minimum lease payments are expected to be received as follows:
(In thousands) - --------------------------------------------- 2000 $220,428 2001 176,076 2002 149,545 2003 109,177 2004 and thereafter 72,154 - --------------------------------------------- $727,380 =============================================
NOTE 7 - RELATED PARTY TRANSACTIONS: The Corporation grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. The movement and balance of these loans were as follows:
(In thousands) Officers Directors Total - -------------------------------------------------------------------------------- Balance at December 31, 1997 $ 2,605 $ 108,610 $ 111,215 New loans 512 190,951 191,463 Payments (51) (129,635) (129,686) - -------------------------------------------------------------------------------- Balance at December 31, 1998 3,066 169,926 172,992 New loans 482 331,883 332,365 Payments (475) (302,299) (302,774) - -------------------------------------------------------------------------------- Balance at December 31, 1999 $ 3,073 $ 199,510 $ 202,583 ================================================================================
These loans have been consummated on terms no more favorable than those that would have been obtained if the transaction had been with unrelated parties. NOTE 8 - PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation and amortization as follows:
Useful life (In thousands) in years 1999 1998 - -------------------------------------------------------------------------------- Land $ 61,265 $ 57,703 - -------------------------------------------------------------------------------- Buildings 15-50 246,060 220,206 Equipment 3-10 424,341 382,687 Leasehold improvements Various 69,746 62,904 - -------------------------------------------------------------------------------- 740,147 665,797 Less - Accumulated depreciation and amortization 380,788 335,426 - -------------------------------------------------------------------------------- 359,359 330,371 - -------------------------------------------------------------------------------- Construction in progress 20,347 36,647 - -------------------------------------------------------------------------------- $440,971 $424,721 ================================================================================
Depreciation and amortization of premises and equipment for the year was $71,320,000 (1998 - $62,649,000; 1997 - $54,523,000) of which $13,285,000 (1998 - - $10,478,000; 1997 - $10,341,000) was charged to occupancy expense and $58,035,000 (1998 - $52,171,000; 1997 - $44,182,000) was charged to equipment, communications and other operating expenses. Occupancy expense is net of rental income of $9,937,000 (1998 - $9,187,000; 1997 - $16,442,000). NOTE 9- DEPOSITS: Total interest bearing deposits as of December 31, consisted of:
(In thousands) 1999 1998 - ------------------------------------------------------- Savings deposits: Savings accounts $ 4,093,788 $ 4,107,990 NOW and money market accounts 1,650,747 1,678,033 - ------------------------------------------------------- 5,744,535 5,786,023 - ------------------------------------------------------- Certificates of deposit: Under $100,000 2,748,499 2,501,535 $100,000 and over 2,395,732 2,208,347 - ------------------------------------------------------- 5,144,231 4,709,882 - ------------------------------------------------------- $10,888,766 $10,495,905 =======================================================
F-45 71 A summary of certificates of deposit by maturity as of December 31, 1999, follows:
(In thousands) - -------------------------------------------------------------------------------- 2000 $3,698,181 2001 775,611 2002 186,886 2003 92,630 2004 264,234 2005 and thereafter 126,689 - -------------------------------------------------------------------------------- $5,144,231 ================================================================================
NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The following table summarizes certain information on federal funds purchased and securities sold under agreements to repurchase as of December 31:
(Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Federal funds purchased $ 28,039 $ 918,555 $ 389,040 Securities sold under agreements to repurchase 4,386,441 3,157,945 2,334,289 - -------------------------------------------------------------------------------- Total amount outstanding $4,414,480 $4,076,500 $2,723,329 ================================================================================ Maximum aggregate balance outstanding at any month-end $4,414,480 $4,076,500 $3,897,110 ================================================================================ Average monthly aggregate balance outstanding $3,831,131 $3,166,436 $2,836,290 ================================================================================ Weighted average interest rate: For the year 5.02% 4.96% 5.01% At December 31 5.75 4.50 5.51
The following table presents the liability associated with the repurchase transactions (including accrued interest), its maturities and weighted average interest rates. Also, it includes the amortized cost and approximate market value of the collateral (including accrued interest) as of December 31, 1999 and 1998. The information excludes repurchase transactions which were collateralized with securities or other assets held for trading purposes or which have been obtained under reverse repurchase agreements:
1999 - ----------------------------------------------------------------------------- Amortized Market Value Weighted Repurchase Cost of of average Liability collateral collateral interest rate - -------------------------------------------------------------------------------- (In thousands) U.S. Treasury securities Within 30 days $ 909,376 $ 917,318 $ 911,089 5.62% After 30 to 90 days 402,264 407,169 404,123 5.39 After 90 days 424,379 435,166 436,836 6.06 - -------------------------------------------------------------------------------- Total 1,736,019 1,759,653 1,752,048 5.67 - -------------------------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations Overnight 40,009 40,091 38,336 4.65 Within 30 days 1,067,672 1,131,220 1,068,111 5.75 After 30 to 90 days 196,265 205,454 203,638 5.40 After 90 days 20,264 22,458 22,103 5.10 - -------------------------------------------------------------------------------- Total 1,324,210 1,399,223 1,332,188 5.65 - -------------------------------------------------------------------------------- Mortgage-backed securities Within 30 days 39,951 43,151 42,948 5.83 After 30 to 90 days 26,849 29,228 29,027 6.04 - -------------------------------------------------------------------------------- Total 66,800 72,379 71,975 5.91 - -------------------------------------------------------------------------------- Collateralized mortgage obligations Overnight 14,328 22,348 22,348 5.20 Within 30 days 200,159 219,717 213,477 5.52 After 30 to 90 days 152,124 173,984 173,408 5.81 After 90 days 49,317 50,776 48,976 5.55 - -------------------------------------------------------------------------------- 415,928 466,825 458,209 5.62 - -------------------------------------------------------------------------------- $3,542,957 $3,698,080 $3,614,420 5.66% ================================================================================
F-46 72
1998 - -------------------------------------------------------------------------------- Weighted Repurchase Amortized Cost Market Value average Liability of collateral of collateral interest rate - -------------------------------------------------------------------------------- (In thousands) U.S. Treasury securities Overnight $ 174,613 $ 179,304 $ 184,965 4.88% Within 30 days 1,054,749 1,042,020 1,058,075 5.04 After 30 to 90 days 12,577 13,300 13,365 4.94 After 90 days 435,983 454,228 456,624 5.65 - -------------------------------------------------------------------------------- Total 1,677,922 1,688,852 1,713,029 5.18 - -------------------------------------------------------------------------------- Obligations of other U.S. Government agencies and corporations Overnight 24,838 25,121 25,211 4.44 Within 30 days 610,223 628,723 625,207 5.14 After 30 to 90 days 2,176 2,191 2,196 4.03 After 90 days 20,252 21,137 21,213 4.93 - -------------------------------------------------------------------------------- Total 657,489 677,172 673,827 5.10 - -------------------------------------------------------------------------------- Collateralized mortgage obligations Within 30 days 24,084 25,248 25,130 5.17 After 90 days 42,129 44,075 44,093 5.25 - -------------------------------------------------------------------------------- Total 66,213 69,323 69,223 5.22 - -------------------------------------------------------------------------------- $2,401,624 $2,435,347 $2,456,079 5.16% ================================================================================
NOTE 11 - OTHER SHORT-TERM BORROWINGS: Other short-term borrowings as of December 31, consisted of:
1999 1998 - ---------------------------------------------------------------------------------- (In thousands) Advances under revolving lines of credit amounting to $1,000,000,000 (1998-$457,395,000) with fixed interest rates ranging from 5.25% to 5.98% at December 31, 1999 (1998 - 4.50% to 5.25%) $ 420,500 $ 30,688 Commercial paper at rates ranging from 4.50% to 7.00% (1998 - 4.60% to 5.83%) 257,705 342,232 Term notes paying interest quarterly at floating interest rates of 0.05% to 0.46% (1998 - 0.125%) over the 3-month LIBOR rate (3-month LIBOR rate at December 31, 1999 was 6.00%; 1998 - 5.07%) 241,062 200,000 Term notes paying interest monthly at a fixed rate of 6.25% (1998 - 5.00% to 10.00%) 32,828 31,059 Term notes paying interest semiannually at rates ranging from 5.50% to 7.72% (1998 - 5.75% to 8.41%) 343,659 185,340 Term funds purchased at rates ranging from 5.15% to 6.52% (1998 - 5.13% to 5.71%) 1,242,336 789,300 Others 74,299 60,463 - ----------------------------------------------------------------------------------- $2,612,389 $1,639,082 ===================================================================================
The weighted average interest rate of other short-term borrowings at December 31, 1999 was 5.75% (1998 - 6.39%; 1997 - 5.60%). The maximum aggregate balance outstanding at any month-end was approximately $2,714,549,000 (1998 - $1,908,541,000; 1997 - $1,985,452,000). The average aggregate balance outstanding during the year was approximately $2,197,118,000 (1998 - $1,675,568,000; 1997 - $1,609,035,000). The weighted average interest rate during the year was 5.69% (1998 - 5.65%; 1997- 5.94%). F-47 73 NOTE 12 - NOTES PAYABLE: Notes payable outstanding at December 31, consisted of the following:
1999 1998 - ---------------------------------------------------------------------------------------- (In thousands) Term notes with maturities ranging from 2001 through 2008 paying interest semiannually at fixed rates ranging from 5.63% to 7.43% (1998 - 5.63% to 7.72%) $1,466,820 $ 883,348 Term notes maturing in 2000 paying interest quarterly at rates ranging from 0.11% to 0.46% over the 3-month LIBOR rate and 3-month US Treasury Bill rate in 1998 (LIBOR and US Treasury Bill rates at December 31, 1998 were 5.07% and 4.37%, respectively) 64,416 Term notes with maturities ranging from 2001 through 2028 paying interest monthly at fixed rates ranging from 5.01% to 7.62% 97,405 24,437 Promissory notes with maturities ranging from 2001 through 2005 with floating interest rates ranging from 85% to 94% of the 3-month LIBID rate (LIBID rate at December 31, 1999 was 5.875%; 1998 - 5.00%) 240,000 260,000 Promissory notes with maturities until 2003 paying interest at a fixed rate of 6.35% (1998 - 5.50% to 6.35%) 8,400 33,200 Mortgage notes and other debt 39,974 41,759 - ---------------------------------------------------------------------------------------- $1,852,599 $1,307,160 ========================================================================================
NOTE 13 - SUBORDINATED NOTES: Subordinated notes at December 31, 1999 and 1998, consisted of $125,000,000 issued by the Corporation on December 12, 1995, maturing on December 15, 2005, with interest payable semiannually at 6.75%. The notes issued by the Corporation are unsecured obligations which are subordinated in right of payment to the prior payment in full of all present and future senior indebtedness of the Corporation. These notes do not provide for any sinking fund. NOTE 14 - PREFERRED BENEFICIAL INTEREST IN POPULAR NORTH AMERICA'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES GUARANTEED BY THE CORPORATION: On February 5, 1997, BanPonce Trust I (BPT), a wholly-owned subsidiary of Popular North America, issued $150,000,000 of 8.327% Capital Securities Series A due in 2027. The Capital Securities of BPT are fully and unconditionally guaranteed by the Corporation. Additionally, the Capital Securities qualify for inclusion in Tier I capital under the Risk-Based Capital guidelines. NOTE 15 - LONG-TERM DEBT MATURITY REQUIREMENTS: The aggregate amounts of maturities of notes payable, capital securities and subordinated notes were as follows:
Notes Capital Subordinated Year payable Securities notes Total - ------------------------------------------------------------------------------ (In thousands) 2001 $ 912,041 $912,041 2002 258,770 258,770 2003 205,626 205,626 2004 407,056 407,056 Later years 69,106 $150,000 $125,000 344,106 - ------------------------------------------------------------------------------ Total $1,852,599 $150,000 $125,000 $2,127,599 - ------------------------------------------------------------------------------
NOTE 16 - PREFERRED STOCK OF BPPR: BPPR has 200,000 shares of authorized preferred stock with a par value of $100. This stock may be issued in series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. At December 31, 1999, there are no such shares issued or outstanding. NOTE 17 - STOCKHOLDERS' EQUITY: The Corporation has 180,000,000 shares of authorized common stock with par value of $6 per share. At December 31, 1999, there were 137,943,619 (1998 - 137,614,927) shares issued and 135,654,292 shares outstanding (1998 - 135,637,327). On May 8, 1997, the Board of Directors approved a stock repurchase program of up to three million shares of the outstanding common stock of the Corporation. As of December 31, 1999, the Corporation had purchased 2,289,327 (1998 - 1,977,600) shares under this program at a total cost of $64,123,000 (1998 - $39,559,000). The Corporation has a dividend reinvestment plan under which stockholders may reinvest their quarterly dividends in shares of common stock at a 5% discount from the market price at the time of issuance. During 1999, shares totaling 328,693 (1998 - 271,918; 1997 - 241,452), equivalent to $9,387,000 (1998 - $7,433,000; 1997 - $4,642,000) in additional equity, were issued under the plan. The Corporation has 10,000,000 shares of authorized preferred stock with no par value. This stock may be issued in one or more series, and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. The Corporation has 4,000,000 shares issued and F-48 74 outstanding of Series A preferred stock. These shares are non-convertible and are redeemable at the option of the Corporation. The redemption price per share is $26.00 through June 29, 2000, $25.75 from June 30, 2000 through June 29, 2001, $25.50 from June 30, 2001 through June 29, 2002 and $25.00 from June 30, 2002 and thereafter. Dividends on the Series A preferred stock are noncumulative and are payable monthly at the annual rate of 8.35% of the liquidation preference of $25.00 per share. The Corporation's average number of common shares outstanding used in the computation of net income per common share was 135,585,634 (1998 - 135,532,086; 1997 - 134,036,964). During the year, cash dividends of $0.60 (1998 - - $0.50; 1997 - $0.40) per common share outstanding amounting to $81,389,000 (1998 - $67,770,000; 1997 - $53,681,000) were declared. In addition, dividends declared on preferred stock amounted to $8,350,000 (1998 - $8,350,000; 1997 - $8,350,000). NOTE 18 - REGULATORY CAPITAL REQUIREMENTS: The Corporation is subject to various regulatory capital requirements imposed by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory requirements. The Corporation's capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Tier I and total capital to risk-weighted assets, and of Tier I capital to average assets (leverage ratio) as defined in the regulations. Management has determined that as of December 31, 1999, the Corporation exceeded all capital adequacy requirements to which it is subject. As of December 31, 1999, BPPR and BPNA were well capitalized under the regulatory framework for prompt corrective action and there are no conditions or events since that date that management believes have changed the institution's category. The 1998 ratios and amounts of total risk based capital, Tier I risk-based capital and Tier I leverage were restated to reflect the reorganization of the U. S. banking operations described in Note 1. The consolidated information for BPNA excludes Banco Popular N.A. (Texas). The information for BPPR is presented on a consolidated basis. The Corporation's actual and required ratios and amounts of total risk-based capital, Tier I risk-based capital and Tier I leverage, as of December 31, were as follows:
Regulatory requirements - ------------------------------------------------------------------------------------------------------------- To be well capitalized under prompt For capital corrective action Actual adequacy purposes provisions Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------- 1999 - ------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Total Capital (to Risk-Weighted Assets): Consolidated $1,881,615 12.29% $1,224,601 8% N/A BPPR 1,135,435 11.26 806,660 8 $1,008,325 10% BPNA 348,897 10.43 267,615 8 334,519 10 Tier I Capital (to Risk-Weighted Assets): Consolidated $1,557,096 10.17% $612,300 4% N/A BPPR 1,008,627 10.00 403,330 4 $ 604,995 6% BPNA 306,916 9.17 133,808 4 200,711 6 Tier I Capital (to Average Assets): Consolidated $1,557,096 6.40% $729,523 3% N/A BPPR 1,008,627 5.74 527,113 3 $ 878,521 5% BPNA 306,916 7.03 131,000 3 218,333 5
F-49 75
Regulatory requirements - ------------------------------------------------------------------------------------------------------------- To be well capitalized under prompt For capital corrective action Actual adequacy purposes provisions Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------- 1999 - ------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Total Capital (to Risk-Weighted Assets): Consolidated $1,760,278 13.14% $1,071,994 8% N/A BPPR 1,185,390 13.64 695,135 8 $868,919 10% BPNA 310,535 10.43 238,180 8 297,725 10 Tier I Capital (to Risk-Weighted Assets): Consolidated $1,450,187 10.82% $ 535,997 4% N/A BPPR 1,075,970 12.38 347,567 4 $521,351 6% BPNA 273,220 9.18 119,090 4 178,635 6 Tier I Capital (to Average Assets): Consolidated $1,450,187 6.72% $ 647,350 3% N/A BPPR 1,075,970 6.81 474,247 3 $790,411 5% BPNA 273,220 7.54 108,682 3 181,137 5
NOTE 19 - INTEREST ON INVESTMENTS: Interest on investments consisted of the following:
(In thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Money market investments: Federal funds sold and securities purchased under agreements to resell $ 32,049 $ 34,505 $ 31,886 Time deposits with other banks 1,380 2,199 1,799 Other 5 77 238 - -------------------------------------------------------------------------------- $ 33,434 $ 36,781 $ 33,923 ================================================================================ Investment securities: U.S. Treasury securities $146,014 $193,293 $213,153 Obligations of other U.S. Government agencies and corporations 162,280 90,141 58,405 Obligations of Puerto Rico, States and political subdivisions 7,562 8,378 8,755 Collateralized mortgage obligations 70,891 47,321 37,786 Mortgage-backed securities 26,368 34,654 34,467 Other 12,792 11,686 6,170 - -------------------------------------------------------------------------------- $425,907 $385,473 $358,736 ================================================================================
Interest income on investment securities for the year ended December 31, 1999, includes tax exempt interest of $330,411,000 (1998 - $301,364,000; 1997 - $290,638,000). Exempt interest relates mostly to obligations of the United States and Puerto Rico governments. F-50 76 NOTE 20 - EMPLOYEE BENEFITS: Pension and benefit restoration plans: All regular employees of BPPR and BPNA are covered by a noncontributory defined benefit pension plan. Pension benefits begin to vest after five years of service and are based on age, years of credited service and final average compensation, as defined. At December 31, 1999, plan assets consisted primarily of U.S. Government obligations, high grade corporate bonds and listed stocks, including 5,672,860 shares (1998 - 5,672,860) of the Corporation with a market value of approximately $158,486,000 (1998 - $192,877,000). Dividends paid on shares of the Corporation held by the plan during 1999 amounted to $3,290,000 (1998 - $2,666,000). BPPR and BPNA also have a non-qualified unfunded supplementary pension and profit sharing plans for those employees whose compensation exceeds the limits established by ERISA. The following table sets forth the aggregate status of the plans and the amounts recognized in the consolidated financial statements at December 31:
Benefit Pension Plan Restoration Plan Total - ---------------------------------------------------------------------------------- 1999 - ---------------------------------------------------------------------------------- Change in benefit obligation: (In thousands) Benefit obligation at beginning of the year $ 332,193 $ 5,913 $ 338,106 Service cost 13,633 716 14,349 Interest cost 21,084 510 21,594 Plan amendment 7,995 7,995 Actuarial (gain) loss (55,445) 352 (55,093) Benefits paid (13,216) (12) (13,228) - ---------------------------------------------------------------------------------- Benefit obligation at end of year 306,244 7,479 313,723 ================================================================================== Change in plan assets: Fair value of plan assets at beginning of the year 447,374 447,374 Actual return on plan assets 3,880 3,880 Benefits paid (13,216) (13,216) - ---------------------------------------------------------------------------------- Fair value of plan assets at end of year 438,038 438,038 ================================================================================== Funded (unfunded) status 131,794 (7,479) 124,315 Unrecognized net asset (13,165) (13,165) Unrecognized net prior service cost 6,181 464 6,645 Unrecognized net actuarial (gain) loss (108,142) 2,859 (105,283) - ---------------------------------------------------------------------------------- Prepaid (accrued) pension cost 16,668 (4,156) 12,512 ================================================================================== Amount recognized in the statement of financial position consists of: Prepaid benefit cost 17,949 17,949 Accrued benefit liability (1,281) (4,344) (5,625) Intangible assets 188 188 - ---------------------------------------------------------------------------------- Net amount recognized $ 16,668 $( 4,156) $ 12,512 ==================================================================================
Benefit Pension Plan Restoration Plan Total - ---------------------------------------------------------------------------------- 1999 - ---------------------------------------------------------------------------------- Change in benefit obligation: (In thousands) Benefit obligation at beginning of the year $ 291,058 $ 3,889 $ 294,947 Service cost 12,360 438 12,798 Interest cost 19,926 330 20,256 Plan amendment 79 79 Actuarial loss 21,642 1,258 22,900 Benefits paid (12,872) (2) (12,874) - --------------------------------------------------------------------------------- Benefit obligations at end of year 332,193 5,913 338,106 ================================================================================= Change in plan assets: Fair value of plan assets at beginning of the year 368,399 368,399 Actual return on plan assets 91,840 91,840 Employee contribution repayments 7 7 Benefits paid (12,872) (12,872) - --------------------------------------------------------------------------------- Fair value of plan assets at end of year 447,374 447,374 ================================================================================= Funded (unfunded) status 115,181 (5,913) 109,268 Unrecognized net asset (15,626) (15,626) Unrecognized net prior service cost (2,053) 518 (1,535) Unrecognized net actuarial (gain) loss (93,387) 2,896 (90,491) - --------------------------------------------------------------------------------- Prepaid (accrued) pension cost 4,115 (2,499) 1,616 ================================================================================= Amount recognized in the statement of financial position consists of: Prepaid benefit cost 4,115 4,115 Accrued benefit liability (2,499) (2,499) - --------------------------------------------------------------------------------- Net amount recognized $ 4,115 $( 2,499) $ 1,616 =================================================================================
Weighted average Benefit assumptions as of Pension Plan Restoration Plan December 31: 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------- Discount rate 7.75% 6.50% 7.00% 7.75% 6.50% 7.00% Expected return on plan assets 9.00% 9.00% 9.00% Rate of compensation increase 4.5 to 4.5 to 4.5 to 4.5 to 4.5 to 4.5 to 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
F-51 77
Benefit Pension Plan Restoration Plan 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------- (In thousands) Components of net periodic pension cost: Service cost $ 13,633 $ 12,360 $ 10,847 $ 716 $ 438 $360 Interest cost 21,084 19,926 18,657 510 330 226 Expected return on plan assets (39,723) (32,618) (25,913) Amortization of asset obligation (2,461) (2,461) (2,461) Amortization of prior service cost (239) (242) (246) 53 53 53 Amortization of net (gain) loss (4,848) (2,032) 391 209 130 - -------------------------------------------------------------------------------------------- Net periodic (benefit) cost $(12,554) $( 5,067) $ 884 $1,670 $1,030 $769 ============================================================================================
The accumulated benefit obligation for BPPR's benefit restoration plan was $4,306,700 as of December 31, 1999 (1998 - $1,085,500). The accumulated benefit obligation for BPNA's pension plan and restoration plan were $576,200 and $8,400, respectively, as of December 31, 1999. BPNA's plans held no assets as of December 31, 1999. Retirement and savings plan: The Corporation also provides contributory retirement and savings plans pursuant to sections 1165(e) of the Puerto Rico Internal Revenue Code and section 401(k) of the Internal U.S. Revenue Code, as applicable, for substantially all the employees of Popular Securities, Equity One, Banco Popular North America, Popular Finance, Popular Leasing, Popular Mortgage, GM Group and Popular Cash Express. Employer contributions are determined based on specific provisions of each plan. The cost of providing this benefit in 1999 was $5,256,000 (1998 - $3,369,000; 1997 - $2,811,000). The Corporation also has a contributory savings plan available to employees of BPPR. Employees are fully vested in the employer's contribution after seven years of service. All contributions are invested in shares of the Corporation. Total savings plan expense was $1,005,000 in 1999 (1998 - $1,105,000; 1997 - $999,000). The savings plan held 1,334,433 (1998 - 1,303,398; 1997 - 1,106,586) shares of common stock of the Corporation with a market value of approximately $37,281,000 at December 31, 1999 (1998 - $44,316,000; 1997 - $27,388,000). Postretirement health care benefits: In addition to providing pension benefits, BPPR provides certain health care benefits for retired employees. Substantially all of the employees of BPPR who are eligible to retire under the pension plan, and provided they reach retirement age while working for BPPR, may become eligible for these benefits. The status of the Corporation's unfunded postretirement benefit plan at December 31, was as follows:
(In thousands) 1999 1998 - ---------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of the year $ 101,286 $ 87,976 Service cost 5,395 4,731 Interest cost 7,007 6,016 Plan amendment (180) (685) Benefits paid (2,921) (3,224) Actuarial (gain) loss (12,401) 6,472 - ---------------------------------------------------------------------- Benefit obligation at end of year $ 98,186 $ 101,286 ====================================================================== Change in plan assets: Unfunded status $( 98,186) $(101,286) Unrecognized net prior service cost 3,260 3,806 Unrecognized net actuarial loss (gain) 4,879 18,550 - ---------------------------------------------------------------------- Accrued benefit cost $( 90,047) $( 78,930) =======================================================================
The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1999 was 7.75% (1998 - 6.50%). The components of net periodic postretirement benefit cost for the year ended December 31, were as follows:
(In thousands) 1999 1998 1997 - ------------------------------------------------------------------------ Service cost $ 5,395 $ 4,731 $3,852 Interest cost 7,007 6,016 5,556 Amortization of prior service cost 366 450 435 Amortization of net loss 1,270 206 - ------------------------------------------------------------------------ Net periodic benefit cost $14,038 $11,403 $9,843 ========================================================================
For measurement purposes, a 7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5% for 2001 and remain at that level thereafter. F-52 78 Assumed health care trend rates generally have a significant effect on the amounts reported for a health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage Point Increase Point Decrease - ----------------------------------------------------------------------- Effect on total service cost and interest cost components $ 2,355,000 $( 1,831,000) Effect on postretirement benefit obligation $14,610,000 $(11,799,000)
Profit sharing plan: BPPR also has a profit sharing plan covering substantially all regular employees. Annual contributions are determined based on the bank's profitability ratios, as defined in the plan, and are deposited in trust. Profit sharing expense for the year, including the cash portion paid annually to employees which represented 50% of the expense for 1999 and 1998 (1997 - 40%), amounted to $23,561,000 (1998 - $22,647,000; 1997 - $25,954,000). Long-term incentive plan: BPPR has a long-term incentive plan for its senior management, which was amended in 1999. Based on the provisions of the new plan, the incentive is determined based on the performance of the Corporation's stock compared to the combined performance of the S&P500 Index and the S&P Financial Index during a three-year period. The incentive is awarded in shares of the Corporation, which are purchased in the open market. For the year ended December 31, 1999, the Corporation recognized an expense of $168,000 (1998 - $626,000; 1997 - $1,493,000) related to this plan. NOTE 21 - RENTAL EXPENSE AND COMMITMENTS: At December 31, 1999, the Corporation was obligated under a number of noncancelable leases for land, buildings, and equipment which require rentals (net of related sublease rentals) as follows:
Minimum Sublease Year payments rentals Net - ----------------------------------------------------------- (In thousands) 2000 $ 26,055 $ 396 $ 25,659 2001 21,804 283 21,521 2002 16,715 232 16,483 2003 14,137 140 13,997 2004 11,670 84 11,586 Later years 63,184 275 62,909 - ----------------------------------------------------------- $153,565 $ 1,410 $152,155 ===========================================================
Total rental expense for the year ended December 31, 1999, was $32,909,000 (1998 - $26,451,000; 1997 - $23,336,000). NOTE 22 - INCOME TAX: The components of income tax expense for the years ended December 31, are summarized below. Included in these amounts are income taxes of $270,000 in 1999 (1998 - $1,606,000; 1997 - $747,000), related to gains on securities transactions.
(In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------- Current income tax expense: Puerto Rico $ 92,177 $ 94,913 $ 83,120 Federal and States 9,399 8,914 16,058 - ------------------------------------------------------------------------------- Subtotal 101,576 103,827 99,178 - ------------------------------------------------------------------------------- Deferred income tax expense (benefit): Puerto Rico (14,378) (27,231) (19,851) Federal and States (2,078) (1,925) (4,866) - ------------------------------------------------------------------------------- Subtotal (16,456) (29,156) (24,717) - ------------------------------------------------------------------------------- Total income tax expense $ 85,120 $ 74,671 $ 74,461 ===============================================================================
The reasons for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory rate in Puerto Rico, were as follows: F-53 79
1999 1998 1997 - ------------------------------------------------------------------------------------------- % of % of % of pre-tax pre-tax pre-tax (Dollars in thousands) Amount Income Amount Income Amount Income - ------------------------------------------------------------------------------------------- Computed income tax at statutory rate $ 132,687 39% $ 119,609 39% $ 110,770 39% Benefits of net tax exempt interest income (54,405) (16) (47,432) (15) (37,860) (13) Federal, States taxes and other 6,838 2 2,494 1,551 - -------------------------------------------------------------------------------------------- Income tax expense $ 85,120 25% $ 74,671 24% $ 74,461 26% ============================================================================================
The Puerto Rico Internal Revenue Code of 1994 repealed the reserve method of determining losses on loans, requiring taxpayers to use the direct charge-off method and recapture the reserve balance at December 31, 1995 into income for tax purposes over a four-year period. In 1997, 1998 and 1999, the Corporation paid $14,982,000, $15,243,000, and $15,253,000, respectively, related to the aforementioned recapture. A deferred tax asset is recognized for the difference between the tax and accounting bases of the allowance for loan losses. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their bases. Significant components of the Corporation's deferred tax assets and liabilities at December 31, were as follows:
(In thousands) 1999 1998 - -------------------------------------------------------------------------- Deferred tax assets: Alternative minimum tax credits available for carryforward and other credits $ 18,047 $ 20,176 Net operating loss carryforward available 6,287 5,939 Postretirement and pension benefits 29,625 30,725 Allowance for loan losses 104,231 75,365 Unrealized loss on securities available-for-sale 35,993 Other temporary differences 31,857 13,614 - -------------------------------------------------------------------------- Total gross deferred tax assets 226,040 145,819 - -------------------------------------------------------------------------- Deferred tax liabilities: Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations 7,552 8,971 Unrealized gain on securities available-for-sale 25,174 Other temporary differences 11,511 7,636 - -------------------------------------------------------------------------- Total gross deferred tax liabilities 19,063 41,781 - -------------------------------------------------------------------------- Valuation allowance 713 3,170 - -------------------------------------------------------------------------- Net deferred tax asset $206,264 $100,868 ==========================================================================
At December 31, 1999, the Corporation had $18,047,000 in credits expiring in annual installments through year 2016 that will reduce the regular income tax liability in future years. The Corporation had, at the end of 1999, $24,488,000 in net operating losses (NOL) available to carry over to offset taxable income in future years until year 2002. Other temporary differences included as deferred assets are mainly related to the deferral of loan origination costs and commissions. A valuation allowance of $713,000 is reflected in 1999 (1998 - $3,170,000), related to deferred tax assets arising from temporary differences for which the Corporation could not determine the likelihood of its realizability. Based on the information available, the Corporation expects to fully realize all other items comprising the net deferred tax asset as of December 31, 1999. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Code provides a dividend received deduction of 100%, on dividends received from "controlled" subsidiaries subject to taxation in Puerto Rico. The Corporation has never received any dividend payments from its U.S. subsidiaries. Any such dividend paid from a U.S. subsidiary to the Corporation would be subject to a 30% withholding tax based on the provisions of the U.S. Internal Revenue Code. The Corporation has not recorded any deferred tax liability on the unremitted earnings of its U.S. subsidiaries because the reinvestment of such earnings is considered permanent. The Corporation believes that the likelihood of receiving dividend payments from any of its U.S. subsidiaries in the foreseeable future is remote based on the significant expansion it is undertaking in the U.S. mainland. The Corporation's subsidiaries in the United States file a consolidated federal income tax return. The Corporation's federal income tax provision for 1999 was $7,048,000 (1998 - $5,054,000; 1997 - $9,583,000). The intercompany settlements of taxes paid is based on tax sharing agreements which generally allocates taxes to each entity based on a separate return basis. NOTE 23 - OFF-BALANCE SHEET LENDING ACTIVITIES AND CONCENTRATION OF CREDIT RISK: Off-balance sheet risk: The Corporation is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financial needs of its customers. These financial instruments include loan commitments, letters of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of condition. F-54 80 The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the statements of condition. Financial instruments with off-balance sheet credit risk at December 31, whose contract amounts represent potential credit risk were as follows:
(In thousands) 1999 1998 - ----------------------------------------------------------------------- Commitments to extend credit: Credit card lines $2,064,785 $1,599,242 Commercial lines of credit 2,093,470 2,247,464 Other unused commitments 180,804 256,445 Commercial letters of credit 22,926 21,232 Standby letters of credit 62,022 86,075 Commitments to purchase mortgage loans 100,000 25,000 Commitments to originate mortgage loans 20,014 83,315 Other commitments 3,000
Commitments to extend credit: Contractual commitments to extend credit are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. To extend credit the Corporation evaluates each customer's creditworthiness. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies but may include cash, accounts receivable, inventory, property, plant and equipment and investment securities, among others. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Letters of credit: There are two principal types of letters of credit: commercial and standby letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In most instances, cash items are held by the Corporation to collateralize these instruments. In general, commercial letters of credit are short-term instruments used to finance a commercial contract for the shipment of goods from a seller to a buyer. This type of letter of credit ensures prompt payment to the seller in accordance with the terms of the contract. Although the commercial letter of credit is contingent upon the satisfaction of specified conditions, it represents a credit exposure if the buyer defaults on the underlying transaction. Standby letters of credit are also issued by the Corporation to disburse funds to a third party beneficiary if the Corporation's customer fails to perform under the terms of an agreement with the beneficiary. These letters of credit are used by the customer as a credit enhancement and typically expire without being drawn upon. Other commitments: In 1999, the Corporation entered into a commitment to purchase $100,000,000 of mortgage loans from another institution with the option of purchasing additional loans up to $175,000,000. The commitment expires on June 30, 2001. The purchased mortgage loans will continue to be serviced by the originating institution. As of December 31, 1999, no loans have been purchased under this agreement. In 1998, the Corporation entered into a similar agreement to purchase up to $175,000,000 in mortgage loans. The Corporation purchased the full amount of this commitment before the end of 1999. Moreover, in 1998, the Corporation entered into a commitment with a third-party to originate $90,000,000 in thirty-year mortgages at an unsubsidized fixed rate of 6.50%. The commitment expires on February 2000, but may be extended for an additional ten-month period subject to certain conditions. As of December 31, 1999, loans amounting to $69,986,000 have been originated under this agreement. Fees received and costs incurred in originating this commitment have been deferred and are being allocated to the loans originated. Geographic concentration: A geographic concentration exists within the Corporation's loan portfolio since most of its business activity is with customers located in Puerto Rico. As of December 31, 1999, the Corporation had no significant concentrations of credit risk and no significant exposure to highly leveraged transactions in its loan portfolio. Note 27 provides further information on the asset composition of the Corporation by geographical area at December 31, 1999 and 1998. Included in total assets of Puerto Rico are investments in obligations of the U.S. Treasury and U.S. Government agencies amounting to $5.2 billion and $5.0 billion in 1999 and 1998, respectively. F-55 81 NOTE 24 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and estimates as of a specific point in time, and may vary significantly from amounts that will be realized in actual transactions. The information about the estimated fair values of financial instruments presented hereunder excludes all nonfinancial instruments and certain other specific items. For those financial instruments with no quoted market prices available, fair value have been estimated using present value or other valuation techniques, as well as management best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows and prepayment assumptions. The fair values reflected herein have been determined based on the prevailing interest rate environment as of December 31, 1999 and 1998, respectively. In different interest rate environments, fair value results can differ significantly, especially for certain fixed rate financial instruments and non-accrual assets. In addition, the fair values presented do not attempt to estimate the value of the Corporation's fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation's value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 1999 and 1998. Short-term financial assets and liabilities have relatively short maturities, or no defined maturities, and little or no credit risk. The carrying amounts reported in the consolidated statements of condition approximate fair value. Included in this category are: cash and due from banks, federal funds sold and securities purchased under agreements to resell, time deposits with other banks, bankers acceptances, customers' liabilities on acceptances, accrued interest receivable, federal funds purchased and securities sold under agreements to repurchase, short-term borrowings, acceptances outstanding and accrued interest payable. Trading and investment securities are financial instruments, which regularly trade on secondary markets. The estimated fair value of these securities was determined using either market prices or dealer quotes, where available, or quoted market prices of financial instruments with similar characteristics. Trading account securities and securities available-for-sale are reported at their respective fair values in the consolidated statements of condition since they are marked-to market for accounting purposes. These instruments are detailed in the consolidated statements of condition and in Notes 3, 4 and 25. The estimated fair value for loans held-for-sale is based on secondary market prices. The fair values of the loan portfolio have been determined for group of loans with similar characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer and credit cards. Each loan category was further segmented based on loan characteristics, including repricing term and pricing. The fair value of most fixed-rate loans was estimated by discounting scheduled cash flows using interest rates currently being offered on loans with similar terms. For variable rate loans with frequent repricing terms, fair values were based on carrying values. The fair values for certain mortgage loans are based on quoted market prices. Prepayment assumptions have been applied to the mortgage and installment loan portfolio. The fair value of the loans was also reduced by an estimate of credit losses inherent in the portfolio. Generally accepted accounting principles do not require nor the Corporation has performed a fair valuation of its lease financing portfolio, therefore it is included in the loan totals at its carrying amount. The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW and money market accounts is equal to the amount payable on demand as of the respective dates. The fair value of certificates of deposit is based on the discounted value of contractual cash flows, using interest rates currently being offered on certificates with similar maturities. Borrowings and long-term debt, which include notes payable, senior debentures, subordinated notes and capital securities, were valued using quoted market rates for similar instruments at December 31, 1999 and 1998, respectively. Commitments to extend credit were fair valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated discounting the projected cash flows of fees on commitments, which are expected to be disbursed, based on historical experience. The fair value of letters of credit is based on fees currently charged on similar agreements. Carrying amounts and estimated fair values for financial instruments at December 31 were: F-56 82
1999 1998 - ------------------------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------------------------------ (In thousands) FINANCIAL ASSETS: Cash and short-term investments $ 1,649,689 $ 1,649,689 $ 1,615,605 $ 1,615,605 Trading securities 236,610 236,610 318,727 318,727 Investment securities available-for-sale 7,324,950 7,324,950 7,020,396 7,020,396 Investment securities held-to-maturity 299,312 295,076 226,134 228,039 Loans held-for sale 619,298 619,743 644,159 662,709 Loans, net 13,996,446 13,902,072 12,167,387 12,640,094 FINANCIAL LIABILITIES: Deposits $14,173,715 $14,135,259 $13,672,214 $13,668,271 Federal funds purchased 49,940 49,940 918,555 918,555 Securities sold under agreements to repurchase 4,364,540 4,364,540 3,157,945 3,157,945 Short-term borrowings 2,612,389 2,612,389 1,639,082 1,639,082 Notes payable 1,852,599 1,781,786 1,307,160 1,315,833 Subordinated notes 125,000 116,604 125,000 126,538 Capital securities 150,000 154,665 150,000 149,115 COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: Commitments to extend credit $ 4,339,059 $ 8,391 $ 4,103,151 $ 7,044 Letters of credit 84,948 1,847 107,307 834
NOTE 25 - RISK MANAGEMENT AND TRADING ACTIVITIES The Corporation's exposure to market risk relates to changes in interest rates or in the fair value of the underlying financial instruments and, to a limited extent, to fluctuations in foreign currency exchange rates. The operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. Risk management activities are aimed at optimizing net interest income, consistent with the Corporation's business strategies. Among the various methods used by the Corporation to measure the risks generated by assets and liabilities are beta-adjusted gap analysis, simulations and duration analysis. In managing its market risk the Corporation enters, to a limited extent, into certain derivative instruments that expose it to credit risk, which represents the risk that the counterparties might default on their obligations. To manage the level of credit risk the Corporation deals with counterparties of good credit standing, enters into master netting agreements whenever possible and, when appropriate, obtains collateral. Concentrations of credit risk which arise through the Corporation's off-balance sheet lending activities are presented in Note 23. The following table indicates the types of derivative financial instruments the Corporation held at December 31. The credit exposure is represented by the fair value of the instruments with a positive market value. The following table should be read in conjunction with the descriptions of these products and the Corporation's objectives for holding them which immediately follows:
1999 1998 - -------------------------------------------------------------------------------------------------------- Average Average Notional for the Fair Notional for the Fair amount year value amount year value - -------------------------------------------------------------------------------------------------------- (In thousands) Interest rate swaps: Pay floating/receive fixed $ 15,000 $ 15,000 $ 20 $ 15,000 $ 15,000 $ 477 Pay fixed/receive floating 35,000 100,792 (133) 190,000 206,042 (2,732) Interest rate swaptions 80,456 77,533 38,995 62,163 55,668 38,495 Interest rate futures 125,065 Interest rate options 21,416 23,631 1,882 61,753 65,835 584 Interest rate caps 2,713 2,713 57 3,500 3,500 22 Interest rate floors 2,713 2,713 (17) 3,500 3,500 (91) Foreign exchange contracts 1,930 2,485 877 Securities sold not yet purchased 413 120 4,649
Interest rate swaps: Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal. Net interest settlements on interest rate swaps are recorded as an adjustment to interest income or interest expense of the hedged item.
(Dollars in thousands) 1999 1998 - --------------------------------------------------------------------------------- Activity of interest rate swaps hedges for the year: Beginning balance $ 205,000 $ 230,000 Matured swaps (155,000) (25,000) - --------------------------------------------------------------------------------- Ending balance $ 50,000 $ 205,000 ================================================================================= Pay floating/receive fixed: Weighted average receive rate at December 31 6.42% 6.42% Weighted average pay rate at December 31 6.09 5.06 Pay fixed/receive floating: Weighted average receive rate at December 31 5.38% 5.23% Weighted average pay rate at December 31 6.75 6.32
F-57 83 The agreements were entered into to change the Corporation's interest rate exposure and they end at the time the related obligation matures. The variable rates are based on the three-month and six-month LIBOR rates. Nonperformance by any of the counterparties on this agreement will expose the Corporation to an interest rate risk. Interest rate swaptions: The Corporation enters into options on swaps ("swaption") derivative securities, which combine the characteristics of interest rate swaps and options, for hedging purposes. BPPR issues certificates of deposit with returns linked to the Standard and Poor's 500 index (the index). In order to hedge the cost of these certificates, positions in swaptions are assumed. These swaptions earn a return to the Corporation equal to the appreciation in the index throughout the life of the certificate of deposit issued. In exchange, the Corporation pays the counterparty a fixed rate of interest. Interest rate futures and forwards: Futures and forwards are contracts for the delayed delivery of securities in which the seller agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. The credit risk inherent in futures is the risk that the exchange party may default. The credit risk inherent in forwards arises from the potential inability of counterparties to meet the terms of their contracts. Both futures and forwards are also subject to the risk of movements in interest rates or in the value of the underlying securities or instruments. Forward contracts include "when-issued securities." When-issued securities are commitments to purchase or sell securities authorized for issuance but not yet actually issued. Accordingly, they are not recorded on the balance sheet until issued. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. Interest rate options, caps and floors: Interest rate options are contracts that grant the purchaser, for a premium payment, the right to either purchase from or sell to the writer of the option a financial instrument at a specified price within a specified period of time or on a specified date. Interest rate caps and floors are option-like contracts that require the writer to pay the purchaser at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate, applied to a notional principal amount. The option writer receives a premium for bearing the risk of unfavorable interest rate changes. Foreign exchange contracts: To satisfy the needs of its customers, from time to time, the Corporation enters into foreign exchange contracts in the spot or futures market. Spot contracts require the exchange of two currencies at an agreed rate to occur within two business days of the contract date. Forward and futures contracts to purchase or sell currencies at a future date settle over periods of up to one year, in general. Futures and forward contracts are recorded at market value. Securities sold not yet purchased: The Corporation enters in securities sold not yet purchased transactions for hedging strategies and for trading purposes. Various assets and liabilities, such as investment securities financed by borrowings, are usually hedged to lock-in spreads and reduce the risk of losses in value due to interest rate fluctuations. Open positions on securities sold short for trading purposes are usually closed at each month-end. The volume of such transactions is not significant. Trading activities: The Corporation maintains limited trading positions in certain financial instruments and nonfinancial contracts including, to a limited extent, derivatives. Most of the Corporation's trading activities are limited to the purchase of debt securities for the purpose of selling them in the near term and positioning securities for resale to retail customers. Trading activities of the Corporation are subject to strict guidelines approved by the Board of Directors and included in the investment policy. In anticipation of customer demand, the Corporation carries an inventory of capital market instruments and maintains market liquidity by quoting bid and offer prices to and trading with other market makers. Positions are also taken in interest rate sensitive instruments, based on expectations of future market conditions. These activities constitute the proprietary trading business and are held by the Corporation to provide customers with financial products at competitive prices. As trading strategies depend on both market-making and proprietary positions, given the relationship between instruments and markets, those activities are managed in concert in order to maximize net trading revenue. All trading instruments are subject to market risk, the risk that future changes in market conditions may make an instrument less valuable or more onerous. Fluctuations in market prices, interest rates or exchange rates change the market value of the instruments. As the instruments are recognized at market value, these changes directly affect reported income. Exposure to market risk is managed, in accordance with risk limits F-58 84 set by senior management, by buying or selling instruments or entering into offsetting positions. At December 31, 1999 and 1998, the Corporation held no futures or options contracts written for trading purposes. The following table indicates the fair value and net gains (losses) of derivatives financial instruments held for trading purposes.
Fair Value - ------------------------------------------------------------------------------------ At December 31, 1999 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) - ------------------------------------------------------------------------------------ (In thousands) Futures contracts $ (7) Forward contracts $50 $123 $1,476
Fair Value - ------------------------------------------------------------------------------------ At December 31, 1999 Average for the period Net gains Assets Liabilities Assets Liabilities (losses) - ------------------------------------------------------------------------------------ (In thousands) Futures contracts $38 $(150)
The Corporation's credit exposure from off-balance sheet derivative financial instruments held or issued for trading purposes is represented by the fair value of the instruments with a positive fair value at that date. NOTE 26 - SUPPLEMENTAL DISCLOSURE ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS: During the year ended December 31, 1999, the Corporation paid interest and income taxes amounting to $879,340,000 and $132,504,000, respectively (1998 - $768,415,000 and $93,850,000; 1997 - $703,553,000 and $88,752,000). In addition, loans transferred to other real estate and other property for the year ended December 31, 1999, amounted to $29,290,000 and $24,959,000, respectively (1998 - $27,978,000 and $26,775,000). NOTE 27 - 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 are made 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, which provide individuals, corporations and institutions with commercial and retail banking services, including loans and deposits, trust, mortgage banking and servicing, asset management, credit cards and other financial services. These services are offered through a delivery system of 298 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 lending segment includes those non-banking subsidiaries whose principal activity is originating mortgage and consumer loans such as Popular Mortgage, Levitt Mortgage, Popular Finance and Equity One. The services of Popular Mortgage, Levitt Mortgage and Popular Finance are furnished through 62 offices in Puerto Rico while those of Equity One are provided in 138 offices throughout 32 states. The Corporation's lease financing segment provides financing for vehicles and equipment through 12 offices of Popular Leasing and Rental, Inc. in Puerto Rico and 10 offices of Popular Leasing, USA in 7 states. 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 described in the summary of accounting policies. Following are the results of operations and selected financial information by operating segment for each of the three years ended December 31:
- --------------------------------------------------------------------------------------------------------------------------- Mortgage and Commercial consumer Lease (In thousands) banking lending financing Other Eliminations Total - --------------------------------------------------------------------------------------------------------------------------- 1999 - --------------------------------------------------------------------------------------------------------------------------- Net interest income $ 817,122 $ 90,656 $ 42,772 $ 3,255 $ (67) $ 953,738 Provision for loan losses 112,881 26,457 8,022 1,588 148,948 Other income 249,446 45,084 18,912 65,816 (6,342) 372,916 Intangibles amortization 28,143 436 754 2,455 31,788 Depreciation expense 55,776 1,852 8,347 5,345 71,320 Other operating expenses 576,817 70,624 25,040 63,829 (1,936) 734,374 Net loss of minority interest 2,454 2,454 Income tax 67,094 12,685 7,526 (1,036) (1,149) 85,120 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 225,857 $ 23,686 $ 11,995 $ (656) $ (3,324) $ 257,558 =========================================================================================================================== Segment assets $21,736,663 $2,148,084 $733,063 $ 6,350,477 $(5,507,748) $25,460,539 ===========================================================================================================================
1998 - --------------------------------------------------------------------------------------------------------------------------- Net interest income $ 751,126 $ 83,940 $ 40,180 $ (2,163) $ (71) $ 873,012 Provision for loan losses 104,374 21,480 11,250 109 137,213 Other income 215,021 31,944 18,828 26,915 (1,462) 291,246 Intangibles amortization 25,602 890 1,237 131 27,860 Depreciation expense 51,830 1,428 8,590 801 62,649 Operating expenses 532,015 55,798 21,668 20,855 (491) 629,845 Net loss of minority interest 328 328 Income tax 53,464 13,964 6,258 972 13 74,671 - --------------------------------------------------------------------------------------------------------------------------- Net income $ 198,862 $ 22,324 $ 10,005 $ 2,212 $ (1,055) $ 232,348 =========================================================================================================================== Segment assets $19,973,005 $1,830,134 $678,878 $ 5,269,381 $(4,591,041) $23,160,357 ===========================================================================================================================
F-59 85
Mortgage and Commercial consumer Lease (In thousands) banking lending financing Other Eliminations Total - ----------------------------------------------------------------------------------------------------------------------------- 1997 Net interest income $ 668,230 $ 76,449 $ 36,648 $ 2,628 $ 783,955 Provision for loan losses 82,095 18,866 9,646 110,607 Other income 201,752 23,741 16,985 5,354 (234) 247,598 Intangibles amortization 20,715 1,001 1,280 (122) 22,874 Depreciation expense 43,898 1,121 8,078 1,426 54,523 Operating expenses 492,009 41,156 20,819 5,959 (420) 559,523 Income tax 55,104 15,067 5,160 (942) 72 74,461 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 176,161 $ 22,979 $ 8,650 $ 1,661 $ 114 $ 209,565 ============================================================================================================================= Segment assets $16,759,606 $1,519,739 $625,436 $ 3,981,062 $(3,585,336) $19,300,507 =============================================================================================================================
Geographic Information
1999 1998 1997 - --------------------------------------------------------------------------------- (In thousands) Revenues*: Puerto Rico $1,555,059 $1,419,371 $1,297,532 United States 555,052 462,582 390,759 Other 114,475 60,996 50,610 - --------------------------------------------------------------------------------- Total consolidated revenues $2,224,586 $1,942,949 $1,738,901 =================================================================================
* Total revenues include interest income, service charges on deposit accounts, other service fees, gain on sale of securities, trading account profit, and other income. - --------------------------------------------------------------------------------
1999 1998 1997 - -------------------------------------------------------------------------------- (In thousands) Selected Balance Sheet Information: Puerto Rico Total assets $18,213,576 $16,517,161 $14,301,572 Loans 8,840,740 7,895,689 7,322,109 Deposits 9,792,129 9,444,199 8,581,277 United States Total assets $ 6,258,029 $ 5,660,628 $ 4,503,956 Loans 5,387,799 4,556,060 3,686,538 Deposits 3,472,839 3,410,808 2,714,282 Other Total assets $ 988,934 $ 982,568 $ 494,979 Loans 679,215 627,046 367,960 Deposits 908,747 817,207 454,027
NOTE 28 - CONTINGENT LIABILITIES: 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. NOTE 29 - POPULAR, INC. (HOLDING COMPANY ONLY) FINANCIAL INFORMATION: The following condensed financial information presents the financial position of the Holding Company only as of December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999. The financial information related to the investment in subsidiaries, presented below, was restated to reflect the U.S. reorganization explained in Note 1. STATEMENTS OF CONDITION
December 31, - ---------------------------------------------------------------------------------- (In thousands) 1999 1998 - ---------------------------------------------------------------------------------- ASSETS Cash $ 332 $ 524 Money market investments 35,500 3,700 Investment securities available-for-sale, at market value 126,716 107,175 Investment in BPPR, at equity 1,048,739 1,309,976 Investment in Banco Popular North America, at equity 429,180 412,220 Investment in GM Group, at equity 46,020 Investment in other subsidiaries, at equity 141,735 160,361 Advances to subsidiaries 895,448 769,406 Other assets 10,057 3,813 - ---------------------------------------------------------------------------------- Total assets $2,733,727 $2,767,175 ================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Securities sold under agreements to repurchase $ 51,438 Commercial paper $ 133,117 164,515 Other short-term borrowings 297,933 247,072 Notes payable 484,715 436,877 Accrued expenses and other liabilities 31,976 33,160 Subordinated notes 125,000 125,000 Stockholders' equity 1,660,986 1,709,113 - ---------------------------------------------------------------------------------- Total liabilities and stockholders' equity $2,733,727 $2,767,175 ==================================================================================
F-60 86
STATEMENTS OF INCOME Year ended December 31, - --------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------- Income: Dividends from subsidiaries $ 314,348 $ 70,925 $ 53,000 Interest on money market and investment securities 3,696 5,052 5,355 Other operating income 7,232 4,674 496 Interest on advances to subsidiaries 57,219 49,564 45,434 - --------------------------------------------------------------------------- Total income 382,495 130,215 104,285 - --------------------------------------------------------------------------- Expenses: Interest expense 64,739 58,747 53,182 Operating expenses 2,155 1,133 1,494 - --------------------------------------------------------------------------- Total expenses 66,894 59,880 54,676 - --------------------------------------------------------------------------- Income before income taxes and equity in undistributed earnings of subsidiaries 315,601 70,335 49,609 Income taxes 32 (1,573) - --------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiaries 315,601 70,303 51,182 Equity in undistributed earnings of subsidiaries (dividends in excess of annual net earnings of subsidiaries) (58,043) 162,045 158,383 - --------------------------------------------------------------------------- Net income $ 257,558 $ 232,348 $209,565 ===========================================================================
STATEMENTS OF CASH FLOWS
Year ended December 31, - ------------------------------------------------------------------------------------------ (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 257,558 $ 232,348 $ 209,565 - ------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries 58,043 (162,045) (158,383) Depreciation of premises and equipment 1,345 Loss on disposition of premises and equipment 3,295 Gain on sale of investment securities available-for-sale (4,303) (824) Amortization of premiums and accretion of discounts on investments 17 25 20 Net increase in other assets (6,244) (130) (335) Net decrease in current taxes (5,359) (1,018) (86) Net increase (decrease) in interest payable 1,557 2,376 (4,199) Net increase (decrease) in other liabilities 5,207 419 (2,190) - ------------------------------------------------------------------------------------------ Total adjustments 53,221 (164,676) (161,357) - ------------------------------------------------------------------------------------------ Net cash provided by operating activities 310,779 67,672 48,208 - ------------------------------------------------------------------------------------------ Cash flows from investing activities: Net (increase) decrease in money market investments (31,800) (3,700) 55,024 Purchases of investment securities available-for-sale (94,299) (7,362) (5,560) Maturities of investment securities available-for-sale 50,000 5,000 682 Sales of investment securities available-for-sale 3,308 7,700 2,365 Capital contribution to subsidiaries (5,100) (119,941) (58,500) Distribution from subsidiary 8,642 Advances to subsidiaries (126,042) (77,700) (57,449) Acquisition of premises and equipment (15) Proceeds from sale of premises and equipment 34,551 - ------------------------------------------------------------------------------------------ Net cash used in investing activities (195,291) (196,003) (28,902) - ------------------------------------------------------------------------------------------ Cash flows from financing activities: Net decrease in securities sold under agreements to repurchase (51,438) (337) (309) Net (decrease) increase in commercial paper (31,398) 66,416 (66,280) Net increase (decrease) in other short-term borrowings 50,861 156,197 (61,126) Net increase (decrease) in notes payable 47,838 (29,211) 232,550 Payment of senior debentures (30,000) Cash dividends paid (87,012) (72,021) (59,037) Proceeds from issuance of common stock 9,387 7,433 4,642 Treasury stock acquired (53,918) (39,559) - ------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (115,680) 128,477 (19,119) - ------------------------------------------------------------------------------------------ Net (decrease) increase in cash (192) 146 187 Cash at beginning of period 524 378 191 - ------------------------------------------------------------------------------------------ Cash at end of period $ 332 $ 524 $ 378 ==========================================================================================
F-61 87 The principal source of income for the Holding Company consists of dividends from BPPR. As a member subject to the regulations of the Federal Reserve Board, BPPR must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared by it in any calendar year would exceed the total of its net profits for that year, as defined by the Federal Reserve Board, combined with its retained net profits for the preceding two years. The payment of dividends by BPPR may also be affected by other regulatory requirements and policies, such as the maintenance of certain minimum capital levels described in Note 18. NOTE 30 - POPULAR INTERNATIONAL BANK, INC. (A SUBSIDIARY OF POPULAR, INC.) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of Popular International Bank, Inc. and its subsidiaries as of November 30, 1999 and 1998, and the results of their operations and cash flows for each of the three years in the period ended November 30, 1999. Popular International Bank, Inc. is the holding company of ATH Costa Rica and Popular North America, Inc., including Popular Holdings USA, Inc. and it subsidiaries; Banco Popular North America and Banco Popular, N.A. (Texas); Popular Cash Express, Inc. and Equity One, Inc. (second tier subsidiaries). It also owns 57% of the outstanding common stock of Banco Fiduciario, S.A. The results of Popular Holdings USA, Inc. and its subsidiaries are included as of December 31, 1999 and 1998. As previously mentioned in Note 1, the financial information for 1998 and 1997, presented below, was restated to reflect the U.S. reorganization as if it had been consummated at the beginning of fiscal year 1997. STATEMENTS OF CONDITION
November 30, - --------------------------------------------------------------------------------- (In thousands) 1999 1998 - --------------------------------------------------------------------------------- ASSETS Cash $ 243,149 $ 297,764 Money market investments 88,877 88,648 Investment securities available-for-sale, at market value 332,203 507,621 Investment securities held-to-maturity, at cost 48,890 21,008 Loans held-for-sale 87,135 207,183 Loans 5,669,057 4,573,802 Less: Unearned income 78,712 70,434 Allowance for loan losses 103,846 92,173 - --------------------------------------------------------------------------------- 5,486,499 4,411,195 - --------------------------------------------------------------------------------- Other assets 298,098 281,258 Intangible assets 151,034 150,318 - --------------------------------------------------------------------------------- Total assets $6,735,885 $5,964,995 ================================================================================= LIABILITIES AND STOCKHOLDER'S EQUITY Deposits: Non-interest bearing $ 626,374 $ 617,298 Interest bearing 3,749,001 3,038,798 - --------------------------------------------------------------------------------- 4,375,375 3,656,096 - --------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 40,540 405,810 Other short-term borrowings, consisting of $346,131 in term notes (1998 - $409,579), and a revolving credit facility with an affiliate of $60,000 in 1998 346,131 469,579 Notes payable 1,167,955 618,540 Other liabilities 93,286 96,946 Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 Minority interest in consolidated subsidiary 21,741 27,591 Stockholder's equity 540,857 540,433 - --------------------------------------------------------------------------------- Total liabilities and stockholder's equity $6,735,885 $5,964,995 =================================================================================
F-62 88 STATEMENTS OF INCOME
Year ended November 30, - ---------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ---------------------------------------------------------------------------- Interest and fees: Loans $ 490,043 $381,521 $317,210 Money market, trading and investment securities 28,485 28,990 33,930 - ---------------------------------------------------------------------------- 518,528 410,511 351,140 - ---------------------------------------------------------------------------- Interest expense: Deposits 154,309 108,764 86,395 Short-term borrowings 43,059 33,641 29,587 Long-term borrowings 74,685 63,573 56,092 - ---------------------------------------------------------------------------- 272,053 205,978 172,074 - ---------------------------------------------------------------------------- Net interest income 246,475 204,533 179,066 Provision for loan losses 53,147 49,283 29,041 - ---------------------------------------------------------------------------- Net interest income after provision for loan losses 193,328 155,250 150,025 Service charges on deposit accounts 28,841 21,116 16,362 Other service fees 50,329 20,380 11,596 Gain on sale of securities 592 2,665 339 Trading account loss (205) Other operating income 25,718 20,880 12,231 - ---------------------------------------------------------------------------- 298,808 220,086 190,553 - ---------------------------------------------------------------------------- Operating expenses 291,174 208,525 145,500 - ---------------------------------------------------------------------------- Income before income tax and minority interest 7,634 11,561 45,053 Income tax 5,209 2,691 20,032 Net loss of minority interest 2,425 328 - ---------------------------------------------------------------------------- Net income $ 4,850 $ 9,198 $ 25,021 ============================================================================
STATEMENTS OF CASH FLOWS
Year ended November 30, - ----------------------------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 4,850 $ 9,198 $ 25,021 - ----------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization of premises and equipment 15,708 9,527 5,958 Provision for loan losses 53,147 49,283 29,041 Amortization of intangibles 13,963 10,472 7,566 Amortization of deferred loan fees and costs (1,829) (1,109) (1,248) Amortization of premiums and accretion of discounts on investments 127 269 1,244 Decrease (increase) in loans held-for-sale 140,503 (176,753) (2,817) Gain on sale of investment securities available-for-sale (592) (2,665) (339) Loss (gain) on disposition of premises and equipment 19 (27) (496) Gain on sale of loans (21,654) (14,828) (10,133) Net increase in interest receivable (8,459) (7,818) (5,267) Net decrease (increase) in other assets 48 (30,122) 363 Net (decrease) increase in interest payable (9,348) 1,121 4,339 Net (decrease) increase in current and deferred taxes (9,166) 870 (3,492) Net increase (decrease) in other liabilities 8,672 (1,090) (4,607) - ----------------------------------------------------------------------------------------------- Total adjustments 181,139 (162,870) 20,112 - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 185,989 (153,672) 45,133 - ----------------------------------------------------------------------------------------------- Cash flows from investing activities: Net increase in money market investments 68,681 44,349 29,621 Purchases of investment securities held- to-maturity (74,990) (4,232) Purchases of investment securities available-for-sale (1,676,821) (894,252) (701,048) Maturities of investment securities held- to-maturity 57,651 79,778 35,446 Sale of investment securities available for-sale 72,087 126,659 649,907 Maturities of investment securities available-for-sale 1,696,081 800,296 70,092 Net disbursements on loans (1,958,083) (1,023,310) (576,372) Proceeds from sale of loans 920,421 587,005 294,001 Acquisition of loan portfolios (5,228) (10,853) Capital contribution to subsidiary 2,761 Assets acquired, net of cash (603) (17,168) (36,734) Acquisition of premises and equipment (24,058) (32,749) (21,817) Proceeds from sales of premises and equipment 1,228 1,178 5,857 - ----------------------------------------------------------------------------------------------- Net cash used in investing activities (840,655) (408,432) (266,132) - ----------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 648,033 204,714 76,641 Net deposits acquired 36,297 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (365,270) 277,336 4,017 Net (decrease) increase in other short- term borrowings (176,978) 143,480 (131,184) Proceeds from issuance of notes payable 615,790 144,501 939,931 Payments of notes payable (121,524) (181,176) (845,916) Proceeds from issuance of Capital Securities 150,000 Proceeds from issuance of common stock 462 Capital contribution from Parent company 119,941 58,039 - ----------------------------------------------------------------------------------------------- Net cash provided by financing activities 600,051 745,093 251,990 - ----------------------------------------------------------------------------------------------- Net (decrease) increase in cash and due from banks (54,615) 182,989 30,991 Cash and due from banks at beginning of year 297,764 114,775 83,784 - ----------------------------------------------------------------------------------------------- Cash and due from banks at end of year $ 243,149 $ 297,764 $ 114,775 ===============================================================================================
F-63 89 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended November 30, - ---------------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------- Preferred Stock: Par value $25; authorized 25,000,000 shares, none issued Common Stock: Par value $5; authorized 1,000,000 shares, 792,300 shares issued and outstanding (1998 and 1997 - 792,300) Balance at beginning of the period $ 3,962 $ 3,962 $ 3,500 Issuance of common stock 462 - ---------------------------------------------------------------------------------- Balance at end of the period 3,962 3,962 3,962 - ---------------------------------------------------------------------------------- Additional paid-in capital: Balance at beginning of the period 470,226 350,285 132,964 Capital contribution from Parent company 116,192 207,132 Retained earnings capitalized upon the reorganization 3,749 10,189 - ---------------------------------------------------------------------------------- Balance at end of the period 470,226 470,226 350,285 - ---------------------------------------------------------------------------------- Retained earnings: Balance at beginning of the period 64,670 59,221 44,389 Net income 4,850 9,198 25,021 Retained earnings capitalized upon the reorganization (3,749) (10,189) - ---------------------------------------------------------------------------------- Balance at end of the period 69,520 64,670 59,221 - ---------------------------------------------------------------------------------- Accumulated other comprehensive income: Balance at beginning of the period 1,575 2,033 626 Other comprehensive (loss) income (4,426) (458) 1,407 - ---------------------------------------------------------------------------------- Balance at end of the period (2,851) 1,575 2,033 - ---------------------------------------------------------------------------------- Total stockholder's equity $ 540,857 $ 540,433 $415,501 ==================================================================================
STATEMENTS OF COMPREHENSIVE INCOME
Year ended November 30, - ---------------------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------- Net income $ 4,850 $ 9,198 $25,021 Other comprehensive (loss) income: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period, net of tax of $(688) (1998 - $(203); 1997 - $622) (3,232) 1,520 1,612 Less: Reclassification adjustment for gains included in net income, net of tax of $91 (1998 - $958; 1997 - $136) 171 1,763 205 Foreign currency translation adjustment (1,023) (215) - ---------------------------------------------------------------------------------------- Total other comprehensive (loss) income (4,426) (458) 1,407 - ---------------------------------------------------------------------------------------- Comprehensive income, net of taxes $ 424 $ 8,740 $26,428 ========================================================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Year ended December 31, - -------------------------------------------------------------------- (In thousands) 1999 1998 1997 - -------------------------------------------------------------------- Foreign currency translation adjustment $(1,238) $ (215) - -------------------------------------------------------------------- Unrealized gains (losses) on securities (1,613) 1,790 $2,033 - -------------------------------------------------------------------- Accumulated other comprehensive (loss) income $(2,851) $ 1,575 $2,033 ====================================================================
NOTE 31 - POPULAR NORTH AMERICA, INC. (A SECOND - TIER SUBSIDIARY OF POPULAR, INC.) FINANCIAL INFORMATION: The following summarized financial information presents the consolidated financial position of Popular North America, Inc. and its subsidiaries, Popular Cash Express, Inc., Equity, One, Inc. and Popular Holdings USA, Inc., and its wholly-owned subsidiaries, Banco Popular North America and Banco Popular, N.A. (Texas) as of November 30, 1999 and 1998, and the results of their operations and cash flows for each of the three years in the period ended November 30, 1999. The results of Popular Holdings USA, Inc. and its subsidiaries are included as of December 31, 1999 and 1998. As previously mentioned in Note 1, the financial information for 1998 and 1997, presented below, was restated to reflect the U.S. reorganization as if it had been consummated at the beginning of fiscal year 1997. F-64 90 STATEMENTS OF CONDITION
November 30, - -------------------------------------------------------------------------------- (In thousands) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 194,117 $ 196,146 Money market investments 56,121 39,963 Investment securities available-for-sale, at market value 314,379 498,695 Investment securities held-to-maturity, at cost 48,890 21,008 Loans held-for-sale 87,135 207,183 - ------------------------------------------------------------------------------- Loans 5,412,101 4,312,703 Less: Unearned income 78,712 70,434 Allowance for loan losses 79,888 66,730 - ------------------------------------------------------------------------------- 5,253,501 4,175,539 - ------------------------------------------------------------------------------- Other assets 218,555 200,326 Intangible assets 141,025 143,239 - ------------------------------------------------------------------------------- Total assets $6,313,723 $5,482,099 =============================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY Deposits: Non-interest bearing $ 591,454 $ 577,099 Interest bearing 3,490,879 2,759,342 - ------------------------------------------------------------------------------- 4,082,333 3,336,441 - ------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase 40,540 405,810 Other short-term borrowings, consisting of $324,905 term notes (1998 - $366,103) and a revolving credit facility with an affiliate of $60,000 in 1998 324,905 426,103 Notes payable 1,125,012 579,194 Other liabilities 78,536 77,847 Preferred beneficial interest in Popular North America's junior subordinated deferrable interest debentures guaranteed by the Corporation 150,000 150,000 Stockholder's equity 512,397 506,704 - ------------------------------------------------------------------------------- Total liabilities and stockholder's equity $6,313,723 $5,482,099 ===============================================================================
STATEMENTS OF INCOME
Year ended November 30, - ----------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------------- Interest and fees: Loans $438,991 $372,569 $317,210 Money market and investment securities 26,021 28,263 32,362 - ----------------------------------------------------------------------------- 465,012 400,832 349,572 - ----------------------------------------------------------------------------- Interest expense: Deposits 118,053 101,372 86,396 Short-term borrowings 37,479 32,496 29,585 Long-term borrowings 72,422 63,246 56,092 - ----------------------------------------------------------------------------- 227,954 197,114 172,073 - ----------------------------------------------------------------------------- Net interest income 237,058 203,718 177,499 Provision for loan losses 51,558 49,174 29,041 - ----------------------------------------------------------------------------- Net interest income after provision for loan losses 185,500 154,544 148,458 Service charges on deposit accounts 24,911 20,312 16,362 Other service fees 43,381 18,734 11,586 Gain on sale of securities 516 2,686 309 Trading account profit 1 Other operating income 23,431 19,936 12,339 - ----------------------------------------------------------------------------- 277,739 216,213 189,054 Operating expenses 261,466 203,059 144,981 - ----------------------------------------------------------------------------- Income before tax 16,273 13,154 44,073 Income tax 7,321 2,691 20,032 - ----------------------------------------------------------------------------- Net income $ 8,952 $ 10,463 $ 24,041 =============================================================================
F-65 91 STATEMENTS OF CASH FLOWS
Year ended November 30, - ------------------------------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 8,952 $ 10,463 $ 24,041 - ------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization of premises and equipment 11,428 8,823 5,914 Provision for loan losses 51,558 49,174 29,041 Amortization of intangibles 13,546 10,407 7,566 Amortization of deferred loan fees and costs (1,829) (1,109) (1,248) Amortization of premiums and accretion of discounts on investments 127 269 1,244 Decrease (increase) in loans held-for-sale 140,503 (176,753) (2,817) Gain on sale of investment securities available-for-sale (516) (2,686) (309) Loss (gain) on disposition of premises and equipment 19 (26) (496) Gain on sale of loans (21,654) (14,828) (10,133) Net decrease in interest receivable (9,346) (3,333) (5,267) Net (increase) decrease in other assets (7,004) (14,555) 538 Net (decrease) increase in interest payable (9,772) 897 4,332 Net decrease in current and deferred taxes (4,021) (2,737) (3,492) Net increase (decrease) in other liabilities 20,439 268 (3,511) - ------------------------------------------------------------------------------------------------- Total adjustments 183,478 (146,189) 21,362 - ------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 192,430 (135,726) 45,403 - ------------------------------------------------------------------------------------------------- Cash flows from investing activities: Net decrease in money market investments 52,752 12,413 29,001 Purchases of investment securities held-to-maturity (74,990) (4,232) Maturities of investment securities held-to-maturity 57,651 79,778 35,446 Purchases of investment securities available-for-sale (1,667,854) (887,994) (700,983) Sale of investment securities available-for-sale 72,087 126,659 649,797 Maturities of investment securities available-for-sale 1,696,081 800,296 70,092 Net disbursements on loans (1,952,035) (1,050,285) (576,372) Proceeds from sale of loans 920,421 587,005 294,001 Acquisition of loan portfolios (5,228) (10,853) Capital contribution to subsidiary (32,486) Assets acquired, net of cash (603) (68,406) (36,734) Acquisition of premises and equipment (22,083) (30,880) (20,385) Proceeds from sale of premises and equipment 50 29 5,695 - ------------------------------------------------------------------------------------------------- Net cash used in investing activities (876,019) (511,603) (265,527) - ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits 674,646 204,623 76,893 Net deposits acquired 36,297 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase (365,270) 277,336 4,017 Net (decrease) increase in other short-term borrowings (161,650) 154,822 (131,183) Proceeds from issuance of notes payable 622,711 144,501 939,931 Payments of notes payable (125,121) (178,712) (845,916) Proceeds from issuance of Capital securities 150,000 Capital contribution from Parent company 36,244 89,941 58,500 - ------------------------------------------------------------------------------------------------- Net cash provided by financing activities 681,560 728,808 252,242 - ------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and due from banks (2,029) 81,479 32,118 Cash and due from banks at beginning of period 196,146 114,667 82,549 - ------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $ 194,117 $ 196,146 $ 114,667 =================================================================================================
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Year ended November 30, - --------------------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------- Preferred Stock: Par value $0.10; authorized 1,000 shares, none issued Common Stock: Par value $1; authorized 10,000 shares, 2,000 shares issued and outstanding Balance at beginning and end of the period $ 2 $ 2 $ 2 - --------------------------------------------------------------------------------------- Additional paid-in capital: Balance at beginning of the period 439,964 350,023 132,163 Capital contribution from parent company 86,192 207,671 Retained earnings capitalized upon the reorganization 3,749 10,189 - --------------------------------------------------------------------------------------- Balance at end of the period 439,964 439,964 350,023 - --------------------------------------------------------------------------------------- Retained earnings: Balance at beginning of the period 65,043 58,329 44,477 Net income 8,952 10,463 24,041 Retained earnings capitalized upon the reorganization (3,749) (10,189) - --------------------------------------------------------------------------------------- Balance at end of the period 73,995 65,043 58,329 - --------------------------------------------------------------------------------------- Accumulated other comprehensive income: Balance at beginning of the period 1,695 2,025 625 Other comprehensive (loss) income (3,259) (330) 1,400 - --------------------------------------------------------------------------------------- Balance at end of the period (1,564) 1,695 2,025 - --------------------------------------------------------------------------------------- Total stockholder's equity $ 512,397 $ 506,704 $ 410,379 =======================================================================================
F-66 92 STATEMENTS OF COMPREHENSIVE INCOME
Year ended November 30, - ----------------------------------------------------------------------------------------- (In thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------- Net income $ 8,952 $ 10,463 $24,041 Other comprehensive (loss) income: Unrealized (losses) gains on securities: Unrealized holding (losses) gains arising during the period, net of tax of $(688) (1998 - $(203); 1997 - $622) (3,088) 1,433 1,573 Less: Reclassification adjustment for gains included in net income, net of tax of $91 (1998 - $958; 1997 - $136) 171 1,763 173 - ----------------------------------------------------------------------------------------- Other comprehensive (loss) income (3,259) (330) 1,400 - ----------------------------------------------------------------------------------------- Comprehensive income, net of taxes $ 5,693 $ 10,133 $25,441 =========================================================================================
DISCLOSURE OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Year ended December 31, - ------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------ (In thousands) Unrealized (losses) gains on securities $(1,564) $1,695 $2,025 ================================================================== Accumulated other comprehensive income $(1,564) $1,695 $2,025 ==================================================================
F-67 93 STOCKHOLDERS' INFORMATION INDEPENDENT PUBLIC ACCOUNTANTS PRICEWATERHOUSECOOPERS ANNUAL MEETING THE 2000 ANNUAL STOCKHOLDERS' MEETING OF POPULAR, INC. WILL BE HELD ON TUESDAY, APRIL 25, AT 10:30 A.M. AT CENTRO EUROPA BUILDING IN SAN JUAN, PUERTO RICO. TELEPHONE: (787) 765-9800 EXT. 5637 FAX: (787) 763-5972 E-MAIL: POPULAR-STCK-TRANSFER@BPPR.COM ADDITIONAL INFORMATION COPIES OF THE ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K AND ANY OTHER FINANCIAL INFORMATION MAY BE OBTAINED BY WRITING TO: AMILCAR L. JORDAN SENIOR VICE PRESIDENT BANCO POPULAR DE PUERTO RICO P.O. BOX 362708 SAN JUAN, PR 00936-2708 DESIGN: BD&E INC., PITTSBURGH, PENNSYLVANIA PHOTOGRAPHY: TONY VERA PRINTING: HOECHSTETTER PRINTING COMPANY BOWNE OF ATLANTA, INC. 94 P.O. BOX 362708 SAN JUAN PUERTO RICO 00936-2708 EX-21.1 6 SCHEDULE OF SUBSIDIARIES OF POPULAR, INC. 1 EXHIBIT 21.1 POPULAR, INC. AS OF DECEMBER 31, 1999 Subsidiaries of the registrant Banco Popular de Puerto Rico, (Banco Popular) - A wholly-owned subsidiary Bank, incorporated under the laws of Puerto Rico in 1998. Popular Leasing & Rental , Inc. (Popular Leasing) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1989. Popular Finance, Inc. (Popular Finance) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1989. Popular Mortgage, Inc. (Popular Home Mortgage) - A wholly-owned subsidiary of Banco Popular, incorporated under the laws of Puerto Rico in 1995. Popular International Bank, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1992. ATH Costa Rica, S.A.- A wholly-owned subsidiary of Popular International Bank, Inc., incorporated under the laws of Costa Rica in 1996. Popular North America, Inc. - A wholly-owned subsidiary of Popular International Bank, Inc., incorporated under the laws of Delaware in 1991. Banco Fiduciario, S.A. (Formerly: Banco Gerencial y Fiduciario Dominicano, S.A.) - A subsidiary of Popular International Bank, Inc., incorporated under the laws of Dominican Republic in 1983. Equity One, Inc. - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1980. Popular Holdings USA, Inc. - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1988. Banco Popular North America - A wholly-owned subsidiary of Popular Holdings USA, Inc., incorporated under the laws of New York in 1998. Popular Leasing, U.S.A. - A wholly-owned subsidiary of Banco Popular North America, incorporated under the laws of Delaware in 1997. BPNA Real Estate Holdings, Inc. - A wholly-owned subsidiary of Banco Popular North America, incorporated under the laws of New Jersey in 1999. BPNA Real Estate, Inc. - A wholly-owned subsidiary of BPNA Real Estate Holdings, Inc., incorporated under the laws of New York in 1999. Banco Popular, National Association (Texas) - A wholly-owned subsidiary of Popular Holdings USA, Inc., incorporated under the laws of Texas in 1985. BanPonce Trust I - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1997. 2 Popular Cash Express, Inc. - A wholly-owned subsidiary of Popular North America, Inc., incorporated under the laws of Delaware in 1997. Popular Securities, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1956. Metropolitana de Prestamos, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1961 (Inactive Corporation). Popular Assets Management, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1994 (Inactive Corporation). Puerto Rico Parking Corporation - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1963 (Inactive Corporation). GM Group, Inc. - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1989. Newco Mortgage Holding Corporation (Levitt Mortgage) - A wholly-owned subsidiary, incorporated under the laws of Puerto Rico in 1999. EX-23.1 7 CONSENTS OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 [PRICEWATERHOUSECOOPERS LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-82507) of Popular, Inc. of our report dated February 24, 2000 relating to the financial statements, which appears on page F-29 of the 1999 Annual Report to Shareholders of Popular, Inc., which is incorporated by reference in Popular, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 10, 2000 2 EXHIBIT 23.1 [PRICEWATERHOUSECOOPERS LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-80167) of Popular, Inc. of our report dated February 24, 2000 relating to the financial statements, which appears on page F-29 of the 1999 Annual Report to Shareholders of Popular, Inc. which is incorporated by reference in Popular, Inc.'s Annual Report on Form 10K for the year ended December 31, 1999. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 10, 2000 3 EXHIBIT 23.1 [PRICEWATERHOUSECOOPERS LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-80169) of Popular, Inc. of our report dated February 24, 2000 relating to the financial statements, which appears on page F-29 of the 1999 Annual Report to Shareholders of Popular, Inc., which is incorporated by reference in Popular, Inc.'s Annual Report on Form 10K for the year ended December 31, 1999. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 10, 2000 4 EXHIBIT 23.1 [PRICEWATERHOUSECOOPERS LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-94703) of Popular, Inc. of our report dated February 24, 2000 relating to the financial statements, which appears on page F-29 of the 1999 Annual Report to Shareholders of Popular, Inc., which is incorporated by reference in Popular, Inc.'s Annual Report on Form 10K for the year ended December 31, 1999. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP San Juan, Puerto Rico March 10, 2000 EX-27.1 8 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL STATEMENTS OF POPULAR, INCORPORATED FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 663,696 54,354 931,123 236,610 7,324,950 299,312 295,075 14,907,754 292,010 25,460,539 14,173,715 7,026,869 459,329 2,127,599 0 100,000 827,662 733,324 25,460,539 1,373,158 425,907 52,605 1,851,670 452,215 897,932 953,739 148,948 638 837,482 342,678 257,558 0 0 257,558 1.84 0 4.65 296,845 28,731 0 117,114 267,249 182,710 58,008 292,010 266,135 25,875 0
EX-99.1 9 POPULAR'S PROXY STATEMENT 1 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
POPULAR, INC. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] Fee paid previously with preliminary materials: [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: 2 POPULAR, INC. P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 ---------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON TUESDAY, APRIL 25, 2000 ---------------------------------- To the Stockholders of Popular, Inc.: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Popular, Inc. (the "Meeting") for the year 2000 will be held at 10:30 a.m. on Tuesday, April 25, 2000, on the third floor of the Centro Europa Building, in Santurce, Puerto Rico, to consider and act upon the following matters: (1) To elect four (4) directors of Popular, Inc. (the "Corporation") for a three-year term; and (2) To transact any and all other business as may be properly brought before the Meeting or any adjournments thereof. Management at present knows of no other business to be brought before the Meeting. Stockholders of record at the close of business on March 6, 2000, are entitled to notice of and to vote at the Meeting. You are cordially invited to attend the Meeting. Whether you plan to attend or not, please sign and return the enclosed proxy so that the Corporation may be assured of the presence of a quorum at the Meeting. A postage-paid envelope is enclosed for your convenience. REMEMBER THAT YOU CAN VOTE BY TELEPHONE OR BY INTERNET; FOR FURTHER DETAILS PLEASE REFER TO THE ENCLOSED PROXY CARD. San Juan, Puerto Rico, March 15, 2000. By Order of the Board of Directors, SAMUEL T. CESPEDES Secretary 3 POPULAR, INC. P.O. BOX 362708 SAN JUAN, PUERTO RICO 00936-2708 -------------------------- PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON TUESDAY, APRIL 25, 2000 -------------------------- This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of Popular, Inc. (the "Corporation") of proxies to be voted at the Annual Meeting of Stockholders (the "Meeting") to be held at 10:30 a.m. on Tuesday, April 25, 2000, on the third floor of the Centro Europa Building, in Santurce, Puerto Rico, and any adjournments thereof. Enclosed with this Proxy Statement is the Corporation's Annual Report (the "Annual Report"), including the financial statements for the year ended December 31, 1999, duly certified by PricewaterhouseCoopers LLP as independent public accountants. This Proxy Statement, the enclosed Annual Report, the Notice of Annual Meeting of Stockholders and the form of proxy are being sent to stockholders on or about March 15, 2000. Shareholders are entitled to vote by telephone or by Internet following the detailed instructions included in the Proxy Card, as authorized by the Puerto Rico Corporation Law and the Bylaws of the Corporation. Properly executed proxies received by the Secretary of the Corporation will be voted at the Meeting in accordance with the instructions which appear therein and for the purposes indicated on the Notice of Meeting. The Board of Directors does not intend to present any business at the Meeting other than that described in the Notice of Meeting. The Board of Directors at this time knows of no other matters which may come before the Meeting. However, if any new matters requiring the vote of the stockholders are properly presented before the Meeting, proxies may be voted with respect thereto in accordance with the best judgment of Proxyholders, under the discretionary power granted by stockholders to their proxies in connection with general matters. SOLICITATION OF PROXIES In addition to solicitation by mail, management may participate in the solicitation of Proxies by telephone, personal interviews or otherwise. The Board of Directors has engaged the firm of Georgeson & Company Inc. to aid in the solicitation of Proxies. The cost of solicitation will be borne by the Corporation and is estimated at $6,500. REVOCABILITY OF PROXY Any stockholder giving a proxy has the power to revoke it before the proxy is exercised. At the Meeting the grantor may revoke the proxy by reclaiming the right to vote the shares of stock registered in the grantor's name or by notice of revocation in writing to the President or Secretary of Popular, Inc., P.O. Box 362708, San Juan, Puerto Rico 00936-2708, delivered before the proxy is exercised. VOTING SECURITIES The only outstanding voting securities of the Corporation are its shares of common stock (the "common stock"), each share of which entitles the holder thereof to one vote. Only common stockholders of record at the close of business on March 6, 2000 (the "Record Date"), will be entitled to vote at the Meeting and any adjournments thereof. On the Record Date there were 135,763,765 shares of common stock of Popular, Inc. issued and outstanding. The shares covered by any such proxy that is properly executed and received by management before 10:30 a.m. on the day of the Meeting will be voted. 2 4 The presence, in person or by proxy, of the holders of a majority of the outstanding shares of common stock of the Corporation is necessary to constitute a quorum at the Meeting. Votes cast by proxy or in person at the Meeting will be counted by the persons appointed by the Corporation as members of the vote-counting committee for the Meeting. For purposes of determining a quorum, the members of the vote-counting committee will treat abstentions and brokers non-votes as shares that are present and entitled to vote. A broker non-vote results when a broker or nominee has expressly indicated in the proxy that it does not have discretionary authority to vote on a particular matter. As to the election of Directors, the Proxy Card being provided by the Board of Directors enables a stockholder to vote for the election of the nominees proposed by the Board, or to withhold authority to vote for one or more of the nominees being proposed. Directors will be elected by a majority of the votes cast. Therefore, abstentions and broker non-votes will not have an effect on the election of directors of the Corporation. PRINCIPAL STOCKHOLDERS Following is the information, to the extent known by the persons on whose behalf this solicitation is made, with respect to any person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) who is known to the Corporation to be the beneficial owner of more than five percent (5%) of the Corporation's voting securities.
Amount and nature Percent of beneficial of Title of Class Name and address of beneficial owner ownership (1) Class (2) - -------------- ------------------------------------ ----------------- --------- Common Banco Popular de Puerto Rico (the "Bank") As Trustee for Banco Popular de Puerto Rico Retirement Plan 5,672,860 The Bank as Trustee for the Profit Sharing Plan for the Employees of Banco Popular de Puerto Rico 5,320,208 ---------- 10,993,068 (3) 8.0972 Common State Farm Mutual Automobile Insurance Company 7,749,124 (4) 5.7078
- ----------------------- (1) As of February 29, 2000. (2) Based on 135,763,765 shares of common stock outstanding. (3) The Bank, as Trustee, administers both Plans through their Administrative Committees, with sole voting and investment power. (4) On February 5, 2000 State Farm Mutual Automobile Insurance Company ("State Farm") and affiliated entities filed a joint statement on Schedule 13-G with the Securities and Exchange Commission reflecting their holdings as of December 31, 1999. According to said statement, State Farm and its affiliates might be deemed to constitute a "group" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934. State Farm and its affiliates could also be deemed to be the beneficial owners of 7,749,124 shares of Popular, Inc. However, State Farm and each such affiliate disclaim beneficial ownership as to all shares as to which each such person has no right to receive the proceeds of sale of the shares, and also disclaim that they constitute a "group". 3 5 SHARES BENEFICIALLY OWNED BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS OF THE CORPORATION AND ITS SUBSIDIARIES Following is the information, as of February 29, 2000, as to equity securities of the Corporation beneficially owned by all current directors, nominees, the most highly compensated Executive Officers of the Corporation and its subsidiaries who are not directors and the total owned by directors, nominees and all Executive Officers of the Corporation and its subsidiaries as a group: COMMON STOCK
Title Amount and Nature Percent of Name of class of Beneficial Ownership class(1) ---- -------- ----------------------- --------- Alfonso F. Ballester ................... Common 1,395,173(3) 1.0276 Juan J. Bermudez ....................... Common 466,831(4) .3439 Francisco J. Carreras .................. Common 15,506 .0114 Richard L. Carrion ..................... Common 1,106,490(5) .8150 David Chafey Jr ........................ Common 81,687 .0602 Antonio Luis Ferre ..................... Common 2,915,695(6) 2.1476 Hector R. Gonzalez ..................... Common 614,416(7) .4526 Jorge A. Junquera ...................... Common 62,345(8) .0459 Manuel Morales Jr ...................... Common 727,330(9) .5357 Alberto M. Paracchini .................. Common 113,490(10) .0836 Francisco M. Rexach Jr ................. Common 192,916(11) .1421 J. Adalberto Roig Jr ................... Common 476,735(12) .3512 Felix J. Serralles Jr .................. Common 429,660(13) .3165 Julio E. Vizcarrondo Jr ................ Common 1,181,766(14) .8705 Maria Isabel P. de Burckhart ........... Common 65,269(15) .0481 Roberto R. Herencia .................... Common 12,687 .0093 Larry B. Kesler ........................ Common 45,106 .0332 Humberto Martin ........................ Common 75,038 .0553 Emilio E. Pinero ....................... Common 38,243 .0282 Carlos Rom Jr .......................... Common 24,388(16) .0180 Carlos J. Vazquez ...................... Common 104,186(17) .0767 Kenneth McGrath ........................ Common 3,953 .0029 Cameron E. Williams .................... Common 200 .0001 All Directors and Executive Officers of the Corporation and its subsidiaries as a group ........................... Common 10,149,110 7.4756
PREFERRED STOCK
Title Amount and Nature Percent of Name of class of Beneficial Ownership class(2) ---- -------- ----------------------- --------- Alberto M. Paracchini .................. Preferred 7,000 .1750 Carlos J. Vazquez ...................... Preferred 4,568(18) .1142 All Directors and Executive Officers of the Corporation as a group ......... Preferred 11,568 .2892
4 6 (1) Based on 135,763,765 shares of common stock outstanding. (2) Based on 4,000,000 shares of preferred stock outstanding. (3) Mr. Ballester owns 1,391,173 shares and has indirect investment power over 4,000 shares owned by his wife. Excludes 1,187,988 shares owned by his sister, as to all of which shares Mr. Ballester disclaims beneficial ownership. (4) Excludes 12,745 shares owned by his wife, as to which Mr. Bermudez disclaims beneficial ownership. (5) Mr. Carrion owns 299,740 shares and also has indirect investment power over 24,421 shares owned by his children. Junior Investment Corporation owns 4,372,999 shares of the Corporation. Mr. Carrion owns 17.89% of the shares of said corporation. (6) Mr. Ferre has direct or indirect investment and voting power as to 2,915,695 shares of the Corporation. Mr. Ferre owns 2,633 shares and has indirect investment and voting power over 513,880 shares owned by ALFRA Investment Corp., 3,200 shares owned by South Management, Inc. and 400 shares owned by his wife. Mr. Ferre owns 85.12% of Ferre Investment Fund, Inc., which owns 950,870 shares of the Corporation. Ferre Investment Fund, Inc. and ALFRA Investment Corporation in turn own 69.39% and 20.57%, respectively, of El Dia, Inc., which owns 1,444,712 shares of the Corporation. (7) Mr. Gonzalez owns 585,064 shares and has voting and investment power over 29,352 shares of the Corporation owned by TPC Financial Services, Inc. of which he has control. (8) Mr. Junquera owns 61,635 shares and has indirect investment power over 211 shares owned by his wife and over 499 shares owned by his children. (9) Mr. Morales owns 319,722 shares and has voting power over 407,608 shares owned by his parents, as their attorney-in-fact. (10) Excludes 1,264 shares owned by his wife, as to which Mr. Paracchini disclaims beneficial ownership. (11) Mr. Rexach owns 85,416 shares and has indirect voting power over 93,500 shares owned by his mother, as her attorney-in-fact, and over 14,000 shares held by Capital Assets, Inc. as President and shareholder. (12) Mr. Roig owns 451,547 shares and has indirect voting power over 25,188 shares owned by his wife. (13) Mr. Serralles owns 226,752 shares, and has indirect voting power over 10,292 shares owned by his wife. Mr. Serralles owns 100% of the shares of each of Capitanejo, Inc. and Fao Investments, Inc., which own 117,020 and 5,596 shares, respectively, of the Corporation and has indirect ownership of 70,000 shares owned by Destileria Serralles, Inc. (14) Mr. Vizcarrondo owns 202,179 shares and has indirect voting power over 184,576 shares owned by his wife. Mr. Vizcarrondo's wife owns 18.18% of the shares of Junior Investment Corporation, which owns 4,372,999 shares of the Corporation. Mr. Vizcarrondo has indirect voting and investment power over 1,334 shares held in trust by Vicar Enterprises, Inc. for the benefit of his children, for which he disclaims beneficial ownership. Mr. Vizcarrondo also disclaims beneficial ownership over 131,278 shares owned by DMI Pension Trust, where he serves as trustee and member of the investment committee. (15) Mrs. Burckhart owns 62,274 shares and has indirect voting power over 2,995 held by her husband as custodian for her daughters. (16) Mr. Rom owns 23,756 shares and has indirect voting power over 145 shares owned by his wife and 487 shares held by him as custodian for various members of his family. (17) Mr. Vazquez owns 10,526 shares and has investment authority over 93,660 shares held by various family members. (18) Mr. Vazquez has investment authority over 4,568 preferred shares held by various family members.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Corporation's directors and named executive officers to file with the Securities and Exchange Commission (SEC) reports of ownership and changes in ownership of common stock of the Corporation. Officers and directors are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such reports furnished to the Corporation or written representations that no other reports were required, the Corporation believes that, with respect to 1999, all filing requirements applicable to its officers and directors were complied with except for one report, covering one transaction, filed late by each of Messrs. Juan J. Bermudez and Felix J. Serralles Jr., both directors of the Corporation. 5 7 BOARD OF DIRECTORS AND COMMITTEES; ELECTION OF DIRECTORS The Certificate of Incorporation and the Bylaws of the Corporation establish a classified Board of Directors pursuant to which the Board of Directors is divided into three classes as nearly equal in number as possible, with each class having at least three members and with the term of office of one class expiring each year. Each director serves for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected or until his successor has been elected and qualified. To better balance the three classes in accordance with the Certificate of Incorporation and Bylaws of the Corporation, one director previously assigned to "Class 2" and two directors previously assigned to "Class 3" are nominated for election as set forth below. At the Meeting, four (4) directors assigned to "Class 1" are to be elected to serve until the 2003 Annual Meeting of Stockholders or until their respective successors shall have been elected and qualified. The remaining eight directors of the Corporation will serve as directors, as follows: until the 2001 Annual Meeting of Stockholders of the Corporation, in the case of those three directors assigned to "Class 2", and until the 2002 Annual Meeting of Stockholders, in the case of those five directors assigned to "Class 3", or in each case until their successors are elected and qualified. The policy of the Board of Directors, as set forth in a resolution adopted on January 8, 1991, provides that no person shall be nominated for election or reelection as director of the Board if, at the date of the Annual Meeting of Stockholders or during the term to be served, such person would attain seventy two (72) years of age. Messrs. Alfonso F. Ballester and J. Adalberto Roig Jr. would attain seventy two (72) years of age during the term to be served. In accordance with Board policy, Messrs. Ballester and Roig will not be nominated for reelection as directors. Mr. Luis E. Dubon Jr, resigned from the Board of Directors of the Corporation as of February 23, 2000. Mr. Dubon's decision was not due to disagreement with the Corporation on any matter relating to the Corporation's operations, policies or practices. Mr. Dubon was member of "Class 2" of the Board of Directors. The people named as proxies in the accompanying Form of Proxy have advised the Corporation that, unless otherwise instructed, they intend to vote at the Meeting the shares covered by the proxies FOR the election of the four nominees named below, and that if any one or more of such nominees should become unavailable for election they intend to vote such shares FOR the election of such substitute nominees as the Board of Directors may propose. The Corporation has no knowledge that any nominee will become unavailable for election. Information relating to principal occupation and business experience during the past five (5) years (including position held with the Corporation or the Bank), age and the period during which each director has served is set forth below. NOMINEES FOR ELECTION AS DIRECTORS CLASS 1 DIRECTORS (TERMS EXPIRING IN 2003) JUAN J. BERMUDEZ: (62 years), Director of the Corporation since 1990. Electrical Engineer. Partner of Bermoedez and Longo, S.E., Unicenter, S.E., Unieast, S.E., Unigardens, S.E., Clearview, S.E., Placid Park, S.E. and PCME Commercial, S.E. Principal Stockholder and Director of BL Management, Corp., Paseomar Corp., PCME Development, Inc., G.S.P. Corp., Unimanagement Corp., LBB Properties, Inc. and Homes Unlimited Corp. Director of the Bank, Popular Securities, Inc., Popular Leasing & Rental, Inc., Popular Finance, Inc. and Popular Mortgage, Inc. Chairman of the Trust Committee of the Bank. RICHARD L. CARRION: (47 years), Director of the Corporation since 1990. Chairman, President and Chief Executive Officer ("CEO") of the Corporation and the Bank. Chairman of Popular International Bank, Inc., Popular North America, Inc., Banco Popular North America and Popular Cash Express, Inc. Chairman of the Board of Trustees of Fundacion Banco Popular, Inc. Director of Equity One, Inc., Popular Finance, Inc., Popular Leasing & Rental, Inc., Popular Mortgage, Inc., Popular Securities, Inc., Banco Fiduciario, S.A. and GM Group, Inc. Member of the International Olympic Committee. President of the Puerto Rico Olympic Trust and Member of the Puerto Rico Olympic Committee. Member of the Board of Directors of Bell Atlantic Corporation (a registered public company) and member of the Benefits & Human Resources Committee of Bell Atlantic Corporation. Member of the Board of Trustees of the Puerto Rico Committee for Economic Development. Former Chairman and President of Puerto Rico Investors Tax-Free Fund, Inc. I, II, III, IV, V (1994 to December 1998) and of Puerto Rico Tax-Free Target Maturity Fund, Inc. I (1996 to December 1998) and II (1997 to December 1998). Former Chairman and President 6 8 of Puerto Rico Investors Flexible Allocation Fund (December 1998 to January 1999). Former Member of the Board of the National Museum of American History, Smithsonian Institution (November 1997 to December 1998). Member of the Board of Directors of Telecomunicaciones de Puerto Rico, Inc. (TELPRI). Chairman of the Executive Committee of the Corporation. JORGE A. JUNQUERA: (51 years), Director of the Corporation since 1990. Chief Financial Officer ("CFO") of the Corporation and the Bank. Supervisor of the Financial Management Group, the U.S. Operations and the Caribbean and Latin America Expansion Group since January 1996. Supervisor of the Bank's Retail Banking Group until December 1995. Senior Executive Vice President since October 1995. President and Director of Popular International Bank, Inc. and Popular North America, Inc. since January 1996. Director and President of Banco Popular North America. Director of the Bank, Equity One, Inc., Banco Fiduciario, S.A., ATH Dominicana, S.A. and Popular Cash Express, Inc. Director of Popular Mortgage, Inc., Popular Finance, Inc. and Popular Leasing & Rental, Inc. until December 1998. Chairman of the Board of Popular Securities, Inc. President of Puerto Rico Tourism Company until February 1997 and President of Hotel Development Co. Director of YMCA and of PRISMA: El Exploratorio, Inc. FRANCISCO M. REXACH JR.: (62 years), Director of the Corporation since 1990. President of Ready Mix Concrete, Inc., a subsidiary of PRCC (a registered public company) until September 1997. President of Capital Assets, Inc. and of Rexach Consulting Group. Director of the Bank, Popular International Bank, Inc., Popular North America, Inc., Banco Popular North America, Banco Fiduciario, S.A., Popular Cash Express, Inc. and Equity One, Inc. Chairman of the Human Resources and Compensation Committees of the Bank and of Banco Fiduciario, S.A. CLASS 3 DIRECTORS (TERMS EXPIRING IN 2002) FRANCISCO J. CARRERAS: (67 years), Director of the Corporation since 1990. Former professor of the University of Puerto Rico. Former President of the Catholic University of P.R. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Executive Director of Fundacion Angel Ramos, Inc. Chairman of the Community Reinvestment Committee of the Bank. Director of the Bank. DAVID H. CHAFEY JR.: (46 years), Director of the Corporation since 1996. Supervisor of the Bank's Retail Banking Group since January 1996. Supervisor of the Financial Management Group and U.S. Operations until December 1995. Senior Executive Vice President since October 1995. Chairman of Popular Securities, Inc. until January 1996. Senior Executive Vice President of Popular International Bank, Inc. and Popular North America, Inc. President of Popular International Bank, Inc. and Popular North America, Inc. until December 1995. Director of the Bank, Popular Mortgage, Inc., Popular Leasing & Rental, Inc., GM Group, Inc. and Popular Securities, Inc. Director of Equity One, Inc. and Banco Popular North America until December 1999. Chairman of the Board of Popular Finance, Inc. Chairman of the Board of Puerto Rico Telephone Authority from 1993 thru 1997. Chairman and President of Puerto Rico Investors Tax-Free Fund, Inc. I, II, III, IV, V, VI, of Puerto Rico Tax-Free Target Maturity Fund, Inc. I and II and of Puerto Rico Investors Flexible Allocation Fund since January 1999. Chairman of the Board of Grupo Guayacan, Inc. President of the San Jorge Children's Research Foundation, Inc. Vice President of the Puerto Rico Bankers Association. Director of Visa International for the Caribbean and Latin America. ANTONIO LUIS FERRE: (66 years), Director of the Corporation since 1984. Vice Chairman of the Board of Directors of the Corporation and the Bank. Chairman of the Board of Puerto Rican Cement Co., Inc. (a registered public company), manufacturers of cement and allied products. President and Editor of El Dia, Inc. and of Primera Hora, newspaper publishing companies. President of Advanced Graphic Printing, a commercial printing company. Chairman of the Board of Virtual, Inc., and Internet company. Director of Metropolitan Life Insurance Company (a registered company under the Investment Company Act of 1940) until December 1995. ALBERTO M. PARACCHINI: (67 years), Director of the Corporation since 1984. Former Chairman of the Board of Directors of the Corporation and the Bank. Former Chairman of Popular North America, Inc., Equity One, Inc., Popular Finance, Inc. and Popular Leasing & Rental, Inc. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Chairman of the Board of Trustees of Sacred Heart University in San Juan, Puerto Rico. Director of Puerto Rican Cement Co., Inc. (a registered public company). Director of Equus Management Co., Inc. and Managing General Partner of Equus Gaming Co., L.P. (a registered public company). Director of Equus Entertainment Corporation, a subsidiary of Equus Gaming Co., L.P. (registered public company) and of Venture Capital Fund, Inc. Director of the Bank. FELIX J. SERRALLES JR.: (65 years), Director of the Corporation since 1984. President and Chief Executive Officer of Destileria Serralles, Inc., manufacturers and distributors of distilled spirits, and of its affiliate Mercedita Leasing, Inc. Director of the Bank, Popular International Bank, Inc., Popular North America, Inc., Banco Popular North America, Popular Cash Express, Inc. and Equity One, Inc. 7 9 CLASS 2 DIRECTORS (TERMS EXPIRING IN 2001) HECTOR R. GONZALEZ: (66 years), Director of the Corporation since 1984. President and Chief Executive Officer of TPC Communications of PR, Inc., owner and operator of cable television systems. President and Chief Executive Officer of TPC Financial Services, Inc., TPC Cable Media, TelePonce Cable TV and Telecell Systems. Director of Damas Foundation, Inc. and Damas Hospital, Inc. Director of the Bank, Popular Finance, Inc., Popular Mortgage, Inc., Popular Leasing & Rental, Inc. and Popular Securities, Inc. Member of the Board of Trustees of Sacred Heart University in San Juan, Puerto Rico. MANUEL MORALES JR.: (54 years), Director of the Corporation since 1990. President of Selarom Capital Group, Inc. President of Parkview Realty, Inc., the Atrium Office Center, Inc., HQ Business Center P.R., Inc., Executrain of Puerto Rico and Office & Home, Inc. Honorary General Consul of Japan in San Juan, Puerto Rico. Member of the Board of Trustees of Sacred Heart University in San Juan, Puerto Rico, of the Caribbean Environmental Development Institute and of Fundacion Angel Ramos, Inc. Member of the Board of Directors of the Better Business Bureau. Member of the National Advisory Council-United States Small Business Administration. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Dean of Consular Corps of Puerto Rico. Chairman of the Audit Committee of the Corporation and the Bank. Director of the Bank. JULIO E. VIZCARRONDO JR.: (65 years), Director of the Corporation since 1990. Civil Engineer. President, Partner and Chief Executive Officer of Desarrollos Metropolitanos, S.E., VMV Enterprises Corp., Resort Builders, S.E., Metropolitan Builders, S.E. and Institutional Builders, S.E., corporations engaged in the development and construction of residential, commercial, industrial and institutional projects in Puerto Rico. Director of the Bank, Popular International Bank, Inc., Popular North America, Inc., Banco Popular North America, Popular Cash Express, Inc. and Equity One, Inc. The Board of Directors of the Corporation met on a monthly basis during 1999. All directors except Messrs. Antonio Luis Ferre, J. Adalberto Roig Jr., Felix J. Serralles Jr. and Mr. Luis E. Dubon Jr., who was on a leave of absence from the Board from February 1999 until his resignation from the Board attended to 75% or more to the meetings of the Board of Directors and the committees of the Board of Directors on which such directors served. STANDING COMMITTEES The Corporation's Board of Directors (the "Board") has standing Audit, Risk Management and Executive Committees. The Board of Directors of the Bank, the principal subsidiary of the Corporation, has a standing Human Resources and Compensation Committee that may review compensation matters for the Corporation. There is no standing Nominating Committee but the Executive Committee charter provides that the Executive Committee may exercise the power to nominate directors. However, in the past the Executive Committee has not exercised such function and nominations have been made by the Board. AUDIT COMMITTEE The functions of the Audit Committee include reviewing the accounting principles and practices employed by the Corporation, and compliance with applicable laws and regulations. The Committee meets with the Corporation's independent external auditors to review their audit procedures, the report on their examination of the Corporation's financial statements, and their comments on the system of internal controls. Also, the Committee oversees the internal audit function and reviews the reports prepared by the Auditing Division on their examinations of the operating and business units and for any other special examinations that may be required. The management of the Corporation is responsible for the preparation, presentation and integrity of the Corporation's financial statements. Management and the internal auditing division are responsible for maintaining appropriate accounting and financial reporting principles and policies and internal controls and procedures designed to ensure compliance with accounting standards and applicable laws and regulations. The external auditors are responsible for planning and carrying out a proper audit and reviews and other procedures. The members of the Audit Committee are not full-time employees of the Corporation or its subsidiaries and are not accountants or auditors by profession or experts in the fields of accounting or auditing. As such, it is not the duty or responsibility of the Audit Committee or its members to conduct "field work" or other types of auditing or accounting reviews or procedures, and each member of the Audit Committee is entitled to rely on the integrity of those persons and organizations within and outside the Corporation from which the Audit Committee receives information and the accuracy of the financial and other information provided to the Audit Committee by such persons or organizations, absent actual knowledge to the contrary. The Committee held four meetings during the fiscal year ended December 31, 1999. 8 10 The Committee members during 1999 were: Juan J. Bermudez, Francisco J. Carreras, Manuel Morales Jr., Alberto M. Paracchini, J. Adalberto Roig Jr. and Felix J. Serralles Jr. HUMAN RESOURCES AND COMPENSATION COMMITTEE The functions of the Human Resources and Compensation Committee include reviewing the compensation and benefits of management and employees, reviewing the policies related to the performance and compensation of management and employees, and reviewing the long-range planning for executive development and succession. The Committee held two meetings during the fiscal year ended December 31, 1999. The Committee members during 1999 were: Juan A. Albors, Salustiano Alvarez Mendez, Francisco J. Carreras, Hector R. Gonzalez, Alberto M. Paracchini and Francisco M. Rexach Jr. None of the members of the Committee are officers or employees of the Corporation or any of its subsidiaries. COMPENSATION OF DIRECTORS Directors who are not employees of the Corporation and its subsidiaries were entitled to a $12,000 annual retainer. The Board has a Stock Deferment Plan, pursuant to which each outside director of the Corporation is given the option to defer all or a portion of the $12,000 annual retainer. The deferred portion, plus an additional amount of $0.25 for each dollar so deferred, is applied toward the purchase in the open market of shares of the Corporation's common stock on behalf of the director. The certificates representing such shares are retained by the Corporation until the director's term in office as a director of the Corporation (and the Bank) terminates. In addition, each director has the right to vote and to receive any dividends payable on the shares held for said director under the Plan, but no such shares may be sold, transferred, assigned, pledged or in any other way encumbered by the director until the certificates representing such shares are delivered to the director. In the event that a director is duly removed from office for cause, said director (1) shall be obliged to sell to the Corporation all of the shares acquired with the deferred retainer amount at a price equal to the lower of (a) the actual purchase price of said shares and (b) the market price of said shares on the date the director was discharged, and (2) shall forfeit to the Corporation any shares purchased with the Corporation's additional contribution. In addition, directors receive $750 for attending each Board meeting, $1,000 for attending each Executive Committee meeting and $500 for attending each of the other committee meetings. Directors who are employees do not receive fees for attending Board and committee meetings. EXECUTIVE OFFICERS The following information sets forth the names of the executive officers (the "Executive Officers") of the Corporation including their age, business experience during the past five (5) years and the period during which each such person has served as an Executive Officer of the Corporation or the Bank. RICHARD L. CARRION: (47 years), Chairman, President and CEO of the Corporation. Executive Officer of the Corporation since 1990. For information about principal occupation and business experience during the past five years please refer to the Board of Directors section. JORGE A. JUNQUERA: (51 years), Senior Executive Vice President of the Corporation. Executive Officer of the Corporation since 1990. For information about principal occupation and business experience during the past five years please refer to the Board of Directors section. DAVID H. CHAFEY JR.: (46 years), Senior Executive Vice President of the Corporation. Executive Officer of the Corporation since 1990. For information about principal occupation and business experience during the past five years please refer to the Board of Directors section. MARIA ISABEL P. DE BURCKHART: (51 years), Executive Vice President of the Corporation. Executive Officer of the Corporation since 1990. Supervisor of the Administration Group. Executive Vice President of the Bank since January 1990. Executive Vice President of Popular International Bank, Inc. and Popular North America, Inc. Member of the Board of Trustees of Fundacion Banco Popular, Inc. Member of the Board of Directors of Fundacion Ana G. Mendez and of Puerto Rico 9 11 Community Foundation. Member of the Board of Directors of the Puerto Rico Convention Bureau from 1993 through October 1998. Secretary of the Board of Directors of the Bankers Club since 1998. ROBERTO R. HERENCIA: (40 years), Executive Vice President of the Corporation. Executive Officer of the Corporation since 1997. Head of the Corporation's U.S. business expansion. Executive Vice President of the Bank since January 1997. Director of Popular International Bank, Inc., Popular North America, Inc., Popular Cash Express, Inc. and Equity One, Inc. Director and Chief Operations Officer of Banco Popular North America. Senior Vice President from December 1991 to December 1996. LARRY B. KESLER: (62 years), Executive Vice President of the Corporation. Executive Officer of the Corporation since 1990. Supervisor of the Individual Credit Group and the Virgin Islands Region. Executive Vice President of the Bank since January 1990. Chairman of the Board of Directors of Equity One, Inc., Popular Leasing & Rental, Inc. and Popular Mortgage, Inc. Executive Vice President of Popular International Bank, Inc. and Popular North America, Inc. Director of Popular Finance, Inc. HUMBERTO MARTIN: (54 years), Executive Vice President of the Corporation. Executive Officer of the Corporation since 1986. Supervisor of the Operations Group. Director of ATH Dominicana, S.A. Executive Vice President of the Bank since November 1986. Executive Vice President of Popular International Bank, Inc. and Popular North America, Inc. Director of GM Group, Inc. EMILIO E. PINERO: (51 years), Executive Vice President of the Corporation. Executive Officer of the Corporation since 1990. Supervisor of the Commercial Banking Group. Executive Vice President of the Bank since January 1990. Director of Popular Mortgage, Inc. and Popular Leasing & Rental, Inc. Executive Vice President of Popular International Bank, Inc. and Popular North America, Inc. Member of the Board of Trustees of American Red Cross, Fundacion Luis Muaeoz Marin, Fundacion del Colegio de CPA de Puerto Rico and Jane Stern Community Library Foundation. CARLOS ROM JR.: (43 years), Executive Vice President of the Corporation. Executive Officer of the Corporation since 1997. Head of the Corporation's Caribbean and Latin America business expansion. Executive Vice President of the Bank since January 1997. Executive Vice President of Popular International Bank, Inc. Director of ATH Dominicana, S.A. and of Banco Fiduciario, S.A. Vice President of the Board of Directors of ATH Costa Rica, S.A. Senior Vice President from September 1995 to December 1996. Director of Marchand-ICS Group, Inc. Vice President and General Manager of Pizza Hut, a division of Pepsi Co., Inc. from July 1994 to September 1995. CARLOS J. VAZQUEZ: (41 years), Executive Vice President of the Corporation. Executive Officer of the Corporation since 1997. Supervisor of the Corporation's Risk Management Group. Executive Vice President of the Bank since March 1997. Director of Popular Securities, Inc. Vice President of J.P. Morgan & Co. Incorporated, Morgan Guaranty Trust Co. of N.Y., J.P. Morgan Securities Ltd. and J.P. Morgan Securities, Inc. from 1982 to 1997. President of J.P. Morgan Venezuela, S.A. from 1995 to 1997. SAMUEL T. CESPEDES: (63 years), Secretary of the Board of Directors. Attorney-at-Law. Proprietary partner of the law firm McConnell Valdes. Secretary of the Board of Directors of the Corporation and the Bank since 1991. Secretary of the Board of Directors of Popular North America, Inc., Equity One, Inc., Popular Leasing & Rental, Inc. and Popular Finance, Inc. FAMILY RELATIONSHIPS Mr. Richard L. Carrion, Chairman of the Board, President and CEO of the Corporation and the Bank, is brother-in-law of Mr. Julio E. Vizcarrondo Jr. OTHER RELATIONSHIPS, TRANSACTIONS AND EVENTS During 1999 the Bank engaged the legal services of the law firm of McConnell Valdes of which Mr. Samuel T. Cespedes, Secretary of the Board of Directors of the Corporation and the Bank is a partner. The amount of fees paid to McConnell Valdes did not exceed 5% of the law firm's revenues for its last full fiscal year. The Bank has had loan transactions with the Corporation's directors and officers, and with their associates, and proposes to continue such transactions in the ordinary course of its business, on substantially the same terms as those prevailing for comparable loan transactions with other people and subject to the provisions of the Banking Act of the Commonwealth of 10 12 Puerto Rico and the applicable federal laws and regulations. The extensions of credit have not involved and do not currently involve more than normal risks of collectibility or other unfavorable features. EXECUTIVE COMPENSATION PROGRAM REPORT OF THE BANK'S HUMAN RESOURCES AND COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION OVERVIEW The Bank's Human Resources and Compensation Committee (the "Human Resources Committee") consists of six non-employee directors of the Bank. The Committee endeavors to keep abreast of competitive compensation practices with regard to salaries, incentive compensation and supplemental programs in order to assist the Corporation in attracting and retaining the most qualified executive officers whose contributions and experience help the Corporation sustain growth, thereby enhancing shareholders value. The Human Resources Committee evaluates and recommends to the Board the Corporation's compensation policy for the Chairman of the Board, President and CEO and the Executive Officers. The Human Resources Committee considers, among other factors, competitive pay practices for developing a stronger relationship between executive compensation and the Bank's long-term performance. It is kept apprised of such competitive pay practices by an independent consultant who conducts a periodic analysis of executive compensation of a peer group of financial institutions similar in size, scope and business orientation ( the "Peer Group"). On an annual basis the banking Peer Group used by the Committee for comparative purposes is reviewed in light of industry developments, and significant mergers/acquisitions, in order to ensure that it remains consistent with the Corporation's size and focus. The Peer Group currently consists of ten regional banking organizations with a retail banking emphasis. The executive compensation program for principal officers of the Corporation's subsidiaries is set according to the industry and geographical area in which each operates and is approved by the Board of Directors of each respective subsidiary. CHAIRMAN OF THE BOARD, PRESIDENT AND CEO, MR. RICHARD L. CARRION On an annual basis, Mr. Carrion submits to the Corporation's Executive Committee a plan setting forth both quantitative and qualitative goals for the fiscal year, and objectives for the medium and long-term. In evaluating and setting compensation the Human Resources Committee considers the Corporation's performance with respect to the goals set forth in the plan. Therefore, the Executive Committee evaluates Mr. Carrion's performance by taking into consideration the growth of the organization, implementation of a diversification strategy, achievement of financial goals, improvements to the product and service delivery system and development of human resources. The weight and significance accorded to these factors is subjective in nature. Mr. Carrion participates in an annual incentive program designed to encourage the achievement of short-term financial goals and to increase shareholder value. The first incentive component could represent 15% of base salary, if the net income target is met, and if the net income target is exceeded it could reach 25%. Although the threshold continues to be 100% of target, the Human Resources Committee may recommend a discretionary bonus if results obtained are at least 95% of the pre-established net income target. The second component, which is based on return on equity (ROE) and is designed to encourage an increase in shareholder value, could range from 5% to 30% of base salary, depending on the ROE obtained. Additionally, the bonus award may be increased by 25% when shareholder return exceeds 20% annually for a consecutive three-year period. Total shareholder return is calculated by taking into account the compounded annual yield of the stock, considering the market appreciation, dividends received or dividend reinvestment. This third and last bonus component recognizes consistent improvement in shareholder value. The maximum total incentive bonus that may be awarded could be 68.75% of base salary if all components of the bonus program are achieved. For 1999, this incentive bonus was 37.26% of Mr. Carrion's base salary. The first objective of net income after tax was 100% of target net income. The ROE obtained was 15.45% thereby exceeding the required minimum of 15%. Total shareholder 11 13 return, which was to exceed 20% annually for a consecutive three-year period, was 20.27% for the three-year period ended December 31, 1999. Mr. Carrion recommended to the Committee that it consider the bonus on a future date. This was accepted by all the members of the Committee. EXECUTIVE OFFICERS The group of Executive Officers is composed of two Senior Executive Vice Presidents of the Corporation and seven Executive Vice Presidents of the Corporation (the "Executive Officers") all of whom participate in the Profit Sharing, Annual Incentive and Long-Term Incentive Plans of the Bank. The President and CEO sets the salary increases and the bonuses to be awarded to the Executive Officers pursuant to the incentive plans. The salary increase program allows discretionary salary increases based on individual performance to be twice the increases of the Executive Officers as a group. It provides the CEO the opportunity to recognize changes in individual responsibilities and performance levels. Each Executive Officer participates in the Annual Incentive Plan. In 1999, a bonus of 37.26% of base salary was awarded to each Executive Officer. This bonus was based on the fact that the Corporation's net income after tax was 100% of target net income, ROE obtained was 15.45%, exceeding the required minimum of 15%, and total shareholder return which was to exceed 20% annually for a consecutive three-year period, was 20.27% for the three-year period ended December 31, 1999. EXECUTIVE COMPENSATION The following table sets forth all cash compensation paid by the Corporation or its subsidiaries to the ten highest paid Executive Officers of the Corporation and the two most highly compensated principal officers of the Corporation's subsidiaries for 1999. HUMAN RESOURCES AND COMPENSATION COMMITTEE Juan A. Albors Hector R. Gonzalez Salustiano Alvarez Mendez Alberto M. Paracchini Francisco J. Carreras Francisco M Rexach Jr. 12 14 SUMMARY COMPENSATION TABLE
LONG-TERM FISCAL ANNUAL COMPENSATION ALL OTHER ANNUAL INCENTIVE PLAN NAME AND PARTICIPANT POSITION YEAR SALARY(A) BONUS(B) COMPENSATION(C) PAYOUTS(D) TOTAL - ----------------------------- ---- --------- -------- ---------------- -------------- ----- Richard L. Carrion 1999 $540,000 $72,164 $ 53,327 -0- $ 665,491 Chairman, 1998 526,667 262,552 46,134 $470,142 1,305,495 President and CEO 1997 500,000 275,942 62,181 91,195 929,318 David H. Chafey Jr. 1999 412,920 209,480 41,638 -0- 664,038 Senior Executive Vice President 1998 393,000 194,560 35,356 281,995 904,911 of the Corporation 1997 350,000 197,909 44,401 63,240 655,550 Jorge A. Junquera 1999 401,760 203,866 40,752 -0- 646,378 Senior Executive Vice President 1998 384,000 189,479 34,722 281,995 890,196 of the Corporation 1997 350,000 197,954 44,401 64,646 657,001 Carlos J. Vazquez 1999 309,742 157,075 31,418 N/A 498,235 Executive Vice President 1998 293,645 140,254 21,017 N/A 454,916 of the Corporation 1997 207,308 179,286 1,770 N/A 388,364 Larry B. Kesler 1999 271,317 137,646 27,521 -0- 436,484 Executive Vice President 1998 258,952 127,899 23,415 196,911 607,177 of the Corporation 1997 235,648 132,537 29,895 51,488 449,568 Maria Isabel P. de Burckhart 1999 255,954 129,860 25,963 -0- 411,777 Executive Vice President 1998 244,288 120,664 22,089 190,731 577,772 of the Corporation 1997 223,187 125,109 28,314 50,349 426,959 Humberto Martin 1999 255,409 129,554 25,907 -0- 410,870 Executive Vice President 1998 244,633 120,448 22,120 188,811 576,012 of the Corporation 1997 225,978 127,075 28,668 48,462 430,183 Roberto R. Herencia 1999 238,411 120,894 23,476 -0- 382,781 Executive Vice President 1998 226,600 112,292 19,824 N/A 358,716 of the Corporation 1997 201,667 112,248 25,584 N/A 339,499 Emilio E. Pinero 1999 235,275 119,449 23,865 -0- 378,589 Executive Vice President 1998 224,552 110,996 20,305 178,512 534,365 of the Corporation 1997 205,720 115,125 25,927 47,576 394,348 Carlos Rom Jr. 1999 210,077 106,546 21,309 -0- 337,932 Executive Vice President 1998 201,083 99,045 18,183 N/A 318,311 of the Corporation 1997 184,500 104,400 23,406 N/A 312,306 Kenneth McGrath 1999 180,000 224,200 75,000 N/A 479,200 President of Popular Securities, Inc. 1998 175,000 165,200 59,000 N/A 399,200 (a wholly-owned subsidiary 1997 170,833 194,410 39,750 N/A 404,993 of the Corporation) Cameron E. Williams(e) 1999 250,000 150,000 62,000 N/A 462,000 President of Equity One, Inc. (a wholly-owned subsidiary of Popular North America, Inc.)
- -------------------------------- (a) Salaries before deductions. (b) The bonus amount for the Bank's Executive Officers includes a Christmas bonus, the bonus awarded under the Annual Management Incentive Compensation Plan, and the cash portion payable under the Profit Sharing Plan of the Bank. For Mr. Vazquez the 1997 bonus does not include a Profit Sharing bonus but rather a special bonus of $49,000 13 15 paid with the Corporation's common stock purchased in the open market. For Mr. McGrath, the amount includes Christmas and performance bonus. For Mr. Williams, the amount includes the annual performance bonus. (c) For the Bank's Executive Officers, except for Mr. Vazquez in 1997, the amount includes deferred portion awarded under the Profit Sharing Plan of the Bank, amounts accrued under the Benefit Restoration Plan, the amount from the Profit Sharing deferred and allocated to Stock Plan and the Bank's matching contribution to Stock Plan, which are described on pages 15 through 17. In the case of Mr. Vazquez, the amount for 1997 only includes the Bank's matching contribution to Stock Plan. For Mr. McGrath, amount includes matching contribution to an 1165(e) plan and a deferred portion of the performance bonus. For Mr. Williams, amount represents the contribution of Equity One, Inc. pursuant to Section 401(k) matching and deferred compensation under Supplementary Executive Retirement Plan. Does not include the value of perquisites and other personal benefits because the aggregate amount of such benefits does not exceed the lesser of $50,000 or 10% of total amount of annual salary and bonus of any named individual. d) For the 1997-1999 Long-Term Incentive Plan, the performance of Popular, Inc.'s stock during the three-year period did not equal or exceed the three-year combined performance of the S&P 500 Index and the S&P Financials Index. In addition, the three-year average ROE target was not achieved, nor was the Peer Group three-year average median ROE exceeded. Also, Popular, Inc.'s average ROE did not represent an improvement over the base year ROE compared to the Peer Group's median ROE. Therefore, none of the shares assigned at the beginning of the plan were awarded. e) Information presented for 1999, 1998 and 1997, except for Mr. Cameron E. Williams who was appointed President of Equity One, Inc. in 1999. No disclosure is required with respect to this officer. LONG-TERM INCENTIVE PLAN Since 1994, the Executive Officers participate in a Long-Term Incentive Plan, the goal of which is to encourage long-term corporate performance and objectives. This Plan divided the incentive payment as follows: 75% based on the attainment of a preestablished three-year average ROE objective for the performance period and 25% based on the achievement of an average ROE greater than the Peer Group's three-year average median ROE. If the ROE for the Corporation does not equal or exceed the Peer three-year average median ROE, the Human Resources Committee, at its own discretion, may recommend the distribution of 25% of the targeted bonus if the average results attained for the Plan year represent an improvement of no less than 25% over the base year. The incentive percentage is established depending on the participant's base salary at the beginning of the three-year period. The resulting dollar amount is divided by the average closing price of the Corporation's common stock. On April 27, 1999, the Board approved an amendment to the Long-Term Incentive Plan changing the calculation of the amount of the incentive awarded. Thereafter, the incentive will be determined based on the market performance of the Corporation's common stock as compared to the combined performance of the S&P 500 Index and the S&P Financials Index during the three-year period of the plan. Beginning in 2000 the S&P Banks Index will be also included in the calculation of the Long-Term Incentive Plan. The range to determine the percentage of base salaries is as follows:
Range ----- Score Incentive ----- --------- <100% 0% 100-109 15% 110-119 25% 120-129 50% 130-139 75% 140-149 100% 150 and over 110%
The score represents the relationship of the performance of the Corporation's common stock during the three-year period, compared with the average appreciation of the S&P 500 Index and the S&P Financials Index. If the Corporation's target is met or exceeded, the share payments corresponding to the Corporation's and Peer Group's goals are increased up to 110% of the base salary of the participant at the end of the Plan year. The three-year period for the 1997-1999 and 1998-2000 Long-Term Incentive Plans had not concluded when the amendment became effective. A transition rule was approved for these plans to allow a proportional calculation based on the method used at the inception of each plan and the new method. 14 16 For both Plans the incentive payment shall be made in common stock of the Corporation. All common stock to be awarded under this program is purchased in the open market. The incentive payment could be deferred, at the option of the participant, until his (her) retirement or it could be paid in common stock of the Corporation. If the payment is made in common stock of the Corporation a portion equal to the estimated tax due may be paid in cash. The estimated maximum shares that could be awarded to the Executive Officers under the 1999-2001 Long-Term Incentive Plan are set forth below: LONG-TERM INCENTIVE AWARDS
ESTIMATED NUMBER PERFORMANCE OF PERIOD NAME SHARES (A) UNTIL PAYOUT ---- ---------- ------------ Richard L. Carrion 22,603.22 1/1/99-12/31/01 David H. Chafey Jr. 17,395.44 1/1/99-12/31/01 Jorge A. Junquera 16,925.29 1/1/99-12/31/01 Carlos J. Vazquez 13,048.76 1/1/99-12/31/01 Larry B. Kesler 11,430.03 1/1/99-12/31/01 Maria Isabel P. de Burckhart 10,782.78 1/1/99-12/31/01 Humberto Martin 10,759.84 1/1/99-12/31/01 Roberto R. Herencia 10,043.74 1/1/99-12/31/01 Emilio E. Pinero 9,911.60 1/1/99-12/31/01 Carlos Rom Jr. 8,850.08 1/1/99-12/31/01
(a) The estimated maximum number of shares was calculated based on the base salary of the participant at January 31, 2000 and the average closing price of the Corporation's common stock from November 1, 1999 to February 29, 2000. For the 1997-1999 Long-Term Incentive Plan, the performance of Popular, Inc.'s stock during the three-year period did not equal or exceeded the three-year combined performance of the S&P 500 Index and the S&P Financials Index. In addition, the three-year average ROE target was not achieved, nor was the Peer Group three-year average median ROE exceeded. Also, Popular, Inc.'s average ROE did not represent an improvement over the base year ROE compared to the Peer Group's median ROE. Therefore, the total shares assigned at the beginning of the plan were not awarded. OTHER INCENTIVE COMPENSATION PLANS OF THE BANK The Bank has an Annual Management Incentive Plan for different management levels. Under this Plan, incentive bonuses are based on individual performance as well as the Corporation or Bank's performance, measured by net income and ROE. The weight assigned to the Corporation or the Bank's performance objectives varies according to management level, but the individual performance is a criterion for all managers participating. The Bank also has an Excellence in Performance Program in which all employees participate. This program rewards employees for extraordinary personal contributions that are nonrecurring in nature, typically not recognizable through merit or promotional salary action, and clearly recognized as such by management and peers alike. Additionally, the Bank has several functional incentive programs that reward employees' productivity in specific areas. PROFIT SHARING PLAN OF THE BANK All officers and regular monthly salaried employees of the Bank are active participants in the Bank's Profit Sharing Plan, as of the first day of the calendar month following the completion of one year of service. 15 17 Under this plan, the Board of Directors determines the Bank's annual contribution based on the profits of the Bank for the year. The amount allocated to each officer or employee is based on his or her earned salary for the year. The total amount contributed for the year 1999 was $23,840,757. Of the total awarded 40% is contributed to the Profit Sharing Plan, 10% to the Stock Plan and the remainder (50%) is paid in cash. However, since 1998 each officer and employee may elect to increase his (her) contribution to the Stock Plan up to 15%; as a result of this election 38% was contributed to the Profit Sharing Plan and 12% to the Stock Plan. BENEFIT RESTORATION PLAN OF THE BANK The Internal Revenue Service (IRS) set a limit of $160,000 as the amount of compensation that may be considered in calculating future retirement payments from qualified pension plans. This limit applies to the Bank's Retirement Plan, Profit Sharing and Stock Plan. The Board of Directors has approved a "Benefit Restoration Plan" for those officers whose annual compensation is higher than the established limit. This non-qualified plan will provide those benefits that cannot be accrued under the Bank's Retirement and Profit Sharing Plan, which are qualified plans. Benefits under the Benefit Restoration Plan shall be equal to the account balance that would be provided under the Profit Sharing Plan and equal to the benefits that would have been accrued under the Retirement Plan. The Plan is unfunded. RETIREMENT PLAN OF THE BANK The Bank has a noncontributory, defined benefit Retirement Plan covering substantially all regular monthly employees. Monthly salaried employees are eligible to participate in the Plan following the completion of one year of service and 21 years of age. Pension costs are funded in accordance with the minimum funding standards under the Employee Retirement Income Security Act ("ERISA"). The basis for the Retirement Plan formula is total compensation, which includes Christmas Bonus, incentives, overtime, differentials, Profit Sharing cash bonuses and any other compensation received by the employees. Benefits are paid on the basis of a straight life annuity plus supplemental death benefits and are not reduced for Social Security or other payments received by participants. Normal retirement age at the Bank is a combination of years of age and completed years of service totalling 75. Early retirement is at 55 years of age with 10 years of service. Employees with 30 years of service or more are provided with a retirement benefit of 40% of total compensation. Benefits are reduced only if the employee retires before age 55. Benefits are subject to the U.S. Internal Revenue Code limits on compensation and benefits. The following table sets forth the estimated annual benefits that would become payable under the Retirement Plan and the Benefit Restoration Plan based upon certain assumptions as to total compensation levels and years of service. The amounts shown in this table are not necessarily representative of amounts that may actually become payable under the plans. The amounts represent the benefits upon retirement on December 31, 1999, of a participant at age 65. 16 18
TOTAL COMPENSATION ESTIMATED ANNUAL BENEFITS / YEARS OF SERVICE 15 20 25 30 35 -- -- -- -- -- $1,400,000 $256,000 $ 357,000 $ 459,000 $ 560,000 $560,000 1,300,000 237,000 332,000 426,000 520,000 520,000 1,200,000 219,000 306,000 393,000 480,000 480,000 1,100,000 201,000 281,000 360,000 440,000 440,000 1,000,000 183,000 255,000 328,000 400,000 400,000 900,000 164,000 230,000 295,000 360,000 360,000 800,000 146,000 204,000 262,000 320,000 320,000 700,000 128,000 179,000 229,000 280,000 280,000 600,000 110,000 153,000 197,000 240,000 240,000 500,000 91,000 128,000 164,000 200,000 200,000 400,000 73,000 102,000 131,000 160,000 160,000 300,000 55,000 77,000 98,000 120,000 120,000
The 1999 total compensation and estimated years of service at age 65 for the ten highest paid key policy-making Executive Officers of the Corporation are as follows.
ESTIMATED 1999 YEARS OF TOTAL SERVICE COMPENSATION AT AGE 65 ------------ --------- Richard L. Carrion $ 665,000 41.6 David H. Chafey Jr. 664,000 39.8 Jorge A. Junquera 646,000 41.5 Carlos J. Vazquez 498,000 26.4 Larry B. Kesler 436,000 16.5 Maria Isabel P. de Burckhart 412,000 33.7 Humberto Martin 411,000 40.1 Roberto R. Herencia 383,000 31.7 Emilio E. Pinero 379,000 43.2 Carlos Rom Jr. 338,000 35.2
STOCK PLAN OF THE BANK The Bank has adopted two Stock Plans, one covering employees of the Bank in Puerto Rico and another covering employees of the Bank in the British and U.S. Virgin Islands. All regular monthly salaried employees of the Bank are eligible to participate in the Stock Plans following the completion of three-months of service (30 days of service for British and U.S. Virgin Islands' employees). The Bank may contribute a discretionary amount based on the profits of the Bank for the year, which is allocated to each officer or employee based on his or her basic salary for the year, as determined by the Board. The Stock Plans also allow employees to voluntarily elect to defer a predetermined percentage not to exceed 10% of their pre-tax base compensation (after tax in the British Virgin Islands) up to a maximum amount as determined by the applicable tax laws. The Bank will match 50% of the amount contributed by a participant up to a maximum participant contribution of two percent (2%) (six percent (6%) for the British and U.S. Virgin Islands' employees) of the participant's annual base salary. STOCK PLAN OF BANCO POPULAR NORTH AMERICA Banco Popular North America has adopted a defined contribution plan ("401(k) Plan") covering all employees. All regular monthly salaried employees are eligible to participate in the 401(k) Plan following the completion of 30 days of service. 17 19 The 401(k) Plan also allows employees to voluntarily elect to defer a predetermined percentage not to exceed 10% of their pre-tax base compensation up to a maximum amount as determined by the applicable tax laws. Banco Popular North America will match 50% (100% if the participant elect to invest his (her) contribution in the Corporation's common stock) of the amount contributed by a participant up a maximum of six percent (6%) of the participant's annual base salary. DEFERRED COMPENSATION PLAN OF POPULAR SECURITIES, INC. Popular Securities, Inc. maintains a non-qualified deferred compensation plan under which a selected group of highly compensated employees of Popular Securities, Inc. are required to defer a portion of their incentive performance bonus. The amount deferred and interest credits are paid to participants as follows: (a) 50% on or before January 31 of the second fiscal year following the fiscal year for which such amounts were contributed and (b) 50% on or before January 31 of the third fiscal year following the fiscal year for which such amounts were contributed. On October 22, 1999, Popular Securities, Inc. created a "Rabbi Trust" (the "Trust") to invest the amounts deferred under the non-qualified deferred compensation plan, if so elected by the participant. The Trust assets are subject to the claims of Popular Securities, Inc.'s creditors in the event of Popular Securities, Inc.'s insolvency until paid to non-qualified deferred compensation plan participants at such times as specified above. The principal balance held by the Trust and any realized and unrealized appreciation are exclusively for the benefit of the non-qualified deferred compensation plan's participants. The earnings on the principal of the Trust are for the exclusive benefit of Popular Securities, Inc. EMPLOYEE BENEFIT PLAN OF POPULAR SECURITIES, INC. Popular Securities, Inc. maintains a contributory savings plan (1165(e)) which is available to employees with more than one year of service. Popular Securities, Inc.'s contributions include a matching contribution and an additional profit sharing contribution. Employees are fully vested on these contributions after five years of service. DEFERRED COMPENSATION PLAN OF EQUITY ONE, INC. Equity One, Inc. adopted a deferred compensation plan designed to provide a post retirement benefit to several key executives. Equity One, Inc. purchases flexible, variable life insurance policies for each participant and names itself as beneficiary. The cash surrender values of the policies are expected to pay benefits to the participants upon their retirement. Should the participant terminate their employment prior to retirement, they are entitled to their vested portion of their account. EMPLOYEE BENEFIT PLAN OF EQUITY ONE, INC. Equity One, Inc. sponsors a defined contribution plan (401(k)) covering all eligible employees. Contributions to this plan are in the form of employee salary deferrals which are subject to an employer matching contribution up to a specified limit at the discretion of Equity One, Inc. 18 20 POPULAR, INC. PERFORMANCE GRAPH The graph below compares the cumulative total shareholder return during the measurement period with the cumulative total return, assuming reinvestment of dividends, of the National Association of Securities Dealers Automated Quotation System (NASDAQ) Stock Market Index and the NASDAQ Bank Composite Index. The cumulative total shareholder return was obtained by dividing (i) the cumulative amount of dividends per share, assuming dividend reinvestment, since the measurement point, December 31, 1994 plus (ii) the change in the per share price since the measurement date, by the share price at the measurement date. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN TOTAL RETURN AS OF DECEMBER 31 (DECEMBER 31, 1994=100) [GRAPH]
COMPANY/INDEX BASE PERIOD 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 POPULAR, INC. 7.03125 100.00 137.78 240.00 352.00 483.56 397.33 NASDAQ BANKS COMPOSITE 240.176 100.00 149.00 196.73 329.39 327.11 314.42 NASDAQ STOCK MARKET 244.532 100.00 141.33 173.89 213.07 300.25 542.43
19 21 INDEPENDENT PUBLIC ACCOUNTANTS The Board intends to retain the services of PricewaterhouseCoopers LLP as the independent auditors of the Corporation for the year 2000. PricewaterhouseCoopers LLP (former Price Waterhouse) served as independent auditors of the Bank since 1971 and of the Corporation since May 1991, when it was appointed by the Board. Representatives of PricewaterhouseCoopers LLP will attend the Meeting and will be available to answer any appropriate questions that may arise; they will also have the opportunity to make a statement if they so desire. PROPOSALS OF SECURITY HOLDERS TO BE PRESENTED AT THE 2001 ANNUAL MEETING OF STOCKHOLDERS Stockholders' proposals intended to be presented at the 2001 Annual Meeting of Stockholders must be received by the Corporation's Secretary, at its principal executive offices, Popular Center Building, San Juan, Puerto Rico, 00918, not later than November 24, 2000 for inclusion in the Corporation's Proxy Statement and Form of Proxy relating to the 2001 Annual Meeting of Stockholders. OTHER MATTERS Management does not know of any other matters to be brought before the Meeting other than those described previously. Proxies in the accompanying form will confer discretionary authority to the Proxyholders with respect to any such other matters presented at the meeting. To avoid delays in ballot taking and counting, and in order to assure that your Proxy is voted in accordance with your wishes, compliance with the following instructions is respectfully requested: upon signing a Proxy as attorney, executor, administrator, trustee, guardian, authorized officer of a corporation, or on behalf of a minor, please give full title. If shares are in the name of more than one recordholder, all should sign. Whether or not you plan to attend the Meeting, it is very important that your shares be represented and voted in the Meeting. Accordingly, you are urged to properly complete, sign, date and return your Proxy Card or vote by telephone or by Internet. San Juan, Puerto Rico, March 15, 2000 RICHARD L. CARRION SAMUEL T. CESPEDES Chairman of the Board, President Secretary and Chief Executive Officer YOU MAY REQUEST A COPY OF THE REPORT ON FORM 10K FILED WITH THE SEC BY CALLING (787) 765-9800 OR WRITING TO AMILCAR JORDAN, SENIOR VICE PRESIDENT, BANCO POPULAR DE PUERTO RICO, P.O. BOX 362708, SAN JUAN, PR 00936-2708. 20 22 [POPULAR, INC. LOGO] c/o BANCO POPULAR de PUERTO RICO TRUST DIVISION PO BOX 362708 SAN JUAN, PR 00936-2708 IF YOU WISH TO VOTE BY TELEPHONE, INTERNET OR MAIL, PLEASE READ THE INSTRUCTIONS BELOW. Popular, Inc. encourages you to take advantage of new and convenient ways to vote your shares for matters to be covered at the 2000 Annual Meeting of Stockholders. Please take the opportunity to use one of the three voting methods outlined below to cast your ballot. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to vote your proxy. Have your proxy card in hand when you call. You will be prompted to enter your 12-digit Control Number, which is located above, and then follow the simple instructions the Vote Voice provides you. VOTE BY INTERNET WWW.PROXYVOTE.COM Use the Internet to vote your proxy. Have your proxy card in hand when you access the web site. You will be prompted to enter your 12-digit Control Number, which is located above, to obtain your records and create an electronic ballot. VOTE BY MAIL Please mark, sign, date and return this card promptly using the enclosed postage pre-paid envelope to: BANCO POPULAR de PUERTO RICO, TRUST DIVISION, PO BOX 362708, SAN JUAN, PUERTO RICO 00936-2708. No postage is required if mailed in the United States, Puerto Rico or the U.S. Virgin Islands. TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: KEEP THIS PORTION FOR YOUR RECORDS - -------------------------------------------------------------------------------- DETACH AND RETURN THIS PORTION ONLY [POPULAR, INC. LOGO] PROXY The Board recommends a vote for the nominees listed below: ELECTION OF DIRECTORS -- NOMINEES: 1) JUAN J. BERMUDEZ, 2) RICHARD L. CARRION, 3) JORGE A. JUNQUERA, 4) FRANCISCO M. REXACH JR. FOR ALL WITHHOLD ALL FOR ALL EXCEPT [ ] [ ] [ ] To withhold authority to vote, mark "For All Except" and write the nominee's number on the line below. ________________________________________________________________________________ THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints Richard L. Carrion, Jorge A. Junquera and David H. Chafey Jr. or any one or more of them as Proxies, each with the power to appoint his substitute, and authorizes them to represent and to vote as designated above all the shares of common stock of Popular, Inc. held of record by the undersigned on March 6, 2000, at the Annual Meeting of Shareholders to be held at the Centro Europa Building, 1492 Ponce de Leon Avenue, 3rd Floor, San Juan, Puerto Rico, on April 25, 2000, at 10:30 a.m. or at any adjournments thereof. The Proxies are further authorized to vote such shares upon any other business that may properly come before the meeting or any adjournments thereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF ALL THE NOMINEES LISTED ABOVE. PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. PLEASE SIGN AS YOUR NAME APPEARS ON THIS FORM. IF SHARES ARE HELD JOINTLY, ALL OWNERS SHOULD SIGN. (VEA AL DORSO TEXTO EN ESPANOL) _________________________________________ _______________________________ Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date -----END PRIVACY-ENHANCED MESSAGE-----